ITC LEGAL UPDATE JANUARY 2016

Transcription

1 ITC LEGAL UPDATE JANUARY 2016

2 2 INCE & CO Contents WELCOME SALE OF GOODS GAFTA default clause and assessment of damages: Supreme Court hands Sellers a golden victory...4 Bunge SA v. Nidera BV [2015] UKSC 43 Nomination of substitute vessel under FOB sale contract found to be invalid... 7 Ramburs Inc v. Agrifert SA [2015] EWHC 3548 (Comm) Non-compliant inspection certificate did not exclude Buyers common law right to reject goods...9 Aston FFI (Suisse) SA v. Louis Dreyfus Commodities Suisse SA (Mega Hope) [2015] EWHC 80 (Comm) SHIPPING Charterers walk away from a voyage charter how much can owners recover? Louis Dreyfus Commodities Suisse SA v. MT Maritime Management BV (MTM Hong Kong) [2015] EWHC 2505 (Comm) COMMERCIAL Supreme Court shifts test away from genuine pre-estimate of loss but declines to abolish rule against penalties Cavendish Square Holding BV v. Talal El Makdessi; ParkingEye Limited v. Beavis [2015] EWSC 67 The Modern Slavery Act

3 3 INCE & CO Welcome Welcome to the latest issue of our International Trade and Commodities Legal Update, which we hope you will find to be of interest and relevant to your business. Interestingly, this issue covers three different disputes arising out of GAFTA 49 sale contracts. First off, we review the headline-making Supreme Court decision in Bunge v. Nidera, a dispute arising out of a sale contract on GAFTA 49 terms. This decision is significant not only to the construction of the GAFTA default clause but also to the interpretation of express damages clauses generally. The Court made it clear that, in assessing damages for breach of contract, no or only nominal damages will be awarded where the innocent party has suffered no loss. In another GAFTA sale contract dispute, Ramburs Inc v. Agrifert, the Court provides useful guidance on what nomination and pre-advice requirements a FOB buyer must comply with when making a substitute vessel nomination pursuant to GAFTA 49. The decision provides a useful reminder to FOB buyers that, whether or not they have an implied or express right to make a substitute nomination, the nomination of any substitute vessel is likely to have to (and, in the case of a contract subject to GAFTA 49, will have to) comply in full with the nomination requirements of the contract. The third GAFTA sale contract dispute we consider is Aston FFI v. Louis Dreyfus. In that case, the question for the Court was whether, as a matter of law, a FOB buyer can only reject goods in reliance on a certificate that complies with the documentary requirements set down in the payment terms of the contract. On the shipping side, in the MTM Hong Kong, the Court again dealt with the assessment of damages a recurring theme, it appears. In this case, the Court departed from the normally used measure of damages where the charterers wrongfully terminate a voyage charter. In doing so, it significantly increased the Owners recovery. The Court s decision was justified on the basis that it compensated the Owners for their true loss. Cavendish v. Makdessi, another Supreme Court decision, deals with an issue of importance to all commercial contracts, namely when a contractual provision will amount to a penalty clause and will therefore be unenforceable. All those who incorporate liquidated damages clauses in their contracts should take note of this decision, which gives guidance on when such a liquidated damages clause could be considered penal and therefore invalid. Finally, on the regulatory side, we review the main provisions of the Modern Slavery Act 2015, which came into force on 31 July 2015, and highlight the issues that are of particular importance for businesses involved in international trade. Ince & Co LLP s International Trade and Commodities Group provides a full service to clients in the global trading community. We advise clients in a range of industries including oil and gas, biofuels, coal, sugar/ molasses, grain and feed, oils and fats and metals. If you have any queries arising out of the content of this Update, or any matters you wish to discuss with us, please feel free to contact me or the authors of specific case reports you are interested in, or your usual contact at Ince & Co. Stuart Shepherd Global Head of Trade, London stuart.shepherd@incelaw.com +44 (0)

4 4 INCE & CO Sale of Goods GAFTA default clause and assessment of damages: Supreme Court hands Sellers a golden victory Bunge SA v. Nidera BV [2015] UKSC 43 The Supreme Court has recently ruled that the Buyers under a sale contract on GAFTA 49 terms could only recover nominal damages for the Sellers wrongful cancellation of the contract. A Russian legislative embargo on the export of wheat having been announced, the Sellers wrongfully purported to cancel the contract prematurely before the end of the shipment period. As it transpired, the embargo was maintained throughout and beyond the shipment period, such that if the Sellers had not acted prematurely, they would have been contractually entitled to cancel the contract at the end of the shipment period. The Supreme Court unanimously held that, on its true construction, the GAFTA default clause did not entitle buyers to recover significant damages for sellers breach of contract where they had suffered no loss as a result of that breach. The significance of this decision is not limited to those dealing with contracts incorporating GAFTA default clauses. It is relevant to the interpretation of express damages clauses in any commodities contract or, indeed, other commercial contract. The Supreme Court has made it clear that an express damages clause will not override the common law principle for the assessment of damages, namely that they are intended to compensate an innocent party for its loss, unless it says so in clear and unambiguous terms. In coming to its conclusions on recoverable damages, the Supreme Court disagreed with the decisions of the Court of Appeal, the Commercial Court and the GAFTA Appeal Board (but agreed with the GAFTA first tier arbitration tribunal). The lower courts inclined to the view that, in assessing damages for breach of contract, the market favoured certainty over fairness and that is what the GAFTA default clause provided. The Supreme Court considered, on the other hand, that while commercial certainty was undoubtedly important, it would rarely justify an award of substantial damages to someone who has not suffered any. The background facts On 10 June 2010, the Buyers entered into a sale contract with the Sellers for Russian wheat. The shipment period was 23 to 30 August The contract incorporated GAFTA 49, a standard set of FOB terms designed for contracts for goods sold in bulk or bags from Central or Eastern Europe. On 5 August, Russia introduced a legislative embargo on the export of wheat, which was to run from 15 August to 31 December On 9 August, the Sellers notified the Buyers of the embargo and purported to cancel the contract under the GAFTA 49 prohibition clause. The Buyers maintained that the Sellers cancellation of the contract was premature because the anticipated embargo might not happen or might not impact the shipment required under the contract. The Buyers treated the purported cancellation as a repudiation of the contract, which they accepted on 11 August. On 12 August 2010, the Sellers offered to reinstate the contract on the same terms, but the Buyers refused and commenced GAFTA arbitration, claiming damages of over US$3 million. In the event, the export ban did come into force and was in fact extended. Had the Sellers waited until the end of the shipment period, they could have cancelled the contract without liability pursuant to the prohibition clause. Instead, they jumped the gun. In arbitration and in the lower courts, one of the issues was whether the Sellers were in breach of contract or whether the prohibition clause entitled them to terminate the contract when they did. By the time the dispute reached the Supreme Court, the Sellers had conceded that they were in breach of contract but maintained that the Buyers were not entitled to substantial damages because they had suffered no loss due to the breach.

5 5 INCE & CO Sale of Goods The GAFTA default clause The relevant parts of the GAFTA default clause provide as follows: DEFAULT In default of fulfilment of contract by either party, the following provisions shall apply: a. The party other than the defaulter shall, at their discretion have the right, after serving notice on the defaulter, to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price. b. If either party be dissatisfied with such default price or if the right at (a) above is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration. c. The damages payable shall be based on, but not limited to the difference between the contract price and either the default price established under (a) above or upon the actual or estimated value of the goods on the date of default established under (b) above. The Golden Victory The Golden Victory was a charterparty dispute, in which the Charterers unlawfully terminated a seven-year time charter when it still had another four years to run but only 14 months before it would have been cancelled in any event under a war clause in the charter when the second Gulf War broke out. The majority of the House of Lords held that an assessment of the Owners damages should take into account that the charter would have terminated early without fault in any event. So where a subsequent event would have resulted in the original contract not being performed after all or performed for only a truncated period, an innocent party might only be entitled to recover reduced or even nominal damages to reflect this. The Sellers in this case argued, among other things, that: 1. the GAFTA default clause did not exclude the application of the common law principle that damages awarded to an innocent party should be calculated to compensate it for its actual loss; and 2. the majority decision in the Golden Victory meant that any damages awarded to the Buyers in this case should take into account the fact that the export ban would have resulted in the Sellers legitimately cancelling the contract in any event. The Buyers argued that the fact that the contract would subsequently have been cancelled was irrelevant and that the default clause required the loss to be assessed on the date of default i.e. 11 August 2010, and that no regard could be had to events post-dating the default date. The Supreme Court decision The Supreme Court found in favour of the Sellers and awarded the Buyers nominal damages of only US$5, as opposed to the substantial damages of over US$3 million they had been awarded by the GAFTA Board of Appeal, whose award had been upheld by the lower courts. The Court stated that damages clauses, such as the GAFTA default clause, are not to be regarded as complete codes for the assessment of damages. The GAFTA default clause provided a detailed code for determining the market price or value of the goods that either were actually purchased by way of mitigation or might have been purchased under a notional substitute contract. It did not however address the effect of subsequent events that would have resulted in the original contract not being performed in any event, nor did it exclude every other consideration that may be relevant to determine the innocent party s actual loss. In those circumstances, common law principles on recoverable damages would continue to apply. Further, while damages clauses may prescribe a fixed measure of loss that differs from the measure of damages recoverable at common law, in the absence of clear words, a court will not conclude that a damages clause was intended to operate arbitrarily and produce a result unrelated to anything that the

6 6 INCE & CO Sale of Goods parties can reasonably have expected to approximate to the true loss. The Supreme Court took the view that a construction of the default clause that would place the Buyers in a financially far better position than if the breach had not occurred was most unlikely to have been intended by those drafting the clause. It was far more likely that the clause was intended to apply to the usual situation of a non-delivery or non-acceptance of goods for which there was an available market, rather than a situation where the contract would not have been performed due to supervening events leading to its inevitable cancellation. The Court also dismissed the argument that the Golden Victory could be distinguished from the present case, because that case related to a period contract whereas this case involved a single sale contract. The Supreme Court held that the principle that damages should be compensatory applied equally to a contract for a one-off sale and an instalment contract. the contractual damages regime is intended to fix the damages at a particular moment in time, such as the date of default, clear words will be required to exclude from consideration any future events that might impact on the actual loss suffered by the innocent party. Stuart Shepherd Global Head of Trade stuart.shepherd@incelaw.com Reema Shour Professional Support Lawyer reema.shour@incelaw.com Comment On a practical note, those drafting and entering into contracts containing express damages clauses, including liquidated damages clauses, should keep in mind that clear and express words are required if the parties intend to exclude general common law principles in relation to the assessment of damages. In particular, if

7 7 INCE & CO Sale of Goods Nomination of substitute vessel under FOB sale contract found to be invalid Ramburs Inc v. Agrifert SA [2015] EWHC 3548 (Comm) This sale contract dispute provides useful guidance on what nomination and pre-advice requirements a FOB buyer must comply with when making a substitute vessel nomination pursuant to GAFTA 49. The background facts By a sale contract dated 3 July 2012 and incorporating GAFTA 49, the Sellers sold maize to the Buyers on FOB terms. The contract called for delivery between 15 and 31 March 2013, both dates included, with no extension. The contract also required the Buyers to give the Sellers not less than 10 days pre-advice with various information including the carrying vessel s ETA, name, flag and dimensions. GAFTA 49 also contains a nomination of vessel clause requiring the buyers to serve notice of the name and probable readiness of the vessel and the estimated tonnage required. It also requires the sellers to have the goods ready to be delivered to the buyers at any time within the contract period of delivery. Further, whilst it gives the buyers the right to substitute the nominated vessel, such substitute must still meet the contractual delivery period. Provided the vessel is presented at the load port in readiness to load within the delivery period, the sellers are required to complete loading after the delivery period if necessary. On 20 March 2013, the Buyers sent a message nominating the m/v Puffin to load the goods and giving an estimated time of arrival at the load port of 26/27 March On 26 March 2013, the Buyers sent another message nominating the m/v Sea Way in place of the m/v Puffin, giving an ETA of 28 March Later that day, the Sellers rejected the nominations of both vessels on various grounds. On 27 March 2013, the Buyers indicated they would buy substitute goods, which they did and they then claimed the difference in price of over $800,000 from the Sellers. The GAFTA Board s finding The matter was referred to GAFTA arbitration. The GAFTA Board found in favour of the Buyers. It held that the Buyers nomination of the m/v Sea Way was valid despite the fact that it was not given 10 days before the end of the delivery period. The Board reasoned that since GAFTA 49 expressly requires that the original delivery period and any extension shall not be affected by the buyer exercising the right of substitution, this affords a buyer sufficient protection from disruption by a late substitution. The Sellers appealed to the Court. The Commercial Court Decision The Court was referred to Cargill UK Ltd v. Continental UK Limited [1989] 2 LLR 290, which also concerned a FOB contract. In that case, the buyer had to give a provisional notice of nomination eight clear days before the vessel s ETA which was to be followed by a final, definite notice four clear days of the date of the presentation of the vessel for loading. That date had to be a maximum of seven days from the original ETA given in the provisional notice and had to be before the end of the contractual delivery period. The buyer initially gave provisional notice nominating the Cobetas or Sub, and two days later gave a definite notice in respect of the same vessel with a slightly later ETA. Four days later, and five days before the end of the delivery period, the buyer gave a further notice purporting to substitute the Finn Beaver or sub for the Cobetas. Despite the fact that this notice was given four clear days before the end of the delivery period, the Court held that the purported substitution was invalid. It held that both the provisional and the final notice had to be given in respect of the same vessel. Even if there was a general right to substitute, it was on any basis, given the express terms of the nomination clause, too late for the buyer to substitute.

8 8 INCE & CO Sale of Goods In this case, the Court said (appearing to assume that there is a general right to substitute under a FOB contract) that if the contract had not expressly provided for the right to substitute a nominated vessel pursuant to GAFTA 49, then the pre-advice requirements in the contract would apply to the nomination of any substitute vessel. As such, if the Buyers failed timeously to give notice of nomination containing the required details of the substitute vessel, then the substitute nomination would not comply with the contract. The issue, therefore, was whether the express right of substitution provided by GAFTA 49 constituted a complete code in respect of the right to substitute and so dispensed with any requirement to give a nomination in the terms, and within the time frame, provided for in the contract in respect of the substituted vessel. The Court found that it did not and that the contractual requirements in respect of the nomination applied equally to any substitute nomination. In the Court s view, it did not make sense to give the contract an interpretation that required the Buyers to give detailed pre-advice information in relation to the loading vessel, but then to permit the Buyers to load the goods on a different vessel, the information about which was not given within the time scale anticipated by the contract. Accordingly, the Court concluded that the nomination of the m/v Sea Way was invalid and that the Buyers were in default. Comment In Cargill UK Ltd v. Continental UK Limited, Evans J. said that There is no general rule of law, in my judgment, which entitled the buyers to substitute another vessel in place of one that has been duly nominated and no such right is reserved by the terms of the contract.... Andrew Smith J. s judgment in this case appears to assume that a FOB buyer does have a general right to substitute, although the point does not seem to have been the subject of argument. However, this decision provides a useful reminder to FOB buyers that, whether or not they have an implied or express right to make a substitute nomination, the nomination of any substitute vessel is likely to have to (and, in the case of a contract subject to GAFTA 49, will have to) comply in full with the nomination requirements of the contract. Further, and adopting the language of the Sellers in this case, the decision highlights that a Mickey Mouse nomination of a vessel the buyer never intends to use to load the cargo serves no useful purpose. Stuart Shepherd Global Head of Trade, London stuart.shepherd@incelaw.com Louise McDonald Solicitor, London louise.mcdonald@incelaw.com

9 9 INCE & CO Sale of Goods Non-compliant inspection certificate did not exclude Buyers common law right to reject goods Aston FFI (Suisse) SA v. Louis Dreyfus Commodities Suisse SA (Mega Hope) [2015] EWHC 80 (Comm) This dispute arose out of a FOB sale contract for Russian wheat between Aston FFI ( Buyers ) and Louis Dreyfus ( Sellers ). The question that the Court considered was whether, as a matter of law, a FOB buyer can only reject goods in reliance on a certificate that complies with the documentary requirements set down in the payment terms of the contract. The Sellers argued that the contract contained an exclusive code for inspection of the goods; the certificate issued by the independent inspector was non-compliant and so the Buyers had to accept the cargo because they did not have a compliant certificate on which to base their rejection. The Court held that a FOB buyer would only be prevented from rejecting goods by the absence of a certificate which complies with the documentary requirements set down in the payment terms of the contract if the contract stipulated in clear terms that that was the case and that the contract in this case did not so stipulate. Whilst this case concerned requirements of the payment terms of the contract, its seems clear that the answer would be the same irrespective of whereabouts in the contract the relevant documentary requirements were contained. The background facts The Buyers entered into the contract ( the Contract ) specifically to fulfil their obligations under a sub-sale to the Egyptian State wheat procurement body, GASC. The Buyers nominated a vessel to load the goods at Novorossiysk. The Contract contained various provisions dealing with inspection and inspection certificates. The Buyers nominated an inspection company, Comibassal (not GAFTA approved), which was the same company as appointed by GASC under the sub-sale. In addition, the Buyers appointed a GAFTA approved inspection company. Both inspection companies found that the goods were off-spec at load port due to excessive Lolium seeds. GASC rejected the goods and the Buyers in turn rejected the goods vis-à-vis the Sellers. The Sellers objected on the basis that the Buyers could not reject the goods as they did not procure a certificate (in respect of quality) which was compliant with the requirements of the Contract; that is, a certificate issued by a GAFTA approved surveyor in the form required by the Contract. GAFTA Board s finding The GAFTA Board of Appeal (contrary to the firsttier tribunal) found in favour of the Sellers on two alternative and independent grounds: (1) the appointment of Comibassal was not contractually compliant because they were not GAFTA approved; alternatively (2) the Comibassal certificate was not contractually compliant because it did not contain all the required information. They concluded: By rejecting the goods with no official analysis to back up that decision, the Buyers were in repudiatory breach of the Contract and consequently we find that Buyers were in default. The Buyers appealed. The Commercial Court decision The Sellers case was that, as a general proposition, where a sale contract provides for a mandatory procedure or code for the inspection of the goods and says that the results as contained in a certificate are final as to quality, then the buyer can only reject the goods by relying on a contractually compliant certificate demonstrating a relevant and sufficient nonconformity of the goods.

10 10 INCE & CO Sale of Goods The Court was prepared to assume, without deciding the point, that the proposition put forward by the Sellers was correct. However, the Court accepted the Buyers argument that the exclusion of the ordinary rights at common law should not be lightly inferred and required clear and unambiguous expression. The Court acknowledged that the opening words of the inspection clause in the Contract said Final and that a compliant certificate was one of the documents needed to trigger payment, but concluded that there was nothing in the Contract which provided that the issuance of a certificate as called for by the Contract was a precondition for rejection of the goods. The Court remitted the matter back to the GAFTA Board to consider whether, taking into consideration the totality of the evidence, the goods were contractually compliant or not. Comment We respectfully suggest that the Court s decision in this case accords with common sense in that, unless the contract clearly says otherwise, it would seem unfair if a buyer were prevented from rejecting goods merely because he is unable to procure a certificate from a particular source or in the form called for by the contract. Such inability may arise for various reasons over which the buyer may have no control. For example, the production of the required certificate can be dependent on the cooperation of the seller (e.g. in agreeing on the inspector) or a third party. The position is different where the contract provides that certification issued in accordance with the contract is final and binding and such certification is issued. In the case of certification final provisions, the buyer has expressly agreed to forgo his common law rights of rejection if a complaint certificate is issued and states the goods are compliant. Ted Graham Partner, London ted.graham@incelaw.com Carl Walker Senior Associate, London carl.walker@incelaw.com

11 11 INCE & CO Shipping Charterers walk away from a voyage charter how much can owners recover? Louis Dreyfus Commodities Suisse SA v. MT Maritime Management BV (MTM Hong Kong) [2015] EWHC 2505 (Comm) The fundamental principle governing the assessment of damages under English law is the compensatory principle, i.e. that damages should compensate the victim of the breach for the loss of their contractual bargain. In applying the compensatory principle in this case, the English Court departed from the normally used measure of damages where the charterers wrongfully terminate a voyage charter. In doing so, it significantly increased the Owners recovery. The background facts On 6 January 2011, Owners and Charterers entered into a voyage charter for the carriage of vegoil from two safe ports/berths within a range of loadports in South America, to one safe berth at 1-4 safe ports Gibraltar- Rotterdam range. The ship s previous employment had taken her to an up river port on the River Congo, where she had suffered a grounding. This led to a delay, which meant that the ship only commenced her ballast voyage on 19 January After an exchange of messages between the Owners and Charterers, the charterparty was terminated on 21 January The ship then continued towards South America as the Owners thought this was the best place to find substitute fixtures. The Owners were found to have acted reasonably in doing so. The ship arrived in Punta del Este, Uruguay on 2 February However, she was only fixed on 24 February This delay was unexpected. The substitute fixture was for a voyage from South America to Rotterdam, and ended on 12 April If the voyage charter had been performed, it would have been completed on around 17 March The ship would then have carried a cargo of urea ammonium nitrate from the Baltic to the USA, followed by a chemical cargo from the USA to Europe. The ship would then have been in Europe around 12 April 2011, about the time she did in fact end her substitute fixture. The North Atlantic chemical trade between the USA and Europe commanded higher freight rates than the vegoil trade from South America to Europe. The usual measure of damages In cases where a charterer has walked away from a voyage charter, the usual measure of damages is: > > the amount of freight that the ship would have earned if the voyage had been performed, less the expenses which would have been incurred in performing the voyage (i.e. the net profit of the voyage); less > > what profit the ship actually earned (if anything) during the period which would have been occupied in performing the voyage.

12 12 INCE & CO Shipping The Owners claim However, in this case, the Owners claimed as their losses the difference between: > > the net profit that the ship would have earned if the intended voyage and the next two voyages had been performed; less > > what the ship actually earned during the period that would have been occupied in performing the voyage and the next two voyages (which, in this case, was the same length as the substitute voyage). Calculating their losses in this way significantly increased the Owners claim, from US$478,386.80, to US$1,212, The London Tribunal awarded the Owners the higher amount. The Charterers appealed to the Court on the ground that the Tribunal had made an error of law. The Commercial Court decision The Court upheld the Tribunal s decision and dismissed the appeal. In doing so, and after a thorough review of the case law, it found that the normal measure of damages in these kinds of claims was the net profit of the voyage less what profit the ship actually earned during the period that would have been occupied in performing the voyage. However, it ruled that this method may be departed from if the result of applying it would be to breach the compensatory principle. The compensatory principle is paramount. This was a case where the normal measure should be departed from because: > > the Owners had acted reasonably in sending the ship to South America the lack of employment at South America was unexpected; > > no suggestion was made by the Charterers that the losses being claimed by the Owners were too remote (i.e. beyond the reasonable contemplation of the parties when they entered into the charterparty); and > > it was possible to predict the ship s future employment if the fixture had been performed with some certainty. That employment would have taken the ship back to the same location at the same time as the completion of the substitute fixture. This meant that damages could be calculated with a degree of confidence that would otherwise not be possible. Comment The Court found that the Tribunal did not err in law by awarding the Owners damages for losses suffered beyond the period when the cancelled voyage would have been completed. This was a clear break from the normal method, and one that substantially increased the Owners recovery. Although the Court departed from the normal method, it made clear that it did so only because of the particular circumstances of this case. It will be interesting to see over the next few months/years the extent to which other owners will be able to make good similar claims. The prospect is certainly there for them to try. Max Cross Partner, Hong Kong max.cross@incelaw.com William Blagbrough Solicitor, Hong Kong william.blagbrough@incelaw.com

13 13 INCE & CO Commercial Supreme Court shifts test away from genuine pre-estimate of loss but declines to abolish rule against penalties Cavendish Square Holding BV v. Talal El Makdessi; ParkingEye Limited v. Beavis [2015] EWSC 67 In two conjoined appeal decisions recently handed down, the UK Supreme Court has re-focused the longestablished test for identifying a penalty clause, but has declined to abolish the rule against the unenforceability of penalties altogether. The decision is consistent with the general trend of the courts in recent years to become more reluctant to interfere with the parties freedom of contract and particularly so in a commercial context. This is highlighted by an acknowledgement in the lead judgment by Lords Neuberger and Sumption that: In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach. The brief background facts In Cavendish v. El Makdessi, Mr Makdessi agreed to sell his controlling stake in a company to Cavendish. The sale contract provided that if Mr Makdessi breached certain restrictive covenants, he would not be entitled to receive the final two instalments of price for his shares and he would also be obliged to sell his remaining shares to Cavendish for a reduced amount that did not take into account any goodwill. Mr Makdessi breached the restrictive covenants and then subsequently challenged the clauses in question on the grounds they were unenforceable penalties. In ParkingEye v. Beavis, Mr Beavis challenged the levy of an 85 parking charge for having overstayed the two-hour time limit permitted in a car park in a retail centre. ParkingEye managed the car park and displayed numerous notices throughout, clearly stating that a failure to comply with the two hour time limit would result in a Parking Charge of 85. Mr Beavis argued that the 85 charge was unenforceable as a penalty (and/or unfair and unenforceable by virtue of the Unfair Terms in Consumer Contracts Regulations 1999). Penalty clauses under English law: the traditional position Under English law, a contractual provision requiring a contract breaker to pay the other party a specified sum of money in the event of a breach of contract has traditionally been treated either as: a. an enforceable requirement to pay liquidated damages if the amount concerned is regarded as a genuine pre-estimate of loss; or b. an unenforceable penalty when the amount concerned is not a genuine pre-estimate of loss but in the nature of a deterrent against breach. In order for a clause to be penal, the traditional view was that the sum that the contract breaker is required to pay must be extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach. Consequently, the comparison usually made was between the loss that would likely be incurred by the innocent party relative to the amount payable pursuant to the clause. The Supreme Court decision The Supreme Court upheld the validity of the disputed clauses in both appeals; albeit for different reasons. In Cavendish, the Supreme Court distinguished between primary obligations (i.e. those obligations that are required to be performed by the terms of the contract) and secondary obligations (i.e. obligations that are triggered by a breach) and held that the clauses in that case were in the nature of primary obligations and therefore not susceptible to the rule against penalties.

14 14 INCE & CO Commercial In ParkingEye, the Supreme Court found that although the parking charge did potentially engage the penalty rule, the level of the charge was not such as to constitute a penalty. The Supreme Court stated that deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract. In that case, the legitimate interest was ensuring the efficient use of the car park by seeking to prevent users overstaying the two hour time limit which, in turn, benefitted ParkingEye. Therefore, the Supreme Court has in effect shifted the focus from the loss that could conceivably have resulted from the breach as being the key question in identifying whether a contractual provision is penal. Rather, even where a damages clause imposes a liability in excess of that which the innocent party might suffer by reason of the breach, the clause may properly be justified by other considerations. This will depend on whether the innocent party had a legitimate interest in performance of the contract extending beyond the damages it would otherwise be entitled to receive from the contract breaker. Following this decision, the question so far as enforceability of the relevant provision is concerned will be whether it is penal, not whether it is a genuine pre-estimate of loss. Therefore, a clause may require a payment that significantly exceeds a pre-estimate of loss but that will not necessarily make it penal. The true test is whether the relevant provision imposes a detriment on the contract breaker that is out of all proportion to any legitimate interest of the innocent party in enforcement of the primary obligation. While the various Lord Justices take slightly different approaches, essentially the key questions are whether: a. there is a legitimate business interest served and protected by the clause; and b. the contractual provision to protect that interest is extravagant, exorbitant or unconscionable. If the clause satisfies a legitimate business interest and is not extravagant, exorbitant or unconscionable, it will be enforceable. In order to fail the latter part of the test, the provision would effectively require a detriment to the contract breaker out of all proportion to the legitimate interest of enforcement by the innocent party. Consequently, when considering whether a clause is penal, it is not just the financial loss that would have been suffered as a result of the breach that is relevant. Potentially relevant factors in applying the test would be: whether others in the same industry impose similar charges; the indirect business cost to the innocent party of breaches of the relevant obligation; and whether the secondary obligation was brought to the contract breaker s attention in an appropriate manner. Comment The Supreme Court has provided a welcome update of the law in relation to penalties. Parties must now have a greater expectation that provisions agreed by commercial parties on an equal footing will be enforced by the courts, providing the innocent party can show that the clause protects its legitimate business interest. Greater consideration will now be required at the drafting stage as to whether an obligation should be drafted as a primary obligation (which would avoid engagement of the rule against penalties) or a secondary obligation, and the distinction between the two is likely to provide fertile ground for disputes. Stuart Shepherd Global Head of Trade, London stuart.shepherd@incelaw.com Amanda Urwin Senior Associate, London amanda.urwin@incelaw.com

15 15 INCE & CO Commercial The Modern Slavery Act 2015 The UK s Modern Slavery Act 2015 ( the Act ), which came into force on 31 July 2015, addresses the rise of new forms of slavery. These include imposing, as from October 2015, an obligation on companies with a turnover of over 36m to disclose what they are doing (or indeed not doing) to eradicate slavery within their supply chains. The Act consolidates the UK s existing anti-slavery legislation, brings in harsher sentencing for offenders, extends powers for offenders property to be seized and aims to encourage companies that are at risk of unwittingly becoming involved with modern slavery to investigate their supply chains. The Act is a response to the increased public awareness of these issues and makes it an offence knowingly to hold another person in slavery or servitude, to make them perform forced or compulsory labour or, importantly for companies engaged in international trade, to arrange or facilitate the travel of another person with a view to their being exploited. Supply chain investigation A key part of the Act, which is partly modelled on Californian legislation that came into force in 2012, is a transparency in supply chains provision, which encourages a new self-regulatory system by obliging companies with a turnover of over 36m to publish a slavery and human trafficking statement each financial year. The statement must outline the steps the organisation has taken during that financial year to ensure that slavery and human trafficking do not take place in any of its supply chains or in any part of its own business. Compliance may be achieved by a statement that nothing has been done. The hope, however, is that the likelihood of negative publicity resulting from inaction will encourage companies to instead take steps to eliminate slavery from their supply chains and to publicise that fact through their annual statements. Affected companies The reach of s.54 of the Act is significant. The UK government conducted a consultation on the most suitable turnover (which would include a company s subsidiaries) and has set the threshold at 36m. Any company carrying on business (or part of a business) within the UK that supplies goods or services and has a turnover of over 36m will be obliged to publish a s.54 statement. Affected sectors Many trading companies ship goods to or from the UK and/or have a presence here. It is uncertain what the courts will decide constitutes carrying on a part of a business in the UK, but the guidance published by the UK government states that a common sense approach should be applied, so the Act may not apply to those companies that merely trade to the UK, although it may well apply to those that, for example, maintain a branch office in the country. In addition, trading companies may find themselves under considerable pressure to provide evidence of anti-slavery and anti-trafficking measures from the purchasers of their goods in the UK - the cascading effect at which the Act aims. If the term supply chains is interpreted broadly, then trading companies are at significant risk of forming indirect links to slavery. Those companies that currently follow the UN s Guiding Principles on Business and Human Rights may already have taken most of the necessary steps to minimise the risk of links to modern slavery. In order to produce a comprehensive annual statement, it may be necessary to investigate, for example, agricultural producers or garment manufacturers operating further down a supply chain. The guidance strongly encourages businesses to look beyond first tier suppliers in order to produce more meaningful statements. The fact that trading companies may sit towards the top of complex supply chains will be apparent to their major customers, who may request information needed for their own compliance purposes. The leaders of this trend are likely to be food and

16 16 INCE & CO Commercial garment retailers, as those industries are particularly vulnerable to slave labour and public boycotts can have drastic and swift effects on sales. Confiscation/detention Freight forwarders and logistics companies should also be aware of a second, quite different risk: forfeiture of vehicles. Under s.11 of the Act, vehicles used or intended to be used in connection with trafficking offences may be forfeited by a court order. Vehicles may be forfeit if the person convicted is: > > The owner of the vehicle; > > A director, secretary or manager of the company owning the vehicle; > > In possession of the vehicle under a hirepurchase agreement; > > A director, secretary or manager of the company in possession of the vehicle under a hirepurchase agreement; or > > The driver of the vehicle. For responsible companies, it seems that the greatest risk lies in failing to ensure as far as possible that none of their managers or drivers could have links to trafficking groups. Forfeiture may be ordered even though the vehicle s owner is unaware that it might be used to commit an offence, so vehicle owners, unlike the owners of ships or aircraft, which can also be forfeit under similar provisions contained in the Act, cannot claim as a strict defence that they exercised due diligence to minimise the risk. Protection, therefore, lies in thorough background checks, which may go beyond those currently in place. If these can be brought to the attention of the Court, which under the Act must allow parties with an interest in the vehicle to make representations, the likelihood of forfeiture may be reduced. Compliance deadline Companies whose financial year ends on 31 March 2016 will be the first required to publish statements under the transparency in supply chains provisions. The government guidance provides that statements should be published as soon as is reasonably practicable and that this means within six months of year end. This gives some time for companies to prepare their statements, which may in any case simply explain that an organisation is taking the first steps to act on the issue. Comment/look ahead The Act raises two issues that are of particular importance for businesses involved in international trade. Firstly, companies maintaining a part of their business in the UK with a turnover of over 36m should invest resources in investigating their supply chains in order to publish annual statements under s.54 of the Act. Those to whom the Act does not apply directly may need to investigate their supply chains anyway, to enable their contractual counterparties in the UK to satisfy their own obligations under the Act. Secondly, companies will need to be aware of and address the risk of vehicle forfeiture, which cannot necessarily be avoided by the exercise of due diligence. It would be wise to keep one step ahead of the requirements under the Act as part of a company s ongoing monitoring of other well-established compliance issues, such as sanctions, anti-corruption and money laundering. Kevin Cooper Partner, London kevin.cooper@incelaw.com Olivia Murray Senior Associate, London olivia.murray@incelaw.com Martin Laughton Trainee Solicitor, London martin.laughton@incelaw.com

17 CONTACTS London Beijing Hong Kong Paris/Le Havre Shanghai Stuart Shepherd Wai Yue Loh +86 (0) Max Cross Jérôme De Sentenac Paul Ho paul.ho@incelaw.com +86 (0) Ted Graham ted.graham@incelaw.com Will Marshall will.marshall@incelaw.com Jonathan Goldfarb jonathan.goldfarb@incelaw.com Michelle Linderman michelle.linderman@incelaw.com Ajay Ahluwalia ajay.ahluwalia@incelaw.com +86 (0) Dubai Rania Tadros rania.tadros@incelaw.com Hamburg Daniel Jones daniel.jones@incelaw.com +49 (0) Rory Macfarlane rory.macfarlane@incelaw.com Rosita Lau rosita.lau@incelaw.com Monaco Ian Cranston ian.cranston@incelaw.com Alexandre Besnard alexandre.besnard@incelaw.com Piraeus Jamila Khan jamila.khan@incelaw.com Singapore John Simpson john.simpson@incelaw.com Fionna Gavin fionna.gavin@incelaw.com Ince & Co is a network of affiliated commercial law firms with offices in Beijing, Dubai, Hamburg, Hong Kong, Le Havre, London, Monaco, Paris, Piraeus, Shanghai and Singapore. E: firstname.lastname@incelaw.com incelaw.com 24 Hour International Emergency Response Tel: + 44 (0) LEGAL ADVICE TO BUSINESSES GLOBALLY FOR OVER 140 YEARS The information and commentary herein do not and are not intended to amount to legal advice to any person on a specific matter. They are furnished for information purposes only and free of charge. Every reasonable effort is made to make them accurate and up-to-date but no responsibility for their accuracy or correctness, nor for any consequences of reliance on them, is assumed by the firm. Readers are firmly advised to obtain specific legal advice about any matter affecting them and are welcome to speak to their usual contact Ince & Co International LLP, a limited liability partnership registered in England and Wales with number OC Registered office and principal place of business: International House, 1 St Katharine s Way, London, E1W 1AY.