Contract law update: Recent developments and practical tips
03 May 2019
On 2 May 2019, Mark Lim, Sohrab Daneshku and Nigel Enticknap from our commercial dispute resolution practice group hosted a seminar discussing provisions that commonly feature in commercial contracts. Whilst important, these terms may enjoy limited attention during negotiations. We covered recent case law, offered tips on how to interpret key clauses and discussed how to avoid common pitfalls. Below is a summary of some of the key points.
Notice provisions - "Get it wrong and an otherwise good case may be struck out"
Mark covered notice provisions, reflecting on compliance and why it can often be critical. Notices can alter the legal relationship between the parties (termination, exercise of an option or set a price). A contract's requirements may be expressed in permissive or mandatory language. If the clause is expressed in terms that a right is not available unless requirements are met, this is often termed a “gateway provision”. Here a failure to comply may mean that underlying rights are lost and an intended notice could be invalid or of no effect. This can be extremely important and there has been a lot of litigation in this area.
When construing a notice provision, one must look at the clause in context. The wording should be reviewed carefully in order to determine what level of detail needs to be included in the notice. There may be requirements prescribing where, how and on whom it should be served. In the case of notices of claim, the requirements are also often qualitative, with minimum levels of detail set down.
Mark recommended thinking about notice clauses carefully at the negotiation stage and considering the following:
- Consistency – if you have a suite of documents, are all the notice provisions the same?
- Workability – is it possible to operate the clause – is it complete?
- Time – be careful to check deeming provisions and when counting business days. On crossborder contracts, it is not unusual for public holidays from more than one jurisdiction to be brought into definitions.
- Language/certainty – be clear on whether a clause should be permissive (“you may”) or mandatory (“you must”). Consider whether you are likely to be operating the clause. If not, do you want to make it difficult to comply with?
- Methods – consider the practicality of how a notice can be served; is email better? Or post? Perhaps describe a method rather than adopting a service name at Royal Mail which could change/become obsolete.
- Recipients – notice clauses might not be operated for a number of years. It may be better to reference positions rather than particular individuals. Consider also whether a single point of service should be nominated, particularly when dealing with multiple counter-parties or those based overseas.
Contractual discretion - "It cannot amount to an uninhibited whim"
Next we heard from Sohrab Daneshku, who discussed the doctrine of contractual discretion and when and how the court will review a discretion exercised under a contract. He explained that contractual discretion is the power of one party (the discretion holder) to make a decision under a contract affecting the other party. In that situation, the court may imply the following obligations to be observed by the discretion holder:
- to act in good faith;
- not to act capriciously/perversely/arbitrarily; and
- to act for a permissible purpose.
Taking us through the leading Braganza case, Sohrab informed us that a discretion holder must (i) take into account only relevant considerations and weigh them up in a non-perverse manner and (ii) come to a reasonable conclusion. A Braganza duty is more likely to be implied where there is a potential or actual conflict between the discretion holder and the other party to the contract. The extent of the obligations that may be implied will depend on the terms and context of the particular contract. Sohrab also highlighted situations where the doctrine may not apply, including where the contract contains a specific control mechanism, or where there is a clear equality of bargaining power.
Sohrab finished by discussing the following practical considerations parties should consider:
- When drafting agreements providing for an exercise of discretion, the precise wording can affect the extent of the obligations owed;
- When exercising contractual discretion, consider the purpose of the contract and the “target” of the discretion, i.e. the issue the discretion holder is meant to be considering; and
- If the Braganza duty is likely to apply, go through and document a thorough and proper decision-making process.
Exclusion and/or limitation of liability - "Put them in flashing lights"
Finally, Nigel Enticknap took us through the law governing clauses in business to business contracts which seek to exclude and/or limit the liability of a party, and the extent to which they are enforceable.
Nigel reminded us of the common rules requiring any exclusion/limitation clause to (i) be strictly interpreted (therefore drafting must be clear and unambiguous) and (ii) have been properly incorporated. Nigel explained that, in order to be properly incorporated, a particularly onerous or unusual clause should be fairly and reasonably brought to the attention of the other party, e.g. by specifically highlighting it on the covering page of a party's terms and conditions.
He also explained that the “reasonableness” test in the Unfair Contract Terms Act 1977 will apply to any clause limiting or excluding liability in negligence (other than a clause seeking to exclude liability for death or personal injury which will be ineffective), or any clause appearing in a counterparty’s standard terms of business that seeks to limit their liability for breach of contract.
Nigel then turned to consider whether entire agreement clauses can exclude liability for misrepresentation: the answer is no. He explained that if a party wants to exclude liability for misrepresentation, this should be stated expressly in the contract. Alternatively, a non-reliance clause could be used, i.e. a clause where one or both parties acknowledge that they have not relied upon any statement or representation when entering into the contract. The Court of Appeal has recently clarified that non-reliance clauses will still be subject to the UCTA reasonableness test.
As regards the assessment of the “reasonableness” of a clause:
- The Courts are less likely to interfere with a clause that has been the subject of negotiation between two parties of relatively equal bargaining power who are represented by lawyers.
- A blanket exclusion of liability is likely to be considered ‘unreasonable’ because the courts dislike contracts where there is no remedy against a breaching party; they consider them worthless.
- Regard will be had to other clauses used in the industry, and if they are similar.
- An offer to arrange insurance to cover the risk excluded by the exclusion clause has been held to make the exclusion of liability “abundantly plain” whilst leaving it open to a customer to obtain its own cover or pay a higher price.
Unsurprisingly, those negotiating contracts tend to focus on the key commercial terms. However, it is important to dedicate attention to some of the more standard provisions. These include clauses discussed in our talk, which should be the subject of careful consideration.
If you have any questions regarding this note or any of the points raised, please contact Mark, Sohrab, Nigel or another member of our Dispute Resolution team. For further details and other articles, view our Dispute Resolution page here.