Common sense prevails in sanctions dispute

A force majeure clause did not allow a shipowner to get out of a contract that had become disadvantageous to it. The shipowner invoked the force majeure clause when the charterer’s parent company was sanctioned by the US, maintaining that the sanctions would prevent payment in US$ (which was required under the contract). The clause provided that force majeure could only be relied upon if the “event or state of affairs” could not be “overcome by reasonable endeavours from the Party affected”. The charterer had offered to make payment in euros instead and cover all currency conversion costs, but the shipowner refused to accept that.

By a majority, the Court of Appeal allowed an appeal from the High Court. The majority accepted that although the contract required payment in US$, the purpose of that payment obligation was to provide the shipowner with the right quantity of dollars in its account at the right time. The charterer’s proposal would have achieved that objective with no detriment to the owner, so that would have “overcome” the state of affairs caused by the imposition of sanctions.

Lord Justice Arnold, dissenting, agreed with the High Court that the owner was entitled to insist on strict performance – payment in US$ – and that an event or state of affairs was not overcome by the offer of non-contractual performance without express provision to that effect.

We see a difference of judicial approach here between those judges who are of the view that parties should be entitled to insist on strict performance of the terms of the contract and those who are more prepared to take a “common sense” approach by looking at the purpose of a provision, where the wording of a provision is sufficiently broad to do so. The latter approach prevailed (subject to any further appeal). 

What does this mean for you?

It is clear from the judgment that the courts will focus on the words of a specific force majeure clause and that should always be the starting point for any analysis.

Where can you read more?

See MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406.

“Terms such as “state of affairs” and “overcome” are broad and non-technical terms and clause 36 should be applied in a common sense way which achieves the purpose underlying the parties’ obligations...It is an ordinary and acceptable use of language to say that a problem or state of affairs is overcome if its adverse consequences are completely avoided.” Lord Justice Males, paragraph 56

No penalties for football matches without fans, but a successful try for rugby 

2021 saw a number of decisions where arguments for relief from the effects of the pandemic failed across a range of different types of contracts (as we reported last year). We kicked off 2022 with two more disputes about the impact of Covid-19.

In the first, the Premier League applied for summary judgment for payment of several instalments under two contracts by which it had granted PPLive rights to broadcast its football matches over three seasons in China. Covid-19 seriously disrupted the 2019/20 season, which was suspended, and when it resumed the matches were played later in the day with empty stadiums.

After PPLive failed to pay the licence fee for the upcoming season, the Premier League terminated the contracts.

The High Court held that the Premier League had been entitled to terminate. In its defence, PPLive tried to rely on a right to re-negotiate the licence fees if the “format” of the competition changed. However, since the “format”, as defined in the contracts, did not include kick-off times, the days when matches were played, nor whether there were fans present, the Covid-related changes instituted by the Premier League hadn’t actually changed the “format” (which was limited to the way that the competition was undertaken between the 20 member clubs).

PPLive’s argument that the obligation to pay the licence fee for the upcoming season was, in effect, a penalty and so unenforceable was also rejected on the basis that the rule on penalties applies only to a secondary obligation that applies on breach. A further argument that the fees were to be apportioned by reference to seasons or matches actually broadcast – and therefore that the Premier League would be unjustly enriched if entitled to full payment – also failed as that was in contradiction to the express terms of the contracts. This could not be supported by any implied term for the same reason – conflict with express terms is an “overwhelming obstacle” to an implied term.

What does this mean for you? 

This decision highlights how difficult it can be for parties to claim relief under commercial contracts in the light of the pandemic in the absence of a clear and express contractual right to do so.

It’s a useful reminder too of the law on penalties (only triggered by a secondary obligation applying on breach which is wholly disproportionate to the innocent party’s legitimate interests in performance) and the conditions for terms implied by fact (they must be reasonable and equitable, necessary to give business efficacy to the contract, so obvious it goes without saying, capable of clear expression and not contradict any express term).

Where can you read more?

See The Football Association Premier League Ltd v PPLive Sports International Ltd [2022] EWHC 38 (Comm) and our SportingLinks blog post.

“In many commercial contracts events may transpire other than as anticipated by one, or even both, contracting parties. That does not mean that the court will re-write the parties’ bargain and impose different terms upon them to suit those later events. That is not the function of the law of contract.” Mr Justice Fraser, paragraph 148

In the second decision, RDA had been granted rights to broadcast live rugby matches in the European Champions Cup and Challenge Cup for four seasons. Again, the outbreak of Covid-19 had a serious impact on these competitions and, in March 2020, European Professional Club Rugby announced the postponement of the competitions’ quarter-finals, semi-finals and finals. RDA relied on the force majeure clause in the contract to first suspend payment, and later terminate the contract.

The High Court held that RDA was entitled to terminate under the force majeure clause. First, the Court decided that Covid-19 was a “Force Majeure Event” under the contract. The definition expressly included an “epidemic”, which would include a pandemic such as Covid-19. In any event, Covid-19 would have been a force majeure event because it was due to “circumstances beyond the reasonable control of a party”.

Secondly, the contract stated that if a “Force Majeure Event prevents, hinders or delays a party’s performance of its obligations for a continuous period of more than 60 days, the party not affected by the Force Majeure Event may terminate this Agreement”. The Court concluded that those conditions were met. RDA’s underlying motive for terminating the contract was not relevant. There was no allegation that the clause was subject to a Braganza duty of rationality so all that mattered was whether, as a matter of construction, RDA was entitled to terminate the agreement using the machinery of the force majeure clause.

What does this mean for you?

This is a rare example of successful reliance on a force majeure clause to terminate a contract. In construing the provisions, the judge made it clear that motivations for terminating didn’t matter – it was simply a question of whether the entitlement had arisen in the circumstances and the conditions in the clause had been fulfilled. Careful attention to the terms of any contract is required both when negotiating its terms and when exercising rights under it.

Where can you read more?

See European Professional Club Rugby v RDA Television LLP [2022] EWHC 50 (Comm) and our SportingLinks blog post.

“The only question is whether as a matter of construction and in the events that have happened a party seeking to rely on the Force Majeure clause was entitled to terminate the contract concerned using that machinery.” HH Judge Pelling QC, paragraph 31

A two-stage test for implied duties of good faith?

The law on implied duties of good faith had been in danger of falling into disarray, with the courts taking disparate positions on this contentious topic. Clarity comes from a firm of solicitors who sued their client for settling a dispute on terms that meant the solicitors had no express entitlement to their costs. The firm alleged this was a breach by the client of an implied obligation of good faith. 

These unpromising facts provided the Court of Appeal with the opportunity to review this area of law. The judgment suggests a two-stage test:

1. Can such an implied duty be implied in fact under the strict test in Marks & Spencer v BNPP [2015] UKSC 72?1 In practice, this means that an implied duty based on good faith is only likely to arise where the contract would lack commercial or practical coherence without it.
2. Is the contract “relational” such that a duty arises in fact or in law? Bates v Post Office (No.3) [2019] EWHC 606 set out nine criteria which are helpful to identify “relational contracts” but these are a sense check, not a series of statutory requirements. 

Unsurprisingly, this approach did not impose an implied duty of good faith on the client in relation to their dealings with their solicitors.

What does this mean for you?

The basis for this duty has been clarified but the practical outcome is the same – implied duties of good faith are only likely to arise under a limited class of “relational” contracts.

Where can you read more?

See Candey Ltd v Bosheh & Anor [2022] EWCA Civ 1103 and our note on good faith on Practical Law.

“The elusive concept of good faith should not be used to avoid orthodox and clear principles of English contract law.” Lord Justice Coulson, paragraph 32

No cookie cutter approach for express duties of good faith

The Court of Appeal considered if an express duty of good faith in a shareholders’ agreement created a “constitutional settlement” under which two directors were entrenched in office and could not be removed by the majority shareholders. Unsurprisingly, the Court rejected this broad interpretation. Given the wider company law framework, if this had been the parties’ intention it would “inevitably” have been subject to express provisions.

More generally, it is wrong to apply broad concepts of good faith from other cases in a formulaic manner. Instead, an express duty of good faith consists of a “core” duty to act honestly and, depending on the contractual context, a duty not to engage in conduct that could be characterised as bad faith. Any further obligation must be capable of being derived as a matter of contractual interpretation or implication from the contract in question. This means express duties are likely to be limited in professionally drafted contracts; though might be more expansive in some commercial arrangements given they are sometimes more loosely defined.

What does this mean for you? 

Express duties of good faith should be used with care given the uncertainty about their meaning. If you want to apply such a duty, consider defining what it means.

Where can you read more? 

See Re Compound Photonics Group Ltd [2022] EWCA Civ 1371 and our note on good faith on Practical Law.

“When considering the interpretation and meaning of an express good faith clause in context, cases from other areas of law or commerce, which turn upon their own particular facts, may be of limited value and must be treated with considerable caution.” Lord Justice Snowden, paragraph 148

Exclusion of loss of profit doesn’t exclude clean-up costs

The Court of Appeal has decided that an exclusion of loss of profit, etc. (see the clause) in an IT development agreement does not exclude a claim for wasted costs – i.e. a claim for expenditure on the contract based on the rebuttable presumption that the contractual benefit is at least equal to that expenditure. 

Three key points support this welcome judgment on an important point:

1. The exclusion clause did not expressly refer to wasted costs and was not apt to cover them. If the supplier wanted to exclude wasted costs, it could have expressly said so.
2. The more valuable the right excluded, the clearer the wording of the exclusion clause must be (under the so-called Gilbert-Ash test). The exclusion clause did not “come anywhere close” to the level of clarity needed to exclude wasted costs. 
3. There is a fundamental difference between loss of profits, revenue or savings, on the one hand, and wasted expenditure, on the other. The former relies on a series of hypothetical alternative scenarios meaning the claims are “notoriously open ended” so are routinely excluded. A wasted cost claim is a “different animal”, being precisely ascertainable.

What does this mean for you? 

If your contracts exclude claims for loss of profits this case suggests this will exclude claims of future loss of profit or revenue but does not exclude a claim for the cost of cleaning up the mess when things go wrong. To exclude claims for wasted costs you should add express language to that effect.

Where can you read more? 

See Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440.

The clause: “neither party shall be liable to the other or any third party for … loss of profit, revenue, savings …, data …, goodwill, reputation (in all cases whether direct or indirect) …”

“Sole and exclusive” remedy excluded termination rights

A clause in a logistics contract contained an ordering mechanism, with a minimum volume commitment. The contract provided that the “sole and exclusive remedy” for breach of that clause was a rather low surcharge. The purchaser said it would not accept any future orders (in breach of the minimum volume commitment) and the supplier sought to terminate and claim damages.

The High Court concluded that the supplier was not entitled to terminate the contract. The “sole and exclusive” remedy clause ousted any contractual termination right and there may have been no right to terminate at common law for anticipatory breach (as by offering to pay the surcharge in lieu of performance, the purchaser demonstrated it wanted to comply with the agreement). There was another exclusive remedy clause in the contract (where the supplier failed to perform a significant number of the jobs that it accepted or was deemed to accept), which did allow for termination in some instances.

Both clauses were written in clear and unambiguous terms in a professionally drawn contract between legally represented parties. It was clear that when entering into the contract the parties had focused on the consequences of the purchaser failing to provide a minimum number of jobs, or the supplier failing to perform a significant number of jobs, and chose to manage those risks in different ways. The parties were “fully entitled to approach each risk differently and having agreed to that approach should be held to their bargain”.

What does this mean for you?

This decision is a cautionary tale for commercial lawyers of the dangers of agreeing “sole and exclusive” remedies. It highlights the danger of looking at a clause in isolation and not considering the effect it may have on other provisions of the contract, such as termination rights.

Where can you read more?

See James Kemball Ltd v “K” Line (Europe) Ltd [2022] EWHC 2239 (Comm).

“The parties have chosen to manage the risk that the defendant would not provide the guaranteed minimum number of Jobs by a contractual compensation mechanism and have done so in clear and unambiguous terms. They might have formulated clause 3.3 in similar terms to those adopted in clause 4.4 but they chose not to do so. There is no basis for the phrase “… sole and exclusive remedy …” to be ignored or for concluding that it should not take effect in accordance with its terms.” HH Judge Pelling KC, paragraph 33

Novation is possible through course of conduct

Novation usually occurs when a contract is terminated and replaced by a new one between one of the original parties and a new party – so, A and B bring their contract to an end and A contracts instead with C. A, B and C must all consent to this. 

While this is often done expressly (and some contracts provide in advance for novation to happen on certain trigger events occurring), novation can be inferred from conduct. A decision of the High Court this year makes it clear that a unilateral contractual right to terminate (available to one or both of A or B) will not prevent the courts from finding that novation has taken place if in fact that is what has happened.

International Jet Club (“IJC”) originally entered into an operation and management services contract with the owner of an aircraft. When two things happened subsequently – 1) a reorganisation of the IJC group; and 2) the aircraft was moved to another jurisdiction – another company, Gama, (which was part of the same group as IJC), provided the services instead. Gama invoiced the owner and was paid by it. Gama was also the entity with sole regulatory approval in the new jurisdiction. 

When the owner then stopped paying, Gama brought a claim for summary judgment for recovery of the unpaid sums.

The High Court held that there had been an implied novation of the contract to Gama (so that Gama was entitled to the sums claimed). A clause providing that either party could terminate on three months’ notice did not prevent the novation. Similarly, there was no express provision preventing, or applying formalities to, the ability of the parties to terminate by agreement, which indicated there should be no bar to termination by novation through a course of conduct.

What does this mean for you?

The decision is a reminder that novation can arise through a course of conduct.

Where can you read more?

See Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] 4 WLUK 364 (29 April 2022) and its addendum Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] EWHC 1191 (Comm) (4 May 2022).

The relevant test: “whether that inference is necessary to give business efficacy to what actually happened.” Evans and SMG Television Limited [2003] EWHC 1423 Ch

Did an assignee’s loss fall into a legal black hole? Not remotely…

The High Court held that the loss claimed by an assignee was not too remote and, even if it had been, a particular provision got round that.

The assignee was the management company for a block of flats who had been assigned the benefit of a warranty from the contractor who built the flats. The original beneficiary of the warranty was the lender to the development.

When the assignee brought an action against the contractor under the warranty for the cost of remedial works, the contractor argued that the losses suffered were too remote. 

The Court had to decide whether the loss in question (cost of remedial work) was of a kind which was in the reasonable contemplation of the contractor as a serious possibility at the time of entering into the warranty with the lender. It found that it was. The possibility of assignment was expressly provided for under the warranty without restriction so that the contractor knew that losses might be claimed by an assignee who was not a substitute lender and/or who had suffered types of loss other than those which a substitute lender might suffer. It was reasonably foreseeable that someone with an interest in the property, like the assignee, would end up with the warranty and need to carry out the remedial works. The claim did not fall into a “legal black hole” by virtue of a “no loss” argument. 

In any event, the following provision would have come to the rescue: “The Contractor agrees with the Beneficiary not to contend…that any person to whom the benefit of this Deed is assigned shall be precluded or prevented from recovering under this Deed…by reason of the fact that such person is an assignee only or otherwise is not the original beneficiary or because the loss or damage suffered has been suffered by such person only and not by the original beneficiary, or because such loss is different to that which would have been suffered by the original beneficiary.”

What does this mean for you?

It’s good to see the courts once again refusing to entertain a “no loss” argument or allow a real loss to fall into a so-called “legal black hole”.

Where can you read more?

See Orchard Plaza Management Company Ltd v Balfour Beatty Regional Construction Ltd [2022] EWHC 1490 (TCC).

“The overriding policy of the law is to provide a real remedy to the person who has suffered real loss arising from the breach of contract.” Mr Justice Morris, paragraph 55(5)