Contract formation
Good faith in negotiatingIs there an obligation to use good faith when negotiating a contract?
There is no generally recognised principle or obligation in English contract law to use good faith when negotiating a contract.
The English courts have rejected suggestions that an obligation to negotiate in good faith should be implied into a contract. It is a long-standing principle of English law that a negotiating party must be free to advance its own interest during a negotiation. Sometimes parties will include an express obligation to negotiate in good faith, but English courts usually view this as equivalent to an agreement to agree and therefore unenforceable for lack of certainty.
‘Battle of the forms’ disputesHow are ‘battle of the forms’ disputes resolved in your jurisdiction?
Under English law, the general legal rule is that the courts will conclude that, unless there is any contrary evidence, the last set of terms to be provided prior to the acceptance or performance of the contract will govern the contract, namely the ‘last shot’ doctrine. A supplier often wins the battle of the forms argument as the supplier can control the sale process by ensuring that it does not agree to supply any goods or services until the buyer agrees to its terms: the supplier fires the last shot.
A supplier dealing on standard terms may incorporate a provision which stipulates that the supplier’s contract terms prevail over any terms provided by the buyer, for example:
The acceptance by [Supplier] of your order is subject to [Supplier’s] terms and conditions of sale.
Using this type of language is not an absolute guarantee that the supplier’s terms will apply although it may discourage some buyers from responding with their own terms on the basis that they are unlikely to be accepted. Such a ‘prevail clause’ will not be effective where the supplier has subsequently agreed to accept the buyer’s terms, or if the buyer expressly refuses to accept the supplier’s terms.
Where parties do business together on the same terms on a regular basis over a period of time, there may be evidence of a ‘course of dealing’ as a result of which the terms normally used by the parties will be considered the terms of their contract. This may enable a supplier to argue that their terms should apply if a buyer subsequently attempts to introduce new terms of purchase.
Language requirementsIs there a legal requirement to draft the contract in the local language?
No. There is no legal requirement to draft a contract in the local language, although this is not generally an issue as the English language is often used for international contracts.
Online contractsIs it possible to agree a B2B contract online?
Yes. The general rule under English law is that a commercial contract does not need to be in any particular form to be legally binding. As long as the basic elements of a contract exist - namely offer, acceptance, consideration, intention to create a legal relationship and certainty of terms - then it does not matter if a contract is made on paper or online.
The key issue when making contracts online is to ensure that the terms are properly incorporated into the contract - namely, the party accepting the terms has an opportunity to read them before accepting the contract. This can be done by having a link to the terms and conditions with a tick box to show acceptance. If the link to the terms is not opened and a party does not bother to read the terms, it is at the party’s risk and the contract will still be binding.
Statutory controls and implied terms
Controls on freedom to agree termsAre there any statutory or other controls on parties’ freedom to agree terms in contracts between commercial parties in your jurisdiction?
English contract law is based on the principle of freedom to contract, and in B2B contracts there are very few restrictions on the terms that parties can agree.
Some restrictions are implied by public policy. For example, a party cannot exclude its liability for losses caused by fraud. Some statutory controls apply when a party is attempting to exclude or limit its liability for certain types of loss. There are also some statutory controls that apply to certain types of contractual relationships, for example principal-commercial agent and employer-employee relationships.
Standard form contractsAre standard form contracts treated differently?
The Unfair Contract Terms Act 1977 (UCTA) applies in a number of circumstances including when a party is contracting on its ‘written standard terms’. The UCTA restricts a party’s ability to exclude or limit its liability for breach of its obligations in such a contract. See question 10 for more information on excluding and limiting liability in a contract.
Implied termsWhat terms are implied by law into the contract? Is it possible to exclude these in a commercial relationship?
Certain terms will be implied into a B2B contract by statute. For example, sections 12 to 15 of the Sale of Goods Act 1979 and sections 3 and 4 of the Supply of Goods and Services Act 1982 imply certain terms as to title, conformity with description or sample and satisfactory quality and fitness for purpose in commercial contracts.
Parties to a contract will often try and exclude these implied terms and sometimes replace them with express terms. Statutory implied terms may be excluded by the parties in their contract, unless the UCTA says that they cannot be excluded. The UCTA provides that:
- liability for breach of obligations arising from the implied condition of title in section 12 of the Sale of Goods Act 1979 and section 2 of the Supply of Goods and Services Act 1982 cannot be excluded in any contract term; and
- liability for breach of obligations arising from sections 13 to 15 of the Sale of Goods Act 1979, namely the implied terms that goods will correspond with description, are of satisfactory quality and fit for purpose, and correspond with a sample, may be excluded in a B2B contract as long as the exclusion satisfies the ‘reasonableness test’ set out in the UCTA.
The UCTA reasonableness test (section 11 and Schedule 2, UCTA) states that when considering if an exclusion is reasonable, the term must be fair and reasonable having regard to the circumstances that were or ought reasonably to have been known or in contemplation of the parties at the time the contract was made.
In determining whether a term satisfies the requirement of reasonableness, the UCTA sets out a non-exhaustive list of factors that should be considered, including:
- the relative bargaining position between the parties, namely whether one party was in a stronger position to impose the exclusion on the other;
- whether the customer received an inducement to agree to the term (for example, the offer of a price discount, if the exclusion clause was agreed, may make it reasonable);
- whether the customer knew or ought reasonably to have known of the existence and extent of the term having regard to any custom of the trade and any previous course of dealing between the parties;
- where a term excludes or restricts liability if a condition is not complied with and where it was reasonable to expect at the time the contract was made that compliance would be practicable; and
- whether the goods were manufactured, processed or adapted by the supplier to the special order of the customer.
The implied statutory terms in the Sale of Goods Act 1979 are classified as conditions. A condition is a term in a contract which, if breached, entitles the innocent party to immediately terminate the contract and seek damages. As a drafting point, if a supplier wishes to exclude liability for these statutory implied terms then it must be careful to expressly exclude its liability for the implied ‘conditions’.
Vienna ConventionIs your jurisdiction a signatory to the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)?
No.
Good faith in entering and peformingIs there an obligation to use good faith when entering and performing a contract?
There is no implied obligation to use good faith when performing a contract. However, in any contract where a party is permitted to exercise a discretion, for example, a discretion to apply service credits, then there is an implied obligation that a party will act honestly and will not exercise its discretion in an arbitrary, capricious or irrational manner.
Limiting liability
Prohibition on exclusions and limitationsWhat liabilities cannot be excluded or limited by a supplier in a contract?
Limitations and exclusion of liability are often the most contentious and heavily negotiated clauses in a contract. Commercially there is an incentive on the supplier to seek to control its liability and conversely the buyer will want the supplier to have unlimited liability.
The UCTA confirms that, in a B2B context, a party can never exclude its liability for:
- death or personal injury caused by its negligence; and
- the implied term as to title and quiet possession in section 12 of the Sale of Goods Act 1979 or section 2 of the Supply of Goods and Services Act 1982.
For public policy reasons, a party can never exclude or limit its liability for losses arising as a result of fraud.
There are no rules on excluding liability for gross negligence or wilful default.
Direct and indirect lossSuppliers nearly always seek to exclude liabilities that are deemed too remote. English law distinguishes between direct loss and indirect loss (often called consequential loss). Direct loss is loss that directly flows from the breach and arises as a natural result of the breach. Indirect or consequential loss is loss that is more remote but can be recovered if the loss was reasonably in the contemplation of the parties at the time they made the contract as the probable result of the breach.
Suppliers will as a rule always seek to exclude their liability for indirect loss.
Suppliers should be aware that, in many cases, common types of financial loss such as loss of profit can be either direct or indirect loss depending on the facts of a case. To exclude all loss-of-profit claims, an exclusion clause must clearly indicate that loss of profit is excluded whether arising directly or indirectly.
Any such financial loss exclusion or limitation will be subject to the reasonableness test in the UCTA if excluding or limiting liability for negligence, or liability for breach of implied conditions, or any exclusion of liability when contracting on standard terms.
Financial capsAre there any statutory controls on using financial caps to limit liability for breach of contract?
It is common for suppliers to place a financial cap on their liability. The UCTA confirms that the reasonableness test in UCTA will apply when assessing whether the financial cap is reasonable and therefore enforceable. Any such financial cap will be subject to the reasonableness test in the UCTA if the financial cap applies to liability for negligence, liability for breach of implied conditions or any limitation of liability when contracting on standard terms (see question 7 for an explanation of the UCTA reasonableness test).
Section 11(4) of the UCTA specifically applies where a party is seeking to restrict its liability to a specified sum of money. When assessing if the financial limitation satisfies the requirement of reasonableness, reference must be made to the resources of the party seeking to limit liability and how far that party was able to cover itself by insurance.
IndemnitiesAre there any statutory controls on indemnities used to cover liability risks in contracts?
A true indemnity is classified as a debt claim because a party agrees to pay a sum of money when the specific loss occurs. A debt claim is different from a damages claim because the common law rules that apply to damages claims, such as the obligation on a party to mitigate its loss and the requirement that the loss is not too remote, do not apply to debt claims.
There are no statutory controls on indemnities. However, if the indemnity is drafted in such a way that it enables one party to avoid its liability in damages to the other party then it will be treated as an exclusion or limitation clause and the UCTA will apply (see question 11).
Liquidated damagesAre liquidated damages clauses enforceable and commonly used in your jurisdiction?
Liquidated damages clauses are commonly used in commercial contracts.
Care needs to be taken when drafting a liquidated damages provision to ensure it does not fall foul of the common law rule against penalties, because penalties are unenforceable. Under English law, damages are supposed to be compensatory and a clause that seeks to impose an excessive or unconscionable payment for breach of an obligation may be challenged as a penalty.
Some important issues are relevant when assessing penalties under English law:
- English courts allow a fairly generous margin when assessing if a clause could be a penalty and are very slow to strike out a clause in a negotiated commercial contract between parties of equal bargaining power.
- The trigger for the payment must be a breach. If the clause is drafted so as to avoid linking the payment to a breach, it cannot be challenged as a penalty. For example, a contract could be drafted so that if one party terminates before the expiry of a fixed term, this would be deemed to be a breach of contract and a fixed sum must be paid by the contract-breaker, linking the payment to a breach of the fixed-term commitment. Alternatively, the clause could be drafted so that one party has an option to terminate the contract, and if that party wishes to exercise that option, the contract-breaker will pay an exit fee. This type of option cannot be assessed as a penalty because the payment it is not linked to a breach, but merely linked to a contractual option to terminate early.
- The rule against penalties does not apply to primary obligations in a contract. A primary obligation is a term in the contract that must be observed for valid performance. A secondary obligation applies when a primary obligation has been breached, for example, the breach of a primary obligation to supply goods by a particular date triggers a secondary obligation to pay liquidated damages. In this scenario, the secondary obligation can be assessed to see if the amount of the liquidated damages is extravagant and unconscionable and therefore a penalty. In a recent UK case, the Supreme Court held that a payment clause was a primary obligation to pay a sum of money, and the ability of a party to withhold a sum of money if the other party breached the contract could not be challenged under the rule against penalties, because the withholding mechanism was merely an adjustment of the primary payment obligation.
Payment terms
Statutory time limits on paymentsAre there statutory time limits for paying invoices? Is it possible to agree a different payment period?
Yes, there are statutory time limits for paying invoices. The Late Payment of Commercial Debts Regulations 2013 (SI 2013/395) apply to the supply of goods and services and implement the provisions in the EU Late Payments Directive.
If the contract is silent on the period to pay an invoice, payment must be made 30 calendar days from the latest of receipt of the supplier’s invoice, receipt of the goods or services, or verification or acceptance of the goods or services.
Any verification or acceptance period:
- must be no longer than 30 calendar days from the date of receipt of goods or services; or
- can be longer if agreed by the parties, if such an extension is not ‘grossly unfair’ to the supplier.
If the contract contains an express payment term, the payment period can be up to 60 calendar days from receipt of the invoice, receipt of the goods or services, or verification or acceptance of the goods or services, unless:
- a longer period is expressly agreed by the parties; and
- such an extension to the payment period is not ‘grossly unfair’ to the supplier.
To determine whether a term is ‘grossly unfair’, it is necessary to consider:
- whether there has been any deviation from good commercial practice contrary to good faith and fair dealing;
- the nature of the product or service; and
- whether the buyer has any objective reason to deviate from the statutory period.
Importantly, the implementation of the Late Payments Directive in the UK means that the 60-day payment period only applies when statutory interest is charged. If the parties set out a different contractual rate of interest in the contract, any payment period can be used as long as it provides a substantial remedy for late payment.
In 2017, the UK government published new legislation that requires large UK companies to publish information and statistics on how quickly they pay their suppliers. These requirements are set out in the Reporting on Payment Practices and Performance Regulations 2017 (SI 2017/395) which came into force on 6 April 2017. The Department of Business, Energy and Industrial Strategy has published a guidance document called ‘Duty to Report on Payment Practices and Performance’ that sets out the size of companies that must report, the information that must be reported and the various deadlines. The government hopes that by increasing transparency about how quickly suppliers are paid, companies will be encouraged to pay more quickly.
Late payment interestIs statutory interest charged on late payments? Is it possible to agree a different rate of interest?
Yes, statutory interest can be charged by a supplier. Statutory interest on the late payment may be charged from the day following the payment date. The UK statutory rate is set at 8 per cent above the reference rate which is the Bank of England base rate as set on 1 January and 1 July each year. For example, if the Bank of England base rate on 1 July is 0.5 per cent then the statutory rate that can be charged by a supplier is 8.5 per cent.
Parties may contract out of the statutory interest rate by inserting an express contractual interest rate in their contract as long as it provides a ‘substantial remedy’ for late payment. For it to be a substantial remedy it must compensate the supplier for the late payment. There is limited case law on what constitutes a substantial remedy, but in one case the court held that a percentage rate of 0.5 per cent was too low to be a substantial remedy. Generally, market practice is to agree a contract rate between 3 per cent and 5 per cent above the base rate.
Note, that if a contract is silent as to the interest rate, the statutory rate will apply.
The interest rate is not applied automatically and, in many cases, suppliers are reluctant to charge interest on late payment because they do not want to damage the ongoing commercial relationship with the buyer.
Civil penaltiesWhat are the civil penalties for failing to comply with statutory interest rate or late payment of invoices?
There are no civil penalties, but the supplier can claim fixed compensation to cover the costs of recovering the debt. These fixed cost are either £40, £70 or £100 depending on the size of the debt.
The supplier is also entitled to claim reasonable compensation for any costs exceeding the fixed compensation and incurred due to the buyer’s non-payment, for example, to cover expenses such as instructing a lawyer or employing a debt collection agency.
Termination
Implied termsDo special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?
A commercial contract will generally include some circumstances in which either party will have the right to terminate.
In addition to these contractual rights, English common law implies a right into a contract that an ‘innocent’ party can terminate the contract where the other ‘guilty’ party has committed a sufficiently serious breach of its obligations that it affects the very substance of the contract - often referred to as a breach which goes to the ‘root of the contract’, for example where a supplier refuses to perform its obligations and abandons the contract or a buyer refuses to pay any invoices. Whether a breach is sufficiently serious to be a repudiatory breach is a question of fact and the relevant circumstances of the case.
It is possible to exclude the common law right to terminate the contract, but this must be expressly stated in the contract. The English courts have stated that they are unlikely to be satisfied that a party has abandoned such a valuable right unless the language used is sufficiently clear.
In many supply contracts, the parties may simply be in a buy-sell relationship where the buyer places an order and the supplier sells the product for which it is paid. This type of one-off buy-sell transaction may continue over several years, but under English law the buyer is not required to give any notice to terminate, it can simply stop placing future orders.
Notice periodIf a contract does not include a notice period to terminate a contract, how is it calculated?
Historically, if a contract was silent as to its term, there was a (rebuttable) presumption that it was permanent and irrevocable. However, the English courts have moved away from this presumption and will now principally look to the construction of the contract, with a view to ascertaining the parties’ intention. If the intention of the parties is not clear from the contract, the general rule is that an indefinite-term contract may be terminated by reasonable notice. There is no equivalent rule for fixed-term contracts, as where it is clear that the parties intended the contract to be for a fixed term, the courts will give effect to this intention.
The rules to determine the reasonable notice period for an indefinite term contract require analysis case by case, as what is reasonable will depend on a number of circumstances at the time of termination. Factors to be considered include:
- the duration of the relationship - usually, the longer the relationship the more likely a longer period of notice will be required;
- the degree of financial dependence of the terminated party on the terminating party, as greater dependence will militate in favour of a longer notice period;
- the time the terminated party requires to replace the lost business; and
- any capital investments made by the terminated party as part of the relationship (eg, staff, premises, equipment) to the extent that these may not have been fully amortised at the time of termination.
Will a commercial contract terminate automatically on insolvency of the other party?
Under English law, there is no common law right to terminate a commercial contract on the insolvency of the other party. Similarly, no person may be excused from the performance of its obligations under the contract simply as a result of financial difficulty. To avoid this situation, parties will often include an express term in the agreement which permits either party to terminate on the insolvency of the other party.
Termination for financial distressAre there restrictions on terminating a contract if the other party is in financial distress?
There are no general common law restrictions on terminating a contract if the other party is in financial distress. This situation will be governed by the provisions of the contract, and a party will be permitted to terminate for financial distress if this is provided for in the contract. However, there is a statutory exception set out in the Insolvency Act 1986, as amended by the Insolvency (Protection of Essential Supplies) Order 2015, which means that a supplier supplying essential services to a company is prohibited from terminating a contract for financial distress. ‘Essential services’ include electricity, gas, water, telecommunications services and IT services.
Force majeureIs force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?
Force majeure is recognised under English law although it is a civil law concept. Force majeure is not defined in English law and so it should be defined in the contract often it is defined to include events such as fire, flood, war or similar events.
Force majeure suspends the obligations during the force majeure event but the obligations are not discharged (unless the parties agree otherwise). If the force majeure event continues for a long time, it may not be feasible for the agreement to continue and, in many cases, the force majeure clause is drafted in such a way to provide an option for the parties to terminate the agreement after a certain period of continuing force majeure.
Subcontracting, assignment and third-party rights
Subcontracting without consentMay a supplier subcontract its obligations under the contract without seeking consent from the other party?
Yes. If a contract is silent on the issue of consent, a supplier can subcontract without recourse to the counterparty; there is no need to notify or obtain consent from the counterparty in respect of the subcontracting. However, the supplier remains responsible for any non-performance by the subcontractor.
Statutory rulesAre there any statutory rules that apply to subcontracting in your jurisdiction?
No. The parties are free to agree in their contract if consent or notice is required. Sometimes a party may insist on a list in the contract of approved subcontractors that can be used when required.
Assignment of rights and obligationsMay a party assign its rights and obligations under the contract without seeking the other party’s consent?
Under English law, only the rights under a contract may be assigned. In contrast, the obligations under a contract can only be transferred by novation, which involves termination of the original contract and its replacement with a new contract.
If both the rights and obligations need to be transferred, the contract must be novated, which involves consent (express or implied) of the original counterparty to the release of the leaving party from its obligations and the transfer to the new party of the obligations. In practice, this is usually achieved by a tripartite agreement.
What statutory controls apply to the assignment of rights or obligations under a supply contract?
Section 136 of the Law of Property Act 1925 says that a legal assignment: (i) must be in writing and signed by the assignor; (ii) must be absolute; and (iii) written notice must be given to the counterparty. No statutory controls apply to the transfer of obligations.
Enforcement by third partyHow may a third party enforce a term of the contract?
The general rule under English law is that only the parties to a contract are bound by its terms and subject to the obligations imposed by it, as well as entitled to benefit and enforce the rights granted by it. This is known as the doctrine of privity of contract.
The Contract (Rights of Third Parties) Act 1999 (CRTPA) creates a statutory exception to the doctrine of privity and provides that a third party may, subject to certain conditions, enforce some terms of a contract in its own right. However, the third party does not by virtue of the CRTPA become a party to the contract and the contracting parties cannot directly impose any obligations on a third party.
The CRTPA gives a third party a direct right to enforce a term of the contract as long as the third party is given that right and identified in the contract by name, as a member of a class or answering a particular description. An example may be a contracting party’s parent company or another group company.
The CRTPA applies automatically to contracts entered into under English law. It is common for contracts to expressly exclude application of the CRTPA to avoid non-contracting parties claiming that they have rights under the CRTPA.
Disputes
Limitation periodsWhat are the limitation periods for breach of contract claims? Is it possible to agree a shorter limitation period?
The limitation period for a claim for a breach of contract is six years from the date of the breach.
It is possible to agree a shorter limitation period, but this will be treated as a limitation of a party’s liability under the contract and subject to the reasonableness test in the UCTA (see question 11).
The English courts have held in previous cases that a limitation period of 12 months to bring a claim for breach of contract was acceptable, although it depends on the facts of the case.
Choice-of-law clausesDo your courts recognise and respect choice-of-law clauses stipulating a foreign law?
Yes, parties may freely elect to use a foreign governing law in their contract. However, some mandatory laws will apply to the contract if one of the parties is an English company even though it has a non-English governing law. For example, in a B2B context, if one of the parties is an English company, some employment law and commercial agency law is mandatory and may apply regardless of the choice of foreign governing law.
Do your courts recognise and respect choice-of-jurisdiction clauses stipulating a foreign jurisdiction?
Yes, parties may freely select a foreign jurisdiction. Ideally, the choice of governing law and jurisdiction should coincide, for example French law and French jurisdiction. Although it is possible for the chosen governing law to be different from the jurisdiction, this will cause practical difficulties and significantly increase the cost and complexity of any dispute.
Efficiency of local legal systemHow efficient and cost-effective is the local legal system in dealing with commercial disputes?
The English courts are well respected internationally and have a great deal of experience in dealing with contract disputes. There is an established set of procedural rules to encourage an efficient dispute resolution process.
New York ConventionIs your jurisdiction a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Which arbitration rules are commonly used in your jurisdiction?
The United Kingdom is a signatory to the New York Convention. The London Court of International Arbitration rules are commonly used in English law-governed contracts, but other arbitrational rules such as those of the International Criminal Court are also acceptable.
Remedies
Available remediesWhat remedies may a court or other adjudicator grant? Are punitive damages awarded for a breach of contract claim in your jurisdiction?
The most common remedy is financial damages to compensate a party for its loss and put it in a position as if the contract had been performed. Damages are the most commonly pursued remedy and may be awarded by a court or any other adjudicator.
A court may also award some equitable remedies such as specific performance or an injunction. The English courts are, as a rule, reluctant to award equitable remedies in the context of commercial contracts and these remedies are a matter for the court’s discretion, and will not be granted where the court considers damages to be an adequate remedy in the circumstances.
Punitive damages are not awarded for a breach of contract claim.
Update and trends
Recent developmentsAre there any other current developments or emerging trends that should be noted?
Current developments33 Are there any other current developments or emerging trends that should be noted?BrexitIn June 2016, the United Kingdom voted to leave the European Union (the ‘Brexit’ vote). The leaving date was intended to be 29 March 2019 but this has been extended and there is uncertainty as to the date when the United Kingdom will leave the European Union.
Brexit will not impact most of English B2B contract law. English contract law has its roots in common law and has never been aligned with EU contract law. Therefore, if there is a good commercial reason for using English law to govern a contract, this is likely to continue being a good decision post-Brexit.
However, when negotiating new contracts in a post-Brexit world, there may be a number of commercial terms that will need consideration, for example, agreements that use definitions that are designed to cover the United Kingdom being part of the European Union (eg, definitions around ‘territory’ or compliance with EU data protection legislation) may need to be amended. In addition, it is likely that there will be pricing and logistics considerations if the United Kingdom moves to a fixed tariff arrangement for goods and services or ceases to be part of the customs union. There will also be obvious free movement effects if contracts rely on the exchange of labour between the United Kingdom and the rest of the European Union.
Certain areas of contract law, for example, consumer law and commercial agency law are derived from EU law and implement EU directives into domestic UK law. The UK government has stated that when the United Kingdom leaves the European Union, the United Kingdom will retain most existing EU law that has already been implemented into UK domestic law.
