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Commercial contract law: what happened in 2016 - ThinkHouse foundations

13 February 2017

Here we provide a round-up of commercial contract law over the last 12 months including key topics such as wilful default - and of course a little bit of Brexit.

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Mike Reed: My name is Mike Reed I'm a senior associate in the commercial, IT and outsourcing team at Gowling WLG and this is a podcast in follow up to our most recent ThinkHouse Foundation session. I'm here with my colleague Rachel Pennell who has done a contract law update for us and that's the topic of this podcast today.

Rachel we're seeing a lot of references in contracts to wilful default and deliberate breach. Can you tell us a bit more about these concepts and the context in which they are being used?

Rachel Pennell: Yes we are seeing more and more references to wilful default in our contracts and also similar terms such as deliberate breach and wilful misconduct perhaps because these concepts have been imported from the US. The context in which we are particularly seeing this is in limitation of liability clauses. Parties are agreeing that liability cannot be excluded or limited for wilful default or deliberate breach. So the contractual liability caps and exclusions therefore do not apply. In our view this is something of a concern mainly given the uncertainty around what these terms actually mean. The Courts have attempted to provide some interpretation of these concepts.

So in National Semiconductors v UPS which is a case that was around about 20 years ago, the Courts had to consider what wilful misconduct meant. The High Court in that case found for the Defendant on the basis that wilful misconduct had not been proved which required there to be firstly an intention to do something which the actor knew to be wrong or reckless, in that the actor knew that loss might result from this act but did not care whether loss resulted or not. They also said that recklessness involved somebody taking a risk he knew he ought not to take.

Then the courts in De Beers v Atos, which was a 2010 High Court case, looked at the meaning of deliberate misconduct in the context of a limitation of liability clause which was expressed not to apply where there was wilful misconduct or deliberate default. The Court found that there was a defending order of culpability for the terms, fraudulent misrepresentation, wilful misconduct and deliberate default. Fraudulent misrepresentation in their view obviously involved dishonesty. Wilful misconduct in their view is a person's conduct who knows that he is committing and intends to commit a breach of duty or is reckless in the sense of not caring whether or not he commits a breach of duty. Whereas deliberate default in the Judge's view did not extend to recklessness but was a default that was deliberate in the sense the person committing the relevant act knew that it was a default.

Then in AstraZeneca v Albemarle, Fujitsu v IBM and the International Broadcasting Corporation v and MAR LLC deliberate breach was looked at and was found to be an act committed by a party knowing it was in breach of contract. So for example in AstraZeneca v Albemarle, Albemarle was found not to have to have deliberately breached a contract by not supplying products subject to purchase orders which AstraZeneca had placed because Albemarle did not believe that it was in breach of contract. In that case a lot of emphasis was placed on the fact that Albemarle had taken US legal advice to the effect that it would not be in breach of contract if it did not supply in accordance with those purchase orders and had acted on that legal advice, so that was irrespective of the fact that legal advice turned out to be wrong.

Mike: So the Courts had been looking at these terms in quite a few cases. So is the concern that they've not really helped to clarify recently what those terms actually mean?

Rachel: Exactly. Our concern is that while case law provides some assistance in interpreting these terms have these cases really helped us to understand what these terms mean and how they will be interpreted in a dispute. It is important to note that their actual meaning will depend heavily on both the other terms of the agreement and the commercial background and context. Also the Courts have to assess in terms of knowledge which means that they have to look behind the express words and this seems to open the door and create uncertainty. Until the Courts have the opportunity to explore these concepts in more detail they are very open to interpretation.

Consider for example how these terms might be interpreted in the context of minor breaches if that minor breach could lead to unlimited liability for a party or if a party terminates a contract wrongfully but not realising they were terminating wrongfully could they then also be exposed to uncapped liability. The worry is that given the lack of clear meaning these concepts have the potential to undermine the contract. This assertion is why you might want to push back on expressing that the liability caps do not apply in relation to wilful default or deliberate breach in your contract. Or if you are going to include reference to these concepts there may be a good reason for doing so but clearly define what it is that you are trying to capture to avoid uncertainty.

Mike: So I know there were a couple of big cases in 2016 in relation to contract variation. Can you explain to us in a bit more detail about what impact those have had?

Rachel: Yes so the Court of Appeal has in two different cases in 2016 looked at whether it is possible to vary a contract orally or by conduct. If there was a clause in the contract expressly stating that any variation must be in writing and signed by authorised representatives of the party. So this is the typical anti-oral variation clause that we see pretty much as boilerplate in most of our contracts.

So in the first case that we are going to discuss Globe v TRW which was a dispute about an exclusive supply agreement. The point was considered by the Court of Appeal in obiter as liability had already been determined against Globe and it was unanimously confirmed by the Court of Appeal that it is possible to vary an agreement which includes a no oral variation clause orally or by conduct. That decision in that case is expressed to be all about freedom of contract, parties can agree what they want and then agree something else further down the line.

Then the Globe v TRW case was very quickly followed by a matter of weeks by MWB Business Exchange Centres v Rock Advertising Limited and the Court of Appeal's decision in this case was precisely on this point. The facts of this case the MWB case were MWB Business Exchange rented out service office space in London to Rock Advertising under a licence. Rock then fell into arrears of the licence fees. MWB then locked Rock out of their office space and gave notice to terminate the licence. Rock argued that MWB were not entitled to do this because a credit controller from MWB had verbally agreed that Rock could have more time to pay. Rock had also agreed to pay part of their debt off straight away. MWB of course disagreed pointing to the clause in the contract saying that all variations to the licence had to be in writing and signed by the parties. So the case went up to the Court of Appeal as the High Court initially found in favour of MWB, the Court of Appeal found in favour of Rock, the Tenant. The Court of Appeal found in favour of Rock the tenant. The Court of Appeal considered three points in this case, two of which are pertinent to this contract update. The first being whether the no oral variation clause in the contract meant that there couldn't be a subsequent oral variation in the contract and the second whether Rock had actually provided any consideration for this oral variation as we all know that consideration is a key constituent of the contract. On the second point, the consideration point, the Court of Appeal decided that there was consideration in recovery of arrears and the fact that the property would not be left empty. In terms of impact, one of the main impacts of this decision is likely to be the limited benefit required to constitute consideration for such a variation, we might have seen more discussion on this point.

But onto the main point that we are talking about, the Court said that this verbal agreement was binding on both of the parties. All terms and documents including a variation clause can be amended at a later date if the parties agree. This meant that there had been a valid variation of the document by verbal agreement between the parties and again the emphasis of the Court's decision was all about freedom of contract and party autonomy. The Court showing a clear reluctance to interfere in what the parties have agreed between themselves.

Mike: So on that basis does that mean that we should no longer include clauses in our contracts that state that variations have to be in writing?

Rachel: No we think that we should continue to include these clauses because it encourages best practice for your businesses. It is a bit of a warning that businesses need to make sure that they have good internal processes in place in terms of who has the authority to talk about contract terms to suppliers and customers and ensuring that there is adequate training to ensure that teams are encouraged to be careful about what they comment about and agree to orally. We are also not clear what the standards and evidential requirements will be for oral agreements to be binding, although the Courts have said that strong evidence would be required. So parties clearly need to be more careful about what they verbally agree to and their conduct after a document has been completed.

Mike: I also understand there has been a big Supreme Court case on implied terms recently. Can you tell us a bit about that as well?

Rachel: Yes. So this was the Marks & Spencer v BNP Paribas case. This case consisted of clarified and confirmed a test for implied terms following the 2009 Attorney General of Belize case in which it was considered that the law of implied terms had somehow been diluted or loosened. In the Mark & Spencer case, although supposedly not having changed the law on this point, is somehow seemed to have reigned the Courts in from taking a potentially more imposing approach to implied terms to taking a stricter test on implying terms into contracts. The facts of the case were that Marks & Spencer served a break clause in a lease which meant that the lease terminated close to the beginning of a quarter for which M&S had already paid rent in advance. M&S obviously wanted their money back and argued that it was necessary to imply a term for apportionment and refund of the rent, in the event that the break was properly exercised. However the Supreme Court rejected Marks & Spencer's argument on the basis that such a term was not necessary for the lease to have business efficacy. They said that a term can only be implied if without the term the contract would lack commercial or practical coherence. The term must be so obvious as to go without saying. This is potentially part of a term by the Courts, there was a stricter approach then for implying terms into contracts and particularly business to business contracts and it was about giving more responsibility to the parties to draft contracts properly. The case suggests that in all but the most necessary of cases it is likely that if commercial parties do not express a term clearly in a contract it is very unlikely to be implied. This decision also seems to follow the variation decisions that we have just discussed in terms of the emphasis on party autonomy.

Mike: So thanks very much Rachel and if anyone has any questions then obviously do feel free to contact either Rachel or myself and do keep an eye out for future ThinkHouse Foundation events and if you have any questions in that regard do please contact us to get added to our mailing list.

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