Commercial Contracts Bulletin

Transcription

1 Commercial Contracts Bulletin July 2017 CMS_LawTax_Negative_ ep

2 CONTENTS Challenging standard form exclusion clauses under UCTA: new guidance High Court finds Option Agreement void as agreement to agree You ve got to have good faith? The Court of Appeal decides against a duty of good faith when terminating contractual relationships Supreme Court rules again on interpretation of contracts: business common sense may not save the day The principle of futility, reasonable endeavours and good faith How to assign contractual rights: the High Court prompts us to take notice How much will your next business dinner cost you? When is a conversation evidence of intention to establish legal relations? Brexit Next - Legal Implications Key Contacts Commercial Contracts Bulletin

3 CHALLENGING STANDARD FORM EXCLUSION CLAUSES UNDER UCTA: NEW GUIDANCE Challenging standard form exclusion clauses under UCTA: new guidance In Goodlife Foods Ltd v Hall Fire Protection Ltd [2017] EWHC 767, the Technology and Construction Court ( TCC ) has rejected an attempt to challenge a broadly drafted standard form exclusion clause under the Unfair Contract Terms Act 1977 ( UCTA ). The decision gives helpful guidance as to the circumstances in which broadly drafted exclusions might be considered reasonable under UCTA. Facts Goodlife is a producer of pre-packaged vegetarian meals. In 2002 Goodlife contracted Hall to supply and install a fire suppression system at its factory in Warrington. In 2012 a fire occurred at the factory which Goodlife alleged ought to have been prevented by the suppression system. A faulty compression joint was said to have prevented the delivery of suppressant media to extinguish the fire. Goodlife brought a large claim against Hall for losses suffered as a result of the fire. Hall defended the claim by relying, among other things, on an exclusion clause contained within its standard terms and conditions supplied to Goodlife with its quotation. The clause read as follows: We exclude all liability, loss, damage or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided by HFS for whatever reason. In the case of faulty components, we include only for the replacement, free of charge, of those defective parts 3

4 CHALLENGING STANDARD FORM EXCLUSION CLAUSES UNDER UCTA: NEW GUIDANCE Goodlife contended that this clause failed to satisfy the UCTA reasonableness requirement and was therefore invalid. In general, the reasonableness requirement applies to i) exclusion or limitation clauses contained in a party s standard terms and conditions (i.e. documents which are not negotiated); and ii) attempts to exclude or limit liability for negligence whether or not contained in standard terms and conditions. Goodlife relied on previous sale of goods cases where broadly drafted exclusion clauses had been held to be incompatible with UCTA. For example, in Balmoral Group Ltd v Borealis [UK] Ltd [2006] EWHC1900 (Comm) liability in relation to the supply of polyethylene polymer was limited to the replacement of defective products or a refund of the price paid for the defective products. The TCC was asked to determine whether Hall s exclusion clause satisfied the requirement of reasonableness. Decision Despite the width of the exclusion clause, the TCC upheld its reasonableness. In reaching this conclusion the TCC placed considerable emphasis on the fact that the only loss to which the clause was directed was one which Goodlife could be expected to insure against (i.e. damage caused by fire). If Goodlife had discovered that the suppression system was faulty before a fire occurred, Hall would be obliged to replace the faulty parts. If a fault went undetected, Goodlife would be exposed to the risk of a fire. However, the TCC found that the risk of fire was one which Goodlife could be expected to insure against. The sale of goods cases relied upon by Goodlife were distinguished by the TCC on the basis that the potential loss and damage to the purchaser in those cases was infinitely variable in terms of cause, effect and amount and could not sensibly be covered by the purchaser s insurance. For example, in Balmoral v Borealis, the polymer supplied was used to make oil tanks, thousands of which proved to be defective allegedly due to the polymer not being fit for purpose. Those were losses which the supplier was better able to manage and insure against. As the TCC noted: the crucial difference between this case and those cases is that in this case, apart from the risk of the need for repair or replacement of some or all of the fire suppression system if defective, which would be a relatively modest cost even if not covered by the warranty, the only likely loss would result from a fire not being prevented by the fire suppression system, in respect of which the customer almost certainly would and certainly should be covered by insurance anyway. Comment This case provides important guidance as to when broad exclusion or limitation clauses might be considered reasonable even where the innocent party is effectively left without any recourse. An important factor in this case was that the parties were considered to be of equal size and bargaining power. Therefore, it is perhaps unlikely that the same conclusion would have been reached by the TCC if the contract had been entered into between Hall and a much smaller purchaser with more limited means. This case also suggests that broad exclusion or limitation clauses are more likely to be reasonable (and therefore enforceable) in contracts for the supply of goods or services which are intended to reduce the risk of incidents commonly insured against, such as fire, flood, theft and so on. Purchasers of these types of goods and services should therefore take care to review any exclusion or limitation clauses in the supplier s standard terms, identify key risk areas and consider how responsibility for those risks should be allocated between the parties. If the goods or services are intended to mitigate a risk which the purchaser ought reasonably to insure against (as happened in this case), the purchaser should ensure it has appropriate insurance in place. 4 Commercial Contracts Bulletin

5 HIGH COURT FINDS OPTION AGREEMENT VOID AS AGREEMENT TO AGREE High Court finds Option Agreement void as agreement to agree In Teekay Tankers Ltd v STX Offshore and Shipbuilding Co Ltd [2017] EWHC 253 (Comm), the High Court took another look at the question of when a contract will be considered unenforceable as an agreement to agree. Facts Teekay Tankers Ltd ( TT ) entered into a series of agreements with STX Offshore and Shipbuilding Co Ltd ( STX ) to purchase tanker ships. TT purchased four ships and entered into an option agreement for the purchase of a further three sets of four ships ( Optional Vessels ). TT had to exercise each option by a specified date and, if it did so, the intention was that TT and STX would enter into a purchase agreement for the Optional Vessels. The wording used in the option agreement stated: Delivery Dates for each [of the] Optional Vessels shall be mutually agreed upon at the time of TT s declaration but STX will make best efforts to have a delivery within 2016 for [the first set of Optional Vessels], within 2017 [for the second set of Optional Vessels] and within 2017 [for the third set of Optional Vessels] [emphasis added]. It subsequently became clear that STX was unlikely to be able to fulfil the contracts owing to its financial position. TT treated this as a repudiatory breach of the option agreement and claimed damages for loss of profits caused by the breach. STX defended this claim by arguing that the option agreement was an agreement to agree and therefore void for uncertainty because an essential term (i.e. the delivery dates) was required to be mutually agreed separately by the parties. TT disagreed that the option agreement was an agreement to agree, arguing that any uncertainty could be resolved by implying one of two terms into the agreement: 1. That the delivery date for the Optional Vessels would be a date offered by STX in 2016 or 2017 (as appropriate) using its best efforts, failing which STX would deliver on the earliest subsequent date possible; or 2. That delivery of the Optional Vessels would take place within a reasonable period of time. This argument is based on the long-standing principle that where parties fail to specify a time for performance, the courts will imply a term that performance must take place within a reasonable timeframe. Decision The High Court had no difficulty in finding that the agreement was intended by both parties to be legally binding, given that steps had been taken towards performance. Accordingly, the Court found that it should strive to give effect to the bargain made by the parties. In order to do so, the Court would need to imply a term that was sufficiently certain in order to be enforceable. 5

6 HIGH COURT FINDS OPTION AGREEMENT VOID AS AGREEMENT TO AGREE The High Court rejected TT s first argument, whereby a term should be implied that the delivery dates for the Optional Vessels would be those offered by STX within a given period. The inclusion of the phrase mutually agreed upon suggests the parties intended for there to be a mechanism allowing for disagreement as to any proposed date. By implying a term to this effect, the Court would be allowing STX to make a unilateral declaration as to the delivery date, which would be inconsistent with the option agreement as drafted. Regarding TT s second argument that a term should be implied that delivery would take place within a reasonable time, the High Court found that this was inconsistent with the use of the phrase best efforts. The judge found no satisfactory answer as to why the parties would have referred to STX s best efforts if the delivery dates were intended to be based on the objective standard of what is reasonable. Use of the phrase best efforts is implicit recognition of the fact that the parties will have conflicting commercial interests regarding the delivery date, which they are entitled to take into consideration. The High Court found that the alleged implied terms were inconsistent with the option agreement, therefore the terms could not be implied and the option agreement failed for lack of certainty. Comment The decision in this case shows that the courts are unwilling to take steps to negate the absence of an essential term by implying a term, if the alleged implied term is inconsistent with the express terms of the parties agreement. The decision therefore highlights the need to carefully review agreements to ensure the parties obligations are sufficiently certain to be enforceable, which is of particular concern when drafting option agreements. If parties wish to ensure a contract comes into existence, notwithstanding that a potentially essential term remains to be agreed at a later date, they should include objective criteria through which the essential term may later be defined and a clear mechanism to enable any disagreement to be resolved. For example, the inclusion of a long stop date for delivery will ensure that the obligations crystallise at a defined point, rather than remaining indefinitely subject to agreement and therefore unenforceable. The decision also emphasises that use of the phrase best efforts is not enough to remedy an uncertain term. Parties should therefore be careful to ensure that any best efforts obligations refer to a particular result, rather than the use of best efforts to reach a future agreement on an essential term. 6 Commercial Contracts Bulletin

7 YOU VE GOT TO HAVE GOOD FAITH? You ve got to have good faith? The Court of Appeal decides against a duty of good faith when terminating contractual relationships The Court of Appeal has upheld a first instance decision to dismiss a claim for wrongful termination in Ilkerler Otomotiv Sanayai Ve Ticaret Anonim Sirketi and another v Perkins Engines Company Ltd [2017] EWCA Civ 183. The Court held that there is no implied duty of good faith when exercising termination provisions. The Court also considered the requirements for implied variation of an agreement through conduct. Facts The first claimant Ilkerler Otomotiv Sanayai Ve Ticaret Anonim Sirketi and the second claimant, a wholly owned subsidiary of the first claimant, (together the Distributors ) acted as distributors for the defendant Perkins Engines Company Ltd ( Perkins ) under a distribution agreement (the Agreement ). During the initial term of 3 years, Perkins could only terminate the Agreement under clause 19.3 which gave Perkins a right to terminate if it considered the Distributors performance to be defective. Clause 19.3 required Perkins to give the Distributors three months notice and an opportunity to remedy their defective performance. By contrast, after the initial term, Perkins could terminate for convenience on giving at least 6 months notice under Clause 2.3. In September 2012, nine years after the initial term had expired, Perkins gave notice to terminate for convenience. The Distributors subsequently claimed wrongful termination on the following grounds: 1. Construction of the contract The inclusion of an express clause permitting termination for defective performance precluded Perkins from terminating for convenience if the reason for termination was the Distributors defective performance. In these circumstances, the Distributors should have been given an opportunity to remedy their defective performance before termination. 2. Variation of the terms by conduct The Distributors argued that the termination provisions in the Agreement had been impliedly varied by parties conduct. In particular, the Distributors pointed to the fact that they had agreed a 3 year project plan ending in 2015 which would require substantial investment by the Distributors in their businesses, including building a new head office in Istanbul at a cost of 1,700,000. However, the Agreement only envisaged a 1 year project plan. The Distributors argued that this variation meant that the Agreement would run until the end of 2015 or at least until the Distributors had recouped their additional investment. 7

8 YOU VE GOT TO HAVE GOOD FAITH? 3. Implied good faith Perkins was in breach of an implied term of good faith in terminating when it did. Decision The Court dismissed the proposition that Perkins was unable to terminate for convenience based on their dissatisfaction with the Distributors performance, finding that the two termination provisions fit perfectly well together. The right to terminate for defective performance during the initial 3 year period was a mechanism that gave Perkins a means of extricating itself from the Agreement if it became dissatisfied with the Distributors performance. On expiry of the initial term, Perkins could choose to terminate either for defective performance or for convenience. The variation argument advanced by the Distributors was also dismissed. The Court found that the test for determining whether an express variation of some terms in an agreement resulted in an implied variation of others is the same as that which should be applied when determining whether an implied contract exists. In other words, was the 3 year project plan inconsistent with the right to terminate on 6 months notice? The Court found that the Agreement had always contemplated that, after the initial 3 year period, Perkins could terminate on 6 months notice which would have cut across the 1 year project plan originally envisaged under the Agreement. As a result there had always been a risk that the Agreement could be terminated before the project plan was fully implemented. Further, as there had been no discussions between the parties about any change to the termination provisions, it would be impossible for the Court to say what the necessary terms of the new termination provisions should be. For their good faith argument, the Distributors relied on the judgment in Yam Seng Pte v international Trade Corporation [2013] 1 All E.R. (Comm) 1321, which found that good faith and a duty of communication, cooperation and loyalty can be implied in circumstances where there is a long-term relationship in which the parties have made a substantial commitment. The Court distinguished the case at hand, highlighting that the judgment in Yam Seng Pte related to the ongoing performance of a contract, not termination. Comment This case highlights the importance of ensuring that variations to a contract are agreed in writing, particularly where the parties intend to incur significant costs in contemplation of the performance of their obligations under the contract. Although the Court had sympathy with the Distributors given that they had invested almost 4,000,000 in their business at Perkins request, the Court was still not prepared to imply a term varying Perkins termination rights. In addition, it is clear that parties should not rely on their counterparty acting in good faith when terminating a contract, regardless of the length of the contract or the nature of the relationship between the parties. 8 Commercial Contracts Bulletin

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10 SUPREME COURT RULES AGAIN ON INTERPRETATION OF CONTRACTS: BUSINESS COMMON SENSE MAY NOT SAVE THE DAY Supreme Court rules again on interpretation of contracts: business common sense may not save the day In Wood v Capita Insurance Services Limited [2017] UKSC 24, the Supreme Court has sought to reconcile the approach to contractual construction and interpretation it adopted in Rainy Sky v Kookmin Bank [2011] UKSC 50 and Arnold v Britton [2015] UKSC 36. In doing so it decided that, where there are rival meanings to a clause, consideration of the words of the contract (as a whole) and commercial common sense both have a role to play. Facts Mr Andrew Wood (the Seller ) entered into a share purchase agreement ( SPA ) with Capita Insurance Services Limited (the Buyer ) for the acquisition of the entire issued share capital of Sureterm Direct Limited (the Company ), a car insurance broker. Following conclusion of the deal, the Company s employees raised concerns about potential mis-selling of products to customers in the period prior to the acquisition. The Company conducted a review and reported its findings to the FSA. The FSA concluded that customers had been misled and the Company paid 1.35 million in customer compensation. The Buyer sought to rely on the following indemnity in the SPA in order to recover this sum from the Seller: The Sellers undertake to indemnify the Buyer against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service. The Seller argued that the Buyer could not rely on the indemnity because it only covered losses which were a result of a claim or complaint registered with the FSA. As the Company had self-referred to the FSA, the indemnity was not engaged. The Buyer argued that the indemnity set out two categories of losses: damages, costs, charges on the one hand and fines, compensation, remedial actions, etc. on the other. According to the Buyer, only the second category of loss was qualified by the need for the claim to have been registered with the FSA by a customer. The Buyer succeeded in the High Court, where the court decided that business common sense required self-reporting to fall within the scope of the indemnity. However, the Court of Appeal decision held that self-reporting was not within the language of the indemnity clause. The Buyer appealed to the Supreme Court, arguing that the Court of Appeal s decision was wrong, because it incorrectly placed too much emphasis on the words of the SPA and gave insufficient weight to the context in which they were agreed (the factual matrix). Decision The Supreme Court found in favour of the Seller and upheld the Court of Appeal decision. Lord Hodge (with whom the other judges agreed) undertook a detailed analysis of the terms of the indemnity in the context of the other contractual terms, and found that its terms (on a close examination) did not cover self-reporting for mis-selling. 10 Commercial Contracts Bulletin

11 SUPREME COURT RULES AGAIN ON INTERPRETATION OF CONTRACTS: BUSINESS COMMON SENSE MAY NOT SAVE THE DAY Importantly, Lord Hodge did not accept the Buyer s argument that Arnold had altered the guidance given by the Supreme Court in Rainy Sky. He gave the following guidance which he considered consistent with Arnold and Rainy Sky: Where there are rival meanings to a clause, the court can give weight to the implications of rival constructions by reaching a view that is more consistent with business common sense. However, in striking the balance between the implications of rival constructions the court must also consider the quality of drafting of the clause. The court must be alive to the possibility that a party may have agreed a clause that does not serve its interests. It follows that contractual interpretation involves an iterative process whereby rival interpretations are checked against the whole contract and the commercial consequences. The courts must take a balanced approach. It may be that the circumstances of the drafting of the contract suggest that more weight should be given to one of the approaches of checking against the whole contract or the factual matrix/commercial consequences. For example, in the context of a sophisticated contract, checking against the contract might be given more weight. After a consideration of the detail of the clause, Lord Hodge decided that, had the indemnity stood on its own, the requirement of a claim or complaint by a customer and the exclusion of loss caused by regulatory action, which was otherwise prompted, might have appeared anomalous. But the indemnity was in addition to wide-ranging warranties which likely covered the circumstances which occurred. It was not contrary to business common sense for the parties to agree wide-ranging warranties which were subject to a time limit, nor to agree a further indemnity which had no time limit but which was triggered only in limited circumstances. On that basis, the appeal failed. Comment In a series of decisions culminating in the Supreme Court s decision in Rainy Sky, the courts decided that, if there are two possible ways of reading a contract, the reading which is consistent with commercial common sense can be preferred. However, some commentators queried whether such an approach was still relevant after Arnold, which appeared to place an emphasis on the natural and ordinary meaning of the words of the contract and cautioned against using business sense to relieve a party of a bad bargain. This case clarifies that where there are rival meanings to a clause, the Supreme Court seems to have identified that the law permits a variety of methods to arrive at the correct answer. The correct approach will likely depend upon the circumstances of the case. In some cases, a literal approach to the contract will be more useful. In others, the context and business sense approach will be more appropriate. However, hindsight is not part of the exercise. Although it seems likely that the courts will place more emphasis on the words of the contract where it has been professionally drafted, the court recognised that negotiators of complex and formal contracts might not achieve a logical and coherent text, for example as a result of protracted negotiations and conflicting interests. Therefore, even where a contract has been professionally drafted and heavily negotiated, its commercial context must not be ignored, and the commercial context may still be helpful in interpreting the contract. 11

12 THE PRINCIPLE OF FUTILITY, REASONABLE ENDEAVOURS AND GOOD FAITH The principle of futility, reasonable endeavours and good faith A recent judgment from the High Court given in Astor Management AG & Anor v Atalaya Mining Plc & Ors [2017] EWHC 425 (Comm) made clear that a precondition to the accrual of a contractual right should not be disapplied even if it is no longer necessary. The Court also provided helpful commentary on reasonable endeavours clauses and the duty of good faith. Facts Astor Management AG ( Claimant ) entered into an agreement ( Master Agreement ) with Atalaya Mining plc ( Defendant ) for the sale of the Claimant s interest in a project involving the mining of copper ore ( Project ). Under the Master Agreement, the Claimant was to receive consideration of up to 63.3 million. However, this consideration was agreed to be deferred and payable in three tranches. For the first tranche to become payable, the Defendant had to: (i) obtain the necessary authorisations to restart mining activities in the Project; and (ii) secure sufficient senior debt finance to allow the restart of mining operations. The Defendant undertook to use all reasonable endeavours to obtain the senior debt finance and to procure the restart of mining activities in the Project on or before 31 December Significantly, a later amendment was made to the Master Agreement which allowed the Defendant s company group to raise funds which could then be passed to the Defendant without requiring the Claimant s consent. The parties originally envisaged that the necessary authorisations to restart mining activities would be granted by the end of However, they were not obtained until 16 July During this period, the Defendant pursued many options in attempting to secure the necessary senior debt finance but was unsuccessful. Eventually, the Defendant group secured the required funds through equity fundraising and made them available to the Defendant through intra-group loans. Subsequently, mining restarted on 31 July Commercial Contracts Bulletin

13 THE PRINCIPLE OF FUTILITY, REASONABLE ENDEAVOURS AND GOOD FAITH As mining had restarted, the Claimant argued that payment of the first tranche had been triggered. It brought a claim in this regard which was founded on two grounds: 1. Since mining had been restarted without the need for the senior debt finance, the requirement to obtain it fell away. 2. The Defendant failed to use all reasonable endeavours to obtain the senior debt finance. As a variant of this, the Defendant acted in breach of implied obligations of good faith. Decision In support of its first claim, the Claimant relied on what it called the principle of futility in contractual interpretation. The Claimant described this principle as follows: if the fulfilment of a precondition to the accrual of a contractual right becomes futile or unnecessary, the courts do not insist upon it. However, the Court disagreed that any such principle exists. The Court found that no principle of law permits a contractual precondition to the accrual of a right to be ignored even if it no longer serves a useful purpose. In response to the Claimant s second claim, the Defendant argued that there were no objective criteria for the Court to judge the reasonableness of its endeavours to obtain senior debt finance. However, the Court disagreed entirely. Although the courts will be slow to question a party on commercial matters, the Court noted that where the parties have agreed to adopt a test of reasonableness they are deliberately inviting the court to make a value judgment. Nevertheless, on the facts of this case, the Court found that the Defendant had breached its obligation to use all reasonable endeavours. The Court also addressed whether there was an implied duty to act in good faith to obtain the senior debt finance. It commented that where there is a duty to act in good faith, it is a lesser duty than the positive obligation to use all reasonable endeavours to achieve a specified result. As a result, the Court held that it was unnecessary to imply a term requiring the Defendants to act in good faith as such a requirement was subsumed within the express obligation to use all reasonable endeavours. Comment The Court s conclusion on the existence of a principle of futility provides helpful guidance on an area of law where few judgments have been made. This decision confirms that even where a contractual precondition to the accrual of a right no longer serves a useful purpose it must still be fulfilled before the right can be enforced. As seen in this case, this can become problematic in long-term contracts under which payment is contingent upon achievement of certain events. Circumstances can change and it may be that a condition precedent, which was considered crucial when drafting the contract, becomes irrelevant. To avoid the risk of non-payment, it is important to include an acknowledgment that payment will become due even if the condition precedent is not fulfilled if the project can move forward to the next stage regardless. This case also highlights the issues associated with interpreting and enforcing reasonable endeavours provisions. A reasonable endeavours clause is not a binding obligation and it can be difficult to determine whether a party has fulfilled or breached this type of obligation. Therefore, when drafting a reasonable endeavours clause it is useful to include specific examples of what a party should do or the steps that should be taken to satisfy such a requirement. 13

14 HOW TO ASSIGN CONTRACTUAL RIGHTS: THE HIGH COURT PROMPTS US TO TAKE NOTICE How to assign contractual rights: the High Court prompts us to take notice In the recent case of General Nutrition Investment Company v Holland and Barrett International Ltd & Anor (Rev 1) [2017] EWHC 746 (Ch) the High Court considered whether a trade mark licence was validly assigned. This decision highlights the importance of issuing valid notices of assignment to ensure that assignees are able to exercise their rights under an assignment agreement. Facts GNIC Arizona Oldco ( GNIC Arizona ) granted a trade mark licence ( Agreement ) to Holland and Barrett International Limited ( H&B ) to use certain GNC trade marks in the UK. During the term of the Agreement GNIC Arizona was dissolved as part of a restructuring of the GNC group. Following the restructuring, General Nutrition Investment Company ( GNIC ) claimed it had acquired title to all the trade marks in the Agreement by way of assignment. The Agreement conferred certain termination rights on the Licensor which GNIC, claiming to be the new licensor, believed it could exercise. GNIC subsequently brought a claim against H&B for material breach of the Agreement and served a number of termination notices on H&B. H&B issued a counterclaim seeking declaratory relief given that it had not received notice of the assignment of the Agreement from GNIC Arizona to GNIC and that therefore none of the termination notices were valid. H&B also denied any breach of its contractual obligations. Decision First, the High Court considered whether there had been a valid assignment of the Agreement between GNIC Arizona and GNIC. The Court concluded that some of the basic conditions of legal assignment required under section 136 of the Law of Property Act 1925 had not been fulfilled, namely the provision of written notice to the licensee (H&B), signed by the assignor (GNIC Arizona). The High Court noted however that there had been an equitable assignment of GNIC Arizona s rights to GNIC. The Court then considered whether GNIC was able to exercise the rights of the Licensor given that it was only an equitable assignee of the benefit of the Agreement and given that H&B had received no notice of the assignment. 14 Commercial Contracts Bulletin

15 HOW TO ASSIGN CONTRACTUAL RIGHTS: THE HIGH COURT PROMPTS US TO TAKE NOTICE Relying principally on Warner Bros Records Inc v Rollgreen Ltd 1976 QB 430, the Court found that GNIC could not exercise the Licensor s rights under the Agreement, including the right to terminate, unless and until H&B had been given notice of the assignment. The Court emphasised that this was not a simple matter of procedure and that knowing to whom a party owes its contractual duties is a substantive contractual right. The Court then examined whether GNIC s termination notices were communicated sufficiently clearly and unambiguously to H&B. The Court stated this would require communicating to H&B (i) the decision to terminate the agreement and (ii) the identity of the person entitled to make that decision. The Court found that the identity of the entity which was entitled to terminate had not been made clear to H&B. The Court also declared it unreasonable to impute to H&B knowledge of the restructuring of GNIC Arizona and that equally it was not reasonable to expect H&B to make enquiries on the identity of the company making the notice. Comment This case involved the assignment of an IP licence, though it serves as a useful reminder of the steps that must be taken in order to validly assign any contractual agreement. In particular, written notice must be given to the assignor s counterparty, failing which it is likely that the assignment will be unenforceable. The High Court reached its decision in this case despite the existence of facts which may have suggested a more lenient outcome. For example, H&B had apparently been informed of the proposed restructuring of the GNIC group. In addition, the assignor and assignee had similar names which may have indicated to H&B that they formed part of the same group and that an assignment had occurred. Notwithstanding these facts, the requirement for written notice of an assignment was found to be an unwavering requirement. 15

16 HOW MUCH WILL YOUR NEXT BUSINESS DINNER COST YOU? How much will your next business dinner cost you? When is a conversation evidence of intention to establish legal relations? Can a binding contract be formed during a conversation over dinner and drinks? The answer is yes, but the contract must still meet certain minimum requirements, including clarity of terms and an intention to establish legal relations. In the recent case of MacInnes v Gross [2017] EWHC 46 (QB), the High Court held that the parties dinner discussions were not sufficient to establish a contract. Facts The claimant alleged he was owed 13.5 million for services relating to the sale of the defendant s business. The claimant and defendant had met a few times, including over drinks at a hotel, prior to a key dinner in London at which it was alleged that a contract was established. The claimant claimed it had been agreed that he would leave his employment at an investment bank in order to join the defendant s company with the aim of maximising the defendant s return on the sale of his business. The claimant followed this meeting with an setting out headline terms between the parties. In return for these services, he was to be paid the difference between the actual price received for the sale and the target price. The claimant provided advice and services to the defendant but did not leave his job at the investment bank and became increasingly side-lined in the ongoing negotiations. Approximately nine months later, as a sale became imminent, the claimant ed the defendant referencing the dinner and emphasising the need to be completely aligned. The defendant replied stating they would need to make a proper contract however a formal written contract was never put in place. Following the sale of the business the claimant demanded payment for his services relying on the alleged contract formed over dinner. Decision A valid contract requires the existence of an offer, acceptance, consideration (which may or may not be monetary), an intention to create legal relations, and certainty of contractual terms. This is an objective standard and does not depend on the subjective intentions of the parties (RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14]). In the absence of an express contract, the party contending that a contract exists must prove there was an intention to establish legal relations. In a commercial context there is a presumption of an intention to establish legal relations. However, this must not be conflated with the need for certainty, which applies in addition to an intention to establish relations. In this instance, the parties conversations and s did not form a sufficiently clear and complete basis to establish such an intention. The Court stated that the more complex a matter, the more likely it is that the parties will want a written contract. Furthermore, as the defendant s first language was not English, caution was required when determining if complex negotiations in a second-language could lead to a binding agreement. 16 Commercial Contracts Bulletin

17 HOW MUCH WILL YOUR NEXT BUSINESS DINNER COST YOU? Although a contract may be concluded in an informal matter and setting, in this instance the facts did not suggest this had been the case. The limited, high-level, and non-specific content of the following the parties dinner, alongside the claimant s use of the phrase on headline terms and other tentative language throughout the s, indicated that there was not yet any formal contract. At best, there may have been the basis for a future agreement. The language used by both the claimant and defendant in their s suggested that neither believed a binding agreement had been reached at the time, and thus there was no intention to create legal relations and no subsequent contract formed. Furthermore, the terms of such an alleged contract would have been too complex and too uncertain to be enforceable. In particular, the Court found that the precise services to be provided by the claimant were unclear. Comment This case highlights the importance of agreeing and recording contractual terms, particularly if they are complex. It is vital that employees, with authority to act on behalf of a business, have a clear understanding of how contracts may be formed and keep detailed records of any contractual negotiations or discussions. While a contract may be agreed with only essential terms (i.e. all terms that an honest and reasonable businessman would have concluded from the parties communications and conduct that they considered to be a precondition to creating legal relations), relying on this can create uncertainty as to whether and how such a contract may be enforced (RTS Flexible Systems Limited (Respondents) v Molkerei Alois Müller Gmbh & Co KG [2010] UKSC 14). When negotiating contracts, the parties should agree a final contract before beginning to perform their contractual obligations; where this is not possible, a clear and appropriately detailed draft should be in place. 17

18 The political landscape has moved. Our Brexit Next: Legal Implications website provides checklists covering a broad range of industry areas, guiding you through what a Brexit could really mean for your business. You can also look at what we think the Brexit process might look like and the future options for the UK in its relationship with the EU. With over 2,500 lawyers in the UK and 5,000 globally, CMS is a top 10 global law firm and Europe s leading law firm with 39 offices in 18 EU member states. We are there to support our clients and help you prepare for any legal and organisational changes that come as a result of the negotiations with the EU Commercial Contracts Bulletin

19 Key Contacts Carina Healy Partner, Commercial - Glasgow T E carina.healy@cms-cmno.com Gemma Lampert Partner, Disputes - Edinburgh T E gemma.lampert@cms-cmno.com Kimberley Cross Associate, Commercial - Glasgow T E kimberley.cross@cms-cmno.com Rachel Morrison Associate, Commercial - Glasgow T E rachel.morrison@cms-cmno.com 19

20 Your free online legal information service. A subscription service for legal articles on a variety of topics delivered by . cms-lawnow.com Your expert legal publications online. In-depth international legal research and insights that can be personalised. eguides.cmslegal.com CMS Cameron McKenna Nabarro Olswang LLP Cannon Place 78 Cannon Street London EC4N 6AF T +44 (0) F +44 (0) CMS Cameron McKenna Nabarro Olswang LLP 2017 The information held in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice. CMS Cameron McKenna Nabarro Olswang LLP is a limited liability partnership registered in England and Wales with registration number OC It is a body corporate which uses the word partner to refer to a member, or an employee or consultant with equivalent standing and qualifications. It is authorised and regulated by the Solicitors Regulation Authority of England and Wales with SRA number and by the Law Society of Scotland with registered number It is able to provide international legal services to clients utilising, where appropriate, the services of its associated international offices. The associated international offices of CMS Cameron McKenna Nabarro Olswang LLP are separate and distinct from it. A list of members and their professional qualifications is open to inspection at the registered office, Cannon Place, 78 Cannon Street, London EC4N 6AF. Members are either solicitors or registered foreign lawyers. VAT registration number: Further information about the firm can be found at cms.law CMS Cameron McKenna Nabarro Olswang LLP CMS Cameron McKenna Nabarro Olswang LLP is a member of CMS Legal Services EEIG (CMS EEIG), a European Economic Interest Grouping that coordinates an organisation of independent law firms. CMS EEIG provides no client services. Such services are solely provided by CMS EEIG s member firms in their respective jurisdictions. CMS EEIG and each of its member firms are separate and legally distinct entities, and no such entity has any authority to bind any other. CMS EEIG and each member firm are liable only for their own acts or omissions and not those of each other. The brand name CMS and the term firm are used to refer to some or all of the member firms or their offices. Further information can be found at cms.law