Of all the pillars of a contract, its term often appears the most straight-forward. However, as the Court of Appeal decision in Interactive Investor Trading Ltd v City Index Ltd [2011] EWCA Civ 837 demonstrates, this can be a serious pitfall if the interplay between the termination notice period, the exit assistance period and the overall term of a contract is not properly considered and clearly drafted.
Interactive v City Index also contains a health warning for companies using white-labelled products or services. A white-labelled arrangement will not necessarily result in a customer ‘belonging’ to the company purchasing white-labelled services. This is despite the common assumption underpinning most white-label arrangements.
A ‘white-label’ service
Interactive Investor Trading Ltd operates an interactive web site which provides financial tools and information for its clients. It purchased a white-label service from City Index Ltd who operated an online trading platform which enabled trading in contracts for differences and spread betting. There were two white-label agreements, one in respect of contracts for differences and the other related to spread betting, under which Interactive introduced its clients to City Index’s online trading services via a link on the Interactive web site. Under the white-labelling arrangement, the trading services provided via Interactive’s web site all had Interactive’s branding.
Once accepted by City Index, a client entered into a separate agreement with City Index. City Index then paid Interactive a share of the commission paid by clients on trades executed on the Interactive-branded platform.
Termination
Notice to terminate both agreements was served on 31 March 2010. The termination notice period under each agreement was three months, following which there was to be a ‘Wind Down Period’. The Wind Down Period was defined in the agreements as ‘the period of 6 months after termination of this agreement‘. The term of the agreements was not specifically defined – the agreements were to continue until terminated by either party.
The agreements were not clearly drafted and the parties entered into a dispute over each other’s respective rights and obligations before, during and at the end of the Wind Down Period. The dispute included Interactive’s right to receive commission on trades executed during the Wind Down Period, and, more critically, the extent to which City Index could solicit clients during and after this period.
The Wind Down period
The agreements could be said to comprise three different phases:
· the business-as-usual phase of service provision prior to termination of the agreement;
· the Wind Down Period; and
· the period after the end of the Wind Down Period.
Despite these more or less well-defined phases, the agreement contained a number of potentially ambiguous provisions. Rights and obligations were expressed to apply to a number of different time periods; ‘for the duration of this agreement‘, ‘during this agreement‘, ‘on termination of this agreement‘, ‘on and following termination of this agreement‘, ‘during the Wind Down Period‘ or ‘after expiration of the Wind Down Period‘.
In each case, it was not entirely clear how each expression of the different phases interacted or overlapped. Of particular importance was whether the Wind Down Period was, or was not, a continuation of the main term of the agreement.
Commission and solicitation
So, for instance, the link to City Index’s online trading platform was to be maintained on Interactive’s web site ‘during the Wind Down Period’ to allow City Link to deal with clients during this period. However, the obligation on City Index to pay Interactive a commission on trades executed by clients applied only ‘during this agreement’. The Court decided this meant that Interactive had to maintain the link to City Index’s trading platform during the Wind Down Period but was no longer entitled to commission on any trades conducted.
The interplay of the various phases caused a similarly unpleasant result for Interactive in respect of the non-solicitation provisions in the agreements. City Index was not permitted to directly market to, or solicit, clients:
· ‘during the agreement‘; and
· ‘after expiration of the Wind Down Period‘.
However, there was no prohibition on solicitation of clients during the Wind Down Period! Interactive argued that a commercial construction should be taken of the phrase ‘during the agreement‘ such that it extended to include the Wind Down Period. This would reflect Interactive’s expectation that it would retain complete ownership over any customer under a white-label arrangement. However, Tomlinson LJ concluded that ‘language is used consistently within the four corners of an agreement‘ and there was a window of opportunity during the Wind Down Period in which City Index was permitted to directly solicit clients to remain with it. A detailed and semantic analysis of words might have to yield to business commonsense in some cases but not this one (The Antaios Compania Neviera SA v Salen Rederierna AB [1985] 1 AC 191).
Drafting tips
The outcome in Interactive v City Index demonstrates the pitfalls of not adequately specifying what terms should apply during an exit period and, in the case of an exit period continuing after the term of the agreement, which terms should survive termination.
The best solution is normally to ensure that the provision of any business-as-usual services (as opposed to exit assistance services) does not extend beyond the termination of an agreement (see Diagram downloadable from panel opposite). It may be stating the obvious, but if the term and exit assistance period are not properly defined and the drafting does not clearly express whether or not the exit period is or is not part of the term of the agreement, the result can quite materially alter the ‘four corners of an agreement’. In Interactive v City Index this meant that under a white-label agreement the provider was given access rights to clients which ordinarily would not be intended for such arrangements.
Similarly, it is important to consider exit assistance obligations. From a business continuity perspective, it is prudent for these duties to commence on the date that a termination notice is issued and to expire some time after the cessation of the services (see Diagram downloadable from panel opposite). This allows the provision of the exit assistance services to run in parallel with the provision of the ordinary services for a period of time up until the date of termination, after which the exit assistance obligations alone may continue for a short period in order to complete any exit activities after the services have been migrated to the customer or a replacement supplier.
In this way, the line between where ordinary service provision ends and where exit assistance services continue is clearly drawn as the date of termination. Finally, the specific survival provision should pick up those provisions which are intended to continue beyond the term of the agreement.
Melissa Fai is a Managing Associate in the Technology, Media and Telecommunications practice at Linklaters LLP
