Boilerplate Quiz – May 2012 editionKimberleigh TuckerClaire Walker

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What’s in store…

• “Boilerplate” can be make or break for your commercial terms

• Large claims often turn on small points of detail

• A selection of the latest cases

• Do you need to change any of your drafting?

Cards at the ready…

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1) Contract formation

A supplier sends - and the customer signs - a quotation for storage facilities for commodities (in this case fuel).

Do the words "a formal contract will follow in due course" in the supplier's accompanying email effective prevent the parties being bound by the terms of the quotation?

a) Yes – they have equivalent force to "subject to contract"

b) It's a question of fact and depends the particular circumstances

c) No –"formal contract" suggests that a "contract" is already in place

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Answer and key points

• Answers (b) and (c) are both correct

• Immingham Storage Company Ltd v Clear plc [2011]

• On these facts:

• Quotation set out all the substantial terms

• Negotiations and quotation were not “STC”

• Subject to 2 conditions, which were fulfilled

• “Formal contract to follow” did not rebut presumption of ICLR…

• Even "subject to contract" is not always bullet proof [RTS Flexible Systems case, 2010]

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2) Best and reasonable endeavours

Does a party under an "all reasonable endeavours" obligation ever needto act against its own commercial interests?  

a) No, it is never obliged to act to its commercial detriment.

b) It may be obliged to act to its detriment – but not to the point of financial ruin.

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Answer and key points

• Answer (b): in the latest case, “all reasonable” DID oblige party to act against its commercial interests

Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417

• The scope of best, reasonable and all reasonable endeavours obligations continue to be litigated regularly

• Impossible to predict with accuracy how a court will interpret those terms

• Specifically defined obligations may be preferable

• Consider defining what effort/ cost is within the scope of a particular “best” or “reasonable” endeavours obligation

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Endeavours obligations: where do things stand?

All reasonable endeavours?

Best endeavours?

No obligation

Absolute obligation

Reasonable endeavours?

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Endeavours: case law snapshot

Involves balancing the contractual obligation against all relevant commercial considerations.

May require limited expenditure; does not require the obligor to sacrifice its commercial interests.

Primarily considered in light of the obligor's circumstances and interests.

Reasonable endeavours

Likely to exhibit characteristics of both best and reasonable endeavours. Same as “best” according to some case law? May require expenditure. May or may not require the obligor to sacrifice its commercial interests.

Unclear. May imply an objective or subjective standard depending on the circumstances.

All reasonable endeavours

Not an absolute obligation, but not “second best” efforts.

Includes steps which a prudent, determined and reasonable obligee, acting in his own interests and desiring to achieve that result, would take.

May be subject to countervailing duties (e.g. directors’ duties). May require significant expenditure by the obligor but not ruinously so.

Generally viewed from the obligee's perspective, but may consider the obligor's interests.

Best endeavours

Effort/ expenditure?Perspective?Obligation

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3) Interpretation and change in law

You are the supplier in outsourcing deal which runs till 2017. You warrant that the services are compliant with the Data Protection Act 1998. The proposed new EU DP Regulation is expected to replace the DPA by 2016. Your contract had no "future proofing" clause and no apportionment of risk for changes in law. What is the likely position?

a) The DPA reference is "future proofed" by the Interpretation Act 1978

b) The UK legislation implementing the new rules might have a “continuity of law” clause

c) The DP obligations are not future proofed – keep quiet and hope the customer does not want to renegotiate them!

d) Both parties will be bound by the stricter new DP obligations anyway – so updating the statutory cross reference is the least of your worries…

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Answer and key points

• Answer (d)!

• Interpretation Act 1978 “future proofs” references to Acts/ SIs passed 1979 onwards in some cases (s 17 (2) and s23)

• Does same rule extend to EU legislation?

• New rules will be a directly effective Regulation – no UK Act needed – (b) is a trick

• Check new legislation for continuity of law/ disapplication of Interp Act

• Key point is to anticipate and apportion risk for significant changes in law

• Inclusion of out of date statutory refs CAN be problematic and costly – e.g. Court of Appeal case Hare v. Shepherd [2010] (out of date Insolvency Act triggers)

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4) Interest rates on late payment

Is a default interest rate of 15% in a business to business contract enforceable, or is it a penalty?

a) Enforceable if both parties have equal bargaining strength

b) 15% is “more inclined towards a penalty than a genuine estimate of loss”

c) Depends on the circumstances, including base rates at time of contract

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Answer and key points

• Answer (c): It depends on all the circumstances, including base rates when the contract was agreed

• Statutory rate for B2B goods and services remains at 8% above base rate (Late Payment of Commercial Debts (Interest) Act 1998)

• 15% NOT a penalty: Taiwan Scot Co Ltd v The Masters Golf Company Ltd [2009] EWCA Civ 685

• 15% IS a penalty: Fernhill Properties (Northern Ireland) Ltd v Mulgrew [2010] NICh20 (High Court of Northern Ireland)

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Interest rates – practical tips

Payees – avoid potential penalties

• Genuine pre estimate of loss

• Recite that it's fair and reasonable/ arms' length

Paying parties – tips for ousting the statutory rate of 8% over base

• Alternative rate must be "substantial remedy" for payee – see s9 factors

• Sufficient to compensate supplier/ deter late payment

• "Fair and reasonable" to oust the statutory rate – factors including…

• Benefits of commercial certainty (of an agreed rate)

• Relative bargaining strengths

• Imposed on paying party to detriment of payee?/inducement to accept term?

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5) Severance

• Your company is trying to enforce some post termination covenants in a franchise agreement. The agreement contains a valid non solicitation clause and an invalid non compete clause. The scope of the “Restricted Area” definition, used in in both clauses, is the problem.

• There is a severance clause which provides that any void restrictions "shall apply with such deletions or with such reduced area of application as may be necessary to make it valid or effective". Can the invalid covenant be severed?

a) No – the Court can only use its “blue pencil” to delete invalid clauses

b) Yes – because the wording of the express clause used went beyond the common law doctrine of severance, allowing the Court to re-write the contract

c) It depends if the “Restricted Area” is defined separately in relation to each restrictive covenant.

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Answer and key points

• Answers (a) and (c): Because the offending definition was shared by the valid and the invalid restrictions, the Court could not sever the invalid provision.

• Francotyp-Postalia Ltd v Whitehead and others [2011]

• The courts may sever a provision of an agreement which is illegal or contrary to public policy, and so allow the remaining provisions to survive, if:

• the offending provision does not form the real or main consideration given by one party or the whole or substantially the whole consideration for the promise;

• it accords with public policy to do so; or

• it is possible to delete the provision while leaving the remaining provisions of the agreement intact ("blue pencil" rule).

• As a general principle, the courts will not make a new contract for the parties, whether by rewriting the existing contract, or by altering its basic nature.

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6) Direct and indirect loss

A contract for a "green" waste water treatment system capable of producing renewable energy excludes the supplier's liability for all "indirect, special, incidental and consequential losses". The system is not up to spec. Which of the following losses can the customer still claim for?

1. Replacement and repair of system

2. Cost of buying energy elsewhere

3. Loss of revenue from Renewable Obligation Certificates

Answer (a) – 1. as only replacement/repair is a direct loss

Answer (b) – all are capable of being direct losses

Answer (c) – 1. and 2. are both direct losses

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Answer and key points

• Answer (b): All are capable of being direct losses, in the right circumstances

• Loss of profits can be direct loss – this is just the latest example

• McCain Foods (GB) Ltd v Eco-Tec (Europe) Ltd [2011]

• In the McCain case, claims of over £1.6m were direct loses and therefore not excluded.

• Classic test: Hadley v Baxendale:

• Direct loss - Losses that flow naturally from the breach of contract and are therefore deemed to have been in the contemplation of the parties at the time the contract was made.

• Indirect Loss - Such loss as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract, as a probable result of the breach.

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7) UCTA reasonableness (1) – limitation periods

In a B2B contract on supplier's standard written terms, is it reasonable to impose a short limitation period (9 months) for claims by the customer?

a) Likely to be unreasonable

b) Likely to be reasonable – the courts do not like to intervene in B2B contracts

c) It depends on the circumstances

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Answer and key points

• Answer (b) in this instance – (c) is also correct as reasonableness is always fact-dependent

• Rohlig (UK) Ltd v Rock Unique Ltd [2011] EWCA Civ 18

• High Court and then Court of Appeal held that clauses in the standard trading terms of the British International Freight Association (BIFA) were reasonable under UCTA.

• Reasonableness test – s 11/ Sch 2 d: where the term excludes or restricts any relevant liability if some condition was not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable

• Same time bar in BIFA terms upheld in Granville Oil & Chemicals Ltd v Davis Turner & Co Ltd [2003] EWCA Civ 570

• Reasonableness should always be decided on the facts BUT

• Court "should not draw fine distinctions between cases that are in broad terms very similar" + important for suppliers and customers in a particular industry to know whether certain terms are likely to be reasonable/ unreasonable

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8) UCTA reasonableness (2) – excluding set-off

In a B2B contract on supplier's standard written terms, is it reasonable to exclude a customer's right of set off of sums due to the supplier?

a) Likely to be reasonable – the courts do not like to intervene in B2B contracts

b) It depends on the circumstances

c) Likely to be unreasonable

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Answer and key points

• Answer (a) in this instance – (b) is also correct as reasonableness is always fact-dependent

• Rohlig (UK) Ltd v Rock Unique Ltd [2011] EWCA Civ 18 (again!)

• No set off reasonable because it applied to "sums due" (not to disputed invoices)

• BIFA's no set off clause already held reasonable by CA in previous case (Schenkers case)

• Relative size of customer v supplier NOT a significant factor here

• BIFA terms negotiated by customer and supplier bodies – more likely to be fair and balanced

• Course of dealing by customer and supplier – customer aware of terms

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9) Jurisdiction and third party claims

An agreement you are negotiating grants certain rights to a third party in accordance with the Contracts Rights of Third Parties Act 1999. How do you ensure the third party can only bring a claim in the jurisdiction which the parties have chosen in the agreement?

a) It is safest to make the third party's claim conditional on agreeing to the relevant jurisdiction – because Brussels Regulation/ Lugano Convention require jurisdiction agreements to be made or evidenced in writing

b) No need to worry - the 3rd party is automatically bound by the jurisdiction clause since any rights it has are subject to the terms of the contract, including choice of jurisdiction

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Answer and key points

• Answer (a): the position is not settled, so the safest course is to make the third party’s claim conditional on agreeing to the jurisdiction clause.

• Act is ambiguous, and still no case law directly on point.

• Petrologic Capital SA v Banque Cantonale De Geneve and another [2012] EWHC 453 was a case on third party rights and jurisdiction – but unfortunately in this case the third party did not have a third party right, so the issue still did not have to be decided!

• Obiter consideration in the 2009 Morgan Stanley case, which considered claims against third parties.

• Conflicting approach in the first instance WPP Holdings case where it was simply assumed 3rd party was bound by the jurisdiction clause.

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Jurisdiction and third party claims (continued)

• The Act itself is silent on whether jurisdiction clause binds third party…

• …but the Bill expressly excluded jurisdiction

• The Act does deal specifically with 3rd party’s status re arbitration

• in any event, jurisdictional rules Brussels Regulation/ Lugano Convention require agreements conferring jurisdiction to be made or evidenced in writing.

• Better safe than sorry!

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A contract provides that Party A’s consent to assignment by Party B “shall not be unreasonably withheld”.

Which of these principles is UNTRUE?

a) It’s a question of fact in every case

b) Burden is on Party A to show it’s being “reasonable”

c) The “reasonable man” test applies

d) Party A normally only needs to consider its own interests, not balance its interests with those of Party B

10) Consent “not to be unreasonably withheld”

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Answer and key points

• Answer (b): is the only UNTRUE statement. Burden is on Party B, i.e. seeking consent, to show that Party A is unreasonable to withhold consent

• Porton Capital Technology Funds and others v 3M UK Holdings Ltd and 3 M Company [2011] EWHC 2895

• The High Court has recently affirmed existing case law

• On these particular facts, consent concerned termination of a company product line

• Applying the principles, not unreasonable for former owners of company to withhold consent to termination of a product line by new owners

Boilerplate Quiz – May 2012 edition

For more informationplease contact:

Claire Walker Kimberleigh Tucker

+44 (0) 207 067 3174 +44 (0) 207 067 3810claire.walker@olswang.com kimberleigh.tucker@olswang.com