Commercial Contracts12th May 2016

Aims of the Session

• Consider the outline structure of a contract.

• Discuss key provisions found in contracts (including warranties and indemnities and endeavour obligations).

• Recognise and understand the importance of checking boilerplate clauses.

• Briefly touch on ways to discharge a contract.

• Consider common issues which often arise in the context of commercial contracts (including the use of limitation and exclusion clauses) and practical steps which can be taken to manage potential dispute scenarios.

STRUCTURE OF A CONTRACT

AND

KEY TERMS

Structure

• Description of the contract

• Date

• Parties

• Background

• Definitions and interpretation

• Conditions precedent

• Key commercial terms

• Limitations and exclusions

• Boilerplate

• Schedules, appendices and annexes

• Execution

Warranties and Indemnities

• Warranties

– Assurance/promise usually that a certain statement of fact is true or state of affairs exist.

– Damages for breach based on normal contractual principles (loss, remoteness of damage, duty to mitigate loss).

• Indemnities

– Undertaking to make payment for a specific liability should that liability arise.

– Risk allocation.

– Claim for recovery of debt on a £ for £ basis.

Relationship between warranties & indemnities

Example:-

“[Party A] warrants that it is and will remain throughout the term of this Agreement registered as a Data Processor and that all processing of personal data will be carried out in accordance with the Data Protection Act 1998”

“[Party A] shall indemnify [Party B] against all loss, damage, liabilities, claims, costs and expenses suffered or incurred by [Party B] as a result of a failure to do so”

Pricing and Payment

Key considerations:-

• Who pays what, how, when and where?

• Include / exclude VAT (presumption is that the price includes VAT unless stated otherwise)

• Price increases and reductions (for example in an annual contract)

• Protections in the event of non-payment (interest on late payments; suspension of services; retention of title; third party guarantee; termination for breach)

Endeavours

• Contractual obligations are usually absolute and a failure to satisfy an absolute obligation will result in breach

• Endeavours obligations are used to “soften” an absolute obligation

• The three commonly used endeavours obligations are:-

– Reasonable endeavours– Best endeavours – All reasonable endeavours

General Characteristics

Obligation Requires expenditure? Overview

Best endeavours May require significant expenditure by the partyperforming the obligation but not ruinously so. May require a party to incur a loss.

Not an absolute obligation.

Includes steps which a prudent,

determined and reasonable party,

acting in its own interests and

desiring to achieve that result,

would take. May impose an

obligation to litigate/appeal a

decision.

All reasonable endeavours

May require expenditure. May or may not require the obligor to sacrifice its commercial interests.

Likely to exhibit characteristics of both best and reasonable endeavours.

Reasonable endeavours

May require limited expenditure, but does not require the party performing the obligation to sacrifice its commercial interests. Courts have suggested that a party is only required to take one course of action rather than many.

Involves balancing the contractual obligation against all relevant commercial considerations.

Good faith – watch this space!

• No doctrine of good faith in English law but are we swimming against the tide?

• Nothing to prevent inclusion of an express provision to act in good faith.

• More willing to imply duty of good faith in “relational” contracts (e.g. JV agreements, long term distributorship agreements).

Boilerplate

• Common boilerplate clauses

– Assignment and subcontracting

– Confidentiality

– Counterparts

– Notices

– No waiver

– Severability

– Entire agreement

– Third party rights

– Choice of law

– Jurisdiction

Discharge of contracts

• Performance

• By agreement

• Termination for breach

• Frustration

Key messages to take away

• Identify key concerns and risks

• Use plain and clear language

• Be specific and use sub-clauses

• Ensure that the document reflects how things will work in practice

• Don’t ignore the boilerplate!

• Consider the reasonableness of limitations/exclusions

• Check parties and execution

Limitation of Liability

• Methods

– Limitation and Exclusion Clauses

– Total exclusion or capped liability (liquidated damages)

– Incorporation

– Prominence

– Extent of exclusion – types of loss

– Regulation via Unfair Contract Terms Act 1977

No death or personal injury

Otherwise subject to the “reasonableness test”.

Entire Agreement Clauses

• Entire Agreement Clauses

– Extensive analysis. Frequent topic of litigation

– Why ? Because people are people

– Designed to prevent parties to a written agreement from raising claims regarding statements made during contract negotiations

• Different elements

– Statement that all terms are found in the contract

– Exclusion of liability for misrepresentation – clear words

No reliance on any statement not set out in the contract

exclusion of liability for misrepresentation

• Time limits – how long after the breach can you claim?

Limitation

• Limitation Act 1980

– Primary limitation

One month

Six years

Ability to extend

Fraud or deliberate concealment

Latent defect

Pre Action Protocols

• Protocol Compliance

– Protocol to cover almost every type of dispute.

Professional Negligence, Judicial Review, Construction and Engineering and the Practice Direction on Pre-Action Conduct and Protocols

– Read in conjunction with the relevant Court Guide

Commercial Court

Technology and Construction Court

Administrative Court

– Sets out obligations and duties on both parties

– Which are what ?

Pre-Action Behaviour

• Pre Action Principles.

• “Spirit not the letter”

• Be reasonable

• Specific rules in different Protocols

• General principles to avoid criticism

• All about the exchange of information and co-operation

– Exchange sufficient information to understand each other’s position; to make decisions about how to proceed, to try and settle without proceedings and to support the efficient management of the proceedings

Pre-Action Behaviour Cont’d

• Settlement

– Direct negotiation on a without prejudice basis – know your terms

– Mediation

– Expert determination

– Contractual process

• Limitations on expectations

– Does not overrule the litigation process

– not obliged to produce wholesale evidence or disclose large scale documents

– strategically important not to let opponent overstep the mark

Pre-Action Behaviour Cont’d

• How is that put into effect

– Letter of Claim. Do not issue without one in all bar extreme limitation circumstances

– Response within a reasonable time limit

14 days to 3 months

• Consequences of non compliance

– Case Management – stays and wasted costs against claimants

– Orders as to costs and interest on sums due

Practicalities

• Practical Steps to take in a dispute scenario

– Act promptly

– Contractual issues

Serve notices

Express provisions providing for a shorter limitation period

Dispute resolution procedures

jurisdiction and choice of law

opponent’s domicile and place of business (enforceability / assets)

– Reserve Rights

– Document creation, circulation and retention proposals. Deletion policies

Practicalities cont’d

– Internal team, communications and privilege issues

– Deadlines. Relief from sanction

– Keep records of discussions

– Speak to potential witnesses

– Funding Options – insurance notification

– Publicity Management