Contractual Limitation: High Court narrows “consequential loss”


In Star Polaris LLC v HHIC-Phil INC [2016] EWHC 2941 the High Court considered the correct construction of the phrase

consequential or special losses, damages or expenses

in a shipbuilding contract which contained a limitation of liability clause.

Overview

The case is of wider interest as lessons can be drawn generally regarding contractual terms and conditions, and letters of engagement, it

  • shows a clear departure from traditional interpretations of “consequential loss” in contract clauses seeking to limit or exclude loss
  • introduces a new approach in considering the meaning of the phrase by taking into account the context of the contract as a whole and the intention of the parties at the time of entering into the contract.
  • demonstrates that a limitation of liability clause setting out an exclusive code of damages may be effective if drafted in clear language

Background

The Claimant, Star Polaris LLC (the “Buyer”) entered into a shipbuilding contract with the Defendant, HHIC-PHIL INC (the “Builder”) for the purchase of a bulk carrier vessel named the POLARIS STAR (the “Vessel”).

Article.XI of the contract made detailed provision for the Builder’s liability for any defects in the ship. Article.XI.1 of the contract imposed an obligation on the Builder to guarantee the Vessel for a period of 12 months against

all defects due to defective materials, design error, construction miscalculation and/or poor workmanship

Following written notification of any defects covered by the guarantee, Article.XI.3 required the Builder to make the necessary repairs or replacements at its shipyard or reimburse the cost thereof.

Most importantly, Article.IX.4(a) of the shipbuilding contract contained a limitation of liability clause which specifically excluded the Builder’s liability for “consequential or special losses, damages or expenses”.

The Vessel was delivered to the Buyer on 14 November 2011; however, on 29 June 2012 the Vessel suffered from a serious engine failure and had to be towed to STX Gosung in South Korea for repairs.

The Builder denied all liability for the incident and as a result the Buyer commenced arbitration proceedings against the Builder for breach of contract. The buyer’s claim included:

a) the cost of repairs to the Vessel; and

b) towage fees, agency fees, service fees, off-hire and off-hire bunkers caused by the engine failure.

During the hearing, the Buyer also indicated that it wished to claim for diminution in the value of the Vessel.

In summary, the tribunal ordered an Interim Final Award on 12 November 2015 on the basis that there had been a causative breach of the Builder’s express warranty of quality. However, the Tribunal found that the Buyer’s chief engineer had failed to react to various warnings to reduce the speed of the Vessel and had failed to stop the Vessel’s main engine in sufficient time. It was held that these omissions contributed to the Vessel’s damage and amounted to a break in the chain of causation and therefore not all the repair costs were recoverable by the Buyer.

When assessing the remainder of the Buyer’s claim, the Tribunal considered Article.IX.4(a) of the shipbuilding contract which contained the limitation of liability clause.

Article.IX.4(a) – “Except as expressly provided in this Paragraph, in no circumstances and on no grounds whatsoever shall the Builder have any responsibility or liability whatsoever or however arising in respect of or in connection with the Vessel or this contract after the delivery of the Vessel. Further, but without in any way limiting the generality of the foregoing, the Builder shall have no liability or responsibility whatsoever or howsoever arising for or in connection with any consequential or special losses, damage or expenses unless otherwise stated herein”.

The Tribunal’s interpretation was that the word “consequential” was intended to be used by the parties in its “cause-and-effect sense”, as meaning “following as a result or consequence”. Accordingly, the losses set out at section (b) above were not recoverable by the Buyer.

It followed that any claim for diminution in value of the Vessel would also be a claim for consequential loss and as such, would be excluded from the Builder’s liability.

High Court Appeal

The Buyer appealed against the Tribunal’s decision on the basis that the phrase

“consequential or special losses”

should be interpreted in accordance with the second limb of the classic test for recoverable loss established in the leading case of Hadley v Baxendale [1854] EWHC 9 Exch 341.

In Hardley v Baxendale it was held that damages available for breach of contract could be pursued under two separate limbs:

  1. Direct loss – those which may fairly and reasonably be considered arising naturally from the breach of contract.
  2. Consequential loss – such damages as may reasonably be supposed to have been in the contemplation of both the parties at the time the contract was made.

The Buyer maintained that at the time the parties entered into the contract, the phrase “consequential or special losses” had a very well-recognised meaning as a matter of law. Furthermore, as other authorities suggest, the fact that both the words “consequential” and “special losses” where paired together in Article.IX.4(a) was a strong indicator that the parties intended the meaning of consequential loss as set out in the second limb of Hardley v Baxendale to apply to the contract.

High Court Judgment

Sir Jeremy Cooke, sitting as a High Court Judge decided in favour of the Builder, that Article.IX of the contract provided a comprehensive code for the determination of liability. He was therefore of the view that the limitation of liability clause should be construed in the context of Article.IX as a whole, including the guarantee in relation to defects.

On an analysis of Article.IX, the judge agreed with the Tribunal that on entering into the contract, the parties did not intend the Builder’s liability to extend beyond the obligation to remedy any defect by making all necessary repairs and replacements. “In short, the parties had agreed objectively that financial loss consequent upon physical damage was excluded”.

At paragraph 39 of his judgment, the judge held that

“consequential or special losses, damages or expenses does not mean such losses, damages or expenses as fall within the second limb or Hadley v Baxendale but does have the wide meaning of financial losses caused by guaranteed defects, above and beyond the costs of replacement and repair of physical damage”

Comment

The Judge decided that the construction of the Article showed the Builders had guaranteed to repair defective items for 12 months, but excluded all other financial consequences, which were the responsibility of the Buyer.

This decision highlights the importance of ensuring that caution is taken when entering into or negotiating a contract and that the contractual terms reflect the true intention of the parties, particularly when one party is attempting to limit or exclude its potential liability.

This case suggests a move towards a more flexible approach when interpreting the meaning of limitation/exclusion clauses, rather than being bound by traditional interpretations. Courts may now be more inclined to consider such clauses on a case-by-case basis, taking into account the whole of the contract that the clause appears in and the intentions of the parties at the time that the contract was entered into. For this reason, contracting parties should also check for any inconsistencies between the limitation/exclusion clause and the contract as a whole.

The decision indicates the conventional Hadley v Baxendale approach is secondary to the wording and construction actually used by the parties.

Action Points

  • Businesses providing goods or services, including professional services, should regularly review their Terms and Conditions and Letters of Engagement to ensure they accord with current practice, law and legislative requirements.
  • Limitation clauses can be included in retainer letters or disclaimers to limit liability, including regarding third parties. A properly drafted clause could substantially affect overall liability.
  • Parties should carefully identify the type of loss that may arise from their contract, and describe clearly what liability the party accepts, and excludes.
  • The court will review the whole agreement in the event of a dispute, to decide on what the parties intended.
  • Consider reviewing your Contracts, Agreements, Terms and Conditions and Letters of Engagement (especially limitation clauses) in light of the trend highlighted in the Star Polaris judgment

Previously published at http://social.luptonfawcett.com/blog/contact-limitation-clause-high-court-limits-consequential-loss

Directors & Shareholder Claims: 2

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Resolving Boardroom Conflict  – 5 More Tips

Disputes between shareholders of private companies are often emotional and can be as complicated as a personal divorce. The disruption to any business can be extremely damaging. Knowing what remedies are available to resolve matters quickly could be the key to survival.

  • What if the majority is taking unfair advantage of you?
  • What if you suspect co-shareholders are stealing from the company?
  • In the second of a series, here are five further important pointers to be aware of:

1/ Protecting the Minority

There is a common misconception that the complex laws and regulations relating to companies should achieve a just and fair relationship between a minority shareholder and the majority. However, there is very little law which protects the minority, unless the parties have agreed beforehand.

Differences between shareholders don’t always arise because of power struggles or personal animosity. Frequently, disputes are down to differences in approach where one party wants to retire or withdraw their investment. Disagreements may centre on

  • timing
  • valuation issues
  • the direction of the company

The public courts are unlikely to be the ideal venue for resolving shareholder disputes. Proceedings are in the public domain and the procedure can be expensive and slow.

Particularly where private companies are concerned, there are effective alternatives, including: negotiation, mediation and arbitration.

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2/ Shareholder Agreement

An effective way to address potential problems before they arise is a Shareholder Agreement. This sets out ground rules for the shareholders in given circumstances. Many potential and predictable problems can be addressed in advance in a Shareholder Agreement. This leaves the shareholders to concentrate on managing the business, rather than a future internal dispute.

Amongst other things, the agreement can cover:

  • management responsibilities
  • non-competition restrictions
  • bonus and remuneration formulae
  • approval/decision process for major corporate decisions
  • buy/sell provision – e.g. a “shotgun clause” to force a transaction
  • how a shareholder can realise his or her investment in the company
  • whether to impose any restrictions on selling shares
  • criteria on valuing the shareholding
  • exit provisions – timetable for sale
  • appointment of an independent third party to value the shares
  • a detailed dispute resolution framework

 

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3/ What is an “Unfair Prejudice” claim?

The majority shareholders are in a powerful position, even where there is a Shareholder Agreement. However, the court will protect the position of minority shareholders from being abused in certain circumstances.

Section 994 of the Companies Act 2006 allows a shareholder to apply to the Court for an order declaring that the affairs of the company are being conducted in a manner unfairly prejudicial to the minority shareholder’s interests. If the court agrees, it will usually order that the shares of the minority shareholder are bought for fair value. However, the Court has a very wide discretion as to what it can order, including:

  • purchase of the shares of any members of the company by other members or by the company itself and, in the case of the purchase by the company itself, the reduction of the company’s capital accordingly
  • conduct of the company’s affairs in the future
  • company to refrain from doing or continuing an act complained about, or to do an act about which the petitioner has complained that it has omitted to do
  • civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the court may direct
  • company not to make any, or any specified, alterations in its articles without the court’s permission

4/ When might a court find “unfair prejudice”?

Where a minority shareholder believes that the company is being run in a way which is unfairly prejudicial to some of the shareholders, the aggrieved shareholder can make an application to the Companies Court for a remedy. Unfairly prejudicial conduct may include for example:

  • majority shareholders paying themselves excess remuneration
  • majority shareholders failing to pay dividends
  • breach of duty by diverting business to majority shareholders or their connected companies
  • directors selling or buying assets at an unfair price
  • failing to pay declared dividends
  • undertaking activities which are not permitted under the company’s Articles
  • doing something which might result in the company’s insolvency
  • failure to follow company law or proper procedure on meetings.
  • failure to issue annual accounts

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5/ “Quasi-Partnership”

In small to medium sized private companies, the court might be persuaded that a “quasi-partnership” exists. The aggrieved party may complain that there is a breach of their ‘legitimate expectations’ about what the company was set up to do, and how it would be run. E.g.

it was agreed, or a common intention is proved:

  • the company would carry on a particular business
  • all would be entitled to an equal say in how the company is managed
  • a mutual expectation of continued employment
  • the directors would be fair when deciding on the salaries to be paid, the amounts to be kept in the company to fund growth, and the dividends to be paid out

If the court decides that a quasi-partnership exists, termination of that arrangement or unfair prejudice to the minority may result in the majority being obliged to buy out the shares of the aggrieved minority shareholder. If the majority acts in breach of such

“legitimate expectations”

the court may intervene.

Where an aggrieved shareholder has cause for complaint, urgent action is required. The court may refuse to interfere if a minority shareholder let the matter slide. The court will treat this as acceptance of the action taken by the majority:

“delay defeats equity”.

The court will consider all of the background circumstances on an application, including the minority shareholder’s own conduct.

These applications are rarely straightforward and are often settled by negotiation before the court is asked to make a final decision.  Quite often, one or more of the shareholders leave with a package.

For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com

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Directors & Shareholder Claims: 1

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

WHEN DIRECTORS FALL OUT

Disclaimer

 

 

 

 

M&S’s Break Clause Dispute: wider contract implications

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See my blog on the Supreme Court’s recent decision:

http://www.luptonfawcett.com/blog/mandss-break-clause-dispute-broader-contract-implications/

  • Contract interpretation
  • Implied terms
  • Necessity
  • Break clauses

This updates last year’s wordpress piece:

https://jpaulsykes.com/2015/01/06/supreme-court-gives-ms-permission-to-appeal/

 

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The Battle of the Forms: Part 2

  • Tips
  • 15 Practical Steps

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In Part 1 “Terms Agreed – but whose terms?” http://wp.me/p4DFLr-8x we examined the perennial problem of the steps necessary to include your companies’ standard contractual terms and conditions (T&Cs) in to a contract.

This was the issue recently covered by the Technology and Construction Court in the case of Transformers & Rectifiers Ltd v Needs Ltd. In that case, neither party to the contract had done sufficient to ensure that their T&Cs were drawn to the attention of the counter party. The court applied the law deciding that in a sale of goods contract where neither the seller’s nor the buyer’s terms and conditions have been incorporated, the relationship is governed by the implied terms of the Sale of Goods Act 1979. Accordingly, the seller of the goods will not be able to exclude or limit its liability for defective goods, which a seller can normally restrict by contract subject to the reasonableness test in the Unfair Contract Terms Act 1977.

In the preliminary discussions between parties, a “battle of the forms” can arise when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own terms. A typical example is where, e.g., a Buyer offers to buy goods from the Supplier on its (the Buyer’s) standard terms and the Supplier purports to accept the offer on the basis of its own standard terms. In this scenario, the battle is often won by the party who fired the “last shot”, i.e., the last party to put forward T&Cs that were not explicitly rejected by the recipient.

A business should ensure that its terms are incorporated into its contracts. To achieve this, terms and conditions should be provided with and/or referred to in pre contractual documentation, such as quotations and orders. A business that relies upon printing their terms on delivery notes or invoices (post contractual documentation) runs the risk that it will not be able to rely upon those terms if there’s a dispute.

Below are a series of practical steps that could be considered to gain the advantage, the key theme being that parties must be clear about the terms on which they are doing business. Although these steps won’t guarantee your company’s standard T&Cs prevail, they may give you an advantage. There is no single overriding rule that trumps all in battle of the forms cases, but the following should help:

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Negotiating Tips:

“Prevail clauses”

Consider including a “prevail clause” in your T&Cs, stating e.g. that your standard T&Cs are incorporated in to the contract to the exclusion of any other parties’ T&Cs, and that your standard terms prevail. This won’t necessarily succeed alone, e.g. where the other side makes a counter-offer, your standard T&Cs including the prevail clause will be by-passed and won’t form part of the contract. This is because your T&Cs will have effectively been rejected by your counterparty and replaced by their counter-offer.

“Prevail clauses” are still used, including as a means to pressurize the other side in to taking the line of least resistance, and accepting the standard terms as a fait accompli. However, a belt and braces approach is safer. Where the other side aims to rely on such a clause it is perfectly reasonable to reply by reiterating that your T&Cs apply.

  • Written records should be kept of all contract negotiations. Ideally, minutes of meetings should be signed by all present.
  • Emphasize that no contract can be agreed until any disputed terms are ratified. Stipulate which terms are outstanding.
  • A contract can be concluded verbally. Ensure that any meetings or telephone calls are confirmed as being conducted on the basis of your company’s T&Cs, or “subject to contract”; to prevent any agreement before a written contract is signed.

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Practical Steps

  1. Always send the other side a clear and legible copy of your T&Cs together with your order/acknowledgment / supply forms and state clearly on the face of your order/acknowledgment that you rely on those T&Cs.
  2. When writing to the other side to agree an order, include a copy of your T&Cs with the letter or email. Stipulate that you are offering to contract on those terms.
  3. Don’t take for granted that your T&Cs apply. Although you may have been doing business with the other side for several years, don’t assume that a court will accept it’s on notice of your standard T&Cs. Whenever you enter into a contract, ensure that your T&Cs are included.
  4. If you send a purchase order/invoice electronically, make sure you don’t omit the back page setting out your standard T&Cs. Ideally, attach a copy of your T&Cs as a separate document.
  5. Actively bring the counterparty’s attention to your standard T&Cs.
  6. Alert the other party on the front page of your pro forma documents such as purchase order/invoices, email or letter footers, to your standard T&Cs and where they are found, e.g. on your website, and / or as attached.
  7. Clarify in writing that your T&Cs are the only terms upon which you are prepared to do business.
  8. Avoid a battle of the forms. If the other side responds with their T&Cs, clarify by return firstly that you don’t accept their terms and secondly, your T&Cs represent the only contractual provisions on which you will proceed.Respond to / reject counter-offers.
  9. If the counterparty replies to your offer ambiguously or doesn’t accept your offer, the court may later treat their communication as a counter-offer, which if it is treated as the last shot, could prevail.
  10. Contracts can be concluded by performance. Avoid premature acceptance of the other side’s T&Cs by conduct. E.g., terms of a contract can be finalized by one side unintentionally accepting the terms of a draft agreement before formal approval or signature. This could be by supplying or paying for the goods or services, accepting delivery of goods, or acting otherwise in line with the terms of the counterparty’s draft contract.
  11. Be aware that if one side proceeds without a clear written agreement and performs the contract, they risk a deemed acceptance of the other party’s terms.
  12. Fire the last shot in the “battle”! The other side’s T&Cs could prevail if they were the last shot, or where they were sent to you and, they weren’t rejected, answered with a counter offer, or where the contract was performed without more.
  13. A tactic that worked in B.R.S v Arthur V. Crutchley Ltd was where the supplier delivered whisky to the buyer’s warehouse. The delivery note set out the supplier’s T&Cs. However, the buyer’s warehouseman stamped it  “Received under [the buyer’s] conditions”.      The Court’s decision was that the warehouseman’s rubber stamp constituted the last shot of the battle. The buyer’s T&Cs prevailed. The stamp represented a counter-offer which the supplier was taken to have accepted by its performance in handing over the goods.
  14. The safest policy is to identify and resolve any dispute about T&Cs directly in negotiations with the other side. However, there may be the temptation not to jeopardies a prospective deal or future custom by risking controverersy. This involves what may be a greater risk down the line of the T&Cs being unclear, with an argument as to whose apply, or whether neither applies.
  15. Specifically negotiating the terms avoids the uncertainty of putting this off. If the seller’s T&Cs are accepted, then agreed variations can be set out in a side letter. On the up-side, when agreement is reached in this way, everyone knows where they stand legally. The down-side is that negotiating the contractual terms may be costly and time consuming. 

A well drafted set of terms and conditions will take into account the manner in which a business operates, and what it hopes to achieve. Your legal adviser should take the time to understand your business to ensure that your contracts achieve what you want them to.  

Advice at the beginning can avoid pitfalls down the line, which could be expensive and involve court proceedings.

 Cases:

Transformers and Rectifiers Ltd v Needs Ltd [2015] EWHC 269 (TCC).

British Road Services Limited v Arthur Crutchley & Co Limited ([1968] 1 All ER 811).

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Battle of the Forms: Part 1

“Terms Agreed” – But whose terms?

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In a recent decision of the Technology & Construction Court, both sides lost out in a “battle of the forms” as to whose standard terms and conditions (T&Cs) applied. The case demonstrates again the dangers of assuming that your latest contract, or even a long-term business relationship is governed by your T&Cs.

FACTS

In Transformers & Rectifiers Ltd v Needs Ltd, the parties had been doing business for around 20 years on a weekly basis. The buyer, Transformers & Rectifiers Ltd regularly ordered nitrile gaskets from the supplier (Needs Ltd).

The buyer complained that two lots of gaskets were not fit for purpose and in breach of contract. There was a dispute to be decided as a preliminary issue as to whose terms applied and whether the supplier could rely on their exclusion clause to limit liability? The supplier contended that its liability was limited or excluded by its terms of sale.

The buyer gave orders by different methods, including by fax, email or post. Their standard T&Cs were printed on the reverse of their standard form purchase orders when sent by post. However, there was no reference to the terms on the face of the purchase order itself. When a fax or email order was sent, the back page wasn’t included.

The supplier acknowledged purchase orders by sending an acknowledgement of order that stated “The quoted prices and deliveries are subject to our normal terms and conditions of sale (copies available upon request)”. However, the supplier hadn’t ever sent their T&Cs to the buyer.

DECISION

The Judge, Edwards-Stuart J found that it was not obvious on reading the front page of the Order that the T&Cs were on the reverse. Also, because the buyer didn’t issue purchase orders in the same way each time, its standard T&Cs were frequently omitted as it usually sent only the front page of its purchase orders via fax or email.

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  1. The Judge found that neither parties’ standard T&Cs were incorporated into their contracts: neither side had done enough to draw the other’s attention to its standard terms. The commercial result was that the supplier could not rely on exclusion clauses within its standard terms, and the buyer couldn’t rely on their T&Cs either. He outlined the following broad principles:
  2. Where X makes an offer on its conditions and Y accepts that offer on its conditions and, performance follows (without more correspondence), on the assumption that each party’s conditions have been reasonably drawn to the attention of the other, there is a contract on Y’s conditions;
  3. Where there is reliance on a previous course of dealing it doesn’t have to be extensive. However, the course of dealing by the party contending that its conditions are incorporated has to be consistent and unequivocal;
  4. Where trade standard terms exist, it will usually be easier to persuade the court that they should be incorporated, provided that reasonable notice of those terms has been provided;
  5. A party’s standard terms will not be incorporated unless that party has given the other side reasonable notice of them;

COMMENT

Frequently, whose terms apply is a question of negotiation between the parties. A “battle of the forms” arises when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own T&Cs. This often happens where e.g. a Buyer offers to buy goods from a Supplier on the Buyer’s standard terms and the Supplier purports to accept the offer on the basis of its own standard terms.

In this situation, the Court often decides that the battle is won by the side that fired the “last shot”, i.e., the last party to put forward T&Cs that were not explicitly rejected by the recipient.

If neither side’s T&Cs apply, as in this case, the contract is governed by the implied terms of the Sale of Goods Act 1979. Therefore the seller won’t be able to exclude or limit its liability for defective goods, which a seller can normally restrict by contract subject to the reasonableness test in the Unfair Contract Terms Act 1977.

The case provides a timely reminder that general words in purchase orders and other documents are insufficient to install a party’s T&Cs, unless a copy of the T&Cs are sent. Businesses should also note that e-mailing and faxing purchase orders or acknowledgements may result in T&Cs on the reverse not being included. 

ACTION POINTS

  • A business should ensure that its terms are incorporated into its contracts. To achieve this, terms and conditions should be provided with and/or referred to in pre contractual documentation, such as quotations and orders. A business that relies upon printing their terms on delivery notes or invoices (post contractual documentation) runs the risk that it will not be able to rely upon those terms should a dispute arise.
  • It is important to ensure that T&Cs are properly used in order to effectively incorporate them into the contract of sale so that the supplier is not exposed to increased liability. A well drafted set of terms and conditions will take into account the manner in which a business operates, and what it hopes to achieve.
  • Another post will explore additional steps that can be taken to gain the advantage in the Battle of the forms.

Case: Transformers and Rectifiers Ltd v Needs Ltd [2015] EWHC 269 (TCC).

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Supreme Court gives M&S permission to appeal

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Break clause lease dispute: wider implications

In a long running saga, the Supreme Court has recently given Marks and Spencer permission to appeal a decision of the Court of Appeal[i]. The dispute relates to a lease between the parties which was terminated early under a break provision. There were earlier conflicting decisions of the High Court and the Court of Appeal as to whether M&S were entitled to a refund from their Landlord. The case is likely to have wider importance in view of differing legal interpretations on the importance of “necessity” in relation to terms that should be implied into a contract.

This extends beyond Landlord and Tenant law, and may touch any commercial or other contract. The Supreme Court (formerly the House of Lords) deals only with cases which:

“raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at that time, bearing in mind that the matter will already have been the subject of judicial decision and may have already been reviewed on appeal”

 Background

In May 2014 the Court of Appeal held that M&S had no express right to a refund on the exercise of the break clause: any intention should have been set out in express terms if there was to be a refund. No such right could be implied into the contract without express provisions. M&S lost out on their claim for a refund of rent, insurance and car parking charges for the period after the break date. Before M&S could activate the break clause, they were obliged to pay the full quarter’s rent in advance.

The High Court had previously decided that because the break conditions required payment of a penalty by M&S, the parties could not have intended that the Landlord would be entitled to retain the excess rent in addition. Accordingly, the High Court found that there should be an implied term that the excess rent was in fact repayable. This was rejected by the Court of Appeal.

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Issue

The Court of Appeal followed the previous leading case, Attorney General of Belize v. Belize Telecom [2009] UKPC 10. The Privy Council found the test to decide whether a term should be implied as a fact (as opposed to law) into a contract was broadly:

 “Is that what the instrument, read as a whole against the relevant background, reasonably be understood to mean?”

So, in order to be implied, a term must be necessary to achieve the express intention of the parties in the context of the admissible background. The importance of the decision in early 2009 is clear from the fact that it was cited in eight other cases that year.

Next step

The Supreme Court is likely to be considering the extent of inconsistency as to interpretation of the word “necessary” across the board, and the meaning of the word itself in the context of the case. That the Supreme Court has granted permission to appeal suggests that it may be reviewing break conditions in particular, or undertaking a wider analysis of how terms are implied into leases and commercial contracts more generally in order to achieve a just outcome.

No date has yet been fixed for the appeal before the Supreme Court.

Implications

Although the decision will be awaited with interest, this is a timely reminder that, so as to avoid uncertainty and ambiguity, parties should

  • expressly set out their commercial intentions in the written contract
  • consider the likely outcome of events that are described in the contract or are otherwise predictable, and whether these are sufficiently provided for in the contract
  • obviously, leaving matters to chance and calling on the Court to intervene and imply terms much later leads to uncertainty and avoidable expense.

[i] Citation:

Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2014] EWCA Civ 603
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8 Ways to avoid a Business Dispute

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Despite the best of intentions on all sides, disputes can arise when entering in to a new commercial contract or business relationship. According to Government figures, between April and June 2014 a total of 370,744 claims were issued in the Civil Courts (excluding Family Cases). This was a decrease on the previous quarter, but that saw the highest number of claims since 2009. A significant number  relate to business disputes.

From long experience, the following ground rules should help to reduce the risk of things going wrong in a business contract, or if they do, ensure you are in the best position to protect your interests:

1 Contractual Terms

These are key to many disputes, and the outcome of claims often turns on what the contract says. The terms and conditions should be read carefully. Ensure that your terms and conditions are drafted or approved by a specialist contract lawyer with experience of your sector. It is essential that these are regularly reviewed and kept up to date, and of course, that the terms represent your understanding of what has been agreed.

Be careful about negotiations and representations made during pre contractual discussions. Although many statements will be just sales talk, others might be construed as a term of the contract.

2 Entire Agreement

This should ensure that the contract between the parties is contained in a single document. The aim is to prevent extraneous documents or communications being relied on e.g. statements or representations made during pre contract discussions.

3 Exclusion clauses

Exclusion clauses may seek to exclude liability for consequential loss, or limit liability to a specified figure. Consideration should be given to whether these are enforceable:

  • do they apply to the areas of dispute most likely to arise?
  • are they as wide as might be assumed?
  • exclusions of “consequential” or “indirect” losses might not apply to claims for loss of profits or other loss amounting to reasonably foreseeable direct losses, within the reasonable contemplation of the parties when entering in to the contract

NB: Under the “contra preferentum” rule, any contractual term which is unclear is interpreted against the party that wants to rely on it.fun-and-games-until-204943-sfreeimages

4 Deadlines

Be realistic about fixing deadlines and be circumspect about specific dates if possible. If it seems as though a date under a contract might be missed, a revised timetable should be negotiated and recorded in writing, before time runs out. Any such variation of the contract terms should be signed by both sides.

5 Dispute Resolution Clauses

You can specifically set out means of settling disputes before they arise, e.g., good faith negotiations, Alternative Dispute Resolution, or mediation stand every chance of resolving a dispute, whilst preserving relations with the other side. This could be crucial where a valuable supplier or customer is involved. Serious consideration should be given as to whether Arbitration, as opposed to court proceedings should be specified. This may often be inserted, without considering the pros and cons, because Arbitration is not necessarily simpler or cheaper than the courts.

6 Internal Communications

Take care over written internal communications, including by email and on any company and employee’s devices. This applies pre contract, and after the contract has been agreed. If a dispute arises, under the Civil Procedure Pre Action Protocols and court rules, all relevant internal communications have to be disclosed (unless subject to legal advice privilege – where lawyers are already advising as to a dispute).

7 Negotiations

Clear communications with your supplier or customer is essential too. Being assertive but not confrontational and having clear lines of communication can help avoid misunderstandings in the first place that can otherwise lead to disputes. If it transpires that some contractual terms can’t be met, inform those affected as soon as possible.

 

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8 Identify Potential Issues Early

Early dialogue can often resolve problems, and prevent them turning in to a dispute. The party claiming breach of contract will have to prove that they acted reasonably to mitigate their loss. As such, the earlier a potential difficulty is addressed, the better chance of a satisfactory resolution being reached, or losses minimised.

Often a case that ends up in court is due to the potential problem not being identified early on, or not dealt with appropriately. In this way, seemingly innocuous molehills can turn in to mountains.

Whist not advocating full scale crisis management procedures for every teething problem, there should be a routine reporting system enabling potential litigious issues to be reviewed. Although businesses may be reluctant to involve solicitors at the start, in fact reporting at an early stage to in-house or external lawyers would be likely to make the communications privileged from production.
This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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