This document provides you with a collection of cases and analyses containing concise and practical guidance on recent legal developments affecting commercial contracts.
Collection list
Collection 1: Better ways to draft This collection contains invaluable guidance from the courts on the drafting of some key terms in commercial contracts, from the recitals to the termination provisions. The decisions may also help identify potential gaps in existing contracts. Pages: 3 - 15 Collection 2: Development in the law These are some of the latest decisions that anyone advising on commercial matters in the UK should be familiar with. Pages: 17 - 37 Collection 3: Old issues/New insights Contract formation, retention of title and other "basics" may be the essentials of law school, but they have each been revisited and merit a fresh look. Pages: 39 - 47 Collection 4: Relationships Whether by government regulation or the common law, certain commercial relationships bring with them implied terms and responsibilities. Any party entering into one of these relationships, such as a joint venture or agency, needs to do so fully informed. Pages: 49 - 67
The Commercial team at Charles Russell Speechlys likes to share. There are few better things to share than knowledge, so we are proud to introduce the second edition of `The Book of Commercial Awareness'. The formula remains the same, with the intention of providing you with practical commercial contract information, in one point of reference, based on the recent most interesting judicial decisions.
But being interesting is not enough. Our focus continues to be on developments which have an impact on the drafting, negotiation and interpretation of commercial contracts. The Book pulls together, in a simple and digestible way, the outcomes of key cases that will have an impact on what you do. Some pieces have been carried forward and updated from the first edition but most items are new. We detail the background issues, what's new in the cases and the practical impact of the decisions. We hope you both enjoy the guide and find it useful. If you feel like giving us feedback then we'd be happy to hear.
David Berry Partner, Commercial team Charles Russell Speechlys
Collection 1: Better ways to draft
Interpretation of Contracts: Page: 4 - 5 Contractual Termination for Material Breach: Page: 6 - 7 Common Law Termination for Repudiatory Breach: Page: 8 - 9 Entire Agreement Clauses: Page: 10 - 11 Penalties: Page: 12 - 13 Governing Law in Consumer Contracts: Page: 14 - 15
Collection 1: Better ways to draft
Interpretation of Contracts
Be aware, nothing beats a well-crafted and clearly drafted contract
Interpretation of Contracts
Business common sense test and contractual ambiguity since Arnold v Britton [2015] UKSC 36
The issue In Arnold v Britton, the Supreme Court provided us with clarification of the correct approach to contractual interpretation. The issue dealt with in Arnold v Britton was whether, in the case of unambiguous wording, there was still room for the business common sense approach.
Arnold v Britton is consistent with and builds upon the earlier landmark case on interpretation, Rainy Sky SA v Kookmin Bank [2011] UKSC 50, reiterating that where there is no ambiguity in the contract, the principle of business common sense should not be applied and the court must give effect to the words used by the parties to express their intentions.
What's new? Arnold v Britton was concerned with the interpretation of an express term for the calculation of service charge contributions. Of the 91 chalets in a caravan park, 21 were subject to 99 year leases containing covenants by the lessee to pay a 90 service charge in the first year, rising by 10% each year thereafter.
In this case, commercial common sense was not a relevant consideration as the majority of the court were of the view that the natural meaning of the clause was clear (although there was a dissenting judgment that there was some ambiguity). The court were not prepared to set aside the clause and invoke commercial common sense retrospectively, even though this resulted in an alarming increase in the service charge for the tenants.
The court highlighted that it was not its function to relieve a party from such disastrous consequences, particularly if doing so departed from the natural meaning of the clause. The case confirmed that the subjective intention of the parties was not relevant for the purposes of interpretation. The test is objective, namely what the parties have agreed constitutes the agreement not what the court thinks they should have agreed.
Subsequently, the case of Transocean Drilling UK Ltd v Providence Resources plc [2016] EWCA Civ 372 has applied the principles of Arnold and confirmed that the starting point should be the language used in the clause itself, in this instance a mutual indemnity clause between parties of equal bargaining power concerning consequential losses.
The Court of Appeal refused to apply restrictive principles of interpretation (as had often been applied in the case of exclusion clauses). The court also rejected various other rules of interpretation, such as the contra proferentem rule, as it was stated that these should only be used when the language was ambiguous. The court pointed to and upheld the clear and plain intention of the parties as set out in the language chosen. The Court of Appeal reiterated that, even if an agreement seems imprudent, the court will respect the principle of freedom of contract by giving effect to the parties' agreement.
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Collection 1: Better ways to draft
Interpretation of Contracts
These cases show that while the court is still inclined to use available methods of interpretation it will only do so when the wording of a contract is genuinely ambiguous and, even then, the narrowest interpretation possible is favoured"
The law in Rainy Sky in respect of ambiguous wording remains good, namely that where words in a contract are ambiguous and more than one meaning of wording is possible, the construction which most accords with business common sense should prevail.
There has been other recent case law setting out the approach taken in instances when the contract wording is evidently not clear.
In NarandasGirdhar v Bradstock [2016] EWCA Civ 88, the Court of Appeal ruled that it was permissible to take into account deleted words of a contract to interpret the remaining ambiguous words provided that "the fact of deletion showed what it was the parties had agreed that they did not agree". The Court of Appeal did, however, warn that the deleted words, and any inferences drawn from them, would have to be used with care. This case also highlighted, in a similar vein to Arnold v Britton, that if the retained words were at the outset unambiguous, reference to the deletion was unnecessary.
In another case, Nobahar-Cookson & Ors v The Hut Group Ltd [2016] EWCA Civ 128, the Court of Appeal had to determine what the ambiguous phrase "becoming aware of the matter" meant in the context of a contractual limitation period under a share purchase agreement warranty. Briggs LJ favoured the "natural meaning of language" approach in Arnold v Britton as a starting point, but did not think the clause was sufficiently clear in this instance to preclude consideration of commercial common sense or other interpretations. The court resolved the "undoubted ambiguities" of the exclusion clause by adopting the narrowest of available interpretations. It did so on the basis that a linguistic, contextual, purposive and common-sense analysis of the disputed clause did not resolve the issues with sufficient clarity.
These cases show that while the court is still inclined to use available methods of interpretation it will only do so when the wording of a contract is genuinely ambiguous and, even then, the narrowest interpretation possible is favoured.
In practice These recent cases emphasise the weight of importance a court will give to a literal interpretation of the words used by the parties and a reluctance to apply other methods of interpretation in instances where the contract is unambiguous. Parties should be wary of relying on a business common sense construction of a relevant clause as this method of interpretation will only be relevant where there is more than one potential meaning.
As ever, the objective should be for contract wording which is unequivocal and unambiguous in the first place. Parties to a contract should ensure they say exactly what they mean. The implications of certain drafting should be considered from the outset when the contract is being negotiated.
Even the possible "get out of jail free card" for genuinely ambiguous clauses has been kerbed as cases such as NobaharCookson show that the court will use methods of interpretation in a restrictive fashion.
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Collection 1: Better ways to draft
Contractual Termination for Material Breach
Contractual Termination for Material Breach
Be aware of the need for business common sense when considering contract termination rights
It is inconceivable that by speaking of a `breach of a material term' rather than `a material breach of a term' the parties intended to innovate on the common law that a contracting party needs a substantial or material breach of a contract by the other party before he can terminate the agreement...If parties were seeking so to innovate they would have chosen much clearer words"
Material breach and breach of a material term compared (Soccer Savings (Scotland) Ltd v Scottish Building Society [2013] ScotCS CSOH 51)
The issue An express right to terminate in the event of the other party's breach of contract is a standard contractual provision. But the terms in which it is expressed can be wide ranging and open to interpretation as to the type of breach which will justify termination. One such example of variable terminology is the use of the phrase "breach of any material term of contract" in place of the more typical "material breach of contract". Is there any significance to this distinction?
What's new? We still await a definitive interpretation by the English courts of the difference between these two phrases. However, the Outer Court of the Scottish Court of Session (broadly equivalent to the Court of Appeal) in Soccer Savings has recently held that "breach of any material term" ought to be equated with material breach. In a common sense decision, the court concluded that "it is inconceivable that by speaking of a `breach of a material term' rather than `a material breach of a term' the parties intended to innovate on the common law that a contracting party needs a substantial or material breach of a contract by the other party before he can terminate the agreement...If parties were seeking so to innovate they would have chosen much clearer words."
It seems, therefore, that in the absence of very clear wording to the contrary, the courts will not seek to identify material or significant clauses which, if breached in even the most minor fashion, would create a termination right. Of more interest than the specifics of the wording considered was the reminder by the court of the circumstances under English law in which a party may terminate a contract. Even in the absence of an express requirement of materiality, a minor or inconsequential breach will not be sufficient grounds to terminate a contract unless the parties have clearly and unequivocally stated their intention that it should be.
On such rationale, a vessel owner could not withdraw his vessel from a charter-party for "any breach" (even though the contract provided for him to be able to do so) (The Antaios [1981] AC 191); nor could a council terminate the appointment of a maintenance contractor for any breach of contract (again despite express contract wording granting a right of termination for breach without the qualification of materiality) (Rice (t/a The Garden Guardian) v Great Yarmouth Borough Council [2000] WL 823961). Instead, the breach has to be repudiatory in other words, sufficiently serious to entitle the innocent party to bring the agreement to an end. This position flows from English law's principle of business common sense (see also the discussion of the Arnold v Britton in "Interpretation of Contracts" case on page 4, for the limitation of this principle).
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Collection 1: Better ways to draft
Contractual Termination for Material Breach
Case law points to the fact that whatever phrase is used, unless specifically stated otherwise, there is no right of termination where a breach is minor and insignificant"
Applied in this context, it would give rise to considerable uncertainty if a party were entitled to terminate an agreement on the basis that the other party committed any breach, however minor, of any term. Business common sense dictates that this could not have been the intention of the parties.
When you add to the mix of phrases identified above, "substantial breach", "serious breach" or "repudiatory breach" as commonly used terms, it can easily be seen why the courts are often asked to consider this issue and why parties can be left confused as to their rights. There is no authority to say that the terms are interchangeable but, in our summation, case law points to the fact that whatever phrase is used, unless specifically stated otherwise, there is no right of termination where a breach is minor and insignificant.
There is a threshold of materiality, whether expressly required or not, to allow a party to walk away from a contract. Note however, the discussion of Monde Petroleum in "Is there an Obligation of Good Faith?" on page 50, where the court refused to imply a term that an express contractual right to terminate would be exercised in good faith.
In practice Despite what has been said above, there may well in practice be subtle differences between the choice of terminology. In applying the law to the facts, it is quite possible (perhaps even likely) that a court would decide that the threshold for termination for "any breach" of contract is not identical to that for termination for "any material breach of contract". While an element of significance would be required in each case, more might well be required in the latter case.
The determining factor will always be circumstances. Consider the nature of the contract, the likely circumstances of breach and the potential impact. While the consequences should not strictly colour interpretation, case law suggests that it does. Therefore, it pays to carry out a full assessment of the factual background if you are proposing to terminate for breach or are on the receiving end of a termination notice.
When drafting, we prefer the term "material" breach to "breach of a material term", "substantial breach" or "serious breach". It is a recognised term which has been considered by the courts and should be used in preference to other terminology.
If you really do want a contract to terminate for something immaterial or insignificant, then you will need to say so unequivocally. A simple statement to that effect, for example that a party has a right to terminate for any breach of contract, whether material or immaterial, significant or insignificant, would indicate that intent.
It is also recommended to list out specific clauses which give rise to a right of termination of contract so it is not left to the court to try and second guess which clauses were material or important to the parties and therefore capable of creating termination rights.
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Collection 1: Better ways to draft
Common Law Termination for Repudiatory Breach
Common Law Termination for Repudiatory Breach
Be aware - the complications of repudiation Mr Justice Tear rejected Vinergy's assertion that a contractual termination procedure should always apply where a party is exercising a common law right to terminate"
Two recent cases: Vinergy International (PVT) Ltd v Richmond Mercantile Ltd FZC [2016] EWHC 525 (Comm) and MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789
The issue A party to a contract may, at common law, terminate the contract following a repudiatory breach. A breach will usually be repudiatory if it is a breach of a condition of a contract, or the breach of a term depriving the terminating party of substantially the whole benefit of the contract. Valilas v Valdet Januzaj [2014] EWCA Civ 436 and Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS [2016] EWCA Civ 982 provide recent guidance as to what can amount to a repudiatory breach. Both cases show that failure to make a payment when due does not necessarily amount to a repudiatory breach.
What's new? Following on from the issue of what amounts to a repudiatory breach, two recent cases have explored the rights of and restrictions on an innocent party following a repudiatory breach.
In the first, Vinergy, the High Court considered whether an innocent party must follow the contract's termination provisions, and give the defaulting party notice and an opportunity to remedy a breach, when seeking to rely on its common law right to terminate for the defaulting party's repudiatory breach.
The contractual termination right arose when a party had failed to observe "any of the terms" of the agreement and then failed to remedy that failure within the notice period (not less than 20 days). Richmond had terminated without giving such notice. Mr Justice Tear rejected Vinergy's assertion that a contractual termination procedure should always apply where a party is exercising a common law right to terminate. As the clause gave a right to terminate which was not dependent upon Vinergy having committed a repudiatory breach, then it would have to be implied that Richmond was required to follow the contractual termination procedure, whether pursuant to that clause or pursuant to the common law. However, it was held that it is a matter of construction as to whether such contractual procedure should be followed in relation to the breach in question. Here the judge could see no grounds to imply that requirement. In this case, the termination clause in the contract only applied to remediable breaches, and the breach in question (failure to observe an exclusive purchase obligation) was held to be irremediable, and therefore outside of the scope of the clause. In the second case, MSC v Cottonex, the Court of Appeal held that an innocent party did not have the right to affirm a contract following the other party's repudiatory breach, where such breach had rendered the defaulting party unable to continue perform the contract.
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Collection 1: Better ways to draft
Common Law Termination for Repudiatory Breach
If you want a contract's termination provisions to apply in all circumstances, including the exercise of a common law right to terminate for repudiation, then deal with that expressly in the contract"
Cottonex's repudiatory breach gave MSC the right to liquidated damages, and accordingly, MSC sought to affirm the contract notwithstanding the breach, in order to continue to enforce this right.
However, it was held that as Cottonex was unable (rather than unwilling) to perform the contract, the purpose of the contract had been frustrated and accordingly could not be affirmed.
The question of whether MSC had a legitimate interest in keeping the contract open for performance did not need to be considered as this would only be relevant where the defaulting party were refusing to perform out of choice.
In practice Extreme care should be taken when considering relying on the common law right to terminate a contract for repudiatory breach.
As Vinergy illustrates, in certain circumstances it is possible to terminate for repudiatory breach without following a notice and cure process under the contract. However, it must be better to deal with this expressly, rather than risk an argument about what is or is not implied. If you want a contract's termination provisions to apply in all circumstances, including the exercise of a common law right to terminate for repudiation, then deal with that expressly in the contract. Likewise, exclude the common law right if you want to keep it outside of the contractual termination process.
In addition, when drafting a commercial agreement, express termination rights for material and/or persistent breaches should be included. This will provide a party with the option to rely on clearly drafted clauses allowing for termination in circumstances which do not necessarily amount to a repudiatory breach.
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Collection 1: Better ways to draft
Entire Agreement Clauses
Be aware, a reminder on warranties and representations
Entire Agreement Clauses
The High Court considers whether a warranty was also a representation in Idemitsu Kosan Co Ltd v Sumitomo Co Corp [2016] EWHC 1909 (Comm)
In Idemitsu Kosan v Sumitomo the High Court considered that express warranties in a share purchase agreement were not capable of founding an action for misrepresentation. This case serves as a reminder of the consequences of a warranty also amounting to a representation and highlights the significance of an entire agreement clause in this context.
The issue Following the decision in Sycamore Bidco Limited v Breslin [2012] EWHC 3443 (Ch), there was some uncertainty as to whether it is possible for warranties in an SPA, which are expressed solely to be warranties, to also amount to representations that are capable of founding an action for misrepresentation. This was due to conflicting positions taken by the respective judges in Sycamore v Breslin and Invertec Ltd v De Mol Holding BV [2009] EWHC 2471 (Ch) which were based on similar facts.
We often see express drafting along the lines of "the seller warrants and represents that ...etc.". Although this drafting is not necessarily conclusive that the warranties do indeed also amount to representations, as this will also be based on the facts of a given case, what is the significance if they do? A warranty amounts to a contractual promise, or rather a term of the agreement between the parties. Breach of a contractual term will give rise to a claim for breach of contract, the remedy for which is damages.
The measure of damages in this context is that the damages should (so far as a monetary award can do it) place the buyer in the same position as if the contract had been performed in accordance with its terms. The limitation of remoteness will apply, which is in essence a test of foreseeability of any loss suffered, as set out in Hadley v Baxendale [1854] 9 Exch 341. If the breach is repudiatory, it may also give the buyer the right to terminate the contract.
A representation is normally a precontractual statement of fact or opinion (although a representation may also be repeated in the contract), which if false and relied on by the buyer, may entitle the buyer to a claim for misrepresentation under the Misrepresentation Act 1967. Generally the remedy for negligent or innocent misrepresentation is damages and/or rescission of the contract - that is, it will be undone and the parties restored to their pre-contract positions. In practice damages are often awarded in lieu of rescission, assessed to achieve the same result in monetary terms. The damages may cover losses arising from the contract (subject to foreseeability, including loss of opportunity but not loss of bargin) and also the expenses of entering into the contract. The test of foreseeability does not apply in the context of the tort of deceit, where there is a fraudulent misrepresentation. It will be a question of fact as to whether it will be a more advantageous measure of damages to seek to replicate unwinding the contract (the tortious measure under the Misrepresentation Act 1967), or put the buyer in the same position he would have been in if the contract had been performed in accordance with its terms (a cause of action in contract).
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Collection 1: Better ways to draft
Entire Agreement Clauses
When acting for a buyer it will often be advantageous to draft on the basis that the warranties given by the seller are also representations, in an attempt to give the buyer parallel remedies in both contract and the tort of misrepresentation"
What's new? In Idemitsu Kosan v Sumitomo, the buyer asserted that, despite the fact that the warranties were not expressly stated to be representations, by providing, offering to sign or signing the execution copy of the SPA, the Seller made pre-contractual representations to the Buyer in the terms of the statements of fact contained in the warranties and therefore the warranties in the agreement were actionable as misrepresentations.
The court accepted that, subject to the facts of any given case, in principle it was possible for the communication of a negotiating position or draft contract to amount to a pre-contractual representation. However, it would be incorrect to construe a warranty schedule as if it had an existence independent of its function in the execution copy of the SPA. On the facts, the Seller's provision of the SPA for execution communicated nothing more than a willingness to give a certain set of contractual warranties in a concluded contract.
Helpfully the court held that in any event the entire agreement clause excluded recourse to any arguments that any actionable representations had been made, however and whenever allegedly made.
This mirrors lessons learned about the effect of entire agreement clauses in Matchbet Limited v Openbet Retail Limited [2013] EWHC 3067 (Ch), where Mr Justice Henderson stated that the result of the use of an entire agreement clause was that "the parties could hardly have made it more clear that their contractual relationship was henceforth to be governed by the terms of the [agreement] alone". It should be also noted that the "exclusionary rule" (as affirmed by the House of Lords in Chartbrook Limited v Persimmon Homes Limited [2009] UKHL 38 1 AC 1101) means that the process of negotiation leading up to an agreement is excluded from the factual matrix of admissible background material. However, tight drafting is still required to accurately and comprehensively set out the positions agreed throughout negotiation.
In practice When acting for a buyer it will often be advantageous to draft on the basis that the warranties given by the seller are also representations, in an attempt to give the buyer parallel remedies in both contract and the tort of misrepresentation.
The Idemitsu Kosan v Sumitomo case highlights the benefit of including a full entire agreement clause when acting for the seller. This should acknowledge that neither party has been induced to enter into the agreement by, nor has it relied upon, any representation, assurance or undertaking (whether in writing or not) save for those contained in the agreement, and that the only remedy available to it in respect of the subject matter of the agreement shall be for breach of contract. Any representation language should also be removed from the agreement.
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Collection 1: Better ways to draft
Penalties
Penalties
Be aware, a charge may not be a pre-estimate of loss, but that alone does not make it a penalty
Supreme Court clarifies rule on penalties in Cavendish Square Holding BV v Talal El Makdessi (Cavendish); ParkingEye Limited v Beavis (ParkingEye) [2015] UKSC 67
The issue Under English law it is an established principle that a clause which is deemed to be a penalty is unenforceable. Traditionally, the courts would decide whether a clause was a penalty by categorising the clause as either a liquidated damages clause (enforceable if it is a genuine pre-estimate of loss), or as a penalty (not enforceable) (Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1).
In Murray v Leisureplay Plc [2005] EWCA Civ 963 a majority of the Court of Appeal favoured the broader approach and asked whether the predominant function of the clause was to deter a party from breaching the contract (unenforceable as a penalty) or to compensate the innocent party for breach (enforceable).
What's new? In the conjoined appeals of Cavendish and ParkingEye the Supreme Court has provided some welcome clarity. The Court declined to abolish or extend the penalty rule. Instead, some underlying principle was needed to assist with its application in all but the simplest cases. The tests established in Dunlop may be perfectly adequate when construing straightforward liquidated damages clauses, but a broader test is needed in more complex cases. It is no longer accurate to assume that a clause that is not a genuine pre-estimate of loss is automatically unenforceable.
Cavendish concerned provisions of a share purchase and shareholder's agreement. They provided that if the seller was in breach of certain non-compete provisions he lost his entitlement to deferred consideration that would otherwise have been payable, as well as the benefit of an option to sell his shares at a price determined by reference to goodwill. Instead the purchaser could buy the remaining shares at a price based on the net asset value with no reference to goodwill. ParkingEye related to an 85 charge imposed for overstaying a two hour free parking period at a retail park. The Court unanimously allowed the appeal in Cavendish. First, it decided that the relevant provisions were primary obligations. The clause dealing with entitlement to deferred consideration was really a price adjustment clause. The clause which required Mr Makdessi to sell his shares at a value which excluded goodwill also reflected the reduced price which should be payable for the business if it could not count on his loyalty. Second, the clauses were justified by a legitimate interest in the observance of the restrictive covenant to protect the goodwill of the business. By a majority decision, the Court dismissed the appeal in ParkingEye, holding that, although the penalty rule applied to the parking charge, the charge was not an unenforceable penalty. ParkingEye had a legitimate interest (managing efficient use of the car park and making a profit from its service) in imposing the charge. The sum of 85 was not out of proportion to this interest. Cases in 2016 and early 2017 have referred to and upheld the principles laid down by Cavendish and ParkingEye.
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Collection 1: Better ways to draft
Penalties
The penalty rule is an interference with the freedom of contract and should only be exercised if the means by which the contracting party's conduct is to be influenced are "unconscionable" or "extravagant""
In Edgeworth Capital (Luxembourg) SARL and another v Ramblas Investments BV [2016] EWCA Civ 412 a borrower claimed that it was not liable to pay a fee to a lender under an "upside fee agreement". The Court of Appeal however found that a "payment event" had occurred which triggered the payment of a fee under the fee agreement. The question then was whether the provision for payment of the fee was unenforceable as a penalty. The Court of Appeal confirmed that the fee had nothing to do with damages for breach of contract as it was payable on the happening of a specified event. As such the fee did not fall foul of the rule against penalties.
In contrast, in Vivienne Westwood Ltd v Conduit Street Development Ltd [2017] EWHC 350 (Ch), the High Court considered termination of a side letter providing for a reduction of the rent payable under a lease. The termination provision provided that if the tenant breached any of the terms of the side letter or the lease a higher rent would be payable with retrospective effect. The Court considered that the provision of the side letter providing for a lower rent amounted to change in the primary obligation under the lease to pay the higher rate. However, to the extent that the side letter allowed the landlord to impose a greater obligation upon the happening of a breach, that amounted to a secondary obligation capable of being a penalty. In the circumstances, the Court found that the secondary obligation was penal in nature. The extra financial detriment to the tenant seemed exorbitant and unconscionable in comparison with any legitimate interest in full performance.
In practice (i) Primary and secondary obligations distinguished The Court confirmed that the penalty rules only apply in the case of an obligation that arises on a breach of contract a secondary obligation. A mere adjustment to the primary obligation should not engage the penalty rule. This was the case in Cavendish: removing goodwill from the value of the shares was an adjustment to the price that was already due to be paid (the primary obligation) prior to the breach of the restrictive covenants. In contrast, the imposition of an 85 charge in ParkingEye created a new secondary obligation to pay a sum of money on breach that was not previously due (parking was free for the first two hours). For this reason the Court considered the penalty rule to be engaged.
(ii) Significance of deterrence downgraded A clause that is not a pre-estimate of loss does not, without more, make it penal. It was perfectly possible for a clause to be commercially justified as a deterrent to breach and not be a penalty. In ParkingEye, for example, it was found to be in the interests of the public at large to deter individuals from overstaying the two hour free parking period.
(iii) Freedom of contract preserved The Court emphasised its desire to enforce negotiated contracts between properly advised parties of comparable bargaining power, and in such cases it will likely be assumed that the parties prescribed "legitimate" remedies for themselves in dealing with the consequences of breach. The penalty rule is an interference with the freedom of contract and should only be exercised if the means by which the contracting party's conduct is to be influenced are "unconscionable" or "extravagant".
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Collection 1: Better ways to draft
Governing Law in Consumer Contracts
Governing Law in Consumer Contracts
Be aware, terms that mislead consumers will be considered to be unfair
Governing law in consumer contracts in Verein fur Konsumenteninformation v Amazon EU Sarl (Case C191/15)
The issue The question before the Court of Justice of the European Union (CJEU) was whether a governing law clause in a supplier's standard terms of a contract concluded in the course of electronic commerce which states that the contract with a consumer in another member state is to be governed by the laws of the member state in which the supplier is established, will be unfair within the meaning of the Unfair Terms in Consumer Contracts Directive.
In Verein fur Konsumenteninformation v Amazon the CJEU was also asked to consider this issue of governing law where a supplier and consumer were based in different member states. The CJEU was asked to clarify whether the law applicable to an action for an injunction against use of allegedly unlawful terms to protect consumers should be determined by the Rome I or Rome II Regulations. In looking at this point the distinction between contractual and non-contractual obligations was very important as this determined whether Rome I (contractual) or Rome II (non-contractual/tortious) determines the governing law.
What's new? In this case, Amazon EU, based in Luxembourg, sold products electronically to consumers based in Austria, through a website called amazon.de. Its standard terms allowed Amazon EU to make use of consumers' personal data (as well as content provided by consumers, such as reviews) and stated that Luxembourg law applied to the contracts with consumers. The Austrian consumer protection body applied to the Austrian Court for an injunction to prevent use of these terms. The case reached the CJEU for a preliminary ruling. The Unfair Terms in Consumer Contracts Directive applies to contracts between a seller and a consumer. If a standard term which has not been negotiated causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer, such term will be considered unfair. The Directive contains a non-exhaustive list of terms which are potentially unfair and this includes terms which exclude or hinder the consumer's right to take legal action. The CJEU observed that EU legislation in principle allows choice of law terms. The Rome I Regulation specifies that parties may choose the law applicable to consumer contracts, provided that the protection is ensured which the consumer is afforded by provisions of the law of his country that cannot be derogated from by agreement.
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Collection 1: Better ways to draft
Governing Law in Consumer Contracts
A term in a supplier's standard terms with a consumer which holds that the law of the member state in which the supplier is established shall apply, is unfair insofar as it misleads the consumer into thinking that only the law of that member state applies"
As a result the CJEU held that a term in a supplier's standard terms with a consumer which holds that the law of the member state in which the supplier is established shall apply, is unfair insofar as it misleads the consumer into thinking that only the law of that member state applies, whereas under Rome I, the consumer will also be able to rely on the mandatory provisions of the law that would apply in the absence of an express term.
In relation to governing law, the CJEU considered that an action for an injunction under the Unfair Terms Directive related to a non-contractual obligation arising out of a tort/delict within the meaning of Rome II. It held that the law applicable to an action for an injunction to prevent the use of unfair contractual terms between an undertaking in a member state and a consumer in another member state must be determined by Article 6(1) of Rome II, which provides that the law applicable to a non-contractual obligation arising out of an act of unfair competition shall be the law of the country where the interests of consumers are, or are likely to be, affected, which in this case was Austria. However, the CJEU confirmed that the law applicable to an assessment of a specific contractual term must always be determined in accordance with Rome I. A distinction needed to be drawn for the purposes of determining governing law, between an assessment of the terms concerned, on the one hand, and the action for an injunction to prevent use of the terms, on the other hand.
In practice The decision means that companies who undertake cross border trading should check their standard choice of law clauses. It needs to be clear to consumers that they will enjoy the mandatory protection applicable in the country where they live despite a choice of law clause designating the law of a different member state. The CJEU was clear that it was necessary to inform consumers of mandatory statutory provisions and to do so in plain and intelligible language. The supplier will clearly need to do enough to ensure that consumers are not misled.
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Collection 2: Developments in the law
Illegal Transactions: Page: 18 - 19 Modern Slavery Act 2015: Page: 20 - 21 Test for Implied Terms: Page: 22 - 23 Signatures: Page: 24 - 25 Hyperlinking and Copyright Infringement: Page: 26 - 27 Website Blocking Orders: Page: 28 - 29 Liability for Copyright Infringement for those Offering Free Wi-Fi: Page: 30 - 31 New General Data Protection Regulations: Page: 32 Challenges to Data Transfer: Page: 33 Brexit: Page: 34 - 36
Collection 2: Developments in the Law
Illegal Transactions
Illegal Transactions
Be aware, a range of factors, rather than the reliance test, will apply when the courts now consider illegal transactions
Approach to illegal transactions in Patel v Mirza [2016] UKSC 42
The issue In 1775 Lord Mansfield in Holman v Johnson (1775) 1 Cowp 341 stated that "No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act". This doctrine can be used as a defence in a civil claim where the contract which is the subject of the claim is prohibited by a statute or where it was entered into for an illegal or immoral purpose. However, what on the surface looks to be a straightforward doctrine based on integrity and public policy considerations has caused, as Lord Toulson said in Patel v Mirza, "a good deal of uncertainty, complexity and sometimes inconsistency."
The reliance principle Much of this confusion stems from the nature in which the illegality doctrine has been applied in the form of what is known as the "reliance principle". The reliance principle was developed in Tinsley v Milligan [1994] 1 AC 340 where Lord Browne-Wilkinson stated that, whilst title to property can pass under an unlawful transaction; the court would not assist an owner to recover the property if he had to rely on his own illegality to prove his title. This principle was much criticised, in particular by the Law Commission, because it depended on how a case was pleaded and there was much confusion over what exactly amounted to "reliance".
What's new? In Patel v Mirza the Supreme Court reviewed the law on illegality, acknowledged the uncertainty in this area and sought to lay down a new "range of factors" approach. The facts of the case are simple - Mr Patel transferred 620,000 to Mr Mirza for the purpose of betting on the price of RBS shares, using insider information which Mr Mirza expected to obtain regarding an anticipated government announcement. This government announcement never materialised, and so the intended betting did not take place, but Mr Mirza failed to repay the money. Mr Patel brought a claim for the recovery of the money.
One key element of Mr Mirza's defence was based on the reliance principle in that the claimant, Mr Patel, had to rely on his own illegality to establish the claim and therefore it was unenforceable. The question at hand was whether a party to a contract tainted by illegality can recover money paid under the contract from the other party under the law of unjust enrichment? In short the answer is yes. A claimant, such as Mr Patel, who satisfies the ordinary requirements of a claim for unjust enrichment, should not be debarred from enforcing his claim by reason only of the fact that the money which he seeks to recover was paid for an unlawful purpose. In upholding Mr Patel's claim, the Supreme Court stated that the reliance principle laid down in Tinsley v Milligan should no longer be followed.
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Collection 2: Developments in the Law
Illegal Transactions
The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system"
Range of factors approach The Supreme Court stated that the essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, certain aspects of public morality). In assessing whether the public interest would be harmed in that way, it is necessary to consider:
l the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim
l any other relevant public policy on which the denial of the claim may have an impact
l whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. Potentially relevant factors include the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties' respective culpability.
In practice Patel v Mirza represents a comprehensive statement of the illegality defence which provides welcome clarity in this area. Whilst this will not affect the practitioner on a day to day basis the key take away message is that, unless a statute provides otherwise, property can pass and money can be recovered under a transaction which is illegal as a contract. However, this is not a hard and fast rule as the courts have significant discretion in this area and there are circumstances in which a court will refuse to lend its assistance. In Patel the Court gave the example of assisting a claimant in a drug trafficking operation as circumstances in which it would refuse to intervene.
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Collection 2: Developments in the Law
The Modern Slavery Act 2015
The Modern Slavery Act 2015
Be aware, that your company and its supply chain may have important obligations under the Modern Slavery Act 2015
Slavery and trafficking continue to be a scourge on society. Businesses are expected to do their bit in the fight against this problem, and face repercussions for not doing so.
The issue In March 2015, the Modern Slavery Act 2015 (MSA) entered into force. The MSA: (i) requires businesses who trade in the UK to publish an annual slavery and human trafficking statement, disclosing what steps they had taken during the financial year to ensure there was no slavery or trafficking present in their organisation or supply chain; (ii) consolidates the existing criminal offences relating to modern slavery and trafficking; and (iii) creates the office of slavery commissioner. The first commissioner is Kevin Hyland, a former senior officer with the Metropolitan Police. The MSA also contains provisions requiring co-operation with the Commissioner and his activities.
What's new? (i) The entry into force of the disclosure obligation. Section 54 of the MSA stipulates that any business which, in any financial year, operates in whole or in part in the UK and has a turnover of 36 million or more is required to publish a slavery and trafficking statement. The statement must be posted online in a prominent place on its homepage. If the organisation has no website, it must make the statement available on request to interested parties. The statement describes the steps the commercial organisation has taken during the financial year to ensure that slavery and human trafficking is not taking place in any of its supply chains, and in any part of its own business. The statement must be approved by the board of directors (or
equivalent management body) and signed off by a senior director, partner or officer of the organisation.
Currently, there is no financial penalty for failing to publish a statement when required to do so. However, inaction could leave the business in question open to enforcement action before the courts from the Government. As discussed below, the possibility of further sanctions is being discussed in the context of a Bill currently before Parliament.
Businesses have some discretion as to what to put in their statements. Section 54 suggests, however, that the following topics could be covered in the statement:
(a) a description of the organisation's structure, its business and its supply chains; (b) its policies in relation to slavery and human trafficking; (c) its due diligence processes in relation to slavery and human trafficking in its business and supply chains; (d) the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk; (e) its effectiveness in ensuring that slavery and human trafficking are not taking place in its business or supply chains, measured against such performance indicators (KPI's) as it considers appropriate; and (f) the training about slavery and human trafficking available to its staff.
The first businesses required to comply with Section 54 were those which had a financial year end on 31 March 2016. Since then, the number of statements online has grown steadily. However, these vary greatly in terms of format, substance and length.
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Collection 2: Developments in the Law
The Modern Slavery Act 2015
"Any business which, in any financial year, operates in whole or in part in the UK and has a turnover of 36 million or more is required to publish a slavery and trafficking statement"
(ii) The Modern Slavery (Transparency in Supply Chains) Bill (the TSC Bill) At the time of writing this proposed law (a private members' bill introduced by Baroness Young of Hornsey) wasawaiting its second reading in the House of Commons, having had three readings in the Lords. If enacted, the TSC Bill will introduce increased penalties for failure to comply with Section 54 and also enhance transparency as to whether or not businesses have complied. The TSC Bill would require the Home Office to maintain a list of all commercial organisations that are required to comply with the Act. Furthermore, organisations would need to publish statements in their annual accounts as well as on websites.
The TSC Bill expressly states that where a public body is conducting a procurement and is aware that an organisation has violated Section 54, that organisation must be excluded from the tender process. That step will be mandatory and Regulation 57(1) of the Public Contracts Regulations 2015 will be amended accordingly.
Finally, it is worth noting that the TSC Bill explicitly provides that Section 54 of the MSA applies to public bodies as well as commercial organisations. While the additional clarity is helpful, it is our view that Section 54 already applies to public bodies that have a turnover of 36 million or more from the provision of goods or services to the public. We note, for example, that a number of residential landlords (who provide housing services) have already published Section 54 statements.
In practice Notwithstanding the steady growth over the last year in the number of published statements under Section 54, NGOs have complained that the level of compliance is still unsatisfactory. To increase transparency, they have compiled a register of all published statements.
This frustration is justified. We note, for example, that even amongst law firms, a surprising number have failed to make disclosures when required to do so. This includes a number of the larger firms, some of whom have been advising their clients to comply with the MSA, while not getting their own house in order.
If organisations have not addressed their obligations under the MSA because of the lack of financial penalties, or for some other reason, the prospect of the TSC Bill becoming law should wake them up. No organisation of any standing should be prepared to ignore the existence or even possibility of existence, of slavery or human trafficking within its business structures or anywhere in its supply chain.
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Collection 2: Developments in the Law
Test for Implied Terms
Test for Implied Terms
Be aware, for a term to be implied in a commercial contract the term will need, amongst other things, to be necessary to give business efficacy to the contract or so obvious that 'it goes without saying'
Test for implied terms in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72
The issue Terms in a contract can be express or implied. Terms can be implied into a contract on the basis of: (i) the parties previous course of dealings; (ii) usage or custom; (iii) the common law; (iv) statute; and (v) fact, to reflect the intention of the parties. The focus here is where terms are implied by fact. The starting point is that where there is no express term in a contract which addresses a particular scenario the courts will not imply a term lightly. As Lord Hoffman explained in AG of Belize v Belize Telecom Ltd [2009] UKPC 10: "The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls."
Nevertheless, under certain circumstances terms can be implied by fact. Traditionally terms implied by fact are those which a court will include so as reflect the intention of the parties where such term:
l is necessary to give business efficacy to the contract (The Moorcock [1889] 14 PD 64) or
l is so obvious that, if an officious bystander suggested to the parties that they include it in the contract, "they would testily suppress him with a common 'oh of course' "(Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206).
However, in the Belize case Lord Hoffman considered these two traditional tests to be a restatement of the same principle. He held that these formulations were best regarded, not as a series of independent tests that must each be satisfied, but as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means. In his view "there is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?"
What's new? The Supreme Court in Marks and Spencer v BNP Paribas reviewed the previous case law and stated that the Belize case should not be interpreted as having changed the law on implied terms. Lord Neuberger considered that the principles in two earlier cases (namely BP Refinery (Westernpoint) Pty Limited v The President, Councillors and Ratepayers of Shire of Hastings (1977) 52 ALJR 20 and Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472) represent a clear, consistent and principled approach to when terms should be implied into a contract.
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Collection 2: Developments in the Law
Test for Implied Terms
"It is always difficult to show that a term should be implied into a commercial contract, for the reason that if the parties had agreed on it, the court would have expected it to have been in the contract"
He also made six additional comments in order to clarify how these cases should be interpreted. In general for a term to be implied, the following conditions (which may overlap) must be satisfied:
l it must be reasonable and equitable
l it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it. Necessity for business efficacy involves a value judgment. The test is not one of "absolute necessity" but rather whether without the term, the contract would lack commercial or practical coherence
l it must be so obvious that 'it goes without saying'
l it must be capable of clear expression and
l it must not contradict any express term of the contract.
A few further points to note:
l the second and third requirements can be alternatives in the sense that only one of them needs to be satisfied
l the implication of a term is not dependent on proof of the actual intention of the parties but rather but with that of notional reasonable people in the position of the parties at the time at which they were contracting and
l a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term.
In practice The Marks and Spencer case confirms that case law predating the Belize case should be applied when considering whether a term can be implied into a contract. As mentioned above, the term will need to be necessary to give business efficacy to the contract or so obvious that 'it goes without saying'. However, whatever test is applied, it is always difficult to show that a term should be implied into a commercial contract, for the reason that if the parties had agreed on it, the court would have expected it to have been in the contract.
One final question: can a well drafted entire agreement clause exclude terms implied by fact? Stanley Burnton LJ in Axa Sun Life Services plc v Campbell Martin Ltd and others [2011] EWCA Civ 133 found that terms which would otherwise be implied into the contract to give it business efficacy were not affected by a general exclusion of implied terms in an entire agreement clause. However, he did not go into detail on this issue. Therefore, if a party wants to exclude terms implied by fact, a prudent approach would be to have an exclusion included in a separate clause, rather than adding it to the entire agreement clause.
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Collection 2: Developments in the Law
Signatures
Signatures
Be aware, if you think a signature requires the use of a pen, think again!
A Sign of the times? Ramsay v Love [2015] EWHC 65 (Ch)
The issue Apart from temper tantrums and fine food, King John, Henry VII and Gordon Ramsay also have in common a place in the law relating to signatures. In Ramsey v Love the celebrity chef was bound by a lease "guarantee" (in fact an indemnity) to which his "signature" had been added by a "Ghostwriter" machine used by Ramsay's father-in law. In the same week, the Royal Mint was criticised for the "schoolboy error" of showing King John holding a quill to sign Magna Carta because, in reality, he "signed" by having the Great Seal affixed to the document. And Henry VIII? His "signature" was regularly impressed onto documents using the "dry stamp" which created an indented copy that could be filled in with ink. So what, in law, is a signature?
What's new? At its most straightforward, a signature is the manuscript addition of the party's name to a document to indicate agreement to, and willingness to be bound by, its terms. However, the court has ruled on the status of a range of "signatures" as standards of literacy have varied, and as new technologies have emerged. In 2001, the Law Commission concluded that the test is one of function, not form. The test is whether the method of signature fulfilled the function of a signature. The court has approved "signature" by stamping, printing, typewriting and other marks applied with an "authenticating intention".
In Ramsay v Love, Morgan J observed that if Ramsay had himself used the signature writing machine there would have been no doubt that the result was a "signature". The parties also accepted that if Ramsay's father-in-law had express authority to use the machine to create "Gordon" signatures on legal documents then the result would be valid signatures. The dispute was not about the form of signature, but rather about the authority of the person attaching it to a legal document. The Judge found that Mr Ramsay's father-in-law had full authority to bind the company and also extensive authority to act for Mr Ramsay personally. Crucially, he found that "Mr Ramsay's authority extended to making contracts on behalf of Mr Ramsay". The signature was valid. "Authenticating intention" also determined the validity and force of the royal signatures. King John authorised the affixing of the Great Seal to Magna Carta. A later King, James II, allegedly made a futile attempt to thwart royal business by discarding the Great Seal as he fled the country. His successor simply had a new one made to show the necessary "authenticating intention". Henry VIII authorised the use of the "dry stamp" to save himself the trouble of signing the daily mass of documents requiring attention. Instead, he would undertake a monthly check of the register of documents to which the "dry stamp" had been applied. One monthly signature confirmed his authority in relation to hundreds of documents.
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Collection 2: Developments in the Law
Signatures
I have no doubt that if a party creates and sends an electronically created document then he will be treated as having signed it to the same extent that he would in law be treated as having signed a hard copy of the same document"
In practice Following this logic, it ought to be the case that all contracts can be "signed" by any of the methods approved by the court for other purposes. For a number of years it seemed that property contracts would be an exception. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires a contract for the sale of land to be in writing and signed, In the 1995 Court of Appeal case of Firstpost Homes Ltd v Johnson [1995] 4 All ER 355 Lord Justice Peter Gibson took the view that "in modern English usage, when a document is required to be 'signed by' someone, that means that he must write his name with his own hand upon it". Property contracts, it seemed, required "wet" signatures.
However, the law has moved on since 1995. In J Pereira Fernandes v Mehta [2006] 2 All ER 891 the judge endorsed the views of the Law Commission: "I have no doubt that if a party creates and sends an electronically created document then he will be treated as having signed it to the same extent that he would in law be treated as having signed a hard copy of the same document."
The Fernandez case has also been used in a detailed statement of what The Law Society considers to be good practice in England and Wales (Practice Note 21 July 2016 "Execution of a document using an electronic signature"). By virtue of that case and because of the wide definition of what constitutes "writing", a contract executed using an electronic signature satisfies a statutory requirement to be in writing and/or signed. Accordingly this would apply equally to guarantees (Statute of Frauds 1677) and assignments of copyright (Copyright, Designs and Patents Act 1988) as it does to property contracts.
The Practice Note also considers the practical means of witnessing an electronic signature in the context of the execution of deeds. It concludes that best practice is for the witness to be physically present when the signatory signs (rather than through a video conference facility, for example). If the witness then signs the adjacent attestation clause (using an electronic signature or otherwise) that deed will have been validly executed.
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Collection 2: Developments in the Law
Hyperlinking and Copyright Infringement
Hyperlinking and Copyright Infringement
Be aware of when unauthorised hyperlinking to a copyright work might constitute infringement
Clarity over infringement through hyperlinking following GS Media v Sanoma Media Netherlands and Others (C160/15)
A recent decision by the CJEU in GS Media has brought welcome clarity on whether hyperlinking to a website containing works which are freely accessible online, but which have been posted without the rights holder's consent, amounts to copyright infringement.
The issue In the 2014 Svensson and Others (C466/12) case, the CJEU ruled that publication of hyperlinks to a freely available work was not copyright infringement. Whilst such hyperlinking constituted an act of communication it did not amount to "communication to the public" for the purposes of Article 3(1) of Copyright Directive 2001/29/EC. The decision left a question mark over whether the same result would follow if the rights holder had not consented to the initial online publication of their works.
Under the Directive, EU member states must provide authors with the exclusive right to authorise or prohibit any communication to the public of their works. As a result, where a hyperlink is deemed a communication to the public, it amounts to copyright infringement.
What's new? In GS Media, Sanoma (the publisher of Playboy magazine) commissioned a photo shoot of Brit Dekker, with the photos to be published in the December 2011 edition of Playboy. In October 2011 GS Media, which operates the Dutch news website Geenstijl, published a link to the photos.
Sanoma claimed GS Media had infringed its copyright and the case was ultimately brought to the CJEU by the Dutch Supreme Court for preliminary ruling. The CJEU was asked whether hyperlinking to a website containing works made freely available online amounted to copyright infringement where the rights holder had not given their consent to the initial publication. Furthermore, did it matter whether the person who published the hyperlink knew, or ought to have known, the rights holder had not consented?
The court referred to the Svensson and Bestwater (C-348/13) judgments and held that where a rights holder had already given consent to the initial online publication of its work to a freely available website (as in both Svensson and Bestwater), they have included all internet users as the relevant public. A hyperlink to that content is therefore not to a "new public" and does not constitute "communication to the public". It is not, however, inferred that the same conclusion will be drawn if no consent has been given.
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Collection 2: Developments in the Law
Hyperlinking and Copyright Infringement
Where the hyperlink is posted by a person who knew or ought reasonably to have known that the link related to an illegally published work, such hyperlinking would amount to a communication to the public"
The court went on to consider that where the hyperlink is posted by a person who knew or ought reasonably to have known that the link related to an illegally published work, such hyperlinking would amount to a communication to the public. Furthermore GS Media's "intervention" of hyperlinking, without which internet users would not have had access to the photos, should be construed in the same way and would amount to a communication to the public. Lastly, where the hyperlink was provided for profit, the court ruled that there is a rebuttable presumption that the poster of the link does so with full knowledge of the nature of the material it posts, and accordingly, the posting of the hyperlink would amount to a communication to the public.
However, in the case where a hyperlink is posted by a person not acting for profit, there is no act of communication if it is considered the person posting the hyperlink did not know, or could not reasonably have known, that the material had previously been published in breach of the author's copyright.
In practice Whilst GS Media is likely to lead to an increase in the number of take down notices and arguments over freedom of expression, the CJEU did distinguish between those ordinary, private, users who cannot reasonably be expected to perform detailed assessments of the content they are sharing with those who have (or ought to have) a degree of knowledge of what they are sharing (including those seeking to post material in pursuit of profit). With that in mind, those looking to publish links online, particularly in pursuit of profit, should exercise caution and ascertain whether those works are protected to avoid unwanted take down notices and potential copyright infringement action against them.
Ultimately, the decision gives rights holders a higher level of protection and control over their protected works in an online architecture designed to encourage sharing. It provides rights holders with greater comfort that Svensson and Bestwater will only apply where the works linked to have been made freely available with their consent, and, where their consent has not been given, they can more confidently pursue those publishing, and hyperlinking to, their works.
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Collection 2: Developments in the Law
Website Blocking Orders
Website Blocking Orders
Be aware, there is good news for trade mark owners as orders are available requiring ISPs to block access by their subscribers to websites selling counterfeit product
Cartier International AG & Ors v British Sky Broadcasting Ltd & Ors [2016] EWCA Civ 658 (06 July 2016)
The issue Internet Service Providers (ISPs) have invested in blocking systems which enable them to operate their services in such a way that requests by subscribers to access a particular site are not returned. Although there are ways to circumvent such blocks, evidence shows that they are relatively effective. For example, blocks have for some time been offered by ISPs to restrict access by children to certain materials on the internet. The technical ability to block access has also assisted UK Courts in granting orders forcing those who provide public access to the internet to block access to websites that infringe copyright. A well-known example being The Pirate Bay site. Such injunctions have been granted pursuant to S.97A of the Copyright Designs and Patents Act (CDPA) which implements certain aspects of the Information Society Directive.
Back in 2014, Richemont and its group companies, which own a number of luxury brands such as Cartier and Montblanc, sought a blocking injunction requiring the main ISPs to block access by customers to certain websites selling counterfeits on the basis of their trade mark rights. This was the first such injunction sought in respect of registered trade mark infringement. Moreover, there was no statutory equivalent in the UK trade mark legislation to S. 97A of the CPDA. Despite this Mr Justice Arnold granted the injunctions. BskyB and 4 other ISPs (together comprising all the main ISPs in the UK) appealed to the Court of Appeal.
What's new? In July 2016 the Court of Appeal upheld Mr Justice Arnold's decision. The Court commented that it is clear that times have moved on and the courts are ready to adapt to new practices in relation to injunctions where necessary and appropriate.
The first question was whether the Court had jurisdiction to make such an order. The Court confirmed that the ISPs themselves were not wrongdoers but considered that S.37 of the Senior Courts Act 1981 (which provides that the High Court may grant an injunction where just and convenient to do so) as interpreted in the light of Article 11 of the EU Enforcement Directive (which provides for injunctions to be granted against intermediaries in respect of infringement of IP rights) provided the Court with jurisdiction to grant injunctions of the type sought.
Such injunctions could only be granted if specific criteria are fulfilled. First, the ISPs must be intermediaries within the meaning of Article 11. Second, either the users or the operators of the website must be infringing the claimant's trade marks. Third, the users or the operators of the website must use the services of the ISPs. Fourth, the ISPs must have actual knowledge of this. The Court of Appeal concluded that all the conditions were satisfied in the present case (refusing to refer the question of use to the EU Court of Justice).
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Collection 2: Developments in the Law
Website Blocking Orders
The fact that the implementation costs are to be borne by the intermediary will be a highly material consideration in assessing the proportionality of any order that the rights holder may seek ... We wait to hear what the Supreme Court will say on the costs point"
Having concluded the Court had jurisdiction to grant an injunction the question was then if that discretionary power should be exercised. Seven requirements which must be satisfied were set out, namely the relief must (i) be necessary; (ii) be effective; (iii) be dissuasive; (iv) not be unnecessarily complicated or costly; (v) avoid barriers to legitimate trade; (vi) be fair and equitable and strike a "fair balance" between the applicable fundamental rights; and (vii) be proportionate. It was also necessary to consider two other matters: first, the substitutability of other websites for the target websites; and second, the requirement in Article 3(2) of the Enforcement Directive that remedies should be applied in such a manner as to provide safeguards against their abuse.
One of the most controversial issues was which party should bear the cost of implementation. It was accepted that generally the cost of an uncontested application should be met by the applicant (it is interesting to note that in the present case there was a costs order against the losing ISPs as the Court noted that they had certainly not acted in a neutral fashion spending over 620,000 in opposing the application). The Court of Appeal (with Lord Justice Briggs dissenting) confirmed that it should be the intermediary who should bear the cost of implementation (as opposed to the application). It did, however, emphasise that the fact that the implementation costs are to be borne by the intermediary will be a highly material consideration in assessing the proportionality of any order that the rights holder may seek.
The majority agreed that the cost of implementation (the cost of a single blocking order being modest) was a cost of doing business for the ISPs and a price for the immunity from infringement claims that intermediaries enjoy. However, it did not rule out the possibility that in another case an applicant may be asked to pay some or all of the cost. The Supreme Court has now granted permission to the appeal the point as to who should bear the cost of implementing the blocking injunctions.
In practice Whilst good news for brand owners, the issue of which party should bear the cost of implementation remains contentious. The Court of Appeal was clear that it is important that judges by whom such applications are heard consider very carefully the evidence before them as to the benefits that are likely to accrue from the order sought and that these benefits are weighed carefully against the costs that are likely to be incurred in implementing the order. Factors such as the ranking of websites in issue will be taken into account. Brand owners should therefore target key infringing sites in order to avoid adverse cost implications. We wait to see what the Supreme Court will say on the costs point.
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Collection 2: Developments in the Law
Liability for Copyright Infringement for those Offering Free Wi-Fi
Liability for Copyright Infringement for those Offering Free Wi-Fi
Be aware, just because you offer Wi-Fi for free, doesn't mean you're not going to pay for it
McFadden v Sony Entertainment Germany GmbH, Case C-484/14, 15 September 2016
The issue Are you running the risk of being sued by copyright owners if their works are abused over a free unsecured Wi-Fi service that you offer, even if it was done without your knowledge?
In short, the answer is yes. Mr McFadden runs a lighting and sound system shop offering customers unsecured access to a Wi-Fi network free of charge. Sony discovered that one of his customers had used the network to make an unlawful copy of a song from its catalogue available to the public and, instead of pursuing the unidentified individual, decided to sue Mr McFadden. Mr McFadden argued that he was exempt from liability, as he was a "mere conduit" of the services.
The law under discussion is the ECommerce Directive (2000/31/EC) (and the German law which transposed it). Generally speaking, information society service (ISS) providers are liable for information which is transmitted across their network. However, there is an exemption where the ISS provider is a "mere conduit", in that they did not (a) initiate the transmission; (b) select the receiver of the transmission; and (c) select or modify the information contained in the transmission.
To fall under the umbrella of ISS provider, you must offer a service at a distance, by electronic means at the recipient's individual request and where such service is normally provided for remuneration. The Court of Justice of the European Union (CJEU) had to determine whether providing a free Wi-Fi service amounted to an information society service and then whether the exemption of being a "mere conduit" would apply to the circumstances.
What's new? The CJEU confirmed that Mr McFadden's Wi-Fi service amounted to an information society service. This is despite the fact that it was given to his customers for free. Although no money changed hands, the purpose of the service, as far as Mr McFadden was concerned, was to draw customers into his shop and so to advertise his goods and services. The cost of that activity was "recouped" through the purchase price of those goods and services.
That being established, the CJEU went on to say that the "mere conduit" requirements were met in this case and so Sony was not entitled to claim compensation for the infringement from Mr McFadden. However, the CJEU did agree that Sony might be capable of obtaining an injunction against Mr McFadden to prevent the copyright infringement from taking place.
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Collection 2: Developments in the Law
Liability for Copyright Infringement for those Offering Free Wi-Fi
While there is no outright requirement for all Wi-Fi services to be password secured and users to be identified, those offering anonymous services should be aware of the risk of injunctions requiring them to change the service in this way"
Strictly speaking, this could take place in any way that McFadden may choose, but in reality, the only avenue that the CJEU could see to satisfy such a requirement would be to order Mr McFadden to secure his network by way of password and obtaining users' identities. This would have the effect of deterring network users from infringing intellectual property rights.
In practice This case offers some relief for providers of free Wi-Fi services to customers. There is now some clear guidance as to what measures should be taken to avoid potential liability for infringement by those users. While there is no outright requirement for all Wi-Fi services to be password secured and users to be identified, those offering anonymous services should be aware of the risk of injunctions requiring them to change the service in this way.
Many businesses have already introduced a requirement for a user to enter some personal information in order to access Wi-Fi (whether this is a requirement every time or the network uses metadata on devices to only require such action once).
The difficulty that some will face is that this can be off-putting because of the additional time requirements or a concern over security and use of data. While such practices are common in hotels where users have the time to complete forms and have already provided personal information to the hotel desk, providing the same personal information to gain Wi-Fi access is seen as no big deal. It may prove harder, however, for a shop or caf to continue to engage with its customers by offering free Wi-Fi and requiring proof of identity as these are, by their nature, quicker, on-the-go uses.
The Book of Commercial Awareness 2017 | 31
Collection 2: Developments in the Law
New General Data Protection Regulations
New General Data Protection Regulations
Be aware, the GDPR has new obligations and expanded enforcement powers PbDD essentially means that that data protection and privacy must be embedded from the outset and privacy must be the default setting, not something that needs to be switched on"
The issue Finally, after three years of discussions and negotiations, the EU General Data Protection Regulation (EU) 2016/679 (GDPR) was agreed in 2016. The intention is that the GDPR will replace the UK Data Protection Act 1998 and will apply in the UK from 25 May 2018. On 23 June 2016, the UK voted to leave the EU in a national referendum. The UK Parliament voted in favour of leaving the EU and on 29 March 2017 formal notice was given by the UK to the European Council. The official exit will take place within a maximum two year timeframe, however the UK government has strongly indicated that the UK will still implement GDPR.
What's new? Whilst the fundamental principles of data protection remain unchanged, the GDPR will expand the protection of data subjects and will place new obligations on organisations, including:
l mandatory breach notification obligations
l the obligation for certain organisations to appoint a Data Protection Officer
l statutory liability for data processors for the first time
l extensive contractual requirements for data processing agreements and
l mandatory data protection impact assessments in certain circumstances.
The concept of data protection by design and default (PbDD) is also enshrined in to the GDPR as a mandatory requirement for all systems, processes and applications that process personal data.
PbDD essentially means that that data protection and privacy must be embedded from the outset and privacy must be the default setting, not something that needs to be switched on. Data protection authorities will have increased enforcement powers, in particular they will be able to impose massive fines on non-compliant data controllers and data processors.
The level of fines will be tiered:
l for breaches regarding general obligations, such as record keeping, data processor relationships and data protection impact assessments, the relevant data protection authority may impose fines of up to the greater of EUR 10 million or 2% of the total worldwide annual turnover / revenue of the preceding financial year and
l for breaches regarding the fundamental data protection principles (including conditions for consent), data subjects' rights and international data transfers, the relevant data protection authority may impose fines of up to the greater of EUR 20 million or 4% of the total worldwide annual turnover / revenue of the preceding financial year.
In practice Whilst there is yet still time prior to implementation of the GDPR, the recommendation must be to use that time to conduct a `gap assessment' of your current level of data protection compliance against the new requirements of GDPR to help understand where you need to focus and prioritise efforts.
The Book of Commercial Awareness 2017 | 32
Collection 2: Developments in the Law
Challenges to Data Transfer
Challenges to Data Transfer
Be aware, will the EU Standard Contractual Clauses survive legal challenge?
This is not the first (and probably not the last) time that personal data transfers have been challenged, and given the importance of data flows for trade, a solution is bound to be found rather quickly"
The issue Since the fall of the Safe Harbor regime in October 2015, we have seen a rise in the popularity of the EU Standard Contractual Clauses (the SCCs) as an alternative mechanism to legitimise transfers of personal data from the EU to the US. Indeed, it has become standard practice for major US-based service providers to enclose a "data processing agreement", including the SCCs, in their service agreement packs for new clients, despite the fact that a new `Safe Harbor 2.0' known as the `Privacy Shield' was approved by the European Commission in the second half of 2016.
What's new? The SCCs, however, are now under threat and they are being challenged by the same arguments that brought down Safe Harbor. A judgment is expected from the Irish High Court in the coming weeks confirming whether it will ask the CJEU to rule on whether the SCC should be declared invalid (for the purposes of transferring data from the EU to the US). The last time the Irish High Court made such a reference, Safe Harbour fell 18 months later. Many businesses are looking for alternatives and considering whether the Privacy Shield may ensure compliance of their EU-US data flows.
To add to the uncertainty, an application for annulment of the Privacy Shield has been lodged with the Court of Justice of the European Union (the CJEU) on 16 September 2016 (Digital Rights Ireland v Commission Case T-670).
In practice The Privacy Shield may be a good way of reinforcing compliance of your organisation's EU-US data flows, but it may also be subject to significant changes over the next 12 months. Despite this complex issue, organisations should not panic. This is not the first (and probably not the last) time that personal data transfers have been challenged, and given the importance of data flows for trade, a solution is bound to be found rather quickly.
In addition, the UK is unique in that data controllers may also make their own assessment of adequacy to countries outside of the European Economic Area (EEA). Paragraph 13 of Schedule 1 of the Data Protection Act 1998 sets out factors to consider when assessing the adequacy of a non-EEA jurisdiction and the Information Commissioner's Office provides helpful guidance on how to make this assessment.
The Book of Commercial Awareness 2017 | 33
Collection 2: Developments in the Law
Brexit
Be aware, priorities for addressing the impact of Brexit on commercial contracts
Brexit
The issue On 29 March 2017 formal notice of the UK's exit from the EU under Article 50 was given by the UK to the European Council. However, the exact manner and timing of the UK's exit from the EU is currently unclear. Despite this uncertainty, businesses will benefit from thinking ahead on the possible implications from Brexit, and a key element of this is to consider how commercial contracts are affected. Here, the focus is on relevant concerns for contracts already in place as well as for upcoming contracts what are the provisions a contracting party should be looking for, and how can they best safeguard their position?
What's new? For some classes of contract, any risks relating to Brexit should be relatively low, for example, those which are minor in value or otherwise non-material, those which only involve UK parties and UK legislation, or those which have a term that will not last into 2019 or beyond (given that the UK's departure from the EU is not expected to occur until 2019 at the earliest). Conversely, there should be more caution regarding major and material contracts, longer term contracts, and contracts with a European or otherwise international dimension. For these contracts, the main points to consider will be as follows:
l Where there are references to the EU as a territory (for example, by establishing the EU as an area of exclusivity, or stating that data will not be transferred outside the EU), will the UK still be covered post-Brexit?
l Where there are references to EU legislation, could the effect of the contract be changed in some way postBrexit because of the changes in the law? At time of writing the Government has announced a `Great Repeal Bill' as part of the Brexit process, and part of its effect would be to convert applicable EU law into domestic law "wherever practical", which could mean a more gradual process of detaching. On the other hand, this automatic conversion could lead to some irregularities, and it is not clear which converted laws might be prime targets for being struck out or overhauled promptly after Brexit
l Is it feasible that one or both of the contracting parties might seek to rely on Brexit as a trigger for suspending performance of the contract or renegotiating it perhaps arguing that Brexit qualifies as force majeure, frustration or material adverse change?
l Is the cost-benefit status of the contract expected to change significantly in the new commercial and legislative landscape that develops after withdrawal from the EU? New burdens of cost, risk and compliance will most likely appear and they will have to be borne by one or both of the parties. This could make a contract much more onerous than initially expected
The Book of Commercial Awareness 2017 | 34
Collection 2: Developments in the Law
Brexit
There should be more caution regarding major and material contracts, longer term contracts, and contracts with a European or otherwise international dimension"
l In the event of a cross-border dispute, will being out of the EU mean additional difficulties with jurisdiction and enforcement? Currently the UK is subject to the Brussels Regime's rules on determining jurisdiction for disputes which bridge more than one country from the EU Member States and/or the European Free Trade Association states (Iceland, Liechtenstein, Norway and Switzerland), but one future effect of leaving the EU could be the Brussels Regime ceasing to be in place for the UK. If this happens, English courts should continue to respect foreign judgments and jurisdiction clauses, but it could cast doubt on whether a clause claiming English jurisdiction will be followed in the courts of every remaining member state, and on whether English court judgments would be fully enforceable in every remaining member state some member states will be more of a risk than others.
In practice 1.Territory If the contract mentions the EU as a region, confirm whether the relevant wording covers the member states from time to time (i.e. no longer includes the UK if Brexit goes ahead), or specifies the countries in question (i.e. if the UK is listed, then the UK should still be included regardless of Brexit). In the absence of express wording, various contextual factors will determine whether the territory for the contract will continue to cover the UK. For new contracts which should cover the UK in any event, it may be
best to add express wording to say that if the UK leaves the EU, then the relevant territory is automatically extended to include the UK along with the EU.
2. Legislation If there is any legislation key to the operation of the contract which may be affected, check for a clause which says that references are to provisions as modified or re enacted. The Great Repeal Bill could deliver an outcome of minimal effect on references to legislation, with a contract's citation of an EU law being effectively rewritten as a citation of a newly-converted UK law. Having said that, it would be risky to place significant reliance on the conversion happening as currently outlined, or the Great Repeal Bill's conversion process producing such a straightforward result. For new contracts where legislation is incorporated `as amended', consider whether the contract should state that changes that have a materially adverse effect on the standing of either party under the agreement are disregarded.
3. Force majeure and similar Review the definition of force majeure to determine whether Brexit could qualify. If so, consider the impact on the other contracting party's duty to perform its obligations, and the potential for it to rely on this to avoid liability for non-performance. If preferred, the force majeure definition in a new contract could expressly include some Brexit-related event relevant to the matter at hand for example, EU trade marks no longer extending to the UK, or the EU procurement regime becoming inapplicable.
The Book of Commercial Awareness 2017 | 35
Collection 2: Developments in the Law
Brexit
Prioritise action as soon as practicable on any court judgments which will need to be enforced in another EU state"
Alternatively an express right to terminate or renegotiate could arise following the specified event. Look for a material adverse change clause, or any wording which may permit renegotiation of terms if the contract should become unprofitable or subject to a change in the law.
Consider whether it will be possible for either party to argue that following the UK's withdrawal, frustration will apply. This would require contractual obligations to have become impossible to observe, with neither party being responsible for the change. Mere inconvenience or the incurring of additional costs would be unlikely to qualify, but there may be more of a valid case for frustration where a contract heavily depends on EU regimes such as passporting. If seeking to ensure that the other party to an upcoming contract cannot use Brexit as a reason to avoid performance, an express statement could be added to confirm that the force and effect of the contract (or select clauses of the contract) shall not be prejudiced or diminished by the UK leaving the EU.
4. Additional burdens Review mechanisms for pricing, given the potential for new import tariffs, VAT changes and other costs of trading. If the currency of the contract is sterling, look for any wording addressing serious fluctuations in its value. There may also be provisions for both parties conducting reviews and renegotiation of prices, especially in longer-term contracts.
Consider whether the contract depends on regimes that may cease to apply, such as free movement of goods / services / people or EU trade deals. If new compliance procedures are introduced, is there any indication of which party will have to discharge that duty? If one party to an upcoming contract may either move their business out of the UK or undertake some other reorganisation once Brexit happens, consider whether assignment to a group company should be permitted, and whether there should be automatic termination following such restructuring.
5. Disputes If a current dispute which relates to the UK and another part of the EU is likely to continue beyond the point of the UK withdrawing, look at taking steps to resolve the dispute sooner, possibly by way of settlement or alternative dispute resolution if faster progress through the courts is unlikely. Prioritise action as soon as practicable on any court judgments which will need to be enforced in another EU state. For new contracts, ensure that the contract is explicit on its governing law and the jurisdiction which has been chosen. If there are concerns regarding enforcement, consider including an arbitration clause.
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Collection 3: Old issues / new insights
Formation of Contract: Page: 40 - 41 Variation of Contract: Page: 42 - 43 Retention of Title Clauses and Sale of Goods Act Section 49: Page: 44 - 45 Piercing the Corporate Veil: Page: 46 - 47
Collection 3: Old issues/ New insights
Formation of Contract
Be aware, the basics of contract formation can present pitfalls to unsuspecting parties
Formation of Contract
Newbury v Sun Microsystems [2013] EWHC 2180 and Gibbs v Lakeside Developments Ltd [2016] EWHC 2203 (Ch)
The issue The fundamental principles of contract formation (and particularly of valid offer and acceptance) can sometimes catch out parties who assume that what has or has not been agreed is clear. By looking at two cases involving settlement correspondence, it can be seen that a binding contract may arise contrary to intentions, and also that what appears to be acceptance of an offer may not always bind after all.
First, in Newbury v Sun Microsystems, the claimant (Sun) had aimed to resolve a dispute with the defendant (Newbury). Sun's solicitors sent Newbury a letter proposing payment of a specified sum plus costs as settlement, "such settlement to be recorded in a suitably worded agreement". Newbury's solicitors responded the same day, accepting the terms of the settlement and saying that they would forward a draft agreement for approval the next day. Ultimately, however, no formal agreement was ever executed, and the question arose of whether the parties were bound by the letters. The High Court held that, despite the absence of the formal agreement, Sun's letter offering to settle for a specific sum and Newbury's letter of acceptance did form a binding contract. The key factors were as follows:
l Sun's letter was expressed to be an offer to settle, and would be objectively construed as such
l The letter included the terms of the offer it was only open for a specific period, and if it was accepted, payment would be made within 14 days. If accepted, those terms would be "recorded" as a record of what had already been agreed (and not a reference to terms still to be negotiated)
l Execution of the written agreement was not a condition of the creation of a binding contract
l The letter had not been expressed to be "subject to contract". Those words would have demonstrated that the terms would not be binding until a formal contract had been agreed.
The more recent case of Gibbs v Lakeside explored similar issues of uncertain offer and acceptance. Here the claimant (Gibbs) had sent an e-mail to the defendant (Lakeside) outlining proposed terms to settle their dispute, including the date for receipt of the settlement sum. Lakeside's solicitors then responded with an e-mail which began by stating that Lakeside "accepts your offer". This e-mail also referred to a draft consent order which was attached, and this provided for a payment date, but one significantly later than Gibbs had stipulated. In the court's view, the difference in payment date showed that Lakeside had rejected the "package" put forward by Gibbs, and that in spite of how the second e-mail mentioned acceptance, it acted as a counter offer. This meant no genuine acceptance had occurred, and so the parties were not bound.
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Collection 3: Old issues/ New insights
Formation of Contract
When both parties intend for a formal document to subsequently record or supplement the terms agreed, this does not necessarily preclude the parties being bound ahead of that document being executed"
What's new? Rather than introducing new law, these judgments highlight key legal principles to contract formation which derive from earlier authorities. What follows is a summary. In deciding whether the parties have reached agreement, the whole course of the parties' negotiations must be considered and an objective test must be applied. The subjective reservations of one party do not prevent the formation of a binding contract. Once the parties have to all outward appearances agreed in the same terms on the same subject matter, usually by a process of offer and acceptance, a contract will have been formed. Conversely, if there is a conflict between the parties with regard to a key term, then this could mean that what superficially appears to resemble acceptance may in fact be a counter offer.
Even when both parties intend for a formal document to subsequently record or supplement the terms agreed, this does not necessarily preclude the parties being bound ahead of that document being executed. The terms should explicitly be "subject to contract" if the intent is that the parties are not bound before some further condition is fulfilled or some further terms agreed. Where a contract did form prior to executing a formal agreement, the existing contract is not invalidated unless the failure to establish the further terms in the formal agreement renders the contract as a whole unworkable or void for uncertainty. Looking beyond these cases, two other judgments from 2016 explore the scope for conduct of parties influencing whether or not a contract may be deemed to be in place. However, this is an area where cases will turn on the facts at hand. In MF Global UK Limited (In Special Administration), Re [2016] EWCA Civ 569, the court produced the unusual outcome of a contract being inferred by conduct between well-advised substantial and commercial companies which were both part of a single group.
This result was based on the interaction of the companies being inexplicable unless there was some kind of contract in place, especially given that the arrangement involved paying considerable sums of money of $330 million per annum. Similarly in Sherlock Holmes International Society Limited v Aidinantz [2016] EWHC 1076 (Ch), the judgment was that an agreement to amend the claimant company's articles (and thereby dis-apply a restriction on who was eligible to be appointed as a director) was inferred from the conduct that had occurred. It was emphasised that inferring of an agreement from conduct should not happen when there are other explanations for what was done, but in this instance a bystander with knowledge of previous appointments would conclude that the restriction was not relevant because the articles had been amended by agreement.
In practice Due consideration should always be given to whether or not correspondence may amount to a contract. If an offer is intended to bind, then it is critical to confirm that it contains all desired terms, and then take care in assessing whether those terms were properly accepted. Alternatively, if an offer is not intended to be capable of acceptance then this should be made clear, and "subject to contract" should be included in correspondence when no commitment to a particular position is intended. Another area of caution will be non-contractual arrangements, or conduct which departs from a contract that is in place. If the only explanation for such behaviour that the parties were operating under a contract, regardless of how the parties themselves may see the situation the courts could potentially infer a contract which is needed to make sense of what took place.
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Collection 3: Old issues/ New insights
Variation of Contracts
Variation of Contracts
Be aware, no variation without written agreement can be overridden by later conduct or oral agreement of the parties
Reveille Independent LLC v Anotech International (UK) Ltd [2016] EWCA Civ 443, MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 and Hughes v Pendragon Sabre Limited T/A Porsche Centre Bolton [2016] EWCA Civ 18
The issue Commercial contracts commonly include boilerplate "no variation clauses", to uphold the formality and objectivity of the terms of the contract, and to mitigate the risk of inadvertent oral variation of its terms.
However, to what extent are such clauses, or other clauses prescribing certain formalities under a contract, enforceable in practice?
What's new? Three key Court of Appeal cases in 2016 provide useful reminders that under common law, prescribed contractual formalities can be varied by mutual agreement and conduct.
In Reveille v Anotech, a case between a US television company and a cookware distributor, a provision prescribing signature to be the mode of acceptance under a contract was held to have been waived by conduct. The judgment referred to the well accepted principle that acceptance can be given by conduct if objectively it was intended to do so (Brogden v Metropolitan Railway Co [1877] 2 App Cas 666). When considering whether a contract has come into existence, Mr Justice Cranston referred to the principle of "the reasonable expectations of honest sensible businessmen", per Steyn LJ in G.Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd's Rep 25.
In MWB Business Exchange v Rock Advertising it was held that a "no variation clause" did not preclude the parties from making an oral variation to the agreement. Lord Justice Kitchin ruled that the most powerful consideration on this point was that of "party autonomy" such that parties should have the right to depart from their previous arrangements. Accordingly it was held that World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413 was correct and should be followed.
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Collection 3: Old issues/ New insights
Variation of Contracts
Whilst "no variation" and "entire agreement" clauses remain good practice, drafters should be aware that they are not impenetrable"
In Hughes v Pendragon, a collateral contract was deemed to have been formed between a car dealership and a customer based on the dealership's commitment to sell the customer a limited-edition model of a Porsche if it could obtain the car from a manufacturer. This commitment under the collateral contract was held to override a provision in the dealership's standard terms which had granted the dealership the right to fulfil orders in any order of priority. Accordingly, the Court of Appeal held that having sold the Porsche to a different customer, the dealership was in breach of the collateral contract and could not rely on the initial provision from its standard terms.
In practice These cases serve as authority that oral agreements and conduct can have the effect of varying a contract, even if this conflicts with formalities under the contract. Whilst "no variation" and "entire agreement" clauses remain good practice, drafters should be aware that they are not impenetrable. However, for any degree of certainty in respect of variations to a contract, such variations should be recorded in writing.
The Book of Commercial Awareness 2017 | 43
Collection 3: Old issues/ New insights
Retention of Title Clauses and Sale of Goods Act Section 49
Retention of Title Clauses and Sale of Goods Act Section 49
Be aware, retention of title clauses can backfire on suppliers of goods
PST Energy 7 Shipping LLC and another v OW Bunker Malta Ltd and another [2016] UKSC23
The issue Retention of title clauses ("ROT clauses") allow a seller of goods to retain title to the goods subject to some conditions which need to be fulfilled by the buyer (usually the payment of the price) regardless of whether the goods have been delivered to the buyer. ROT clauses (sometimes referred to as Romalpa clauses, after the first leading case on the subject, Aluminium Industrie Vaasan BV v Romalpa Aluminium Ltd [1976] 1 WLR 676) are allowed under sections 17 and 19 of the Sale of Goods Act 1979. If payment cannot be made for the goods (whether due to the buyer's insolvency or for some other reason) a ROT clause is useful. It effectively removes the seller from the statutory order of distribution as the buyer never actually receives title to the goods, which cannot be distributed amongst the creditors and must be returned to the seller.
For sellers who employ ROT clauses in their contracts, complications can arise if the buyer resells the goods. Section 49(1) of the Sale of Goods Act 1979 establishes a seller's right to bring proceedings if the buyer of goods fails to pay the price, but s49(1) only applies if property has passed. This means that the seller's ability to bring a claim in respect of the price of the goods could be hampered by the effect of the ROT clause.
This backfiring effect of a ROT clause was demonstrated in the case of FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2013] EWCA Civ 1232. The claimant (Wilson) had a distributorship agreement with the defendant (Holt), and the applicable terms included a ROT clause which ensured that the goods only passed to Holt once they had paid Wilson in full. Holt failed to pay a number of invoices to Wilson, and so under the terms of their contract, Holt held the goods relating to those invoices as Wilson's fiduciary agent, and title in the goods never passed to Holt, though Holt was still able to resell.
As part of the case coming before the Court of Appeal, one matter to consider was whether s49(1) was the mandatory means for a seller to bring action for lack of payment, or whether the section was merely permissive. The judges were agreed that s49(1) was mandatory, and so an unpaid seller could only sue for the purchase price if the title to property had passed. Essentially, Wilson were caught out by their ROT clause because although it was effective for preventing the transfer of title to Holt, the corollary of this was that an action under s49(1) was unavailable. English law does not normally allow a claim for damages for failure to pay money, and there was a logical difficulty in arguing breach of contract for Holt's failure to pay the price if the goods had never passed to Holt, was the price due? The verdict on s49 (1) in this case was clearly unfortunate for Wilson, but the lesson seemed to be that ROT clauses can have an undesirable sideeffect, blocking off a key means of recourse for non payment.
The Book of Commercial Awareness 2017 | 44
Collection 3: Old issues/ New insights
Retention of Title Clauses and Sale of Goods Act Section 49
When the buyer comes to resell the goods, the best course will be to provide that title passes from the seller to the buyer immediately before the goods are re-sold. This will then enable the seller to maintain an action for the price"
What's new? In PST Energy v OWBM, the Supreme Court examined another instance of a defendant (OWBM) who had been subject to a ROT clause, and had failed to pay for what the claimant (PST) had provided. It was ultimately determined that the contract between OWBM and PST was not one for sale of goods under the SGA, but Mance LJ made a point of adding obiter comments on s49(1) to address what the position would have been for these parties if the contract had been one of sale.
The obiter comments do not overrule Wilson v Holt, but Mance LJ demonstrated that there is a case to be made for s49(1) not being mandatory after all, and that it may be possible to make a claim for price other than in accordance with the terms of s49. He cited two authorities pre-dating the first Sale of Goods Act (1893) which suggested that the price is recoverable even when the goods are at the buyer's risk but ownership has not passed. His conclusion was that s49 is not an exhaustive code for claiming a price that was not paid; therefore if the contract had been for sale of goods, PST should have been able to rely on s49(1) despite the ROT clause. The effect of this is essentially to put the Wilson v Holt verdict on s49 into doubt, but the practical scope for a claim for price which does not fit within s49, and the significance attached to ROT clauses in such a matter, is still unclear. Mance LJ said that he was leaving those issues to be determined on some future occasion.
In practice Issues around ROT clauses persist, and the OWBM case has increased an atmosphere of uncertainty which was already present. It should be fine for the goods to be held by the buyer as agent, but when the buyer comes to re-sell the goods, the best course will be to provide that title passes from the seller to the buyer immediately before the goods are re-sold. This will then enable the seller to maintain an action for the price. Of course, if the buyer is retaining the goods for use in its own business, then a straightforward retention of title clause should work. The warnings when using ROT clauses are as follows: consider what difficulties may result from title being retained; look out for further developments in this evolving area; and do not consider ROT clauses as a substitute for a robust credit control system.
The Book of Commercial Awareness 2017 | 45
Collection 3: Old issues/ New insights
Piercing the Corporate Veil
Piercing the Corporate Veil
Be aware, the corporate veil can be pierced
Prest v Petrodel Resources Ltd and others [2013] UKSC 34 and other case law from 2016 clarifying the principles of when the corporate veil will be pierced
The issue It is a fundamental principle of company law that a company has separate legal personality distinct from that of its shareholders. However, since the 2013 matrimonial divorce case of Prest the absolute nature of the doctrine of the corporate veil has been brought into question. The application and analysis of the Prest judgment in subsequent case law, including a number of notable judgements from 2016, suggests that the rules laid down in Prest are certainly of wider application outside matrimonial proceedings. Established principles surrounding the doctrine of piercing the corporate veil are starting to emerge.
Piercing the Veil In Prest the court held that it is possible to pierce the corporate veil when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. Where such circumstances apply, and where no other remedy is available, it was held in Prest that the court may seek to pierce the corporate veil solely for the purpose of depriving the company or its controller of the advantage which they would otherwise have obtained by the company's separate legal personality. If there is another legal remedy, piercing the corporate veil will not be necessary and will not be available.
This "evasion principle", as it has become known, enables the court to pierce the corporate veil and to treat the company's acts in law as those of the controller.
The "Concealment" and "Evasion" principles in Prest the court drew the distinction between the "evasion principle" and circumstances where the interposition of a company or perhaps several companies conceals the identity of the real actors. Here the court will look behind the "cloak or sham" to discover the facts which the corporate structure is concealing (the "concealment principle"). In Rush Hair Limited v Hayley Gibson-Forbes [2016] EWHC 2589 (QB) it was noted that "the application of the concealment principle enables the court to conclude that the acts apparently done by the company are, in fact, acts of the person controlling it (on Lord Neuberger's analysis of Gilford Motor Co. v Horne [1933] Ch. 935, because the use of the company as a "cloak" makes the company the agent of the controller)".
However, note that in Prest the judge had concluded that "cases concerned with concealment do not involve piercing the corporate veil at all. They simply involve the application of conventional legal principles to an arrangement which happens to include a company being interposed to disguise the true nature of that arrangement. Accordingly, if piercing the corporate veil has any role to play, it is in connection with evasion". This reasoning is supported by the judgement in Antonio Gramsci Shipping Corp and others v Lembergs [2013] where the Court of Appeal refused to pierce the corporate veil and considered that it would be difficult to extend the principle beyond the evasion principle identified in Prest.
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Collection 3: Old issues/ New insights
Piercing the Corporate Veil
In the case law subsequent to Prest the courts have consistently referred to the two principles of "concealment" and "evasion" which will allow the court to pierce the corporate veil"
What's new? The decision in Prest has already been relied on in a number of cases. In R v Sale [2013] it was held that notwithstanding the fact that the findings of the Supreme Court in the Prest case were obiter, the principle of piercing the corporate veil was of general application across the board. In Pennyfeathers Ltd & others v Pennyfeathers Property Co Ltd [2013] EWHC 3530 (Ch), it was held that the defendants could not interpose a company to disguise their conduct in diverting the opportunities that they should have pursued on the claimants behalf to their own benefit, Prest applied.
The principles set out in Prest judgement have also been applied recently by the court in R. v Boyle Transport (Northern Ireland) Ltd [2016] EWCA Crim 19. Adhering to the two principles of "concealment" and "evasion" it was concluded that a judge had unjustifiably departed from established principles of company law when piercing the company's corporate veil. It was noted that the phrase "piercing" the corporate veil had been used broadly without focusing precisely on the two concepts of concealment and evasion as have now been identified by Lord Sumption in Prest. In examining the criteria required to satisfy the evasion principle as set out in Prest, the judge in R. v Powell (Jacqueline) [2016] EWCA Crim 1043 noted "the need for there to be a legal right against the person controlling the company which exists independently of the company's involvement." On the facts of the case the Court could not find a legal right, liability, obligation or restriction on either respondent which existed independently of the company.
As such the company had not been "interposed so that its separate legal personality would defeat or frustrate the enforcement of some right against the respondents". Similarly the case of Tartan Army Ltd v Sett GmbH [2015] CSOH 141 reminded us that every company is set up for a purpose. The purpose of a company, short of fraud or concealment or evasion of some legal liability, was irrelevant to the question of whether the rights and liabilities arising out of fact or omissions of the company belonged to the company or the individual so as to fix individuals with personal liability.
In practice Prior to Prest, it was thought that whilst a considerable body of case law has developed suggesting that the corporate veil can be pierced, many of the decisions are unclear and inconsistent which led to some doubting whether the doctrine even existed. In the case law subsequent to Prest the courts have consistently referred to the two principles of "concealment" and "evasion" which will allow the court to pierce the corporate veil. However as noted above, there remains some uncertainty as to where the "concealment" principle is rightly categorised as piercing the corporate veil. Furthermore, some judgments have commented that there may indeed be limited circumstances outside the "concealment" and "evasion" principles where the corporate veil may still be pierced. The courts have noted that in all cases the full factual matrix must be carefully considered. It is worth noting that the Prest ruling may cause the courts to go on to consider the legal consequences of piercing the corporate veil, including whether it may go as far to permit a controlling mind to be made a party to a company's contracts.
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Is there an Obligation of Good Faith? Page: 50 - 51 Discretion and Good Faith: Page: 52 - 53 Agency Update - Defining the Commercial Agent: Page: 54 - 55 Agency Update - What is a New Customer: Page: 56 - 57 Agency Update - The Choice between Compensation and Indemnity Payments: Page: 58 - 59 Agency Update - Agency and Good Faith: Page: 60 - 61 Agency Update - Effect of Termination of Agency Agreement: Page: 62 - 63 Liability for Misrepresentation: Page: 64 - 65 Fraudulent Misrepresentation Settlement Set Aside: Page: 66 Liability for Negligent Misstatement: Page: 67
Collection 4: Relationships
Is there an Obligation of Good Faith?
Is there an Obligation of Good Faith?
Be aware, a duty of good faith may be implied into certain commercial contracts
Swimming against the tide of good faith, from Yam Seng Pte Limited v. International Trade Corporation Ltd [2013] 1 All E.R. (Comm) 1321 to Monde Petroleum SA v Westernzagros [2016] EWHC 1472 (Comm) and Bristol Rovers (1883) Ltd v Sainsbury's Supermarkets Ltd [2016] EWCA Civ 160.
The issue English law had traditionally drawn a sharp distinction between certain relationships where the parties owed onerous obligations of fidelity to each other (such as partnership, trusteeship and other fiduciary relationships) and other contractual relationships, in which no such obligations were supposed to operate. However, a general duty of good faith has long been recognised in the US and was increasingly being recognised in European countries and other common law jurisdictions, both in the making of a contract and in its performance. Since the widely reported decision of the English courts in the Yam Seng case, further decisions have helped calm any initial over-exuberance from that case.
What's new? In refusing to recognise any general obligation of good faith, and continuing to rely on its piecemeal solutions to demonstrated problems of unfairness, the English jurisdiction would be "swimming against the tide". So thought, Leggatt J. in the Yam Seng case. Whilst a "simple exchange contract" may not require an implied duty to disclose information, that was not the case with "relational contracts" which involved a longer term relationship and a substantial commitment by the parties.
They generally required a high degree of communication, co-operation and predictable performance based on mutual trust and confidence. Examples of such relational contracts given by Leggatt J. in his judgment were joint venture, franchise and long term distributorship agreements. But we think outsourcing agreements are an obvious candidate as well. We have already seen the courts recognise a duty of good faith between parties to a joint venture (Ross River Ltd & others v Waveley Commercial Ltd & others [2013] EWCA Civ 910). In the view of Leggatt J there was nothing novel or foreign to English law in recognising an implied duty of good faith in the performance of contracts, or in describing it as a duty of good faith and "fair dealing". The advantage of including a reference to "fair dealing" is that it draws attention to the fact that the standard is objective and distinguishes the relevant concept of good faith from other senses in which the expression "good faith" is used. He concluded by suggesting that the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persisted, was misplaced. This approach was followed in a case involving a contract between a company that specialised in training pilots and a supplier of training materials: Bristol Groundschool v Intelligent Data Capture [2014] EWHC 2145. The High Court held that the contract was a "relational contact" of the kind referred to in Yam Seng and found that there was an implied duty of good faith. Similarly in D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB), the High Court judge used the term "integrity" to capture an implied term of fair dealing and transparency in a long term contact to recover vehicles for a police authority, in what was described as a "relational contract par excellence".
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Is there an Obligation of Good Faith?
Good faith in this context equates with fair dealing rather than a fiduciary duty. It will not therefore result in one party having to subordinate its own commercial interests to those of another party"
But an "ad hoc" supply contract, brought about by force of circumstances and intended to serve as an interim arrangement affording the parties an opportunity to negotiate a new joint venture, is not a relational contract: Hamsard 3147 Ltd v. Boots UK Ltd [2013] EWHC 3251. Other recent cases have shown the court's refusal to imply a duty of good faith:-
l where one party had an express contractual right to terminate a consultancy contract (the court refused to imply a term that the right would not be exercised in bad faith, depriving the other party of profits from an oil exploration and production contract): Monde Petroleum SA v Westernzagros and
l where specific contractual obligations curtailed any possible implication of good faith (Sainsbury's had fulfilled its contractual obligations to appeal a planning decision and as it was not obliged to make a further planning appeal it could not have been the intention of the parties that Sainsbury's should be obliged to consent to such an appeal by Bristol Rovers): Bristol Rovers v Sainsbury's.
Circumstances when good faith may attach to the exercise of a contractual discretion are discussed separately in "Discretion and Good Faith" on page 52.
In practice Note that good faith in this context equates with fair dealing rather than a fiduciary duty. It will not therefore result in one party having to subordinate its own commercial interests to those of another party.
The fact that the duty of good faith may be implied in certain circumstances by law means, of course, that it can be excluded by agreement (subject to UCTA) although most of us would baulk at doing so expressly.
This contrasts with civil law jurisdictions where the duty cannot be excluded. Many of those jurisdictions also impose a general duty to negotiate in good faith, but notwithstanding the recent developments in English common law "there is no general duty currently recognised in English law to conduct contractual negotiations in good faith" (Leggatt J. again, this time in Knatchbull-Hugesson & Ors v. SISU Capital Ltd [2014] EWHC 1194 at [21]).
It also remains good law that an openended duty to negotiate in good faith is a mere "agreement to agree" of indeterminate duration, impossible to know what agreement would have resulted if performed, and is therefore normally unenforceable: Walford v. Miles [1992] 2 AC 128, HL. Obligations to negotiate in good faith within an existing, binding contract are more likely to be enforceable, such as an obligation on the parties to endeavour to resolve disputes through an identified ADR procedure: Cable and Wireless v. IBM [2002] 2 All ER (Comm) 1041 (Comm). Even a time-limited obligation on the parties to seek to resolve disputes "by friendly discussion" was considered to be enforceable as a condition precedent to the right to start proceedings (Emirates Trading Agency v. Prime Mineral Exports [2014] EWHC 2104 (Comm)).
However, the potential of floodgates being opened by the Yam Seng case has receded. Based on more recent decisions, such as in the Monde Petroleum case, the fact that a contract is long term or "relational" is not enough. To justify an implied duty of good faith it needs to be so obvious as to go without saying or necessary for business efficacy that is the traditional approach to the implication of terms.
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Discretion and Good Faith
Be aware what might be implied when exercising a contractual discretion
Discretion and Good Faith
Myers and another v Kestrel Acquisitions Ltd and others [2015] EWHC 916 (Ch), Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC) and MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWHA Civ 789
The issue Contractual obligations will frequently involve the exercise of discretion. For example, a clause requiring Party A to obtain the written consent of Party B before it can assign its rights under the contract gives Party B the absolute right to exercise its discretion to approve (or not approve) a proposed assignment. A more subtle form of discretion can be seen where contracting parties have agreed that "Party A will value the assets and pay 50% of the assets' value to Party B". Here, Party A must make an assessment on the value of the assets, but is not given any parameters or methodology for doing so in other words, Party A will exercise its discretion to determine the matter. It is established case law (see, for example, Abu Dhabi National Tanker Co v. Product Star Shipping Ltd [1993] 1 Lloyd's Rep 397) that the courts will imply a term into a contract requiring a party to exercise a contractual discretion honestly and in good faith, and not arbitrarily, capriciously or irrationally.
This will be the case where a party has responsibility to exercise its judgment on a matter that materially affects the other party's interests, where there is scope for differences of view on the matter, and the decision is binding on the other party. The court will not imply such a term where a party is exercising an absolute contractual right, such as in the first example above, recent cases have reinforced this position.
What's new? In Myers v Kestrel the claimant argued that a lender's right to unilaterally amend a loan note, which represented part of the consideration for the sale of the claimant's sub-prime lending business, was subject to an implied term that the modification had to be made in good faith. The High Court found that the right to amend the loan note was an absolute contractual right and, while a duty of good faith may be imposed on a party who exercises a contractual discretion, this duty does not apply where there is a choice about whether or not to exercise such a right. If a contractual duty of good faith is intended to apply in such a situation the obligation should be expressly set out in the contract.
In Portsmouth v Ensign the High Court considered a long term PFI contract under which Portsmouth was able to award service points if Ensign was in breach of its contractual obligations giving rise ultimately to a termination right if enough points were awarded.
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Discretion and Good Faith
The courts will imply a term into a contract requiring a party to exercise a contractual discretion honestly and in good faith, and not arbitrarily, capriciously or irrationally"
After a few years Portsmouth decided the contract was unaffordable and so began awarding the maximum number of service points for every default. Ensign felt ambushed and was unable to discuss the matter in cooperation with Portsmouth. The matter was referred to expert determination and then following an unfavourable determination Portsmouth commenced legal proceedings. The High Court found in favour of Ensign that although Portsmouth was not subject to an overriding duty to act in good faith in relation to the service points it was subject to an implied duty to act honestly and not in a manner that was arbitrary, capricious or irrational when assessing the number of service points to be awarded against Ensign.
In MSC v Cottonex, MSC agreed to ship certain products for Cottonex but, as a result of changing market conditions, Cottonex's customer failed to collect the products or return the shipping containers to MSC within the prescribed period.
The key question for the High Court was whether an innocent party (in this case MSC) faced with a repudiatory breach had an option to affirm a contract where the defaulting party could not perform its obligations. The case went up to the Court of Appeal on various points including the High Court's suggestion that MSC was prevented from affirming the contract because there was a general duty to act in good faith.
This was rejected by the Court of Appeal who once again confirmed that English contract law imposes no general duty on the parties to a contract to act in good faith.
In practice Good faith in the exercise of discretion requires a party to a contract to interpret and apply the contractual terms in such a way so as to reflect the obvious, albeit unexpressed, intention. As noted in "Is there an Obligation of Good Faith?" on page 51, it may be possible (if not easy to argue) to expressly exclude obligations of good faith from a contract. If contracting parties have agreed that a matter should be determined in a certain way, it should be incorporated into the contract in appropriate detail so as to minimise any discretionary element.
The Court of Appeal in MSC v Cottonex downplayed the finding of the High Court judge in the same case that there was an increasing recognition of the need for good faith contractual dealings. Instead the Court of Appeal judge warned against such a development urging that if a general principle of good faith were established it would be invoked to undermine agreed contractual terms as often as to support them.
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Agency Update - Defining the Commercial Agent
Agency Update - Defining the Commercial Agent
Be aware, who is a commercial agent? It's all about "negotiation", but not as we know it
Invicta UK v International Brands Limited [2013] EWHC 1564 (QB) and Software Incubator Ltd v Computer Associates Ltd [2016] EWHC 1587
The issue In common parlance, the label "commercial agent" is used loosely to cover a wide range of arrangements involving varying degrees of input and control from the "agent" and "principal" respectively. Some of these arrangements may not even create an agency in a legal sense, rather a distributorship. In defining a commercial relationship in a contract, we need to be more precise. Assuming a party is genuinely to operate as an agent (by acting as an intermediary in the making of a contract between his principal and the principal's customer), a well-drafted agreement will set out the parameters of authority granted to the agent and the duties imposed on him. These, in conjunction with English common law on agency, provide the basic legal framework in which agents operate. However, the contractual parameters of authority and the practical responsibilities of an intermediary must also be read in the context of the Commercial Agents (Council Directive) Regulations 1993. These Regulations implemented an EC Directive intended to harmonise, enhance and protect the position of commercial agents in relation to their principals which, amongst other protections, gives the right for commercial agents to receive compensation or an indemnity payment on termination of the agency agreement in certain circumstances.
It has, therefore, become a critical point of legal advice to both agents and principals to identify whether an agent is a "commercial agent" for the purposes of the Regulations. Who is a "commercial agent" under the Regulations? And what light does recent case law shed on the subject?
What's new? By definition, under the Regulations a "commercial agent" is a self-employed intermediary who has continuing authority to: 1) negotiate the sale or purchase of goods on behalf of another person (the principal); or 2) negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal (Regulation 2 (1)). In addition, his activities must in part relate to an European Economic Area country and it is also to be noted that his involvement must be in the marketing and sale of goods, not services. Certain elements of the definition are generally straightforward to identify. It should be apparent from practice or the terms of a well-drafted contract whether an agent is a self-employed intermediary and whether he is authorised to conclude the sale or purchase of goods on his principal's behalf for the purposes of limb two. "Continuing authority" is also a clear question of fact depending on whether the agent is authorised in respect of a single transaction only or in an ongoing role (see ECJ in Poseidon Chartering BV v Marianne Zeeschip VOF and others (C-3/04)). Accordingly, it has been the question of whether a party has authority to "negotiate" sale or purchase on behalf of the principal which has attracted most debate and case law.
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Agency Update - Defining the Commercial Agent
The role of Invicta (the agent) in procuring wine sales and acquiring customers for International Brands was sufficient to make it a commercial agent, even though Invicta did not negotiate terms for those sales"
The case of Invicta v International Brands has confirmed previous case law in the UK and abroad construing "negotiate" in very broad terms. The High Court considered that the role of Invicta (the agent) in procuring wine sales and acquiring customers for International Brands was sufficient to make it a commercial agent, even though Invicta did not negotiate terms for those sales. The fact that Invicta had existing relationships with major retailers who purchased the wines meant that it played an active role in "negotiating" sales. It was this element of active involvement in developing the goodwill of the principal's business that was key: taking a purposive approach to the Regulations, the courts consider it right that an agent should benefit from compensation wherever it has contributed to goodwill. What this means is that "negotiate" should be understood in its broadest sense as requiring an element of management or conduct of, or active contribution to, sales or purchases, but not necessarily involving discussions over terms of sale or purchase. Haggling or bargaining are not necessary roles; however, there must be some active contribution above simply facilitating a transaction without active input (for example, a petrol station operator on behalf of Esso was not considered to be a commercial agent because it took no part in the customer's choice or self-service (Parks v ESSO Petroleum Company Ltd [1999] EWCA Civ 1942)). We have also seen recently further discussion on what constitute "goods" in the digital era for the purposes of the Regulations in the case of Software Incubator v Computer Associates Ltd [2016] EWHC 1587. This was concerned with the supply of software known as application release automation software.
The court held that the definition of "goods" should not be restricted to tangible items or chattels and supplying software of this type online would count as "sale of goods". This is a reminder that the digital provision of non-physical goods still needs to be considered under the Regulations.
In practice Where a party appoints another with authority to act on its behalf in relation to the sale or purchase of goods, it will be very rare for the Regulations not to apply. The starting point should be to assume that the agent will be considered to be a commercial agent for the purposes of the Regulations, unless it plays a very limited, procedural role in sales or purchases which cannot be deemed to be negotiation in even its broadest sense. If acting for the principal and you think it really is the case that the agent is not playing a significant enough role in developing goodwill to be a commercial agent, then be very clear in the contract as to the limitations of the agent's role and why the parties consider that the Regulations do not apply. Ultimately, the courts will carry out a factual analysis of what has occurred in practice, but clear contractual limitations on a role may help and will assist practical management of the relationship to ensure the agent does not exceed his authority. Given the likelihood of an agent being a commercial agent, the business unit of the principal or agent should be made aware of the rights or obligations on contract termination to receive or pay compensation. As the parties can agree the basis of compensation (either on a "compensation" or "indemnity" basis) in the contract, it also pays to give consideration to which basis will suit you best and whether to select the indemnity basis in preference to the default rule of compensation.
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Agency Update - What is a New Customer?
Agency Update - What is a New Customer?
Be aware, a "new customer" can include existing customers
Defining a "new customer" Marchon Germany GmbH v Karaszkiewicz: C-315/14 (2016) C-315/14, [2016] 1 Lloyd's Rep 531
The issue The Commercial Agents Directive (86/653/EC) (OJ 1986 L382/17) (the "Directive") implemented by the Commercial Agents (Council Directive) Regulations 1993 (the "Regulations") was introduced with the main intention of protecting the position of commercial agents in relation to their principals. Under the Regulations, an agent is entitled to an indemnity upon termination of the agency agreement if and to the extent the agent "has brought the principal new customers... and the principal continues to derive substantial benefits from the business with such customers" (Regulation 17(3)) (see "Agency Update - The Choice between Compensation and Indemity Payments" on page 58 for further discussion on the distinction between an entitlement to payment under the compensation or indemnity principles).
What's new? In Marchon v Karaszkiewicz, the CJEU was asked to consider whether the meaning of "new customers" was restricted to brand new customers that had no prior business relationship with the principal.
The case concerned the sale of three specific brands of spectacle frames by the commercial agent (the "Agent") to opticians with whom Marchon (the "Principal") had existing business relations. The Principal had business relations with these opticians only in relation to other branded frames within the Principal's product range. The Agent argued, on termination of the agency contract, that the opticians were "new customers" given that this was the first time she had sold the specific goods assigned to her to those opticians.
The CJEU adopted a non-restrictive interpretation and concluded that customers brought in by the agent for specific goods which are assigned to him must be regarded as "new customers", even if those customers already had existing business relations with the principal in relation to other goods.
The CJEU gave weight to the "spirit and purpose" of the Directive in protecting commercial agents and emphasised that this interpretation was necessary to take "full account of the merits of the [agent] in carrying out the transactions assigned to him".
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Agency Update - What is a New Customer?
The CJEU gave weight to the "spirit and purpose" of the Directive in protecting commercial agents and emphasised that this interpretation was necessary to take "full account of the merits of the [agent] in carrying out the transactions assigned to him" "
In practice This decision broadens the scope of the first limb of the indemnity principle and highlights that, if the contract specifies the payment of the indemnity rather than compensation on termination of the agency agreement, principals cannot evade this on the basis that they have an existing relationship with the customer to whom the agent is selling the goods.
However, in order to qualify for the indemnity the agent must still satisfy the other requirements of Regulation 17(3), namely that a principal must continue to derive substantial benefit from business with such new customers and a payment of the indemnity must be equitable having regard to all the circumstances.
In Marchon v Karaszkiewicz, the principal's argument that "it is easier for commercial agents to place new goods with persons who already have a business relationship with the principal" could, according to the CJEU, be taken into account when considering the equitability of the indemnity. The CJEU, however, left this up to the national court to decide. It remains to be seen to what extent the agent in this case will benefit under the indemnity when considering the other hurdles that have to be crossed.
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Agency Update - The Choice between Compensation and Indemnity Payments
Agency Update - The Choice between Compensation and Indemnity Payments
Be aware and grasp the nettle when faced with the choice between agent's compensation and indemnity It is not possible for a commercial agency agreement to provide that the agent will receive the lower of indemnity or compensation"
The choice between compensation and indemnity payments in Charles Shearman (t/a Charles Shearman Agencies) v Hunter Boot Ltd [2014] EWHC 47 (QB)
The issue Most of us have grappled with the thorny question on termination of a commercial agency agreement: if the commercial agent is entitled to a payment, will the payment be based on the indemnity or the compensation principles under the Commercial Agents (Council Directive) Regulations 1993 (the "Regulations")?
To set the scene, the Regulations implement the Commercial Agents Directive (86/653/EC) (OJ 1986 L382/17) (the "Directive").
One of the key aims of the Directive was to protect the position of commercial agents in relation to their principals. The parties to an agreement to which the Regulations apply cannot contract out of many of the important terms of the Regulations.
Under the Regulations, an agent has the right to payment on a "compensation" or an "indemnity" basis on termination of the agency agreement in certain circumstances (Regulations 17 and 18). The intention behind this is to protect the agent, who is treated under the Directive as being the weaker party in the relationship.
The absence of any right to damages at common law in respect of the termination is not relevant to the question of whether a compensation or indemnity payment is due under the Regulations.
The default position under the Regulations is that an agent is entitled to be paid on the compensation rather than the indemnity basis. The parties must expressly choose the indemnity alternative if they want it to apply. This means that if a written agency agreement is silent, then the compensation system will apply.
The Regulations make no provision for payment on a compensation or indemnity basis for the principal if the agent terminates, although in that instance damages for breach of contract will, in principle, be available in the normal way.
What's new? Charles Shearman v Hunter Boot reiterates the premise that it is not possible for a commercial agency agreement to provide that the agent will receive the lower of indemnity or compensation. Whether the payment is to be made on an indemnity or compensation basis must be specified. If the agreement is silent, the compensation system will apply.
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Agency Update - The Choice between Compensation and Indemnity Payments
Payment on the indemnity rather than the compensation basis is still the usual choice for a principal to make because of the cap on the payment equal to one year's commission"
However, the court did say that it was possible to specify that the agent would receive an indemnity payment if termination was for certain reasons and a compensation payment where termination was for other reasons. In Brand Studio Limited v St John Knits, Inc [2016] EWHC 3134 (QB) whilst confirming the analysis in Charles Shearman v Hunter Boot in relation to whether there is an agreement that the indemnity alternative applies, the High Court applied the severance principle when interpreting a similar clause. It was noted that the question of severance, so as to leave the indemnity provision intact, was not argued in Charles Shearman v Hunter Boot (although it was raised by the judge). However, in Brand Studio the Court found that the provision providing for compensation in the alternative could be severed, so that the agent remained entitled to the indemnity only.
In practice Payment on the indemnity rather than the compensation basis is still the usual choice for a principal to make because of the cap on the payment equal to one year's commission. Despite the possibility of arguing severance clear drafting is preferable.
An agent's right to compensation or indemnity will arise whenever an agency agreement comes to an end, apart from if the agent: seriously breaches the agreement in a way that justifies"immediate termination" by the principal; terminates the agreement for reasons other than age, illness or circumstances attributable to principal; or assigns the agreement with the principal's consent.
A detailed contract with comprehensive duties on the agent and obligations, for example to achieve sales figures, may make it easier to terminate without having to pay compensation or indemnity. Also, an agent must make a claim for indemnity or compensation within a year of termination of the agreement (Regulation 17(9)). Otherwise, the agent cannot claim indemnity or compensation. Time is therefore critical when making a claim.
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Agency Update - Agency and Good Faith
Agency Update - Agency and Good Faith
Be aware, clear agency termination clauses are key
A principal had no duty to terminate in good faith in Monk v Largo Foods Ltd [2016] EWHC 1837
The issue Under Regulation 4 of the Commercial Agents (Council Directive) Regulations 1993 (the "Regulations"), a principal "must act dutifully and in good faith" in his relationship with a commercial agent. In Monk v Largo Food, the High Court considered whether Regulation 4 qualified an express right to terminate the agency agreement by the principal.
What's new? Largo engaged Mr Monk in March 2008 as a consultant to assist with securing distribution deals with retailers for the sale of Largo's branded crisps and snacks. The agency contract was amended in January 2011 and a "term of arrangement" clause (the "Term") was introduced.
The Term stated that the consultancy relationship was to continue for a term of three years subject to the completion of a successful review after one year and, assuming both parties were satisfied with the arrangement, it would continue for a further two years. In January 2012, Largo terminated the agreement seemingly "out of the blue" and the decision was presented to Mr Monk as a fait accompli.
The dominant reason given for the termination was commercial as Largo felt they would no longer get value for money from the relationship. Mr Monk argued that there was a breach of contract on the basis that Largo had neither undertaken a "structured review" of his performance nor provided a reasonable assessment of his performance with reference to objectively quantifiable sales targets.
The High Court determined that the rights under the Term were absolute contractual rights. Both parties had to be "satisfied with the arrangement" which distinguished it from contractual discretion cases where one party is allocated a power to make decisions which impacts the other.
The Term did not make reference to any sales target figures which the Court would have expected it to if there was an agreed benchmark for the operation of the Term. The language of the Term did not impose any formal decision-making process and there was also no obligation on either party to continue beyond the first year of the contract.
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Agency Update - Agency and Good Faith
A principal's obligation to act dutifully and in good faith towards an agent for the purposes of performing an ongoing agency agreement does not apply to termination of the agency agreement"
The High Court concluded that a principal's right to terminate was not constrained by the obligation of good faith in Regulation 4. A principal's obligation to act dutifully and in good faith towards an agent for the purposes of performing an ongoing agency agreement does not apply to termination of the agency agreement. In addition, the High Court was reluctant to draw any parallel between the implied term of mutual trust and confidence in an employment context and the duty of good faith in a contract of commercial agency.
In practice Although the breach of contract claim failed in this case and no damages were payable, the claims for commission and compensation under Regulation 8 and 17 were successful. The rights of the Term were drafted in such a way that enabled the Court to interpret the right to termination as being an absolute right.
Commercial agents should consider carefully the wording of termination provisions in an agency agreement. If an agent expects procedures to be followed prior to termination these must be clearly set out.
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Agency Update - Effect of Termination of Agency Agreement
Agency Update - Effect of Termination of Agency Agreement
Be aware, an agent's authority expressed to be irrevocable may still be revocable
The Effect of Termination of an Agency Agreement in Bailey v Angove's Pty Ltd [2016] UKSC Civ 47)
The issue Generally, a principal is entitled to end an agent's authority at any point during the relationship. The principal may be in breach of contract and liable to pay damages if it does not adhere to a term in the agency agreement regarding termination. Despite this, the agent's authority will still end. If the ability to withdraw the agent's authority would hinder the purpose of the agreement, the parties may decide to make such authority irrevocable.
In the recent case of Bailey v Angove's Pty, the Supreme Court was asked to consider whether, following the alleged termination of the agent's authority, the provisions of the agency agreement preserved the agent's right to collect payments due from customers for goods already provided.
What's new? In Bailey v Angove's Pty, an Australian wine producer (the "Principal") had appointed D&D Wines International Ltd (the "Agent") to act as an agent and UK distributor pursuant to an Agency and Distribution Agreement (the "Agreement"). The Agreement was stated to be terminable with immediate effect on the appointment of an administrator.
The Agent went into administration in April 2012 and the Principal gave written notice terminating both the Agreement and the Agent's authority to collect the outstanding balances of two invoices amounting to nearly AUS $875,000. When the Agent moved into creditor's voluntary liquidation, liquidators subsequently claimed that they were entitled to collect the outstanding invoices on the Agent's behalf and that authority to collect the money was irrevocable given that the Agent needed to recover its commission.
The Supreme Court held that an agent's authority could be revoked even if it was expressed to be irrevocable. The Supreme Court took the opportunity to clarify the limited circumstances in which an agent's authority could not be revoked by a principal or by operation of law.
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Agency Update - Effect of Termination of Agency Agreement
Even if an agent's authority is expressed to be irrevocable, it may still be revocable if the second limb is not present, namely that the authority is conferred to secure an interest of the agent's"
An agent will be deemed to have irrevocable authority when both:
l the parties agree that the agent's authority should be irrevocable and
l the authority is conferred to enhance or protect either a proprietary interest or liability to the agent personally and for its benefit.
In Bailey v Angove's Pty, the Supreme Court came to the conclusion that under the Agreement, there was no express provision stating that the authority to collect payments from the customers was irrevocable or that the authority should survive termination of the Agreement. The customers were entitled to pay the Principal directly and therefore the Agent had no "right" to collect the money.
This authority was also described as a "responsibility" and therefore was likewise not considered to be an "accrued right or remedy" that would have survived termination of the Agreement. Finally, the Supreme Court said it was "inherently improbable" that the parties intended for the authority to be irrevocable. The Principal's notice to terminate was therefore effective to terminate the Agent's authority. As a result, the payments were to be paid directly to the Principal rather than distributed to the creditors in the Agent's insolvency.
The Supreme Court also held, as obiter, that in the event that the Agent had been deemed to have irrevocable authority, the Agent's receipt of the sums knowing that it was approaching insolvency would not have given rise to a constructive trust in favour of the Principal. The court concluded that the necessary elements needed to establish a constructive trust, for example payments made due to mistake or money resulting from fraud, theft, or breach of trust, were not present in this scenario.
In practice If an agent's authority is intended to be irrevocable this should be expressly covered in the agency agreement. Clear drafting should highlight the scope of the agent's irrevocable authority. Any other provisions intended to survive termination of the agreement should also be specifically highlighted. Be aware, however, that even if an agent's authority is expressed to be irrevocable, it may still be revocable if the second limb is not present, namely that the authority is conferred to secure an interest of the agent's.
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Collection 4: Relationships
Liability for Misrepresentation
Liability for Misrepresentation
Be aware of the risks of giving out information provided by third parties
Webster v Liddington [2014] EWCA Civ 560
The issue The Court of Appeal decision in Webster v Liddington has reinforced a judicial trend towards imposing liability on product distributors for false third-party claims (usually by manufacturers) which are then communicated by them to consumers. It will have particular significance in determining the apportionment of liability for false claims made in the marketing of non-surgical treatments by the cosmetics industry. The issue at stake in Webster v Liddington was whether brochures about a product, distributed to consumers by clinicians, which contained potentially misleading proclamations about that product by a third party manufacturer, could constitute an express statement by the clinicians capable of inducing another party to enter into a contract and amounting to misrepresentation.
The decision ultimately turned upon whether liability could attach to the very act of disseminating the brochure to patients. It was held that in such circumstances clinicians themselves could indeed be liable for the accuracy of claims made in the brochures. The scope of this decision's application remains to be seen, but the potential burdens it places upon professionals distributing specialist products to the public are significant.
What's new? The grounds for determining when a party (B) may be liable to a consumer (C) for information that has been provided to it by another party (A) was laid down in IFE Fund v Goldman Sachs International [2006] EWCHC 2887 (Comm). Such cases were held to turn, in the words of Toulson J, on an interpretation of ``what a reasonable person [C] would have inferred was being implicitly represented by a representor's [B] words and conduct in their context.'' This is a largely objective test and rests solely on the likelihood of the average consumer believing that B was presenting certain information about a product as fact, whether or not it was actually supplied by A, as fact. Clearly, factors such as the status of the distributor, B, and the depth of the clinical knowledge that they have, or ought to have, of the products in question, particularly as opposed to the consumer, are of considerable importance under such a test.
This approach was readily applied by Jackson LJ to the facts in Webster v Liddington. The case arose when a group of patients received a non-surgical cosmetic treatment from clinicians which had been manufactured by a company that had subsequently gone into administration. This treatment involved taking a skin sample from prospective patients. This skin sample was then used to create a solution for injection into the skin by clinicians to improve wrinkles. The leaflets produced by the manufacturer, while it was still a going concern, stated that the final product only contained the skin cells of the patient into whom it was to be injected. However, it later materialised that the product also contained bovine foetal cells, which had been used in the cultivation of the finished product.
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Collection 4: Relationships
Liability for Misrepresentation
It was concluded that the reasonable consumer would almost certainly assume that the clinicians had verified and approved the content of the leaflets"
This had the potential to cause severe health issues in patients who might suffer allergic reactions to such foreign bodies and the consumers concerned proceeded to bring a claim against the clinicians who had distributed the leaflets and administered the product. It was the clinicians, rather than the manufacturers, who were the target of liability proceedings primarily because the manufacturers had already gone into administration. The issue, therefore, became whether the clinicians could be held to be liable for the clear misrepresentations contained in leaflets which they had distributed but not produced. It was held that they were and the Court of Appeal dismissed the clinicians' appeal against the decision at first instance, holding that they themselves were responsible for the veracity of the content of the leaflets.
A key factor was the very fact that the distributing party were clinicians. It was held that this meant that there was a considerable imbalance between the knowledge of the product, and the process of its manufacture, that they ought reasonably to have had, and that which an average consumer was likely to have. Reverting back to Toulon J's comments in IFE Fund, it was concluded that the reasonable consumer would almost certainly assume that the clinicians had verified and approved the content of the leaflets. This was particularly the case given that nowhere in the leaflet had the clinicians appended any disclaimer regarding its contents. They ought to have known that consumers would rely on them, in their position as clinicians, to distribute accurate information regarding a product, and they were subsequently liable for that information, whether or not they themselves had formulated it.
In practice The scope of the future application of Webster v Liddington still remains unclear but it seems likely that it will have particular significance in those cases which involve professionals of any stripe distributing misleading third party information about a product to consumers, particularly where that information reasonably falls within the parameters of their professional expertise. In such circumstances the courts are always likely to hold the distributor liable for third party information (alongside that third party if possible), particularly where a consumer would reasonably expect, in the absence of anything to the contrary, such information to have been vetted by the professional distributor. This emphasises the need for clear and comprehensive disclaimers to be included whenever third party information about a product is passed to consumers. This is certainly the case where that information is specific or technical and unlikely to be instantly understandable by the average consumer.
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Collection 4: Relationships
Fraudulent Misrepresentation Settlement Set Aside
Fraudulent Misrepresentation Settlement Set Aside
Be aware of the risks of relying on a Settlement Agreement
Hayward (Respondent) v Zurich Insurance Company plc (Appellant) [2016] UKSC 48
The issue In Hayward v Zurich the Supreme Court considered whether a settlement agreement (SA) could be set aside for fraudulent misrepresentation in a situation where the insurer suspected the claim to be fraudulent before entering into the SA. In Hayward the parties entered the SA in respect of an injury that Mr Hayward suffered at work. Zurich had admitted the liability but Mr Hayward had deliberately and dishonestly exaggerated the extent of his injury in order to obtain a higher sum. Having collated the relevant evidence Zurich then sought to set aside the SA and claim damages from Mr Hayward for deceit. The Supreme Court was required to consider the second Court of Appeal's decision that Zurich could not be allowed to set aside the SA for reason of fraudulent misrepresentation since Zurich was aware of Mr Hayward's fraud at the time of entering the SA. The Supreme Court rejected the conclusion of the second Court of Appeal and restored the decision of the first Court of Appeal that the SA should be set aside for fraudulent misrepresentation and Mr Hayward awarded a much reduced sum. The Supreme Court held that Zurich had been induced by Mr Hayward's fraud to enter the agreement evidenced by the fact that it settled for a much higher sum than it would have otherwise. Zurich's suspicions that the claim was fraudulent did not in itself preclude inducement and Zurich was not required to prove it had been deceived.
What's new? The two key points to take away from the Supreme Court judgment are:
1. It is not necessary for a claimant to prove that it believed that a representation was true in order to prove inducement. However, the claimant's state of mind is relevant here if the claimant did not believe the representation was true it may have difficulty establishing that it was in fact induced to enter the contract as a result. This difficulty is underlined in a litigious context (as was the case here) - even where a party is sure that a statement is a lie it may be unable to ignore it realising the risk that it may at some point be believed by the judge at trial. As such, Zurich's belief that Mr Hayward was lying here did not disprove inducement it was clear that Mr Hayward's statements had influenced Zurich in deciding how much to pay Mr Hayward under the SA.
2. Lord Clarke held that it was difficult to envisage any circumstance in which a suspicion of fraud would preclude the unravelling of a settlement agreement where fraud is then established.
In practice The Supreme Court's decision in Hayward v Zurich is an important decision for insurers. The case clearly recognises the difficulties faced by insurers where they suspect a claim to be fraudulent but do not, at the time of settlement, have the evidence to prove it. This case proves that in such cases insurers are able to settle to prevent the risk of a judgment in favour of the claimant without then being penalised for investigating claims and subsequently unravelling settlements.
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Collection 4: Relationships
Liability for Negligent Misstatement
Liability for Negligent Misstatement
Be aware, you still need to take care in giving references but the extent of the duty of care has been sensibly reduced
Liability for negligent misstatement arising out of references relating to individuals in Playboy Club London Limited v. Banca Nazionale Del Lavoro SPA [2016] EWCA Civ 457 (18 May 2016)
The issue It was established in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC465 (HL) that where a reference is given in relation to an individual, the party giving the reference could be held liable to a third party for negligent misstatement if that third party relies on the reference despite the fact that party was not the original addressee.
What's new? The Playboy case limits the scope of liability for references which are relied upon by third parties who were not the intended original recipient of the reference. This is good news for those who are often asked to provide references such as banks. The ruling in Hedley Byrne v Heller has always been potentially too wide in scope.
This case therefore narrows the scope of the duty of care with regards to references. In Playboy the reference in question was given by Banca Nazionale Del Lavoro ("Banca") relating to the creditworthiness of an individual to a Playboy intermediary company, Burlington Street Services Limited ("Burlington"). Burlington and Playboy were owned by the same parent company. Playboy sought to rely on the reference and claimed against Banca for negligent misstatement when it transpired that the individual who was the subject of the reference was unable to pay debts owed to Playboy.
The Court of Appeal held that there was clearly a duty of care owed by Banca to Burlington as the intended recipient of the reference. However, the court went on to impose some important limitations to the original ruling in Hedley Byrne v Heller as follows:
l A party giving a reference cannot be held liable for a reference where it did not know the purpose for the reference or the third parties who would rely on the reference. Further, the court noted that the meaning of the phrase "given in strictest confidence" used by Banca in relation to the reference should be given its natural meaning and that therefore the reference should not have been given to a third party
l There is a difference between a disclosed (but unnamed) recipient of the reference (as in Hedley Byrne v Heller) and an undisclosed recipient (as in the Playboy case)
l It is not reasonable for an undisclosed third party to argue that it should be owed a duty of care. In this case, Playboy did not disclose its interest in Banca's reference so as to preserve the confidentiality of its customers.
In practice For those who give references, it is recommended that words such as "strictly confidential" are used or a specific disclaimer should accompany the reference limiting the scope of reliance to the intended recipients only. For those who are seeking to rely on references, the result of this case is that it should be made clear that the reference may be relied on by the addressee and other third parties (and preferably named third parties) and that this is made known to the party giving the reference.
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List of contributors
David Berry Laura Bruin Sam Collingwood Natalie Elsborg Christina Fleming Paul Henty Annabel Madewell Jonathan McDonald Paul Shapiro Caroline Swain Jon Walters Jaclyn Wilkins George Willis Caroline Young Shayda Youssefian Louise Zafer
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