Travis Perkins: Commercial Focus – Spring 2019
- Contract found to expressly identify a class for the purposes of the Contracts (Rights of Third Parties) Act 1999
Chudley and others v Clydesdale Bank Plc (t/a Yorkshire Bank)
- Liquidated damages clauses where project never completed
Triple Point Technology Inc v PTT Public Company Ltd
- Documentary evidence needed to support oral contract
O’Neill v Avic International Corporation (UK) Ltd
- Binding contract despite failure to agree essential term
Wells v Devani
- Construction of notice period in SPA
Hopkinson v Towergate Financial (Group) Ltd
- Distance contracts: limited space to display information and the right of withdrawal
Walbusch Walter Busch GmbH & Co. KG v Zentrale zur Bekampfung unlauteren Wettbewerbs Frankfurt am Main eV
- Relational contracts and implied duty of good faith
Bates v Post Office Ltd
- Are your data transfer contracts ready for no-deal?
- Jurisdiction clauses: steps to take on a no-deal Brexit
Recent Case Law
Contract found to expressly identify a class for the purposes of the Contracts (Rights of Third Parties) Act 1999
The recent case of Chudley v Clydesdale Bank provides a useful illustration of how s1(3) Contracts (Rights of Third Parties) Act 1999 (the Act) is to be applied. The case involved a letter of instruction between an investment manager and a bank, to set up a segregated client account. The Court of Appeal allowed the appeal of investors, and held that the letter of instruction was a binding contract, the benefit of which could be enforced by the investors under the Act.
The bank’s main argument was that there was no express identification of the investors by name. After construing the contract as a whole, the court found that the reference to “client account” was an express identification of a class that the appellant investors fell under, in compliance with s1(3) of the Act. There was no reason why the same contractual term could not also satisfy the requirement in s1(1)(b) of the Act, that the term purported to confer a benefit on the third party. The court also noted that it was not a requirement of the Act that a third party entitled to benefit from the contract, was aware of the contract at the time it was made, or at any time thereafter.
There is a relative dearth of case law on the Act, so this is a welcome illustration of the courts’ approach. Of particular interest in this case is the reasonably flexible approach taken by the court in determining that a class of persons had been identified (in this case, simply the use of the words “client account” was sufficient) and, associated with this, the fact that the court will consider the contract as a whole in order to identify a class of persons for the purposes of the Act. The fact that the investors did not need to be aware of the contract at the time it was made is also of note.
For further information, please contact Jessica Brickley
Liquidated damages clauses where project never completed
The case of Triple Point Technology v PTT Ltd concerned the termination of a software systems contract amidst a dispute about delay. Article 5.3 of the contract required Triple Point to pay damages for delay at the rate of 0.1% of undelivered work per day. The question for the court was how to apply a liquidated damages clause for delay, in circumstances where the supplier had failed to complete the contract.
In cases where the contractor fails to complete and a second contractor steps in, the court identified three approaches to clauses providing for liquidated damages for delay. The court held that the correct approach depends upon the specific wording used. There is no rule that liquidated damages must be used to compensate the employer for part of its loss. In this case, article 5.3 focused specifically on delay between the contractual completion date and the date when completion was achieved. It had no application in a situation where the supplier never achieved completion. So, PTT was entitled to damages for non-completion assessed on ordinary principles, but not liquidated damages.
There is a significant contrast between the decision here and that in a recent High Court Case, GPP Big Field LLP v Solar EPC Solutions SL, in which liquidated damages were held to continue to apply post-termination. There is clearly a significant divergence in the authorities as to how this point is handled; in Triple Point, the approaches the judge identified were the clause not applying in the given circumstances, the clause applying up until the point of termination of the contract, and the clause continuing to apply until a third party completes the work in the original supplier’s place. The application of liquidated damages beyond termination and/or when a project is never finished is clearly very much subject to the individual wording of the clause, and so care should be taken to handle such events expressly in liquidated damages clauses.
For further information, please contact Louise Wilson
Documentary evidence needed to support oral contract
The High Court has recently considered whether an alleged oral contract had been entered into between Mr O’Neill and Avic. The alleged agreement was written on the side of an envelope, which Avic claimed they had never been provided with. The High Court held that the best approach for a judge to adopt in making factual findings was to be guided principally by the contemporary documents, and inferences which could be drawn from them and from known or probable facts, rather than oral evidence of witnesses.
Applying settled law, the High Court ruled that the claimant had not proved that there was an oral contract, with the lack of documentation/electronic footprint being a deciding factor. In particular, the court highlighted the fact that it would be unusual to have an agreement for such a high value (2% of £27m), without a written agreement of any sort, and the fact that the associated NDAs had not been properly put in writing and executed. The court therefore found that this alleged contract was not made.
This case provides an interesting illustration of the factors which the court will take into account when determining whether the parties intended to be legally bound. In particular, it is interesting that the court considered, a) the value of the contract and the fact that market practice is generally to have a full written agreement for a high value contract, and b) the state of the associated documentation.
Binding contract despite failure to agree an essential term
The Supreme Court has overturned a majority decision of the Court of Appeal to hold that a binding agreement was reached between two parties, despite the parties’ failure to agree an essential term identifying the event that would trigger the obligation to pay commission.
Mr Wells developed a block of 14 flats that he had trouble selling. His details were provided to Mr Devani, an estate agent, who telephoned Mr Wells to discuss the flats. During the call, Mr Devani told Mr Wells how his commission was calculated (2% plus VAT), but did not mention the event which would trigger its payment. Thereafter, Mr Devani introduced a purchaser to Mr Wells who later bought all of the flats. When the sale was completed, Mr Devani submitted an invoice and Mr Wells refused to pay it.
At first instance, the judge held that a legally binding contract had been made during the phone call, despite no agreement on the trigger event that would entitle Mr Devani to commission. He held that, in the absence of express agreement, the law will imply the minimum term necessary to give business efficacy to the parties’ intentions. The Court of Appeal overturned this decision to hold that failure to agree an essential term meant that there was no concluded contract. The Court of Appeal recognised that terms may be implied into a concluded contract, but it was wrong to turn an incomplete bargain into a legally binding contract by adding implied terms.
The Supreme Court found that the only sensible interpretation of the parties’ words and conduct was that the commission would be payable on completion of a purchase by a buyer introduced by the agent, so it was not necessary to imply a term. If it had been necessary, however, the court would have had no hesitation in doing so. It did not agree with the Court of Appeal that there is any general rule preventing the court implying a term where that will render the agreement sufficiently certain or complete to constitute a binding contract, and the conditions for implying a term are satisfied.
The decision emphasises the court’s reluctance to find that an agreement is too vague or uncertain to be enforced where the parties intended to be bound and have acted on their agreement. Of course, as a practical matter, to avoid the risk that the courts will find their bargain unenforceable – or, conversely, imply a term that is not in fact what they intended – parties should ensure that all essential terms are expressly agreed.
For further information, please contact Caroline Williams
Construction of notice period in SPA
Under an SPA, the sellers agreed to indemnify the buyer against any claims arising out of an investigation, launched by the Financial Conduct Authority (FCA), into mis-selling of certain financial products. The buyer notified the sellers that it intended to claim under the indemnity, in relation to potential mis-selling claims arising out of a review the FCA had already started. The sellers rejected the claim because they did not provide the details of the claims under the indemnity, including an estimate of their value (required by clause 6.7), and the fact that the claim was premature. The judge at first instance rejected the sellers’ claims and the sellers appealed.
The limitation on the sellers’ liability under the SPA read as follows:
“6.7 The Purchaser shall not make any Claims against the Warrantors nor shall the Warrantors have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing (specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims) is given to all the Warrantors as soon as possible and in any event prior to: 6.7.1 the seventh anniversary of the date of this Agreement in the case of any Claim solely in relation to the Taxation Covenant; 6.7.2 the date two years from the Completion Date in the case of any other Claim; and 6.7.3 in relation to a claim under the indemnity in clause 5.9 on or before the seventh anniversary of the date of this Agreement.”
The SPA defined “Claim” as a claim under the warranties or the tax covenant in the SPA. It was known between both parties that the defined term “Claim” did not include claims under the mis-selling indemnity.
The court held that the claim was valid and the notice did not need to set out an estimate of the claim in order to be valid. The court acknowledged that, “parties who have entered into a professionally drafted agreement in which terms have been elaborately defined intend to use such terms in accordance with the definitions”. Although the court noted that the limitation had not been drafted particularly well, it was clear from the consistent use of “Claim” in clause 6.7 that the choice of an un-capitalized “claim” in clause 6.7.3 was deliberate, and intended to refer to claims under the indemnity, as distinct from claims falling within the definition of “Claim”, and that accordingly the bracketed wording was intended to apply only to claims falling within that definition, and not to claims under the indemnity.
Although this case related to an SPA, it is obviously relevant to any contract which contains a notice period for the making of claims.
As far as the drafting is concerned, where parties have entered into a professionally drafted agreement, the normal starting point for interpretation is a textual analysis of the words used. However in this case the judge concluded that the clauses were so strewn with errors that rigorous textual analysis was unlikely to reveal the parties’ intended meaning. The judge speculated that some of the mistakes arose because clause 6.7.3 was bolted onto clause 6.7 as an afterthought. A reminder that if you are inserting provisions into an agreement which has already been drafted, always check carefully the other parts of the clause, associated definitions and other clauses to ensure the new clause works properly.
For further information, please contact Caroline Williams
Distance contracts: limited space to display information and the right of withdrawal
The European Court of Justice (ECJ) has considered the rules around using “a means of distance communication which allows limited space or time to display the information”, for the purposes of the Consumer Rights Directive (2011/83/EU) (CRD). Under the CRD, where distant communication is used to complete a contract, the trader may provide some of the required pre-contract information via separate means, such as via a linked website.
The case concerned the information on a consumer’s right of withdrawal in that company’s advertising, in the form of an advertising brochure attached to various newspapers and magazines. That leaflet contained a purchase order in the form of a detachable mail order coupon. The right of withdrawal was referred to on both the front and back of the mail order coupon. The instructions on withdrawal and the model withdrawal form could be found on the website identified. The Zentrale was of the opinion that the leaflet in question was unfair on the ground that it did not meet the formal information requirements relating to the consumer’s right of withdrawal, as the model withdrawal form was not attached to that leaflet.
The ECJ held that, when determining whether a particular means of communication allows limited time or space to display information, it is the “inherent characteristics of the means concerned” that counts. However, the trader’s decision about how much advertising space or time to buy and how to use it, are not relevant.
Where the means of communication are limited the trader must, as per the CRD, provide the consumer with information about the conditions, time limit and procedures for exercising the right of withdrawal. It is not enough to just mention the right of withdrawal. However, the trader need not provide the model withdrawal form itself; it is sufficient for the form to be provided via another source.
ECJ confirmed that it is for a national court to determine whether a particular means of communication qualifies as one that allows limited space or time to display the information; the Attorney General also made it clearer that he did not consider paper leaflets would qualify.
For further information, please contact Jessica Brickley
Relational contracts and implied duty of good faith
The third judgment of Fraser J in respect of this group litigation focused only on the common issues to all claims in the Group, namely the legal relationship between Post Office and the Claimants (over 500 sub-postmasters) and contractual interpretation. This judgment will lead to determination, at further trials, as to whether any express or implied contractual terms have been breached and the Claimants’ entitlement to damages.
Implied duty of good faith
The court recognised that there is no general duty of good faith in all commercial contracts. However, it held that an obligation of good faith will be implied into some contracts (“relational contracts”) if there are no express terms preventing the implication of such an obligation and where there is a presumed intention of the parties. Whether a contract is a relational one is heavily dependent on the context but the court provided a non-exclusive list of relevant characteristics, which are to be taken into consideration, namely:
- The contract is mutually intended to be a long-term one.
- The parties intend that their roles will be performed with integrity and fidelity to their bargain.
- The parties are committed to collaboration.
- The spirits and objectives of the parties’ venture may not be capable of being expressed exhaustively in a written contract.
- Each party places trust in the other, but of a different kind to that found in fiduciary relationships.
- The contract relies on a high degree of communication, cooperation and mutual trust and predictable performance based on mutual trust and confidence, and expectations of loyalty.
- There may be a degree of significant investment or substantial financial commitment by either one or both of the parties.
- The relationship between the parties may be exclusive.
Consequential implied terms
The judge held that a considerable number of terms were to be implied into the contracts between Post Office and the Claimants due to the contracts being found to be relational ones. Among others, Post Office was subject to the following obligations:
- not to take steps which would undermine the relationship of trust and confidence between the parties;
- to exercise any contractual or other power honestly and in good faith for the purpose for which it was conferred;
- not to exercise any discretion arbitrarily, irrationally or capriciously; and
- to exercise any discretion in accordance with the obligations of good faith, fair dealing, transparency, co-operation, trust and confidence.
Other more specific duties included obligations to keep accurate records of all transactions in the accounting system, cooperate in seeking to identify the possible causes of alleged shortfalls, disclose possible causes of apparent shortfalls to claimants fully and frankly, and not seek recovery unless and until Post Office had carried out a reasonable and fair investigation as to whether a shortfall was properly attributed to a Claimant.
Post Office’s position had been that these were business to business contracts, and that “if the Claimants were right in the broad thrust of their case, this would represent an existential threat to Post Office’s ability to continue to carry on its business throughout the UK in the way it presently does.” In this case, the Claimants were right and this could have far reaching repercussions on the preparation of and compliance with contractual terms, even where they have not been expressly drafted into a contract.
It is important to consider the contractual terms that you have in place with your agents or similar – particularly regarding those relationships that are long term involving a high degree of trust, cooperation and communication. It may be that the Court would consider that further terms are implied into the contract (that are not expressly stated), and that there are more obligations on one party than originally envisaged.
Changes to the reporting procedure under RIDDOR
The Health and Safety Executive (HSE) are making some changes to the way that Reportable Accidents, Diseases and Dangerous Occurrences are reported online. There are no changes in the legislation or, as a consequence, what has to be reported.
The main change is that the web-based system will NOT now automatically send a copy of the report to your email. It is important that you keep a copy of your report, in the event that you are asked to prove that you have reported a particular incident. On the new system you need to download your completed accident report, which should then either be printed or stored securely.
For more information about how to make a RIDDOR report, please contact our Compliance & Regulatory team, or visit the HSE website.
Still no consensus on what will happen with Brexit, but the following two items will be of interest in case of a no-deal.
Are your data transfer contracts ready for no-deal?
GDPR and the UK as a third country
The General Data Protection Regulation (GDPR) has already been transposed into UK legislation by the Data Protection Act 2018, and this will be reinforced by the Withdrawal Act. Data protection regulation within the UK, therefore, should not change following Brexit. However, where the UK’s regime interacts with the EU, contracts which involve cross-border data transfers may need to be revisited.
Transfers to the UK
Post-Brexit, the UK will be a “third country” for the purposes of the cross-border transfer arrangements. The European Commission has indicated that, in the event of a no-deal, it will not start the process of making an adequacy decision in relation to the UK (which would provide a blanket approval of the UK to receive data transfers) until after Brexit, and this process is likely to take many months.
In the meantime, in order to transfer personal data to the UK, businesses in EEA member states will need to meet one of the other methods of ensuring adequate safeguards set out in the GDPR. In reality, the most straightforward way to achieve this is by entering into the EU-approved standard contractual clauses between the parties. This does require some time and resource, as the standard clauses should set out the type of data, purpose of processing, etc. and so an information-gathering exercise will be required to ensure adequate details are included.
Transfers from the UK
The UK government has confirmed that it will, at least transitionally, continue to recognise all EEA countries, Gibraltar, and any country which is the subject of an existing EU adequacy decision, as “adequate” to allow data flows from the UK to Europe to continue. In addition, the EU Standard Contractual Clauses and any Binding Corporate Rules authorised prior to Brexit will continue to be recognised in UK law. Businesses will, therefore, for the time being, continue to be able to send personal data to other countries on the same basis as they currently do.
However, note that where transfers are made to the US under the Privacy Shield framework, the US participant receiving personal data must update their commitment statement to state specifically that it extends to personal data received from the UK, in order for UK businesses to continue to rely on Privacy Shield to transfer to that participant post-Brexit.
Documenting the changes
When dealing with the above changes, businesses will need to ensure that these are reflected in their data protection-related documentation. For example, privacy notices are required to set out the fact that data will be transferred to a third country, the existence or absence of a relevant adequacy decision, and reference to the method of ensuring adequacy used in the absence of an adequacy decision, and so are likely to need updating if any of the above considerations apply. Businesses’ internal records of processing (which are required to be maintained to comply with GDPR/DPA), will also need to be updated to reflect the changes in the adequacy mechanism used.
For further information, please contact Deryck Houghton
Jurisdiction clauses: steps to take on a no-deal Brexit
The Hague Convention and the effect on existing contracts
The enforcement of contracts made between two UK parties with exclusive jurisdiction in the UK, should not be affected by Brexit (unless they involve assets located elsewhere in Europe). However, where cross-border enforcement is involved the position is more complex.
The UK deposited an Instrument of Accession to the Hague Convention on 28 December 2018, and accordingly the Hague Convention will apply to agreements entered into on or after 1 April 2019. This means that EU member states (and Mexico, Montenegro and Singapore) must, a) give effect to exclusive English jurisdiction clauses, and b) enforce judgments of the English courts.
However, this does not apply to agreements entered into before 1 April 2019. In addition, for existing agreements, the recast Brussels Regulation (which regulates jurisdiction and the recognition and enforcement of judgments between EU member states), will not apply in the UK after Brexit, and so enforcement of UK judgments in EU member states will be subject to the national procedural laws of the applicable jurisdictions.
Three potential routes for dealing with this issue in respect of existing agreements are:
- Obtain local advice on the ability to enforce an English law judgment in the relevant member state (i.e. where any non-UK party to the contract is situated) post-Brexit.
- Enter into a supplementary agreement post 1st April granting exclusive jurisdiction to the English courts (which will then be subject to the Hague Convention).
- Enter into a supplementary agreement setting out that disputes will be settled by arbitration.
In respect of option 3, arbitration is unlikely to be affected by Brexit, as it is typically regulated at the national level and then by the New York Convention, a non-EU international instrument. Any award made in the UK should remain enforceable in EU member states on the basis of the New York Convention.
For further information, please contact Lindsey Clegg
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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