Richard Stephens presented his
annual update on contractual interpretation case law from the last year,
continuing this invaluable series which has become a staple for IT and
commercial contract lawyers.
The session considered the
English courts’ increasing tendency to focus on parties’ conduct rather than
written terms and covered such diverse themes as contract formation,
misrepresentations, non-variation clauses, good faith and termination rights. A
selection of the take-home points are outlined below.
Have you got a contract? If so, with whom?
We started with a lesson from Fairhurst Developments and Fairhurst v
Collins [2016] EWHC 199 (TCC) in which it was held that the person who
signs will be held to be the contracting party, unless they made it clear in
the document or by extrinsic evidence that they were doing so as an officer of
a company. This will be of particular import to SME clients who might be at
risk of exposing themselves to such personal liability if this is not heeded.
Formalities, implied contracts and letters of intent
The importance of working through
negotiations to the very end was emphasised by several cases in 2016 and many
businesses may be surprised to find that they have entered into an agreement
without a drop of wet ink.
Reveille Independent v Anotech International [2016] EWCA Civ 443
highlighted the fact that an unsigned draft agreement can be entered into by
conduct and bind the parties (in some cases, even where it specifies that it
must be executed by both parties to be effective).
The importance of lawyers
ensuring that agreements are approved and executed was further stressed in Heis v MF Global UK Services [2016] EWCA
Civ 569. In that case no draft reached
the signature stage but the existence of an agreement was implied due to the parties’
continuing conduct in paying substantial sums for services.
In such cases it is the conduct of
the parties which tends to be of more importance than the wording or
formalities. In New Media Holding
Company v Kuznetsov [2016]
EWHC 360 (QB), a one-page, ostensibly non-binding term sheet was held to be
enforceable in the absence of a subsequent formal agreement. The question was
whether objectively the parties intended to create legal relations and had
agreed all the terms necessary to create a binding contract.
Arcadis Consulting (or Hyder) v AMEC (or Buchan) [2016] EWHC 2509 (TCC) provided a cautionary
tale in which no version of a letter of intent was agreed but works were
carried out. The court held that there was a simple contract based on the draft
letters of intent but not incorporating any terms and conditions and, crucially,
not including any liability cap.
The overriding lesson is that it is often better to reach an agreement
based on a compromise than to let the agreement fall by the wayside and carry
on without.
Can a warranty also be a misrepresentation?
In Idemitsu v Sumitomo [2016]
EWHC 1909 (Comm) it was held that providing an execution copy with finalised warranties in it did not amount to
simultaneously making a representation in the same terms. While this is not
binding precedent and there are some conflicting judgments, academic opinion
appears to be siding with this approach.
Non-variation clauses
A tour through Globe Motors v TRW Lucas Varity [2016] EWCA Civ 396 and MWB Business
Exchange Centres v Rock Advertising [2016] EWCA Civ 553 further
played down the importance of lawyers’ carefully drafted contracts by finding
that terms stating that variations are not valid unless made in signed writing
are not effective in invalidating subsequent oral variations.
Penalties
In the wake of Edgeworth Capital v Ramblas Investments [2016] EWCA Civ 412 and Hayfin Opal Luxco
v Windermere VII CMBS [2016] EWHC 782 (Ch) it appears that it is the
primary/secondary obligation test from Makdessi
which the courts are favouring for penalties. However, there appears to be no
settled way of applying the test so it is advisable to draft around the issue
by avoiding making payments consequent on breach.
Termination
Last but not least, the
discussion turned to recent case law on termination.
Following Vinergy
International v Richmond Mercantile [2016] EWHC 525 (Comm), if a
contract does not specifically address common-law repudiatory breach, notice-to-remedy
material breach requirements will not apply to repudiatory breaches.
In Grand China Logistics v Spar Shipping [2016] EWCA Civ 982 it was
held that failure to make punctual payment of hire under a charter party was
not a breach of condition and while a slightly late payment is not likely to be
a repudiatory breach, chronic non-payment (with a notice of inability to pay),
was.
A further point to note from this
case is that that a mere contractual right to terminate does not automatically
mean the party terminating can sue for loss of bargain – it depends on
construction so drafters should try to have the right expressly set out in the
contract.
For more discussion of defined
terms, order of precedence clauses, reasonable endeavours, good faith, notice
requirements, exclusive remedies, indirect losses and more, don’t miss the podcast
of the session and accompanying slides.
Part
2 of this seminar is on 21 March 2017. It will include a panel discussion with senior
lawyers from Sky and Visa giving an in-house perspective and an opportunity to discuss
views on this year’s developments in a workshop forum.
Matthew Ives is an Associate at
Hogan Lovells International LLP
