David Lowe discusses elements in the updated Insolvency Act that will impact commercial contracts, he reflects on how the COVID-19 pandemic has tested features of contracts such as Force Majeure, and he highlights some recent cases which should be at the top of your reference list.
ThinkHouse Unlocked: Commercial contract law update
Transcript
David Lowe: Hello everybody and welcome to commercial contract update for ThinkHouse. I am David Lowe I lead our commercial contracts team drafting and negotiating a wide range of commercial contracts, supply chain, routes to market, procurement, etc. I am also one of the leaders of ThinkHouse so I am sure many of you have seen me before at our physical events.
Today I am going to look at how commercial contract law has changed since March 2019. Why March 2019? What is so special about that date? Well that was the last time I gave this talk at ThinkHouse and so those of you who are collecting David Lowe's compendium to contract law this will be neat chapter to add to the end of your existing notes.
We are going to be covering commercial contract law. That means I am going to be focusing on B-to-B, not consumer law because consumer contract law has its own special features. It is broadly focused on contracts of the supply of goods and services although much of what I have to say will be relevant to any contract. And my reference point is what has changed in contract law since March 2019 that makes a difference to how I draft or negotiate contracts, or just illustrates a point really well as a reminder of the key basics. So that is the kind of theme that I am bringing to you.
Three key areas that we are going to cover. Of course COVID-19, we cannot ignore it, it is here. Now that has not changed contract law as such but I think it is useful just to reflect on how contracts have coped with COVID-19 and some of the key issues coming out of that. I am also going to talk about the new Insolvency Act, I am not going to give the general overview - Jasvir the partner in our restructuring team has already done a ThinkHouse session on the new Insolvency Act providing an overview of that which is recorded and you can watch. I am just going to concentrate on the impact of the Insolvency Act on contracts. What do you need to actually change in your contract as a result? And then of course finally I am going to do a case law update sort of those key cases that have happened since March 2019.
Now just to manage expectations it has been quite a fallow year for contract cases. When I look back at March 2019 we had the Big Rock advertising case, the Supreme Court judgement on variation, we also had the Brexit Canary Wharf case giving some insight on how the courts were going to approach the interaction between Brexit frustration force majeure. Well we have had nothing of the sort in the cases since then, so we will be covering the cases that have come up but they are not very substantial.
COVID-19 and contracts
So COVID-19, obviously something that is at the front of all of our minds and I thought it would be helpful to reflect on what we have learnt since March about the impact of COVID-19 in contracts how contracts have coped with COVID-19. Now obviously the key area of that is force majeure and I am going to go through that and particularly reflect on what I think people ought to think about in drafting new contracts.
So the other big area which is not a change of law as such, but there has been this massive shift away from using paper and the practical issues that that has thrown up. Now force majeure, we have already done various sessions on force majeure and there are the briefing notes on force majeure in the supply chain for those who want the detail. In that briefing note I set out step by step how to analysis the contracts of law. I am not going to dwell too much on the detail but I need to obviously go through some of it to allow me to write and comment on what I think we should do with new contracts.
OK, we always recommended that contracts have force majeure and the reason for that is that English law, if you do not have a force majeure clause in your contract, just has the concept of frustration which is a very narrow concept and only applies if your contract becomes impossible to perform. Famously things like the closing of the Suez Canal that was not frustration because it simply made it more expensive and more difficult to ship goods but it did not make it impossible. So we have always advised clients to always include a force majeure clause.
One of the interesting things about COVID-19 was actually how many contracts do not have a force majeure clause. Obviously not the contracts I normally would have drafted on or negotiated on, but there are plenty of contracts we discovered that did not have a force majeure clause. Either because they have been drafted by people who are non-lawyers or because one party or another had purposely decided not to include a force majeure clause, for example standard purchase terms. It is often the case the customer does not include a force majeure clause because typically it helps the supplier.
What was interesting though is that even though those contracts had no force majeure clause actually often frustration did help, but if anything COVID-19 has been the exception that proved the rule. Because with COVID-19 wide ranging laws were introduced banning certain activities, closing shops, closing theatres, sports grounds and so forth it was usually easier to demonstrate that there had been a frustrating event with the supplier for it is impossible for them to perform and therefore the contract had the benefit of frustration. As I said, that is unusual in my experience for force majeure circumstances for it to be so bad to be frustrating and COVID-19 really is very frustrating isn't it, both legally and generally of course.
A piece of law that we all had to rediscover, not that we look at very often, mainly because contracts usually are not frustrated was the Law Reform Frustrated Contracts Act 1943. The way that Act works is before that Act came in, if a contract was frustrated basically the contract fell as it was and so if you had as a supplier invested heavily in the expectation that you were going to get paid back over a five year term and the contract was frustrated well you could not really recover that investment back from the customer. Now it was recognised as being unfair and so the Law Reform Frustrated Contracts Act then deals with that and deals with the allocation between the parties of the payments and cost. Basically, looking for a fair approach which usually often will end up typically having to go to a court to decide but of course there is very little case law so very little insight into how the courts would approach it.
So, many people were lucky that their contracts that did not have a force majeure clause still coped because of frustration because COVID-19, and all legal measures introduced as a result of COVID-19, have been so wide ranging, but the lesson there is do not rely on that. Always, always include a force majeure clause or at least think about it. You may consciously choose not to put a force majeure clause in but please make sure it is a conscious decision rather than an accident.
Now two ways that the contracts that did have force majeure clauses here is a typical summary of a force majeure clause that is usually a definition of a force majeure, usually referring to an event outside the reasonable control full of our long list of things that are examples of a force majeure. Typically of course we need a clause to have an obligation to notify so the other party knows that you are suffering force majeure. An obligation to use reasonable endeavours to overcome the force majeure. Extending relief if performance is impossible or hindered as a result of the force majeure.
Some but not all force majeure clauses then go on to deal with what happens on payments when a force majeure happens, does payments continue or not, and many but not all also go on to deal with termination. At what point does the force majeure go on for so long that the other party can terminate? Now with that sort of backdrop, how did we work with COVID-19? Well the measures introduced to deal with COVID-19 were typically a force majeure. There were some issues around the early days, where there was merely government advice for businesses to perhaps consider shutting down and that grey area was difficult because, if you were legally able to provide services, then there was government advice that may be you should not or it should be restricted. Is that an event outside your reasonable control? Pretty difficult but once legal restrictions were introduced saying you cannot open a shop, you must operate in certain ways, then that definitely became something that outside the reasonable control of people and was a force majeure event.
Now, there were some contracts, specifically very old contracts or old fashioned contracts, where the force majeure definition was not as I put it here, 'an event outside reasonable control' and then a long list of stuff, but simply what force majeure means and then just listed events, act of God, civil insurrection, etc. Now those contracts do present a problem because they would never mention COVID-19 and rarely mentioned pandemic. Some of them did mention disease and in quarantine actually, some really old ones, but most of them did not touch on it and therefore you were in a difficult place. Are theCOVID-19 measures, is that a force majeure in this particular contract?
So a tip there really is, it is unusual in the modern contract to have that but be very wary of exclusive lists because you can guarantee the event you have not anticipated is going to happen and you will then have a question about whether it is force majeure. The usual kind of wording I have just put here, 'an event outside the reasonable control of the parties etc. including' and then put the list, do not put just the list.
I think the key problem that came up with COVID-19 and contracts was not about where it was impossible or difficult for the suppliers to supply because that was plainly force majeure but was where customers did not want to buy. So for example a cleaning contract for an office, if there is nobody in the office then the customer would probably want no cleaning to be done or little cleaning to be done because actually there is no one in the office. So in that circumstance the customer does not want to buy, but that is not a force majeure, not wanting to do something is not a force majeure. Just because there is no one in the office because of government laws is not itself a force majeure if the cleaners can still come legally and come and clean the offices then it is not force majeure. And so those contracts were difficult and similarly contracts where suppliers had invested heavily in advance, had high fixed costs and therefore often force majeure clauses were not dealing with how they continue to be paid on during the force majeure.
So the money that arises from force majeure, that was usually where the difficult discussions were going on, partly because the clauses often did not deal with it. Now furlough took the sting out of that because the main issue for many people is the labour costs, and if they could somehow get rid of the labour cost by furlough then the supplier felt a bit happier and so often we will see deals being done. So for example on cleaning contracts, OK I am the cleaning company, I will agree with you to put all the cleaners on furlough that takes almost all of the employment costs out of it and we are just left with a little bit of management time and fixed costs and so forth. So as a customer I will carry on charging you but it will be a much smaller amount of money and so that usually worked well.
But my worry is that as furlough unwinds by the end of October those difficult discussions about money with those types of contracts are going to come back because, once furlough ends, then the employees are back and need to be paid or, if they cannot be used they need to be made redundant and that comes at a cost. So a cleaning company is going to say, I can come and clean your office from 1 November, the cleaners are here ready and waiting that is going to cost money and customers, if they have not opened their offices or have not opened offices fully, are not going to want to pay for that and now there is going to be an argument about who pays for the redundancy costs and what happens in that situation and that will require looking at the detail of the contract. What does it say about termination? What does it say about costs?
There has been, I have noted, a rush to add pandemic to the lists of the force majeure events. So as I have said, an event outside the reasonable control including act of God, riots, civil insurrection, people are now adding the word pandemic. Frankly I do not think it makes much difference, if you have drafted the way I suggested it so that it is an event outside reasonable control first, then it does not really matter what is in the list, I have just given a bit of feel for what the kind of things you had in mind. So the fact that pandemic is there or not makes little difference. There is no harm putting pandemic in but equally I do not think it is really worth your while going back and rewriting all your existing contracts to add the word pandemic in.
An issue that is definitely going to come up is around new contracts. If you entered into a contract back in 2019 there is no way that you could reasonably anticipate COVID-19 or indeed the measures to try and deal with it. And so therefore it is a force majeure event, it is obviously something outside the reasonable control of parties, it is obviously something that cannot be reasonably anticipated. So if you enter into a new contract today that is no longer the case. You can anticipate this COVID-19 and COVID-19 measures coming up, you can anticipate there will be second possibly third waves and therefore you cannot just rely on the force majeure clause in a new contract to deal with the impact of COVID-19. I have seen some people simply adding to the list of force majeure events COVID-19 but the trouble is, if the parties could have reasonably anticipated COVID-19 measures, the courts are probably likely to say it is not a force majeure. And therefore the best advice is to have a standalone clause that deals specifically with disruption caused by COVID-19 measures so that you are up front and clear about what happens if there is a total shutdown.
I think another tip is be clearer on what happens with the money when a force majeure happens because, as we have discovered in the COVID-19 event, most clauses did not really deal with that and that left lots of unanswered questions. Obviously it is easier if it is a pay as a go contract where I just pay for what I get, that it is easy, but if it is not think about what happens when force majeure happens. Do you still have to pay the fixed costs of the supplier for example or not, best to make that clear. And given my observation that the big issue on COVID-19 was about customers discovering they no longer wanted to buy but that was not really good enough to be a force majeure. I would suggest any customer should be thinking about how they can introduce flexibility into their contract. Should they have a right to suspend or flex requirements or simply an ability to terminate at will on short notice? Maybe it comes at a cost consequence but it then gives at least certainty and choices when it happens.
So enough of force majeure and proper law. What I wanted to go onto is the shift of going electronic. We all as lawyers paid lip-service to electronic signatures and electronic documents before COVID-19 but we have been forced to engage with it because it has just become very difficult and impractical to secure a wet ink signature. So certainly pre-COVID-19 people were shifting towards accepting a wet ink signature that had been scanned in but fundamentally a piece of paper that is actually printed off, presented to somebody who had signed with a wet ink signature and then it had been scanned in, that was as revolutionary as we as lawyers have tended to get. Yes, there are e-signature systems out there but they were not frequently used, lots of people worrying about whether they were legal and so you were seeing them perhaps on low grade contracts but not substantial contracts.
That has all changed. There has been no choice, it has become impractical to print off and get a wet ink signature and therefore we have seen the rise of systems such as DocuSign and other e-signature products to allow for remote signing. So probably a good time to remind ourselves about when e-signatures are legal and when they are not. We basically, and you might remember at a ThinkHouse forum I think 12 months ago, we covered e‑signatures where I explained that under English law e-signatures are legal in most forms of contracts and documents. Certainly the kind of contracts that I am talking about the supply of goods and services they certainly are legal in an English law contract. But problems with e-signatures are in three different areas: one is where foreign law might apply because I am obviously talking about English law I could not tell you what the law in South Africa say is on e-signatures and bear in mind, that is not just where your contract is subject to a foreign law, it is possible for your English law contract be impacted by foreign law. If you have an English law contract with a foreign company signing it then the law of the country of that foreign company will be relevant to judging whether its signature is valid. And so if you have a contract with a non-English law party that local law might apply and you obviously ideally need to go and seek local legal advice.
The second area is property documents. Pre-COVID-19 the Land Registry refused to accept electronic signatures so whatever the law said about electronic signatures did not really matter because if you could not register your property at the Land Registry it was pointless and so, if you had a property document in a transaction, you could not use e-signatures.
And the final problem is that it is very unclear at law whether a deed which is needed to be witnessed to be executed whether that witnessing could be done remotely. Is it possible for me to effectively witness somebody signing by watching them sign over say a Zoom call. Nobody knows. There is a lot of academic debate. There are ancient cases about how people were able to witness a signature by looking through a window, and isn't the analogy to a window a Zoom etc.? But it is all speculation nobody knows, the law commission and its consultation confirm that, although it hoped that remote witnessing was valid, it did not know and it needed a change in law, either by legislation or by a court case to confirm that point. Therefore there is a big question mark over deeds and witnessing.
So how have things changed? There have been some changes. Obviously more generally the world has just shifted, decided to take the risk of e-signatures because it just has to get on with it and to stop worrying and faffing around with paper documents. And therefore I would suggest if you have not yet come across e-signatures on any of your contracts I predict you will within the next six months have one of yours where the other party would propose using DocuSign or some kind of e-signature platform.
The Land Registry has changed its rules. It is now willing to accept electronic signatures. There has been a whole load of detailed rules about exactly when it will and what format and so forth. Therefore, if you have a property document then you should get expert property legal advice on whether it is possible to sign it with an electronic signature in order for it to be registered and how we do that. But in principal it is possible now.
We are still not clear on deeds and witnessing. So there is still a big question mark out there that, if you have a deed that is executed and needs to be witnessed, whether it can be witnessed remotely. Maybe, but do you really want to be the test case to find out? So my suggestion there is that, firstly try and avoid a deed that needs witnessing. Does is need to be a deed at all? Can you just stick a quid in and get some consideration and make it a normal contract? Or if it does have to be a deed, can you find an alternative way of executing it? For example if it is being executed by a company then two signatures from two directors is sufficient you do not need a witness then. And so you just side-step the whole issue. If it does need to be witnessed, then you need to make sure you have some evidence that it has been physically witnessed. Maybe it is just a picture, a selfie, of the witness and signatory together in the room as they sign it - of course practicing social distancing. That would at least help because there is a risk that one day somebody might challenge you if you have electronically witnessed as to whether it was a valid witnessing and who knows where that case would go.
I would like to think that somehow or another we are going to get over this issue in the near future because it is just an irritating up-take issue but right now I cannot guarantee to you that a remotely witnessed deed is valid.
Obviously going electronic is not just about e-signatures. I have started to see a shift in contracts, and the notices clause to considering using emails. They are obviously normally in a contract somewhere back in the small print in the boilerplate at the back it will talk about how contractual notices can be given by personal delivery, which means courier, or whether it could go by first class post or registered post or something like that and it might even mention fax. Usually, almost all contracts I typically see, emails are not possible but I have seen a shift over the last six months, people are starting to seriously considering including email notices in and just grasping the nettle in recognising the need to do that.
So I think email notices in contracts are coming. I am seeing a significant minority of new contracts I am drafting now has it in and I think that will probably grow to a majority over the next 12 months or so. What do you need to think about if you are going to go with email signatures? Well the first thing you need to think about is internal authority levels on people giving contractual notices. One of the nice things of having to be hard copy letter notices with wet ink signatures is it usually made the person signing it a pause for thought, should I be signing this? Should I be sending it? Or should I be actually getting a director to authorise me to do that because this is obviously a big cheese moment. But with emails people sort of seem to disengage any kind of restraints and just email out and say all kinds of things which they may then live to regret. So reminding people of real authority levels and what they ought to think about before issuing a contractual notice is a really important part of this.
You need to obviously have an email inbox but it should not be that of an individual it should not be david.lowe@gowlingwlg.com, because if I leave Gowling WLG nobody is going to check my email inbox, at least not after a couple months. And a contractual notice could arrive, being validly served, but the person receiving it did not even know it had arrived.
So do not do it to an individual, have something like cosec@gowlingwlg.com and put in place procedures to check the email inbox. Make sure that twice a day somebody is checking it and there is some record kept that it is done. Think about file sizes as well, because there is no point to agreeing for email notices if the firewall is too restrictive. Consider whether you want a hard copy to be served as well. Emails are fine as long as you send me copy via the post. I hesitate to do that because it feels bonkers, but it might be step that can just help you transition over to this.
Finally please, please stop using faxes, well none of you use faxes but please stop using fax notice clauses! Many contracts I see still have fax as a possible means of notice and that is just going to cause a risk for you. Somebody might send you a fax and you do not even know and therefore you have been validly served with contractual notice. So just go through your company's standard templates and delete fax.
The other brief observation on electronic documents. With big transactions, big outsourcing transitions with large schedules and pricing schedules and schedules of pictures showing slides and complicated tables and so forth. They are usually in reality a hybrid document. Each element of that contract would be stored electronically, and I would print off all of those different components, maybe five or six different documents, excel spreadsheets, pictures and so forth and then stick it all together so it looks like one single document. As a paper document no one is none the wiser that there are actually lots of different documents there.
Now in COVID-19 world where printing off numerous documents and sticking it all together has become a lot harder, we have a choice. We either circulate final documents which are a patchwork of lots of different documents and word documents, Excel documents and so forth, or you can merge it all into one PDF. The problem with merging to PDF, as I have discovered frequently now is, it takes a long time to do it properly because trying to deal with all the formatting issues is painful and then once you have done it, it is quite difficult to change and you have to restart the whole process.
So completely electronic documents? I do not think actually we are quite there yet but making them really easy when we need to, and of course it is going to be a pre-curser to smart contracts where they automatically run to contract and measures the service levels and charges people automatically. Once you achieve that you need a single electronic document.
Corporate Insolvency and Governance Act 2020
Turning now to the new Insolvency Act, Jasvir has provided an overview on what this Act is, why it has come into force and the key changes in it. I am not going to go into any of that at all, though I do strongly recommend you acquaint yourself with her talk because it is a really useful scene set up. I am just going to concentrate on the two areas where it impacts on contracts. There are two areas, one is there is a new type of insolvency called moratorium and the second is around termination.
So dealing with the first issue moratorium. What this means is that in your contract where you have a long list of insolvency events, administration, liquidation all that kind of stuff, you need to add moratorium in there as well. Because otherwise somebody could go into a moratorium and from your point of view they're insolvent but your contract may not allow you to do anything about that. So update your definitions of insolvency events to include moratorium.
The biggie though for us with contracts is that, if a customer goes insolvent, the supplier will no longer be able to terminate a contract for goods or services. This is a concept that has been around a long time in many countries around the world, many countries around Europe had this concept, but we in the UK have not had this concept before. We in the UK have had it, if you have put in your contract I can terminate if you become insolvent, then that works and that has now changed. Now, key issue here, this is about customer insolvency not supplier insolvency. If I am a customer and my supplier goes bust this is not relevant you do not need to worry about this. This is only relevant where a customer goes bust and you are a supplier. It is also only relevant for contracts to supply of goods and services. So it does not apply for example to leases of property and there are certain exemptions from goods and services such as finance contracts.
So what it means is a supplier cannot terminate once their customer is insolvent. The law also says that, if a supplier had the right to terminate, does not exercise it, the customer goes bust, the supplier cannot then terminate post-insolvency for the pre-insolvency breach. So if the customer has failed to pay you and is therefore in breach of contract and you have not gotten around to terminating the contract then they go bust, you cannot then terminate because the law says you cannot, and in the notes underneath these slides you will see there are extracts from the legislation setting out the exact words.
The other difficult thing is, a supplier cannot do any other thing due to customer insolvency and nobody knows what that any other thing really means. Does that mean that a supplier cannot change their behaviour, the way in which they managed a contract? Does that mean that, if the customer breaches the contract, wrongly refuses to accept delivery for example but the supplier cannot terminate, is that due to the customer insolvency? Lots of big questions there.
You can terminate if you have the consent of the company or the insolvency office holder, but they are only going to give you that consent if they want to, if it suits them or you can go and get the Court to agree to you being able to terminate and that would require a continuation of contract with core supplier hardship. And again we do not know just what supplier hardship means until we have had some case law.
Bear in mind payments. Before the insolvency, then the money owed to you by the customer well you just become a creditor, no change there, once the customer becomes insolvent you will get so many pence in the pound once the insolvency is sorted out. So no change to that. However if you are supplying post-insolvency, then it is complicated and you will see in the notes in the explanation of how it works, but basically the expectation is that you should get paid for post-insolvency deliveries. So it is not the end of the world with your contract not being terminated because at least as it carries on you will get paid for the post-insolvency.
The challenge is that it means that you cannot refuse to supply until you are paid for the pre-insolvency money, which is what used to happen and that can no longer happen. So the tables have shifted in favour of the customer and the insolvent customer.
Lots of areas for dispute in this. That exemption for finance insurance, just exactly what does that mean? For example commodity contracts with maybe a floating charge in it is that possibly a derivative can you argue that to get it into an exemption so that you can terminate it. Is supplier terminating post-insolvency or something not to do with insolvency, I do not know the customer is in breach of contract because it fails to do certain things. To what extent can the supplier do that given that he cannot do any other thing relating to the insolvency? What happens if a supplier changes behaviour in how it manages a contract, is that allowed or not?
What about call-off contracts where there is a framework that says you can place orders and either the supplier has to accept, unless they have a good reason not to, what happens if the supplier does refuse to accept the call-off? What about call-offs where the supplier has the absolute discretion to accept or not, does it have to accept the call-offs post-insolvency? We do not know and that is going to require litigation. Then of course contracts are not simply contracts for goods and services. I deal with many complicated contract stretches where there is a more collaborative arrangement where there is goods going back and forth or there are guarantees and so forth. How do those work in this situation? Which none of us actually know and again unfortunately, we are going to have wait for some litigation.
So what do I suggest? Do keep your insolvency for termination clause in your contract. They might just work, the law might change, litigation might come along, it might just work so there is no harm in it being there but my suggestion is you do not change your boilerplate, just leave the insolvency clause in there. Do update the definition of insolvency events to refer to moratorium and also have a review of the clause, does it include some of the pre-insolvency triggers? Before the customer has become formally insolvent, you are entitled to terminate so if you have a trigger for pre-formal insolvency then you might be able to get out of it if you act quickly. And of course you must monitor the credit risk and act quickly. You of course will always be monitoring creditors but now it is even more important and it is even more important that you at least allow yourself to act quickly. We are also seeing in public sector contracts following Carillion, they introduced a financial monitoring clauses where the supplier has to tell the government if it has got any problems going on. Perhaps we will start seeing those leaking in to big set piece contracts where suppliers might be worried about the customer going bust and wants some kind of financial monitoring.
Case law update
Now I am going to turn to case law update. We have talked about COVID-19, force majeure, electronic documents, electronic signatures, we have talked about the Insolvency Act and now we are in the final act, which is the case law update. And as I have mentioned there are not too many cases, the law has not radically changed in the last 18 months so you can rest assured that your contracts, your way of thinking that you have developed over your years' experience has not been significantly altered by cases in the last 18 months.
So I am going to start first with economic duress, not least because we are starting to see a significant rise in this. This is where typically a supplier says, 'I am obliged to supply you, I have a contract to supply you, but I am going to refuse to supply you unless we can double the price because I know you have got nowhere to go. So, can we agree to a contract variation doubling the price otherwise you are not going to get the parts delivered to you tomorrow?' And usually this has happened because the supplier is sliding into difficult finances or may have strategically decided they want just do not want to be in this sector because it is too risky or whatever. So we are seeing quite a lot of that and it is a really difficult area. The law is that, if it is illegitimate pressure that has led to that, then that variation is void. So if the other party can show the economic duress after the event then you might be able to reverse the contract and get the premium back etc.
What is known by a legitimate pressure? Well a threat to breach a contract probably is, but not necessarily, and that is where you would need to talk to a litigator but, there is good chance breaching contract knowingly is going to be a legitimate pressure. Pakistan International Airlines was a case where the was no breach of contract. Pakistan International Airlines was fed up with some agents suing it for commission so it terminated its old travel agency contracts - and it was allowed to do that under its contract, it had a right to terminate if it wanted to - and it introduced new contracts. In the new contract they required the agents to waive their rights to commission. And if you did not sign up to that then they massively reduced the ticket allocation which, given that Pakistan Airlines was the main airline flying from UK to Pakistan, had a big impact on some travel agents.
So they all claimed economic duress. The courts had to decide whether or not Pakistani Airlines had used illegitimate pressure. On the one hand this did not look very nice behaviour just unilaterally terminating contracts and introducing these new contracts and waiving the commission claims, but on the other hand Pakistani Airlines had acted in accordance with the contract, it was allowed to terminate and it is entitled to put in contracts for whoever it wants. The High Court thought it was illegitimate pressure pointing to the lack of choice for the agents as there was no other big Pakistani airline they could switch to. However the Court of Appeal disagreed. The Court of Appeal said this might not be very nice behaviour but it is not illegitimate, there is no sign that Pakistani Airlines knew that it was not allowed to do this. It is allowed to do it under the contract and yes, there may well be a monopoly on these flights to Pakistan, but that is not for the Courts to deal with ultimately. So this means that if a party has acted in accordance with a contract it is less likely to be illegitimate pressure, less likely to be economic duress.
Turning now to remoteness, there has been a big case in the Privy Council. The Privy Council is the non-UK Supreme Court for Commonwealth jurisdictions and others and is attended by Supreme Court judges, so it is the equivalent of the Supreme Court. The case on remoteness is about where do you draw the line on damages on the breach of contract. A design and build contract of a water reclamation plant was contract one, and there was then a follow on contract to operating manager for 12 years. British Virgin Islands breached the contract and so the GWA, the supplier, was suing them for damages and wanted to claim for damages for the loss of profit on contract one, which had been breached and wrongly terminated, but they also wanted damages for the follow on contract. Could it claim those damages? The Supreme Court went back to basics as in Baxendale and said, is it in the reasonable contemplation of the parties? And after reviewing all the various case law and considering the facts, it concluded that it was in the reasonable contemplation of the parties. That if the first contract was breached and wrongly terminated then the consequence would be a loss of profit for the second contract as well.
So no surprises in that. Ultimately remoteness is a fact based assessment but the cases are a really useful summary of all the basic principles so if you are needing to get into I really recommend it as a good read.
Good faith. So we have been monitoring the good faith clauses for some years now you will recall that we had in the Yam Seng case Justice Leggatt introducing the concept of the potential to imply into a contract a duty to use good faith. A big debate about whether every contract has an implied duty to use good faith or only some and what you can do about it and so we have been monitoring that for some time. Most cases since then have considered it and then decided that in their particular contract there is no implied duty to use good faith but there has been a couple of cases, typically if Justice Leggatt is the judge on it, where the court have implied a duty to use good faith. So there is considerable uncertainty at the moment about when good faith gets implied and what it means.
So we had last year Bates and The Post Office. A bunch of sub-postmasters suing The Post Office to do with a failed accounting system and the Courts were asked to consider whether there is an implied duty to use good faith. The judge in that case decided that as it is a relational contract, relational contract is the word lifted from Justice Leggatt and Yam Seng, that this contract therefore had an implied duty to use good faith. And the judge said there are nine factors to support that implied duty and here are five of them and here is the remaining four of them. So there are quite a few of them and no express term, long term and then loads of other words about collaboration and trusting confidence and all that kind of stuff.
So it is not that helpful to actually tell you whether your contract has implied duty of good faith or not. It certainty encourages though if your contract is a collaborative, joint venture certainly then there is a high risk that you have got an implied duty to use good faith. Now you can expressly exclude it, but of course that it quite a difficult call to put into your contract and express exclusion of the duty to use good faith. It does not exactly start off the relationship the right way. So you probably will not do that and you will probably cross your fingers and worry about it should there ever be any litigation and worry about what good faith means then.
There is that debate about what is good faith. It is more than honesty. The judge said not to behave in a way that would be regarded as commercially unacceptable by reasonable and honest people, whatever that means. I see a wide range of behaviours in contracts and disputes so I think it is difficult to work out what is commercially acceptable by reasonable and honest people. Is the way to see is this just an outlying case that we can all ignore or are we going to see more good faith cases? We are conscious that Justice Leggatt is now a Supreme Court Judge and so it would not surprise me that when he has the opportunity is that he may well introduce the concept of good faith in a Supreme Court judgement. And hopefully at that point we will get a bit more clarity.
Another big area that we touched on a few years ago was the Makdessi case on penalties which reviewed the law and significantly changed the law on penalties. That old law of general pre-estimate of loss was decided not to be necessarily required for something to an enforceable obligation. We should not call them penalties but if you call them something else and it is not totally outrageous then it will almost certainly be enforceable and we have been watching the cases since then, we reviewed them last June 2019 and very few cases where it was found to be unenforceable most cases were enforceable.
Here are three more cases where in each one the Courts have decided that the obligation is enforceable and they are quite a range as you can see. Liquidated damages, high interest rates, bad leaver provisions so quite a few cross section of all the typical different ways in which you see penalty clauses and in all of them the courts said they were enforceable. So broadly, as long as you are sensible you can do what you want.
Finally an issue close to my heart, Incoterms 2020. I am sure you have heard me go on about this and we have a new series of podcasts and supporting materials should you be as interested in Incoterms as I am, and many of you will remember that I was the level co-chair of the drafting group for Incoterms 2020. Incoterms 2020 deal with shipping terms like FOB, FCA, free carrier and delivery duty paid. They had their ten year review and were published in January 2020. There is no radical change but there are changes in the detail and we are seeing people starting to shift over to them. So it is a good time to review your usage of Incoterms and I have provided in the notes below the slides all of the various links to the materials we have if you are interested in that. And I suggest that actually now is also a really good time to review your Incoterms and your international freight delivery terms because of Brexit looming. It looks likely we are going to have a hard or no-deal Brexit, in which case understanding exactly who has responsibility for what crossing the UK border and the other countries boarders is going to be really important. And we are seeing people coming to us with difficult issues around responsibility for importer records, customs, VAT which if you are using Incoterm would be largely resolved so do review that.
It has been very good talking to you all this time. I am very much looking forward to seeing you all again in our offices for a physical event in the future, but I hope in the meantime this has been a useful commercial contract summary. Thank you.
Originally published by Gowling, October 2020
Read the original article on GowlingWLG.com
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