Contract law update - David Lowe - ThinkHouse March 2015

Sarah Sasse: I am going to talk to David Lowe who heads up our commercial contracts team about what changes in English contract law there have been over the last 18 months.

So David, you've been doing these commercial law updates for some time now. What are there in terms of recent trends?

David Lowe: Well of course every year the case is about liability, for example, penalties are another area, then we have big issues like good faith. But the thing that's been common every time I have done this contract law review is how many of the cases are arguments about is there a contract at all and battle of the forms types of cases.

It occurs to me that actually we're not that great at managing risks and organisations on contracts because the contracts that are generating the problems and risks typically are not the ones that in-house legal have been involved in. They usually survive. It's the below the iceberg that struggles.

I think assiduous training, especially to senior managers on the importance of using subject to contract when you don't intend to form a contract, is really important because all too often directors and senior managing companies seem to end up sending inappropriate emails and finding they are stuck in a contract they didn't want to end up in.

And then the other area is on incorporation of terms. In the old paper days 15 years ago people used to be very good at my terms and conditions of sale shall apply and at least having the opportunity to have the battle of the forms but many of the recent cases show that people have forgotten about that and have forgotten how to incorporate terms in an electronic world to protect their businesses.

Sarah: So can you now incorporate standard terms by reference to a website?

David: Yes, is the good news. We always thought you could. As long as you were very how you did that you should be able to refer to a website saying subject to the terms and conditions on this website. But we've now had a case that actually says that does work. I think the Judge said something like "in this day and age why should you not".

So it is a very strong guidance incorporated by way of a website but in that case on the website page there is actually three different sets of terms and conditions and he didn't even have a problem with that. He said it is pretty obvious it's a warehousing contract and it's going to be subject to the warehousing terms and not the freight terms and therefore they apply.

People should be careful though, I mean if you incorporate by reference to your website make sure the link works. In litigation somebody is going to argue that the link never worked, the terms were never there, the site was always under construction and so forth. So you do need to keep archives of your websites, records of your websites and so on. But as long as you do all that it will work and I heavily recommend it in an electronic world it's a way of speeding things up.

Sarah: When you last did an update I seem to remember that good faith was the hot topic. Have there been any updates on good faith?

David: Yes you're right Sarah. We had a Yam Seng case which said good faith could be implied into contracts which shook a big shudder of fear around the business contracts community. We then had the Compass case which suggested that an express right to use good faith may have meaning but then the Court of Appeal did say yes but narrowed it considerably and also raised questions about the Yam Seng case about whether that was actually good law.

But then we've had a run of cases since then that generally sought to not apply good faith. So there TSG Building Services where the contract allowed a right to terminate in three months' notice without reason and court said that you didn't need to use that in good faith. There has been one case involving a training manual for pilots where the courts did decide to imply a duty to use good faith but it was a pretty unusual relationship and so it suggests that there is quite a high watermark now to imply a good faith term which is encouraging news.

Sarah: Have there been any recent cases on excluding liability?

David: We haven't had one of those cases. We have had a couple of interesting cases on exclusion of loss of profit. There was the Fujitsu and PWC contract where there was a total exclusion of loss of profit, direct and indirect. Fujitsu then claimed that that meant that they were left with no remedy and that's unfair, unjust and therefore shouldn't apply. The court very quickly kicked that to touch. They said you have very clearly excluded loss of profit, direct and indirect. In fact it's a mutual exclusion which you put in because you, Fujitsu wanted it so don't be surprised if it now comes back and bites you when you want it the other way round.  

I mean there's some difficulty with that case. The court said that Fujitsu did have some remedies. It was able to recover payment of historic invoices which is good news because sometimes we spend hours arguing about whether an exclusion of loss of profit excludes payment of the invoices and also suggested that Fujitsu might have had some other remedies such as asking PWC - which have become IBM - to account of profits which I think is a bit strange but generally a robust support of the contractual wording.

There has been another case on exclusion of loss of profits which is a reminder that in minimum purchase obligations if you exclude loss of profits you may well be excluding your remedy there if somebody's failed to purchase. However, the court quickly identified that the loss of profit in that case only excluded indirect loss of profit. The clue was that they put the word indirect at the beginning of the sentence so funnily enough the court said this only excludes indirect loss of profit therefore it didn't exclude direct loss of profit.  

So, no ground breaking clauses but cases that do remind us of the importance of getting the detail in these clauses right. It is well worth reviewing your standard exclusion clauses and making sure they are up-to-date.

Sarah: If there is a foreign party signing the contract what things need to be considered?

David: I think as commercial lawyers we often forget that if you have got a foreign party to an English law contract the foreign law might still be relevant. Many of us avoid getting the extra costs on the foreign legal advice because it often doesn't tell us anything that's surprising and often can be quite expensive.

There has been a recent case involving two Swiss parties to an oil trading contract subject to English law where, under Swiss law, one of the parties claimed they had signed in a way that made the contract invalid and the courts looked at it and said well in assessing whether the company has signed in accordance with local company law we have to have a look at local company law and if local Swiss law says it's not a valid signature, it's not a valid signature and therefore the whole contract is invalid. Even though it was subject to English law. So it's a real reminder to us that ideally you should get foreign legal advice if you've got a foreign party although you have got to weigh out the cost benefit, if you are regularly trading in other countries make sure you've got a broad understanding of the execution requirements in that country to avoid bespoke advice.

Sarah: I gather there have been a few cases recently where the courts have looked at inconsistencies in contracts?

David: Yes. We're all familiar with the situation. We have got a beautiful front end to the contract but we have never seen the back end. We have never seen the commercial schedules, the payments structures and so forth. They all come in on midnight the day before signature and you have a quick flick trough them and insert them and cross your fingers a bit really to be honest.

And one of the ways we have all got comfortable with that is putting a precedents clause into the contract making it clear that the front end overwhelms the back end if there is ever a dispute. We've had two cases now on that point about how do you deal with a precedents clause.

So if you've said the front end will always take precedent over the services specification, if there is an inconsistency, does the front end entirely trump the schedule and interestingly the court have said in both cases before we go to precedents clause we read the entire contract and try and make sense of the entirety and only then if we are left we a question on a particular point might we consider going to the precedents clause. So it is not a schedule A or schedule B applies. They'll put schedule A and schedule B together and find the little error and only concentrate on that and then deal with that and take that away from it.

So that precedents clause I'm afraid is rarely going to be relevant, the courts are going to try very hard not to use it. Counsel of perfection you have got to make sure your contracts are consistent but we all know the challenge of doing that with the substance of the commercial schedules.

Sarah: Do we have any greater clarity now on what's a reasonable termination notice?

David: Yes. It's always a difficult question isn't it? Badly written contracts, not clear what the termination clause says, how can you terminate it, are you locked in forever, one month, a year? And the classic question, of course, the legal answer as if it's not clear you can terminate on reasonable notice, what could that mean?

Hamsard and Boots was about children's wear being supplied to Boots. Hamsard - which became the Phoenix vehicle that came out of Adams children's wear - had actually gone bust several times. Boots then gave nine months' notice to terminate. The supplier said that feels a bit short. Under the old contract with Adams Childrenwear which we were always complying with, it was 18 months. Why shouldn't it be 18 months?

And the court said well firstly you never novated the agreement over so that old agreement is of historical interest only, it doesn't apply to the new relationship, nobody is applying that. So 18 months is irrelevant therefore the court had to look at what's reasonable and was nine months' notice reasonable? The Court said nine months is more than enough, its more than a season of children's wear which is what they thought would be a reasonable period and therefore yes Boots you have properly terminated this contract and supplier you have now been disappointed.

Sarah: And do you have any advice on how to effectively manage the transfer of a contract?

David: Well the Boots case is an example of how not to do it. The supplier has taken over from Adams Childrenswear but they had not made any attempt to say "hey Boots the older contract applies". If they had said to Boots "can we all agree that we are now trading on exactly the same terms as the old contract" or, even better, done a novation with the old company, the new company and Boots then it would have been absolutely clear what the contractual terms are but because they didn't bother, they just assumed. They didn't get away with it and so my advice would be always try and make it clear to the other party what you think the contractual terms are because it will then kick it to them to either deny or agree.

Sarah: Are we likely to see any changes in late payment?

David: Yes. A very big topic and it's interesting as a contracts lawyer to find there's potentially a manifesto issue in the forthcoming UK general election. We have seen a series of large corporates being challenged about their payment terms, increasing trends that organisations are stepping to 90 or even 120 days payment terms. That's now attracting political attention.

The current law in the UK says your payment terms should not be beyond 60 days but they can be beyond 60 days so long as they are not grossly unfair. What's grossly unfair? Nobody knows. The Government guidance at the time of the legislation comes in provides no help and there is little guidance as to whether it should be 90 or 120 days.

The Government has now recognised that this lack of clarity is potentially causing this problem and that if they want to help small and medium size businesses with payment practice they are going to need to do something. BIS has gone out to consultation on strengthening the law which I think could have the result that 60 days will be the default period unless you have got a very very very good reason and hopefully we'll have clarity on how good a reason it needs to be to step out of that.

They have also introduced obligations for larger companies to report on their payment practices so they can be held accountable publicly and they're also looking at changing the UK Government's sponsor of the Prompt Payment Code to make it clear that prompt payment means payment within no longer than say 60 days.

My prediction is that over the 12 months (depending on the nature of the Government that gets elected),we will have legislation making it difficult to pay beyond 60 days if you want it to be enforceable. But so what anyway, what does the law matter in this area. People who are suppliers will not take litigation to enforce against an ongoing contract. The only way this is really going to change is if trade associations and regulators take enforcement action and will they have stomach for that, that's to be seen.

Sarah: I have read a bit about the Modern Slavery Bill - what impact will that have?

David: Yes Sarah. It is not something you typically find yourself discussing in a commercial contracts review. Modern slavery, a very important issue for human rights purposes but why is that relevant to businesses?

It's become relevant to businesses because as the Modern Slavery Bill has gone through the House of Commons, House of Lords, they have introduced a transparency requirement requiring businesses to report on what they have done about reviewing their supply chain in ensuring there is no modern slavery in their supply chains. The idea is that companies above a certain level of size would have that obligation to report in their annual report.

There is currently a Home Office consultation out there saying what size of company and what sort of measures should they be required to comply with. If I had been asked what kind of size of company, I would be saying large multi-nationals who are probably already doing this anyway so I would say, I don't know a worldwide turnover of £200 million plus maybe.

Well the Home Office has said should it be a company larger than £35 million or more. Now £35 million is a relatively small business in my world and that feels like a fairly onerous obligation, therefore I'd encourage your businesses and trade associations to respond to the consultation saying if it's going to be large companies then we should make it very much very large companies and accept the threshold accordingly.

Importantly, companies will have the ability to simply say in the annual report we have done nothing. That's allowed as an option so a company might chose to not check its supply chain and simply make that statement. The whole point of that is to therefore track the bad publicity that will inevitably follow for higher profile companies to encourage the change.

Sarah: David, there is always a lot to take into account when you listen to a contract law update but as an in-house lawyer what are the key points to note.

David: I think the first point I'd start on is the key thing.

Have you got robust contract procedures to deal effectively with the battle of the forms to incorporate your standard terms in at the key steps? Remember you can incorporate into a website, make sure your senior management team understand the use and power of the word subject to contract and that they should use it often to avoid getting themselves into badly drafted contracts. So for me that's the most important issue because I think that's an area of risk businesses are not very good at managing and with a little bit of more care they can make a big difference to their risk profile.

But on the more traditional topics, do review your standard exclusions limitations to clauses and your typical way you negotiate them. It is an area where good practice is changing, the law is starting to change a little bit, and it is obviously really important that they work effectively. Look at the late payment practices, do you pay late, what are your typical payments practices, should you be responding the consultations and finally keep an eye out on the modern slavery bill, consider what you will be doing as an organisation, respond to the Home Office consultation.  

Sarah: David, thank you. That has been a really useful update so thank you very much for that.

David: Pleasure.