Contract law: 12 months in review

A number of cases have come before the courts due to uncertainty over which terms should prevail, either as a result of inconsistencies between bespoke and standard terms, battle of the forms or incorporation issues.

The case of Septo Trading Inc. v Tintrade Limited [2021] considered the former, with the Court of Appeal concluding that two provisions could not fairly and sensibly be read together.  The case provided a useful reminder of the distinction between a standard term that qualifies an expressly agreed term and one that deprives it of practical effect.  For more information, see our briefing here.

The main question under consideration in the case of TRW Ltd v Panasonic Industry Europe GmbH & Anor [2021], was whether careful drafting could beat the ‘last shot’ doctrine in a battle of the forms dispute.  In this interesting judgment, the Court of Appeal decided that careful drafting protected Panasonic against the ‘last shot’ doctrine.  The first shot therefore won the battle, despite TRW subsequently issuing blanket orders containing their own terms. For more information, see our briefing here.

The clause in dispute in the case of Blu-Sky Solutions Limited v Be Caring Limited [2021] was an administration charge contained within standard terms accessible from Blu Sky’s website. The judge decided that the charge was particularly onerous and unusual and had not fairly been brought to the attention of Be-Caring.  Instead, it was “cunningly concealed in the middle of a dense thicket”.  For more information, see our briefing here.

On the issue of inconsistency, certain clauses (such as force majeure clauses or extensions of time) have the practical effect of qualifying absolute obligations in other clauses within a contract. However, this does not mean that they are inconsistent. The question to consider is whether the clauses can sensibly be read together. If they cannot, there is inconsistency and the special condition is likely to prevail over the standard term, provided that is the true intention of the parties.

In relation to competing sets of terms, it now appears that the last shot doctrine can, in theory, be displaced by evidence and careful drafting. If a party wishes to ensure its standard terms govern all future transactions, careful wording will be required and crucially agreement should be obtained from the counterparty at the outset. This should ideally be in writing, as would be required for the creation of an overarching master agreement

Finally, a word of warning about the drafting and layout of standard terms. The judge in the case of Blu-Sky solutions was particularly scathing about the standard terms in question, set in closely spaced type with no separate clause headings. Despite the contract being between two commercial entities, the case highlights the importance for all standard terms to be written in clear and concise terms, highlighting substantial financial obligations with clear headings.

One of the most anticipated judgments of 2021 was the Supreme Court ruling in the case of Triple Point Technology, Inc v PTT Public Company Ltd [2021] following the Court of Appeal decision in 2019. 

The contract stated that liquidated damages were to be payable from the due date for delivery up to the date PTT accepted the work. The Court of Appeal held that as PTT did not accept the work (as it was not completed), liquidated damages were not payable.  The Supreme Court considered that the Court of Appeal’s analysis was inconsistent with commercial reality and the accepted function of liquidated damages.  Overturning the decision, the Supreme Court ruled that the purpose of the clause was to provide for liquidated damages if Triple Point did not discharge its contractual obligations on time, regardless of whether PTT accepted the work. For more information, see our briefing here.

The decision on this point clarifies that the orthodox position in relation to liquidated damages applies: subject to clear expression to the contrary, liquidated damages apply up to the date the contract is terminated, with general damages recoverable from then onwards. As this is established law, there is no need for liquidated damages clauses to be drafted to expressly provide for this.

The Supreme Court also overturned the Court of Appeal’s interpretation of “negligence” in the exclusion clause in the Triple Point decision (above).  The contract excluded from the general cap on liability (being the price paid under the contract), liability for “fraud, negligence, gross negligence or wilful misconduct”.   The Court of Appeal had decided that the word "negligence" must mean some independent tort, but did not cover a breach of a contractual duty of skill and care. The Supreme Court disagreed, holding that negligence should be given its natural meaning (as accepted in English law), thereby removing from the cap all damages for negligence on the supplier's part, including damages for negligent breach of contract.

There has previously been some confusion over whether there is a special rule of interpretation for limiting loss caused by a repudiatory breach.  The case of  Mott Macdonald Ltd v Trant Engineering Ltd [2021] put the matter beyond doubt, confirming that clauses which purport to exclude or restrict a party's liability for breach, including deliberate or repudiatory breaches, should be construed by reference to the normal principles of contractual interpretation.  There is therefore no presumption against the exclusion of liability, and no particular form of words required to exclude liability.

The case of CIS General Insurance Ltd v IBM United Kingdom Ltd [2021] considered a claim for wasted costs and damages resulting from the termination of a contract for a new IT system. The limitation of liability clause excluded “loss of profit, revenue, savings (including anticipated savings) … (in all cases whether direct or indirect) …”.  Although CISGIL framed its claim as one for “wasted expenditure”, the High Court held that this did not change the characteristics of the losses for which compensation was sought. The clause excluded the claim whether quantified as loss of profit, revenue and savings, or alternatively as wasted expenditure. For more information, see our briefing here.

The key issue in the case of Phoenix Interior Design Ltd v Henley Homes plc and another [2021] was whether an exclusion clause in a supplier’s standard terms satisfied the requirement of reasonableness under the Unfair Contract Terms Act 1977.   The terms sought to exclude liability under various warranties if the total price for the goods had not been paid by the due date for payment.  As well as being tucked away in the standard terms, this “unusual” and “exorbitant” clause posed difficulties in its practical application (with no calendar due date for payment) and the court therefore concluded it did not pass the reasonableness test. For more information, see our briefing here.

While the Triple Point case clarified the meaning of “negligence” in the context of an exclusion clause, Mott Macdonald provided welcome clarification on limiting loss caused by a repudiatory breach.

Although the court may look at the true characteristics of the losses in question (as in the case of CIS), it remains important to draft limitation clauses carefully and to specifically address which types of loss are recoverable. At the end of the day, each case will essentially be about contractual interpretation of the clauses in question.

Finally, the Phoenix case provided an obvious reminder that it is essential to clearly flag the existence of an exclusion clause within standard terms, even in a B2B context.

In the widely reported case of Pakistan International Airline Corporation (Respondent) v Times Travel (UK) Ltd (Appellant) [2021], the Supreme Court considered the law of economic duress for the first time.  Confirming that lawful act duress exists, the decision clarified that there must be threat (or pressure exerted) that is illegitimate; this must cause the claimant to enter into the contract; and there must have been no reasonable alternative.  Although the boundaries of the doctrine are not fixed, the judgment emphasised that the doctrine will be applied restrictively

The decision recognises that inequality of bargaining power in commercial negotiations means that one party may be able to impose terms on a weaker party which seem harsh. However, the pressure applied by a negotiating party will very rarely come up to the standard of illegitimate pressure or unconscionable conduct. Lawful act duress in the context of commercial negotiations is therefore likely to be rare.

Where the doctrine of restraint of trade is engaged, clauses in restraint of trade are regarded as void, unless they are designed to protect a legitimate business interest and are no wider than is reasonable by reference to the interests of the parties concerned and the interests of the public.

Although it is well established that the doctrine can apply to covenants in employment contracts and between buyers and sellers of a company, the position has always been less clear for commercial contracts.   The case of Quantum Actuarial LLP v Quantum Advisory Ltd [2021] clarified that the court will not impose the "trading society" test (adopted by the Supreme Court in 2020) in all cases, particularly where bespoke terms have been agreed. Instead, it will adopt a flexible approach in determining whether the restraint of trade doctrine applies to commercial contracts and consider each contract on its own facts.  In this particular case, the Court of Appeal upheld a decision that certain covenants in a Services Agreement with a 99 year term did not engage the doctrine of restraint of trade. For more information, see our briefing here.

The subsequent decision in Harcus Sinclair LLP and another v Your Lawyers Ltd [2021] looked at the question of how to determine whether a party has legitimate interests to protect through a restraint of trade clause. The Supreme Court held that it was acceptable “to take into account what the parties (objectively) intended or contemplated, consequent on the contract, at the time the contract was made as well as the contract terms”.  Taking into account the parties’ non-contractual intentions, the Supreme Court decided that the non-compete clause in question (contained in a non-disclosure agreement between two law firms) was not an unenforceable restraint of trade.

Although these cases provide useful guidance on the application of the doctrine of restraint of trade, they also highlight that each case will turn on its own facts. The courts are likely to be slow to interfere with the terms of a commercial contract if it contains bespoke covenants which have been negotiated between experienced parties of equal bargaining power and form a legitimate part of the commercial arrangement.

When drafting restrictive covenants in commercial agreements (such as non-compete, non-solicitation and non-use clauses), parties should ensure that covenants protect a legitimate interest and do not go further than reasonably necessary to protect such interests. Covenants are more likely to be unenforceable if they are broad or unbalanced, or the parties have not obtained legal advice.

The leisure, hospitality and entertainment sectors have been particularly hard hit by the pandemic, where venues have had to close or been subject to restrictions. Various cases started to come before the courts in early 2021 in an attempt to reallocate the losses suffered.

One of the first of such challenges was the case of Westminster City Council v Sports and Leisure Management Ltd [2021], in which the High Court was asked to determine the allocation of lost customer revenues caused by lockdown restrictions.  The narrow definition of a force majeure event was not applicable, so the arguments focussed on the change in law provisions. The judge concluded that that these provisions did not require the local authority to pay a “reverse” management fee to the leisure management company.

The subsequent case of Rockliffe Hall Ltd v Travelers Insurance Company Ltd [2021] considered a claim for business interruption losses where the policy provided cover for “Infectious Disease”. The hotel’s claim against its insurers was summarily dismissed, as the policy included an exhaustive list of what was covered by “Infectious Disease”.  Covid-19 was not listed.

In April, the court considered whether amounts were outstanding under three aircraft lease agreements, notwithstanding Indian government restrictions on operating the aircraft: Wilmington Trust SP Services (Dublin) Ltd & Ors v Spicejet Ltd [2021] .  The court granted summary judgment in favour of the lessors for the amounts outstanding, rejecting the argument that suspension of use of the aircraft for one year (in a ten year lease) amounted to frustration of the contract.

The court also ruled in favour of a landlord in the case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2021] for non-payment of rent, even though the premises could not be used as a cinema during lockdowns.  The tenant argued that there should be an implied term that it was not liable to pay for these periods, but this was rejected. There was also no “failure of consideration” as the tenant continued to have possession of the premises throughout the lockdowns.

Moving into 2022, the High Court found that the pandemic did not trigger a material adverse change clause in the case of The Football Association Premier League Ltd v PPLive Sports International Ltd [2022]. The suspension of the Premier League in 2020 and the conditions under which it resumed did not amount to a "fundamental change" to "the format of the competition" entitling the broadcaster to seek a reduction in the fees payable. 

However, the subsequent case of European Professional Club Rugby v RDA Television LLP [2022] has provided more hope for those seeking relief as a result of Covid-19.  The High Court decided that the pandemic did trigger the force majeure clause in a media rights agreement and as a result, a broadcaster was entitled to terminate the agreement due to the postponement of the final stages of premier club rugby union competitions. 

The contrasting decisions this year, despite the similar factual backgrounds, show that each case will depend on the protections provided in the contract. Neither party sought to rely on force majeure in the Football Association case as it was narrowly defined. In the European Professional Club Rugby case, the pandemic was clearly a circumstance " … beyond the reasonable control of a party affecting the performance by that party of its obligations under this Agreement including…..epidemic…”

When drafting force majeure clauses and material adverse change clauses, parties should consider carefully how to allocate risks for a broad range of unforeseen events, however difficult that might be.

Finally, the most recent case of MUR Shipping BV v RTI Ltd [2022] has provided some clarity on a party’s reasonable endeavours obligations to overcome a force majeure event.  Sanctions imposed by the US led the charterer to propose payment in Euros rather than US dollars, as stipulated under the shipping contract.  The court decided that the shipowner was not required, by virtue of a reasonable endeavours obligation, to accept payment in a different currency in order to circumvent the effect of force majeure.

While this case related to sanctions imposed in 2018, it will be relevant to disputes under the current sanctions regime. The court clarified that the exercise of reasonable endeavours requires endeavours towards the performance of the parties’ bargain; not towards achieving a different result than agreed.

The court also indicated that it may be sympathetic to parties who take time to review their position and “opt for caution” where there is a force majeure event. However, parties will need to ensure their reaction does not break the chain of causation; the cause of delay must remain the force majeure event, rather than the intervening reaction to that event.