Summer 2016 Editor: Melanie Willems IN THIS ISSUE Anti-Oral Variation Clauses: A Written Analysis 03 by Melanie Willems 08 13 14 The problem with Agreeing to “Go Dutch” by Robert Blackett Express Yourself: Keeping to the Contract’s Proper Meaning by Ryan Deane THE ARBITER SUMMER 2016 2 Exercising Termination Rights - As Always, Approach with Caution by Angela Wallace THE ARBITER SUMMER 2016 3 AnƟ-Oral VariaƟon Clauses: A WriƩen Analysis by Melanie Willems Despite the saying that ‘a verbal contract is not worth the paper it is wriƩen on’ (aƩributed to the American film producer Samuel Goldwyn), there is no shortage of cases in the English courts based on alleged oral agreements, or oral variaƟons of wriƩen contracts. Such claims may well face eviden- Ɵal difficulƟes, and they might ulƟmately fail. But they inevitably introduce risk and uncertainty for the party resisƟng such asserƟons, who will be exposed to legal costs. Leaving alleged oral understandings to one side, another way in which wriƩen agreements may be varied is by subsequent conduct. One regularly encounters situaƟons where aŌer signing the contract, the parƟes both fall into the habit of performing it in a manner that is inconsistent with its terms. To protect the wriƩen bargain, most commercial agreements contain an anƟ-oral variaƟon clause as part of the ‘boilerplate’ clauses. AnƟ-oral variaƟon clauses state that no variaƟon shall be effecƟve unless it is in wriƟng and signed by the parƟes through their duly authorised representaƟves. For a number of years, it was unclear whether such provisions were effecƟve under English law, with apparently conflicƟng Court of Appeal decisions on the point. Now, in Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd  EWCA Civ 396, the Court of Appeal has provided the most detailed consideraƟon of the authoriƟes, both for and against, so far. Although obiter, the Court of Appeal concluded that anƟ- oral variaƟon clauses were flawed as a maƩer of basic legal principle. That view may prove persuasive in future cases. This arƟcle considers the authoriƟes leading up to, and the decision in, Globe Motors, and outlines how the parƟes nevertheless might protect themselves against claims based on an oral variaƟon or implicit understanding. The case for: United Bank Ltd v Asif (Court of Appeal, 2000) ParƟes relying on anƟ-oral variaƟon clauses tend to cite the Court of Appeal decision in United Bank Ltd v Asif. In that case, in January 2000, the Court of Appeal denied permission to appeal from a summary judgment against a guarantor, who had been held liable to repay a loan of £6 million on which the debtor had defaulted. At first instance, the guarantor had advanced a defence based on an alleged oral variaƟon of the guarantee. He claimed that the bank had (orally) agreed to extend Ɵme for payment, and (even beƩer) had also significantly reduced the amount that was guaranteed. The deed of guarantee provided that “no variaƟon … shall be valid or effecƟve unless made by one or more instruments in wriƟng signed by the parƟes …”. When granƟng summary judgment for the bank, Wright J kept his reasoning brief. He rejected the submission that an officer of the bank had simply disregarded the anƟ-oral variaƟon clause in the deed. The judge also found that the allega- Ɵons of fraud (described as ‘somewhat ByzanƟne’ on appeal) were unsubstanƟated, and that the bank’s officer accused of leƫng the guarantor off the hook had lacked the authority to bind the bank. On appeal, Sedley LJ upheld the judge’s decision “that no oral varia- Ɵon of the wriƩen terms could have any legal effect”. He also found (separately) that the bank’s officer had not had actual or ostensible authority to make the concessions in any event. Neither the judge nor the Court of Appeal however explained why the anƟ-oral varia- Ɵon clause was itself effecƟve to preclude any variaƟon: it seems the point had not been argued in any kind of detail. Despite the brevity of the Court of Appeal’s judgment, United Bank Ltd v Asif has subsequently been treated as authority for the proposiƟon that these clauses do work. Before moving on to the next Court of Appeal decision on anƟ- oral variaƟon clauses (which went the other way), it is worth noƟng that the alleged oral variaƟon in United Bank also failed because the relevant officer of the bank who had allegedly acceded to the variaƟon, acƟng as agent of the bank, had lacked any authority to bind his principal in this manner. This point takes on greater signifi- cance for parƟes in the wake of Globe Motors v TRW, as will be seen. The case against: World Online Telecom Ltd v IWay Ltd  EWCA Civ 413 Two years later, the Court of Appeal heard another appeal from a summary judgment decision, in World Online v I-Way. The dispute concerned the payment that I-Way, an internet service provider, would receive from World Online in return for providing hardware necessary to ensure that World Online’s customers would be able to access the internet. The contract was signed in April 1999. I -Way argued that as early as May 1999, it became clear that the hardware requirements to enable internet access were in fact more extensive than had been anƟcipated, so that I-Way asked for, and was granted, an addiƟonal 10% of the relevant amount from World Online. I-Way said that an oral agreement had been concluded to that effect, and that the extra 10% was then paid regularly by World Online. World Online applied for summary judgment in reliance on an anƟ-oral variaƟon clause, which provided that: “... no addiƟon, amendment or modificaƟon of this Agreement shall be effecƟve unless it is in wriƟng and signed by and on behalf of both parƟes.” The judge refused summary judgment. He found that I-Way had a reasonable prospect of overcoming the provision, and neatly summed up the logical conundrum that casts doubt on whether these clauses bite. IrrespecƟve of such a clause, in theory parƟes 4 THE ARBITER SUMMER 2016 are free to conduct themselves as they wish, and enter into a new agreement: “… orally or by conduct, for that maƩer, if they chose. That agreement can either be treated as an oral agreement varying the original agreement, or as a free-standing contract, and I know nothing in case law that prevents such an event having effect.” On appeal, Sedley LJ found that the judge was right to have ordered a full trial. Having had the benefit of argument on the point, his view was that “… the parƟes have made their own law by contracƟng, and can in principle unmake or remake it …”. Reaching a subsequent oral agreement notwithstanding the clause in the original contract would therefore be an exercise of freedom of contract - a fundamental principle of English law. UlƟmately, the Court of Appeal noted that the law was not fully seƩled on the point, and that alone was a good enough reason for having a trial. The maƩer did indeed go to trial before David Steel J (I-Way Ltd v World Online Telecom Ltd  EWHC 244 (Comm)). The judge upheld I-Way’s claim that the contract had been varied orally in the course of a meeƟng, which (as he found) had ended with a consensus and a handshake. The judge did not refer to the anƟ-oral varia- Ɵon in the judgment, which suggests that World Online was either not pursuing that line of argument, or (at least) had not been pushing the point. It is worth noƟng that the oral agreement (which the judge upheld) had subsequently been referred to in correspondence and minutes of other meeƟngs, although World Online never seems to have unequivocally accepted it in wriƟng. So there was, at least, some ‘wriƩen’ evidence of the agreement, though not in the form of a duly signed amendment. Upping the stakes The next case in which anƟ-oral variaƟon clauses featured upped the stakes financially. In Energy Venture Partners Ltd v Malabu Oil and Gas Ltd  EWHC 2118, Gloster LJ (siƫng as a judge of the Commercial Court) had to decide whether Energy Venture Partners (“EVP”) and Malabu had orally varied their wriƩen contract such that Malabu had to pay EVP an amount of up to US$ 200 million, in return for services provided by EVP in relaƟon to the sale of Malabu’s interest in an oil field in Nigeria. EssenƟally, under the wriƩen agreement, EVP was to act exclusively for Malabu as a broker. EVP would seek to obtain offers for the block in quesƟon. EVP would then be paid a commission by Malabu if there was a qualifying sale following an offer procured by EVP during the exclusivity period. This was a complex dispute, and Gloster LJ’s judgment runs to 337 paragraphs. She found that Malabu had ulƟmately entered into a transacƟon that, in principle, enƟtled EVP to a fee under the contract. However, it was not at all clear what that fee should be. That was because the parƟes had, apparently quite deliberately, departed from the contractual provisions seƫng out how EVP’s commission was to be calculated. The contractual mechanism required an agreement between Malabu and EVP as to a parƟcular price, which then governed how much EVP would receive. Malabu did not agree that price, so it became impossible to calculate EVP’s commission based on the wriƩen contract. Gloster LJ found that the parƟes had reached an implied agreement, orally at a parƟcular meeƟng and by conduct thereaŌer, that EVP should nevertheless be paid a fee for its services. She went on to imply a term into the agreement that EVP was enƟtled to a ‘reasonable’ fee (which turned out to be around US$ 110 million). In resisƟng the claim based on an implied agreement, Malabu had relied on an enƟre agreement clause, which said that “… no addi- Ɵons, amendment to or modificaƟons of this Agreement shall be effecƟve unless it is in wriƟng duly signed on behalf of the parƟes …”. Malabu accepted that this clause could subsequently be overridden if the parƟes in fact entered into an oral agreement (and EVP agreed with that proposiƟon), but nonetheless submiƩed that “… the purpose of such clauses, is not to prevent the recogniƟon of oral variaƟons, but, rather, [to prevent] casual and unfounded allegaƟon of such variaƟons being made.” Gloster LJ noted that neither party had relied on any authoriƟes holding that such clauses were ineffecƟve as a maƩer of law, and that the enquiry would therefore have to be fact based. She concluded that while this was not the occasion to decide the point of legal principle: “… as at present advised, I incline to the view that there can be an oral variaƟon in such circumstances, notwithstanding a clause requiring wriƩen modificaƟons, where the evidence on the balance of probabiliƟes establishes such variaƟon was indeed concluded.” That conclusion was tantamount to saying that anƟ-oral varia- Ɵon clauses were of no effect, since the burden of proof for establishing an oral agreement would also be ‘on the balance of probabiliƟes’ absent any such provision. On the facts before her, Gloster LJ found that an implied agreement had been proven, regardless of the anƟ-oral variaƟon clause. No more appeƟte for anƟ-oral variaƟon clauses? By then, parƟes appeared to have lost their appeƟte for relying on anƟ-oral variaƟon clauses being effecƟve to preclude unwriƩen variaƟons or agreement. In Virulite LLC v Virulite DistribuƟon Ltd  EWHC 366 (QB), the High Court again proceeded on the agreed assumpƟon that such a clause could not preclude any subsequent waiver, estoppel or indeed variaƟon from arising as a maƩer of law. Instead, the argument was that anƟ-oral variaƟon clauses gave rise to an ‘evidenƟal presumpƟon’ that the parƟes did not intend to vary the contract unless they produced a signed, wriƩen instrument to that effect. In effect, it was said that these clauses made it more difficult to establish the oral variaƟon. Stuart-Smith J rejected that argument. He noted that the concept of an ‘evidenƟal presumpƟon’ was not something that had THE ARBITER SUMMER 2016 5 been sancƟoned by authority under English law, and that the standard of proof remained the balance of probabiliƟes. References to the need for ‘strong evidence’ were unhelpful, as the Court would (as it ordinarily does) consider all the evidence, and giving due weight to all the facts. The judge did note, however, that the parƟes having included such a clause in their agreement was a relevant factor, and the circumstances in which such a clause was included in the contract in the first place might also be relevant. The existence of an anƟ- oral variaƟon clause would require the Court to “look closely” at whether a subsequent agreement was actually concluded and “whether, in reaching that agreement, the parƟes had intended to enter into legal relaƟons so as to vary the terms of their original contractual obligaƟons.” The judge’s second point, relaƟng to the intenƟon to enter into legal relaƟons, merits further commentary. Together with offer and acceptance, and consideraƟon, an intenƟon to create legal a relaƟonship is one of the fundamental requirements for a binding contract under English law. In the commercial context, where contracts (as opposed to leƩers of intent or documents marked ‘subject to contract’) are being negoƟated, an intenƟon to create legal relaƟons is usually found. Indeed, this requirement oŌen goes unmenƟoned as it has so obviously been met. As will all maƩers relaƟng to contract formaƟon, English law adopts an objecƟve approach to determine whether there was the necessary intenƟon. In RTS Flexible Systems Ltd v Molkerei Alois Muller  UKSC 14, the Supreme Court summarised the general principles: “… Whether there is a binding contract between the parƟes and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjecƟve state of mind, but upon a consideraƟon of what was communicated between them by words or conduct, and whether that leads objecƟvely to a conclusion that they intended to create legal relaƟons and had agreed upon all the terms which they regarded or the law requires as essenƟal for the formaƟon of legally binding relaƟons. Even if certain terms of economic or other significance to the parƟes have not been finalised, an objecƟve appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condiƟon to a concluded and legally binding agreement.” As the Court of Appeal noted in Barbudev v Eurocom Cable Management  EWCA Civ 548: “In a commercial context, the onus of demonstraƟng that there was a lack of intenƟon to create legal relaƟons lies on the party asserƟng it and it is a heavy one.” An anƟ-oral variaƟon clause in an exisƟng contract between the parƟes is certainly an ‘objecƟve’ maƩer. A party resisƟng a claim that the contract was varied notwithstanding such a provision should therefore be able to rely on it in denying that it lacked the requisite intenƟon to alter the agreement. That is what StuartSmith J said in Virulite v Virulite. However, the learned judge also held that the mere existence of the clause did not somehow shiŌ the onus on to, or increase the burden of, the party seeking to overcome the clause. The end of the road? Globe Motors v TRW The Court of Appeal in Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd  appears to have now put the final nail in the coffin of anƟ-oral variaƟons clauses. The appeal concerned a dispute under a long term agreement for the exclusive supply of electric motors and certain other components used in power assisted steering systems for cars. TRW, the defendant, assembled these power steering systems. Under the supply agreement, TRW agreed to purchase all electric motors and lead frame assemblies that it might require exclusively from Globe Motors. The exclusivity obligaƟon in the contract only bit, however, if the relevant motors and assemblies fell within the specific scope of what was called the ‘Products’ under the agreement. The parƟes entered into their supply agreement in 2001. In or around 2005, TRW began to purchase certain ‘second generaƟon’ motors from a company called Emerson. In 2006, TRW then acquired Emerson, and Emerson conƟnued to supply the next genera- Ɵon motors to TRW. By 2014, TRW had purchased more than 3 million units from Emerson. Globe Motors alleged that this was a breach of the exclusivity obligaƟon in the supply agreement. TRW argued in its defence that the second generaƟon motors were not in fact ‘Products’ for the purposes of the supply agreement. TRW said this was because the contract provided for a parƟcular process by which engineering specificaƟons could be altered so as to widen or extend the scope of the ‘Products’, as originally defined (socalled Engineering Changes): however, this contractual machinery had never been operated with regard to the type of motor that TRW had been buying from Emerson. At first instance, the judge decided that the exclusivity obligaƟon applied to the second generaƟon motors, because they were a product that Globe ‘could and would have built’ if TRW had required that of Globe pursuant to the agreement by operaƟng the machinery - something that TRW could have done. The judge relied on the fact that the Engineering Changes procedure could have applied to the Emerson motors, and if that had happened, Globe would have had to buy all of its requirements from TRW under the exclusivity arrangement. He concluded that any new type of motor that “could and would” have gone through the Engineering Changes process was also a Product (or, at least, was deemed to be one). Globe succeeded at trial. The Court of Appeal held that the judge had fallen into error. The key reason for allowing TRW’s appeal was that under the contract, Engineering Changes had to be iniƟated by TRW. Globe 6 THE ARBITER SUMMER 2016 would then have to agree to these changes, always provided it was capable of manufacturing the new specificaƟon. However, there was no obligaƟon (express or implied) on TRW to go through the Engineering Changes process with Globe, once TRW had realised that it might need a different type of motor to which the contract did not (yet) apply. In finding for the claimant, the judge had been influenced by the fact that the supply agreement was a long-term, ‘relaƟonal’ contract that was clearly of great importance for Globe. Globe had invested and increased its manufacturing capabiliƟes specifically to allow it to perform the contract. The Court of Appeal noted that in some long-term contracts, there might be scope for the implicaƟon of a duty of loyalty or good faith, or a duty to co-operate: such a duty might be breached by one party deliberately refusing to operate contractual machinery that was plainly intended to apply, so that a new product would not be covered by the contract. Beatson J was however careful to point out that any implicaƟon of such a duty of good faith would only succeed where the contractual wording permiƩed it, and would not follow simply because the contract fell into a parƟcular category (such as a long-term, exclusive supply agreement): “… an implicaƟon of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it. It is thus not a reflecƟon of a special rule of interpretaƟon for this category of contract.” In this case, Globe might, nonetheless, have succeeded with an argument that there was an implied duty: “In the present case, where the Agreement was for exclusive supply and, absent insolvency or material breach, was for the lifeƟme of the plaƞorms and a long term agreement, the flexibility of approach I have described might have given considerable force to a submission that there was an implied obligaƟon on TRW Lucas to give Globe an opportunity to show that it could provide a Gen 2 motor.” Unfortunately for Globe, any claim for a breach of such an implied obligaƟon would have been Ɵme-barred, as more than six years had elapsed since TRW awarded the contract to Emerson. Globe therefore failed to achieve by a process of interpretaƟon of the express terms of the contract what it might have been able to achieve by a process of implicaƟon. The express terms simply said that it was up to TRW to iniƟate the Engineering Changes. Having found that the judge was wrong to conclude that TRW was in breach of contract, the Court of Appeal did not need to decide another ground of appeal, which concerned the effecƟveness of an anƟ-oral variaƟon provision contained in the supply agreement. The judge had also found that an affiliate of Globe’s had become a party to the contract (in addiƟon to the named parent company), by conduct or through an implicit understanding between the parƟes, notwithstanding the anƟ-oral variaƟon clause. Based on that finding, the judge awarded damages for losses suffered by Globe’s affiliate - which could not stand as the appeal was allowed. Nevertheless, Beatson, Underhill and Moore-Bick LJJ all offered obiter conclusions on whether the anƟ-oral variaƟon clause could be effecƟve as a maƩer of principle, having had the benefit of full argument. As will be seen, they decided against such clauses being effecƟve. Before turning to the reasons for that, it is worth looking at just how the parƟes had (according to the judge) varied their contract and added a party. Globe had a subsidiary, incorporated in Portugal (referred to in the judgments as “Porto”). Porto had been established with the intenƟon of supplying motors to TRW under the supply agreement. While Porto was not a named party to the supply agreement, Globe argued that the contract was subsequently varied so as to make Porto a party. That was because Porto had in fact performed the agreement on behalf of Globe, and had been supplying motors to TRW from November 2002 onwards. Globe relied on the following maƩers as having led to Porto becoming a party to the contract: - From early 2003, TRW had placed orders with Porto for ‘Products’, in accordance with the contractual specificaƟons and prices. Porto had in turn supplied the ‘Products’, in line with the contract. Porto also invoiced TRW (or its nominees), and payments were made to Porto. - TRW submiƩed warranty claims made under the applicable provisions of the supply agreement to Porto. TRW also submiƩed volume forecasts (as envisaged by the contract) to Porto. None of the relevant contractual correspondence or noƟces were addressed to Globe. - In 2005, TRW and Porto (not Globe) entered into a supplemental agreement, in order to saƟsfy certain consignment stock requirements set out in the supply agreement. On these facts, the judge found that it was overwhelmingly clear that the parƟes had intended to vary the supply agreement, such that Porto had become a party to it. Pausing here, one can see that a contrary conclusion might seem unfair and arƟficial. If Globe had really wanted to keep the contract at parent company level, then the parent enƟty could and should have taken the lead in managing and performing the agreement. That leŌ the quesƟon whether the anƟ-oral variaƟons clause precluded that subsequent variaƟon from being effecƟve and binding as maƩer of law. ArƟcle 6.3 of the contract provided: “6.3 EnƟre Agreement; Amendment: This Agreement, which includes the Appendices hereto, is the only agreement between the ParƟes relaƟng to the subject maƩer hereof. It can only be amended by a wriƩen document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both ParƟes.” Beatson LJ rejected the submission that the Court of Appeal was bound by the prior decision in United Bank v Asif. He took the view THE ARBITER SUMMER 2016 7 that, on its face United Bank v Asif (though it was a brief judgment) was inconsistent with World Online Telecom Ltd v I-Way Ltd. As there were two inconsistent decisions at the appellate level, the incarnaƟon of the Court of Appeal that had to decide Globe Motors v TRW was free to choose which prior judgment it would follow. As the Court of Appeal in United Bank had only approved the judge’s proposiƟon that these clauses were effecƟve, without giving any reasons, Beatson LJ preferred to follow the later judgment in World Online, which was also in line with the other first instance decisions set out above (Energy Venture Partners and Virulite). The Court of Appeal noted that anƟ-oral variaƟon clauses were meant to serve a purpose, of prevenƟng parƟes having to incur costs in defending ill-founded allegaƟons of oral agreements, whilst at the same Ɵme promoƟng certainty in commercial agreements. However, these consideraƟons could do nothing to alter the posiƟon as a maƩer of legal principle, that: “Absent statutory or common law restricƟons, the general principle of the English law of contract is that … The parƟes have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct. The consequence in this context is that in principle the fact that the parƟes’ contract contains a clause such as ArƟcle 6.3 does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct.” Beatson LJ also agreed with Gloster LJ’s comments in Energy Venture Partners, that it was undesirable to aƩach any adjecƟves or qualificaƟons to the evidence that a party seeking to prove an oral variaƟon in the face of such a clause would have to adduce: the quesƟon was simply whether on the balance of probabiliƟes, they had established a subsequent agreement. Underhill LJ added that it did not, however, follow that anƟ-oral variaƟon clauses were of no value at all: “In many cases parƟes intending to rely on informal communicaƟons and/or a course of conduct to modify their obliga- Ɵons under a formally agreed contract will encounter difficul- Ɵes in showing that both parƟes intended that what was said or done should alter their legal relaƟons; and there may also be problems about authority. Those difficulƟes may be significantly greater if they have agreed to a provision requiring formal variaƟon.” Conclusion The principle of freedom of contract provides an absolute answer to any suggesƟon that anƟ-oral variaƟon clauses can preclude a subsequent oral agreement from being effecƟve in law. If the parƟes can agree today that they must amend their contract in wriƟng, they can also agree tomorrow that they no longer want to be bound by this restricƟon, and that they are prepared to amend their contract orally. If the parƟes entered into an oral variaƟon, and thereaŌer performed the contract as if it had been duly amended, there may also be a case for an estoppel prevenƟng either of them from denying the oral variaƟon (assuming the necessary reliance and detriment were present on the facts). While black-leƩer lawyers everywhere will rejoice, the posiƟon is less saƟsfactory from a pracƟcal point of view. Underhill LJ in Globe Motors v TRW clearly recognised that allegaƟons of oral variaƟons create uncertainty and make the contract more difficult to enforce, because there may be enough in such claims at first blush to have the maƩer go to a full hearing. Having looked for ways in which anƟ-oral variaƟon clauses might be given effect, he could find none that were doctrinally sound - and neither could Moore-Bick LJ, the third member of the Court of Appeal. Nonetheless, it is suggested that there are ways in which these clauses can be Ɵghtened up such that they might sƟll carry the day on a summary judgment applicaƟon in Court (or be enough to have an arbitral tribunal reject an ‘oral variaƟon’ as a preliminary maƩer). The key lies in the fact that parƟes to commercial contracts are almost always companies, who act through duly authorised agents. If the scope and limits of an agent’s authority are clearly set out and explained to the counterparty, which can be draŌed into the anƟ-oral variaƟon clause, then it becomes more difficult to argue that the principal is nevertheless bound where the agent has exceeded their actual authority (by operaƟon of the law of agency as to ‘ostensible’ or ‘implied’ authority). Certain contracts in the construcƟon and energy sector appoint named representaƟves and make them solely responsible for the administraƟon of the contract. There is no reason why an anƟ-oral variaƟon clause could not, in addiƟon, refer to a named individual, ideally a director of the company, as having the sole authority to amend or alter the wriƩen agreement, and go on to state that any successors must be duly appointed by the board and be noƟfied in wriƟng to the other party. The counterparty (or at least its corporate ego) would then be expressly aware of who is authorised to bind the company in quesƟon - and an analogy can be drawn with the corporate counterparty having the requisite intenƟon to be legally bound. Any oral agreement that could vary a contract that includes this addiƟonal protecƟon then becomes more involved, and hence more difficult to prove: not only must there have been a new agreement on the substance of the variaƟon, but it must also have been made by the relevant director - and preferably in wriƟng (though as we have seen, lack of wriƟng alone is not decisive). At the very least, amending these clauses in this way gives a company resisƟng an oral variaƟon another string to its bow, based on a lack of authority. 8 THE ARBITER SUMMER 2016 The Problem with Agreeing to “Go Dutch” by Robert BlackeƩ On 20 April 2016 a Dutch court made an order quashing certain arbitraƟon awards which had been made by an arbitral tribunal seated in the Hague. Why should this be of interest? It might be that anything is interesƟng if there is enough money involved. The arbitral awards in quesƟon are (of course) the record -breaking awards made pursuant to the Energy Charter Treaty in the long-running dispute between Russia and foreign investors in the “Yukos Oil Company” (“Yukos”), whom the tribunal awarded more than 50 billion US dollars in damages. The value of the awards aside, the decision is interesƟng insofar as it serves to highlight some elements of the Netherlands’ arbitra- Ɵon law which will surprise those who are familiar with the broadly pro-arbitraƟon regime which applies in England. QuesƟons of how the English court might approach the same issues are also not a mere hypotheƟcal. The shareholders have reportedly taken steps to enforce the Yukos awards in England, and other awards made under the ECT may also come to be considered by the English courts. The Energy Charter Treaty In the early 1990s the end of the Cold War raised the prospect of increased trade with and investment in the former Soviet Union by the West. The former Soviet Union had enormous, but underexploited energy resources, due to a lack of investment and a lack of access to the latest oil & gas technology (supply of which to Russia had previously been embargoed). The Netherlands’ then Prime Minister, Ruud Lubbers, launched an iniƟaƟve to establish an internaƟonal framework for energy trade, transit and investment. The first step, in 1991, was an internaƟonal declaraƟon called the “Energy Charter”, signed in the Hague. The signatories, including Russia, agreed that they were: “determined to create a climate favourable to the … flow of investments …” affirming “it is important for the signatory states to nego- Ɵate and raƟfy legally binding agreements on promoƟon and protecƟon of investments which ensure a high level of legal security …”. The signatories duly negoƟated a “legally binding agreement” known as the “Energy Charter Treaty” (“ECT”). This was opened for signature in Portugal in December 1994. ArƟcle 10 of the ECT obliges “ContracƟng ParƟes” to treat investments of foreign investors fairly and equitably and refrain from taking discriminatory measures which hamper the use of those investments. ArƟcle 13 requires that such investments not be na- Ɵonalised, expropriated or subject to measures with a similar effect, except “for a purpose which is in the public interest; … not discriminatory; … carried under due process of law; and … accompanied by the payment of prompt and adequate compensaƟon”. ArƟ- cle 21 provides that this ArƟcle 13 “shall apply to taxes”. ArƟcle 26 of the ECT concerns disputes between a ContracƟng Party and an investor of another ContracƟng Party. By ArƟcle 26, each ContracƟng Party “gives its uncondiƟonal consent to the submission of a dispute to internaƟonal arbitraƟon”. The investor is given the opƟon of submiƫng the dispute either to ICSID, to a tribunal established under the UNCITRAL rules, or to an arbitral proceeding under the ArbitraƟon InsƟtute of the Stockholm Chamber of Commerce. Background to the arbitraƟon Yukos was a Russian company and a major oil producer. In 2003 the Russian tax authoriƟes took the posiƟon that Yukos had been involved in large scale tax evasion, imposing substanƟal tax assessments and fines. Enforcement of the authoriƟes’ claims resulted in the sale of Yukos assets and, in August 2006, in Yukos’s bankruptcy. Three Yukos shareholders took the posiƟon that, by doing this, the Russian FederaƟon had breached the Energy Charter Treaty (“ECT”), which contained a provision for disputes between investors to be resolved by way of arbitraƟon. Each of the shareholders therefore made a request for arbitraƟon under the UNCITRAL Rules. The same three member tribunal was appointed in each of the three arbitraƟons. The parƟes agreed on the Hague as the legal seat. From the outset Russia objected to the Tribunal’s jurisdicƟon. The Tribunal determined that it had jurisdicƟon. The Tribunal went on to find that there had been a breach by Russia of ArƟcle 10 (the prohibiƟon on expropriaƟon) and awarded the shareholders nearly 50 billion US dollars. On 10 November 2014, Russia commenced proceedings in the Hague, seeking “reversal” of the award on six grounds under ArƟcle 1065 of the Dutch Civil Code. On 20 April 2016 the Dutch court gave a 63 page judgment quashing the Final Awards. Time limits for challenges in Dutch law Dutch law evidently allowed Russia to challenge the Final Awards almost four months aŌer they were made. This can be compared to English law, where the Ɵme limit for bringing a challenge is just 28 days from the date of the award. It turns out that Dutch law imposes an obligaƟon on arbitral tribunals to “ensure that without delay … the original of the … award is deposited with the Registry of the District Court within whose district the place of arbitraƟon is located” (Dutch Civil Code ArƟcle 1058, English translaƟon from dutchcivillaw.com). The Dutch Civil Code then provides (ArƟcle 1061 and 1063): “Enforcement in the Netherlands of [an arbitral award] can take place only aŌer the Provisional Relief Judge of the District Court with whose Registry the original of the award shall be deposited by virtue of ArƟcle 1058(1), has, in pursuance of THE ARBITER SUMMER 2016 9 a request of one of the parƟes, granted permission for enforcement … An applicaƟon for a reversal may be made as soon as the award has acquired the force of res judicata. The right to make an applicaƟon shall be exƟnguished three months aŌer the date of deposit of the award with the Registry of the District Court. However, if the award together with leave for enforcement is officially served on the other party, that party may make an applicaƟon for a reversal within three months aŌer the said service, irrespecƟve of whether the period of three months menƟoned in the preceding sentence has lapsed.” Presumably, the reason Russia was able to raise challenges almost four months aŌer the date of the Final Awards was either because the Tribunal delayed deposiƟng the original of the award or the shareholders had sought leave for enforcement against the shareholders in the Netherlands, thus causing the three month Ɵme period for challenging the award to start again. The Dutch approach seems surprising, and not parƟcularly arbitraƟon friendly. Why should a party who has allowed the Ɵme limit for challenging an award to lapse be given a second chance to bring a challenge simply by reason of the fact that another party has sought to enforce it? Undecided issues In its judgment, the Dutch court only discussed the first of the six grounds relied on by Russia: “absence of a valid arbitraƟon agreement”. The court held that there had been no valid arbitraƟon agreement, and so made an order quashing the Final Awards. The other grounds relied on by Russia included (for example) an allegaƟon that the shareholders were simply “leƩerbox companies”, through which Russian oligarchs had made “U-turn investments” back into Russia - they were not foreign investors of the kind the ECT was intended to protect. Russia also alleged that the award had been wriƩen, or largely wriƩen, by the tribunal’s assistant, and not by the tribunal itself. Unfortunately, the Dutch court did not discuss these (arguably more interesƟng) grounds of appeal. This approach seems surprising given that the decision is, inevitably, going to be the subject of an appeal. Suppose the appellate court finds there was an arbitra- Ɵon agreement - the appellate court then has to consider the other grounds without the assistance of any findings from the first instance judge - including on factual issues (like: who wrote the award?). Presumably, all this will have to be (re)heard on the appeal. This can be contrasted with the approach of the English courts, which will usually set out what their findings would have been even on issues which do not strictly require to be decided. Provisional applicaƟon On 17 December 1994 OD Dalyov (then Russia’s prime minister) signed the ECT on behalf of the Russian FederaƟon. The Russian FederaƟon was, therefore, a “signatory” to the ECT. The ECT provided: “ArƟcle 39. RaƟficaƟon, acceptance or approval This Treaty shall be subject to raƟficaƟon, acceptance or approval by signatories. Instruments of raƟficaƟon, acceptance or approval shall be deposited with the Depositary.” “ARTICLE 44 ENTRY INTO FORCE (1) This Treaty shall enter into force on the nineƟeth day aŌer the date of deposit of the thirƟeth instrument of raƟficaƟon, acceptance or approval thereof, or of accession thereto, by a state … which is a signatory to the Charter as of 16 June 1995. (2) For each state … which raƟfies, accepts or approves this Treaty or accedes thereto aŌer the deposit of the thirƟeth instrument of raƟficaƟon, acceptance or approval, it shall enter into force on the nineƟeth day aŌer the date of deposit by such state ... of its instrument of raƟficaƟon, acceptance, approval or accession …” On 26 August 1996, the government of the Russian FederaƟon presented a legislaƟve proposal to the Duma (part of the Parliament of the Russian FederaƟon) seeking “raƟficaƟon” of the ECT. The Duma never raƟfied the ECT and so Russia never “deposit[ed] … its instrument of raƟficaƟon”. Russia, then, was a “signatory” to the ECT but, for Russia, the ECT never “entered into force” in accordance with this ArƟcle 44. The ECT, however, also contains the following provision: “ARTICLE 45 PROVISIONAL APPLICATION (1) Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with ArƟcle 44, to the extent that such provisional applicaƟon is not inconsistent with its consƟtuƟon, laws or regulaƟons. (2) (a) Notwithstanding paragraph (1) any signatory may, when signing, deliver to the Depository a declaraƟon that it is not able to accept provisional applicaƟon. The obligaƟon contained in paragraph (1) shall not apply to a signatory making such a declaraƟon. …” Some ECT signatories made “declaraƟons” that they were not able to accept provisional applicaƟon. Austria, Luxembourg, Italy, Romania, Portugal and Turkey all made such declaraƟons. 10 THE ARBITER SUMMER 2016 Russia made no such declaraƟon. Russia, therefore, agreed “to apply this Treaty provisionally pending its entry into force … to the extent that such provisional applicaƟon is not inconsistent with its consƟtuƟon, laws or regulaƟons”. The central issue in the dispute between Russia and the investors was whether provisional applicaƟon of the arbitraƟon provisions in ArƟcle 26 of the ECT was inconsistent with Russian law, with the that Russia was not bound to submit to arbitraƟon of the investors’ claims. What does ArƟcle 45(1) mean? The investors argued, and the Tribunal held, that by ArƟcle 45(1) each signatory agreed to apply the enƟre treaty pending its entry into force, unless the principle of provisional applicaƟon itself was contrary to the signatory’s consƟtuƟon, laws or regulaƟons - in which case the signatory would not apply the treaty. This was referred to as the “all or nothing” approach. It was clear that the principle of provisional applicaƟon itself was not contrary to Russia’s consƟtuƟon, laws or regulaƟons. The evidence had been that, at the Ɵme of the arbitraƟon, there were some 45 treaƟes being applied provisionally by Russia, and provisional applicaƟon was expressly permiƩed by ArƟcle 23(1) of the Russian Federal Law on InternaƟonal TreaƟes (“FLIT”): “An internaƟonal treaty or a part thereof may, prior to its entry into force, be applied by the Russian FederaƟon provisionally if the treaty itself so provides or if an agreement to such effect has been reached with the parƟes that have signed the treaty.” Russia’s argument was that instead ArƟcle 45(1) required an assessment as to whether each individual arƟcle of the ECT was compa��ble with Russian law - if so, it applied. If not, it did not. This was referred to as the “piecemeal” approach. If the piecemeal approach was right then the relevant quesƟon would not be whether provisional applicaƟon of treaƟes was permiƩed in Russian law. The relevant quesƟon would be whether ArƟcle 26, which allowed investors to refer disputes to arbitraƟon, was “inconsistent with [Russia’s] consƟtuƟon, laws or regulaƟons”. Where the Tribunal had favoured the “all or nothing” interpreta- Ɵon, the Dutch Court came to the opposite conclusion and favoured the “piecemeal” interpretaƟon. As the Dutch Court put it “the ordinary meaning of phrases is paramount” and “to the extent in common parlance signifies a degree of applicaƟon …”. This is really the most persuasive argument for the “piecemeal” interpretaƟon - it is simply the natural reading. Also relevant (according to the Dutch Court) was the fact that the ECT referred to incompaƟbility with “consƟtuƟon, laws or regulaƟons”. One can imagine that the principle of provisional applica- Ɵon might be prohibited by the consƟtuƟon or enshrined in primary legislaƟon. The Dutch court considered it “inconceivable” that a ban on provisional applicaƟon of treaƟes could be laid down in delegated legislaƟon (i.e. “regulaƟons”). That is probably puƫng it too high, but one can see it is at least unlikely that a state’s law with respect to the effect of treaƟes would be set out in delegated legislaƟon. The formalism of the Dutch approach Both before the arbitrators, and before the Dutch Court, the investors had also made another argument - that, when read together, the effect of paragraphs 45(1) and (2) was in fact that the treaty was always to be given provisional applicaƟon unless the signatory had submiƩed a declaraƟon that it did not consent to provisional applicaƟon. Of this, the Dutch Court said: “The court is inclined to follow the reasoning of the Russian FederaƟon when it argues that this issue cannot be raised in the current reversal proceedings. The Tribunal did not follow the reasoning of the defendants and therefore did not base its competence on the absence of such a declaraƟon. In accordance with the legal system of reversal proceedings, from which it follows that the grounds for reversal are stated in the summons and which has determined that a ground for reversal can only be directed against a posiƟve arbitral decision on jurisdicƟon … there appears to be no room in these proceedings to form an opinion on the quesƟon whether or not the Tribunal could have assumed its jurisdicƟon based on another argument it rejected. Nevertheless, the court will discuss this issue for the sake of completeness.” The court went on to find that the Tribunal had been correct to reject the investors’ argument on this point. But the passage highlights a further difference between the Dutch and English approaches. In English law, when an award is challenged for want of jurisdicƟon, the quesƟon for the court under secƟon 67 of the ArbitraƟon Act 1996 is simply: did the tribunal have substanƟve jurisdicƟon? It seems that in Dutch law, the quesƟon arises differently. The tribunal makes an award determining that it has jurisdicƟon, and it is that award which is subject to challenge. The quesƟon is not whether the tribunal had jurisdicƟon, but whether the tribunal: (i) had jurisdicƟon; and (ii) followed the correct reasoning in order to arrive at that conclusion. Again, this is not a parƟcularly arbitraƟon-friendly approach. If an arbitrator decides, correctly that he has jurisdicƟon, but arrives at that conclusion for the wrong reasons, why should that result in his award being set aside? Is ArƟcle 26 “inconsistent”? ArƟcle 26, provided for disputes about alleged breaches of the ECT to be referred to arbitraƟon. Given the court’s preference for the “piecemeal” interpretaƟon, the issue was whether this provision was “inconsistent” with Russian law. The Tribunal had heard extensive evidence from a large number of experts in Russian law, and formed a conclusion as to what that THE ARBITER SUMMER 2016 11 law was. The Tribunal had determined, in its awards on jurisdicƟon, that “ArƟcle 26 of the ECT [is] consistent with Respondent’s ConsƟ- tuƟon, laws and regulaƟons”. The investors argued that a provision of the ECT, such as ArƟcle 26, could only be inconsistent with Russian law if the Treaty provision concerned is actually prohibited in naƟonal law. It was not enough to establish incompaƟbility if Russian law simply made no express provision for the arbitraƟon of such disputes. The Dutch Court rejected this as “too limited” and held that “the provisional applicaƟon of the arbitral provision contained in ArƟcle 26 is … contrary to Russian law if there is no legal basis for such a method of dispute seƩlement, or – when viewed in a wider perspec- Ɵve – if it does not harmonise with the legal system or is irreconcilable with the starƟng points and principles that have been laid down in or can be derived from legislaƟon.” For the investor, such an approach is evidently problemaƟc. In order to find out whether it would enjoy the right to arbitrate breaches of the ECT (or any other treaty which provides for provisional applicaƟon) it is insufficient for the investor to check that the signatory’s laws do not expressly prohibit the arbitraƟon of such disputes. The investor would also have to consider whether there was any “legal basis for such a method of dispute resoluƟon” and whether the arbitraƟon of such disputes “harmonised with the legal system” or was “irreconcilable” with that legal system’s “starƟng points and principles”. When Russia’s government had submiƩed the ECT to the Duma for raƟficaƟon, it had also provided an explanatory memorandum, which stated: “The provisions of the ECT are consistent with Russian legisla- Ɵon. The legal regime of foreign investments envisaged under the ECT is consistent with the provisions of the exisƟng Law […] on Foreign Investment in [Russia], as well as with the amended version of the Law currently being discussed in the State Duma”. [The regime of the ECT for foreign investments] “does not require the acknowledgement of any concessions or the adop- Ɵon of any amendments to the abovemenƟoned Law”. The Dutch Court was unimpressed with this, dismissing it as essenƟally irrelevant being “the opinion of the execuƟve aimed at prompƟng the Duma, as part of the legislature, to raƟfy the ECT” staƟng that it “cannot be ascribed to the legislature and the government’s standpoint therefore does not have independent meaning”. Russia’s 1993 InternaƟonal ArbitraƟon Law provided (emphasis added): “The following kinds of disputes shall be submiƩed for internaƟonal commercial arbitraƟon by agreement between the parƟes: disputes arising from contractual and other civil law relaƟonships arising from the maintenance of foreign trade and other internaƟonal economic relaƟons, if the commercial enterprise of at least one of the parƟes is located abroad (…)” It was said, by Russia’s legal experts, to follow from this that “if relaƟons between the parƟes are of a public law nature, then a dispute arising out of such relaƟons cannot be referred to interna- Ɵonal commercial arbitraƟon”. The Dutch court accepted this. The Russian law did not actually say that public law disputes were not arbitrable, but it did not say that they were. Silence on the ques- Ɵon of whether such disputes could be arbitrated was, it seems, sufficient to establish that they could not. The investors relied upon Russia’s Law on Foreign Investments 1991, as providing a legal basis for the arbitraƟon. ArƟcle 9 provided: “Investment disputes, including disputes over the amount, condiƟons and procedure of the payment of compensaƟon, shall be resolved by the Supreme Court of the RSFSR or the Supreme Arbitrazh Court of the RSFSR, unless another procedure is established by an internaƟonal treaty in force in the territory of the RSFSR. Disputes of foreign investors and enterprises with foreign investments against RSFSR State bodies, disputes between investors and enterprises with foreign investments involving maƩers relaƟng to their operaƟons, as well as disputes between parƟcipants of an enterprise with foreign investments and the enterprise itself shall be resolved by the RSFSR courts, or, upon agreement of the parƟes, by an arbitral tribunal, or, in cases specified by the laws, by authoriƟes authorized to consider economic disputes.” One can easily see why the tribunal was persuaded, based on this, that Russian law did permit the arbitraƟon of disputes under the ECT. The Dutch court disagreed, finding that there was a fundamental disƟncƟon in Russian law between investment disputes of a civil nature and those of a public nature, which appeared from (amongst other things) the 1993 ArbitraƟon Law. It followed that “investment disputes” in the Law of Foreign Investments 1999 should be read as meaning only “investment disputes of a predominantly civil law nature”. Russia’s Law on Foreign Investments 1999 provided (ArƟcle 10): “A dispute of a foreign investor arising in connecƟon with its investments and business acƟvity conducted in the territory of the Russian FederaƟon shall be resolved in accordance with internaƟonal treaƟes of the Russian FederaƟon and federal laws in courts, arbitrazh courts or through internaƟonal arbitraƟon (arbitral tribunal).” This too had persuaded the Tribunal that the arbitraƟon of the dispute in accordance with ArƟcle 23 of the ECT was not contrary to Russian law. 12 THE ARBITER SUMMER 2016 Again, the Dutch court disagreed. The Dutch court’s reasoning is not easy to précis or, indeed, to follow. In essence, the Dutch court accepted the posiƟon advanced by Russia’s legal experts: that this was a purely “declaratory”, “generic” passage “an ‘empty blank, a reference to a certain type of rule” and that “ArƟcle 10 therefore does not create a direct legal basis for arbitraƟon of disputes over obligaƟons of Part III of the ECT, but rather makes the opƟon of arbitraƟon condiƟonal on the existence of a provision in treaƟes and federal laws to that effect”. Effect of a foreign set aside decision in England The tribunal’s awards against Russia would be “New York ConvenƟon” awards for the purposes of the ArbitraƟon Act 1996, since they were made by a tribunal seated in the Hague, and the Netherlands is a New York ConvenƟon state. SecƟon 103(2) of the ArbitraƟon Act 1996 provides: “(1) RecogniƟon or enforcement of a New York ConvenƟon award shall not be refused except in the following cases. (2) RecogniƟon or enforcement of the award may be refused if the person against whom it is invoked proves— … (f) that the award … has been set aside … by a competent authority of the country in which, or under the law of which, it was made.” The word "may" in s.103(2) of the 1996 Act confers a discreƟon on the English court to enforce an award even though the award has been set aside. The approach of the English court is only to exercise this discre- Ɵon, however, if the set aside decision “offends basic principles of honesty, natural jusƟce and domesƟc concepts of public policy". See Dicey, Morris & Collins, 15th ediƟon, at Rules 50-5 and paragraph 16-148, Simon J in Yukos Capital S.a.r.L v OJS Oil Company RosneŌ  EWHC 2188 (Comm) at paragraph 20 and Walker J in Malicorp Limited v Government of the Arab Republic of Egypt  EWHC 3610. As Walker J put it in the laƩer case (concerning enforcement in England of an award by a tribunal seated in Egypt which had been set aside by an EgypƟan court): “an asserƟon that a foreign judgment is "wrong" is not a sufficient basis to refuse to recognise it. When considering whether to recognise a foreign judgment this court acknowledges that the determinaƟon of foreign law is a maƩer for the foreign court. Thus evidence relied on by Malicorp that the 2012 Cairo Court of Appeal decision is wrong does not address the relevant issues. As Egypt points out, there is no suggesƟon in that evidence that the 2012 Cairo Court of Appeal decision is perverse. AllegaƟons that there was a failure "to take account of" Malicorp's submissions merely because those submissions were not repeated in the judgment, or that the judgment gave reasons which were "insufficient and contradictory" do not assist Malicorp in this regard.” The Dutch court’s decision to set aside the Yukos awards was not, of course, based on a determinaƟon of Dutch law. It was based on the Dutch court’s determinaƟons as to: (i) the meaning of the ECT; and (ii) the law of Russia. Could it be argued that the ra- Ɵonale for deferring to the foreign court is therefore weaker in the case of the Yukos awards, because the Dutch court is no beƩer qualified than the English court is to decide what the ECT means or what Russian law is? This is true, but in response it can simply be said that the parƟes chose to have their arbitraƟon seated in the Hague - it was they who agreed that it should fall to the Dutch courts (not the English courts) to decide any such quesƟons. The Dutch court’s decision is the subject of an appeal. If the setaside decision stands then, to enforce the awards in England, the investors will have to show some dishonesty on the part of the Dutch courts, some breach of natural jusƟce, or perhaps persuade the English court that the Dutch judgment is so obviously wrong as to be “perverse”. Conclusion The latest decision in the Yukos saga has been widely reported - the seƫng aside of a $50bn award, and Russia’s scandalous (but undetermined) claim that the arbitrators had the award wriƩen by an assistant make for a good news story. If the Dutch court’s findings on Russian law are right, then it certainly serves to underline just how hosƟle and opaque the Russian legal system is for a foreign investor - though this is hardly news. More surprising perhaps, is the insight the case gives into some of the arbitraƟon-unfriendly rules which apply in the Dutch legal system. Of course, the case also provides yet another reminder of the importance of the seat. Whatever seat parƟes agree to, they are in effect agreeing that they are ulƟmately happy to have the courts of that country decide whether the award the arbitrators make will be allowed to stand. It is, for example, surprisingly common that foreign investors and contractors (who do not wish to expose themselves to the courts of their counterparty’s home country) will require that disputes be resolved by arbitraƟon, but then sƟll agree to its being seated in the counterparty’s home country, subject to that country’s laws and the supervisory jurisdicƟon of its courts. THE ARBITER SUMMER 2016 13 Exercising TerminaƟon Rights - As Always, Approach with CauƟon by Angela Wallace Against the current backdrop of depressed oil prices, companies operaƟng in the oil and gas industry are taking measures to adapt to a new ‘normal’, such as streamlining their porƞolios to focus resources on core business units or jurisdicƟons. That may in turn necessitate withdrawals from certain contracts that are no longer economically viable or profitable. Companies wishing to bring a contractual agreement to an end generally have two opƟons available to them: (i) terminaƟng in accordance with any express contractual provisions; or (ii) exercising a right to terminate at common law in response to a breach that is sufficiently serious so as to be ‘repudiatory’. The recent decision in Vinergy InternaƟonal (PVT) Ltd v Richmond MercanƟle Ltd FZC  EWHC 525 (Comm) highlights the interplay between contractual and common law terminaƟon rights, in parƟcular as regards whether it is necessary to give noƟce of terminaƟon under a contractual provision and give the contract-breaker Ɵme for the breach to be remedied, where there has been a repudiatory breach. Parallel terminaƟon rights Express terminaƟon clauses tend to be the innocent party’s first port of call. However, they may very well not be a complete code, if they do not displace the common law consequences of a ‘repudiatory breach of contract’ - a fundamental breach which deprives a party of substanƟally the whole benefit of the contract, such as a refusal to perform any contractual obligaƟons. In the event of such a serious breach, the injured party may be enƟtled to exercise a parallel right to terminate at common law. The right to terminate for repudiatory breach must be excluded expressly through clear words. It is not just deemed to have been abandoned because there is an express terminaƟon clause that the parƟes adopted. In Stocznia Gdynia SA v Gearbulk Holdings Ltd  EWCA Civ 75, the Court of Appeal noted that the parƟes to any contract: “… enter into negoƟaƟons in the expectaƟon that if one of them commits a breach which goes to the root of the contract in the sense just described, the other will be enƟtled to recover damages for the loss of his bargain. The parƟes may, of course, agree to depart from that posiƟon, but that is the point from which they start.” Whether the common law right of terminaƟon has been excluded will depend on the parƟcular contract. To bring a contract to an end at common law, the innocent party must ‘accept’ the repudia- Ɵon. That requires an overt act that is plainly inconsistent with the contract conƟnuing in force. There is no requirement that accepƟng a repudiaƟon must be done in wriƟng, though it is of course safest to do so. The innocent party must make a choice: if it does not accept the repudiaƟon, it may be taken to have affirmed the contract, thus waiving the breach. But once a repudiatory breach has been accepted, the contract comes to an end with immediate effect. Do contractual noƟce requirements apply to terminaƟon rights at common law? Vinergy v Richmond was an appeal against an arbitraƟon award, as the parƟes had not excluded the right to appeal on a point of law in the circumstances permiƩed by SecƟon 69 of the ArbitraƟon Act 1996. The High Court was called upon to determine whether a buyer’s repudiatory breach of a master service agreement allowed the supplier to terminate the contract at common law, and in doing so bypass the clauses in the contract requiring it to give noƟce to the breaching party as well as an opportunity to cure the breach. The arbitral tribunal found that three repudiatory breaches had been commiƩed by the buyer: a breach of the exclusivity provisions of the agreement and two breaches of payment obligaƟons. Each of these breaches permiƩed the supplier to lawfully terminate the agreement at common law. Clause 17.1.1 was at the heart of the dispute. It stated that: “… failure of the other party to observe any of the terms herein and to remedy the same where it is capable of being remedied within the period specified in the noƟce given by the aggrieved party to the party in default, calling for remedy, being a period not less than twenty (20) days”. Richmond had terminated without giving noƟce under that provision. Vinergy had not, therefore, been given the opportunity to remedy the breaches that the contract seemed to envisage. In the High Court, Vinergy argued that Clause 17.1.1 and the requirement for serving noƟce showed that the parƟes had intended that breaches would only be sufficiently serious if they had not been cured aŌer a noƟce had been served. Moreover, the clause said that it applied to a failure “… to observe any of the terms …”, which might cover a repudiatory breach as well. In support of that contenƟon, Vinergy relied on a statement by Ramsey J in BSkyB v HP Enterprise Services UK Ltd  EWHC 86 (TCC) “Equally, the fact that for a parƟcular breach the contract provided that there should be a period of noƟce to remedy the breach would indicate that the breach without the noƟce would not, in itself, amount to a repudiatory breach.” Vinergy also relied on a Court of Appeal decision relaƟng to a construcƟon contract, Lockland Builders v Rickwood (1995) 46 Con LR 92 (CA). In that case, the contract enƟtled the employer to ter- 14 THE ARBITER SUMMER 2016 minate for delay or defecƟve materials by serving noƟce and complying with a contractual procedure. The employer did not do that, and instead sought to terminate for repudiatory breach. The Court of Appeal noted that: “[the clause requiring noƟce] did impliedly preclude [the employer] from terminaƟng the contract on the facts of the present case otherwise than by the exercise of his rights under [the clause] since the complaints made fell squarely within the scope of [the clause], i.e. complaints as to the quality of materials and workmanship. However, [the clause] would not have done so in relaƟon to breaches outside the ambit of [the clause], e.g. by [the contractor] walking off the site when the works were sƟll substanƟally incomplete.” The High Court upheld the arbitral tribunal’s decision and disagreed with Vinergy. Teare J approached the construcƟon of Clause 17.1.1 differently. He found that the provision did not expressly extend to repudiatory breaches. The parƟes had simply said that a breach of any of the provisions of the contract that had not been remedied within a period of 20 days from the relevant noƟce gave rise to a terminaƟon right (under that parƟcular provision). Clause 17.1.1 could only extend to repudiatory breaches if a term to that effect could be implied. He decided against implying this, for a number of reasons: - Clause 17.1.1 could apply to minor breaches. There was no reason why a requirement that applied to breaches that did not have serious consequences should also be made to apply to serious, repudiatory breaches. - Clause 17 as a whole also created a terminaƟon right in respect of five other specific breaches - including insolvency. The cure period of 20 days did not apply to any of the other five grounds, so there was no reason to think that the parƟes had intended for it to operate ‘across the board’, including to repudiatory breaches. No term could therefore be implied. The judge found that as draŌed, this provision applied only to breaches which were in fact capable of being remedied. The two failures to pay were remediable, but the breach of the exclusivity provision (caused by the buyer secretly contracƟng with a different supplier for the supply of cargoes) was not, as the arbitrators had decided. It was this breach that permiƩed the supplier to avail itself of its common law terminaƟon rights. Discussion Teare J decided the maƩer on a point of interpretaƟon, by determining which types of breaches the clause requiring noƟce and a cure period applied to based on the contract wording. He did not think that any of the authoriƟes laid down a legal principle, but if he was wrong and there was a legal principle aŌer all, it would be that “… a clause requiring noƟce to remedy applies to breaches within the scope of the clause.” Repudiatory breaches are not, therefore, immune from being caught by noƟce or cure period provisions. DifficulƟes could arise where a contract requires a specific no- Ɵce or a cure period for terminaƟon following a ‘material’ or substanƟal breach. In Crane Co v WiƩenborg A/S  All ER(D) 1487, the Court of Appeal considered a clause that read: “B. Either party shall be enƟtled forthwith to terminate this Agreement by wriƩen noƟce to the other if that other party commits any substanƟal breach of any of the provisions of this Agreement and in the case of breach capable of remedy fails to remedy the same within 90 days of receipt of a wriƩen noƟce giving full parƟculars of the breach and requiring it to be remedied.” The Court of Appeal found that substanƟal meant the same as repudiatory: “‘SubstanƟal’ deprivaƟon of the intended contractual benefit is aŌer all one way in which the test of repudiatory breach is oŌen expressed. … I therefore consider that substanƟal should be read as equivalent to repudiatory.” It might well follow that, where the contract includes a similar clause, a repudiatory breach would be caught by a requirement for a cure period if it were remediable. Whether a repudiatory breach is remediable is a quesƟon which (as so many others) depends on the facts of the case. For instance, even an outright refusal to perform any further obligaƟons under the contract (a good example of a repudiatory breach in the form of a renunciaƟon) might be remedied if the contract breaker changes their mind and resumes performance following a contractual noƟce. So while the common law right to terminate is very frequently present, it provides no guarantee for risk free and immediate terminaƟon even where it has arisen. The contractual terminaƟon provisions sƟll have to be reviewed carefully. Express Yourself: Keeping to the Contract’s Proper Meaning by Ryan Deane In the recent case of Transocean Drilling U.K. Ltd v Providence Resources Plc  EWCA 372 the Court of Appeal has provided a Ɵmely lesson for lawyers and professionals alike on avoiding some common piƞalls in the interpretaƟon of exclusion clauses in a contract negoƟated between two commercial parƟes at arm’s length. While ostensibly concerning the construcƟon of a few clauses in a contract for the hire of a semi-submersible drilling rig, it raises some interesƟng quesƟons about the freedom of commercial par- Ɵes to determine the terms on which they wish to do business. THE ARBITER SUMMER 2016 15 In addiƟon, the first instance judgment contains some suspect reasoning on the nature of the Contractor’s maintenance obliga- Ɵons under a modified ‘LOGIC’ form contract. Background On 15 April 2011 the owner of the rig, Transocean Drilling U.K. Ltd. (“Transocean”), entered into a contract with Providence Resources Plc (“Providence”), to drill an appraisal well in an area of the Barryroe field off the Southern coast of the Republic of Ireland. The contract was based on a ‘LOGIC’ form contract, which the par- Ɵes had adapted to meet their parƟcular needs. On 18th December 2011 drilling operaƟons were suspended as a result of the misalignment of part of the blow-out preventer (“BOP”), the safety device used to prevent the uncontrolled flow of liquids and gases during well drilling operaƟons. They resumed on 2nd February 2012, when the rig was able to conƟnue work from the point at which it had been interrupted. The delay gave rise to various disputes between the parƟes. Transocean claimed for the remuneraƟon due to it for compleƟng the work but which Providence had failed to pay. Providence’s main claim was for the addiƟonal overheads it had incurred during the extended period of work, known as ‘spread costs’, such as the costs of personnel, equipment and services contracted from third parƟes, which it said were wasted as a result of the delay. The judge at first instance, Popplewell J, found that Transocean had breached the contract by failing to maintain the BOP in accordance with the contractual requirements. He then turned his aƩen- Ɵon to the quesƟon of whether Providence could recover damages for the loss caused by that breach, which could then be set off against the monies due to Transocean. InterpretaƟon of the exclusion clause The contract contained a detailed mutual hold harmless regime, oŌen referred to as “knock for knock” agreement. In summary, this is an agreement that loss or damage should stay where it contractually falls, regardless of who was ‘to blame’. Of parƟcular relevance to the parƟes’ dispute was clause 20, which contained mutual undertakings by Transocean and Providence to indemnify each other against their own consequenƟal loss. If the spread costs in issue fell under the definiƟon of ‘ConsequenƟal Loss’ in clause 20, Providence would have to hold Transocean harmless in respect of those costs, and most of its claim would fall away. Clause 20 read as follows: “20. ConsequenƟal Loss For the purposes of this Clause 20 the expression “ConsequenƟal Loss” shall mean: (i) any indirect or consequenƟal loss or damages under English law, and/or (ii) to the extent not covered by (i) above, loss or deferment of producƟon, loss of product, loss of use (including, without limitaƟon, loss of use or the cost of use of property, equipment, materials and services including without limitaƟon, those provided by contractors or subcontractors of every Ɵer or by third parƟes), loss of business and business interrup- Ɵon, loss of revenue (which for the avoidance of doubt shall not include payments due to CONTRACTOR by way of remuneraƟon under this CONTRACT), loss of profit or anƟcipated profit, loss and/or deferral of drilling rights and/or loss, restricƟon or forfeiture of licence, concession or field interests whether or not such losses were foreseeable at the Ɵme of entering into the CONTRACT and, in respect of paragraph (ii) only, whether the same are direct or indirect. The expression “ConsequenƟal Loss” shall not include CONTRACTOR'S losses arising in connecƟon with (1) failure by COMPANY to provide the leƩer of credit as required by Clause 3.13 of SecƟon III or resulƟng terminaƟon of this CONTRACT or (2) any termina- Ɵon of this CONTRACT by reason of COMPANY'S repudiatory breach. Subject to and without affecƟng the provisions of this CONTRACT regarding (a) the payment rights and obligaƟons of the parƟes or (b) the risk of loss, or (c) release and indemnity rights and obligaƟons of the parƟes but notwithstanding any other provision of the CONTRACT to the contrary the COMPANY shall save, indemnify, defend and hold harmless the CONTRACTOR GROUP from the COMPANY GROUP'S own consequenƟal loss and the CONTRACTOR shall save, indemnify, defend and hold harmless the COMPANY GROUP from the CONTRACTOR GROUP'S own consequenƟal loss.” Popplewell J began his analysis by staƟng that the clause must be interpreted contra proferentum, and therefore against Transocean, because “a party relying on an exclusion clause must establish that the words show a clear intenƟon to deprive the other party of a remedy to which he would otherwise be enƟtled.” In support of this principle he relied on the well-known observaƟon of Lord Diplock in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd  AC 689 that there is a presumpƟon that neither party to a contract intends to abandon any remedies for its breach. If the parƟes wish to rebut that presumpƟon they must spell it out in clear words. A restricƟve interpretaƟon was also jusƟfied because clause 20 (ii) was an incursion into the territory of the first limb of Hadley & Baxendale (losses arising naturally from a breach of contract). Popplewell J thought that the courts should be slow to interpret such clauses as a widespread redefiniƟon of excluded loss. The judge was reinforced in his view by the applicaƟon of the eiusdem generis principle (LaƟn for “of the same kind”), which applies to a general term followed by specific examples, as in clause 20(ii). If the specific examples are all of the same kind, the principle applies to limit the interpretaƟon of the general term to 16 THE ARBITER SUMMER 2016 cover only those examples. The judge used the principle to explain that the words “cost of use” were intended only to refer to the cost of hiring in equipment or services, the benefit of which has been lost, in order to miƟgate the loss of the benefit. The clause had no applicaƟon to the spread costs where the costs were for equipment and services actually provided. Finally, Popplewell J found that giving Clause 20 the interpreta- Ɵon put forward by Transocean would render the primary performance obligaƟons in the contract effecƟvely devoid of contractual content, because there would be no sancƟon for non-performance. It would be a mere ‘declaraƟon of intent’. That result was a strong indicaƟon that the parƟes did not intend the clause to have that meaning. This reasoning led Popplewell J to the conclusion that the spread costs Providence had incurred were not covered by the language of clause 20, and could be set off against the amounts due to Transocean. Transocean appealed to the Court of Appeal on this one issue of construcƟon, arguing that the judge had failed to apply the correct principles of contractual interpretaƟon. Court of Appeal’s decision Moore-Bick LJ, who gave the sole judgment in the Court of Appeal, agreed with Transocean. In as judicious language as he could muster, he found that Popplewell J failed to apply the correct principles at each stage of his analysis. Moore-Bick LJ pointed out that the first instance judge had failed to ask himself the most important quesƟon: what is the natural meaning of the language the parƟes had used? The words “loss of use” naturally refer to the loss of the ability to make use of some kind of property or equipment owned or under the control of either party. However, in Moore-Bick LJ’s view, it was clear that the par- Ɵes had intended to widen the scope of those words in the remainder of clause 20(ii). As an illustraƟon of this, Moor-Bick LJ pointed out that the clause extended to the loss of use or the cost of use of property, equipment and materials provided by contractors, sub-contractors and third parƟes. Further, the repeated use of the words “without limitaƟon” in clause 20(ii) were a strong indicaƟon of the parƟes’ inten- Ɵon to give the words a broad meaning. Fundamentally, the basis of Providence’s claim to recover spread costs was that they represented costs of goods and services obtained and paid for by Providence, but which were wasted as a result of the delay caused by Transocean’s breach of contract. That was exactly the type of loss that was naturally covered by the words “loss of use or the cost of use of property, equipment, materials and services … provided by contractors or subcontractors of every Ɵer”. This rather straighƞorward approach was sufficient to dispose of the appeal, but Moore-Bick LJ conƟnued in his judgment to explain why the analysis undertaken by Popplewell J was wrong. First, the court gave a reminder that the principle of contra proferentem is only applicable in circumstances where the clause is one-sided and genuinely ambiguous, i.e. equally capable of bearing two disƟnct meanings. Only in those cases will it be appropriate to construe ambiguity in the words of a clause against the party aƩempƟng to rely on them. It was therefore inappropriate to apply it to clause 20, which had a clear natural meaning and was negoƟated between two parƟes of equal bargaining power. Moore-Bick LJ lamented that the principle of contra proferentem now seems to be used synonymously with the principle in Gilbert Ash. The laƩer principle was oŌen given undue importance, and parƟes should remember that it is readily rebuƩable by clear words in a contract. In any event, the quesƟon here was not whether the parƟes had intended to give up a contractual right - that was the whole purpose of clause 20 - the only quesƟon was to what extent the parƟes intended to give up those rights. Neither was there any authority for Popplewell J’s proposiƟon that the clause should be defined narrowly because it was an incursion into the first limb of Hadley v Baxendale. Such an approach would be tantamount to re-shaping the contract instead of giving effect to the intenƟon of the parƟes. If the parƟes wished to exclude recovery of losses naturally flowing from a breach of contract, it was open to them to use clear words to do so. Moore-Bick LJ was equally dismissive of Popplewell J’s use of the eiusdem generis principle. The natural reading of the sub-clause was that those words were intended to expand, not restrict, the words “loss of use”. This was clear from the repeated use of “without limitaƟon” within clause 20(ii). The purpose of the clause was to catch consequenƟal losses of all kinds, and the words were wide enough to cover the spread costs in dispute. Finally, the Court of Appeal dealt with the argument that, if clause 20 was given the meaning Transocean contended, it would effecƟvely denude the contract of any meaningful obligaƟons and become “a mere declaraƟon of intent”. Moore-Bick LJ began by recognising that such an argument could succeed if it was supported by the facts of the case. The principle was, however, to be used as a last resort. It applies to the very small number of cases where the effect of a clause is to relieve one party from all liability for breach of any of the obligaƟons which he purports to undertake. Only in such a case could it be said that the contract amounted to nothing more than a mere declaraƟon of intent. On the facts, the contract between Transocean and Providence contained many obligaƟons relaƟng to the performance of the work and important mutual undertakings relaƟng to the manner in which any loss or damage should be borne. The contract was not devoid of legal content just because the parƟes had agreed that neither should be enƟtled to recover consequenƟal, as opposed to direct, loss. That suggested to Moore-Bick LJ that the court below had made an agreement for the parƟes which they had not chosen to make. He concluded: “I can see no reason in principle why commercial parƟes should not be free to embark on a venture of this kind on the basis of an agreement that losses arising in the course of the THE ARBITER SUMMER 2016 17 work will be borne in a certain way and that neither should be liable to the other for consequenƟal losses, however they choose to define them. In my view the language of clause 20 is clear and is apt to exclude liability for wasted costs in the form of the spread costs which Providence seeks to recover in this case.” The Court of Appeal’s straighƞorward approach to the construc- Ɵon of clause 20 is to be welcomed. It is commendable that the court’s starƟng posiƟon was the ascertainment of the natural meaning of the words used by the parƟes. This gives parƟes some confidence that the use of clear words in a contract will be the most important factor to a court in discerning that contract’s meaning. By contrast, Popplewell J was heavily influenced in his judgment by the apparent injusƟce he saw in the consequences of the various mutual indemniƟes the parƟes had included in their contract. This led him to rely on a vague and generalized applicaƟon of several principles normally used to interpret exclusion clauses restric- Ɵvely. His judgment should serve as a warning to lawyers, who oŌen fall into the trap of applying the same restricƟve principles to an exclusion clause before aƩempƟng to ascertain the natural meaning of the words. The nature of a contractor’s maintenance obliga- Ɵons Although not subject to appeal, Popplewell J’s judgment contains another piece of suspect reasoning that deserves close scruƟ- ny. It concerns Transocean’s maintenance obligaƟons under the contract, which were as follows: “4.1. On the COMMENCEMENT DATE … [Transocean] shall provide the DRILLING UNIT fully equipped as set out in sec- Ɵon IV(b) – Rig SpecificaƟon. Subject to its design limitaƟons, the DRILLING UNIT shall be adequate to conduct the WORK at the locaƟon(s) specified by [Providence] and contemplated by this CONTRACT. The DRILLING UNIT and all other equipment, materials and supplies hereinaŌer specified as being provided by [Transocean] shall be in good working condiƟon and together with the personnel, shall be provided and maintained by [Transocean]. 4.2. [Transocean] shall carry out all of its obligaƟons under the CONTRACT and shall execute the WORK with all due care and diligence and with the skill to be expected of a reputable contractor experienced in the types of work to be carried out under the CONTRACT. 4.3 [Transocean] shall take full responsibility for the adequacy, stability and safety of all its operaƟons and methods necessary for the performance of the WORK ... 5.10 [Transocean] shall install, operate, test, repair and maintain its well control equipment, in good condiƟon at all Ɵmes and shall use all reasonable means to control and prevent fires and blowouts and to protect the hole.” Providence contended that the effect of these terms was that Transocean had an absolute duty to maintain the rig in a good working condiƟon. Transocean argued that the terms imported a duty to act with reasonable skill and care, and that there would be no breach unless Providence established that there had been a failure to implement a proper maintenance plan. Popplewell J agreed with Providence that the duty was an absolute one. His starƟng point was that the natural meaning of clause 4.1 was that the rig and equipment must be maintained as “adequate to conduct the WORK”, a conƟnuing objecƟve that must be met, and was not simply an obligaƟon to “maintain” in the general and undefined sense. The judge thought it was “clear” from clauses 4.1, 4.3 and 5.10 that this obligaƟon took the form of a conƟnuing warranty and not a due diligence obligaƟon. His view was that the words in clauses 4.1 and 4.3 were the language of achieving a stated result, not of following a process of due diligence in order to achieve it. Transocean were responsible for ensuring that the WORK was adequate at all Ɵmes. Popplewell J found further support for this interpretaƟon in Clause 5.10. The obligaƟon to maintain the well control equipment was expressed in absolute terms, in contrast to the “reasonable means” standards to prevent fires and blowouts and to protect the hole. He expressed the view that: “Where the parƟes wished to idenƟfy a due diligence obliga- Ɵon, they did so in terms. By contrast the obligaƟon to maintain in clause 5.10 is not so qualified.” An unconvincing analysis The obvious response to the above quoted remark is clause 4.2, which the judge inexplicably failed to refer to in his analysis. Clause 4.2 provides that all Transocean’s obligaƟons under the contract are subject to the standard of due care and diligence. Those express words must be the starƟng point for any analysis of whether a parƟcular obligaƟon under the contract is subject to an absolute or qualified duty. The inferences Popplewell J drew from clauses 4.1, 4.3 and 5.10 do not jusƟfy a departure from the clear words contained in clause 4.2. The natural reading of the contract is that Transocean’s obligaƟon to maintain the rig were subject to the standard of due care and diligence. The ‘due diligence’ interpretaƟon is supported by a considera- Ɵon of the operaƟon of the contract as a whole. In parƟcular, the contract provided for a standard remuneraƟon regime in rig hire contracts, whereby a different rate would be paid depending on whether the rig was operaƟonal, on stand-by, under repair etc. The ‘Repair Rate’ provided as follows: “Except as otherwise provided, the Repair Rate will apply in the event of any failure of [Transocean's] equipment 18 THE ARBITER SUMMER 2016 (including without limitaƟon, non-rouƟne inspecƟon, repair and replacement which results in shutdown of operaƟons under this CONTRACT including the Ɵme up to recommencement of [Providence’s] operaƟons at the same point (including any trip Ɵme, e.g. “drill to drill”) as when the failure occurred excluding any period when the failure has been remedied but operaƟons cannot proceed due to adverse weather or sea condiƟons …” The Repair Rate applies in the event of “any failure” of Transocean’s equipment, including where that failure is caused during repair or maintenance. The normal understanding of these words would be that the rate will apply in the event of any equipment failure except where that failure was caused by Transocean’s negligence or by any of the excepƟons specified in the clause. Negligence as an excepƟon is read into such clauses because it is assumed that commercial parƟes are unlikely to agree that the contractor should be paid in the event of his negligence or default. This presumpƟon can be rebuƩed but clear words are needed to do so (Sonat Offshore v Amerada Hess  1 Lloyd’s Rep 145). The effect of Popplewell J’s interpretaƟon of Transocean’s maintenance obligaƟons transformed this normal understanding. Any failure of Transocean’s equipment would be a breach of contract, because Transocean had an absolute duty to ensure that the equipment was adequate for the work. In circumstances where Transocean had acted with all due care and diligence but the operaƟon of the rig was stopped, it would no longer be able to claim the Repair Rate, or any rate, because that would be construed as paying the contractor for his own default. The default posiƟon of the Repair Rate was reversed. It was now only payable when the excepƟons specified in the clause applied, such as a failure of the equipment caused by adverse weather or sea condiƟons. If the equipment failed for any other reason, including the non-negligent acts or omissions of Transocean, no remuneraƟon would be payable to Transocean for the duraƟon of the shutdown. This represented a significant shiŌ in the balance of risk provided for in the contract, no doubt one which the parƟes did not intend. In the event, the issue was not argued before the Court of Appeal because Popplewell J made the addiƟonal finding that, if he was wrong on the interpretaƟon of Transocean’s maintenance obligaƟons, Transocean had failed to exercise due care and diligence in implemenƟng an adequate maintenance programme for the rig. Transocean would not be enƟtled to the Repair Rate in any event because the shutdown of the rig had been caused by their negligence. On the facts of this case Popplewell J’s view of the nature of the contractor’s maintenance obligaƟons was of no consequence. It is not difficult, however, to imagine a scenario where the disƟncƟon could be vital. It cannot be rare that some piece of equipment on a rig will break down as a result of a non-negligent act or omission of the contractor. While it is impossible to predict how the courts will interpret such obligaƟons in future, and bearing in mind that the construc- Ɵon of a contract will depend on its exact terms, it is to be hoped that the courts’ aƩenƟon will be drawn to the shortcomings in Popplewell J’s analysis, in parƟcular his failure to account for the effect of clause 4.2 on Transocean’s maintenance obligaƟons or to fully consider the consequences of his interpretaƟon on the availability of the Repair Rate. To avoid such uncertainty, it may be necessary for parƟes to spell out expressly in their contract exactly what standard is expected by a contractor in the performance of its maintenance obligaƟons. A general catch-all due diligence term such as clause 4.2 may now be insufficient. Conclusion There is currently an encouraging trend in the decisions of the courts at the highest level. Increasing emphasis is being given to the principle that one should hold the natural meaning of the words used in a contract as paramount to its construcƟon. Perhaps the most prominent recent examples are Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38 and Arnold v BriƩon  UKSC 36. ParƟes to contracts with novel or unorthodox clauses should be reassured that the courts will strive to give effect to their inten- Ɵons if clear words are used. On the flip-side, the piƞalls of not clearly defining the parƟes’ obligaƟons are aptly demonstrated by Popplewell J’s misinterpretaƟon of Transocean’s maintenance obligaƟons, with its potenƟally far-reaching, unintended consequences.