Commercial Contracts Bulletin December 2016
CONTENTS Contents Notice provisions take note! 3 Acceptance or counter-offer? 4 Let s be clear. ECJ clarifies the rules on governing law clauses in consumer contracts 6 High Court rules no implied obligation of good faith when exercising contractual right of termination 8 Court of Appeal dismisses idea of a general organising principle of good faith in English law 10 UK Government publishes guidance paper on electronic signatures 12 Exclusion of liability: not a taboo a commercial reality 15 Key contacts 19 2 Commercial Contracts Bulletin
NOTICE PROVISIONS TAKE NOTE! Notice provisions take note! The Court of Session has recently illustrated the importance of strictly complying with notice clauses. In Hoe International Limited v Martha Andersen and Sir James Aykroyd [2016] CSOH 33, the Court confirmed that compliance with the terms of mandatory notice provisions in a contract must be to the letter if a notice is to be considered valid. Facts Hoe International Limited ( HIL ) contracted with Andersen and Aykroyd (the Sellers ) to purchase the whole share capital of Speyside Distillers Company Limited ( Speyside ). A condition of the share purchase agreement ( Agreement ) between the parties was that the Sellers were to disclose to HIL any disputes Speyside had been involved in. Pursuant to this, the Sellers disclosed a seemingly lifeless dispute with Chambers Finance Limited ( Chambers ) and consequently, the Agreement included a warranty from the Sellers that Speyside had no further liability to Chambers with regard to this dispute. In order to rely upon this, the Agreement stated that HIL would have to provide notice to the Sellers as soon as reasonably practicable if it became aware of any claim under the warranty. It transpired that the dispute was in fact not at an end. HIL received a letter to this effect and pursuant to its obligations under the Agreement, notified the Sellers solicitors of the claim. The Sellers settled the claim out of court; however, HIL then sought to enforce the warranty against them. The Sellers argued that HIL did not serve valid notice in accordance with the Agreement and so there was no liability under the warranty provision. The Agreement s notice provisions explained the process for giving notice to the Sellers, and required hand delivery, first class post or recorded delivery. It was also required that the notice was marked for the attention of a specific person and to a specific address. HIL sent the notice by Document Exchange ( DX ) and email, neither of which the Agreement permitted. It was HIL s position that a sensible commercial person would think that service by means of DX was sufficient as the result would be the same as if it was served in accordance with the terms of the Agreement that the letter would be placed on the Sellers solicitor s reception desk. The Decision Relying on various Scots law authorities, it was held by Lord Woolman that the Agreement was decisively specific on how notice was to be served and HIL did not adhere to the specifics it set out. The notice was served incorrectly and was therefore held to be invalid. Lord Woolman held that authorities in this area have been clear and consistent; namely that if strict compliance is required under the contract, it shall be required in practice also. Quite simply, Lord Woolman stated that HIL failed to use the right key, and accordingly the lock will not turn. Comment Often overlooked as a boilerplate clause, this case is a helpful reminder to carefully review notice provisions both during contractual negotiations and when they are required to be used, to avoid potentially invalid notices being served when such an occurrence could be so easily avoided. The repercussions of not sending a notice in the correct way may be significant, and you should carefully check you are precisely adhering to any conditions set out in any contractual notice provisions. In the words of Lord Woolman (citing Lord Reed in Siemens Hearing Instruments Ltd v Friends Life Ltd [2014] EWCA Civ 382): The clear moral is: if you want to avoid expensive litigation you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely. This case clearly indicates that the courts are conscious of strictly following the provisions of a contract with no deviation. Despite the fact that in this case the letter was clearly received and understood, the failure to strictly follow the provisions of the contract defeated the practical outcome from being achieved. 3
ACCEPTANCE OR COUNTER-OFFER? 4 Commercial Contracts Bulletin
ACCEPTANCE OR COUNTER-OFFER? Acceptance or counter-offer? In Caroline Gibbs v Lakeside Developments Ltd [2016] EWHC 2203, the High Court considered whether an email and attachment constituted acceptance or counter-offer. Facts Ms Gibbs was engaged in a dispute with Lakeside Developments Ltd ( Lakeside ) in relation to the forfeiture of a lease of property. She obtained permission to appeal a County Court decision dismissing her claim. Shortly before the date of the appeal hearing, Ms Gibbs offered to settle the case for 90,000, subject to the offer being accepted by Lakeside by 9 March 2016 and the money being transferred to an account nominated by Ms Gibbs by 16 March 2016. On 8 March 2016 Lakeside sent an email to Ms Gibbs stating [Lakeside] accepts your offer. I attach a draft consent order for your consideration and approval. The consent order deviated from the terms of Ms Gibbs offer in that it stated that the sum of 90,000 would be paid by 8 April 2016 rather than 16 March 2026. Ms Gibbs replied to Lakeside, stating that her offer had not been accepted as the consent order purported to vary the specified date of payment of the settlement monies. Ms Gibbs later claimed that the email and attachment received from Lakeside constituted an acceptance of her initial offer, creating a binding settlement agreement between the parties. Lakeside disagreed, arguing that the email and attachment was in fact a counter-offer which had not been accepted by Ms Gibbs, therefore there was no binding settlement agreement. The issue between the parties was whether by that email exchange an agreement was concluded or not. The Decision The Court at first instance ruled that Lakeside s email of 8 March 2016 was not an acceptance of Ms Gibbs original offer, but rather a counter-offer. The High Court upheld this ruling. The High Court noted: the essential task is to determine whether the parties negotiations have crystalized into a contractually binding agreement. In order to achieve this, the traditional test applying an objective test is to seek to identify a definite offer by one party and a definite acceptance of that offer by the other party. The High Court considered the terms of Ms Gibbs offer, stating that it had two clear aspects: (1) the offer to accept 90,000 as settlement of the claim must be accepted by 9 March 2016; and (2) that 90,000 must be transferred to a nominated account by a 16 March 2016. The High Court stated that as a package, [the offer] fell to be accepted as a whole or not at all. The High Court found that that package was not accepted as a whole, as Lakeside s response proposed a different date for payment: there was consensus as to the sum to be paid by way of settlement, but there was not consensus as to the date by which that sum had to be paid. Lakeside s response was a counteroffer and a rejection of Ms Gibbs offer, therefore there was no contract between the parties. Comment This case serves as a reminder of the basic principle that there must be an offer and an acceptance of that offer to give rise to a legally enforceable agreement. If the terms of an acceptance differ from the offer, this constitutes a counter-offer, and there is no agreement until that counter-offer is accepted. Parties should also be alert to the risk of unwittingly accepting a counteroffer (for example, by performing the obligations contemplated by the counter-offer). If a counter-offer is accepted then its terms rather than those of the original offer will become the terms of the contract, and this may lead to undesirable consequences. Finally, organisations should ensure that the terms of any emails attachments or enclosures to letters are consistent with the terms of a proposed offer, especially where these terms are fundamental to the existence of the contract. A failure to do this may mean that the parties agree different terms to those originally contemplated. 5
LET S BE CLEAR. ECJ CLARIFIES THE RULES ON GOVERNING LAW CLAUSES IN CONSUMER CONTRACTS Let s be clear. ECJ clarifies the rules on governing law clauses in consumer contracts In Verein für Konsumenteninformation v Amazon EU Sàrl (C-191/15), the European Court of Justice (the ECJ ) ruled that a clause stipulating that the contract between a supplier and a consumer is to be governed by the law of the Member State in which the supplier is established is unfair. The ECJ also clarified other questions relating to choice of law clauses generally and in the context of the Data Protection Directive. Facts Amazon EU Sàrl ( Amazon ), a company registered in Luxembourg, provided electronic commerce services to Austrian consumers via its German website, without having a presence in Austria. Such services were provided under Amazon s standard terms and conditions ( T&Cs ) which stated that the contract between the consumer and Amazon was governed by the laws of Luxembourg. Verein für Konsumenteninformation, an Austrian consumer protection group, sought an injunction preventing Amazon from using the T&Cs in Austria. Their application reached the Austrian Supreme Court, who sought clarification from the ECJ on how to apply Regulations 593/2008 and 864/2007 ( Rome I and Rome II, respectively), the Unfair Terms in Consumer Contracts Directive (93/13) (the UTCC Directive ) and the Data Protection Directive (95/46) (the DP Directive ) to this scenario. 6 Commercial Contracts Bulletin
LET S BE CLEAR. ECJ CLARIFIES THE RULES ON GOVERNING LAW CLAUSES IN CONSUMER CONTRACTS Decision Determining which law should apply to these proceedings Rome I and Rome II help determine which law should govern any given dispute, with Rome I applying to contractual obligations and Rome II to non-contractual obligations (for example, torts). The Austrian Supreme Court was unsure which set of rules should apply to these proceedings, given that on the one hand they related to a contractual term, but on the other, they were instigated by a consumer association, which did not have a contractual relationship with Amazon. The ECJ concluded that Rome II should be used to determine the law applicable to the action for an injunction for the protection of consumers interests, but that the law applicable to the assessment of a particular contractual term should be determined using Rome I. Considering the UTCC Directive The ECJ considered whether a term designating the law of the EU Member State in which the supplier is established as the governing law of the contract is unfair under the UTCC Directive. Under Article 3(1) of the UTCC Directive, a contractual term which has not been individually negotiated is unfair if it causes a significant imbalance in the parties rights and obligations, contrary to the requirement of good faith and to the detriment of the consumer. This would be the case if a term is not drafted in plain and intelligible language. Given the weak position of the consumer, this requirement must be interpreted widely. Article 3 of Rome I provides that a contract should be governed by the law chosen by the parties, but Article 6 affords special protection to consumers by stipulating that consumer contracts must be governed by the law of the country where the consumer has his habitual residence. A choice of different governing law in the contract cannot deprive the consumer of the protection of Article 6. Therefore, the ECJ determined that a clause in a consumer contract designating the law of the EU Member State in which the supplier is established as the governing law of the contract will be unfair, in so far as it misleads the consumer into thinking that only the law of the supplier s Member State applies and does not inform him of the protection he enjoys under the Rome I Regulation. e-commerce and the processing of personal data The final question referred to the ECJ by the Austrian Supreme Court was whether under Article 4(1)(a) of the DP Directive, the treatment of personal data by an undertaking engaged in electronic commerce is governed by the law of the Member State to which that undertaking directs its activities. The ECJ confirmed that processing of this kind is governed by the law of the Member State to which the undertaking directs its activities, if that undertaking carries out the data processing in the context of the activities of an establishment situated in that Member State. The ECJ confirmed the interpretation of establishment and in the context of the activities set out in previous EU case law (Weltimmo, C-230/14) and approved the Opinion of the Advocate General prepared for this case; namely that, whilst not having a branch or a subsidiary in a Member State does not preclude an undertaking from having an establishment there, an establishment cannot exist in a Member State just because an undertaking s website is accessible there. The ECJ further stated that it is for the Austrian court to determine whether an undertaking carries out the data processing in the context of an activities of an establishment situated in Austria. If the referring court determines that the data processing is carried out in Germany, German law would apply. Comment It is worth noting that the guidance in relation to the law governing the data processing has a short use by date and more clarification may be needed when the General Data Protection Regulation comes into force. However, this decision should alert companies engaged in cross-border electronic commerce within the EU that the choice of law clause in their standard terms and conditions must be drafted in plain and intelligible language and should make it clear that customers are always entitled to the consumer protections available in their country of residence. 7
HIGH COURT RULES NO IMPLIED OBLIGATION OF GOOD FAITH WHEN EXERCISING CONTRACTUAL RIGHT OF TERMINATION High Court rules no implied obligation of good faith when exercising contractual right of termination In the recent case of Monde Petroleum SA v Westernzagros Ltd [2016] EWHC 1472 the High Court has ruled on whether a contractual right to terminate a contract was subject to an implied term that it must be exercised in good faith. 8 Commercial Contracts Bulletin
HIGH COURT RULES NO IMPLIED OBLIGATION OF GOOD FAITH WHEN EXERCISING CONTRACTUAL RIGHT OF TERMINATION Background WesternZagros Ltd ( WZL ) entered into an agreement with Monde Petroleum SA ( Monde ) for consultancy services (the Agreement ) in relation to the negotiation of an oil exploration and production sharing agreement between WZL and the Kurdistan government. In addition to monthly charges, the Agreement provided that, if certain milestones were met, Monde would also receive an option to acquire a 3% working interest in the oil project. Less than a year after the contract was entered into, WZL served notice of termination on Monde under the express terms of the contract (although it had not given the required 30 days notice, this was not considered material to the outcome of the case). The final milestone had not been reached and the option for the 3% interest had not vested. Monde brought an action against WZL, claiming that WZL had terminated the Agreement in bad faith, therefore breaching the Agreement s implied terms. Decision The Agreement did not contain mutual obligations or commitments which suggested that loyalty was contemplated by the parties. The Court therefore considered whether WZL s contractual right to terminate a contract was subject to an implied term that it must be exercised in good faith. Following the decision in Lomas v JB Firth Rixson Inc [2012] EWCA Civ 419, (where the Court of Appeal stated that the right to terminate could not be made subject to an implied requirement of good faith) the judge expressed doubt as to whether an express contractual power to terminate would ever be subject to an implied restriction of good faith. Accordingly, the judge found that WZL s contractual right to terminate could be exercised irrespective of their reason for doing so. Comment This adds to the growing number of cases concerned with good faith, the majority of which have held against implying a duty of good faith. Where a fiduciary relationship clearly exists, the courts may rule in favour of an implied duty of good faith in relation to the performance of the contract. However, this case indicates that even where there is an implied duty of good faith it may not apply to an express contractual right to terminate. This edition of the Commercial Contracts Bulletin also comments on the recent decision in MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2015] EWHC 283 which considered the concept of a general organising principle of good faith in relation to the performance of a contractual obligation. Monde claimed that given the long term nature of the relationship which was contemplated a duty of good faith should be implied into the Agreement. However the Court held that the Agreement being long term or relational was not in itself sufficient to imply a duty of good faith. The test for implied terms is that any implied term must be obvious and necessary to give efficacy to the contract. The Court found that in the circumstances, Monde had very little chance of reaching the milestone that would trigger the option for the acquisition of the 3% interest. If WZL had not terminated, they would have had to continue to pay Monde for little or no expected benefit. The Court held that the right to terminate was not considered relevant to performance of the Agreement and as such, there was no necessity for an implied term to give business efficacy to the contract. 9
COURT OF APPEAL DISMISSES IDEA OF A GENERAL ORGANISING PRINCIPLE OF GOOD FAITH IN ENGLISH LAW Court of Appeal dismisses idea of a general organising principle of good faith in English law In MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789 the Court of Appeal considered the concept of a general organising principle of good faith in English law. Facts MSC Mediterranean Shipping Company S.A. ( MSC ) and Cottonex Anstalt ( Cottonex ) entered into a shipping contract under which MSC agreed to ship 35 containers of raw cotton to Bangladesh for Cottonex (the Agreement ). Cottonex had sold the cotton to a third party who refused to take delivery when the cotton arrived due to a significant decrease in the market value of cotton. The containers remained at the port under the control of local customs authorities, which refused to allow the cotton to be unloaded following the outcome of local court proceedings between Cottonex and the third party. Cottonex was therefore unable to return the containers. MSC raised proceeding in the High Court claiming damages in accordance with the Agreement which provided that Cottonex must return the unloaded containers to MSC within 14 days of arriving in Bangladesh or damages would be payable to MSC at a daily rate until the containers were returned. 10 Commercial Contracts Bulletin
COURT OF APPEAL DISMISSES IDEA OF A GENERAL ORGANISING PRINCIPLE OF GOOD FAITH IN ENGLISH LAW High Court Decision The High Court held that Cottonex had repudiated the Agreement on the date that it informed MSC that there was no realistic prospect of it being able to redeliver the containers. Once there was no realistic prospect that Cottonex would redeliver the containers, MSC did not have a legitimate commercial interest in keeping the shipping contract alive in the hope of future performance and could not claim damages beyond the date of repudiation. In finding that MSC had no legitimate interest in keeping the contract in force, Leggatt J. drew support from what he described as an increasing recognition in the common law world of the need for good faith in contractual dealings. He referred to a recent unanimous decision of the Supreme Court of Canada (Bhasin v Hrynew, 2014 SCC 71), which held that good faith contractual performance is a general organising principle of the common law of contract.. Court of Appeal Decision He observed that it is well recognised that broad concepts of fair dealing may be reflected in the court s response to questions of construction and the implication of terms, but stated that it would be preferable for the law to develop along established lines rather than encourage judges to look for what the judge in this case called some general organising principle drawn from cases of disparate kinds. Lord Justice Moore-Bick highlighted the danger that a general principle of good faith may not be fully compatible with parties freedom to contract, stating if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement. Comment This case highlights English law s divergence from other common law systems, such as Australia and Canada, and is a clear reminder that there is no general principle of good faith in English contract law. The law does however rely upon a number of piecemeal solutions to deal with specific problems of injustice, including contractual interpretation, implied terms and promissory estoppel. However, these solutions fall short of the broad application that would be expected from a general principle of good faith. Parties can ensure that contracts adequately safeguard their interests through careful and precise drafting. However, even express obligations to use good faith in doing something can lack clarity and there may be doubt as to what a party must do to fulfil its contractual obligations. Where possible, an agreement should provide for the specific steps a party is required to take in order to meet its contractual obligations, ensuring that the contract is clear and that the parties expectations will be met. 11
UK GOVERNMENT PUBLISHES GUIDANCE PAPER ON ELECTRONIC SIGNATURES 12 Commercial Contracts Bulletin
UK GOVERNMENT PUBLISHES GUIDANCE PAPER ON ELECTRONIC SIGNATURES UK Government publishes guidance paper on electronic signatures Regulation (EU) No 910/2014 on electronic identification and trust services for electronic transactions ( eidas ) has recently been implemented in the UK via the Electronic Identification and Trust Services for Electronic Transactions Regulations 2016 (the Electronic Identification Regulations ). To coincide with this, the Department for Business, Energy and Industrial Strategy ( BEIS ) has published new guidance on electronic signatures, detailing what these are and how to use them, the role of trust services, and other key changes made to the electronic signature regime. The importance of e-signatures and electronic authentication An electronic signature, or e-signature, is used by an individual to electronically indicate their execution of a document, or otherwise signify their consent to stated terms or provisions. As with many other forms of digital communications, e-signatures provide the commercial world with the benefit of being instantaneous, regardless of the location of the contracting parties. One of the primary concerns for those involved in commercial transactions or sensitive communications is the need for confidence in the systems which support these activities, including satisfaction that a document sent electronically has not been amended in any way, or that its transmission has the necessary security. Businesses and individuals are increasingly using and investing in electronic signatures and, accordingly, in trust services, such as identification of the electronic signatory, electronic time stamping and electronic seals guaranteeing document origin and integrity. As a result of the ever increasing need for security and trust in electronic documents and communications, eidas updates the European Community s rules on electronic signatures, creating a uniform regime for mutual recognition of electronic identification and trust services in all Member States. The UK has had a fairly sophisticated e-signature regime in comparison to its European counterparts for some time now, but the recent BEIS guidance recognises that eidas makes changes across three key areas of law governing online authentication electronic signatures, trust services and electronic identification schemes. Electronic Signatures One of the most significant changes under the new regime is that an e-signature can now only be used by an individual and not by a corporate entity. Accordingly, corporate entities should ensure this form of signing is only used in respect of individuals signing as directors or authorised signatories. Additionally, eidas redefines the Advanced Electronic Signature. Previously defined quite plainly under the former Directive, this now allows unique identification and authentication of the signatory, enabling the verification of the signed document. It is anticipated that this will be achieved via the issuance of a digital certificate by one of the various authorities responsible for issuing digital certificates in the UK, often through the use of mobile technology. eidas also goes a step further and introduces the Qualified Electronic Signature ( QES ), which is an Advanced Electronic Signature created by a qualified signature creation device based on a Qualified Certificate. These certificates can only be issued by a qualified trust service provider. The data relating to the creation of the e-signature must be stored on a qualified signature creation device, such as a smart card or a cloud-based trust service. Whilst advanced electronic signatures offer increased certainty, QESs go a step further through their close link to qualified certificates 13
UK GOVERNMENT PUBLISHES GUIDANCE PAPER ON ELECTRONIC SIGNATURES which can only be issued by an accredited organisation under the careful eye of an overarching supervising authority. Many commercial entities may therefore see qualified electronic signatures as the safest, most viable option for electronically putting their name to contractual documents. Trust Service Providers Whilst e-signatures are important for ensuring the security and legal validity of transactions carried out electronically, alone they are not always sufficient. Trust services can electronically seal, time stamp or register delivery of service, and guarantee origin or otherwise provide evidence that data existed in a certain form at a certain time. eidas requires Member States to establish, maintain and publish trust lists containing details of qualified trust service providers ( QTSPs ) in their territory. QTSPs can also provide certificates confirming Advanced Electronic Signatures, or verifying the integrity of qualified signature creation devices. Under the new regime, QTSPs are permitted to use the new EU trust mark to identify their services in a simple, recognisable and clear manner. The European Commission now allows access to the trust lists of all Member States, via a central list on its website. Alongside this, the UK has expanded its trust list mechanism with the help of tscheme Limited, which creates, hosts and maintains the UK list on behalf of BEIS. Electronic identification schemes Under eidas all electronic verification services shall be admissible as evidence in legal proceedings, including electronic signatures, seals, time stamps, registered delivery services and certificates for website authentication. An electronic signature shall not be denied legal effect as evidence in proceedings solely due to its electronic form. However, these electronic identification services still have to meet certain technical requirements to confirm the integrity and correctness of the data to which they are linked. Comment The Commission has very high aims and expectations for this new regime. It is hoped that eidas and the corresponding local legislation will allow greater certainty when seeking to safely verify sensitive online data such as electronic education or health records, make government services more flexible, lower the amount of paperwork needed, and generally reduce security and privacy concerns. Some commentators believe that the extent of eidas effect in UK will be slightly limited as its voluntary framework is already largely in place in the UK. This is perhaps reflected in the fairly limited guidance that BEIS offers. However, it is expected that eidas will be significant for cross-border transactions in Europe, providing a convenient, user-friendly and reliable way for individuals and commercial entities to electronically mark sensitive contracts, forms, invoices and other important documents in the course of business activities. Individuals and businesses should explore all new and enhanced options open to them when reviewing their security measures in electronic transactions, such as the qualified electronic signature, and ensure they are aware of the stricter supervisory measures which now apply to trust lists. 14 Commercial Contracts Bulletin
EXCLUSION OF LIABILITY: NOT A TABOO A COMMERCIAL REALITY Exclusion of liability: not a taboo a commercial reality A common aspect of commercial contracts is the allocation of risk between the parties. This is achieved, in part, by contractual clauses that exclude a party s liability for certain risks or limit the manner in which claims can be brought. This article provides a summary of three recent decisions which suggest that the courts are no longer prepared to accept that all exclusion clauses should be construed narrowly and against the party seeking to rely on it. Transocean Drilling U.K. Ltd v Providence Resources PLC This case of Transocean Drilling U.K. Ltd v Providence Resources PLC [2016] EWCA Civ 128, which has been widely reported in oil and gas circles, related to a contract that excluded liability for consequential losses and, specifically whether that included wasted costs of third party suppliers which would not have been incurred but for the breach of contract. Transocean argued that liability was excluded in the contact. This was because the contract contained a clause which provided that each party would hold harmless the other party in relation to consequential loss. Consequential loss was defined to include: loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption. Providence argued that the exclusion was not engaged; the costs represented the costs of goods and services that were obtained and paid for but were wasted as a result of the delay caused by Transocean s breach of contract. As such, there was no loss of use. The first instance judge held that Transocean was liable for the spread costs because the clause did not clearly exclude liability for such costs. 15
EXCLUSION OF LIABILITY: NOT A TABOO A COMMERCIAL REALITY Overturning that decision, the Court of Appeal held that: 1. the starting point for interpreting the clause was the natural and ordinary meaning of the words used by the parties; 2. applying this approach, the words loss of use naturally refer to the loss of the ability to make use of some of kind property or equipment; 3. the mutual nature of the clause and its role as part of provisions allocating loss was indicative of an intention by the parties to give the words a broad meaning; 4. the rule that exclusion clauses should be interpreted contra proferentem i.e. against the party seeking to rely on the exclusion could be applied when the language used by the parties is one-sided and genuinely ambiguous, i.e. equally capable of two distinct meanings. However it has no part to play when the clause favours both parties equally, in particular, when both parties are of equal bargaining power; and 5. the principle of freedom of contract is fundamental and requires the court to respect and give effect to the parties agreement. If the parties have effectively agreed to exclude liability for damages for any breaches, it is difficult to see why the court should not give effect to their agreement. Nobahar-Cookson & Ors v The Hut Group The decision in Nobahar-Cookson & Ors v The Hut Group [2016] EWCA Civ 128 related to a contractual provision in a SPA that required notice of warranty claims to be given as soon as reasonably practicable and in any event within 20 business days after the buyer became aware of the matter, a standard provision in SPAs. The buyer made a claim that the sellers were in breach of warranties. The sellers disputed the claim and stated that the buyer was time barred because the buyer had not provided the required notice within 20 business days of becoming aware of the facts giving rise to the warranty claim. The buyer had served notice of its warranty claim on 6 February 2012. It was common ground between the parties that if it was held that the buyer had become aware of the matter by 9 January 2012 (being 20 business days prior to 6 February 2012), then its warranty claim would be contractually time barred. The first instance judge held that the claim was not time barred. The sellers appealed and the following three interpretations of the time at which notice of the claim should have been given were put before the Court of Appeal: 1. awareness of the facts giving rise to the claim (even if unaware that those facts did give rise to a claim); 2. awareness that there might be a claim under the warranties; or 3. awareness that there was proper basis for the claim. Dismissing the appeal, the Court of Appeal held that the correct interpretation was awareness that there was proper basis for the claim. In giving the leading judgment Briggs LJ held that the ambiguity in the clause should be 16 Commercial Contracts Bulletin
EXCLUSION OF LIABILITY: NOT A TABOO A COMMERCIAL REALITY resolved by a preference for the narrower construction, if linguistic, contextual and purposive analyses do not disclose an answer to the question with sufficient clarity. Briggs LJ was persuaded by the fact that the purpose behind the notice requirement was to prevent the buyer from pursuing claims previously kept up its sleeve, rather than to goad him towards analysis and obtaining advice about known facts sufficient to enable him to notify the claim within the stipulated 20 business days. of the meaning of the words used by the parties. Only if there is ambiguity in the words used by the parties, should the court consider the commercial purpose of the contract and the provision and adopt a narrow interpretation against the party seeking to rely on it. If the sellers were correct that the buyer was required to give notice of its claim upon awareness of the facts giving rise to the claim or that there might be a claim, this would severely limit the buyer s right to compensation for breach of warranty, without a sensible purpose. In order to achieve this, clearer words would be required. Star Polaris LLC v HHIC-Phil Inc The issue of exclusion of liability for consequential losses arose again in Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 2941 (Comm). The Commercial Court gave the words consequential or special losses or expenses an expansive meaning that severely restricted the remedies available to the wronged party. In doing so, the court said that it could no longer be said that exclusion clauses are to be read narrowly when they appear in commercial contracts. The wording must be given its ordinary and natural meaning, although where there is ambiguity the contra proferentum rule may play a role. Conclusion These decisions are consistent with Lord Neuberger s approach in the Supreme Court in Arnold v Britton [2015] UKSC 36 and re-emphasise the importance of the freedom of contract and the need to preserve the sanctity 17
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KEY CONTACTS Key contacts Carina Healy Partner, Commercial Glasgow T +44 141 304 6032 E carina.healy@cms-cmck.com Gemma Lampert Partner, Disputes Edinburgh T +44 131 200 7548 E gemma.lampert@cms-cmck.com Kimberley Cross Associate, Commercial Glasgow T +44 141 304 6161 E kimberley.cross@cms-cmck.com Guy Pendell Partner, Disputes London T +44 20 7367 2404 E guy.pendell@cms-cmck.com Jennifer Barr Associate, Commercial Glasgow T +44 141 304 6233 E jennifer.barr@cms-cmck.com Kushal Gandhi Senior Associate, Disputes London T +44 20 7367 2664 E kushal.gandhi@cms-cmck.com 19
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