Force majeure clauses commonly include a “reasonable endeavours” proviso; a party cannot rely on a force majeure event if that party could have avoided it by the exercise of reasonable endeavours. 

The Supreme Court decided a “reasonable endeavours” obligation did not require a party to accept an offer of non-contractual performance by the other party, even in circumstances where the offer was a sound commercial proposition. In doing so, the Court confirmed the sanctity of the principle of freedom of contract and the need for legal certainty under English law.

A shipowner invoked the force majeure clause under a charterparty when the charterer’s parent company was sanctioned by the US, arguing that the sanctions would prevent payment in US dollars as required by 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 offer.

The Supreme Court held that reasonable endeavours did not require the shipowner to accept payment in euros because the shipowner was not obliged to accept non-contractual performance. It had an undoubted right to insist on payment in US dollars and to refuse payment in any other currency. The Court saw no justification for creating “needless additional uncertainty" by departing from the standard of performance provided by the terms of the contract.

What does this mean for you?

Reasonable endeavours obligations are common. While they involve evaluative judgments and some degree of uncertainty, they must still be aimed at the relevant contractual obligation. The Supreme Court was clear that to find otherwise would introduce uncertainty and undermine the expectations of reasonable business people.

Where can you read more?

See RTI Ltd v MUR Shipping BV [2024] UKSC 18.

“The principle of freedom of contract includes freedom not to contract; and freedom not to contract includes freedom not to accept the offer of a non-contractual performance of the contract.” Lords Hamblen and Burrows, paragraph 42

In 2007, Tesco decided to move its distribution centres. Mindful of the need to retain experienced staff, it entered into a collective agreement with the union to provide a substantial pay increase to staff that relocated. This was called “retained pay” and was variously described as a “permanent feature” and “guaranteed for life”, subject only to specified exceptions such as where the employee was promoted. This provision was incorporated into the staff employment contracts.

In 2021, Tesco decided to end these arrangements. It offered generous compensation to staff who agreed to the removal of the retained pay; those that did not agree would be fired and rehired without those terms. The heart of the dispute is therefore a conflict between:

• the fact that the retained pay arrangements were a “permanent feature”, and
• Tesco’s unqualified contractual power to dismiss the employees.

The majority resolved the conflict through a straightforward application* of the rules of interpretation and implication of terms in fact. While there was no express term fettering Tesco’s power to dismiss employees, a term would be implied that Tesco could not dismiss the employees for the purpose of depriving the employees of their retained pay. This implied term was necessary in order not to undermine the promise that retained pay would be a permanent feature. In doing so, the Court dismissed Tesco’s argument that there should be no fetter on an unqualified termination right.

Lord Leggatt’s minority decision goes further. He suggests reformulating the “business efficacy” test for implied terms by first identifying the purpose of the agreement and then determining if a term must be implied to prevent it being defeated. More controversially he suggests that “a contractual power, even though expressed in unqualified terms, is in general circumscribed by an implied qualification that the power must be exercised in good faith and not arbitrarily, capriciously or irrationally or for an improper purpose”. Lord Reed’s minority judgment pushes back strongly on this proposition.   

* The Court relied on various statements made prior to the collective agreement to interpret the employment contracts. This pre-contractual material is not normally admissible as an aid to interpretation. However, the parties agreed it was admissible and the Court would have admitted it in any event.

What does this mean for you?

Lord Leggatt’s suggestion that termination rights must be exercised in good faith and not arbitrarily, capriciously or irrationally or for an improper purpose is controversial. It was not endorsed by Lord Reed. However, it may provide fertile ground to challenge the exercise of termination rights in years to come.

Where can you read more?

See Tesco Stores Ltd v Union of Shop, Distributive and Allied Workers and others [2024] UKSC 28.

“Nor would I endorse [Lord Leggatt’s] statement …  that "a contractual power, even though expressed in unqualified terms, is in general circumscribed by an implied qualification that the power must be exercised in good faith and not arbitrarily, capriciously or irrationally or for an improper purpose". That is a wider proposition than has been adopted in earlier cases in this court” Lord Reed, paragraph 149

Cavendish v Makdessi [2015] UKSC 6 sets out when a contractual provision will constitute a penalty and therefore be unenforceable. There are three questions:

1. First, the threshold question: is the provision in substance a secondary obligation engaged upon breach of a primary contractual obligation?
2. If the answer to the first question is yes, what is the extent and nature of the legitimate interest of the promisee in having the primary obligation performed?
3. Having regard to the legitimate interest identified above, is the secondary obligation exorbitant or unconscionable in amount or in its effect?

Here, London Credit agreed to loan money to CEK Investments for a period of 12 months. The standard rate of interest was 1% per month and the default rate was 4% per month, with interest being compounded monthly. London Credit decided that CEK Investments had breached the facility letter and demanded repayment of the full loan amount plus the default interest. 

The High Court decided that the default interest rate was an unenforceable penalty. However, that decision was reversed by the Court of Appeal. The High Court had not applied the Cavendish test correctly nor taken proper account of the conclusion in Cargill International Trading v Uttam Galva Steels [2019] EWHC 476 that lenders have a good commercial justification for charging a higher rate of interest after a payment default when, having defaulted, the borrower is a greater credit risk. The High Court also appeared not to have considered whether the default interest was extortionate, exorbitant or unconscionable. 

The Court of Appeal considered that it was not in a position to substitute its own decision so remitted the case back to the High Court.

What does this mean for you?

The Court of Appeal's judgment emphasises the need for the proper application of the three-stage test in Cavendish, and the clear separation of those tests, to determine if a contractual provision is a penalty. 

The default interest rate in this case equated to an annual rate of around 60%. This is relatively aggressive so it is worth watching out for the subsequent decision of the High Court.

Where can you read more?

See Nuray Houssein & Ors v London Credit Limited & Anor [2024] EWCA Civ 721.

“It seems that the judge misunderstood the second question posed by Mr Fancourt QC in the Vivienne Westwood case and failed to address the third. Although he used the phrase "legitimate interest", his reasoning does not suggest that he was considering the extent and nature of London Credit's interest after default. Secondly, he did not address the question of whether the default interest provision was extortionate, extravagant and/or unconscionable in the light of the nature and extent of the legitimate interest.” Asplin LJ, paragraph 54

This dispute arose in relation to an energy supply contract. If the customer was subject to an amalgamation (not approved in advance) the supplier could terminate and claim 50% of the remaining charges as compensation.

When the customer amalgamated with another housing association in April 2018, it didn’t seek advance approval but did provide prompt notice to the supplier. The supplier expressed no concerns and continued to work with the customer. However, eight months later, the relationship broke down and the supplier terminated based on the amalgamation. 

The question for the Court was whether there had been "waiver by election" - i.e. had the supplier: (a) with knowledge of the facts giving rise to its right and the right itself, made a clear choice to continue the contract; and (b) communicated that choice to the customer in clear and unequivocal terms.

Unusually, while the supplier was aware of the amalgamation, the Court decided it was not aware of its termination right in the contract and had not been advised by its lawyers of the right. (An alternative argument for "waiver by estoppel" had been dismissed at the summary judgment stage and no claim was advanced for "waiver by convention".) Thus, despite the eight month hiatus, there had been no waiver by election and the termination was effective.  

What does this mean for you?

You need to master two competing tensions when terminating for breach:

(a) Measure twice, cut once. Do not rush into it. The counterparty will likely claim the termination notice is a repudiation, so things will escalate quickly. Check the facts, ensure you have considered all potential termination rights and think about the practical consequences of termination.

(b) But don’t delay. If you do, there is a risk of “waiving” your rights. An express reservation of rights can be very helpful. However, if you take too long you may find the matter is taken out of your hands

Where can you read more?

See our DigiLinks blog post  and URE Energy Limited v Notting Hill Genesis [2024] EWHC 2537 (Comm).

The clause: “The Supplier may terminate this Contract at any time for all or any Supply Premises if…the Customer passes a resolution for its winding up which shall include amalgamation, … (other than a solvent amalgamation… approved in advance by the Supplier)”

Mr Truman was dismissed from his role as an employee of a subsidiary company in October 2022 and removed as a director a month later. However, he remained a director of the holding company until May 2023.

A dispute arose over the leaver provisions in the holding company’s articles of association. Article 11.3 deemed a transfer notice to be served if an employee member ceased for any reason “…to be employed as an employee, director or consultant of a Group Company (and does not continue in that capacity in relation to any Group Company)”.

There were two competing interpretations:

• The first was that dismissal triggered a transfer notice immediately, as Mr Truman ceased as an employee of the subsidiary company and was not an employee of any other group company. He was therefore entitled to the lower “market value” for his shares.
• Mr Truman argued that Article 11.3 addressed three different ways in which an employee member may work for a group company – employee, director or consultant. While he ceased to be an employee, he was still a director of the holding company and so the provision was not engaged. He was therefore entitled to the higher “fair value” for his shares with no minority discount.

The High Court found that the leaver provisions were not triggered until Mr Truman retired as a director of the holding company. Although the wording was not entirely clear, the more natural reading of the relevant provisions was that the words “in that capacity” related back to the three capacities mentioned. It was not a reference only to the capacity which the employee member previously held. 

This interpretation accords with commercial common sense. The purpose of the provision was that, if a shareholder ceased to be involved in the day-to-day running of the business, the other shareholder(s) should be given the opportunity to buy that shareholder’s shares. It is not uncommon (especially in private companies) for a senior employee to continue as a consultant after retiring from full time employment. In those circumstances it would not make commercial sense for the articles to force such an individual to sell their shares and to do so at a lower valuation. 

What does this mean for you?

Clear drafting is important when it comes to establishing leaver provisions within a company’s articles or a shareholders’ agreement. In the context of group companies, make sure you consider the different positions that shareholders may hold in various companies and when it is intended that leaver or compulsory transfer provisions should be triggered.

Where can you read more?

See Syspal Capital Limited v Christopher John Truman & Anor [2024] EWHC 1561 (Ch).

“… the process of interpretation to arrive at the true meaning of a provision in a company’s articles of association must concentrate on the natural and ordinary meaning of the words used, when viewed in light of the scheme and purpose of the articles in general, any extrinsic facts about the company or its membership that would reasonably be ascertainable by any reader of the company’s constitution and public filings at Companies House, and commercial common sense.” Snowden J in Re Euro Accessories Ltd [2021] EWHC 47 (Ch)

One of the main issues in a dispute arising from a sale of goods contract was whether, on a true construction of the contract, an “advance payment" made by the buyer was non-refundable on breach by the buyer. The contract (for the sale of rape and soybean meal) simply provided that the buyer would pay 20% of the Contract Price as an “advance payment/guarantee upon signing of the contract”. 

Not long after sending the advance payment to the seller, the buyer repudiated the contract. The buyer accepted that it had repudiated the contract but contended that the advance payment was repayable.

The High Court held that the advance payment was refundable. Crucially, it was not called a "deposit", which would have suggested that it was non-refundable. HHJ Pearce noted that the pre-payment by the buyer of 20% of the purchase price gave significant security to the seller, providing it with an available fund from which it could recover its losses (if any) flowing from non-performance. To go further by finding that the advance payment was not recoverable even if the seller suffered no loss would go beyond the normal meaning of the words used, as well as those not used, such as "deposit".

What does this mean for you?

Where an advance payment is made, the contract should be crystal-clear as to the circumstances when it will be refundable and the payer would be best advised for it to be secured by an advance payment bond.

Where can you read more?

See Ayhan Sezer Yag Ve Gida Endustrisi Ticaret Limited Sirket v Agroinvest SA [2024] EWHC 479 (Comm).

“Had the parties intended the Advance Payment not to be recoverable, they would either have called it a deposit or expressly stated this to be the case. They did not do so.” HHJ Pearce, paragraph 86

Drax raised a number of warranty claims against Scottish Power following the sale of a gas power station. Scottish Power made a summary judgment application to dismiss them. 

The notice of claim clause in the share purchase agreement required Drax to state "in reasonable detail the nature of the claim and the amount claimed (detailing Drax’s calculation of the Loss thereby alleged to have been suffered)". Scottish Power argued that Drax’s notice of claim had not been sufficiently particularised. The High Court decided the notice was invalid because it did not reflect the amount of loss based on the traditional ‘difference in value’ measure applied in warranty claims. 

The Court of Appeal reversed the decision and found the notice was sufficient. The purpose of a notice of claim clause is to provide a contractual limitation period which promotes finality and certainty in commercial dealings. If notice is given, the principles of Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638 come into play, that is to enable the recipient to make inquiries into the factual circumstances giving rise to the claim, with a view to gathering or preserving evidence, assessing the merits of the claim. 

Of course, whether a notice is sufficient depends on the exact language of the notice of claim clause. However, where general language such as “nature of claim” or “reasonable detail” is used, that will be interpreted in the light of the commercial purposes of such clauses. This is despite the fact that these are essentially exclusion clauses subject to the principle that parties are not lightly to be taken to have given up valuable rights without making it clear that they intend to do so (Gilbert-Ash (Northern) v Modern Engineering (Bristol) [1974] AC 689).

What does this mean for you?

This is a pragmatic, commercial approach to notice of claim clauses. However, the Court was clear that the wording of the clause will be paramount, so careful drafting of these clauses is essential, as is strict compliance with their terms when sending a notice of claim.

Where can you read more?

See Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited [2024] EWCA Civ 477.

“It is important that Notice of Claim clauses should not become a technical minefield to be navigated, divorced from the underlying merits of a buyer’s claim.” Males LJ, paragraph 50

A common misconception is that you can never limit or exclude liability for fraud in a commercial contract. For this reason, limitation clauses often contain express carve out to that effect. 

However, this judgment shows that the position is more complex. It relates to a Research Agreement between Innovate Pharmaceuticals and the University of Portsmouth. One of the University’s researchers (Dr Hill) submitted a paper to a respected academic journal, Cancer Letters, but it had to be retracted due to problems with the underlying data. Innovate alleged this was the result of Dr Hill’s dishonesty* and sued for approximately £100m as a result of the consequent disruption.

One stumbling block was that the contract limited the University’s liability to £1m. The question was whether it applied to Dr Hill’s alleged dishonesty. In considering this point, the Court identified that:

• a company cannot contract out of fraud in inducing the making of a contract; and
• a company cannot contract out of fraud attributable to its “controlling mind” (HIH Casualty v Chase Manhattan Bank [2003] UKHL 6); but
• a company may be able to contract out of fraud of its agents or employees in the performance of the contract (Frans Maas (UK) Ltd [2004] EWHC 1502). 

This was a case of alleged dishonesty of an employee in the performance of the contract. The judge concluded that the generally worded limitation clause was effective to limit the University’s liability to £1m even if Dr Hill had been dishonest. 

* The Court ultimately found that Dr Hill was not dishonest and the mistakes were the product of the professional and personal pressure on Dr Hill.

What does this mean for you?

In many contracts, there is a risk that employees will act fraudulently or dishonestly when performing the contract. The judgment demonstrates that it is possible to cap this liability and that a generally worded exclusion and limitation clause may well have that effect. 

Where can you read more?

See Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC).

“Parties do not contemplate fraud in the making of a contract… But it is another thing altogether to say that parties do not contemplate the risk of deliberate wrongdoing at some point in the performance of a valid contract. That is a matter for construction of the contractual provisions” Gross J in Frans Maas (UK) Ltd [2004] EWHC 1502

This barely credible attempt to avoid paying for stock based on a limitation clause was dismissed in short order. However, the judgment illustrates a fundamental property of exclusion clauses – they only apply to secondary obligations. 

The key facts can be stated shortly. The Vaishes owned a chain of convenience stores. They bought £117,726 worth of stock from Costcutter but the relationship broke down. When Costcutter demanded payment for the stock, the Vaishes relied on Clause 19.2:

“the total liability of either party shall in respect of all acts, omissions, events and occurrences whether arising out of any tortious act, breach of contract or statutory duty or otherwise arising in any particular Contract Year in no circumstances exceed a sum equal to five (5) times the Service Charge [in the last year]”

Unfortunately, Costcutter had changed its pricing model and stopped issuing a Service Charge. This meant the Service Charge was £0, and so the liability cap was also £0. The Vaishes therefore argued that their liability to pay for the stock (i.e. the “breach of contract” for non-payment) was also £0. 

Constable J was unimpressed by this argument. A contract imposes primary obligations on the parties to perform the contract. If those primary obligations are not performed they are replaced by a secondary obligation to pay damages. An exclusion or limitation clause will generally only apply to a secondary obligation. It will not relieve a party from performing its primary obligations. 

What does this mean for you?

It is not surprising you can’t use a limitation clause to escape your payment obligations, but the principle likely goes wider. For example, other primary obligations, such as indemnities, might well fall outside the scope of your exclusion and limitation clauses on the same basis. 

Where can you read more?

See Costcutter Supermarkets Group Limited v Ameet Kumar Vaish & Anor [2024] EWHC 152 (KB).

“… it is clear that the words within [the limitation clause] are not directed at removing the primary obligation upon the Retailer to comply with its obligation to pay for goods received” Constable J, paragraph 41

The sale and purchase agreement (SPA) for the acquisition of two Brazilian mines contained a condition to closing that no material adverse effect (MAE) shall have occurred since signing. An MAE was defined as any “change, event or effect that… is or would reasonably be expected to be material and adverse to the business, financial condition, results of operations, the properties, assets, liabilities or operations of the [target companies] …”.

The buyer attempted to terminate the SPA on the basis that a significant displacement of rock at one of the mines which occurred between signing and closing was an MAE. The rock displacement did not immediately halt operations but triggered safety protocols and monitoring by the seller.

The High Court decided the buyer was wrong to terminate because the MAE clause was not triggered. To constitute an MAE an event must be substantial, affect long-term earnings power and materially alter the financial performance or value of the business being acquired. The rock displacement was significant in the short term but lacked the sustained impact required to meet the materiality threshold. The safety protocols and remediation measures put in place immediately following the incident had stabilised the situation, minimising any long-term consequences. The buyer also contended that the event should qualify as an MAE because it revealed pre-existing, undisclosed risks associated with the mine's geotechnical stability, but the Court rejected this. MAE clauses cover post-signing changes only, not pre-existing risks that become known later. On reduction of value, the Court considered that a reduction of more than 20% would be material and a reduction of 15-20% might be material, but 10% would be too low to be material.

What does this mean for you?

Judgments on MAE are relatively rare so this is useful guidance of the Court’s strict approach and a reminder that such clauses will be applied in the context of the agreement as a whole - the Court declined to apply any fixed threshold or formula for materiality, ruling instead that the context of each transaction dictates materiality. 

Where can you read more?

See BM Brazil I Fundo De Investimento Em Participações Multistrategia v Sibanye BM Brazil (Pty) Ltd [2024] EWHC 2566 (Comm).

“…there is no bright line test for what constitutes materiality which will be applicable to all MAE clauses. A number of considerations will be relevant as to what is to be regarded as material in a particular case. In the present case, I consider that the size of the transaction, the nature of the assets concerned, including that they are susceptible to such matters as geotechnical events, the length of the process of the sale of the Mines and the complexity of the SPAs are all relevant…” Butcher J, paragraph 251