In-House Lawyers Contract Law update: December 2020

Quickfire round

Subject to contract (Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541):

In this case, the Court of Appeal reiterated the meaning of the phrase "subject to contract", being that neither party intends to be bound and each party reserves their rights to withdraw from negotiations unless or until a formal contract is agreed between them. The court emphasised that once negotiations are begun "subject to contract" that condition is carried all the way through. The judgement provides welcome reassurance that entering negotiations “subject to contract” will not result in any unwanted or unforeseen contractually binding consequence, provided the parties make clear that their discussions are and continue to be "subject to contract" by, for example, using the phrase in email subject headings.

Notice provisions (Dodika Ltd & Ors v United Luck Group Holdings Ltd [2020] EWHC 2101): 

This case serves as a reminder that if you want to make it difficult for your counterparty to bring a claim against you, you could make the notice provisions particularly specific or convoluted. Equally, if you are the party needing to provide notice under the contract, you need to follow the relevant provisions to the letter. This builds on the Stobart case discussed in our July webinar (available here) where a party did not provide the amount of information required by the provisions in the contract, and as such the notice was invalid.

Possible reforms to Modern Slavery legislation:

The Government has set out proposals to strengthen the Modern Slavery Act 2015, in particular the slavery and human trafficking statement that businesses need to produce annually. This is certainly something to watch out for, as it is likely to have a bearing on the wording of these clauses going forward, which will need to be reviewed and updated if the proposals are adopted.

Varying standard terms (CFH Clearing Ltd v Merrill Lynch International [2020] EWCA Civ 1064):

You should only use standard terms of business when their application is certain. Expressing that any one of your standard terms is "subject to" more detailed "market specific" rules or practices introduces uncertainty and the risk of unenforceability. If your standard terms are to be variable somehow, then you need to be very clear that this is your intention and ensure that the variation is precise and clear.

Ipso Facto termination clauses - Corporate Insolvency and Governance Act 2020:

As you will no doubt be aware, the Corporate Insolvency and Governance Act 2020 has introduced a permanent prohibition on the operation of ipso facto termination provisions in supply contracts due to insolvency of the counterparty. In these cases, the inclusion of the termination clauses in a supply contract is not unlawful, just ineffective. In addition, a supplier’s contractual right to terminate on the grounds of any pre-insolvency events of default are suspended until the relevant insolvency process comes to an end. There is a temporary exclusion for small suppliers which was due to expire but has recently been extended by the Extension Regulations to terminate on 30 March 2021. 

Insights

More sponsorship drama for Liverpool FC...

Winlink Marketing Limited v Liverpool Football Club [2020] EWHC 2271

A sponsorship intermediary, Winlink, has lost its claim for over £1million in commission against Liverpool FC after failing to show their introduction to the club of BetVictor in 2013 was an “effective cause” of the sponsorship agreement being signed between the parties three years later.
Liverpool FC has successfully defended a claim worth over £1million with a sponsorship intermediary, Winlink Marketing. In 2013, Winlink and Liverpool FC entered into what is commonly referred to as an "introduction agreement", following which Winlink "introduced" the club to BetVictor. Liverpool FC and BetVictor entered into a £15million sponsorship agreement in 2016 for which Winlink claimed that Liverpool FC owed them £1.125million in commission.

Liverpool FC disagreed. The club argued that the 2016 agreement was entered into after the expiry of the "Introduction Period" (which was undefined in the introduction agreement…) and also maintained that an implied term applied to the introduction agreement which required that the introduction by Winlink be an "effective cause" of any resulting sponsorship agreement.

Very interestingly (given the restatement of the rule and the high threshold set in, for example, Marks & Spencer plc v BNP Paribas Securities in 2015) the court agreed that the introduction agreement must be subject to this implied term in order to make commercial sense, satisfying the business efficacy test for implied terms. Winlink nevertheless argued that the 2013 introduction satisfied this "effective cause" requirement, but the judge disagreed. The 2016 deal eventually entered into by Liverpool FC was of a much greater magnitude and completely different to the deal envisioned in 2013, with Winlink playing no active role in the new negotiations. In fact, the new 2016 deal appeared to be a result of a long-standing commercial relationship between BetVictor’s new CEO (appointed in 2016) and Liverpool FC’s new marketing executive. Therefore, Winlink lost the claim and was not owed any commission in respect of the 2016 deal.

A significant factor in this case was the ambiguous drafting of the introduction agreement, and it serves as a warning (or a helpful reminder, depending on which side of the fence you are on) that, even where no "effective cause" term has been incorporated into an introduction agreement, the court may imply one where it makes commercial sense to do so. Particularly where large commission fees are payable, careful drafting and certainty are key.

This is an important case not least for the very fact that the court saw fit to imply the "effective cause" term into the contract. Also, introduction agreements are notorious for being poorly drafted, with the trigger for whether commission payments are due rarely not in contention in precisely the situations where the parties want to avoid uncertainty. Sometimes the plea for certainty in contract drafting falls on deaf ears, but this case – and these types of agreement generally – really highlights the need for precision in order to avoid unhelpful and costly disputes.

Remembering that a duty of good faith is optional

Cathay Pacific Airways Limited v. Lufthansa Technik AG [2020] EWHC 1789 (Ch)

The High Court has provided a welcome judgment continuing the current discussion and clarification of the law on contractual interpretation, implied terms and the duty of good faith. 

On the expiry of an aircraft maintenance contract, Lufthansa Technik AG (LHT) sought payment of certain charges. However, Cathay Pacific Airways Ltd (CX) contended that it was the net payee as it was entitled to recover two sums from LHT, one of which arose following the exercise by CX of an option to withdraw engines from the scope of the agreement. LHT argued the option had not been validly exercised for three reasons, one being that the contract was a "relational contract" (note that this phrase, recently adopted in the Yam Seng decision, is now regularly appearing in pleadings) and so the option was subject to a general duty of good faith.

Although "clearly still in a state of development", the court this time held that a term of good faith may be implied in a relational contract as a matter of law and as a matter of fact. Following Bates v Post Office Ltd, it so happened that the court in this case concluded that the contract in question was not relational, but went on to consider whether a duty of good faith could be implied, summarising the test for the implication of good faith as a matter of law as whether it is long-term, collaborative and reflects the objectives of the parties’ joint venture which they have not or cannot specify. The fact that the court was even entertaining this is noteworthy in itself because, as discussed in our July webinar, it was only in the recent UTB LLC v Sheffield United case that the High Court seemed to make it very clear that a term of good faith could not be implied in law (ie on broader grounds of social policy) but only in fact.  This shows that the law is on this topic is in a real state of flux, and so the cases will keep coming until the position settles.

In any event, the comments in the Cathay Pacific case on whether a contract was "relational" or not were interesting, and a helpful guide for assessing whether a contract meets that categorisation or not.  Although this contract was long-term and required some level of cooperation, the agreement was detailed, prescriptive as to each party’s obligations and their relationship was not akin to a joint venture where there is a greater sense of a "common purpose". As such this test was not satisfied, with the court holding that the contract worked well without any obligation of good faith, as the implication of good faith would potentially create uncertainty.

Whilst parties seem to be adding express obligations of good faith to contracts rather liberally at the moment, it always pays to check why, and assess quite what it might achieve. This case is evidence that well-drafted contracts do not need to introduce duties of good faith in order to work, and indeed such duties will not be implied in those instances and nor do they need to be. So before including an express obligation of good faith in a contract, carefully consider whether it is necessary based on your commercial objectives and your relationship (especially for relational contracts), and what it would actually mean in terms of performing the contract. If the term would serve only to introduce uncertainty, do think whether it would it be better to include more detailed terms on each party’s obligations and to be more precise about what each party’s expectations actually are, rather than relying on this rather uncertain concept of good faith. 

Are you working on a project with more than one contract?

Attorney General of the Virgin Islands v Global Water Associates Ltd (British Virgin Islands) [2020] UKPC

Where you are entering into a project where the contractual arrangements have been carved up into and across separate contracts then, if it is important for your exposure to be limited and ring-fenced for each contract separately, you need to state this expressly on the face of each contract.

This case concerns the BVI Government entering into two separate contracts - a "Design and Build Agreement" (DBA) and a “Management, Operation and Maintenance Agreement” (MOMA) – with the same contractor for building and then operating a new water treatment plant.

The treatment plant was never built, the DBA was terminated, and the contractor brought a damages claim. Although unsuccessful initially, on appeal the Privy Council held that the contractor’s lost profits under the MOMA (as a result of not being able to operate the unbuilt plant) were within the reasonable contemplation of the parties when they signed the DBA, and as such were not too remote when applying the Hadley v Baxendale test.

We are all familiar with the Hadley v Baxendale test (limbs 1 and 2), and this case (although a helpful reminder and summary of this test) does not create any new law. However, it is important to note when entering into projects with contractually distinct phases that, for the paying party’s exposure to be limited under each contract separately, this must be expressly stated and limited in each contract. The Privy Council has made it clear that the simple fact of there being two separate contracts is not enough.

This was the case even though the Privy Council highlighted the fact that the two contracts related to the build of the same plant, were made between the same parties, incorporated a number of the same supporting documents and were executed on the same day. The BVI Government was fully aware that the operation of the MOMA relied on the successful completion of the DBA, and so losses under that contract were in its contemplation and thereby recoverable. Had it wanted to exclude its liability for the losses under the MOMA, that needed to be done expressly and done in the terms of the MOMA, which it wasn’t.

Worked examples vs a narrative formula – which one is right?

Altera Voyageur Production Ltd v Premier Oil E&P UK Ltd [2020] EWHC 1891 (Comm)

The difficulties in narrating complex calculations can often be assisted by including worked examples in a contract, but what happens when the examples contain an additional step not mentioned in the main agreement? Well, it likely depends on whether they conflict or simply build upon the other.

The two parties entered into a boat charter contract which contained both a narrative formula and two worked examples on how an adjustment was calculated using that formula. During negotiations, the contract was clearly amended but the impact of those changes and the resulting consequences were not thoroughly checked for consistency, with the worked examples left containing an extra step which had not been set out in the narrative formula.

The judge dismissed arguments that application of the worked examples was commercially illogical and that the express term in the main agreement – stating that it should take precedence over the appendix (where the worked examples were located) – meant the formulaic narrative should prevail. The judge concluded that the operation of the worked examples was not "arbitrary or irrational" and the precedence provision was irrelevant, as the narrative formula clearly allowed for finer details of the calculation to be clarified in the worked examples and so there was no inconsistency between the two parts of the agreement over which precedence needed to be established. The judge held that the sums due should, therefore, be calculated in accordance with the worked examples, rather than the narrative formula.

This is, perhaps surprisingly, only the second time the courts have been asked to comment on the application of illustrations in the interpretation of a contract, and serves as both a lesson to ensure your narrative description of a formula is consistent with the calculation, but also a reminder to consider the benefits of including a worked example or two where calculations are more complex or difficult to describe.

Do you want to make sure certain conditions are satisfied and are you certain when a binding contract will come into effect? 

Nautica Marine Limited v Trafigura Trading LLC [2020] EWHC 1986 (Comm)

In the current climate, entering into large scale projects and collaborations can feel particularly risky.  As such, a number of our clients have wanted to ensure that specific conditions are satisfied before further commitments are made, which can involve debating whether these are drafted as a "pre-condition" or a "performance condition". This case is a helpful clarification of the distinction between the two.

This case emphasises the distinction between a "pre-condition" and a "performance condition". The first being a condition which, if not performed, means that a contract will not come into existence. By contrast, a "performance condition", if not satisfied, allows a binding contract to form but means that performance of a particular obligation does not need to take place so long as all reasonable steps have been taken to achieve the condition.

This case concerned a contract for the charter of a petrol tanker which gave the charterer the option to load different grades of crude oil at different ports – "subject to" the quantity and availability of the oil, and the approval of a number of different stakeholders (the "Supplier", "Receiver", and "Management"). The approval of each stakeholder was held to be a “pre-condition”, so no contract came into force without their approval.

Had the "subject to" been a "performance condition" – and there was debate as to whether it should – then the contract would have come into force, with an implied term obliging the charterer to take all reasonable steps to obtain the relevant approvals. The fact that the court debated what sort of condition this was shows that it really is important not to assume that all such "subject tos" are "pre-conditions" – indeed it may prove a contracting party’s saving grace to try to achieve such conditions just in case a binding contract has come into force, leaving it vulnerable otherwise to a breach of contract claim. 

Although difficult to classify, and the authority is not definitive, in considering the legal effect of the particular "subject", one of the key factors the court looked at was whether performance of the "subject" depended on the decision of a contracting party or a third party. The "subject" is more likely to be a "pre-condition" than a "performance condition" where one of the parties to the contract is required to exercise their own judgment.

If you require further information about anything covered in this briefing, please contact Paul Jones, Antonia Lyne, Hannah Laird, Genna Morgan, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2020