Welcome to our annual summary of 2021's top contract law cases from north and south of the border for Scots lawyers.

Liquidated damages

Triple Point Technology Inc. v. PTT Public Co Limited (Supreme Court)

The Supreme Court confirms that liquidated damages accrue in circumstances where work is never completed by a contractor

In Triple Point v. PTT, the Supreme Court resolved uncertainty over whether liquidated damages for delay were payable in respect of works which a supplier had not completed at the point of termination.

The Supreme Court reversed the Court of Appeal's decision, holding that "it is ordinarily to be expected that, unless the clause clearly provides otherwise, a liquidated damages clause will apply to any period of delay in completing the work up to, but not beyond, the date of termination of the contract".

The relevant clause provided that liquidated damages were payable "from the due date for delivery up to the date PTT accepts such work …". The Supreme Court found that the words "up to the date PTT accepts such work" were not a condition for the award of liquidated damages, rather they simply specified the date on which liquidated damages would stop accruing.  

Entitlement to liquidated damages is therefore not conditional on the contractor ultimately completing the work, in the absence of such drafting.

The lesson for contract drafters is to avoid any ambiguity by spelling out that liquidated damages accrue until the date of termination even if completion/acceptance does not occur.  

Onerous and unusual contract terms

Blu-Sky Solutions Limited v. Be Caring Limited (High Court) 

Green v. Petfre (Gibraltar) Limited t/a Betfred (High Court)

Phoenix Interior Design Limited v. Henley Homes Plc (High Court)

A warning to carefully consider how unusual and onerous clauses in standard terms are presented and signposted

In 2021, the courts repeatedly stressed that the more onerous or unusual a clause included in standard terms is, the more that needs to be done to bring the clause to the other party's attention in order for it to be incorporated into a contract. 

In Blu-Sky v. Be Caring, an onerous cancellation charge in a contract for the supply of a mobile network service was not validly incorporated. The cancellation terms were located, not in the contract which had been signed, but in a set of terms and conditions referred to in the document signed. The judge held that the reference in the signed document was sufficient to incorporate the terms in general, but not the onerous cancellation clause which was "cunningly concealed in the middle of a dense thicket which none but the most dedicated could have been expected to discover and extricate".

In Green v. Betfred, the court concluded that a clause in the standard terms applicable to an online betting game excluding liability in the event of a defect or malfunction did not form part of the contract. Users were required to acknowledge their acceptance of the terms and conditions by clicking a button on signing up for an account with Betfred. The judge considered the presentation and signposting of clauses within Betfred's terms and conditions, finding that: "The unhelpful, often iterative presentation in closely typed lower-case or numerous paragraphs of capital letters meant that the relevant clauses were buried in other materials." It was therefore unreasonable to have expected Mr Green to find and note the importance of the exclusion clause.

The presentation of unusual or onerous exclusion clauses also forms part of the "reasonableness test" in The Unfair Contract Terms Act 1977. In Phoenix v. Henley Homes, the court considered an exclusion clause in a contract for interior design services providing that the seller was under no liability under its warranty if the total price of the goods had not been paid by the due date for payment. The court concluded that this clause did not meet the UCTA reasonableness test. In considering whether the customer knew or ought reasonably to have known of the existence and extent of the exclusion clause, the judge found that: "This apparently unusual clause is tucked away in the undergrowth of the Standard Terms and Conditions without any particular highlighting of the consequences of even the slightest delay in payment." 

The message is clear – if unusual or onerous clauses are to be relied upon, they must be brought to the other contracting party's attention through appropriate methods such as clear signposting and/or visually highlighting the relevant terms.

Good faith

Dwyer (UK Franchising) Ltd v. Fredbar Ltd (High Court)

Van Oord UK Ltd v. Dragados UK Ltd (Inner House, Court of Session)

Scots law slowly embraces good faith in commercial contracts

Good faith in commercial contracts has been a hot topic in the English courts in recent years. Duties to act in good faith have been implied into certain agreements requiring a high degree of cooperation, trust and loyalty, often termed "relational contracts".  

Parties exercising a contractual discretion have also been found to be subject to a duty not to act in a manner that is arbitrary, capricious or irrational (often referred to as "the Braganza duty", having been established by the Supreme Court in the case of Braganza v. BP Shipping Limited in 2015). For example, in Dwyer v. Fredbar, the court held that a contractual right to declare a force majeure event in response to COVID-19 disruption must not be exercised arbitrarily, capriciously or irrationally. 

There has been little consideration of the role of good faith in Scots law in recent years which makes the Inner House's comments in Van Oord UK Ltd v. Dragados UK Ltd particularly interesting. This case concerned the correct interpretation of an NEC3 contract for the dredging of Nigg Bay, part of the Aberdeen Harbour expansion project. The court considered clause 10.1 of the NEC3 standard form, which contained a requirement to act "in a spirit of mutual trust and co-operation". In giving the opinion of the court, Lord Woolman commented that this clause "reflects and reinforces the general principle of good faith in contracts".

The recognition of a general principle of good faith in contracts by our appeal court is a notable development. It is likely to be explored and tested in coming years by litigating parties who have suffered loss as a result of what may be regarded as commercially unacceptable conduct by another contracting party. 

The other lesson from Van Oord is that the courts will give teeth to express contract terms containing good faith requirements such as a duty to act in a spirit of mutual trust and co-operation. In Lord Woolman's words, such terms are "not merely an avowal of aspiration".  

Frustration

Wilmington Trust SP Services (Dublin) Ltd v. Spicejet Ltd (High Court) 

Salam Air SAOC v. Latam Airlines Groups SA (High Court)

Bank of New York Mellon (International) Ltd v. Cine-UK Ltd & others (High Court)

Frustration is very unlikely to rescue contracting parties struggling to meet payment obligations as a result of the impact of COVID-19 restrictions

The doctrine of frustration brings a contract to an end where an event occurs after the formation of the contract, rendering the contract physically or commercially impossible to fulfil or making the obligation to perform radically different. The courts treat this as a high threshold to meet.

Recent decisions of the English courts illustrate how difficult it is to successfully argue frustration.

In Wilmington Trust v. Spicejet, a frustration claim in relation to the lease of aircraft was rejected. The court held that suspension of use of the aircraft (partly due to COVID-19 restrictions and partly due to a decision to ground particular models of aircraft following incidents) for approximately 10% of the lease term did not amount to frustration. 

Spicejet follows on from the case of Salam Air v. Latam Airlines where a claim that the lease of an aircraft was frustrated by the grounding of flights in response to COVID-19 was similarly rejected.  The court concluded that frustration did not occur because the purpose of the lease was simply to provide possession of the aircraft. There was no common purpose to operate the leased aircrafts commercially.

The court in Bank of New York Mellon v. Cine-UK considered the doctrine of frustration in the context of a claim by the landlords of commercial premises for payment of rent. The tenants adopted a creative argument that their leases had been "temporarily frustrated" due to COVID-19 restrictions, the effect of which was to excuse non-performance (the payment of rent) rather than bring the lease to an end. This argument was rejected, with the court concluding that there was no such thing as temporary frustration. 

Contract interpretation

Parks of Hamilton (Holdings) Ltd v. Scottish Football Association Ltd (Outer House, Court of Session)

Coal Pension Properties Limited v. Technip UK Limited (Outer House, Court of Session) 

The purposive approach to contract interpretation prevails in Scotland 

Our reviews of the top contract law cases of 2019 and 2020 highlighted the Inner House's promotion of a purposive approach to contract interpretation in Scotland, with commercial common sense playing a key role.  This approach has a notable difference in emphasis from the guidance of the Supreme Court and Court of Appeal in England, where the language used by the contract drafters is identified as the primary consideration.

The purposive approach is now well established in Scotland, with an example of its application seen in the Inner House's interpretation of the SFA's Articles of Association in Parks of Hamilton v. SFA. The Lord President summed up the correct approach to contract interpretation as being "a contract must be construed objectively, contextually, purposively, and in a manner which accords with commercial common sense".

We also reported last year that Outer House commercial judges appeared to view commercial common sense as having a more restricted role than that promoted by the Inner House. Adoption of the purposive approach is now filtering through to the first instance courts. In Coal Pension Properties Limited v. Technip UK Limited, Lord Tyre followed the Inner House's guidance in stating that the court should adopt a purposive approach in interpreting provisions in a lease, having regard to the "fundamental objectives that reasonable persons in the parties' position would have had in mind", as well as commercial common sense.

The challenge with such statements is that, when disputes arise, it becomes difficult for lawyers to predict whether the actual language selected by the parties will be regarded by a court as providing the primary indicator of a contract's meaning; or other factors such as the overall purpose of the contract and commercial common sense.  

Mandatory ADR terms 

Fraserburgh Harbour Commissioners v. McLaughlin & Harvey Limited (Inner House, Court of Session)

Greater Glasgow Health Board v. Multiplex Construction Europe Ltd (Outer House, Court of Session)

Mandatory dispute resolution provisions requiring adjudication or arbitration do not prohibit commencing court action to avoid the prescription of claims 

In the Inner House case of Fraserburgh Harbour Commissioners v. McLaughlin & Harvey Limited and the Outer House case of Greater Glasgow Health Board v. Multiplex Construction Europe Limited, the courts confirmed that contractual terms requiring disputes to be determined by way of adjudication or arbitration do not entirely preclude the courts' jurisdiction.

A court action may be commenced to prevent the operation of prescription or in order to secure diligence on the dependence of an action. The appropriate course of action would then be for the court action to be sisted pending conclusion of the adjudication or arbitration process.