Last year we noted that the law was still in a state of flux. One year on, is it any clearer when a contract will be subject to an implied duty of good faith? It’s fair to say the law still “has not yet reached a stage of settled clarity” (Cathay Pacific Airways Ltd v Lufthansa [2020] EWHC 1789) with a continuing split between the two visions of this duty, namely:

• that there is a class of “relational contracts” that are subject to a duty of good faith as a matter of law (Essex County Council v UBB Waste (Essex) Ltd [2020] EWHC 1581), or

• that such a duty will only arise where the strict tests for the implication of terms in fact are satisfied (Taqa Bratani Ltd & Ors v Rockrose UKCS8 LLC [2020] EWHC 58).

Around these central themes, there have been various clarifications to the law. For example, in Morley v Royal Bank of Scotland Plc [2020] EWHC 88 (Ch) the High Court rejected a borrower’s argument that the bank had an implied duty to act in good faith towards it under a loan agreement. The Court held that this was not a relational contract of any kind but an ordinary loan facility agreement. The bank’s decision to call in the loan was the exercise of a contractual right, not a discretion (subject to the Braganza duty). The bank’s power to obtain a revaluation of the charged assets and its power to charge a default interest rate were discretions which had to be exercised for purposes connected to the bank’s commercial interests and not so as to vex the borrower maliciously (following Property Alliance Group Ltd v Royal Bank of Scotland plc [2018] EWCA Civ 355). On the facts, they had been exercised properly.

Similarly, the courts continue to treat references to good faith in some clauses as evidence that a wider overarching duty of good faith should not be implied into the agreement (see Russell v Cartwright [2020] EWHC 41 (Ch)).

Perhaps most important is the nature of any duty of good faith. While this is sometimes described in broad terms, for example to “adhere to the spirit of the contract, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose, and to act consistently with the justified expectations of [the other party]” (CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535), the courts have recently made it very clear that the assertion that a party has not acted in good faith is a serious allegation.

In Essex County Council v UBB Waste (No. 3) [2020] EWHC 2387 (TCC) the courts suggested this was, put colloquially, an allegation of “sharp practice”. To make such an allegation without proper foundation was out of the norm and justified an order for costs on an indemnity basis.

What does this mean for you?

Good faith is still an evolving area in English law. Until we have greater clarity, it is worth considering whether your contract might be classified as “relational” or whether a duty of good faith might arise under the rules for the implication of terms in fact. In either case, you might want to address the matter expressly. Finally, allegations of a breach of good faith are serious and should not be made without foundation, so plead at your peril.

In times of crisis, contractual parties may have even greater reason to examine those parts of their contracts which may exclude or limit liability or offer defences to breach (such as force majeure provisions).

Force majeure and a variety of limitations

A recent dispute concerning the 2011 riots in London put all of these provisions under the spotlight. The High Court found that a warehouse operator had failed to use reasonable skill and care to protect the contents of the warehouse (CDs and DVDs), which were destroyed by fire during the riots. Could the operator rely on any contractual terms to excuse or limit its liability?

It was not able to rely on the force majeure clause since the fire was not a circumstance “beyond [its] reasonable control”. The Court found that, if it had acted reasonably, it could and should have prevented the fire.

Since the claims (for loss of profits, business interruption costs and increased cost of working, suffered as a result of the fire) were all direct (in that they were exactly the type of loss that one would expect to result from the breach), the clause excluding liability for “indirect and consequential loss” did not apply. A cap on liability for damage to goods was no protection either as the claims were not for damage to the goods themselves. However, an overall – aggregate – cap on all liability (of £5 million) was effective.

What does this mean for you?

These types of clauses are very topical in the current uncertain times and always need to be drafted carefully. This case reminds us that the position of commercial parties will depend upon the exact terms of the contracts, applied to the facts of the situation.

Where can you read more? See 2 Entertain Video Ltd & Ors v Sony DADC Europe Ltd [2020] EWHC 972 (TCC).

Indirect and consequential loss

Another recent case highlights just how useful an exclusion of “indirect and consequential loss” could have been, if only it had been included.

A contractor terminated a construction contract for breach by its employer (on the basis that the latter had failed to provide a prepared site for the water treatment plant that was to be built). The Board of the Privy Council held that the contractor was entitled to recover, as damages for breach, the loss of profits that it would have made under an operation and maintenance contract for the same plant had it been built. These losses were not too remote (and fell within the second limb of Hadley v Baxendale [1854] EWHC Exch J70) as they were within the reasonable contemplation of the parties to the construction contract when that contract was entered into (on the same day as the operation and maintenance agreement).

What does this mean for you? 

When entering into related contracts, it is vital to consider the exact relationship between them, including the consequences of a termination, breach or force majeure scenario arising under one of them and the knock-on effects this might have. Exclusion of liability under a related contract might be achieved by an exclusion of indirect and consequential loss (depending upon the specific drafting) or expressly.

Where can you read more? See AG of the Virgin Islands v GWA [2020] UKPC 18. 

Loss of goodwill

It is also relatively common to see clauses exclude liability for “loss of goodwill”. The Court of Appeal decided that, in a commercial context, the ordinary legal meaning of “goodwill” was the good name and public reputation of the business concerned. If a contract intends the term to have an unusual or technical meaning (such as the accounting concept of goodwill) then that should be spelt out expressly.

What does this mean for you?

This decision highlights how important it is to agree the meaning of (and clearly define) terms in agreements, particularly where something different from the ordinary legal meaning is intended.

Where can you read more? See Primus International v Triumph Controls [2020] EWCA Civ 1228.

In a recent decision, the High Court considered the case law on contractual consent provisions, which often state that one party “shall not unreasonably withhold consent” to whatever is being requested.

If we call the party asking for consent, Party A; and the party being asked to give consent, Party B, the Court found that the authorities drew the following distinction:

• while it may be legitimate for Party B to impose a condition to protect or compensate it for the impairment of a benefit it enjoys under the contract which would result from giving consent,

• that is completely different to imposing a condition which would impair a right which Party A currently enjoys under the contract.

The contract was for the onshore pipeline transportation of hydrocarbons produced in the North Sea. The producer (Party A in our analogy) requested consent to amend its estimated production profile for transportation for the period from January 2021 to December 2040. The pipeline owner (Party B) stated that it was only willing to consent to the amendment if Party A agreed to an increase in the tariff payable under the agreement. Contractually, Party B was not entitled to “unreasonably withhold” its consent to the amendment. Was Party B therefore acting contractually or non-contractually by seeking to impose a tariff rise as a condition to giving consent?

The Court found that Party A was both entitled and obliged to tender its hydrocarbons for transportation at the contractual tariff for the duration of the agreement, which would continue until terminated on one of the contractual bases set out in the agreement. The terms did not limit that entitlement and obligation to the period up to 2020. In those circumstances, it would be inconsistent with the terms and scheme of the agreement if Party B was entitled to make its consent to the amendment conditional on a fundamental revision of the parties’ bargain in the form of a new tariff. Party B was acting non-contractually.

What does this mean for you?

This decision clarifies that a condition might be reasonable as a prerequisite to giving consent (e.g. to make up for something lost by the consenting party as a result of the change). However, a party cannot use a consent request as an opportunity to renegotiate terms or impose an unrelated change on the other party. It may be preferable to make this clear in the drafting of any relevant provision, by stating that consent cannot be unreasonably withheld or delayed, or made subject to additional conditions.

Where can you read more? See Apache North Sea v INEOS FPS Limited [2020] EWHC 2081 (Comm).

The Supreme Court recently provided the answer to this question in a landmark decision.

An arbitration clause is generally regarded as legally distinct from the main agreement in which it is contained (and the Rome I Regulation excludes arbitration and choice of court clauses from its scope). In England, therefore, common law conflict of laws rules apply to determine the law applicable to the arbitration agreement. Under those rules that will be: (i) the law expressly or impliedly chosen by the parties; or (ii) in the absence of such choice, the law “most closely connected” to the arbitration agreement.

Where the parties have not specified the law applicable to the arbitration agreement, but they have chosen the law to govern the contract as a whole, this choice will generally also apply to the arbitration agreement, rather than the law of the seat of the arbitration (as the Court of Appeal had held). But where the parties have made no choice of law to govern the arbitration agreement, either specifically or by choosing the governing law of the contract, the closest connection test will, in general, lead to the arbitration agreement being governed by the law of the seat of arbitration.

What does this mean for you?

The potential for issues regarding what the applicable law of an arbitration clause is arise most frequently where the law governing the main contract and the place of the seat do not “match”. To remove the room for debate, parties, where the seat of arbitration is in England and the law of the contract is not English, therefore frequently consider using an express choice of law to govern the arbitration clause. Often, this is in favour of the law governing the main contract (the benefits of consistency with that law being something touched upon by the Supreme Court in its judgment). That approach should not change. The Supreme Court’s clarification of this area is welcome but is a general interpretative approach. Therefore, in such cases, an express designation still carries the value of some increased certainty (it will, of course, always be necessary to ensure the clause is properly drafted and works under the chosen law).

Where can you read more? See Enka Insaat Ve Sanayi AS (Respondent) v OOO Insurance Company Chubb (Appellant) [2020] UKSC 38, and, for our ArbitrationLinks coverage see here.

The High Court held that an assignment by a contractor to an employer of “the subcontract” was an assignment of both (a) accrued rights, and (b) future rights under the subcontract. This meant that when the employer claimed damages in the sum of £133 million from the contractor, the contractor was left without a contractual right to seek a direct remedy from the subcontractor (in principle, it would be able to claim contribution from the subcontractor under the Civil Liability (Contribution) Act 1978, but this would have to be considered, alongside the effect of any relevant limitation or exclusion provisions, at full trial). The Court also held that the assignment did not amount to a novation, so that the contractor’s obligations under the subcontract had not been transferred to the employer.

What does this mean for you?

It’s imperative to think – in advance and before agreeing to do so – what the possible effects of a transfer of rights might be, so that you are not left without a clear remedy, should that be needed. The decision also contains a handy summary of some of the key aspects of assignment and novation:

Assignment:

• Subject to any express restrictions, a party to a contract can assign the benefit of a contract without the consent of the other party to the contract.

• The burden of a contract (the obligations under it) cannot be assigned but the principle of conditional benefit can apply so as to impose on the contractual assignee a positive obligation where such obligation is inextricably linked to the benefit assigned.

• In the absence of any clear contrary intention, reference to assignment of the contract by the parties is understood to mean assignment of the benefit of both accrued and future rights.

• It is possible to assign future rights only, but clear words are needed for that.

Novation:

• Novation occurs when the original contract between A and B is extinguished and replaced by the creation of a new contract between A and C.

• Novation requires the consent of all parties to the original and new contract. Consent can be given in the original contract, but clear words are needed.

• The terms of the new contract must be sufficiently certain to be enforceable.

• In every case the court must construe the contractual arrangements to give effect to the expressed intentions of the parties, using the established rules of construction.

Where can you read more? See Energy Works (Hull) Limited v MW High Tech Projects UK Limited and another [2020] EWHC 2537 (TCC).

A share purchase agreement provided that the sellers would pay the buyer an amount equal to any tax liability which arose in certain circumstances, provided that, when making a claim, the buyer provided written notice stating “in reasonable detail” the matter which gave rise to the claim, the nature of such claim and (so far as reasonably practical) the amount claimed. The buyer gave notice of a claim to the sellers, referring to an investigation begun by the relevant tax authorities and gave a chronology of key milestones. Was this enough?

The High Court noted that the “reasonable detail” requirement amounted to an obligation to provide sufficient information so that the sellers, acting reasonably, knew what matter gave rise to the claim as well as the nature of the claim and, if reasonably practical, the amount. On the facts, the notice was insufficient. It contained no indication of the relevant facts, events or circumstances giving rise to the claim. Reference to the tax investigation was insufficient, and did not import all the tax authority’s comments and allegations, even if they were known to the sellers’ representatives. There had to be some indication of how the claim arose out of the facts identified.

What does this mean for you?

Requirements to provide details usually mean that more, rather than less, should be included. It might help to consider what the purpose of the notification is and what it is that the recipient will need to know in order to respond or take a matter forward.

Where can you read more? See Dodika Ltd & Ors v United Luck Group Holdings [2020] EWHC 2101 (Comm).

Rights can sometimes be lost by waiver by election: where a party has alternative, inconsistent rights, has knowledge of the facts which give rise to them and acts in a way which is only consistent with its having chosen to rely on one of them, it will be taken to have waived the other right (Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850). This explains why a party who communicates unequivocally an intention to continue with performance thereby loses the right to terminate a contract (instead, it is taken to have affirmed the contract).

A recent decision of the Privy Council is an important, and topical, illustration of the boundaries of the concept of waiver by election and highlights that it isn’t always applicable.

The parties entered into a fuel supply agreement against the backdrop of a potential closure of a refinery which supplied petroleum to the seller. The seller had a specific contractual right in a “Performance Relief” clause (effectively, a force majeure clause) to withhold, reduce or suspend deliveries to the extent it thought fit where necessitated by, amongst other things, the closure of the refinery.

When the refinery gave notice to the seller that it was closing, the seller notified the buyer but carried on supplying fuel, purchased and shipped from elsewhere while negotiations took place between the parties (as the seller sought a price increase to offset its higher costs). When these negotiations broke down, the seller sought to rely on the clause. The buyer argued that the seller’s rights had been “exhausted” after the seller had continued making deliveries. The Board of the Privy Council disagreed: waiver by election did not apply here. The seller’s right to claim performance relief did not present the seller with a binary, all-or-nothing choice between, on the one hand, putting an end to all the parties’ obligations or, on the other hand, treating all those obligations as still binding. Instead, it had a range of options: at one end of the scale, the seller might merely delay a delivery of fuel; at the other extreme, the seller might decide to cease all further deliveries under the contract, as eventually happened.

What does this mean for you?

In situations where a party is faced with deciding whether to exercise a contractual right or not, whether taking one course of action will constitute a “waiver” of its other right(s) will ultimately turn on whether the rights are truly inconsistent with each other. Parties who want to make it clear that any action they are taking is to be without prejudice to their other rights should say so expressly, in writing. It should also be kept in mind that in these types of situations, estoppel can be relevant – for example, if the seller had unequivocally represented it would not withhold deliveries under the supply agreement despite the closure of the refinery, it might have lost its right to performance relief by waiver by estoppel. There was no argument, however, that this was so in this case.

Where can you read more? See Delta Petroleum v BVI Electricity Corporation [2020] UKPC 23.