IT briefing. National differences in interpretation of key IT contract terms - Part III

Transcription

1 IT briefing March 2006 National differences in interpretation of key IT contract terms - Part III Standard contracts offer convenience but suppliers should be wary of using them in multiple countries unless the contract reflects the national differences in interpretation of key terms. In Part III of this series of IT Briefings we look at the differences in interpretation of a further three key contract terms in Belgium, Denmark, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland and the UK. The risk in using global standard contracts Using a standard contract in multiple countries without first adapting it to suit the local laws is a risky strategy. Differences in national laws mean that the supplier may find that the contract it has carefully drafted to suit the laws of its home country will not offer the same degree of protection when used in other countries. That uncertainty cannot be entirely eliminated by the contract stating that in the event of a dispute the laws of the supplier s home country will apply and the courts in the supplier s home country will hear the dispute. Particularly in relation to contracts involving consumers most countries have mandatory laws which they will apply regardless of any such choice of law or choice of jurisdiction clause in the contract. Expert legal advice on the impact of local laws is essential before attempting to use a standard contract. In this Briefing series we use the combined expertise of our network to provide an overview of how terms are likely to be treated by a national court in Belgium, Denmark, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland and the UK if used in a standard contract. So far in this Briefing series we have considered the following terms: Part I the grant of a licence in perpetuity or for an indefinite period; the grant of a licence on a non-exclusive, nonassignable or non-transferable basis; exclusion of consequential damages/loss; exclusion of warranties of fitness for purpose; and deemed notice rules. Part II financial caps on the supplier s liability; and obligations on a supplier to use its best endeavours. Part III In this Briefing we will consider the following: a term permitting termination for ; a requirement to perform by a specified date; and a requirement to perform within a reasonable time. Interpretation by the national courts Belgium According to article 1184 of the Belgian Civil Code the termination of the contract for breach ( ontbinding / résolution ) may be pronounced upon by a judge at the request of one of the parties. If the parties want to be able to terminate the contract without such prior recourse to a court, they have to specifically stipulate this in the contract. A party must have fulfilled a number of conditions to seek such termination of the contract. It must have previously put the other party formally on notice for breach. Furthermore the contract can only be terminated in cases of serious breach by the other party. To determine whether there is a serious breach, it is necessary to consider whether the parties would still have concluded the contract if they had known this particular breach would occur.

2 These rules are however not mandatory. The parties are thus free to further accommodate the termination regime, ie, by providing in the contract that no prior formal notification is required and that the contract will be terminated for any breach. In case the termination is disputed the Belgian courts have, however, a discretionary power to determine ex post factum whether the breach was sufficiently serious to justify the termination. If they decide that this was not the case, the termination may be considered as wrongful. In such case the courts can grant damages to the other party or can order the continuation of the agreement. In case one of the parties is a consumer, the courts will be more reluctant to allow the termination of the contract for smaller breaches by the consumer. Parties should thus be careful when unilaterally terminating an agreement. They can limit the risk by stipulating which breaches justify termination. This will limit the discretionary power of the judges to examine the seriousness of the breach, but that discretion can never be totally excluded. When a contract specifies that an obligation has to be performed by a specified date, a party can only claim this obligation when the time limit has expired. The specified date can be mentioned explicitly in the contract or can be inferred from the circumstances. When the obligation is not performed by the specified date, there is no longer an obligation to put the other party formally on notice of the breach. The consequences of not respecting the specified date depend on whether the specified date was an essential element of the contract. Belgian Civil law does not contain general principles on this and it will be decided on a case by case basis. The judge will only terminate the contract as specified above when the delay is a sufficiently serious breach of the contract. The Judge will balance the damage suffered from the delay against both the usefulness and the feasibility of the continuation of the contract. If the judge decides not to terminate the contract, he can award damages to the other party. Parties can avoid this uncertainty by stipulating in the contract what the consequences will be if the specified date is not respected. The Belgian Civil Code does not define the concept reasonable time. Nevertheless, the parties can still agree in the contract to perform within a reasonable time. The specific meaning of this obligation will depend on the circumstances of the case and if there is a dispute, be subject to interpretation by the court. The court will take into consideration the circumstances surrounding the conclusion and the performance of the agreement and the intention of the parties. When a party considers that a reasonable time has elapsed, he will have to put the other party unlike in the case of performance required by a specified date formally on notice of the breach, in which he stipulates a final deadline to fulfil his obligations. The Belgian Law on Commercial Practices and Consumer Protection considers that clauses in consumer contracts which allow a vendor unilaterally to decide the date of performance, are an unfair practice and will be null and void. Denmark The basic rule in Danish law is that termination can take place only if there is a material breach of the agreement. This rule may be modified by agreement between the parties. If consumers are involved, however, the principal rule may only be modified to the detriment of the consumer to a limited extent. In a consumer contract, a contract term permitting termination for any breach is likely to be set aside by the courts, and rights of termination would rely on the normal Danish rules on termination in consumer relations. In business-tobusiness relations, the principal rule may be modified to a larger extent. However, a term permitting termination for any breach would only be upheld if it was clear that both parties had negotiated that particular term due to special circumstances relevant to the particular situation. It is therefore recommended that rather than having a general termination clause, any breaches that are so important to the party that they should be grounds for termination, (eg, copyright infringement) should be expressly specified in the contract as grounds for termination. Under Danish law the consequence of being in default of an obligation to perform by a specified date depends on the nature of the agreed performance. In commercial relations any delay in the delivery of goods, including standard software, will, as a starting point, be considered a material default of the contract. A material default will entitle the purchasing party to terminate the contract. Consequently, if a purchase agreement includes a requirement to deliver by a specific date, any delay in the delivery will entitle the purchasing party to terminate the agreement, provided that nothing to the contrary was agreed as to the consequences of delay. The same applies in consumer relations, but only if 2 IT briefing March 2006

3 the consumer has made it a particular condition, that delivery takes place by a specific date. If the agreement concerns the performance of services by a specified date (eg, a development agreement) termination by the purchaser for a short delay will only be possible if it is clear to the supplier that performance by the specified date is of material importance to the purchaser. The purchaser will, apart from the right of termination, normally always be entitled to damages for any loss that may have been suffered by the purchaser as a result of the delay. An obligation to deliver within a reasonable time will be interpreted as meaning that time is not of the essence under the contract. It shall only give rise to a right of termination for cause if there is a delay of some significance. What is considered a reasonable time for the delivery of a good or the performance of a service, depends very much on the particular surrounding circumstances. Relevant circumstances include the normal time for the delivery or performance of similar goods or services, any information given by the purchaser to the supplier and vice versa, and any other circumstances that may be important in the particular situation (provided that the supplier could reasonably have foreseen the importance of those circumstances). In accordance with the French Civil Code (article 1134), if the contract provides for performance by a specific date, the failure to perform such an obligation may be regarded as a serious breach giving the right to the innocent party to terminate the contract, provided he is doing so in good faith. In addition, a contractual term may provide that the breaching party shall be liable to a penalty for delays in performance. Such a penalty clause encourages the parties to respect the mandatory deadline provided for in the contract. The French Civil Code (article 1147) states that the breaching party shall be ordered to pay damages, (either by reason of the non-performance of his obligation or by reason of delay in performing) unless he can prove that the non-performance is due to an external cause for which he cannnot be held responsible. The French Supreme Court has ruled that a contract term providing a requirement to perform within a reasonable term is valid. However, the definition of what is a reasonable time is a matter of fact which is to be determined by the judge. French courts have decided that, notwithstanding the fact that a delay in performing was not excessive, the party suffering a loss which could have been avoided if the contract had been executed in a timely manner may obtain damages from the defaulting party to compensate for his loss. France French Courts have ruled that a contract term permitting termination for is enforceable automatically, without the need to initiate an action before a Court of Justice, under the following conditions: - The contract term must specify that termination will be immediate in case of a breach. If the drafting of the term is ambiguous, French courts may decide that such a term is a mere reminder of article 1184 of the French civil code pursuant to which termination of a contract can only be ordered by a judge. - The termination clause may only be enforced in relation to breaches of express terms of the contract, as opposed to implied terms. - The innocent party must give prior written notice of the breach to the defaulting party and allow a reasonable period for the breach to be rectified. - The party seeking to terminate the contract must do so in good faith. Germany In the context of standard terms, a clause permitting the user of these terms to terminate the contract for any breach could be invalid. Under sec. 308 Nr. 3 Civil Code (Bürgerliches Gesetzbuch BGB), a clause entitling the user to free himself from his contractual duties without just grounds, whereby such grounds must be stated in the contract, is invalid. This provision refers to contracts with consumers, but the rule may also be applied to contracts with businesses. It does not apply to long-term agreements. However, the clause could be invalid in a long-term agreement as well if it were deemed to place the contractual partner at an unreasonable disadvantage (sec. 307 BGB). If a standard term is deemed invalid, the rest of the contract remains in force, and statutory law is applied (sec. 306 BGB). Statutory law allows rescission of a contract if the contractual partner negligently or intentionally does not or does not correctly fulfil a IT briefing March

4 contractual obligation and a reasonable remedy period has been set and has passed without remedy (sec. 281 BGB). In addition, a party to a long-term agreement, may terminate the agreement for material cause in the event that the party, in consideration of all the circumstances of the case and after weighing both parties interests, can not be reasonably expected to continue the contract until its agreed end or until the end of an agreed notice period (sec. 314 BGB). If the grounds are the breach of a contractual obligation, the termination is only permitted after a remedy period or a warning has passed without effect, unless the contract partner has definitively refused to fulfil its obligation, time was of the essence and the deadline was not met, or in special circumstances which justify an immediate termination. A party is in default (Verzug) if it has not performed a contractual obligation in spite of a reminder by its contractual partner after the obligation was due. A reminder is not necessary if: - the obligation was due on a calendar date; - the obligation was to follow an event and a reasonable period for performance of the obligation was set, which can be calculated according to the calendar; - the party has seriously and definitively refused performance; - for special reasons and after weighing both parties interests the party must be deemed to be in default immediately; or - 30 days have passed since performance was due and an invoice was served (exceptions apply here for consumers). The party is not in default if the lack of performance is not due to his own negligence or intent. This must be proved by the party himself. The party in default is also liable to pay further damages (eg, default interest if payment was due under the contract). It is therefore in the interest of users of standard terms to set specific calendar dates for performance and payment, in order to achieve default as soon and as clearly as possible. The term could translate into German as innerhalb eines angemessenen Zeitraums or unverzüglich. The term angemessen is used, for example, in sec. 281 BGB and means that the deadline must be sufficiently long for fulfilment to be possible. The term unverzüglich means without negligent delay (sec. 121 BGB). Whereas the former term emphasises the objective possibility of observing a deadline, the latter focuses on the effort that can be expected of the person observing the deadline. Both terms are not defined in terms of number of days by statute or court practice, but depend on the circumstances of the case. Italy A contract term permitting termination for any breach is ineffective under Italian law. Precise drafting is required if the parties want the right immediately to terminate the contract. In particular, the contractual clause must precisely identify the obligation(s) whose non-performance gives the party not in default the right to terminate the contract. In this case, the contract is terminated upon communication by the innocent party that it wants to avail itself of the clause. The effect of a party failing to perform the obligation by a specified date will depend on whether time is of the essence in relation to that obligation. Time will be of the essence in three situations: i) the parties have expressly stated it in the contract; ii) it is implied by the circumstances or the subject matter of the contract; or iii) the defaulting party has unduly delayed performance of the obligation and the innocent party makes time of the essence by serving a valid notice on the other party to perform within a specified term. In situation i) and ii) the failure to perform the obligation by the specified date will cause the immediate termination of the contract (without it being necessary for the innocent party to give notice) unless the innocent party gives the defaulting party a moratorium term within three days from the expiration of the specified date. In situation iii), the contract will automatically be terminated upon the expiration of the specified term, provided that the innocent party sends a written notice to the defaulting party containing (a) the request to perform within a reasonable term, and (b) the express warning that in case of non performance within that term the contract will be automatically terminated. The term shall not be of less than 15 days unless the parties have provided in the contract for a different term or unless a term of less than 15 days is reasonable under the circumstances. Regardless of whether time is, or is not, of the essence the innocent party will have the right to sue for any damages it suffers as a result of the non-compliance. 4 IT briefing March 2006

5 It is not standard practice in contracts governed by Italian law to provide for a requirement to perform within a reasonable term. It is a common opinion however that such requirement shall be implicit if the parties have not fixed a time for the performance. There is no standard period which equates to a reasonable time. The criterion for assessing a reasonable time is an objective one, based on the evaluation of the time normally necessary to perform under the circumstances surrounding the particular contract in question. The Netherlands According to the Dutch Civil Code, every breach of a contract gives the other party the right to terminate the contract in part or in full, unless the breach, considering its special nature or minor importance, does not justify the termination. If the performance is not permanently or temporarily impossible, the right to terminate does not arise until the breaching party is in default. It is not necessary to have incurred damages for a party to terminate. The three aspects of the right to terminate are: i) there must be a breach of one of the party s obligations. It is not necessary that the cause of the breach can be attributed to that party. Exceptions to this rule exist if the breaching party has a legitimate right to suspend performance or if the other party is also in default. ii) the consequences of the breach must justify the termination. It is for the breaching party to demonstrate that the breach does not justify termination. iii) as long as performance is not permanently or temporarily impossible, the right to terminate does not arise until the breaching party is in default. If a party wishes to claim damages from the breaching party, then it is necessary that the breach was attributable to the breaching party. A clause in a contract (eg, permitting termination for any breach) can override the above provisions of the Dutch Civil Code, but limitations to this freedom may exist elsewhere in the Civil Code (eg, in B2C relations clauses in general terms and conditions that limit the right of consumers to terminate an agreement are not allowed). A contract containing a clause that requires a party to perform by a specified date is deemed an agreement under a suspending time limit. It suspends claims to perform before the date. The requirement to perform by a specified date does not need to be mentioned specifically in a contract, but may be concluded from the nature of the contract and the circumstances of the case. The effect of a party failing to perform the obligation by a specific date is that the party is in default without any need of the other party to provide a notice of default. A party is also in default if the other party may deduce from a statement of the first party, before the performance date, that the first party will breach his performance. The right to terminate after a failure to perform by a specified date is not as rigidly enforced in the Netherlands as the English law term time is of the essence. It is still subject to reasonable explanation and the limiting effect of reasonableness and fairness. If a party fails to perform by a specified date and the other party terminates the contract the next day, then a court may find this unacceptable according to the criteria of reasonableness and fairness. A standard period that defines a reasonable time does not exist; it depends on the circumstances that surround the contract in question. A party to a contract can only provide the other party with a written notice of default if the following three conditions are all satisfied: a) the reasonable time for performance has expired; b) the delay in performance can be attributed to the delaying party; and c) performance is not yet permanently impossible. If a delaying party is temporarily unable to perform, or from his attitude it is clear that demanding performance is useless, notice can be given by a written statement in which the delaying party is held responsible for the delay in performance. In this notice a fixed date is given by which the delaying party must perform. The term between the notice and the final performance date must be a reasonable term. If the delaying party does not perform by the date in the notice of default, he is in default. When the delaying party is in default, the other party can terminate the contract. If a party may deduce from a statement of the other that the other party will breach his obligation to perform, then the other party is in default without the need for a notice. Norway The basic principle under Norwegian law is that the parties are free to agree under which circumstances a IT briefing March

6 contract may be terminated. However, if the contract is governed by Norwegian law, a contract term permitting termination for any breach is subject to a general test of reasonableness set out in Section 36 of the Norwegian Contracts Act. In asserting reasonableness generally a wide range of factors may be of significance, including the nature of the contract, the balance struck between the parties and all other elements of the contract and subsequent events and circumstances. The reasonableness in invoking a provision allowing termination for any breach would largely depend on the severity of the breach in question, coupled with an overall assessment of the impact of termination on the party in breach. If a contract does not regulate a right of termination, the contract will be supplemented by the general rule under Norwegian law stating that termination is contingent upon a material breach by the other party. In assessing the reasonableness of a clause permitting termination for any breach, the courts may use the general rule as a benchmark. A failure by a party to perform the obligation by a specified date may trigger a set of remedies for the benefit of the non-defaulting party, provided that the reason for the failure to perform is not due to circumstances for which it is liable or circumstances considered as force majeure under Norwegian law. These remedies include, subject to certain provisions, the right to affirm the performance, to withhold payment, to terminate the contract and to claim damages. A right to terminate the contract will be triggered if the delay amounts to a material breach of contract. In cases where the non-defaulting party prior to entering into the contract, or in the contract itself, has stressed that the timely fulfilment is of material importance to him, or this may be implied by the nature of the performance in question, any delay may under the circumstances be considered as a material breach of contract. The non-defaulting party may, subject to certain conditions, terminate the contract in cases where the defaulting party fails to perform within a reasonable extended deadline for performance fixed by the nondefaulting party. A higher threshold for termination may apply for the supply of bespoke software. Notwithstanding any right of termination, the failure to perform by a specific date may trigger a right for the non-defaulting party to withhold payment and to claim damages for economic loss caused by the delay. Such a requirement corresponds to the rule that would apply under Norwegian law if the contract had not specified a time for performance. There is no standard period which equates to a reasonable time as it will depend on the circumstances surrounding the particular contract in question, including circumstances that occur after the contract was entered into and any other relevant circumstances. Spain According to Article 1124 of the Spanish Civil Code when a breach has been committed by one of the parties to an agreement, the party not in default may choose between the effective performance of the agreement or its termination. In both cases, the nondefaulting party can also claim any damages caused by the breach by the other party. The Spanish Courts have considered that any breach may not automatically cause the unilateral termination of a contract. On the contrary, Spanish case law has established that a breach must be of an essential obligation in order to terminate. In this respect, a party that has complied with its own obligations is entitled to unilaterally terminate an agreement when the other party has caused a serious and voluntary breach of an essential obligation. According to the criteria set out by the Spanish Courts, a breach will give the right to terminate if it frustrates the contractual aim pursued by the party not in default. Thus, parties may specify in the agreement which breaches or defaults should be considered as essential in order to cause the termination of the contract. However, even in such cases, the courts will be entitled to review such provisions in order to analyse if the alleged breach is serious enough to justify terminating the contract. According to Article 1125 of the Spanish Civil Code, the duty to perform by a specified date is only enforceable before a court when the said date has passed. When analysing this type of issue in order to consider it as a cause for unilaterally terminating the agreement, the Spanish Courts have taken into account whether having the specified date for performance is essential or not for the contract. A term may be considered as essential when the need to have the service provided by the specified date is a 6 IT briefing March 2006

7 key element for the object of the agreement. In such cases, if the obligation is not performed by that date, the object of the agreement is considered as breached, as it has lost its sense. The non-defaulting party is therefore given the right to unilaterally terminate the agreement as well as to claim the damages derived from the infringement and termination of the agreement. If an obligation is executed out of time, but without affecting the essence of the contract (ie, without impeding the fulfilment of the object of the agreement), such a term must be considered as non-essential. In these cases, if the party not in default decides not to terminate the agreement the obligation must still be performed by the party that has breached the said term. Moreover, according to Article 1101 of the Spanish Civil Code, the party requiring the performance of the services shall be entitled to claim the damages derived from the delay in the effective provision of the services. There is no specific regulation in the Spanish Civil Code which defines the concept of reasonable time. Nevertheless, according to Article 1128 of that Code, when no term has been established by the parties for performing a given obligation or when such a period depends solely on the will of the party that must perform the obligation, the actual length of such period should be ultimately decided by a court. The Spanish case law has identified a number of elements to be taken into account. The parties intentions when signing the agreement, in addition to the object and the circumstances surrounding the agreement will be the key elements in determining the length of the term for performing the obligation. Sweden Since most commercial disputes are resolved by arbitration, case law is scarce on the following contract clauses in Sweden. Therefore, it is advisable to obtain expert legal advice before using the following contract terms in Sweden. The freedom of contract principle enables the parties in a business to business relationship to determine what type of breach shall lead to termination. Thus, a clause stating termination for would be considered enforceable by the courts in Sweden. However, should the clause be deemed unreasonable, it can be adjusted by a court or arbitration tribunal in accordance with section 36 of the Contracts Act. Unless there is a substantial difference in the parties bargaining power, such adjustment is, however, exceptional in business to business relations. Non-mandatory provisions in Swedish law can supplement the rules of the agreement. The Sale of Goods Act gives the party a right to terminate if there is a fundamental breach of contract by the other party. A breach of contract is considered fundamental if a party is substantially deprived of what he is entitled to expect under the contract. Additionally, in order for a party to rightfully terminate the contract, the party in breach must have foreseen the fundamentality of the breach for that party. In business to consumer relationships the mandatory provisions of the Consumer Sales Act apply. Only fundamental breaches, as described above, entitle the parties to terminate the agreement. If performance by a specific date is set forth in an agreement, such a clause is considered an obligation. Should a party be in default with its performance in relation to the set date, the other party can make claims for certain measures. According to the Sale of Goods Act, the innocent party suffering from the delay may be entitled to, inter alia, retain payments, demand fulfilment of the performance within an additional time limit or claim a price reduction. If the delay is fundamental in relation to the subject matter of the agreement, the innocent party can terminate the agreement. If the innocent party has notified an additional time limit for fulfilment, such time limit must pass prior to termination. Regardless of what remedy is chosen, the innocent party has the right to sue for any damages it has suffered as a result of the delay in performance subject to any contractual limitation of liability for damages. The assessment of reasonable time must be considered on a case by case basis, with reference to the subject matter of the agreement and established customs and practices between the parties. A contract clause requiring performance within a reasonable time should be examined in the context of the entire agreement. If a contract term is formulated as to emphasise the significance of timely deliveries, such as time is of the essence, termination can be considered an appropriate measure should such performance not be met within a reasonable time. Switzerland Generally, under Swiss law, permanent contracts such as IT contracts can be terminated (i) ordinarily by observing a cancellation period or (ii) extraordinarily, in most instances with immediate effect. As a matter of IT briefing March

8 principle, an extraordinary termination is permissible only if the terminating party can claim a valid reason (wichtiger Grund). The term valid reason is not specified by law and has to be determined on a case by case basis taking into account the circumstances of the particular IT contract. As a general rule a valid reason is given if the continuation of the contract is, by impartial standards, unacceptable to the terminating party. The parties can agree upon situations they consider as valid reasons and that will allow them to terminate the contract extraordinarily. The term permitting the termination for constitutes such a clause. The courts have protected such clauses, allowing extraordinary termination, in most instances with immediate effect. This results from the general principle of freedom of contract. However, if such a clause is being invoked in bad faith and leads to an inappropriate result, a court would most likely not protect such a termination. As a matter of principle, under Swiss contract law, a party to the contract cannot be in default without being reminded of its obligations. This however does not apply if a specified date for the performance of an obligation has been stipulated. A party failing to fulfil such an obligation is automatically in default. Upon such default, the other party has the choice to sue for performance plus damages due to delay, or, alternatively, the other party may without delay waive subsequent performance. In such a case, this party may either (i) opt for the perpetuation of the contract and ask for compensation for damages arising out of the nonperformance, or (ii) withdraw from the contract. In case (i), the failing party has to pay compensation instead of providing the originally stipulated performance. In case (ii), the failing party has to pay compensation for damages resulting from the withdrawal from the contract unless it can prove that no fault is attributable to it. A Swiss court interpreting the contract clause to perform within a reasonable time would take into account the time requirement the supplier needs in good faith for the provision of the agreed performance and, at the same time, at which point of time the purchaser can in good faith expect performance. Accordingly, the period depends on the circumstances surrounding the particular IT contract. As there is no exact point of time by which the performance is due, normally, the failing party has to be reminded to perform before it is in default. If the failing party still does not perform, the other party has to fix an appropriate time limit for subsequent performance. If there is no performance after the expiration of this time limit, the options (i) and (ii) described above will apply likewise. UK The UK Courts have ruled that such a term does not enable a party to terminate for trivial breaches. It can only be used to terminate the contract if a repudiatory breach has occurred. A breach is repudiatory if it is so significant that it will deprive the party not in default of substantially the whole benefit of the contract. In practice, this is a very difficult test to satisfy in IT contracts and requires a careful analysis of the circumstances surrounding the breach so that the exercise of the termination right can, if required, be justified to a court as being reasonable and proportionate. The above test is less likely to be applied if the contract is drafted so as to make it clear that particular terms, if breached, will give the parties a right to terminate. Such drafting is essential if there are terms in the contract which one of the parties regards as critical (eg, adherence to Export Control or Health and Safety laws), but which if breached, the courts might not otherwise regard as important enough to give a right to terminate. The effect of a party failing to perform the obligation by a specified date will depend on whether time is of the essence in relation to that obligation. Time will be of the essence in three situations: i) the parties have expressly stated it in the contract; ii) it is implied by the circumstances or the subject matter of the contract; or iii) the defaulting party has unduly delayed performance of the obligation and the innocent party makes time of the essence by serving a valid notice on the other party to perform within a specified time. In situation i) and ii) the failure to perform the obligation by the specified date will give the innocent party the right to terminate. In situation iii), the innocent party will only have the right to terminate for non-compliance if either the contract expressly gives that right or it amounts to a repudiatory breach (discussed above). Regardless of whether time is, or is not, of the essence the innocent party will have the right to sue for any damages it suffers as a result of the non-compliance. 8 IT briefing March 2006

9 Precise drafting is therefore required if a party wants the right to terminate on the failure to meet a particular deadline. There is no standard period which equates to a reasonable time as it will depend on the circumstances surrounding the particular contract in question. Even a party which performs its obligations after a protracted delay will still be regarded as performing within a reasonable time provided the delays are due to causes beyond its control. The UK Court of Appeal recently confirmed that the assessment of what is a reasonable time should be made with the benefit of hindsight, and will not be confined to the factors considered by the parties when they signed the contract. The assessment should take into account a broad range of factors including: any estimate given by the performing party of how long it would take it to perform; whether that estimate has been exceeded and, if so, in what circumstances; whether the party for whose benefit the relevant obligation was to be performed needed to participate in the performance; whether it was necessary for third parties to collaborate with the performing party in order to enable it to perform; and what was the cause, or causes, of the delay to performance. The European IT Group If you would like further information on any matters in this briefing, please contact one of the people below. Herbert Smith Christopher Rees (London) christopher.rees@herbertsmith.com Mark Turner (London) mark.turner@herbertsmith.com Nick Elverston (London) nick.elverston@herbertsmith.com Alexandra Néri (Paris) alexandra.neri@herbertsmith.com Dr Stefan Weidert (Berlin) Stefan.Weidert@gleisslutz.com Dr Ann Marie Welker (Frankfurt) Ann-Marie.Welker@gleisslutz.com Stibbe Reinout Rinzema (Amsterdam) reinout.rinzema@stibbe.nl Erik Valgaeren (Brussels) Erik.Valgaeren@stibbe.be Cuatrecasas Jorge Llevat (Barcelona) jorge.llevat@cuatrecasas.com Homburger Gregor Bühler (Zurich) gregor.buehler@homburger.ch Studio Legale Macchi di Cellere Gangemi Salvatore Orlando (Rome) s.orlando@macchi-gangemi.com Vinge Björn Gustavsson (Stockholm) bjorn.gustavsson@vinge.se Our alliance The three-way alliance formed in January 2002 between leading international firms,, and Stibbe has enabled us to provide an integrated domestic and cross-border service to the three firms clients. The joint European group for Information technology and e-commerce now has enormous collective experience in the increasingly diverse areas of information, technology, and e-business. also has a relationship with the top tier Spanish firm, Cuatrecasas as well as affiliations with a number of other first-class law firms around the world including the Swiss firm Homburger, the Italian firm Studio Legale Macchi di Cellere Gangemi and members of the Scandinavian Law Alliance Vinge, Kromann Reumert and Thommessen. The European IT group is made up of more than a dozen partners and 50 associates from across the different firms comprehensive European network. Kromann Reumert Lau Normann Jørgensen (Copenhagen) LNJ@kromannreumert.com Thommessen Haakon Opperud (Oslo) hop@thommessen.no If you would like to receive more copies of this briefing, unsubscribe or would like to receive Herbert Smith publications from other practice areas please sally.henderson@herbertsmith.com or call business development on You can also contact us to say whether you would prefer to receive these publications in a printed or electronic format. and database right The information contained in this publication is of a general nature. Specific advice should be sought for specific legal problems. IT briefing March

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