A–Z Guide to Boilerplate and Commercial Clauses 9781526500632, 9781526500601

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Downloadable precedents

In previous editions of The A–Z of Boilerplate Clauses, the precedents have been available separately on a CD-ROM. For the new 4th edition, the precedents are available to download electronically from www.bloomsburylawonline.com/boilerplate. They are password-protected and the password is BJG36hzP. They can be downloaded individually or in totality. If you have any problems downloading the precedents or have any questions, please contact Bloomsbury Professional customer services on 01444 416119 or by email at [email protected]. For a Licence agreement relating to the use of this Data, please see overleaf at p vi.

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Licence agreement

The Data on www.bloomsburylawonline.com/boilerplate is © Bloomsbury Professional 2017. Bloomsbury Professional (‘the Publishers’) grant you a non-exclusive and non-transferable licence to use the Data from www.bloomsburylawonline. com/boilerplate. You may download, copy or print the Data from www.bloomsburylawonline. com/boilerplate for private use or use in the ordinary course of your business but you may not make any profit from the use of the Data other than would ordinarily be made in the course of your business. You may not sell the Data under any circumstances or make or sell any copy or reproduction of it. You may not copy or print out any part of the Software for any purpose or make any modifications to the Software. If you have any queries about the use of the Data from www. bloomsburylawonline.com/boilerplate, please contact customer services at Bloomsbury Professional: [email protected].

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Preface

The goal we set for the first edition of the A–Z Guide to Boilerplate and Commercial Clauses, back in the 1990s, was that it should be a useful source of information across the main areas covered by boilerplate clauses. As the title states, this is the fourth edition, but the goal remains equally true this time around – to provide a sourcebook of: •

precedent material;

• the key reasons for including a particular boilerplate or commercial clause; • the essential legal principles underpinning a boilerplate or commercial clause; and •

practical points to consider when drafting or understanding a boilerplate or commercial clause.

So what is new? As in previous editions, we continue to add to individual sections, by providing more guidance and example wording, and taking account of new statute and case law. Since the third edition, several new legislative measures have appeared, such as the Consumer Rights Act 2015, the Trade Secrets Directive (2016/943) and the General Data Protection Regulation (2016/679). They have modified or added to existing law, of course, but not to the extent that substantial new or additional wording will be necessary for a mainstream commercial contract (as far as we can tell at present!). The same applies to the many cases on boilerplate clauses which have been reported since the third edition; too many to be listed here. Many of these cases concern the meaning of a contract clause (or words within a clause). A couple of examples will suffice: •

a force majeure clause is a classic boilerplate provision and a topic which, as far as significant new case law is concerned, appeared to have fallen asleep for several years. Then there is one new case which helps focus attention on the meaning of ‘beyond reasonable control’;

•

the perennial classic, the entire agreement clause. If it includes wording such as ‘supersedes … any prior written or oral representations’ then it is not enough, normally, to exclude liability for pre-contract representations.

Even if new cases don’t affect how clauses of this kind should be worded, it is valuable to see how the court interprets them. vii

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Preface

This book is a companion to Drafting and Negotiating Commercial Contracts, the fourth edition of which appeared in December 2016. The preface to that edition reported a (third party) view that lawyers had become ‘copy and paste monkeys’. The same is just as true of non-lawyers, especially as so many terms and conditions are now available online for them to copy and paste. This book is one of the answers to that criticism. By providing the reader with information on the meaning and use of boilerplate clauses, he or she can avoid the mindless repetition of contract wording. Another point made in the preface to Drafting and Negotiating Commercial Contracts was the strong message sent out by the most senior courts in the UK (in cases such as Rainy Sky SA v Kookmin Bank [2011] UKSC 50 and culminating in Arnold v Britton and others [2015] UKSC 36) that parties are bound by the words they have chosen to use in their contracts. Just because they draft their contract poorly, or one or both parties is commercially disadvantaged or has made a bad deal, the answer from the courts is likely to be: tough. In signing off, we would like to mention a countervailing ‘message’. That it is easy for the parties to depart from the wording of their contract. A ‘no amendment, no variation’ clause is one found in many contracts, and typically provides that the parties to contract cannot amend or vary their contract unless they comply with a particular procedure or formality. Recent court decisions have decided that such wording is of no effect if the parties’ subsequent conduct or oral agreement is sufficient to vary or amend their contract. This is due partly, no doubt, by the lack of formality required to enter into legal relations under UK law. But this second message is really all part of the same approach of the courts, that in the event of a dispute, a court will look at the objective reality of what has occurred, not what the parties think has occurred. Not only must the contract drafter or user pay attention to the words they use, but also to their own behaviour. Having a judge pick over what you say or do is rarely a happy experience. This book and its companion can help with the first message; as to the second: watch your step… Mark Anderson and Victor Warner www.andlaw.eu August 2017

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How to negotiate boilerplate clauses

Driftwood: Oh that’s the usual clause. That’s in every contract. That just says, uh, it says, uh, if any of the parties participating in this contract is shown not to be in their right mind, the entire agreement is automatically nullified … That’s what they call a ‘sanity clause’. Fiorello: Ha, Ha, Ha, Ha, Ha. You can’t fool me. There ain’t no Sanity Clause! ‘A Night at the Opera’, Marx Bros. (MGM Studios, 1935)

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Table of Statutes

References at the right-hand side of the column are to page numbers.

page Acquisition of Land Act 1981 s 23(4)............................................... 455 Arbitration Act 1996............. 63, 64, 65, 69, 70, 71, 72, 73, 78 Pt I (ss 1–84)..................................... 70 s 1(a).................................................. 63 2(1)................................................. 70 3....................................................... 70 4(1), (2).......................................... 65 9–11, 24, 43..................................... 65 67, 68............................................... 65, 72 69(1)............................................... 71 91..................................................... 72 Sch 1.................................................. 65 Banking and Financial Dealings Act 1971................................................ 458 Bills of Sale Act 1878............................. 536 Bills of Sale Act (1878) Amendment Act 1882......................................... 536 Capital Allowances Act 2001 s 466................................................... 311 Civil Jurisdiction and Judgments Act 1982................................................ 452 s 32, 33............................................... 446 42..................................................... 496 Companies Act 1948 s 725................................................... 481 Companies Act 2006.... 17, 21, 31, 32, 126, 127, 128, 263, 264, 265, 266, 274, 426, 494, 645 s 3....................................................... 263 33..................................................... 221 39..................................................... 124, 645 40............................................ 124, 128, 645 (1)............................................... 126 (2)............................................... 645 43..................................................... 124 44.............................................. 31, 128, 263 (2), (3)........................................ 265 (5)............................................... 269 (6), (7)........................................ 268 (8)............................................... 264 45(1)............................................... 263 46............................................ 263, 264, 266 (2)............................................... 266

page Companies Act 2006 – contd s 47..................................................... 128 112................................................... 17 287................................................... 496 442(2)............................................. 455 735................................................... 263 Pt 25 (ss 859A–894).......................... 543 s 860................................................... 536 861(4)............................................. 405 871(1)............................................. 536 875................................................... 536 1159........................................ 16, 17, 18, 19, 20, 21, 22, 24 (1)(a)–(c)............................... 24 1160................................................. 22 1161............................................... 16, 22, 23 (5)........................................... 19, 664 1162............................ 17, 18, 20, 21, 23, 26 (2)(a), (b)............................... 26 (c)...................................... 27 (d)...................................... 26 (4)(a)...................................... 27 (5)........................................... 19 1173................................................. 16 Sch 6.................................................. 24 para 1–3........................................ 24 4–8........................................ 25 9, 10...................................... 26 Sch 7.................................................. 24, 25 para 1, 2........................................ 26 3............................................ 26, 27 4, 5........................................ 27 6–8........................................ 27, 28 9–11...................................... 28 Competition Act 1980........................... 662 Competition Act 1998........................... 662 Consumer Credit Act 1974................... 422, 656 s 100................................................... 286 Consumer Rights Act 2015.... 194, 195, 196, 197, 199, 203, 204, 208, 211, 286, 300, 371 Pt 2 (ss 61–72).......................... 195, 196, 200 s 3(3)................................................. 196 9....................................................... 204 (2), (3).......................................... 197 10..................................................... 204

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Table of Statutes page Consumer Rights Act 2015 – contd s 11..................................................... 204 (4)............................................... 196 12............................................ 196, 201, 204 13–17............................................... 204 28..................................................... 204 (2), (3)........................................ 204 29..................................................... 204 30..................................................... 203 31..................................................... 200, 204 (2), (3)........................................ 205 34–37............................................... 204 36..................................................... 201 37..................................................... 196 41..................................................... 204 47..................................................... 200, 204 (2)............................................... 205 49..................................................... 205 50..................................................... 205 (3)............................................... 196, 201 51, 52............................................... 205 57..................................................... 200, 205 (4), (5)........................................ 205 62..................................................... 200 (2), (3)........................................ 195 (4)............................................... 371 (6)............................................... 195 63..................................................... 200 64(1)............................................... 199 (2)............................................... 195, 199 (3), (4)........................................ 195 (5)............................................... 199 65(1)............................................... 200 68, 71............................................... 195 Sch 2.......................................... 199, 200, 288 para 1............................................ 211 (b)....................................... 551 2, 3........................................ 211 4............................................ 211, 288 5, 6........................................ 211 7–14...................................... 212 15.......................................... 212, 213 16.......................................... 213 17.......................................... 213, 299 18–21.................................... 213 22–25.................................... 214 Contracts (Applicable Law) Act 1990 s 2....................................................... 446 Contracts (Rights of Third Parties) Act 1999..................... 2, 3, 19, 87, 90,206, 218, 219, 220, 221, 222, 223, 224, 225, 226, 227, 228, 229, 569, 668 s 1....................................................... 229 (1)................................................. 218, 220 (a)............................................ 218, 222 (b)................................... 218, 219, 222, 227, 228 (2)........................................ 218, 222, 226, 227, 228 (3)................................................. 222, 230 (5)................................................. 220

page Contracts (Rights of Third Parties) Act 1999 – contd s 2....................................................... 223 6....................................................... 221 7(1)................................................. 219 (4)................................................. 220 8....................................................... 228 10..................................................... 220 Copyright, Designs and Patents Act 1988................................................ 404, 405 s 3....................................................... 404 11(1)............................................... 404 92(1)............................................... 311 119D, 225........................................ 311 Corporate Bodies’ Contracts Act 1960 s 1....................................................... 124 Corporation Tax Act 2009.................... 405 s 921................................................... 311 County Courts Act 1984........................ 420 s 74..................................................... 420 Data Protection Act 1998............ 249, 250, 251, 252, 253, 254, 255, 656 s 1(1)................................................. 251 2....................................................... 251 4(4)................................................. 251 Sch 2.................................................. 252 Sch 3.................................................. 252 Finance Act 1999................................... 562 s 112................................................... 562 Finance Act 2000 s 129(2), (3), (5)............................... 563 Sch 34 para 4............................................ 563 Finance Act 2003 s 42(2)(b), (c)................................... 563 43..................................................... 563 (1), (3)........................................ 563 48(1)(a).......................................... 563 76(3)............................................... 563 85..................................................... 563 125................................................... 562 Sch 13................................................ 562 Finance Act 2009 s 129(2)(a)........................................ 563 Forgery and Counterfeiting Act 1981 s 9(1)(g)............................................ 136, 257 Freedom of Information Act 2000....... 57, 349, 350, 352, 353, 355, 356, 357, 358, 359, 360, 361, 362 s 22, 40............................................... 349 41..................................................... 351, 352 42..................................................... 349 43............................................ 349, 353, 354 Sch 1.................................................. 356 Health and Safety at Work etc Act 1974................................................ 655 Insolvency Act 1986.............................. 426 s 123................................................... 397 252................................................... 393 253................................................... 394, 397 264................................................... 393

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Table of Statutes page Insolvency Act 1986 – contd s 267, 268........................................... 397 273, 286........................................... 394, 397 Interpretation Act 1978.............. 274, 425, 426, 463, 464, 612 s 5............................................. 273, 427, 429, 453, 612 6....................................................... 427, 429 17..................................................... 71, 429 (2)(a).......................................... 22, 425 21, 22............................................... 430 23..................................................... 71 (3)............................................... 22, 425 Sch 1......................................... 273, 427, 429, 453, 612 Sch 2 Pt I (paras 1–5)............................. 430 para 5(a)................................... 612 Landlord and Tenant Act 1927 s 19(2)............................................... 178 Land Registration Act 2002.................. 261 s 18, 21............................................... 261 25(1)............................................... 261 Late Payment of Commercial Debts (Interest) Act 1998........................ 420, 422 s 1....................................................... 421 2(1)................................................. 420 (5)................................................. 421 3....................................................... 420 4, 5, 5A............................................ 421 6....................................................... 420 8(1)................................................. 421 9....................................................... 421 (3)................................................. 421, 422 13..................................................... 422 Law of Property Act 1925 s 41..................................................... 621 49(2)............................................... 286 52(1)............................................... 261 53..................................................... 573 61..................................... 427, 429, 453, 463 71(1A)............................................. 264 72..................................................... 263 74A(1)(a)........................................ 264 (b)....................................... 266 (2)............................................. 266 104................................................... 261 109(1)............................................. 261 Law of Property (Miscellaneous Provisions) Act 1989...................... 263 s 1(2)(a)............................................ 264 (b)............................................ 263, 264 (2A)............................................... 264 (3)........................................ 265, 267, 268 (b)............................................ 266 (4)................................................. 265 (4A)............................................... 264 2........................................... 42, 50, 573, 588 Law Reform (Frustrated Contracts) Act 1943......................................... 338 Limitation Act 1980.............................. 12 s 5....................................................... 263 29, 30............................................... 11

page Limited Liability Partnerships Act 2002................................................ 30 s 1(2)................................................. 31 3....................................................... 31 Local Government Act 1972 s 1, 20, 73........................................... 612 Misrepresentation Act 1967................. 296, 304 s 3.............................................. 301, 303, 318, 329, 331 Partnership Act 1890..................... 30, 392, 435 s 9....................................................... 435 Patents Act 1977.................................... 405, 662 s 30 (6).............................................. 42 40, 41............................................... 660 68..................................................... 310 130(1)............................................. 311 Powers of Attorney Act 1971................ 364 s 1....................................................... 261 (1)................................................. 364 4....................................................... 368 (1)................................................. 364 Sale of Goods Act 1979............... 120, 203, 205, 314, 316, 318, 332, 333, 533, 534, 626, 630 s 3(2)................................................. 124 8....................................................... 502 10..................................................... 504 (1), (2)........................................ 621 13..................................................... 332 14..................................................... 291, 332 Pt III (ss 16–26)................................ 630 s 16............................................ 626, 627, 630 17............................................ 533, 626, 630 (1), (2)........................................ 627 18........................................... 505, 626, 627, 630, 631 r 1–4........................................... 631 5............................................... 631, 632 19..................................................... 626, 632 20..................................................... 626, 632 (1), (4)........................................ 627 20A.................................................. 630 21(1)............................................... 537 25(1)............................................... 537 61..................................................... 626 Stamp Act 1891 s 122................................................... 562 Supply of Goods and Services Act 1982................................................ 205, 318 s 14..................................................... 621 15..................................................... 502 18 r 1............................................... 533, 534 Trade Marks Act 1994........................... 405 s 29(1)............................................... 311 Unfair Contract Terms Act 1977......... 194, 195, 315, 317, 318, 320, 321, 324, 333, 345, 372, 381, 398, 551 s 1....................................................... 327 (2)................................................. 318 2....................................................... 332 (1)................................................. 317, 331

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Table of Statutes page Unfair Contract Terms Act 1977 – contd s 2(2)................................................. 317 3............................................... 317, 325, 549 (1)................................................. 321 4....................................................... 321 6(1)................................................. 318 (3)................................................. 324 7(3), (4).......................................... 324 8....................................................... 301 11..................................................... 320, 329 (1)............................................... 318 (4)............................................... 319, 400 13..................................................... 549 24..................................................... 320 26..................................................... 318 Sch 1.................................................. 318 Sch 2................................. 319, 320, 324, 330

page Union with Scotland Act 1706 art 1.................................................... 612 Value Added Tax Act 1994................... 405 s 1, 4................................................... 633 19(2)............................................... 504 31..................................................... 633 44(1)............................................... 636 47, 59............................................... 635 Sch 9.................................................. 633 Sch 10 para 2............................................ 636 3(7)....................................... 636 NEW ZEALAND Contracts (Privity) Act 1982 s 4....................................................... 228

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Table of Statutory Instruments

References at the right-hand side of the column are to page numbers.

page

page

Cancellation of Contracts made in a Consumer’s Home or Place of Work etc Regulations 2008, SI 2008/1816................................. 196 Civil Procedure Rules 1998, SI 1998/ 3132................................................ 35, 437 Pt 6 (rr 6.1–6.52).............................. 35 r 6.4(4).............................................. 481 6.11(1), (2)..................................... 35 6.12, 6.15, 6.16................................ 36 6.32, 6.33......................................... 35 6.36, 6.37......................................... 35 PD 6B................................................. 35 r 16.6.................................................. 550 44.3(2)............................................ 66 Commercial Agents (Council Directive) Regulations 1993, SI  1993/ 3053................................................ 30 reg 2(1)............................................. 427 3, 4............................................... 371 Companies (Model Articles) Regulations 2008, SI 2008/3229 Sch 1 art 49............................................. 265 Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, SI 2013/3134........................ 196, 201. 202 reg 6(1), (2)...................................... 201 7, 9, 10, 13................................... 201 28(1)–(3).................................... 202

Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 – contd Sch 1.................................................. 201 Freedom of Information Act (Environmental Information) Regulations 2004, SI 2004/3391....................... 350, 359 Land Registration Rules 2003, SI 2003/ 1417 r 74, 75, 98, 206–209......................... 261 Late Payment of Commercial Debts (Rate of Interest) (No  3) Order 2002, SI 2002/1675....................... 421 Limited Liability Partnerships (Application of the Companies Act) Regulations 2009, SI  2009/ 1804 reg 4................................................... 124, 263 Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009, SI 2009/1917................................. 263, 266 Unfair Arbitration Agreements (Specified Amount) Order 1999, SI 1999/2167 art 3.................................................... 72 Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083.. 72, 194, 195, 196, 206, 209, 324

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Table of Cases References at the right-hand side of the column are to page numbers. A AIB  Group (UK) plc (formerly Allied Irish Banks plc & AIB  Finance Ltd) v Martin [2001] UKHL 63, [2002] 1 WLR 94, [2002] 1 All ER (Comm) 209.............................. 435, 437 Adelphi (Estates) Ltd v Christie (1984) 47  P  & C  R  650, (1984) 269  EG  221, [1984] 1 EGLR 19.......................................................................................................................... 276 Afovos Shipping Co SA v R Pagnan & Fratelli (The Afovos) [1983] 1 WLR 195, [1983] 1 All ER 449, [1983] 1 Lloyd’s Rep 335........................................................................... 456 African Export-Import Bank v Shebah Exploration & Production Co Ltd [2016] EWHC 311 (Comm), [2016] 2 All ER (Comm) 307, [2016] 2 BCLC 412........................................ 323 Agricultural, Horticultural & Forestry Industry Training Board v Aylesbury Mushrooms Ltd [1972] 1 WLR 190, [1972] 1 All ER 280................................................................... 189, 190 Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd (The Strathallan) [1983] 1 WLR 964, [1983] 1 All ER 101, [1983] 1 Lloyd’s Rep 183 (Note).................................................. 327, 331 Air Transworld Ltd v Bombardier Inc [2012]  EWHC  243 (Comm), [2012] 2  All ER (Comm) 60, [2012] 1 Lloyd’s Rep 349................................................. 291, 292, 315, 317, 332 Aktion Maritime Corpn of Liberia v S Kasmas & Brothers (The Aktion) [1987] 1 Lloyd’s Rep 283.............................................................................................................................. 82 Alexander v Webber [1922] 1 KB 642..................................................................................... 285 Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496, [2017] 1 All ER 942, [2017] 1 All ER (Comm) 667.......................................................................... 511, 514, 515, 516 Allardyce (Keith) v Roebuck (Philip) [2004]  EWHC  1538 (Ch), [2005] 1  WLR  815, [2004] 3 All ER 754........................................................................................................... 619 Alpha Lettings Ltd v Neptune Research & Development Inc [2003]  EWCA  Civ 704, (2003) 147 SJLB 627......................................................................................................... 608, 609 Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676, [1976] 2 All ER 552, [1976] 1 Lloyd’s Rep 443.................................................................. 533, 534, 535 Amble Assets LLP (in administration) v Longbenton Foods Ltd (in administration) [2011] EWHC 3774 (Ch), [2012] 1 All ER (Comm) 764............................................... 285 Amin Rasheed Sjipping Corpn v Kuwait Insurance Co (The Al Wahab) [1984] AC 50, [1983] 3 WLR 241, [1983] 2 All ER 884.......................................................................... 441 Anglo-American Asphalt Co Ltd v Crowley, Russell & Co Ltd [1945] 2 All ER 324............. 96 Antaios Compania Naviera SA  v Salen Rederierna AB (The Antaios) [1988]  AC  191, [1984] 3 WLR 592, [1984] 3 All ER 229.......................................................................... 117, 597 Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339, [1990] 3 WLR 810, [1990] 3 All ER 481................................................................................................................................ 534 Arnold v Britton [2015] UKSC 36, [2015] AC 1619, [2015] 2 WLR 1593.......... 216, 316, 390, 504 Aspen Insurance UK  Ltd v Pectel Ltd [2008]  EWHC  2804 (Comm), [2009] 2  All ER (Comm) 873, [2009] Lloyd’s Rep IR 440........................................................................ 243 AstraZeneca UK  Ltd v Albermarle International Corpn [2011]  EWHC  1574 (Comm), [2011] 2 CLC 252, [2011] All ER (D) 162 (Jun)................................... 147, 151, 374, 484, 491 Attwood v Lamont [1920] 3 KB 571........................................................................................ 554 Ault & Wiborg Paints Ltd v Sure Services Ltd (The Times, 2 July 1983).............................. 112 Avraamides v Colwill [2006] EWCA Civ 1533, , [2007] BLR 76, [2006] All ER (D) 167 (Nov).................................................................................................................................. 222, 230 Axa Sun Life Services plc v Campbell Martin Ltd [2011]  EWCA  Civ 133, [2012] Bus LR 203, [2011] 2 Lloyd’s Rep 1.............................................................................. 296, 305, 549 B BP Exploration Operating Co Ltd v Dolphin Drilling Ltd [2009] EWHC 3119 (Comm), [2010] 2 Lloyd’s Rep 192.................................................................................................. 136, 138 BP Oil UK Ltd v Lloyds TSB Bank plc [2004] EWCA Civ 1710, [2005] 1 EGLR 61, [2004] 1 All ER (D) 336 (Dec)..................................................................................................... 486, 490

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Table of Cases BSkyB Ltd v HP Enterprise Services UK Ltd (formerly t/a Electronic Data Systems Ltd) [2010] EWHC 86 (TCC), [2010] BLR 267, 129 Con LR 147......................................... 296, 304 Beecham v Smith (1858) El Bl & El 442, 120 ER 574............................................................. 434 Bennett v Bennett [1952] 1 KB 249, [1952] 1 All ER 413, [1952] 1 TLR 400...................... 554 Bensley v Burden (1830) 8 LJ (OS) Ch 85.............................................................................. 525 Berkeley v Hardy (1826) 5 B & C 355, 108 ER 132................................................................. 128 Bespoke Couture Ltd v Artpower Ltd (No  4) [2006]  EWCA  Civ 1696, (2004) 150 SJLB 1463........................................................................................................... 598, 600, 605 Beta Investment SA v Transmedia Europe Inc [2003] EWHC 3066 (Ch), [2003] All ER (D) 133 (May).......................................................................................................... 112, 575, 582 Bikam OOD v Adria Cable Sarl [2013] EWHC 1985 (Comm).............................................. 11 Bikam OOD v Adria Cable Sarl [2012] EWHC 621 (Comm)................................................ 315 Blackpool & Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1  WLR  1195, [1990] 3 All ER 25, 88 LGR 864....................................................................................... 189 Blue Metal Industries Ltd v RW Dilley [1970] AC 827, [1969] 3 WLR 357, [1969] 3 All ER 437................................................................................................................................ 275 Bominflot Bunkergesellscahft für Mineralole mbH & Co KG v Petroplus Marketing AG (The Mercini Lady) [2010] EWCA Civ 1145, [2011] 2 All ER (Comm) 522, [2011] 1 Lloyd’s Rep 442.............................................................................................................. 317 Bond Worth Ltd, Re [1980] Ch 228, [1979] 3 WLR 629, [1979] 3 All ER 919.................... 536 Bonython v Australia [1951] AC 201, 66 TLR (Pt 2) 969, [1948] 2 DLR 672....................... 246 Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch  25, [1979] 3  WLR  672, [1979] 3 All ER 961........................................................................................................... 536 Bottin (International) Investments Ltd v Venson Group plc [2004]  EWCA  Civ 1368, [2004] All ER (D) 322 (Oct)............................................................................................ 471, 480 Boufoy-Bastick v University of West Indies [2015] UKPC 27, [2015] IRLR 1014................. 454 Bravo Maritime (Chartering) Est v Alsayed Abdullah Mohamed Baroom (The Athinoula) [1980] 2 Lloyd’s Rep 481.................................................................................................. 512 Bridgewater’s Settlement, Re [1910] 2 Ch 342....................................................................... 525 British Electrical & Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 WLR 280, [1953] 1 All ER 94, (1953) 97 SJ 96............................................................. 339 British Fermentation Products Ltd v Compair Reavell Ltd [1998] TCC 577........................ 323 British Gas Trading Ltd v Eastern Electricity (The Times, 2 November 1996).................... 90 British Waggon Co v Lea & Co; Parkgate Waggon Co v Lea & Co (1880) 5 QBD 149......... 566 Bunge Corpn v Tradax Export SA  [1981] 1  WLR  711, [1981] 2  All ER  540, [1981] 2 Lloyd’s Rep 1.................................................................................................................. 620 Burford UK  Properties Ltd v Forte Hotels (UK) Ltd (formerly Trusthouse Forte) [2003] EWCA Civ 1800, (2004) 148 SJLB 145, [2003] NPC 159................................... 146 C C  Czarnikow Ltd v Centrala Handlu Zagranicznego Rolimpex (CHZ) [1979]  AC  351, [1978] 3 WLR 274, [1978] 2 All ER 1043........................................................................ 148 CDV  Software Entertainment AG  v Gamecock Media Europe Ltd [2009]  EWHC  2965 (Ch)................................................................................................................................... 216 Cadogan Petroleum Holdings Ltd v Global Process Systems LLC  [2013]  EWHC  214 (Comm), [2013] 2 Lloyd’s Rep 26, [2013] 1 CLC 721................................................... 286 Caledonia North Sea Ltd v London Bridge Engineering Ltd 2000  SLT  1123, [2000] Lloyd’s Rep IR 249, 2000 GWD 3-84................................................................................ 81 Canada Steamship Lines Ltd v R [1952] AC 192, [1952] 1 All ER 305, [1952] 1 Lloyd’s Rep 1.................................................................................................................................. 316, 381 Capitol Films Ltd (in administration), Re; Rubin v Cobalt Pictures Ltd [2010] EWHC 2240 (Ch)................................................................................................................................... 30 Cartwright v MacCormack [1963] 1 WLR 18, [1963] 1 All ER 11, [1962] 2 Lloyd’s Rep 328...................................................................................................................................... 454 Channel Island Ferries Ltd v Sealink UK Ltd [1998] Lloyd’s Rep 323................................. 343 Chartbrook Homes Ltd v Persimmon Homes Ltd [2007] EWHC 409 (Ch), [2007] 1 All ER (Comm) 1083, [2007] 2 P & CR 9; aff’d [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 387, [2008] 11  EG  92 (CS); revs’d [2009]  UKHL  38, [2009] 1  AC  1101, [2009] 3 WLR 267............................................................................................................. 276, 504 Chemidus Wavin Ltd v Société pour la Transformation et l’Exploitation des Resines Industrielles SA [1978] 3 CMLR 514, [1977] FSR 181................................................... 554 Cheverny Consulting Ltd v Whitehad Mann Ltd [2007] EWHC 3130 (Ch)........................ 297 Chilingworth v Esche [1924] 1 Ch 97, [1923] All ER Rep 97................................................ 286

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Table of Cases Chrion Corpn v Murex Diagnostics Ltd (No 2); Chrion Corpn v Organon Teknika Ltd (No 12) [1996] FSR 153, )1997) 37 BMLR 28, (1996) 19 (3) IPD 19018..................... 447 City & General (Investment) Ltd v Razama Ltd [2009] EWCA Civ 1568.................... 106, 178, 180 City Inn (Jersey) Ltd v Ten Trinity Square Ltd [2008] EWCA Civ 156, [2008] 10 EG 167 (CS), [2008] NPC 28......................................................................................................... 276 City Inn Ltd v Shepherd Construction Ltd [2003] BLR 468, 2003 SLT 885......................... 146 Clerical Medical & General Life Assurance Society v Fanfare Properties Ltd (unreported, 2 June 1981)...................................................................................................................... 177 Clough Mill Ltd v Martin [1985] 1 WLR 111, [1984] 3 All ER 982, (1985) 82 LSG 1075... 535, 536 Coca-Cola Financial Corpn v Finsat International Ltd (The Ira) [1998] QB 43, [1996] 3 WLR 849, [1996] 2 Lloyd’s Rep 274............................................................................. 550 Coco v AN Clark (Engineers) Ltd [1968] FSR 415, [1969] RPC 41...................................... 155, 352 Cohen v Nessdale Ltd [1982] 2 All ER 97............................................................................... 581 Columbia Tristar Home Video (International) Inc v Polygram Film Internatonal BV (formerly Manifesto Film Sales BV) [2000] 1 All ER (Comm) 385............................... 96, 98 Commercial Management (Investments) Ltd v Mitchell Design & Construct Ltd [2016] EWHC 76 (TCC), 164 Con LR 139...................................................................... 323 Communication Technology Investments Ltd v International Environmental Management Ltd [2005] EWHC 3292 (Ch).................................................................... 524 Compaq Computer Ltd v Abercorn Group Ltd (t/a Osiris) [1991]  BCC  484, [1993] BCLC 603.............................................................................................................. 537 Compass Group UK & Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB), [2012] 2 All ER (Comm) 300; rev’sd [2013] EWCA Civ 200, [2013] BLR 265, [2013] CILL 3342........................................................................ 118, 374, 375 Confetti Records v Warner Music UK Ltd [2003] EWHC 1274 (Ch), [2003] ECDR 31, [2003] EMLR 35................................................................................................................ 575, 580 Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501, [1994] 4 All ER 834, [1993] 46 EG 184.............................................................................................................. 550 Co-operative Group Ltd v Birse Developments Ltd (in liquidation) [2014] EWHC 530 (TCC), [2014] BLR 359 153 Con LR 103........................................................................ 83 Cornfoot v Royal Exchange Assurance Corpn [1904] 1 KB 40............................................. 454 Cornish v Midland Bank plc [1985] 3 All ER 513, [1985] FLR 298, (1985) 135 NLJ 869... 42 Cott UK Ltd v FE Barber Ltd [1997] 3 All ER 540.................................................................. 428 Courtauld’s Application, Re [1956] RPC 208......................................................................... 309 Criterion Properties plc v Stratford UK  Properties LLC  [2004]  UKHL  28, [2004] 1 WLR 1846, [2004] BCC 570.......................................................................................... 30 Cryer v Scott Bros (Sudbury) Ltd (1986) 55 P & CR 183....................................................... 177 Cutlan v Dawson (1897) 14 RPC 249....................................................................................... 593 D DB Rare Books Ltd v Antiqbooks (a limited partnership) [1995] 2 BCLC 306................... 116 DMA Financial Solutions Ltd v BaaN UK Ltd [2000] All ER (D) 411................................... 575, 583 DRC Distribution Ltd v Ulva Ltd [2007] EWHC 1716 (QB)................................................. 152 Dairy Containers Ltd v Tasman Orient Line CV (The Tasman Discoverer) [2004] UKPC 22, [2005] 1 WLR 215, [2004] 2 All ER (Comm) 667.......................................................... 315 Dais Contractors Ltd v Fareham UDC  [1956]  AC  696, [1956] 3  WLR  37, [1956] 2  All ER 145................................................................................................................................ 338 Dalkia Utilities Services plc v Celtech International Ltd [2006] EWHC 63 (Comm)....... 118, 120, 597 Damon Compania Naviera SA  v Hapag-Lloyd International SA (The Blankenstein) [1985] 1 WLR 435, [1985] 1 All ER 475, [1985] 1 Lloyd’s Rep 93................................ 82 Dany Lions v Bristol Cars Ltd [2014] EWHC 817 (QB), [2014] 2 All ER (Comm) 403, [2014] Bus LR D11............................................................................................................ 485 Data Direct Technologies Ltd v Marks & Spencer plc [2009] EWHC 97 (Ch), [2009] All ER (D) 198 (Jan).............................................................................................................. 512, 546 Davies v Collins [1945] 1 All ER 247....................................................................................... 566 Davstone Estate Ltd’s Leases, Re; Manprop Ltd v O’Dell [1969] 2 Ch  378, [1969] 2 WLR 1287, [1969] 2 All ER 849.................................................................................... 554 Dawson International plc v Coates Paton plc [1990] BCLC 560........................................... 111 Days Medical Aids Ltd v Pihsiang Machinery Manufacturing Co Ltd [2004]  EWHC  44 (Comm), [2004] 1 All ER (Comm) 991, [2004] 2 CLC 489.......................................... 112 Decro-Wall v Practitioners in Marketing Ltd [1971] 1  WLR  361, [1971] 2  All ER  216, (1970) 115 SJ 171.............................................................................................................. 610

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Table of Cases Deepak Fertilisers & Petrochemicals Ltd v Davy McKee (London) Ltd [1999] 1 All ER (Comm) 69, [1999] 1 Lloyd’s Rep 387, [1999] BLR 41................................................. 296, 302 Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1  QB  699, [1968] 3 WLR 841, [1968] 3 All ER 513...................................................................................... 338 Department of Health v ICO (EA/2008/0081; 18 November 2008).................................... 351 Derry City Council v Information Commissioner (EA/2006/0014; 11 December 2006).... 351 Dies v British & International Mining & Finance Corpn [1939] 1 KB 724........................... 285, 286 Dodds v Walker [1981] 1 WLR 1027, [1981] 2 All ER 609, (1981) 42 P & CR 131.............. 455, 463 Dolphin Maritime & Aviation Services Ltd v Sveriges Angartygs Assurans Forening [2009] EWHC 716 (Comm), [2010] 1 All ER (Comm) 473, [2009] 2 Lloyd’s Rep 123...................................................................................................................................... 219 Dominion Corporate Services Ltd v Debenhams Properties Ltd [2010]  EWHC  1993 (Ch), [2010] 23 EG 106 (CS), [2010] NPC 63................................................................ 117, 597 Don King Productions Inc v Warren (No 1) [1998] 2 All ER 608, [1998] 2 Lloyd’s Rep 176, [1998] 2  BCLC  132; aff’d [2000] Ch  291, [1999] 3  WLR  276, [1999] 2  All ER 218................................................................................................................................ 83 E EA  Grimstead & Son Ltd v McGarrigan [1999]  All ER (D) 1163, [1998-99] Info TLR 384.................................................................................................................... 296, 301, 303 ENE  Kos 1 Ltd v Petrolio Brasiliero SA  Petrobas (The Kos) [2012]  UKSC  17, [2012] 2 AC 164, [2012] 2 WLR 976............................................................................................ 117, 597 EPI  Environmental Technologies Inc v Symphony Plastic Technologies plc [2004] EWHC 2945 (Ch), [2005] 1 WLR 3456, [2005] FSR 22; aff’d [2006] EWCA Civ 3, [2006] 1 WLR 495............................................................................................... 158, 161, 171 Eagle Star Insurance Co Ltd v Cresswell [2004] EWCA Civ 602, [2004] 2 All ER (Comm) 244, [2004] 1 CLC 926...................................................................................................... 146, 151 Earl of Lonsdale v A-G [1982] 1 WLR 887, [1982] 3 All ER 579, (1983) 45 P & CR 1......... 215 Elpis Maritime Co Ltd v Marti Charter Co (The Maria D) [1992] 1  AC  21, [1991] 3 WLR 330, [1991] 3 All ER 758...................................................................................... 43 Emeraldian Ltd Partnership v Wellmix Shipping Ltd (The Vine) [2010]  EWHC  1411 (Comm), [2011] 1 Lloyd’s Rep 301, [2010] 1 CLC 903................................................. 343 Ener-G Holdings plc v Hormell [2012] EWCA Civ 1059, [2013] 1 All ER (Comm) 1162, [2012] CP Rep 47.............................................................................................................. 471 Etablissements Chainbaux SARL v Harbormaster Ltd [1955] 1 Lloyd’s Rep 303................ 620 Exmek Pharmaceuticals SAC  v Alkem Laboratories Ltd [2015]  EWHC  3158 (Comm), [2016] 1 Lloyd’s Rep 239.................................................................................................. 449 Exxonmobil Sales & Supply Corpn v Texaco Ltd [2003] EWHC 1964 (Comm), [2004] 1 All ER (Comm) 435, [2003] 2 Lloyd’s Rep 686........................................................... 297 F F Goldsmith (Sicklesmere) Ltd v Baxter [1970] Ch 85, [1969] 3 WLR 522, [1969] 3 All ER 733................................................................................................................................ 495 Faccenda Chicken Ltd v Fowler [1987] Ch 117, [1986] 3 WLR 288, [1986] 1 All ER 617.. 407 Fairstate Ltd v General Enterprise & Management Ltd [2010] EWHC 3072 (QB), [2011] 2 All ER (Comm) 497, 133 Con LR 112.......................................................................... 524 Famous Army Stores Ltd v Meehan [1993] 1 EGLR 73, [1993] 09 EG 111.......................... 550 Farstad Supply A/S  v Enviroco Ltd [2011]  UKSC  16, [2011] 1  WLR  921, [2011] 3  All ER 451................................................................................................................................ 17 Fastframe Ltd v Lohinski (unreported, 3 March 1993).......................................................... 549, 551 Fell v Goslin & Morgan (1852) 7 Exch 185, 155 ER 909........................................................ 433 Figgis, Re; Roberts v MacLaren [1969] 1 Ch  123, [1968] 2  WLR  1173, [1968] 1  All ER 999................................................................................................................................ 456 Fillite (Runcorn) Ltd v APV Pasilac Ltd (The Buyer, July 1995)........................................... 321 Firma C-Trade SA v Newcastle Protection & Indemnity Association (The Fanti) [1991] 2 AC 1, [1990] 3 WLR 78, [1990] 2 All ER 705............................................................... 382 First National Bank plc v Thompson [1996] Ch  231, [1996] 2  WLR  293, [1996] 1  All ER 140................................................................................................................................ 525 Fitzroy House Epworth Street (No 1) Ltd v Financial Times Ltd [2006] EWCA Civ 329, [2006] 1 WLR 2207, [2006] 2 All ER (D) 463 (Mar)...................................................... 116, 118 Fitzroy Robinson Ltd & Mentmore Towers Ltd;; Fitzroy Robinson Ltd v Good Start Ltd (No 3) [2009] EWHC 3365 (TCC), [2010] BLR 165m 128 Con LR 103...................... 420 Floor v Davis (Inspector of Taxes) [1980]  AC  695, [1979] 2  WLR  830, [1979] 2  All ER 677................................................................................................................................ 275

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Table of Cases Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd [1958] 1 WLR 45, [1958] 1 All ER 11, [1958] RPC 8................................................................................................ 95, 96 Force India Formula One Team Ltd v Ethad Airways PJSC  [2010]  EWCA  Civ 1051, [2011] ETMR 10, (2010) 107 (40) LSG 22...................................................................... 638 Francotyp-Postalia Ltd v Whitehead [2011] EWHC 367 (Ch)............................................... 555, 558 Frank W  Clifford Ltd v Garth [1956] 1  WLR  570, [1956] 2  All ER  323, (1956) 100 SJ 379.......................................................................................................................... 554 Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004]  EWHC  1502 (Comm), [2005] 2 All ER (Comm) 783, [2004] 2 Lloyd’s Rep 251..................................... 315, 317, 330 Fraser v Thames Television Ltd [1984] QB 44, [1983] 2 WLR 917, [1983] 2 All ER 101.... 484 Freeman v Read (1863) 4 B & S 174, 122 ER 425................................................................... 464 Frontier International Shipping Corpn v Swissmarine Corpn Inc (The Cape Equinox) [2005]  EWHC  8 (Comm), [2005] 1  All ER (Comm) 528, [2005] 1 Lloyd’s Rep 390.............................................................................................................................. 343 G Galbraith v Mitchenall Estates Ltd [1965] 2  QB  473, [1964] 3  WLR  454, [1964] 2  All ER 653................................................................................................................................ 286 Gallaher International Ltd v Tlais Enterprises Ltd [2008] EWHC 804 (Comm)................. 524, 597 Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, [1973] 3 WLR 421, [1973] 3 All ER 195...................................................................................... 551 Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400, [1972] 3 WLR 1003, [1973] 1 All ER 193........................................................................................................... 316, 381 Global Container Lines Ltd v Black Sea Shipping Co [1997] CLY 4535.............................. 374 Globe Motors v TRW  LucasVarity Electric Steering Ltd [2016]  EWCA  Civ 396, [2017] 1 All ER (Comm) 601, [2016] CLC 712.......................................................................... 31, 47 Glolite Ltd v Jasper Conran Ltd (The Times, 28 January 1998)............................................ 597 Glyn v Margetson & Co [1893] AC 351......................................................................... 512, 515, 516 Goodinson v Goodinson [1954] 2 QB 118, [1954] 2 WLR 1121, [1954] 2 All ER 255........ 554 Government of Gibraltar v Kenney [1956] 2 QB 410, [1956] 3 WLR 466, [1956] 3 All ER 22.................................................................................................................................. 70 Grant v Maddox (1846) 15 M & W 737, 153 ER 1048............................................................ 454 Granville Oil & Chemicals Ltd Davies Turner & Co Ltd [2003] EWCA Civ 570, [2003] 1 All ER (Comm) 819, [2003] 2 Lloyd’s Rep 356........................................................... 296, 319 Graves v Masters (1883) Cab & El 73....................................................................................... 126 Great Eastern Shipping Co Ltd v Far East Chartering Ltd [2011] EWHC 1372 (Comm), [2011] 2 Lloyd’s Rep 309.................................................................................................. 222 Great Elephant Corpn v Trafigura Beheer BV  [2013]  EWCA  Civ 905, [2013] 2  All ER (Comm) 992, [2014] 1 Lloyd’s Rep 1.............................................................................. 343 Griffon Shipping LLC v Firodi Shipping Ltd [2013] EWHC 593 (Comm), [2013] 2 All ER (Comm) 246, [2013] 2 Lloyd’s Rep 50........................................................... 243, 284, 285, 286 Guyot v Thomson [1894] 3 Ch 388......................................................................................... 593 H HHR Pascal BV v W2005 Puppet II BV [2009] EWHC 2771 (Comm), [2010] 1 All ER (Comm) 399...................................................................................................................... 618 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 All ER (Comm) 349, [2003] 2 Lloyd’s Rep 61.................................................... 296, 317, 331 Hadley Design Associates v City of Westminster [2003] EWHC 1617 (TCC), [2004] TCLR 1, [2004] Masons CLR 3....................................................................................................... 323 Hagee (London) Ltd v Co-operative Insurance Society (1992) 63  P  & CR  362, [1992] 1 EGLR 57, [1991] NPC 92.............................................................................................. 238 Hall v Burnell [1911] 2 Ch 551................................................................................................ 284, 285 Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576, [2004] 1 WLR 3002, [2004] 4 All ER 920........................................................................................................... 66 Hammond v Haigh Castle & Co Ltd [1973] 2  All ER  289, [1973]  ICR  148, [1973] IRLR 91.................................................................................................................. 456 Harold Wood Brick Co Ltd v Ferris [1935] 2 KB 198............................................................. 618 Harrison v Shepherd Homes Ltd [2011] EWHC 1811 (TCC), (2011) 27 Const LJ 709; aff’d [2012] EWCA Civ 904, 143 Con LR 69, [2012] 3 EGLR 83.................................... 208 Hart v Middleton (1845) 2 Car & K 9, 175 ER 4..................................................................... 453 Hashwani v Jivraj [2009]  EWHC  1364 (Comm), [2010] 1  All ER  302, [2009] 2  All ER (Comm) 778...................................................................................................................... 555

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Table of Cases Haughland Tankers AS v RMK Marine Gemi Yapin Sanayii ve Deniz Tasimaciligri Isletmesi AS [2005] EWHC 321 (Comm), [2005] 1 All ER (Comm) 679, [2005] 1 Lloyd’s Rep 573............................................................................................................................. 484, 485, 489 Heath v Crealock 1(1874-75) LR 10 Ch App 22..................................................................... 525 Hector Whaling Ltd, Re [1936] Ch 208.................................................................................. 456 Henrich Hirdes GmbH v Edmund [1991] 2 Lloyd’s Rep 546............................................... 457 Hellewell v Chief Constable of Derbyshire [1995] 1 WLR 804, [1995] 4 All ER 473, (1995) 92 (7) LSG 35.................................................................................................................... 352 Helstan Securities Ltd v Hertfordshire County Council [1978] 3 All ER 262, 65 LGR 735.... 83 Hendry v Chartsearch Ltd (1998) CLC 1382, (2000) 2 TCLR 115....................................... 82 Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd [1984] 1  WLR  485, [1984] 2 All ER 152, [1984] 2 Lloyd’s Rep 422............................................................... 535, 536 Hickman v Haynes (1874-75) LR 10 CP 598........................................................................... 638 Higher Education Funding Council for England v ICO & Guardian News & Media Ltd (EA/2009/0036; 13 January 2010).................................................................................. 352 Hillel v Christoforides (1991) 63 P & CR 301......................................................................... 285 Hinton v Sparkes (1867-68) LR 3 CP 161................................................................................ 285 Hiscox Syndicates Ltd v The Pinnacle Ltd [2008]  EWHC  145 (Ch), [2008] 5  EG  166 (CS).................................................................................................................................... 106 Hong Kong & Shanghai Banking Corpn v Kloeckner & Co AG [1990] 2 QB 514, [1990] 3 WLR 634, [1989] 3 All ER 513...................................................................................... 550 Household Fire & Carriage Accident Insurance Co Ltd v Grant (1879) 4 Ex D 216........... 470 Howe v Smith (1884) 27 Ch D 89............................................................................................ 285 Hughes v Pendragon Sabre (t/a Porsche Centre Bolton) [2016] EWCA Civ 18, [2017] 1 All ER (Comm) 173, [2016] 1 Lloyd’s Rep 311........................................................... 31 Humble (Grace) v Hunter (1848) 12 QB 310, 116 ER 885................................................... 82 Hydraulic Engineering Co Ltd v McHaffie Goslett & Co (1878) 4 QBD 670....................... 459 I IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335....................... 104, 105, 111, 112 IFE  Fund SA  v Goldman Sachs International [2006]  EWHC  2887 (Comm), [2007] 1 Lloyd’s Rep 264, [2006] All ER (D) 268 (Nov)............................................................ 323, 332 Inntrepreneur Pub v East Crown [2000] 2 Lloyd’s Rep 611, [2000] 3 EGLR 31, [2000] 41 EG 209........................................................................................................................... 295, 302 International Asset Control Ltd (t/a IAC  Films) v Films Sans Frontieres SARL [1999] EMLR 268, [1998] All ER (D) 476............................................................ 620 Internet Broadcasting Corpn Ltd (t/a NETTV) v MAR LLC (t/a MARHedge) [2009] EWHC 844 (Ch), [2010] 1 All ER (Comm) 112, [2009] 2 Lloyd’s Rep 295..... 316 Investors Compensation Scheme v West Bromwich Building Society (No  1) [1998] 1 WLR 896, [1998] 1 All ER 98, [1998] 1 BCLC 531............................................ 216, 280, 524 J JIS  (1974) Ltd v MCP  Investment Nominees I  Ltd (Construction of Lease) [2003] EWCA Civ 721, (2003) 100 (24) LSG 36............................................................. 276 J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1............. 339 JP Morgan Chase Bank (formerly Chase Manhattan Bank) v Springwell Navigation Corpn [2008] EWHC 1186 (Comm), [2008] All ER (D) 167 (Jun)............................... 318, 323, 331 JSC BTA Bank Ablyazov [2011] EWHC 2506 (Comm).......................................................... 36 Jackson Distribution Ltd v Tum Yeto Inc [2009] EWHC 982 (QB), [2009] All ER (D) 107 (May).................................................................................................................................. 593, 608 Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417, [2012] 2 All ER (Comm) 1053, [2012] 1 CLC 605.......................................................................................... 105, 106, 115 John Connor Press Associates Ltd v Information Commissioner (EA/2005/0005; 25 January 2006)............................................................................................................... 354 Johnson v The Edgeware etc Rly Co (1866) 35 Beav 480, 55 ER 982.................................... 215 Joint London Holdings Ltd v Mount Cook Land Ltd [2005] EWCA Civ 1171, [2006 2 P & CR 17, [2005] 3 EGLR 119............................................................................................... 216 Joseph Constantine Steamship Line Ltd v Imperial Smelting Corpn Ltd [1942] AC 154, [1941] 2 All ER 165, (1941) 70 Ll L Rep 1...................................................................... 338 K Kall Kwick Printing (UK) Ltd v Rush [1996] FSR 114........................................................... 555 Kawasaki Kisen Kabushiki Kaisha v Belships Co Ltd Skibs A/S [1939] 2 All ER 108, (1939) 63 Ll Rep 175..................................................................................................................... 485

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Table of Cases Kendell v Hamilton (1879) 4 App Cas 504............................................................................. 433 Kinance v Mackie-Conteh [2004] EWHC 998 (Ch), [2004] 19 EGCS 164 (CS).................. 573 King v Hoare (1844) 13 M & W 494, 153 ER 206................................................................... 434 Kleinwort Benson Ltd v Malaysian Mining Corpn Bhd [1988] 1 WLR 799, [1988] 1 All ER 714, [1988] 1 Lloyd’s Rep 556.................................................................................... 216 Kyprianou (Pheobus D) v Cyprus Textiles [1958] 2 Lloyd’s Rep 60..................................... 148 L Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) (No  2) [2005] EWCA Civ 519, [2005] 23 All ER (Comm) 167, [2005] 1 Lloyd’s Rep 688...... 222, 230 Lafarge (Aggregates) Ltd v Newham London Borough Council [2005]  EWHC  1337 (Comm), [2005] 2 Lloyd’s Rep 577................................................................................. 454 Lancrest Ltd v Asiwaju [2005] EWCA Civ 117, [2005] L & TR 22, [2005] 1 EGLR 40........ 619 Landlord Protect Ltd v S Anselm Development Corpn Co Ltd [2008] EWHC 1582 (Ch), [2008] 28 EG 113 (CS), [2008] NPC 82.......................................................................... 216 Lee-Parket v Izett (No 2) [1972] 1 WLR 775, [1972] 2 All ER 800, (1972) 23 P & CR 301.... 147 Lemmerbell Ltd v Britannai LAS  Direct Ltd [1999]  L  & TR  102, [1998] 3  EGLR  67, [1998] 48 EG 188.............................................................................................................. 470 Leofelis SA  v Lonsdale Sports Ltd [2008]  EWCA  Civ 640, [2008]  ETMR  63, (2008) 158 NLJ 1041..................................................................................................................... 117, 597 Levison v Fairn [1978] 2 All ER 1149...................................................................................... 216 Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1  AC  85, [1993] 3 WLR 408, [1993] 3 All ER 417................................................................................. 81, 83, 551 Linggi Plantations Ltd v Joagtheesa [1972] 1 MLJ 89............................................................ 284 Little v Courage Ltd [1995] CLC 164, (1994) 70 P & CR 469............................................... 373 Lockett v A & M Charles Ltd [1938] 4 All ER 170.................................................................. 433 London & Regional Investments Ltd v TBI plc [2002] EWCA Civ 355................................ 373 London Regional Transport v Wimpey Group Services Ltd (1987) 53 P & CR 356, [1986] 2 EGLR 41, (1986) 280 EG 898........................................................................................ 503 M MSAS Global Logistics v Power Packaging Inc [2003] EWHC 1393 (Ch)............................ 620, 624 MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789, [2017] 1 All ER (Comm) 483, [2016] 2 Lloyd’s Rep 494........................................................... 374 MWB  Business Exchange Centres Ltd v Rock Advertising [2016]  EWCA  Civ 553, [2017] QB 604, [2016] 3 WLR 1519................................................................................ 31, 47 MacArdle, Re [1951] Ch 66..................................................................................................... 262 McCausland v Duncan Lawrie Ltd [1997] 1 WLR 38, [1996] 4 All ER 995, (1997) 74 P & CR 343................................................................................................................................ 50 McCrone v Boots Farm Sales Ltd 1981 SC 68, 1981 SLT 103................................................. 321, 327 McMillan Williams (a firm) v Range [2004] EWCA Civ 294, [2004] 1 WLR 1858, [2004] All ER (D) 335 (May)............................................................................................................. 66 Mamidoil-Jetoil Greek Petroleum Co SA  v Okta Crude Oil Refinery AD (No  3) [2003] EWCA Civ 1031, [2003] 2 All E (Comm) 640, [2003] 2 Lloyd’s Rep 635......... 341, 343 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, [1997] 2 WLR 945, [1997] 3 All ER 352...................................................................................... 470 Margerison v Bates [2008] EWHC 1211 (Ch), [2008] 3 EGLR 165...................................... 276 Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556, [1955] 3 WLR 212, [1955] 2 All ER 722, (155) 72 RPC 236...................................... 334, 593, 609, 610 Mayson v Clouet [1924] AC 980, [1924] 3 WWR 211............................................................. 285 Mendll v Smith (1943) 112 LJ Ch 279..................................................................................... 420 Mikeover Ltd v Brady [1989] 3 All ER 618, (1989) 21 HLR 513, (1990) 59 P & CR 218..... 433 Millichamp v Jones [1982] 1 WLR 1422, [1983] 1 All ER 267, (1983) 45 P & CR 169........ 484 Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] EWHC 2178 (Ch), [2003] 2 All ER (Comm) 823....................................................................................................... 340 Mitas v Hyams [1961] 2 TLR 1215........................................................................................... 263 Mitsui Construction Co Ltd v A-G of Hong Kong 1(1986) 33 BLR 14.................................. 280 Monde Petroleum v WesternZagros Ltd [2016] EWHC 1472 (Comm), [2017] 1 All ER (Comm) 1009, [2016] 2 Lloyd’s Rep 229........................................................................ 374 Moon, ex p Dawes, Re (1886) 17 QBD 275............................................................................. 523, 525 Multiplex Construction (UK) Ltd v Cleveland Bridge UK Ltd [2006] EWHC 1341 (TCC), 107 Con LR 1..................................................................................................................... 373 Multiservice Bookbinding Ltd v Marden [1979] Ch 84, [1978] 2 WLR 535, [1978] 2 All ER 489................................................................................................................................ 246

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Table of Cases Multi Veste 226 BV v NI Summer Row Unitholder BV [2011] EWHC 2026 (Ch), 139 Con LR 23, [2011] 33 EG 63.................................................................................................... 620, 624 Mylcrist Builders Ltd v Buck [2008] EWHC 2172 (TCC), [2009] 2 All ER (Comm) 259, [2008] BLR 611................................................................................................................. 208, 209 N National Bank of Saudi Arabia v Skab (unreported, 23 November 1995)............................ 550 National Grid v Mayes [2001] UKHL 20, [2001] 1 WLR 864, [2001] 2 All ER 417............. 243 Navigators & General Insurance Co v Ringrose [1962] 1 WLR 173, [1962] 1 All ER 97, [1961] 2 Lloyd’s Rep 415.................................................................................................. 612 Newfoundland v Newfoundland Rly Co (1888) 13 App Cas 199........................................... 551 Newland Shipping & Forwarding Ltd v Toba Trading FZC [2014] EWHC 661 (Comm)... 117, 597 Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm), [2004] 1 All ER (Comm) 481, [2004] 1 Lloyd’s Rep 38...................................................................... 222, 226 Nittan (UK) Ltd v Solent Steel Fabrications Ltd [1981] 1 Lloyd’s Rep 633.......................... 495 Nokes v Doncaster Amalgamated Collieries Ltd [1940] AC 1014, [1940] 3 All ER 549...... 566 Norbury Natzio & Co Ltd v Griffiths [1918] 2 KB 369, (1918) 87 LJ KB 952....................... 433 O OTV Birwelco Ltd v Technical & General Guarantee Co Ltd [2002] EWHC 2240 (TCC), [2002] 4 All ER 668, [2002] 2 All ER (Comm) 1116...................................................... 495 Office of Fair Trading v Abbey National plc [2009]  UKSC  6, [2010] 1  AC  696, [2009] 3 WLR 1215....................................................................................................................... 195, 199 Okolo v Secretary of State for the Environment [1997] 4 All ER 242, [1997] JPL 1009, [1998] COD 8.................................................................................................................... 455, 464 Omar v El-Wakil [2001] EWCA Civ 1090, [2002] 2 P & CR 3, (2001) 98 (30) LSG 40........ 285 Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 1 All ER (Comm) 981, [1999] 2 Lloyd’s Rep 273, [1999] CLC 1243.................................................. 319, 322, 324 Owen v Wilkinson (1858) 5 CB NS 526, 141 ER 213.............................................................. 434 Oxford Gene Technology Ltd v Affymetrix Inc [2001] IP & T 93, [2000] IP & T 1006...... 90, 91, 92, 93 Oxonica Energy Ltd v Neuftec Ltd [2008]  EWHC  2127 (Pat); aff’d ]2009]  EWCA  Civ 668.................................................................................................................... 216, 275, 276, 279 P Page v Combined Shipping & Trading Co Ltd [1997] 3 All ER 656, [1996] CLC 1952, [1999] Eu LR 1.................................................................................................................. 371 Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565, [1987] 2 Lloyd’s Rep 342.............................................................................................................................. 511, 515 Panoutsos v Raymond Haldy Corpn of New York [1917] 2 KB 473....................................... 638 Patel v Brent London Borough Council (No 3) [2004] EWHC 763 (Ch), [2005] 1 P & CR 20, [2004] 3 PLR 74.................................................................................................... 114 Peachdart Ltd, Re [1984] Ch 131, [1983] 3 WLR 878, [1983] 3 All ER 204........................ 536 Peekay Intermark Ltd v Australia & New Zealand Banking Group Ltd [2006] EWCA Civ 386, [2006] 2 Lloyd’s Rep 511, [2006] 1 CLC 582.......................................................... 13 Pegler Ltd v Wang (UK) Ltd (No 1) [2000] BLR 218, 70 Con LR 68, [2000] ITCLR 617...... 323 Pera Shipping Corpn v Petroship SA (The Pera) [1984] 2 Lloyd’s Rep 363........................ 215 Peter Pan Manufacturing Corpn v Corsets Silhouette Ltd, [1964] 1 WLR 96, [1963] 3 All ER 402, [1963] RPC 45..................................................................................................... 96 Petromec Inc v Petroleo Brasileiro SA [2004] All ER (D) 10 (Feb)...................................... 575 Petromec Inc v Petroleo Brasileiro SA Petrobras (No 3) [2005] EWCA Civ 891, [2006] 1 Lloyd’s Rep 121.............................................................................................................. 372, 373 Phillips Petroleum Co (UK) Ltd v Enron (Europe) Ltd [1997] CLC 329............................ 105, 113 Phoenix Media Ltd v Cobweb Information (unreported, 16 May 2000).............................. 118, 597 Photo Production Ltd v Securicor Transport Ltd [1980]  AC  827, [1980] 2  WLR  283, [1980] 1 All ER 556........................................................................................................... 316 Pips (Leisure Productions) Ltd v Walton (1982) 43 P & CR 415.......................................... 111 Pitt v PHH Asset Management Ltd [1994] 1 WLR 327, [1993] 4 All ER 961, (1994) 68 P & CR 269................................................................................................................................ 374 Plymouth Corpn v Harvey [1971] 1 WLR 549, [1971] 1 All ER 623, 69 LGR 310................ 263 Port Line Ltd v Ben Lin Steamers Ltd [1958] 2 QB 146, [1958] 2 WLR 551, [1958] 1 All ER 787................................................................................................................................ 87 Poulton v Moore [1915] 1 KB 400........................................................................................... 525 Price v Bouch (1986) 53 P & CR 257, [1986] 2 EGLR 179, (1986) 279 EG 1226................. 177

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Table of Cases Primus Build Ltd v Pompey Centre Ltd [2009]  EWHC  1487 (TCC), [2009]  BLR  437, [2009] All ER (D) 14 (Jul)............................................................................................... 474 Prudential Assurance Co Ltd v Ayres [2007]  EWHC  775 (Ch), [2007] 3  All ER  946, [2007] L & TR 35.............................................................................................................. 219 Q QR Sciences Ltd v BTG International Ltd [2005] EWHC 670 (Ch), [2005] FSR 43........... 484, 493 QR Sciences Ltd v BTG International Ltd (Supplemental Judgment) [2005] EWHC 1500 (Ch)................................................................................................................................... 493 Quest 4 Finance Ltd v Maxfield [2007] EWHC 2313 (QB), [2007] 2 CLC 706................... 13, 215 R R  v North & East Devon Health Authority, ex p Coughan [2001]  QB  213, [2000] 2 WLR 622, [2000] 3 All ER 850...................................................................................... 189 R v Secretary of State for Social Services, ex p Association of Metropolitan Authorities [1986] 1 WLR 1, [1986] 1 All ER 164, (1985) 17 HLR 487............................................ 189 RJB Mining (UK) Ltd v National Union of Mineworkers (1995) [1995] IRLR 556............. 457 RTS  Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG (UK  Production) [2010] UKSC 14, [2010] 1 WLR 753, [2010] 3 All ER 1................................................ 577, 585 RWE npower Renewables Ltd v JN  Bentley Ltd [2014]  EWCA  Civ 150, [2014] CILL 3488.............................................................................................................. 511 R  (on the application of Capenhurst) v Leicester City Council [2004]  EWHC  2124 (Admin), (2004) 7 CCL Rep 557, [2004] ACD 93.......................................................... 189 R  (on the application of Mercury Tax Group) v R  & C  Comrs [2008]  EWHC  2721 (Admin), [2009] STC 743, [2009] Lloyd’s Rep FC 135......................................... 236, 267, 268 Rackham v Peek Foods Ltd [1990] BCLC 895........................................................................ 111 Rainy Sky SA [2011] UKSC 50, [2011] 1 WLR 2900, [2012] 1 All ER 1137.......................... 216, 316 Rank Xerox Ltd v Lane (Inspector of Taxes) [1981] AC 629, [1979] 3 WLR 594, [1979] 3 All ER 657....................................................................................................................... 238 Rasbora Ltd v JCL Marine Ltd [1977] 1 Lloyd’s Rep 645...................................................... 82 Ray v Classic FM plc [1998] ECC 488, [1999] ITCLE 256, [1998] All ER (D) 105.............. 404 Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries & Food [1963]  AC  691, [1963] 2 WLR 439, [1963] 1 All ER 545.......................................................................... 454 Registrar of Companies v Radio-Tech Engineering Ltd [2004] BCC 277............................. 455 Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292 (Comm), [2007] 2 All ER (Comm) 577, [2007] 2 Lloyd’s Rep 325.............................. 106 Rice (t/a the Garden Guardian) v Great Yarmouth Borough Council [2003]  TCLR  1, (2001) 3 LGLR 4, [2000] All ER (D) 902........................................................................ 117, 597 Richardson v Cartwright (1844) 1 Car & K 328, 174 ER 833................................................. 126 Right, on the demise of William Jeffrys v Bucknell (Henry) (1831) 2  B  & Ad 278, 109 ER 1146....................................................................................................................... 525 Robson v Drummond (1831) 2 B & Ad 303, 109 ER 1156..................................................... 82 Rohlig (UK) Ltd v Rock Unique Ltd [2011]  EWCA  Civ 18, [2011] 2  All ER (Comm) 1161.................................................................................................................................... 549 Rossetti Marketing Ltd v Diamond Sofa Co Ltd [2011] EWHC 2482 (QB), [2012] 1 All ER (Comm) 18, [2012] Bus LR 571................................................................................. 427 Royal Albert Hall Corpn v Winchillsea (1891) 7 TLR 362..................................................... 433 Royal Boskalis Westminster NV v Mountain [1999] QB 674, [1998] 2 WLR 538, [1997] 2 All ER 929....................................................................................................................... 554 Rust Consulting Ltd (in liquidation) v PB  Ltd (formerly Kennedy & Donkin Ltd) [2010]  EWHC  3243 (TCC), [2011] 1  All ER (Comm) 951, 135 Con LR  69; aff’d [2011] EWCA Civ 899, [2012] 1 All ER (Comm) 455, 137 Con LR 92......................... 524 Rust Consulting Ltd (in liquidation) v PB  Ltd (formerly Kennedy & Donkin Ltd) [2011] EWCA Civ 1070, [2012] BLR 427, 144 Con LR 63............................................. 524 Ruttle Plant Hire Ltd v Secretary of State for the Environment, Food & Rural Affairs [2009] EWCA Civ 97, [2010] 1 All ER (Comm) 444, [2009] BLR 301......................... 421 Ryanair Ltd v SR Technics Ireland Ltd [2007] EWHC 3089 (QB)........................................ 297 S St Albans City & District Council v International Computers Ltd [1996] 4  All ER  481, [1997-98] Info TLR 58, [1997] FSR 251.......................................................................... 319, 321 Sainsbury’s Supermarkets Ltd v Bristol Rovers (1883) Ltd [2016] EWCA Civ 160.............. 105 Saltman Engineering Co Ld v Campbell Engineering Co (1948) [1963] 3  All ER  413 (Note), (1948) 65 RPC 203.............................................................................................. 158

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Table of Cases Salvage Association v CAP Financial Services Ltd [1995] FSR 654........................................ 321, 327 Samarenko v Dawn Hill House Ltd [2011]  EWCA  Civ 1445, [2013] Ch  36, [2012] 3 WLR 638......................................................................................................................... 619 Sargent v Macepark (Whittlebury) Ltd [2004] EWHC 1333 (Ch), [2004] 4 All ER 662, [2004] 3 EGLR 26............................................................................................................. 178 Satyam Computer Services Ltd v Upaid Systems Ltd [2008] EWCA Civ 487, [2008] 2 All ER (Comm) 465, [2008] 2 CLC 864................................................................................ 297 Savill Bros Ltd v Bethell [1902] 2 Ch 523............................................................................... 215 Scottish Coal Co Ltd v Danish Forestry Co Ltd [2009] CSOH 171, 2010 GWD 5-79........... 373 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, [1962] 2 WLR 186, [1962] 1 All ER 1.................................................................................................................................... 87 Seager v Copydex Ltd (No 1) [1967] 1 WLR 923, [1967] 2 All ER 415, [1967] RPC 349... 173 Seakom Ltd v Knowledgepool Group Ltd [2013] EWHC 4007 (Ch)................................... 82 Seay v Eastwood [1976] 1 WLR 1117, [1976] 3 All ER 153, (1976) 120 SJ 734.................... 274 Sere Holdings Ltd v Volkswagen Group UK Ltd [2004] EWHC 1551 (Ch)......................... 297 Shaker v Vistajet Group Holding SA  [2012]  EWHC  1329 (Comm), [2012] 2  All ER (Comm) 1010, [2012] All ER (D) 141 (May)......................................................... 372, 373, 377 Sheffield District Rly Co v Great Central Rly Co (1911) 27 TLR 451.................................... 111, 112 Shell UK  Ltd v Total UK  Ltd; Colour Quest Ltd v Total Downstream UK  Ltd [2010] EWCA Civ 180, [2011] QB 86, [2010] 3 All ER 793........................................... 242, 243 Silver Queen Maritime Ltd v Persia Petroleum Services plc [2010] EWHC 2867 (QB).267 Smith v Anderson (1880) 15 Ch D 247................................................................................... 92 Smith v The Hull Glass Co (1852) 11 CB 897, 138 ER 729.................................................... 126 Smith v South Wales Switchgear Ltd; Smith v UMB  Chrysler (Scotland) Ltd [1978] 1 WLR 165, [1978] 1 All ER 18, 1978 SC (HL) 1............................................................ 381 Société Italo-Belge pour le Commerce et l’Industrie SA (Antwerp) v Palm & Vegetable Oils (Malaysia) Sdn Bhd (The Post Chaser) [1982] 1 All ER 19, [1981] 2 Lloyd’s Rep 695, [1981] Com LR 249.................................................................................................. 619 Sonat Offshore SA v Amerada Hess Development & Texaco (Britain) [1988] 1 Lloyd’s Rep 145, 39 BLR 1, [1987] 2 FTLR 220........................................................................... 343 Soper v Arnold (1889) 14 App Cas 429................................................................................... 284 Southway Group Ltd v Wolff (1991) 57 BLR 33, 28 Con LR 109, [1991] EG 82 (CS)......... 566 South West Water Services Ltd v International Computers Ltd [1999] BLR 420, [1999][2000] Info TLR 1, [1998-99] Info TLR 154.......................................................... 321, 322, 329 Spenborough UDC’s Agreement, Re [1968] Ch 139, [1967] 2 WLR 1403, [1968] 1 All ER 959................................................................................................................................ 334 Springwell Navigation Corpn (a body corporate) v JP  Morgan Chase Bank (a body corporate) (formerly known as Chase Manhattan Bank) [2010]  EWCA  Civ 1221, [2010] 2 CLC 705.............................................................................................................. 11 Square Mile Partnership Ltd v Fitzmaurice McCall Ltd [2006] EWCA Civ 1690, [2007] 2 BCLC 23, [2006] All ER (D) 262 (Dec)........................................................................ 524 Staunton v Wood (1851) 16 QB 638, 117 ER 1025................................................................. 459 Steiglitz v Egginton (1815) Holt NP 141, 171 ER 193............................................................ 128 Stephen v Scottish Boat Owners Mutual Insurance Association (The Talisman) [1989] 1 Lloyd’s Rep 535, 1989 SC (HL) 24, 1989 SLT 283.......................................................... 114 Steria Ltd v Sigma Wireless Communications Ltd [2008]  BLR  79, 118 Con LR  177, [2008] CILL 2544.............................................................................................................. 216 Stevenson & Sons v Maule & Son 1920 SC 335, 1920 1 SLT 237........................................... 566 Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600, [1992] 2 WLR 721, [1992] 2 All ER 257........................................................................................................................ 324, 549, 551 Stockloser v Johnson [1954] 1 QB 476, [1954] 2 WLR 439, [1954] 1 All ER 630................ 285 Styles v Wardle (1825) 4 B & C 908, 107 ER 1297.................................................................. 457 Superior Overseas Development Corpn & Phillips Petroleum (UK) Ltd v British Gas Corpn [1982] 1 Lloyd’s Rep 262...................................................................................... 116 Swift v Dairywise Farms Ltd (No  1) [2000] 1  WLR  1177, [2003] 1  All ER  320, [2000] BCC 642................................................................................................................. 83 T T  & N  Ltd (in administration) v Royal & Sun Alliance plc [2003]  EWHC  1016 (Ch), [2003] 2 All ER (Comm) 939, [2004] Lloyd’s Rep IR 106............................................. 276 TSG  Building Services plc v South Anglia Housing Ltd [2013]  EWHC  1151 (TCC), [2013] BLR 484, 148 Con LR 228.................................................................................... 375 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd (No 1) [1984] 1 Lloyd’s Rep 555... 315

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Table of Cases Tajik Aluminium Plant v Hydro Aluminum AS [2005] EWCA Civ 1218, [2006] 1 WLR 767, [2005] 4 All ER 1232......................................................................................................... 64 Tarkin AG v Thames Steel UK Ltd [2010] EWHC 207 (Comm)........................................... 619 Tatung (UK) Ltd v Galex Telesure Ltd (1988) 5 BCC 325..................................................... 537 Tele2 International Card Co SA v Post Office Ltd [2009] EWCA Civ 9, [2009] All ER (D) 144 (Jan)............................................................................................................................ 638 Telewest Communications plcl v C & E Comrs [2005] EWCA Civ 102, [2005] STC 481, [2005] BTC 5125............................................................................................................... 82 Terrell v Mabie Todd & Co [1952] 2 TLR 574, (1952) 69 RPC 234, [1952] WN 434.......... 111, 115 Tersons Ltd v Stevenage Development Corpn [1965] 1 QB 37, [1964] 2 WLR 225, [1963] 2 Lloyd’s Rep 333.............................................................................................................. 215 Thomas Witter Ltd v TBB Industries Ltd [1996] 2 All ER 573.................... 296, 300, 302, 303, 304 Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd; Associated Portland Cement Manufacturers (1900) Ltd v Tolhurst [1903] AC 414....................................... 566 Tradigrain SA v Intertek Testing Services (ITS) Canada Ltd [2007] EWCA Civ 154, [2007] 1 CLC 188, [2007] Bus LLR D32...................................................................................... 315 Triodos Bank NV v Dobbs [2005] EWCA Civ 630, [2005] 2 Lloyd’s Rep 588, [2005] All ER (D) 364 (May)................................................................................................................... 50, 52 Trow v Ind Coope (West Midlands) Ltd [1966] 3 WLR 1300, [1967] 1 All ER 19, (1966) 110 SJ 964; aff’d [1967] 2 QB 899, [1967] 3 WLR 633, [1967] 2 All ER 900................. 456, 457 Truegold International Ltd v Questrock Ltd [2010] EWHC 966 (Ch)................................. 486 Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53, [1991] 3 WLR 750, [1991] 4 All ER 1.................................................................................................................................... 331 Tweddle v Atkinson (1861) 1 B & S 393, 121 ER 762............................................................. 262

U UBH (Mechanical Services) Ltd v Standard Life Assurance Co (The Times, 13 November 1986).................................................................................................................................. 105, 113 UR Power GmbH v Kuok Oils & Grains Pte Ltd [2009] EWHC 1940 (Comm), [2009] 2 Lloyd’s Rep 495, [2009] 2 CLC 386................................................................................. 147 United Bank of Kuwait Ltd v Hammoud; City Trust Ltd v Levy [1988] 1 WLR 1051, [1988] 3 All ER 418, (1988) 138 NLJ Rep 281............................................................................ 127 United Scientfic Holdings v Burnley Borough Council [1978] AC 904, [1977] 2 WLR 806, [1977] 2 All ER 62............................................................................................................. 619

V Valilas v Januzaj [2014] EWCA Civ 436, [2015] 1 All ER (Comm) 1047, 154 Con LR 38.... 617

W W v Edgell [1990] 1 Ch 359, [1990] 2 WLR 471..................................................................... 352 WW Gear Construction Ltd v McGee Ltd [2010] EWHC 1460 (TCC), 131 Con LR 63, (2011) 27 Const LJ 39....................................................................................................... 146 Walford v Miles [1992] 2 AC 128, [1992] 2 WLR 174, [1992] 1 All ER 453............... 372, 373, 376, 485, 574 Walker v Great Western Rly Co (1866-67) LR 2 Exch 228...................................................... 126 Wallis Son & Wells v Pratt & Haynes [1911] AC 394, [1911-13] All ER Rep 989.................. 316, 317 Watford Electronics v Sanderson CFL Ltd [2001] EWCA Civ 317, [2001] 1 All ER (Comm) 696, [2001] IP & T 588.................................................... 295, 296, 301, 302, 303, 319, 321, 329 Watson v Mid Wales Rly Co (1866-67) LR 2 CP 593............................................................... 551 Weldtech Equipment Ltd, Re [1991] BCC 16, [1991] BCLC 393......................................... 537 White v John Warrick & Co Ltd [1953] 1  WLR  1285, [1953] 2  All ER  1021, (1953) 97 SJ 740............................................................................................................................ 315 Whitehead Mann Ltd v Cheverny Consulting Ltd [2006] EWCA Civ 1303, [2007] 1 All ER (Comm) 124...................................................................................................................... 573 William Hare Ltd v Shepherd Construction Ltd [2010] EWCA Civ 283, [2010] BLR 358, 130 Con LR 1..................................................................................................................... 395, 426 Winn v Bull (1877) 7 Ch D 29.................................................................................................. 573 Woodroffe v Box [1954] ALR 474, 28 ALJ 90 (Australian High Court)................................ 484 Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993]  AC  573, [1993] 2 WLR 702, [1993] 2 All ER 370...................................................................................... 285

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Table of Cases Y Yewbelle Ltd v London Green Developments Ltd (Knightsbridge Green Ltd Pt  20 defendant) [2006] EWHC 3166 (Ch), [2007] 1 EGLR 137, [2006] All ER (D) 122 (Dec).................................................................................................................................. 114, 115 Youell v Bland Welch & Co Ltd (No 1) [1992] 2 Lloyd’s Rep 127......................................... 215 Young v Schuler (1883) 11 QB 651.......................................................................................... 43 Yuanda (UK) Co Ltd v WW  Gear Construction Ltd [2010]  EWHC  720 (TCC), [2011] 1 All ER (Comm) 550, [2010] All ER (D) 157 (May)..................................................... 322, 422

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Introduction

Boilerplate and commercial clauses of ‘lesser importance’ are unglamorous.1 In the heat of negotiating a commercial deal, few business people are likely to spend much time or emotional capital arguing over the wording of a force majeure clause or a waiver clause. Instead, they leave the negotiation of such dry details to the persons responsible for preparing the agreement (or their lawyers). Good lawyers will have a clear idea of which boilerplate clauses are important, and how they should be worded. Although there is a strong ‘legal’ element to many boilerplate clauses, they also raise commercial issues (often critical commercial issues). For example: •

should a party be allowed to assign its rights or obligations to another?

•

should flooding, a failure in the electricity supply or a strike at the supplier’s premises entitle the supplier to delay delivery of contract goods?

•

should the parties take a dispute to arbitration or to a court?

• should any statements made prior to the contract by one party which the other has relied on in entering into the contract become part of the contract? It may be difficult to get detailed instructions on what the client requires on some of these issues. In many cases, it will be necessary to ‘take a view’. Commercially, it is easier to justify including extensive boilerplate provisions in a 50-page agreement than in a two page agreement. From a legal perspective such a distinction is less easy to justify. The problem, of course, is that it is very difficult to predict whether any particular boilerplate provision will prove to be important in a particular agreement. A  dispute might arise unexpectedly over whether a party may assign its rights under the agreement, or whether a reference to a ‘year’ in an agreement means a year starting on 1  January or a year starting on an anniversary of the date of the agreement. The contract drafters will often have to weigh up potentially conflicting objectives: legal certainty, a commercial desire to ‘keep it simple but effective’, efficient use of an expensive lawyer’s time, the likelihood of a dispute arising, and so on.

1

‘Lesser importance’ means clauses which are often not the focus of a business person: that is provisions other than those which concern what a party is to supply, what price a party will pay or charge for it or when a party will be supplying it.

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Introduction

What the contract drafter should not do is just include a ‘standard’ set of boilerplate clauses in the agreement without considering whether they are appropriate for the particular transaction. When preparing a suitable set of clauses, the contract drafter needs to understand why each boilerplate clause is useful, when it is important to include it and the potential legal consequences of including or not including it. A related point is that the wording of some ‘standard’ clauses needs modification from time to time in light of detailed and continuing judicial scrutiny and interpretation. Entire agreement and assignment clauses are just two of the more recent examples. Other clauses are sometimes added because of changes in the law (such as following the passing of the Contracts (Rights of Third Parties) Act 1999). This book aims to provide guidance on the purpose and effect of boilerplate clauses that are in common use. It also covers a selection of other contract clauses, that are typically classified as ‘boilerplate’, but are nevertheless frequently encountered in many types of commercial agreement (for example, confidentiality clauses). The main purpose of this book is to discuss why such clauses are used, discuss drafting issues that arise, and provide practical samples of commonly used precedents. Also included are extracts from judgments where particular clauses have been defined, analysed or interpreted. The main part of this book consists of approximately 80 topics arranged in alphabetical order, starting with ‘Acknowledgments’ and ending with ‘Warranties’. Also included is a set of typical boilerplate terms in a form in which they might be found in a lengthy commercial agreement (see the ‘Boilerplate Agreement’ in Appendix A).

What is ‘boilerplate’? In this book, the term ‘boilerplate’ is used broadly to mean contract terms that are often found in commercial agreements, almost irrespective of the subject matter of the agreement. Usually these terms are found towards the end of the agreement, after the ‘interesting’ commercial terms that are concerned with the main purpose of the transaction. Sometimes, boilerplate terms are concerned with the operation of the agreement as a legal document (eg law and jurisdiction, notice and interpretation clauses). In other cases, they clarify the rights and obligations of the parties (eg force majeure, assignment and waiver clauses). In all cases, it is important to be aware of their purpose and legal effect.

Which boilerplate clauses are the most important? The safe answer is ‘it all depends’. For example, a force majeure clause may be thought essential in a contract involving a country where a civil war is likely to take place, but irrelevant to most contracts for the purchase of stock items from a shop. Nevertheless, it is possible to make a few generalisations as to 2

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Introduction

the boilerplate provisions that are frequently encountered in different types of agreement. It should be stressed that many contracts will not conform to these generalisations. No boilerplate. Sometimes, no boilerplate clauses are included in a contract. It may be felt that any kind of ‘legal’ language is commercially unacceptable or off-putting. This is a decision for the commercial client to take, rather than a contract drafter. In practice, written contracts containing no boilerplate clauses tend to be short documents, often drafted without legal advice. Minimal boilerplate. Sometimes the instructions are to keep the boilerplate to an absolute minimum, eg  when drafting a short letter agreement. The contract drafter will often wish to include the following boilerplate clauses in this situation: • A Notices clause. • A  Law and Jurisdiction clause (unless there is absolutely no foreign element). •

A Contracts (Rights of Third Parties) Act 1999 clause.

Light boilerplate. Where the intention is to keep the contract short and simple, the contract drafter may wish to include the following provisions in addition to those already mentioned: •

some brief Interpretation provisions; and

•

perhaps set out any definitions in a separate Definitions clause.

Medium boilerplate. Where the agreement can accommodate more detailed boilerplate provisions, but it is felt to be inappropriate to ‘go the whole hog’, the contract drafter may wish to include some or all of the following provisions, in addition to those already mentioned. The following list concentrates on ‘pure’ boilerplate clauses, such as those to be found in the final clause of the specimen Boilerplate Agreement (see Appendix A). The contract drafter may include other common clauses, eg warranties, exemption clauses, termination provisions, payment terms and confidentiality provisions, but it is more difficult to generalise about which clauses will be included. •

More extensive Interpretation provisions.

•

Entire Agreement and Amendment clauses.

•

Assignment clause.

•

Waiver clause.

•

In contracts involving a programme of work or co-operation between the parties, an Agency clause and a Force Majeure clause.

• In contracts involving the provision of business, technical or other information from one party to another, a Confidentiality clause, a Data Protection clause and, if a party is a public authority, a Freedom of Information clause. 3

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Introduction

• In contracts involving a transfer of property or the grant of rights in property, a Further Assurances clause. •

If there is doubt over whether provisions would be upheld by a court, a Severance clause.

•

Perhaps a clause dealing with how Announcements about the contract can be made.

Full-scale boilerplate. In some situations, the requirement is to make the contract as watertight and unambiguous as it can be, and the business person is happy to include lengthy boilerplate provisions if these will protect their interests. In effect there is no commercial pressure to limit the number or extent of such provisions. For example, commercial bank guarantees are sometimes very detailed. In this situation, the contract may include some or all of the provisions mentioned above, as well as a large number of further boilerplate provisions.

Location of clauses in an agreement There is generally no requirement for a contract under English law to follow a particular format or layout, however most modern commercial contracts prepared by lawyers follow a similar structure. There are advantages to having a structured and standard layout, including giving a logical and clear framework. The aim is to draft an agreement so that it can be read, understood and used quickly and efficiently (whether by the parties to the contract, the contract drafter or anyone else who needs to). In this book, for each clause we have suggested (in the Location section) where, in a typical commercial agreement, the clause might go, using the classification shown in the first column of the table, below. Grouping particular clauses in this way can be of assistance to users of commercial agreements, to: •

ensure that all the relevant provisions on a particular theme are considered or included; and

•

consider whether any further provisions should be added.

The following table indicates in the first column the different sections of a typical commercial agreement, and in the second column, those provisions that might typically be included in each such section. Section of an agreement Clauses that might appear in that section Top of the Subject to contract agreement Date of the agreement Date of the Commencement date agreement Deeds (to state document is a deed) Parties Parties Successors and assigns 4

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Section of an agreement Clauses that might appear in that section Recitals Recitals Definitions Definitions Affiliates etc Charges Commencement date Completion Definitions Exclusive, non-exclusive and sole (where these words have particular meanings) Force majeure Intellectual property Interpretation Months (and other expressions of time) Net sales value Parties Price (which refers to payment terms and Interest clause) Sub-contracting (such as the meaning of a particular sub-contractor) Territory Main Commercial Acknowledgments (usually within another clause) Provisions Appointment (usually within another clause such as X appoints Y to do Z) Audit and records (usually with a Payments clause) Best and reasonable endeavours (usually within other clauses—X to use the best endeavours to provide service Z to Y) Breach (usually within another clause—eg stating what the consequence of failure to perform a key commercial obligation) Commencement date (usually within another clause— eg within a main commercial provision to indicate when performance is to start) Completion (usually within another clause—eg within a main commercial provision to indicate when certain defined activities to take place) Conditions precedent and subsequent (usually within another clause) Consent (usually within another clause) Consultation Currency (usually with a Payment clause) 5

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Introduction

Section of an agreement Clauses that might appear in that section Main Commercial Deposits and part payments (usually with a Payment Provisions—contd clause) Exclusive, non-exclusive and sole (usually within another clause—such as within a main commercial clause, such as X grants an exclusive licence to Y to use the materials) Good faith (if a specific contractual obligation on the parties to work or co-operate on something specific) Indexation (usually with a Payment clause) Intellectual property (usually within another clause— eg in the main commercial provisions concerning the licensing, use of and ownership of intellectual property) Interest (usually with a Payments clause) Net sales value (usually with a Payments clause) Options Payment terms and interest Receipts (usually within another clause—eg such as the manufacturer indicating it has received materials) Reporting Retention of title (usually with a Payments clause) Set-off and retention (usually with a Payments clause) Sub-contracting (where there are particular obligations/ requirements, etc on a sub-contractor) Time of the essence (usually within another clause— such as a main commercial provision: the delivery of the goods will be of the essence, or a Payment clause, so that payment of the contract price is of the essence) Title (or property) and risk (usually within a Payments or Retention of title clause) VAT (usually with a Payments clause) Secondary Acknowledgments (usually within another clause) Commercial Best and reasonable endeavours (usually within other Provisions clauses—X to use the best endeavours to provide service Z to Y) Breach (usually within another clause—eg within Termination or Warranty provisions) Capacity (usually within another clause—eg within a Warranties clause, whether party has capacity/ authority to enter into clause) 6

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Introduction

Section of an agreement Clauses that might appear in that section Secondary Completion (usually within another clause—eg within Commercial Termination clause to indicate when certain Provisions—contd defined activities are take place) Conditions precedent and subsequent (usually within another clause) Confidentiality Consent (usually within another clause) Consequences of termination (usually with a Termination clause) Consultation (usually within another clause) Covenants (usually with Warranties or Exemptions clauses) Cumulative remedies (usually within another clause— such as Payment and Termination clauses) Data Protection Disclaimers (usually party of a Warranties clause) Exemption clauses (usually grouped with clauses such as Warranties and Indemnities) Freedom of Information Expiry and termination at will (usually included with a Termination clause) Force majeure (sometimes included with a termination or similar provision to indicate the consequences of a force majeure event occurring) Indemnities (usually grouped with Exemption and Warranties clauses) Insolvency (usually with a Termination clause) Insurance (usually grouped with Exemption, Warranties and Indemnities clauses) Intellectual property (usually within other clauses— eg in such clauses in Warranties (what warranties are given in relation to the intellectual property), Termination (what is to happen to any licences of intellectual property when the agreement terminates) Termination for breach Warranties (usually grouped with Exemption, Indemnity and Insurance clauses) Boilerplate Agency and partnership (denials of) Agents for services Amendment or variation Announcements 7

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Introduction

Section of an agreement Clauses that might appear in that section Boilerplate—contd Arbitration and ADR (sometimes with Law and jurisdiction) Assignment and novation Capacity Charges (sometimes included within an Assignment clause) Certificate of value Contracts (Rights of Third Parties) Costs and expenses Counterparts (or duplicates) Cumulative remedies Entire agreement/final agreement Exclusive, non-exclusive and sole (usually within an Interpretation clause where this clause is located in this section) Force majeure (usually where a short provision) Further assurance Interpretation Joint and several liability Language Law and jurisdiction Months (and other expressions of time) (sometimes within an Interpretation clause) Notices Partnership (denial of) (sometimes within an Agency and partnership (denials of) clause) Priority of terms Retention of title (if not included with a Payments clause) Set-off and retention (if not included with a Payments clause) Severance and invalidity Stamp duty Sub-contracting (usually with an Assignment and novation clause to indicate that sub-contracting is permitted, or a separate clause to indicate subcontracting is permitted) Successors and assigns Time of the essence (usually within another clause— such as in a Notices clause) Waivers and releases 8

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Section of an agreement Clauses that might appear in that section Signing section Capacity (usually as a statement with execution and signature block clauses) Execution and signature block clauses

Schedules

Deeds (to state document is a deed or executed as a deed) Schedules

Origin of the meaning of ‘boilerplate’ Some readers may be curious as to the origins of the term ‘boilerplate’ and its meaning. It appears that the term was in common use in the United States for many years, used both in a legal and non-legal context (in the latter case, used principally by journalists). It seems that the expression originated in nineteenth century newspaper production in the United States. Local newspapers used to incorporate sections of national news that were sent to the local newspaper office by train, already typeset and ready for printing on metal drums. The metal drums were known as boilerplate. Boilerplate text became a name for standard text that was slotted into the newspaper along with more tailored, local news.

9

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Acknowledgments

Purpose of the clause An acknowledgment is used to indicate such matters as: • the existence of a (particular type of) legal relationship between the parties; or •

the existence of a fact or a set of facts; or

•

the deemed existence of a fact or a set of facts; or

•

the occurrence of an event; or

• that one or more of the parties have not relied on statements (such as warranties, representations or undertakings, etc) or a set of facts. Such acknowledgments are either made by one party and upon which both parties intend the recipient to rely, or are made by both parties and upon which both parties intend to rely. A person may give an acknowledgment in a stand-alone document or as part of another document that deals with other matters. As such, it is provided in writing and may appear as either a separate document or as part of an agreement. Also, if some important event occurs or the assumptions or facts change during the course of an agreement, the parties may acknowledge that in writing (ie as a way of documenting what has occurred or changed). An acknowledgment can also be a form of receipt, such as one party acknowledging that it has received a sum of money, documents or materials etc. Acknowledgments are often used in non-commercial matters, such as conveyancing and probate matters, where some right or possession of a document is acknowledged. In commercial agreements, one party may acknowledge that another party is the owner of specified property or that specified facts are true or that it owes a certain amount. For example, in a franchise agreement, the franchisee might be required to acknowledge that the licensed trademarks are the property of the franchisor, or that the franchisor has advised the franchisee to seek independent advice before entering into the franchise agreement. The above points relate to a party or the parties acknowledging some fact, etc; however, it is possible that a party or the parties agree on a point when they know it is not correct or true. Eg: 10

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Acknowledgments

•

the parties may acknowledge that one party did not make any pre-contractual representations about the quality or nature of a product supplied by that party, when in fact that party did make such statements; or

• the parties may agree that an amount that one party owes to another is different to what is stated in the contract or is owed. Such acknowledgments (or agreements, the precise terminology is not determinative) are likely to be binding and will create a contractual estoppel (see Springwell Navigation Corpn (a body corporate) v JP Morgan Chase Bank (a body corporate) (formerly known as the Chase Manhattan Bank) [2010] EWCA Civ 1221; Bikam OOD v Adria Cable SARL [2013] EWHC 1985 (Comm). In the earlier case the court stated: ‘I see commercial utility in such clauses being enforceable, so that parties know precisely the basis on which they are entering into their contractual relationship’.

Drafting issues •

What is not an ‘acknowledgment’? Acknowledgments are not to be confused with: •

warranties or representations; or

•

statements made in recitals; or

• acknowledgments of a claim for the purposes of the Limitation Act 1980, s 29. The effect of this particular type of acknowledgment is that the time limit for a party to bring a claim under a contract is ‘reset’ (when a party acknowledges the claim of the other party or makes a payment and the acknowledgment is made in writing) (Limitation Act 1980, s 30). •

Effect of warranties, recitals and acknowledgments: •

Warranties. If a party warrants that a statement is true, then that party is positively asserting the statement. The other contracting party may rely on it and may also be able to sue the party making the statement for breach of contract if the statement turns out to be untrue. But if a party merely acknowledges a statement, then that party will not be liable for breach of a warranty if the statement is untrue. However, that party may be unable to claim that it was not aware of the stated fact at a later date (that is the party may be estopped from denying that it made the acknowledgment). Although the giver of an acknowledgment may not be able to deny making it, the precise legal effect of the acknowledgment will be dependent on the wording used in the agreement and the circumstances. A  court will wish to come to its own view as to the true nature of a statement made by a party, as to whether it is an acknowledgment, warranty, representation etc.

•

Recitals. Recitals are not usually legally binding and their aim is to set out the background to an agreement. However, some recitals, rather 11

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than expressing a willingness or wish to undertake certain acts under the agreement, are statements of facts, eg: ‘Party A  has the resources, facilities and equipment to manufacture the Goods.’ However, a recital nowadays may be used as part of the factual background to an agreement when a court comes to interpret the provisions of an agreement (see Recitals). •

•

Acknowledgment of claim. An acknowledgment of claim or part payment in the form required by the Limitation Act 1980 has the effect of stopping the effect of the 1980 Act and restarting the limitation period (see above).

Interpretation of an acknowledgment. How an acknowledgment is interpreted will depend on the circumstances in which the agreement was made and who drafted it; a non-legal drafter may ‘get away’ with less precise use of language than a lawyer. •

If a party is to be responsible for the truth of the statement, then the party should give a warranty, not an acknowledgment.

• ‘Acknowledges and agrees’. Some clauses are stated so that a party ‘acknowledges and agrees’ to something. The precise legal effect is not certain, but perhaps it is used to indicate a stronger level of commitment to the something than a ‘mere’ acknowledgment. •

What is to happen if an underlying fact, etc is untrue? Before giving an acknowledgment, a party should consider what the consequences would be if the statement turned out to be untrue and whether this possibility should be specifically addressed in the contract.

Location in the agreement An acknowledgment is often not a stand-alone clause but found to be part of another clause, usually in the Main Commercial Provisions or Secondary Commercial Provisions. The next section gives some examples.

Linkage and use It is possible to use an acknowledgment for some of the following purposes: •

indicating the existence of a legal relationship between the parties or with one or more third parties: eg, that a party is a subsidiary or parent of another company, that the parties to an agreement are legally not connected;

• requiring the party providing the acknowledgment to indicate the existence (or non-existence) of some fact or state of affairs: eg, that materials provided by the other party are hazardous; that a party’s decision to enter into an agreement is based solely on their own personal judgement; that information given is correct; that the agreement has been read by a party; 12

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•

indicating that some document, thing or financial matter has been sent, received or taken place: eg, that a payment has been sent or received; an application required to be made (to a regulatory or registration authority) has been made; or a letter has been sent or received; eg, that a notice sent by one party is assumed to be received by another party a certain number of days after it is sent;

•

indicating that a party has a right to call for documents to be produced;

•

stating that – other than the thing acknowledged – everything else relating to the matter is not permitted or excluded; and

•

indicating that a party has not relied on any (pre-contract) representation. These type of statements are normally included (if they are) within an entire agreement clause (Quest 4 Finance Ltd v Maxfield [2007] EWHC 2313 (QB); Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386) (see Entire agreement).

Sample precedent material Precedent 1—Confirmation of a fact [Party A] acknowledges that [Party B] has assigned certain R&D Contracts with [Party C] to [Party A] [as set out in [Schedule [ ]] to this Agreement] (‘R&D Contracts’). Precedent 2—Confirmation of a state of affairs The Parties acknowledge that it is not possible for [Party A] to negotiate a complying sub-licence as required by Clause [no] because [ ], and [Party A] will negotiate or enter into a sub-licence on the best terms and conditions (most closely complying with Clause [no]) as [Party A] is able to obtain. Precedent 3—Franchisee The Franchisee acknowledges: 1 that he has been advised by the Franchisor to discuss his intention to enter into this agreement with other franchisees of the Franchisor and to seek other appropriate independent advice; and 2

that his decision to enter into this agreement has been taken solely on the basis of the personal judgement and experience of the Franchisee having taken such independent advice.

Precedent 4—Acknowledgment from account bank of receipt of letter We hereby acknowledge receipt of a letter (a copy of which is attached) dated [date] and addressed to us by [name of company] (‘the Company’) and accept the instructions and authorisations contained in that letter 13

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Acknowledgments

and undertake to act in accordance and comply with its terms. Terms defined in that letter shall have, when used in this letter, the same meanings. We acknowledge and confirm to the Agent on behalf of the Bank that: 1 no rights of counterclaim, rights of set-off or any other equities whatsoever have arisen in our favour against the Company in respect of the Account Funds or the debts represented by them or any part of them and we will not make any claim or demands or exercise any rights of counterclaim, rights of set-off or any other equities whatsoever against the Company in respect of the Account Funds or any part thereof; 2 we have not, as at the date hereof, received any notice that any third party has or will have any right or interest whatsoever in or has made or will be making any claim or demand or taking any action whatsoever against the Account Funds or the debts represented thereby or any part thereof; 3 we undertake that, in the event of our becoming aware at any time that any person or entity other than the Agent has or will have any right or interest whatsoever in the Account Funds or the debts represented by them or any part of them, we shall forthwith give written notice of the terms thereof to the Agent; and 4 we have made the acknowledgments and confirmations and have given the undertakings set out in this letter in the knowledge that they are required by the Agent in connection with the security which has been constituted by the Company in favour of the Agent as agent for the Bank under the Deed. This letter shall be governed by English law. Precedent 5—Acknowledgment for production of deeds (for unregistered land) AB acknowledges the right of CD to production and delivery [of copies] of the deeds and documents described in Schedule [5] below and to delivery of them and undertakes for their safe custody. Precedent 6—Conveyance/transfer to contain acknowledgment The [transfer or conveyance] shall contain an acknowledgment by [name of party giving the acknowledgment] of the right of the Buyer to production of the documents listed in Schedule [no] and to delivery of copies of them. Precedent 7—Memorandum on deed where acknowledgment given for its production [Purchaser] as purchaser of [description of property] being part of the land comprised in the within-written deed is entitled to the production and delivery of copies of the within-written deed [and to the benefit of an undertaking for the safe custody of the same]. 14

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Precedent 8—Acknowledgment of copyright information to be displayed [Party] undertakes and agrees as follows: 1 to include the original title of the Work, the name of the Author and the original publisher on the title page or the reverse of the title page of all Copies of the Translation; 2 to ensure that the Copyright Notice appears on the title page or the reverse of the title page of all Copies of the Translation; 3 to submit to the Owner a proof of the preliminary pages of the Translation for the Owner’s approval prior to publication; and 4 to procure the inclusion of the Author’s name prominently on the jacket cover, the spine and title page of all Copies and in all publicity and advertisements relating to the exercise of the Publisher’s Rights granted under this agreement Provided that any such use of the Author’s name is not without the Author’s prior written consent to be included by way of endorsement or testimonial for the Translation.

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Affiliates, group companies and subsidiaries

Purpose of the clause A  company or individual that is connected or associated with a party to an agreement is often referred to as an ‘affiliate’. The purpose of referring to a party’s affiliates is usually to enable an affiliate: •

to receive a specific benefit under an agreement; or

•

to subject them to specific obligations under an agreement.

Drafting issues •

General points: • in the UK there is no standard definition as to the meaning of an affiliate; • accordingly, the parties should define the meaning of affiliates in their agreement; •

UK companies legislation contains no definition of ‘affiliate’;

• often (although not always) other companies in the same group of companies as a contracting party are defined as its affiliates. •

Use of statutory definitions: • many definitions of ‘affiliate’ in agreements use the meanings of certain words found in the Companies Act 2006 (the text of these is found at the end of this section): •

s  1159. ‘subsidiary’, ‘holding company’ and ‘wholly owned subsidiary’ are defined in the Companies Act 2006; and

•

ss  1161, 1173. ‘parent undertaking’, ‘subsidiary undertaking’, ‘parent company’, ‘undertaking’ and ‘group undertaking’ are also defined. These sections appear in a section dealing with various accounts matters and provide a wider definition than under ss 1159 etc. They were originally introduced following the introduction of EC Seventh Directive on Group Accounts;

16

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Affiliates, group companies and subsidiaries

•

where the term ‘affiliate’ is used to mean, in effect, another company in the same group as a party to the contract, wording based on s 1159 is sometimes used (see Precedent 1);

•

to make the definition broader, the definition of ‘group undertaking’ in the Companies Act 2006 can be used (see Precedent 3);

•

sometimes parties will wish to make the definition of group companies broader still, to include joint ventures which are not majority-owned subsidiaries;

• if there are parties to an agreement who are not incorporated or based in the UK then the contract drafter should consider using a more general definition, which does not refer to UK companies legislation. The reference in Precedent 4 to less than 50% ownership of shares, etc, takes account of the fact that in some countries, foreign investment in a company may not exceed a specified percentage of the share capital. For practical purposes, such a company may still be regarded as a member of the same group as the foreign parent, even though the percentage shareholding is less than 50%;

•

•

if an affiliates definition refers to specific wording that is used in the Companies Act 2006, then it is likely that the courts, in the event of a dispute, will interpret the wording used as having the meaning used in the 2006 Act. In Farstad Supply A/S v Enviroco Ltd [2011] UKSC 16, a decision on what is now Companies Act 2006, s 1159, the court held that the word ‘member’ used in that section of the Act as to whether a holding company of the subsidiary must be a member of the subsidiary must have a meaning consistent with that found in another section of the Companies Act 2006, (s 112, that a member is a person who agrees to become a member of the company and whose name is entered into the register of members);

•

if the parties to an agreement want a definition of an affiliate where a holding company or subsidiary does not need to be a member of one or the other then either the Companies Act 2006, s 1162 may be used or there should be use of alternative wording that does not make reference to the Act and that clearly explains the intentions of the parties.

Points to note: When using a definition of ‘affiliates’ or ‘group companies’, references to affiliates or group companies are often included in a contract to enable them to receive a benefit under the contract. It may not be clear who is or is not a party to the agreement unless careful consideration is given to the drafting of such provisions. In general, if a person is to be a party to the contract then they should be named as such, and then the person or the person’s agent (or, in the case of a company, an authorised signatory) must also sign the contract. If a party to an agreement does not also sign as agent of any of its affiliates (if none of the affiliates are to sign themselves), then the affiliates will not be 17

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bound by the contract and will not have enforceable contractual rights under it.

A contract drafter, when drafting a clause referring to affiliates or group companies, should consider the following points: •

if a party is referred to as a member of a group, and the contract states that references to the party include references to the group, are the group and all its members parties to the agreement?

•

is the term ‘affiliate’, ‘group’ (or whichever term is used) defined in the contract? Will the definition make use of terms such as ‘subsidiary’ and ‘holding company’? If so, is the intention that the statutory definitions set out in ss 1162 (wider definition) and 1159 (narrower definition) of the Companies Act 2006 apply (see below)?



If the wider definition is used (s 1162) then persons who, although not incorporated, can claim a dominant influence over a party to the agreement may be able to claim a benefit under the contract;

•

are the affiliates/group companies named as parties (such as in the Parties clause) and will they sign the contract?

•

will a (named) party to the agreement have the authority to act (and be stated in the contract to have that authority to act) as the agent of the other affiliates/group of companies, and accordingly be able to sign the contract on behalf of each of the affiliates/members of the group?

• if group companies are to be parties to an agreement (either by reference or by explicitly stating their names), it is important to be clear which of the parties has rights or obligations under particular clauses of the contract. If more than one party has such obligations, do the obligations give rise to joint, several or joint and several liabilities on the parties concerned (see Joint and several liability)? •

the above issues will need addressing on a case-by-case basis.

The above points deal with defining the meaning of an affiliate in general terms. However, in a particular deal it may only be relevant that one company would come within the meaning of ‘affiliate’, not all the possible companies within the group of companies of which a party is a member. For example, one party may wish to disclose some confidential information to the other party, and the other party is a member of a group of companies. Given the nature of confidential information or the proposed deal, only one other member of the group of companies will need to see that confidential information. The disclosing party may wish to restrict the meaning of affiliate to that one other member of the group of companies of which the other party is a member (see Precedent 2).

Location in the agreement An Affiliates, etc clause will usually appear in the Definitions section of an agreement. 18

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Linkage and use The following are some of the more common situations when one or more of the parties to an agreement might wish to make use of a definition of ‘affiliate’: • in a confidentiality clause: where confidential information is disclosed by one party to another party, the other party will be able to disclose the confidential information of the first party to its affiliates; •

that the affiliates of one party can (also) enforce an obligation imposed on another party;

•

that under some types of licence agreements where royalty payments are involved, the receipts generated by a party will include that of its affiliates;

• that warranties and/or indemnities provided by one party to another party will also extend to the affiliates of the other party (and the clause will sometimes extend to the affiliate having the right to bring an action against the party in breach of the indemnity etc); • that a party is permitted to assign its rights and/or obligations to an affiliate (without the consent of the other party in an assignment clause); •

that an affiliate is included as a person who has the right to enforce some or all of the provisions of an agreement under a Contracts (Rights of Third Parties) Act 1999 clause.

Other phrases/words are sometimes used instead of, or in addition to, ‘affiliates’, such as ‘associated companies’.

Sample precedent material Precedent 1—Using the Companies Act 2006, s 1159 In relation to a person, ‘Affiliate’ means any subsidiary or holding company of that person, and any other subsidiary of that holding company, where ‘subsidiary’ and ‘holding company’ have the meanings given in the Companies Act 2006, s 1159 (as amended). Precedent 2—Specific company named as an Affiliate, using the Companies Act 2006, s 1159 In relation to Party A, ‘Affiliate’ means [name of company]. [[name of company] shall be an Affiliate of Party A for so long as it remains a subsidiary or holding company of Party A, and any other subsidiary of [name of company], where ‘subsidiary’ and ‘holding company’ have the meanings given in the Companies Act 2006, s 1159 (as amended)]. Precedent 3—Using the Companies Act 2006, s 1162(5) ‘Affiliate’ in relation to a Party shall mean any group undertaking of that Party, where ‘group undertaking’ has the meaning given in the Companies Act 2006, s 1161(5) (as amended). 19

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Precedent 4—Where ‘control’ may be less than that found in the Companies Act 2006, s 1159 An ‘Affiliate’ of a Party shall mean any person controlling (directly or indirectly), controlled by or under common control with that Party. For the purposes of this definition, ‘control’ shall mean direct or indirect beneficial ownership of [more than 50%] [50%] [(or, outside a Party’s home territory, such lesser percentage as is the maximum permitted level of foreign investment)] [or more] of the share capital, stock or other participating interest carrying the right to vote or to distribution of profits of that entity or person, as the case may be. Precedent 5—Using the Companies Act 2006, s 1162 A company or other person is affiliated to another company or person if one is a subsidiary undertaking of the other or both are subsidiary undertakings of the same third company or other person, where ‘subsidiary undertaking’ has the meaning given in the (UK) Companies Act 2006, s 1162. Precedent 6—Definition of ‘group company’ ‘Group Company’ means a company within the group of companies of which [the Company] is from time to time a member. Precedent 7—Definition of ‘group company’ ‘Group Company’ means the Company and (as the context requires) the Subsidiaries and each or any of them. Precedent 8—Definition of ‘group company’ by ownership ‘Group Company’ means any company which either owns more than 50% of the issued share capital of A or in which either A or any subsidiary of A owns more than 50% of the issued ordinary share capital. Precedent 9—Definition of ‘group company’ with reference to the Companies Act 2006, s 1159 ‘Group Company’ means any of the Company or its subsidiaries or holding companies or any subsidiary of the Company’s holding company and ‘subsidiary’ and ‘holding company’ shall bear the meanings given to them by the Companies Act 2006, s 1159. Precedent 10—Definition of ‘subsidiary’ ‘Subsidiary’ has the meaning given to that expression in the Companies Act 2006, s 1159. Precedent 11—Definition of ‘subsidiary’ and ‘holding company’ ‘Subsidiary’ and ‘holding company’ shall bear the same respective meanings as in the Companies Act 2006, s 1159. Precedent 12—Definition of ‘subsidiary’ ‘Subsidiary’ means either: 1

a subsidiary within the meaning of s 1159 of the Companies Act 2006, or

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2 unless the context requires otherwise, a subsidiary undertaking within the meaning of s 1162 of the Companies Act 2006. Precedent 13—Definition of ‘subsidiary’ by control ‘Subsidiary’ means an entity from time to time of which A or B: 1 has direct or indirect control, or 2

owns directly or indirectly more than 50% of the share capital or similar right of ownership,

‘control’ for this purpose meaning the power to direct the management and the policies of the entity, whether through the ownership of voting capital, by contract or otherwise. Precedent 14—Definition of ‘subsidiary’ by control – longer form A ‘subsidiary’ of a company, corporation or entity shall be construed as a reference to any company, corporation or entity: 1 that is controlled, directly or indirectly, by the first-mentioned company, corporation or entity; 2

more than half the voting rights of which are held directly or indirectly, by the first-mentioned company, corporation or entity; or

3 that is a subsidiary of a subsidiary of the first-mentioned company, corporation or entity, and for these purposes a company, corporation or entity shall be treated as being controlled by another if that other company, corporation or entity is able to direct its affairs or control the composition of its board of directors or equivalent body. Precedent 15—No subsidiaries The Company has no subsidiaries except (name of subsidiary) which at Completion will be wholly owned. References to the ‘Company’ in this agreement shall be construed as including every Affiliate of the Company [for the time being during the continuation of this agreement] [which is an Affiliate at the date of this agreement].

Extracts from legislation Sections from the Companies Act 2006 1159  Meaning of ‘subsidiary’ etc (1) A company is a ‘subsidiary’ of another company, its ‘holding company’, if that other company: 21

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(a) holds a majority of the voting rights in it, or (b) is a member of it and has the right to appoint or remove a majority of its board of directors, or (c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company. (2) A company is a ‘wholly-owned subsidiary’ of another company if it has no members except that other and that other’s wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned subsidiaries. (3) Schedule 6 contains provisions explaining expressions used in this section and otherwise supplementing this section. (4) In this section and that Schedule ‘company’ includes any body corporate. 1160  Meaning of ‘subsidiary’ etc: power to amend (1) The Secretary of State may by regulations amend the provisions of section 1159 (meaning of ‘subsidiary’ etc) and Schedule 6 (meaning of ‘subsidiary’ etc: supplementary provisions) so as to alter the meaning of the expressions ‘subsidiary’, ‘holding company’ or ‘wholly-owned subsidiary’. (2) Regulations under this section are subject to negative resolution procedure. (3) Any amendment made by regulations under this section does not apply for the purposes of enactments outside the Companies Acts unless the regulations so provide. (4) So much of section 23(3) of the Interpretation Act 1978 (c 30) as applies section 17(2)(a) of that Act (effect of repeal and re-enactment) to deeds, instruments and documents other than enactments does not apply in relation to any repeal and re-enactment effected by regulations under this section. 1161  Meaning of ‘undertaking’ and related expressions (1) In the Companies Acts ‘undertaking’ means— (a) a body corporate or partnership, or (b) an unincorporated association carrying on a trade or business, with or without a view to profit. (2) In the Companies Acts references to shares— (a) in relation to an undertaking with capital but no share capital, are to rights to share in the capital of the undertaking; and (b) in relation to an undertaking without capital, are to interests— 22

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(i) conferring any right to share in the profits or liability to contribute to the losses of the undertaking, or (ii) giving rise to an obligation to contribute to the debts or expenses of the undertaking in the event of a winding up. (3) Other expressions appropriate to companies shall be construed, in relation to an undertaking which is not a company, as references to the corresponding persons, officers, documents or organs, as the case may be, appropriate to undertakings of that description. This is subject to provision in any specific context providing for the translation of such expressions. (4) References in the Companies Acts to ‘fellow subsidiary undertakings’ are to undertakings which are subsidiary undertakings of the same parent undertaking but are not parent undertakings or subsidiary undertakings of each other. (5) In the Companies Acts ‘group undertaking’, in relation to an undertaking, means an undertaking which is– (a) a parent undertaking or subsidiary undertaking of that undertaking, or (b) a subsidiary undertaking of any parent undertaking of that undertaking. 1162  Parent and subsidiary undertakings (1) This section (together with Schedule 7) defines ‘parent undertaking’ and ‘subsidiary undertaking’ for the purposes of the Companies Acts. (2) An undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if— (a) it holds a majority of the voting rights in the undertaking, or (b) it is a member of the undertaking and has the right to appoint or remove a majority of its board of directors, or (c) it has the right to exercise a dominant influence over the undertaking— (i) by virtue of provisions contained in the undertaking’s articles, or (ii) by virtue of a control contract, or (d) it is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking. (3) For the purposes of subsection (2) an undertaking shall be treated as a member of another undertaking— (a) if any of its subsidiary undertakings is a member of that undertaking, or (b) if any shares in that other undertaking are held by a person acting on behalf of the undertaking or any of its subsidiary undertakings. 23

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(4) An undertaking is also a parent undertaking in relation to another undertaking, a subsidiary undertaking, if— (a) it has the power to exercise, or actually exercises, dominant influence or control over it, or (b) it and the subsidiary undertaking are managed on a unified basis. (5) A  parent undertaking shall be treated as the parent undertaking of undertakings in relation to which any of its subsidiary undertakings are, or are to be treated as, parent undertakings; and references to its subsidiary undertakings shall be construed accordingly. (6) Schedule 7 contains provisions explaining expressions used in this section and otherwise supplementing this section. (7) In this section and that Schedule references to shares, in relation to an undertaking, are to allotted shares.

SCHEDULE 6 – Meaning of ‘Subsidiary’ etc: Supplementary Provisions Section 1159 1 Introduction The provisions of this Part of this Schedule explain expressions used in section 1159 (meaning of ‘subsidiary’ etc) and otherwise supplement that section. 2  Voting rights in a company In section 1159(1)(a) and (c) the references to the voting rights in a company are to the rights conferred on shareholders in respect of their shares or, in the case of a company not having a share capital, on members, to vote at general meetings of the company on all, or substantially all, matters. 3  Right to appoint or remove a majority of the directors (1) In section 1159(1)(b) the reference to the right to appoint or remove a majority of the board of directors is to the right to appoint or remove directors holding a majority of the voting rights at meetings of the board on all, or substantially all, matters. (2) A company shall be treated as having the right to appoint to a directorship if— (a) a person’s appointment to it follows necessarily from his appointment as director of the company, or (b) the directorship is held by the company itself. (3) A right to appoint or remove which is exercisable only with the consent or concurrence of another person shall be left out of account unless no other person has a right to appoint or, as the case may be, remove in relation to that directorship. 24

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4  Rights exercisable only in certain circumstances or temporarily incapable of exercise (1) Rights which are exercisable only in certain circumstances shall be taken into account only— (a) when the circumstances have arisen, and for so long as they continue to obtain, or (b) when the circumstances are within the control of the person having the rights. (2) Rights which are normally exercisable but are temporarily incapable of exercise shall continue to be taken into account. 5  Rights held by one person on behalf of another Rights held by a person in a fiduciary capacity shall be treated as not held by him. 6 (1) Rights held by a person as nominee for another shall be treated as held by the other. (2) Rights shall be regarded as held as nominee for another if they are exercisable only on his instructions or with his consent or concurrence. 7  Rights attached to shares held by way of security Rights attached to shares held by way of security shall be treated as held by the person providing the security— (a) where apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with his instructions, and (b) where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in his interests. 8  Rights attributed to holding company (1) Rights shall be treated as held by a holding company if they are held by any of its subsidiary companies. (2) Nothing in paragraph 6 or 7 shall be construed as requiring rights held by a holding company to be treated as held by any of its subsidiaries. (3) For the purposes of paragraph 7 rights shall be treated as being exercisable in accordance with the instructions or in the interests of a company if they are exercisable in accordance with the instructions of or, as the case may be, in the interests of— (a) any subsidiary or holding company of that company, or (b) any subsidiary of a holding company of that company. 25

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9  Disregard of certain rights The voting rights in a company shall be reduced by any rights held by the company itself. 10 Supplementary References in any provision of paragraphs 5 to 9 to rights held by a person include rights falling to be treated as held by him by virtue of any other provision of those paragraphs but not rights which by virtue of any such provision are to be treated as not held by him.

SCHEDULE 7 – Parent and Subsidiary Undertakings: Supplementary Provisions Section 1162 1 Introduction The provisions of this Schedule explain expressions used in section 1162 (parent and subsidiary undertakings) and otherwise supplement that section. 2  Voting rights in an undertaking (1) In section 1162(2)(a) and (d) the references to the voting rights in an undertaking are to the rights conferred on shareholders in respect of their shares or, in the case of an undertaking not having a share capital, on members, to vote at general meetings of the undertaking on all, or substantially all, matters. (2) In relation to an undertaking which does not have general meetings at which matters are decided by the exercise of voting rights the references to holding a majority of the voting rights in the undertaking shall be construed as references to having the right under the constitution of the undertaking to direct the overall policy of the undertaking or to alter the terms of its constitution. 3  Right to appoint or remove a majority of the directors (1) In section 1162(2)(b) the reference to the right to appoint or remove a majority of the board of directors is to the right to appoint or remove directors holding a majority of the voting rights at meetings of the board on all, or substantially all, matters. (2) An undertaking shall be treated as having the right to appoint to a directorship if— (a) a person’s appointment to it follows necessarily from his appointment as director of the undertaking, or (b) the directorship is held by the undertaking itself. (3) A right to appoint or remove which is exercisable only with the consent or concurrence of another person shall be left out of account unless no 26

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other person has a right to appoint or, as the case may be, remove in relation to that directorship. 4  Right to exercise dominant influence (1) For the purposes of section 1162(2)(c) an undertaking shall not be regarded as having the right to exercise a dominant influence over another undertaking unless it has a right to give directions with respect to the operating and financial policies of that other undertaking which its directors are obliged to comply with whether or not they are for the benefit of that other undertaking. (2) A ‘control contract’ means a contract in writing conferring such a right which— (a) is of a kind authorised by the articles of the undertaking in relation to which the right is exercisable, and (b) is permitted by the law under which that undertaking is established. (3) This paragraph shall not be read as affecting the construction of section 1162(4)(a). 5  Rights exercisable only in certain circumstances or temporarily incapable of exercise (1) Rights which are exercisable only in certain circumstances shall be taken into account only— (a) when the circumstances have arisen, and for so long as they continue to obtain, or (b) when the circumstances are within the control of the person having the rights. (2) Rights which are normally exercisable but are temporarily incapable of exercise shall continue to be taken into account. 6  Rights held by one person on behalf of another Rights held by a person in a fiduciary capacity shall be treated as not held by him. 7 (1) Rights held by a person as nominee for another shall be treated as held by the other. (2) Rights shall be regarded as held as nominee for another if they are exercisable only on his instructions or with his consent or concurrence. 8  Rights attached to shares held by way of security Rights attached to shares held by way of security shall be treated as held by the person providing the security— (a) where apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in accordance with his instructions, and 27

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(b) where the shares are held in connection with the granting of loans as part of normal business activities and apart from the right to exercise them for the purpose of preserving the value of the security, or of realising it, the rights are exercisable only in his interests. 9  Rights attributed to parent undertaking (1) Rights shall be treated as held by a parent undertaking if they are held by any of its subsidiary undertakings. (2) Nothing in paragraph 7 or 8 shall be construed as requiring rights held by a parent undertaking to be treated as held by any of its subsidiary undertakings. (3) For the purposes of paragraph 8 rights shall be treated as being exercisable in accordance with the instructions or in the interests of an undertaking if they are exercisable in accordance with the instructions of or, as the case may be, in the interests of any group undertaking. 10  Disregard of certain rights The voting rights in an undertaking shall be reduced by any rights held by the undertaking itself. 11 Supplementary References in any provision of paragraphs 6 to 10 to rights held by a person include rights falling to be treated as held by him by virtue of any other provision of those paragraphs but not rights which by virtue of any such provision are to be treated as not held by him.

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Purpose of the clause Commercial agreements sometimes include provisions stating that one party cannot bind or act on behalf of another party. Or they are acting together or have any relationship other than as provided in the agreement. This issue is particularly relevant where the agreement provides for a long-term or collaborative relationship between the parties, especially where they will work closely together on a project. For example, • a long-term supply agreement, where a supplier of goods sells goods against separate orders from the buyer is unlikely to come within this category; but • a long-term advertising campaign involving an advertising agency, a graphic designer and a photographer providing their services to a company might require the parties to work closely together. Any of the providers may need to book space in newspapers, on TV, on social media, as well as hire or contract with sub-contractors (such as an advertising agency hiring a photographer or video director etc). If the wording of the agreement is not clear or its provisions are complex and/ or there are many parties, it may not be clear whether an agency or partnership is intended.

Existence of agency, etc Agency is the relationship that arises whenever one person (the agent) has authority, express or implied, to act on behalf on another (the principal) and consents so to act. An agent primarily means a person employed to place the principal in contractual or other relations with a third party. Some agents have authority to sign contracts on their principal’s behalf, but the exact authority of the agent will depend on the requirements of the principal and the negotiations between the principal and the agent However, the term ‘agent’ is also used in a broader sense: certain types of commercial agent merely introduce customers to the principal rather than making specific contractual commitments (the terms of specialist 29

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agency agreements, including consideration of commercial agents and the Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053, are beyond the scope of this book). A  contractual provision between parties may be sufficient to indicate that there is no type of agency between the parties. But if one exists, the agent may not be permitted, for example, to enter into contracts on behalf of the principal. Although this limitation on the authority of the agent may not actually affect whether the agent can bind the principal (ie acting outside or against the provisions of the contract between the agent and the principal). If the agent enters into a contract with a third party, with the agent indicating that it is contracting on behalf of the principal or has apparent authority to do so, then it may bind the principal. This will be so as long as the third party has a reasonable belief that the agent had authority to bind the principal. The third party will find it difficult to meet the last point if the third party knew that the contract into which it wished to enter was not in the commercial interest of the principal (Re Capitol Films Ltd (in administration); Rubin v Cobalt Pictures Ltd [2010] EWHC 2240 (Ch), and also Bowstead and Reynolds on Agency (20th Edn, 2014, Sweet & Maxwell), 8-218). Also, and more obviously, the principal will not be bound by a contract purportedly made by the agent and the third party if the third party knew that the agent did not have actual authority (Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28). No contract wording can specifically deal with the day-to-day actions of an agent, but the principal may need to take actions that extend beyond merely relying on contract wording, either in instructions to the agent or notices made publicly available indicating what its agents can and cannot do. In most cases, parties will wish to deny the existence of an agent/principal relationship or will need to specify exactly where such a relationship might lie.

Existence of a partnership Whether or not a partnership exists between two persons is always a question of fact, which does not depend solely on the documents they have executed or even the express statements they have made. Where a relationship has all the properties of a partnership, an express written provision by the parties denying the existence of a partnership may be insufficient to prevent one being held to exist. The definition of a partnership is that set out in the Partnership Act 1890: ‘the relation which subsists between persons carrying on a business in common with a view of profit’.

There is no requirement for formality in order to establish a partnership (ie, under the Partnership Act 1890, unlike a limited liability partnership, which requires registration under the Limited Liability Partnerships Act 2002), and there will sometimes be a risk of creating a partnership under a commercial 30

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agreement, particularly in agreements concerned with unincorporated joint ventures. A limited liability partnership is more akin to a company as: • it has a separate legal identity: it is a body corporate (Limited Liability Partnerships Act 2002, s 1(2)); •

its existence will and can only commence when the members’ application for registration is accepted by the Registrar of Companies (Limited Liability Partnerships Act 2002, s 3);

• it will execute documents in the same way as for a company formed or regulated by the Companies Act 2006 (eg, Companies Act 2006, s  44 applies, but with references to ‘director’ and ‘secretary’ replaced by ‘member’). Where the parties to a business arrangement do not intend their relationship to be a partnership (and the relationship lies outside the scope of the Partnership Act 1890), the parties should state that: •

they are not partners; and

•

their agreement is not a partnership agreement; and

•

their subsequent actions do not amount to carrying on a partnership.

As regards the last bullet point, despite the clear wording in an agreement that the parties are not a partnership or a joint venture, such a statement may not cover their actions after the date of the agreement. The current trend in interpreting contracts of parties is to focus on the conduct of the parties and to decide, objectively, what the true nature of that conduct is. Accordingly, if the parties start acting in a way that falls within the legal definition of a partnership then, in the event of dispute, a court may find that the parties have entered into a partnership even though the wording of their agreement says otherwise. For example, in relation to other boilerplate wording concerning ‘no variations’ clauses, which provides that a contract cannot be varied except in writing, a court will look at what the parties say and do, and in appropriate cases a court will hold that the parties have varied their contract even though the parties failed to comply with a ‘no variations’ clause (see MWB  Business Exchange Centres v Rock Advertising [2016] EWCA Civ 553; Hughes v Pendragon Sabre [2016] EWCA Civ 18; Globe Motors v TRW Lucas Varity [2016] EWCA Civ 396). See Amendment or variation below. Except where the parties have consciously chosen to enter into a partnership, they will wish to avoid the risk of their relationship being treated as a partnership, in view of the liability that a partner has for the acts and omissions (and losses) of the other fellow partners. A  clause denying partnership will not be conclusive, but may assist the parties to argue their position if someone (such as HMRC) asserts that the parties are a partnership. Often, a clause which denies that the parties are in partnership will also state that neither party may bind the other. 31

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Joint venture There is no English statute on joint ventures comparable to the Companies Acts for companies. The expression ‘joint venture’ has no specific legal meaning under English law, unlike the position in some other countries. In practice, joint ventures are: •

set up as partnerships; or

•

set up as a company in which each of the joint venturers is a shareholder. Sometimes each joint venturer will own 50% of the issued share capital of the company, although the precise shares of ownership (as well as other aspects of their relationship) are subject to the agreement of the joint venturers; or

•

established by two separate parties collaborating on a project by providing resources (human, financial etc), without there being a separate legal entity.

A clause dealing with denials of agency and partnership will also often include a denial that the parties are involved in a joint venture in case joint venture has a meaning that implies legal obligations, such as with a partnership.

Drafting issues •

Default points. In commercial agreements, there should be a clear statement that: •

a party is acting as agent for another (eg if a parent company signs an agreement on behalf of itself and its subsidiaries); or

• the relationship between the contracting parties is not one of agent and principal or one of partnership or joint venture. Sometimes parties will go further and include obligations on the parties not to represent to any other person that they have any authority to make commitments on each other’s behalf. •

•

Where a form of agency exists exclude partnerships, joint venture and other agency relationships. Where there is a form of agency in an agreement (ie a traditional agency arrangement or where some provisions in an agreement are intended to be that of an agent and a principal), there should be a denial that: •

the parties wish to form a partnership; or

•

the parties are carrying on a joint venture (of any type); or

•

any agency arises apart from that expressly conferred by the agreement.

Agency also plays a part when an agreement is signed, typically where a company is involved. The company has to act through human beings, who act as agents for, or authorised representatives of, the company. Such issues

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are not normally addressed in this type of boilerplate provision (but are considered further in Capacity).

Location in the agreement The Boilerplate section of an agreement is normally the location of a no agency, joint venture or partnership clause.

Linkage and use This boilerplate provision is not normally specifically linked or referred to in an agreement. However, for many types of agreements one party may specifically be given an ‘agency’ type of role for another party, eg  in a manufacturing contract, the manufacturing party may need to buy materials, but it is stipulated that the party is doing it as an agent for the other party.

Sample precedent material Precedent 1—No partnership Nothing in this agreement shall be deemed to constitute a partnership between the parties. Precedent 2—No partnership or agency or other relationship other than contractual relationship This agreement shall not constitute or imply any partnership, joint venture, agency, fiduciary relationship or other relationship between the Parties other than the contractual relationship expressly provided for in this agreement. Neither Party shall have, nor represent that it has, any authority to make any commitments on the other Party’s behalf. Precedent 3—No partnership or joint venture-limited agency only The Parties are not partners or joint venturers nor is [Party B] able to act as an agent of [Party A] save as authorised by this agreement. Precedent 4—No partnership The Parties to this agreement are not partners. Precedent 5—No partnership Nothing in this agreement shall be deemed to constitute a partnership between the Parties. Precedent 6—No agency Nothing in this agreement shall be deemed to constitute either Party as the agent of the other Party. Neither Party shall have any authority to make any commitments or enter into any contracts on the other Party’s behalf. 33

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Precedent 7—No agency Each Party represents and undertakes that it is entering this agreement as principal and not as agent for any other party. In performance of this agreement, the status of each Party including its employees and agents shall be that of independent contractor and not of employee, agent or fiduciary of the other Party. Neither Party has any right to make commitments for or on behalf of the other Party. Precedent 8—Assertion of agency relationship Party A enters into this agreement [both as principal, and] as agent for Company X, and warrants and represents that it has been duly authorised by Company X to enter into this agreement on Company X’s behalf. Precedent 9—No undisclosed principal [Party A] warrants that it is not the nominee or agent of any undisclosed principal and that it will assume sole and complete responsibility for the performance of the obligations in this agreement expressed to be performed by [Party A].

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Agents for service

Purpose of the clause A party may require that any documents that are issued by a court in relation to legal proceedings are not sent to that party but to someone else. Court rules permit this in certain circumstances. However, it may be necessary to obtain the permission of the court to do so if a party to a contract is resident or has its registered office (or equivalent) outside the United Kingdom. However, an ‘agents for service’ clause aims to allow service of documents in legal proceedings within the United Kingdom (and where possible without the permission of the courts) on the agent of a party, whether or not they are based in the United Kingdom.

Drafting issues •

Legal issues •

The Civil Procedure Rules (CPR), SI 1998/3132, (see CPR 6) governs the service of documents in legal proceedings;

• if a contract contains a provision providing that if a claim is made concerning the contract, any claim form issued in relation to that claim may be served as specified in that contract, then the claim form is deemed to be served if it is served by the method specified in the contract: CPR 6.11(1); •

if a claim form needs serving outside the United Kingdom then it may be necessary to obtain the permission of the court (under CPR 6.36) unless it falls into a category where permission is not required (under CPR 6.32 or CPR 6.33): CPR 6.11(2);

• the rules for determining whether a party needs to obtain the permission of the court is found in CPR  6.36 and CPR  6.37. In addition, Practice Direction 6B to this CPR needs consideration (the detailed provisions of which are beyond the scope of this book); Readers should obtain specialist advice and/or consult standard legal books such as the Civil Court Practice); 35

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Agents for service

•

if an agreement does not contain a provision concerning the serving of documents in legal proceedings then a party may still serve an agent of the foreign party subject to: •

the party applying to the courts; and

•

the contract to which the claim relates being entered into within the jurisdiction with or through the foreign party’s agent; and

• the agent’s authority not being terminated, or the agent still having business relations with the foreign party: CPR 6.12; • it is also possible to apply for permission to serve a claim form by an alternative method or to an alternative place if there is a good reason (CPR 6.15), such as a saving of time by serving on the London solicitors of a claimant rather than the place where the defendant is resident (JSC BTA  Bank Ablyazov [2011]  EWHC  2506 (Comm) or dispensing with the service of a claim form altogether in exceptional circumstances) (CPR 6.16). •

•

Appointment of an agent •

where a party to an agreement is based outside the United Kingdom, there should be provision for appointment of an agent within the United Kingdom (see Precedent 1);

•

the provision should deal with the extent of the appointment of the agent, such as: •

whether the appointment should be irrevocable;

•

the appointment being limited to the term of the agreement;

•

whether it is possible to terminate the appointment on notice;

•

whether the other party should receive notification on termination of the appointment.

Failure by agent to perform duties • If the agent fails to notify the party who appointed the agent that proceedings are served, then there should be wording that such failure does not affect the validity of the service (see Precedent 2); •

•

if the agent takes an excessive amount of time to notify the party that appointed the agent, then there should be wording specifying a time limit when service is deemed effective (see Precedent 3).

Although an Agents for service clause aims to deal with the situation where a party (which is not based in the United Kingdom) agrees a method of service out of the jurisdiction by means of an agent, it may still be regarded as invalid under a foreign law, and therefore the ability to proceed in other ways should be retained (see Precedent 4).

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Location in the agreement The Boilerplate section of an agreement is normally the location for an Agents for service clause.

Linkage and use This type of clause is not normally linked to or used by other clauses except: •

where a party is based outside England and Wales (or the United Kingdom), the other party to the agreement should check that the address given in the Parties clause is the address to be used for notices (including for the service of proceedings);

• the Notices clause may include provisions of an Agents for service clause or will need to be amended to reflect the fact that particular types of notices (such as the service of proceedings caused by an Agents for service clause) are dealt with elsewhere by their own clause.

Sample precedent material Precedent 1—Appointment of an agent [Party A] irrevocably appoints [name] at present of [address] to receive on its behalf service of proceedings issued out of the English courts in any action or proceedings arising out of or in connection with this agreement. Precedent 2—Failure on the part of the agent to carry out instructions Failure by such agent to notify [Party A] of such service shall not adversely affect the validity of such service or any judgment based on it. Precedent 3—Setting a time limit when service is deemed effective Such service shall become effective 30 days after despatch. Precedent 4—Permitting other methods of service Nothing contained in this agreement shall affect the right to serve process in any other manner permitted by law. Precedent 5—Effective service on agent All proceedings, notices of proceedings and other notices in connection with or to give effect to this agreement shall be served upon [agent in England for the foreign party] (the ‘Agent for Service’) at the Agent for Service’s address in [London] on behalf of [foreign party] and [foreign party] shall be bound by such service as if [foreign party] had been personally served within the jurisdiction. 37

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Precedent 6—Effective service on agent [Party A] irrevocably appoints [name] at present of [address] to receive on its behalf service of proceedings issued out of the English courts in any action or proceedings arising out of or in connection with this agreement and agrees that failure by such agent to notify it of such service shall not adversely affect the validity of such service or any judgment based on it. Precedent 7—Effective service on agent [Party A] irrevocably appoints [name] at present of [address] as its agent to receive on its behalf service of proceedings issued out of the English courts in any action or proceedings arising out of or in connection with this agreement. [Party A] warrants that [name] has agreed to act as its agent as aforesaid. Failure by such agent to notify [Party A] of such service shall not adversely affect the validity of such service or any judgment based on it. Such service shall become effective 30 days after despatch. Nothing contained in this agreement shall affect the right to serve process in any other manner permitted by law. Precedent 8—Effective address for service 1 Any notice of proceedings or other notices in connection with or which would give effect to any such proceedings may without prejudice to any other method of service be served on any party in accordance with Clause [no]. 2 In the event that [name] is resident outside [England] its address for service in [England] shall be the address for such service nominated at the head of this agreement and any time limits in any proceedings shall not be extended by virtue only of the foreign residence of [name]. Precedent 9—Appointment of process agent 1 [Party A] irrevocably appoints [name] of [address] in England as its process agent to receive on its behalf service of process in any Proceedings in England. Such service shall be deemed completed on delivery to such process agent (whether or not it is forwarded to and received by [name]). If for any reason such process agent ceases to be able to act as process agent or no longer has an address in England [name] irrevocably agrees to appoint a substitute process agent acceptable to the other party to this agreement and to deliver to such other party a copy of the new process agent’s acceptance of that appointment within 30 days. 2 [Party A] irrevocably consents to any process in any Proceedings anywhere being served in accordance with the provisions of this agreement relating to the service of notices. Such service shall become effective 30 days after despatch. Nothing contained in this agreement shall affect the right to serve process in any other manner permitted by law. 38

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Precedent 10—Alternative form of appointment of process agent (eg multi-currency loan agreement) Each of the Borrower and the Guarantor hereby irrevocably and unconditionally: 1 appoints [name] of [address] in England [and in the case of the courts of or in the State of New York [name] of [address]] to receive, for and on its behalf service of process in any Proceedings with respect to this agreement; 2 agrees to maintain in England and in the State of New York a duly appointed process agent notified to the Agent, for the purposes of Clause 1; 3 agrees that failure by any such process agent to give notice of such process to the Borrower or, as the case may be, the Guarantor, shall not impair the validity of such service or of any judgment based thereon; 4

consents to the service of process out of any of the said courts in any such Proceedings by the airmailing of copies, postage prepaid, to it at its address for the time being applying for the purposes of Clause [no]; and

5 agrees that nothing in this Clause shall affect the right to serve pro­ cess in any other manner permitted by law.

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Agreeing to enter and signing an agreement (execution and signature block clauses)

Purpose of the clauses The purpose of these clauses is for each party to state (formally) that they consent to the provisions of the agreement and to record the party’s signature signifying that fact. This section deals only with contracts and other documents that do not need signing as deeds. See Deeds for the legal requirements to execute a deed.

Note on legal terminology Traditional (or old) legal terminology is still used (particularly in more ‘traditional’ areas of law, such as property transactions). The traditional terminology for a clause where a party: • signifies its consent is called a testimonium clause (in this section it is called the ‘execution’ clause); and •

signs is called an attestation clause (it is called the ‘signature block’ in this section).

Execution clause The execution clause appears immediately before the signature block and formally states the parties’ consent to the terms of the agreement and sometimes that the signatures that follow are those of the parties. The execution clause (for contracts) is not a legal requirement or otherwise needed, but the usual practice is to include it in conventionally drafted agreements. The execution clause: ‘is not necessary for the validity of the agreement but is added merely to preserve the evidence of its due execution. For this reason it may be of importance and, except in instruments relating to registered land, it should never in practice be omitted…’: Encyclopaedia of Forms and Precedents, vol 12(2), para 18, 3103. 40

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Agreeing to enter and signing an agreement (execution and signature block clauses)

Signature block The signature block is the place in the agreement where the parties sign: •

to indicate their consent to the provisions of the agreement; and

•

to indicate that the agreement is coming into operation (immediately or at some later date).

Parties do not always sign the agreement themselves, and may appoint others to sign on their behalf, for example: • agents; •

directors or authorised officers for a company;

•

employees; or

•

the solicitors or other advisers of a party.

If this is the case then the signature block should contain wording that the person signing is signing on behalf of someone or somebody else. It is possible to sign agreements ‘under hand’ or as a deed. The legal requirements for deeds are discussed in Deeds.

Drafting issues •

Commencing the execution clause •

Traditional: • agreement (stating ‘As witness’ and then immediately following with the signature block); • deed (stating ‘In witness’ and then immediately following with the signature block);

•

Modern: Particularly in a commercial agreement: •

for an agreement: ‘Agreed by the parties through their authorised signatories’ and then immediately following with the signature block;

•

for a deed: ‘Executed as a deed’ and then immediately following with the signature block.

For some formal types of document executed as a deed (eg a power of attorney) or transactions involving the sale/purchasing or leasing of property, trusts, guarantees, etc), it is often best to use traditional language, to avoid any risk that a court (or other parties or any governmental or regulatory board) will misinterpret the document. The relatively relaxed attitude of the courts to the format and language of commercial contracts may not apply to other types of legal matter. 41

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•

The placement of the signature block. It is up to the parties which spot in the agreement they choose to sign. However, • the placing of the signature(s) otherwise than at the end of the document; and/or • having the signature block clause drafted in other than one of the conventional ways may not be acceptable to some parties.

•

Does an agreement need signing (at all)? Except in a few instances there is no legal requirement for the parties to a contract to sign it. But a real signature indicates (among other things) that the party signing is signifying their consent to the provisions of the agreement. Although a party need not sign a contract, it must be named (or otherwise identified) as a party to the contract to be able to enforce it or use it as a defence. Eg, a bank does not usually sign a guarantee that it receives. There are, however, exceptions to this principle. Eg:

•

•

a contract for the sale or other disposition of an interest in land needs to be in writing, but also has to be signed by or on behalf of each party (Law of Property (Miscellaneous Provisions) Act 1989, s 2);

•

an assignment or mortgage of a patent must be in writing and signed by or on behalf of the assignor or mortgager (Patents Act 1977, s 30(6)).

Witnessing a signature • A  contract (unless signed as a deed) does not need to have the signatures of the parties (or their authorised representatives) witnessed. However, signatures are sometimes witnessed: Eg, a bank taking a personal guarantee will require a solicitor to witness the signature of the guarantor together with a statement on the guarantee to indicate that the solicitor has explained its effect to the guarantor before the guarantor signed: Cornish v Midland Bank plc [1985] 3 All ER 513; •

signature blocks in some civil law countries are drafted in a way so that two persons sign for each party, and sometimes one person is said to be witnessing the signature of another party (rather than two people signing the agreement);

• in the United States, some commercial agreements have execution clauses, and then there is wording where the lawyer for that party is indicating (by the lawyer’s signature or initials) that the agreement is approved as to form. •

One person signing for more than one party. When a person signs in two or more capacities (eg as principal and as agent of another, or as an officer or authorised signatory of two parties (ie a party entering a contract and the party’s parent acting as a guarantor)) then the person:

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•

should sign for each party (ie if signing for two parties then the person should sign twice, and accordingly there should be two signature blocks, one for each party); or

• should sign once and the signature block should reflect that the signature covers more than one party. A  single signature is legally effective if it is stated to be in both capacities or there is evidence that the signatory intended it to be a double signature (Young v Schuler (1883) 11  QBD  651; Elpis Maritime Co Ltd v Marti Charter Co Inc [1992] 1 AC 21, [1991] 3 All ER 758, HL, in which Young v Schuler was distinguished). For the position concerning deeds, see Deeds. •

Adding the date to the execution clause. Some lawyers hold the view that an execution clause in modern format for contracts should not state the date. Rather the date should just be stated at the head of the agreement once all parties have signed. However, in the case of agreements signed on different dates, perhaps without the assistance of lawyers, it is suggested that it can be helpful to include a line to enter the date after the signatures.

Location in the agreement The traditional English practice is that the execution and signature block clauses are normally located after all the other provisions of the agreement (including the schedules or annexes). However, for some agreements, the execution and signature block clauses appear at the end of the agreement, but before the schedules. There is no particular legal significance to this, other than convention. A  further practice, particularly now that agreements are drafted and exchanged electronically, is that sometimes the page containing the execution and signature block clauses is signed without the rest of the agreement, ie the page containing these clauses is printed off by itself and signed by the appropriate/relevant person without having the rest of the agreement in front of that person, either because the provisions of the agreement are not finalised yet or it is not thought necessary to do so. In the latter case, if the provisions are finalised, the party signing might attach a scanned copy of the signed execution and signature block page to the rest of the agreement to create a complete agreement. There are dangers in such a practice where a party (who is not acting honestly, or is simply negligent) attaches a signature page to a different version of the agreement, or a different type of agreement altogether. A second issue is that for some types of document (such as deeds and in particular in regard to specific types of transactions), such a practice should never be used. See Deeds for more on this issue.

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Linkage and use By convention, the names of the parties that appear in the signature block should be their full names as they appear in the Parties clause, and not the ‘defined’ names. Eg, if the full name of a party is Jane Smith (UK) Drivers Limited, and the defined name is ‘Chauffeur’, the former name rather than the latter should appear. However, standard form agreements will often use the defined name of a party in the signature block.

Sample precedent material Precedent 1—Modern form of execution and signature clauses for agreements under hand AGREED by the Parties through their authorised signatories: For, and on behalf of [  ]

For, and on behalf of [  ]

signature

signature

print name

print name

job title

job title

date

date

Precedent 2—Traditional form of execution and signature clauses for agreements under hand AS WITNESS the hands of the parties on the day and year first before written SIGNED by [name of person signing on behalf of body corporate] [as director][duly authorised] for and on behalf of [name of body corporate]

(signature of person signing)

Precedent 3—Modern form of execution and signature clauses for an individual to execute a deed SIGNED [and DELIVERED upon signature] as a DEED by [name of individual]

Witnessed by:

signature

signature description address

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Precedent 4—Modern form of execution and signature clauses for a company to execute a deed EXECUTED as a Deed by the parties on the date first above written: SIGNED [and DELIVERED] as a Deed by [name of company] acting through [one director][two of its directors][a director and the company secretary] director’s signature

[director][company secretary]’s signature

If only director is signing then this signature block will need to be adapted to indicate that the director’s signature is witnessed (and remove the wording ‘[director][company secretary]’s signature’. Precedent 5—Traditional form of execution and signature clauses for an individual to execute a deed IN WITNESS of which [name of individual] has set his hand to this deed in the presence of the attesting witness [this day of [ ]] or [the day and year first above written] SIGNED [and DELIVERED] as a DEED by the above-named [name of individual] in the presence of:

(signature of executing party)

signature, name, address and description of attesting witness Precedent 6—Traditional form of execution and signature clauses for a company to execute a deed (but not using its company seal) IN WITNESS of which this deed has been duly executed by [name of company] pursuant to a resolution of its board of directors duly passed [and has delivered it upon dating it] [this [day] day of [month and year][the day and year first above written] Or IN WITNESS of which this deed has been duly executed by [name of company] [and has delivered it upon dating it][this [day] day of [month and year][the day and year first above written] SIGNED [and DELIVERED] as a DEED by [name of company] acting through two of its directors

(signature of directors)

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Or SIGNED [and DELIVERED] as a DEED by [name of company] acting through a director and the company secretary

(signature of director and the company secretary)

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Amendment or variation

Purpose of the clause The parties to an agreement are usually free to decide when and how they can change the agreement’s provisions. The purpose of an amendment clause is to determine: • whether, and the extent to which, one or more of the parties to an agreement can amend an agreement; and •

the procedure the party or parties must follow to vary the provisions of an agreement.

An agreement can contain provisions that, for example, can: • specifically permit one or more of the parties to vary some or all of the provisions of the agreement; or •

forbid any amendment without the consent of the parties.

In the latter case, the parties are free, subsequent to entering into the agreement, of course, to vary it as they wish, provided all parties give their consent. An amendment clause specifying whether the parties can or cannot vary the agreement provisions (and if possible in what circumstances it can occur, the procedure etc) is desirable to avoid arguments that the agreement has been varied by the conduct of the contracting parties. The intention of including such a provision in an agreement is to clearly state if and how the parties may vary the provisions of the agreements, sending a strong signal that the subsequent conduct of the parties (be it what they say or do) will not vary what they have agreed in writing. However, recent court cases have indicated that the subsequent conduct or an oral agreement is sufficient to vary or amend an agreement, even if the agreement contains wording such as that of the precedents set out below (eg  Globe Motors v TRW  Lucas Varity [2016]  EWCA  Civ 396; MWB  Business Exchange Centres v Rock Advertising [2016] EWCA Civ 553). Given the approach of the courts, a party may be less able to rely on such wording if another party asserts that some conduct or oral agreement has in fact led to a variation or amendment. A party may ask what is the value of including such a provision if it can be so easily overridden by a court. It will still be necessary for the party who argues that there is an amendment or variation to demonstrate that what has occurred qualifies as an intention to create legal relations and meets the other criteria for making a 47

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binding contract. However, the mere inclusion of such wording is not enough to prevent changes in the provisions subsequently, as a court will look at the objective intentions of the parties. Perhaps the true value of this wording is that it expresses the intention of the parties at the time they entered into their agreement, as well as their intention on how they expected the relationship to operate during the life of the agreement. The wording may also be used by the party who wishes to argue or defeat any claim by the other party that there has been an amendment or variation.

Drafting issues •

Are amendments or variations to an agreement permitted at all? For an agreement that is not of long duration and/or provides for the supply of a fixed quantity of (defined) goods or services then it is not likely that the parties will need to vary or amend the agreement (and Precedents 1, 2 or 3 should be used).

•

Who needs to agree to vary or amend the provisions of an agreement? •

both parties need to agree; or

•

one party can impose an amendment or variation on any part of the agreement; or

• one party can impose an amendment or variation in relation to specific clauses in the agreement or in relation to particular issues; eg, a party supplying goods or services over a long period under an agreement may wish to increase the prices at particular intervals without obtaining the agreement of the other party. • one party can impose an amendment or variation, subject to the other party having a limited period of time to object, otherwise the amendment or variation takes effect; or •

one party can impose an amendment or variation but it must not be such as to materially affect the provisions of the agreement or the outcome of the agreement; eg, an agreement to provide a manufactured product might have a provision allowing the manufacturing party to amend the specifications so long as the amendment does not change the functions of the finished product, its size, maintenance etc. The manufacturer may need to buy materials from a third party supplier and these may be subject to small variations. If the manufacturer makes an electronic product and has a third party supply the covers for the product, the third party may from time to time, in each batch of covers, make the colour very slightly different.

•

Which provisions of an agreement it is possible to amend or vary? Is it possible to amend or vary: •

all the provisions of an agreement?

•

only some provisions of the agreement?

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•

•

•

Who is authorised to make the amendment? •

no-one specifically is named; or

•

a named person, or particular level of responsibility (eg ‘manager’) is identified.

How can the parties make the amendments or variations? •

in writing;

•

requiring the signature of both parties.

Is a particular form or procedure to be used? Eg: • is a special form of document needed, such as by email, letter or agreement format? or •

do all amendments or variations need to be made by deed?

•

Is there wording addressing whether amendments made informally or by accident have any (legal) effect?

•

Will an amendment affect other parts of the contract that are not apparently directly affected by the amendment? Eg, the parties to a manufacturing agreement may agree to vary the date when the manufacturer is to manufacture goods, but fail to address other provisions such as the timing of payments or when the agreement is to terminate. If these are not also addressed, their fulfilment may no longer accord with the intentions of one or more of the parties.

•

What records should be kept of the amendments and variations? Eg: •

ideally whenever any amendment or variations are made, the parties should file them with the agreement;

• administratively, •

are there procedures in place so that amendments and variations are properly noted and kept with the un-amended agreement?

•

is there a log of amendments and variations made with dates?

• for more long-term or important agreements, should a party prepare/maintain a summary of the changes to, and their effect on, the agreement? Eg, an agreement may run for several years. Over that period the parties may need to make changes to the specification, amounts payable, timing etc, all of which have been documented by amending agreements. At the end of the term, anyone directly involved with the agreement or its subject matter may no longer be employed by the parties. In the event of a dispute or a decision to terminate, it may be difficult to determine the current position as to what was agreed etc if the amendments are not kept together or a summary of what has occurred is not prepared. 49

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•

If an existing agreement is changed by means of a separate document. If amending an agreement with another written document (such as a letter or amending agreement), does it contain provisions: • so that it states that it complies with the provisions of the original agreement? •

that clearly state which clauses (or part of a clause) are amended of the original agreement?

• that deal with the status of clauses which are not amended in the original agreement (usually that they remain in effect)? • •

that state the date from when the amended clauses take effect?

Will consideration be supplied for making the amendments? Sometimes there is doubt whether an amendment or variation (even where specifically permitted under an agreement) will be legally effective if there is an absence of consideration. Eg, only one party may be perceived as providing a benefit or suffering a detriment. Some parties make amendments by deed as a matter of policy, to avoid any doubts if there is a dispute about the enforceability of any amendments or variations.

•

Does the amended agreement affect a third party? If the agreement is varied or amended too substantially then the agreement may no longer be the ‘same’ agreement. If a third party is involved (eg someone guaranteeing the payments of a party under the agreement) then the person providing the guarantee may no longer be liable if the amendments are too great (see Triodos Bank NV v Dobbs [2005] EWCA Civ 630, [2005] All ER (D) 364 (May), see also Case analysis below).

•

Amending or varying a contract concerning the sale or other disposition of an interest in land. If a contract concerns the sale or other disposition of an interest in land then not only must the contract be in writing, but also the parties (either the parties themselves or someone on their behalf) have to sign the contract (Law of Property (Miscellaneous) Provisions Act 1989, s 2). The same is true also for any amendments or variations to that contract (McCausland v Duncan Lawrie Ltd [1996] 4 All ER 995).

Location in the agreement The Boilerplate section of an agreement is normally the location of an Amendment or variation clause.

Linkage and use This clause is not normally linked to or used by other clauses. However, if there is a specified form of amendment (such as a precedent letter or amending 50

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agreement) then this might be included in a schedule to the agreement. Where a particular type of clause can be amended by an Amendment or variation clause, that clause may need to be checked to ensure that there is nothing preventing amendment, for example, it may refer or be linked to other clauses, which in turn need amendment but are not covered by the Amendment or variation clause.

Sample precedent material Precedent 1—No amendment or variation No amendment or variation to this agreement shall take effect unless it is in writing, signed by authorised representatives of each of the Parties. Precedent 2—No amendment or variation This agreement may not be varied except by an instrument in writing signed by the authorised representatives of all of the parties to this agreement. Precedent 3—No amendment or variation This agreement may not be released, discharged, supplemented, interpreted, amended, varied or modified in any manner except by an instrument in writing signed by a duly authorised officer or representative of each of the parties to this agreement. Precedent 4—Limited, permitted, amendment To enable us to take account of actual or expected changes in market conditions, we may from time to time increase or reduce the interest rate after giving you 30 days’ previous written notice. We may give effect to any such increase or reduction by increasing or reducing the length of the estimated repayment or the size of your monthly payment or both. Precedent 5—No amendment or variation – alternative wording Neither us or you can change any of the terms and conditions of this ­contract except as indicated in the following sentence. If we or you wish to change any of the terms and conditions then both of us need to agree to the changes and we and you both must sign a document setting out the changes which are to be made to the contract. Precedent 6—Specifying which clauses are varied (For use in a separate agreement whose aim is to vary another agreement.) This Amending Agreement is supplemental to the Existing Agreement. Except as expressly amended by this Amending Agreement, the Existing Agreement shall remain in full force and effect. Terms defined in the Existing Agreement shall have the same meaning in this Amending Agreement, unless otherwise provided by this Amending Agreement. 51

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The Parties agree to make the following amendments to the Existing Agreement with effect from [date]: (a) in Clause 5, line 2, delete the words ‘within 30 days’ and insert ‘within 60 days’; (b) …

Case analysis Triodos Bank NV v Dobbs [2005] EWCA Civ 630, [2005] All ER (D) 364 (May) Facts 1 D entered into a guarantee on two loan agreements (original agreements) between a bank and a company. 2 The original agreement provided: ‘2.4 The Bank may at any time as it thinks fit and without reference to the Guarantor: 2.4.1 grant time for payment or grant any other indulgence or agree to any amendment, variation, waiver or release in respect of an obligation of the Company under the Loan agreement.’ 3 The bank and the company subsequently entered into three further loan agreements (increasing and extending the amount of loans), the first two each of which were stated to be replacements for the earlier agreements. 4 The bank eventually called in the loan and asked D to pay under the guarantee. 5 D argued that the guarantee only applied to the original agreement and not to the further loan agreements despite the fact that the guarantee was expressly referred to in the three latter loan agreements. Held 1 The court held that the third loan agreement was not an amendment or variation of the original loan agreement and was not in the scope of the original agreement: That the third loan agreement made was ‘so different from the original agreement [that it] cannot be an ‘amendment or variation’ of the initial contract.’ (para 14). The loan agreement ‘imposes new and different obligations …obligations which cannot be said to be by way of variation or amendment of any obligation under or pursuant to the [original] agreement. And there can 52

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be no doubt that the obligation of a guarantor in respect of the borrower’s obligations under the [third loan agreement] would be substantially more onerous than the obligations in respect of the [original agreement].’ (para 37) 2 The court’s decision is further amplified in the following part of the judgment: ‘9. As a matter of principle there is no reason why the right of the Bank under clause 2.4.1 to agree amendments or variations to the loan agreement without reference to the guarantor should be confined to amendments or variations which are expressly contemplated by the agreement; the clause must mean that anything rightly termed a variation or an amendment is a matter which can be agreed without reference to the guarantor. The question is then whether what is said to be an amendment or variation is correctly so called. To my mind an agreement which truly “replaces” the original loan agreement would not rightly be called an amendment or variation to the original agreement, since it will be a new agreement. This will be particularly true in the context of a guarantee which obliges the guarantor to pay sums falling due “under or pursuant to” a particular loan agreement. Once that loan agreement has been replaced by a second and different agreement, sums due under that new and different agreement cannot be sums due “under or pursuant to” an earlier agreement. For this purpose it does not matter whether the old agreement is discharged in the sense of the loan being fully repaid and a new agreement then made (in the technical sense of there being a novation) or whether there is a replacement agreement which is, for the future, treated as governing the parties’ relationships. The new governing agreement is not the agreement “under or pursuant to” which there falls due the money which the guarantor has guaranteed to pay.’

Although the case is limited to a loan guarantee, similar situations might arise in other types of commercial agreements, such as where a company is providing a parent company guarantee, for example.

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Announcements

Purpose of the clause Contracting parties sometimes wish to control how, and to what extent, information is released to the outside world about: •

their (existing) agreement;

•

the fact that they are negotiating;

•

the subject that they are negotiating;

•

the subject matter of the agreement;

•

the provisions of their agreement;

•

what is happening while the agreement is operative;

•

if a problem arises while the agreement is operative;

•

if an objective is not reached or cannot be reached;

•

even whether there is any form of relationship between the parties; or

•

the parties terminating the agreement.

Any one of these matters could be sensitive, whether financially, commercially or in ways that might affect their public image. For example: • two parties who are in the same market developing rival technologies (and often engaged in publicly-known litigation about alleged intellectual property infringement etc) may not wish it to be known that they are in fact collaborating on a new or existing technological method that will reduce their costs etc. It may suit their image (and also diffuse interest of competition authorities and other regulatory authorities) to indicate that they are locked in fierce competition; •

a company may have entered into a contract with another party, where the latter has a poor public image (eg has a poor environmental record, pays its employees badly, or uses overseas manufacturing facilities in a third world country that have been subject of media interest). The first company may not wish it to be known that it has entered into an agreement with the second; such a fact may damage the image the first company has built of itself or persuade some of its customers/clients to no longer trade with it.

Although a public announcement may not be required by law, it can be beneficial to the parties involved. Examples include the announcement of results of a joint venture, a merger, test results or launch of a new product. 54

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The timing and method of the announcement may need careful handling so as not to adversely impact on the parties’ respective businesses. Eg: • a merger between two companies might lead to job losses. An untimely announcement by one party, before the other party has consulted with employees, may cause problems, in terms of both employee relations and compliance with employment law requirements to consult with one’s employees before taking decisions on redundancies; or • the release of test results on a product (such as a drug going through clinical trials or a new technological product) that is not performing as expected. A  premature announcement by one party, before the other party has consulted with other licensees and regulatory authorities, may cause adverse press and media interest, regulatory investigation and investors (and potential investors) to try to disassociate themselves from one or more of the parties; •

premature release of information about a new product. An announcement of details about a new product too early may lead to problems about when to release or on releasing the product into the market. For example, it might lead competitors to launch rival products or copies (if the competitors can make the rival products quickly enough). Another consequence (given that much production of products is now done by contractors) is that competitors may ‘buy up’ the contractor’s production facilities and thus stop the party making the announcement either to get the product made in time or have to pay a much higher price than expected. Also, too early an announcement may lead to consumer demand that cannot be satisfied in a timely fashion (ie too long a lead-time before the product is actually available) and thus cause negative comment.

In such cases, the parties may wish to agree a strategy for (and agree the text of) public announcements during their negotiations. The final wording for each stage of the agreement (where appropriate) can be attached to the agreement as a schedule. The use of an Announcements clause can be particularly important for: • public companies, where the information could be price-sensitive (ie affect the share price), or the agreement has to be notified to the Stock Exchange under the Listing Rules; or •

companies subject to close regulatory scrutiny or control; or

•

companies whose activities are subject to close media scrutiny or criticism.

Drafting issues •

Are announcements allowed at all? Can press or other public announcements about the agreement, or any aspect of it, be made?

•

When should the parties make the press or other public announcements? At a time: •

as agreed by the parties; 55

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•

when a particular event, achievement or milestone is achieved (eg if the parties are developing a product, when the product is ready for sale).

•

Which party can make an announcement?

•

Is the consent of a party needed? If a party wishes to make an announcement, must it obtain the permission or consent of the other party?

•

Before a party or the parties make an announcement do they need to agree on its wording?

•

Does an announcement that a party or parties wish to make need agreement? Can similar wording be used on future occasions, or must the parties agree each disclosure?

•

Can employees etc make announcements? Is there a requirement that a party procures that its employees, agents do not make any announcements etc?

•

Is subsequent use of an announcement permitted? If an announcement or press release is made, can a party subsequently refer to, use or announce again the matters referred to in the initial announcement or press release without restriction?

•

Is an announcement required to be made? If it is a legal requirement to disclose the information, eg to the Stock Exchange, is there a risk that the parties might not be able to agree the terms of the disclosure? If so, should there be a let out clause to allow disclosures where required by law?

•

Extent of restriction on announcements. Where announcements or press releases are not permitted, what is the extent of the restriction? Is it: •

on any details concerning the provisions of the agreement?

•

that negotiations are taking place?

•

about the existence of the agreement?

•

concerning the subject matter of the agreement?

• identifying a party in any promotional, advertising or other such materials? •

Is the text of an announcement included with an agreement? Should the form and content of the announcement or press release be annexed as a schedule to the agreement? Eg, the parties may (during negotiations) agree the form of press release to be made when the agreement is signed. In such cases it can be convenient to attach the agreed form of press release to the agreement as a schedule or annex and to add to the clause concerning Announcements an additional sentence to deal with this (see Precedent 8).

Location in the agreement The Boilerplate section of an agreement will normally contain an Announcements clause. Sometimes an Announcements clause will also appear with confidentiality provisions. 56

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Linkage and use This clause is not normally linked to or used by other clauses. However, since this clause concerns the possible release of information (some of which may be confidential), it may have implications for clause(s) dealing with confidentiality. In some cases, it may be appropriate to make an Announcements clause subject to the obligations of confidentiality. If a party is a public authority for the purposes of the Freedom of Information Act 2000, then any restriction on making an announcement may not be effective. The duty of the public authority to release information following a request is likely to override any contractual wording (unless the requested information is subject to any permitted exceptions/exemptions under the Act).

Sample precedent material Precedent 1—Approval of announcements No public or press announcements shall be made with regard to the subject matter of this agreement unless the text of such announcement is first approved and initialled by all the parties. Precedent 2—Approval of announcements Neither Party shall make any press or other public announcement concerning any aspect of this agreement, or make any use of the name of the other Party in connection with or in consequence of this agreement, without the prior written consent of the other Party. Precedent 3—Approval of announcements No announcement of any kind shall be made in respect of the subject matter of this agreement except as specifically agreed between the parties or if an announcement is required by law [or The London Stock Exchange]. Any announcement by either party and so required by law [or The London Stock Exchange] shall in any event be issued only after prior consultation with the other. Precedent 4—Approval of announcements – sale agreement No announcement regarding the transactions contemplated by this agreement or any matter ancillary thereto and no disclosure of the terms of this agreement shall (save as required by law) be made by the Purchaser without the prior written approval of the Seller. Precedent 5—Approval of announcements – new company investment agreement No announcement concerning the terms of this agreement shall be made or caused to be made before or after Completion by any party other than 57

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as required by law or by The London Stock Exchange (in which case the parties shall consult with each other on the form of the announcement) without the prior written approval of the Investor. Precedent 6—Approval of announcements – sale of assets of business in receivership No announcement to the press, customers or suppliers which either the Company the Receivers or the Buyer may desire to make concerning this agreement or the subject matter thereof shall be made except at a time and in a form agreed by the other parties hereto. The terms of this agreement shall not be disclosed by the Buyer to any person without the prior consent of the Receivers, save as such disclosure may be compelled by law. Precedent 7—Longer form – approval of announcements – eg share transaction No party shall issue or make any public announcement or disclose any information regarding this agreement unless prior to such public announcement or disclosure it: 1 furnishes all the parties with a copy of such announcement or information, and 2 obtains the approval of such persons to its terms. Provided that no party shall be prohibited from issuing or making any such public announcement or disclosing such information if it is necessary to do so in order to comply with any applicable law or the regulations of a recognised stock exchange. Precedent 8—Agreed form of press release [Without prejudice to the generality of the foregoing, T][t]he Parties agree to the issue of a press release substantially in the form attached as Annex A upon and following signature of this agreement by both Parties. Precedent 9—No announcements – alternative form Neither you nor us will provide, make available or supply any information about our Agreement, whether directly or indirectly, to any third party by any manner (whether orally, in writing or by electronic means) for any purpose (‘Supplying’). Supplying will mean (but is not limited): •

stating that there exists an agreement between you and us;

•

providing, supplying or disclosing any details about the provisions of the Agreement; or

•

disclosing the name of any party in connection with the Agreement

If either you or us wishes to make any public or press announcement then the party wishing to do so will first supply to the other party the text of the announcement it wishes to make. The party wishing to make the an58

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nouncement will only be permitted to do so when it has obtained the prior written consent of the other party. Precedent 10—Agreed announcements – for development and release of software 1 The Parties agree to the issue of press releases or announcements on occurrence of the following events: (a)

the signature of this Agreement by all the Parties;

(b)

on release of each version of a Beta version of the Software;

(c)

on the Completion of the Software.

2 The form of the press releases or announcements shall be in the forms set out in Schedule [ ] to this Agreement and shall be made within the following time periods and by the following means: (a) for a press release or announcement under Clause 1(a), the press releases and announcements shall be made within one (1) working day of the last Party to sign the Agreement and by means of an announcement on the website of the Supplier, on the Twitter feed of the Supplier and by email to the publications and internet sites set out in Schedule 1, Section 1; (b)

for an announcement under Clause 1(b), an announcement shall be made as soon as a Beta version of the Software is available to download from [ ] to persons who have entered into a Beta Test Agreement; and

(c) for press releases and announcements under Cause 1(c), the press releases and announcements shall be made on the Release Date and by means of press releases and announcements on the websites of the Supplier and the Company, on the Twitter feeds of the Supplier and Company, and by the Supplier by email to the publications and internet sites set out in Schedule 1, Section 1.

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Appointment

Purpose of the clause An appointments clause is usually the main clause describing the main or key obligations or purpose of the agreement. For example: •

in a contract for the manufacture of goods, it will be the clause that states that the manufacturer will be making the goods and the purchaser is buying them;

•

in a contract for the provision of services it will be the clause stating that a party will be providing the services and that the other party will pay for them.

Most often, the use of the word ‘appointment’ or an appointment clause is seen where there is need for the services of an agent, or a professional such as a consultant. Although the focus of an Appointment Clause is usually to indicate the appointment of a person or organisation to carry out a service (as noted above), it is also used for other (partly) non-services orientated tasks, such as, for example: •

the appointment of a party to carry out the manufacturing of a product; or

•

the appointment of a party as a licensee.

The word is also used in articles of association and shareholders’ agreements, eg, where directors or shareholders have the right to appoint directors. Other appointments arise where a person is appointed to carry out some function, such as the appointment of a liquidator or trustee. A standard appointment clause in a contract for services might read as in Precedent 1. The use of the word ‘appointment’ is not required but is conventional within certain types of agreement. An agency agreement is simply a special form of services agreement where the conventional drafting practice is to use the word ‘appointment’. The essential element is that the agent (or other service provider) is agreeing to provide services and the client/customer/principal as the case may be is agreeing to their performance (in a more conventional services agreement with the words such as ‘in consideration of the Client paying the Price’ or similar wording) 60

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Drafting issues •

Is there wording clearly appointing one person is asking another to do something? Does the clause state that one party is asking another party to do something?

•

What is being done? Is the thing (service, task, grant of rights) that is to be provided under the agreement clearly stated and with sufficient precision (either in the clause, by the use of a definition or in a schedule)?

•

Is there consideration? Is consideration clearly given in return for the appointment? Eg, a price or a method for calculating how and when payment is to be made;

•

Is the appointment accepted? Should there be wording that the party being appointed is accepting the appointment, ie, are there other provisions in the agreement that clearly state what the appointed party is to do? If not add wording to state this (see Precedent 1).

•

How long is the appointment? Is the length of time clearly stated or referred to elsewhere in the agreement, either by use of a definition or a reference to another clause (which states clearly when the person appointed is to start performing their obligations and when the agreement is terminated)?

•

Do the definitions used agree? If this clause uses and refers to a number of definitions, are all the definitions defined and make sense in the context of the agreement and the transaction?

Location in the agreement This clause is usually the first clause in the Main Commercial Provisions of an agreement (usually immediately after the definition section).

Linkage and use This clause is usually linked to: •

a number of definitions (such as Services, Price, Term, Goods, Conditions);

• other operative clauses of the agreement, which often relate to the definitions stated in the previous bullet point.

Sample precedent material Precedent 1—Appointment by one party of another to provide services [Party A] hereby appoints [Party B] to [describe services to be provided] for the Term in return for the Payments, and [Party B] accepts the appointment. 61

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Precedent 2—Appointment of an agent [Party A] hereby appoints [Party B] as its sole agent in [define territory] for the sale of all goods manufactured or dealt with by [Party A], and the Agent accepts the appointment. Subject to earlier termination under Clause [no], the appointment shall be for an initial period of five years from the Commencement Date and thereafter will continue until the appointment shall be determined by six calendar months’ notice in writing. Precedent 3—Alternative form for the appointment of agent From the [date of this Agreement] (or) [Commencement Date] [Party A] appoints [Party B] as its exclusive agent for the marketing and sale of the Goods within the Territory for the Period. Precedent 4—Alternative form for the appointment of agent without using the word ‘appoint’ From the [date of this Agreement] (or) [Commencement Date] [Party B] shall be the exclusive agent of [Party A] for the marketing and sale of the Goods within the Territory for the Period. Precedent 5—Appointment of service provider From the [date of this Agreement] (or) [Commencement Date] [Party B] shall provide the Services to [Party A] in accordance with the Specification in consideration of the [Party A] paying the Fee to [Party B], subject to the provisions of this Agreement.

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Arbitration, alternative dispute resolution and the use of experts

Purpose of the clause Background The purpose of arbitration ‘is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense’ (Arbitration Act 1996, s 1(a)). The purpose of an arbitration clause in a contract is to enable the resolution of a dispute between some or all of the contracting parties with final and binding effect by an impartial third person or panel of persons, acting in a judicial manner. The arbitrator’s authority is derived from the agreement of the parties concerned. The drafting of an arbitration clause assumes that the parties wish to use an alternative method (arbitration) to resolve their dispute rather than use the courts. Whether the parties wish to do this instead of resorting to litigation is clearly a question that the parties will need to address first. Clients sometimes have a vague impression that arbitration is cheaper, quicker and more user-friendly than litigation in the courts. Even with the passing of the Arbitration Act 1996 arbitration is not necessarily a cheaper or quicker option than litigation. There are advantages of using arbitration: • the parties can choose their own person to deal with their dispute (an arbitrator who is experienced in the sector or the field in which the parties operate); • the parties, subject to the requirements of the 1996 Act, can decide on their own procedure and timescale (and consequently, if the parties cooperate, can make arbitration speedier than using the courts); •

the parties can keep their dispute and any result or award of the arbitration confidential.

Some disadvantages: •

the cost of hiring an arbitrator (often at a daily rate or a fixed fee, which is likely to be high for someone who is experienced or with sufficient authority). This is likely to be even more expensive if there is more than one arbitrator. For use of the English court system there is normally one 63

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court fee (with some additional fees for various stages in the litigation), regardless how long a case takes; •

the costs of ‘running’ the arbitration, which might include the hiring of arbitration rooms, travel and accommodation expenses for the arbitrator (and any other persons needed to help or work with the arbitrator, such as someone to record or make a note of the proceedings);

• the lack of enforceable time limits and procedures (compared with litigation where the court’s rules normally prescribe periods of times for doing things or make things possible, such as obtaining evidence). For example, it is more difficult to make a witness attend an arbitration (or to produce evidence to an arbitration) than where the parties are using litigation (see Tajik Aluminium Plant v Hydro Aluminium AS  [2005]  EWCA  Civ 1218, where the court would not compel a third party to produce evidence to an arbitration). The agreement of all the parties is necessary or the agreement of the arbitrator is needed before an application to a court is made (and only if the witness is in the United Kingdom and the arbitration is conducted in the UK); • it is not normally possible for a party to challenge the way an arbitrator is running the arbitration proceedings before the arbitrator has made an award (unlike in litigation, where it is possible to appeal against certain acts or decisions of a judge while a trial is in progress); • the delays involved in getting busy arbitrators to find free time in their diaries for hearing dates; and •

the likelihood of appeals being made to the court if a party does not like the decision of an arbitrator.

Use of an ‘expert’ rather than an arbitrator Arbitration is not the only alternative to court proceedings. It is possible to refer a matter to an ‘expert’, which some parties may prefer, particularly if a technical, rather than a legal, issue needs resolving. In recent years, mediation and other forms of non-binding alternative dispute resolution (ADR) have become popular. The precedents in this section include clauses referring disputes to experts and mediators as well as arbitrators. Parties sometimes agree to refer differences for determination to an independent expert chosen for their expertise in relation to the particular subject matter of the contract. Determination by an expert is not arbitration, and therefore the procedural rules of the Arbitration Act 1996 do not apply. The expert decides the question by using their own knowledge and expertise, whereas an arbitrator acts judicially. Expert determinations are often provided for in, for example, rent review clauses and other agreements involving assessment of monetary amounts, and specialised technology agreements. 64

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Confidentiality and enforceability issues A factor that has always favoured arbitration is confidentiality. If the dispute involves highly sensitive information, or the parties simply do not wish their dispute to be publicly known, arbitration will generally allow a more private resolution. Court proceedings are a matter of public record, although it is sometimes possible to keep particularly confidential details out of the public eye during litigation. In international arbitrations, an arbitration award may, in some countries, be easier to enforce than a foreign court judgment, depending on local laws in the country in which enforcement is sought and how those laws are implemented.

Provisions of the Arbitration Act 1996 that apply despite contents of an agreement If the parties choose to use arbitration then certain mandatory provisions of the Arbitration Act 1996 will apply notwithstanding any agreement to the contrary (Arbitration Act 1996, s 4(1)). These include: • ss  9–11 (power of a party to the arbitration to stay relevant legal proceedings); •

s 24 (removal of an arbitrator by the court on application by a party);

•

s 43 (powers of a court to secure attendance of witnesses); and

• ss  67, 68 (power of party to challenge an award on grounds of want of jurisdiction or serious irregularity). The full list of mandatory provisions is set out in Schedule 1 to the Arbitration Act 1996. The other provisions of the Act allow the parties to make their own arrangements by agreement, but provide rules that apply in the absence of such agreement (Arbitration Act 1996, s 4(2)).

Arbitral institutions In certain commercial fields, bodies have been set up to provide an arbitration framework with specialised rules of procedure, services and staff. Examples include the Chartered Institute of Arbitrators, the London Court of International Arbitration and the ICC International Court of Arbitration. Where parties agree to refer any dispute to such a body, the form of referral clause drawn up by that body should be used.

Contracts with an international element In international contracts, a further question arises as to whether the courts in each party’s ‘home territory’ will enforce the arbitration award. In some 65

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countries, an arbitration award may not be legally enforceable without a retrial of the action. Enforcement will be much easier in countries that are parties to the New York Convention; indeed enforcement of arbitration awards may be easier in some of these countries than enforcement of a foreign court order. Where a contract with a party based in a foreign country is contemplated, advice should be taken from local lawyers in that country as to how their courts would implement an arbitration award, and whether any particular form of words should be used in the arbitration clause.

Alternative dispute resolution (ADR) In recent years, the Centre for Effective Dispute Resolution (CEDR) and other bodies (such as the Chartered Institute of Arbitrators and the ADR Group) have been prominent in promoting methods of alternative dispute resolution such as mediation, informal opinions by a neutral third party, and structured negotiation. Such methods only work if the parties are all willing to use ADR in good faith. The subject matter of the dispute must also be amenable to such methods of resolution. For example, ADR may not be suitable for disputes that turn on matters of law. The courts are keenly encouraging the use of ADR. For example, the Civil Procedure Rules now provide that there is duty on the court through case management powers to encourage the use of ADR. Certain pre-trial protocols include provisions relating to the use of ADR. Court guides also have further steps to encourage the use of ADR, eg, see Appendix 7 of the Commercial Court Guide. In appropriate cases, where the parties ignore a recommendation to use ADR, the courts may make no order as to costs (see McMillan Williams (a firm) v Range [2004] EWCA Civ 294, [2004] All ER (D) 335 (Mar)). In Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576, the Court of Appeal set out guidance on the factors that a court should take into account when considering whether a party’s refusal to agree to ADR is unreasonable, and therefore dis-apply CPR 44.3(2) (that the costs in a case normally are paid by the unsuccessful party). The factors to be taken into account include: the nature of the dispute, the merits of the case, whether other settlement methods have been attempted, whether the costs of mediation would be disproportionately high, delay, and whether the mediation had a reasonable prospect of success.

Summary An agreement to submit to arbitration amounts to a voluntary surrender of a party’s right to pursue its remedy for breach of contract through the courts. Therefore the parties need to give careful consideration as to whether to include a clause to that effect in a contract. The party being advised must be made fully aware of its future obligation, in the event of a dispute arising, to submit to the arbitrator’s jurisdiction and accept the award, however much 66

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the party may feel aggrieved at that future time. This is particularly so where the right of appeal to the court on a question of law is excluded. For this reason, arbitration clauses are usually to be found in agreements in which the parties are more or less on an equal footing, and which confirm and formalise their desire to co-operate in a project or transaction. Typical examples might be: shareholders’ agreements, joint ventures, research and technical aid agreements, partnership deeds and certain contracts for services. In these types of transaction, the parties will often wish differences to be settled quickly and inexpensively, and with a minimum of animosity or publicity. An arbitration clause may not be appropriate where one of the parties has, by the very nature of the transaction, the upper hand, as in an agency or franchise agreement, or contract of employment, or financing and loan agreement. Of course, each case must be treated on its merits.

Drafting issues •

Is an arbitrator or an expert required? Where the issue is purely technical and raises no legal issues, it may be more appropriate to refer the dispute to an expert. Usually, the expert will have specialist knowledge of the matter on which his decision is sought. For example, a software development agreement may call for an expert who has a background in the development of software (or particular/specific technical knowledge of a particular coding application) to determine whether the software developer has properly coded an application. The parties will usually agree that the expert’s decision is to be final and binding on the parties. Failure to comply with the expert’s decision will then be a breach of contract, but the expert’s decision will not be enforceable without further court proceedings, unlike an arbitrator’s decision.

•

Use of an expert. Where the parties wish disputes to be settled by an expert, this must be made quite clear in order to avoid any subsequent confusion with arbitral proceedings: ‘… such person to act as expert and not as arbitrator.’

In the absence of instructions, the expert will have complete freedom as to the manner in which they proceed; the parties should therefore consider whether they wish to place any restriction or specification as to his appointment or his conduct of the investigation. They may also agree to be bound by the expert’s decision, as there is no statutory fetter on this, but it may be wise to stipulate that each party has a chance of at least being heard: ‘[the expert’s] decision shall be final and binding on all parties but before making a decision he shall give all parties a full opportunity of making such representation as they may reasonably require.’ 67

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Other terms may also be appropriate, eg stating that the expert’s costs are to be borne equally by the parties. •

How long should the arbitration agreement be? The contract drafter is faced with some difficult choices when drafting an arbitration clause. If the clause is to deal with every possible aspect it could become longer than the main commercial provisions of the agreement. Instead, parties tend to include a relatively short arbitration clause in the commercial contract, and rely on the legal framework provided by the Arbitration Act 1996. They may then choose to supplement these provisions with a more detailed arbitration agreement, if and when a dispute arises.

•

Should a single arbitrator be appointed or a panel of two or three? A three-person arbitration will be more expensive than using a single arbitrator and may be more time-consuming (particularly if the hearing extends over several days and the arbitrators’ diaries are full, in which case hearing dates may end up being several months apart). On the other hand, it may lead to a better decision, and be less likely to be affected by the personal views of an individual. A multi-person arbitration panel may include both persons skilled in the subject matter of the dispute and lawyers with an understanding of the underlying contract law.

•

How should the arbitrator be chosen? Should the parties agree between themselves who the arbitrator should be or, if they cannot agree after a certain period of time, should someone be designated to act as appointing authority at the request of either party to the agreement? In many general transactions the custom is to appoint the President of the Law Society or of the Chartered Institute of Arbitrators, but it may be more appropriate to designate an official of a body relevant to the subject matter of the agreement with a view to obtaining the appointment of a person with specialist knowledge of the subject area of the dispute. It should be first ascertained whether the association in question is willing to act. It should also be checked whether the appointing body has a panel of arbitrators that it will invariably recommend and, if so, what criteria are used for including people on that panel. It is understood that some organisations may have rather short lists of ‘self-selected’ individuals who are members of the organisation. Where a three-person arbitration panel is to be used, it is sometimes agreed that each party will select one of the arbitrators, and the two selected arbitrators will select the third arbitrator. Or (as a variation on this theme) there may be a two-person panel, with referral to an umpire chosen by the two arbitrators if they are unable to agree. In the majority of agreements, and where both parties are domiciled in the UK, the parties will agree to refer disputes to a sole arbitrator, leaving the choice of arbitrator to be agreed on by themselves, eg: ‘any dispute … shall be referred to the decision of a single arbitrator to be agreed upon between the parties.’

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In such a case provision has to be made in the event of disagreement as to the appointment of an arbitrator, eg: ‘or in default of agreement within 14 days to be appointed at the request of either party by the President for the time being of the Law Society of England and Wales.’

Where there are more than two parties to the agreement, as, say, in many partnership agreements, it is more practical to provide for a thirdparty appointment as soon as a dispute has arisen, since to obtain the agreement of all the parties on an appointment might well be difficult and time-consuming. However, in such a case the precise ‘trigger’ for the third party reference should be specified, ie by request of one/two parties. Eg: (dentists’ partnership agreement) ‘… shall be referred to an arbitrator to be nominated on the request of any partner by the Secretary for the time being of the British Dental Association.’

•

Multi-arbitrator agreements. Where there may be practical difficulties in agreeing on the appointment of a sole arbitrator, as where one or more parties are not resident in the United Kingdom, or in the more complex commercial agreements, it may be advisable to provide for the appointment of two or more arbitrators, presided over by an umpire. Usually the umpire is appointed by the arbitrators, and has no part in the proceedings unless the arbitrators fail to agree, in which case the umpire will enter the proceedings and make an award as if he were sole arbitrator. Even if express power to appoint an umpire is not given to the arbitrators, there is under the Arbitration Act 1996 deemed to be such a power unless a contrary intention is expressed, but it may be thought advisable to make the basic rules of procedure clear in the initial agreement. Eg: ‘Any dispute or difference between the parties in connection with this agreement shall be referred to two arbitrators, one appointed by each party.’

A longer form, for more complex situations, can be seen in Precedent 11. Alternatively, future disputes may be referred to a tribunal of three arbitrators, two to be appointed by the parties and the third to be appointed by those appointees. In such a case, the award of any two of the arbitrators is binding on the parties. Eg: ‘Any dispute or difference between the parties in connection with this agreement shall be referred to arbitration in [London] by a tribunal of three arbitrators. Each party shall appoint one arbitrator. The third arbitrator shall be appointed by the arbitrators so appointed or, failing agreement, by (appointing authority).’

However, it is advisable in ‘tribunal’ provisions to provide for failure of a party to appoint an arbitrator, and for failure of the three arbitrators to agree on an award. •

Does the arbitrator need particular expertise or a specific qualification? Should the arbitrator have some technical or specified expertise? 69

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•

What disputes or issues can be considered by an arbitrator? •

Does the reference to arbitration only cover a dispute? Or

•

Can it extend to a question or mere difference between the parties?

• Should the clause cover all or some of the terms or the rights and liabilities of the parties? A typical arbitration clause will apply on a very wide basis, eg to: ‘any difference between the parties concerning the interpretation or validity of this agreement or the rights and liabilities of any of the parties’ or: ‘any dispute, difference or question which may arise at any time hereafter between [party] and [party] as to the meaning of the terms of this agreement or the rights or liabilities of the parties’

or, more simply and more usually: ‘any dispute arising out of or in connection with this agreement.’

Note that the words ‘arising out of’ have a wider application than ‘under’, and they have been held to include a claim for quantum meruit and a claim under the Law Reform (Frustrated Contracts) Act 1943 (see Government of Gibraltar v Kenney [1956] 2 QB 410, [1956] 3 All ER 22; and Mustill and Boyd Commercial Arbitration (3rd Edn, 2012) pp 117–122). Where the agreement to go to arbitration is also to cover a dispute arising from the acts of a person who is not himself a party to the agreement, eg an agent or valuer, it may be advisable to confirm this, eg: ‘any dispute arising out of or in connection with this agreement including any dispute as to any decision, opinion, direction or valuation of [agent].’

Where, because of the particular subject matter of the agreement, liability may arise after its termination (eg a manufacturing or building contract), a party may wish to ensure that the agreed reference to arbitration covers such a situation by adding: ‘whether before or after the termination, abandonment or breach of the contract.’

•

Which procedural rules should be adopted (such as the International Chamber of Commerce Court of Arbitration or the London Court of International Arbitration)? By far the most common method of designating the arbitration procedure is to state that the appropriate statutory code shall apply. This is currently contained in the Arbitration Act 1996. Strictly speaking, it is unnecessary to apply the Act, as Part I (ss 1–84) of the Act (containing the rules for arbitral proceedings) applies in all cases where the ‘seat of the arbitration’ is in England and Wales (Arbitration Act 1996, s  2(1)). The ‘seat of the arbitration’ is the juridical seat of the arbitration designated by the parties to the agreement or by the arbitral institution or tribunal empowered to act; in the absence of such designation it is determined having regard to the parties’ agreement and ‘all the relevant circumstances’ (Arbitration Act 1996, s 3).

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Express provision in the arbitration clause applying the Arbitration Act 1996 will avoid any doubt over the matter, eg: ‘in accordance with and subject to the provisions of the Arbitration Act 1996.’

It is customary to add: ‘or any re-enactment or modification of such Act for the time being in force.’

It could be argued that these words are not strictly necessary by virtue of the Interpretation Act 1978, ss  17 and 23, but it may be felt safer to insert them. However, wording of this nature is redundant and should be omitted where (as is often the case) a general interpretation clause in the agreement provides for modifications to legislation. To avoid any doubt as to the place of arbitration, the parties may agree to be specific, eg: ‘The arbitration shall take place in [London].’

Although adopting the rules and procedures of an arbitration body should assist the smooth running of the arbitration and help to avoid prevarication by one or more of the parties to the arbitration, will the detailed procedures of the chosen arbitration body be appropriate to the type of dispute? Eg, the International Chamber of Commerce (ICC) is regarded as a major international ‘heavyweight’ in the arbitration field. It can bring political influence to bear, eg  in persuading a country to accept an arbitration award. However, it is also very expensive to use, and is not regarded as particularly flexible – to a certain extent you must follow the ICC way of doing things, even if the parties would prefer to do things a different way. It is probably not the best choice for a small- to medium-sized contract, eg a typical patent licence agreement. Instead, the rules of a body such as the London Court of International Arbitration (LCIA) may be preferable. Copies of the rules can usually be obtained from the body concerned. •

Language and law in international arbitrations. For international arbitrations, which language is the arbitration to be conducted in, and which country’s laws are to be applied (both substantive contract laws and procedural laws)?

•

Excluding the right of appeal to the court. Section 69(1) of the Arbitration Act 1996 provides that parties to arbitral proceedings may appeal to the court on a question of law arising out of an award ‘unless otherwise agreed by the parties’. Parties who wish to exclude this right of appeal and thus avoid the attendant delay and expense sometimes incorporate the following wording in the arbitration clause: ‘and the decision of the arbitrator shall be final and binding on all the parties.’ 71

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It is not safe to assume that the inclusion of such words will be held to amount to an exclusion agreement for the purposes of the Act. The agreement to exclude should be clearly stated; words such as the following are sometimes used: ‘The parties agree to exclude any right of application or appeal to the English courts concerning any question of law arising in the course of the arbitration.’

However, it is not possible to exclude the right of a party to apply to the court challenging an award on the ground of substantive jurisdiction (ie  under the Arbitration Act 1996, s  67) or on the ground of serious irregularity (ie under s 68), as these are mandatory provisions. Also, in some cases, where parties are not based in the UK or the arbitration takes place otherwise than in the UK, it may be open to a party to seek judicial remedies (such as injunctions). •

Post-termination issues. Where, because of the particular subject matter of the contract, liability may arise after the termination of the contract (eg in the case of a manufacturing or building contract), a party may wish to ensure that the agreed reference to arbitration covers such a situation.

Location in the agreement A short arbitration or use of experts clause will usually be located either: •

in a separate clause in the Boilerplate section of an agreement; or

•

together with the Law and jurisdiction clause in the Boilerplate section of an agreement.

Longer form arbitration or experts clauses are usually located in a separate schedule to the agreement, with a short clause in the main part of the agreement.

Linkage and use See above.

Consumer issues A clause which constitutes an arbitration agreement is unfair for the purposes of the regulations as to unfair terms in consumer contracts (ie the Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083 so far as it relates to a claim for a pecuniary remedy which does not exceed £5,000 (Arbitration Act 1996, s 91; Unfair Arbitration Agreements (Specified Amount) Order 1999, SI 1999/2167, Article 3). 72

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Sample precedent material Precedent 1—Sole arbitrator – Arbitration Act 1996 – short clause Any dispute under or arising out of this agreement shall be referred to a single arbitrator in accordance with the provisions of the Arbitration Act 1996. Precedent 2—Sole arbitrator – Arbitration Act 1996 – longer clause All disputes or differences which shall at any time arise between the parties concerning this agreement or its construction or effect or the rights, duties or liabilities of the parties under it or any other matter in any way connected with or arising out of the subject matter of this agreement shall be referred to a single arbitrator to be agreed upon by the parties or in default of agreement to be nominated by the President for the time being of the [Chartered Institute of Arbitrators] in accordance with the Arbitration Act 1996. Precedent 3—Sole arbitrator – Arbitration Act 1996 – full clause All disputes, differences or questions arising out of this agreement or as to the rights or obligations of the Parties under it or in connection with its construction shall be referred to arbitration by a single arbitrator to be agreed between the Parties or, failing agreement, within 14 days by an arbitrator to be appointed at the request of any party by [the President for the time being of The Law Society of England and Wales] having due regard to any representations made to him as to the appropriate qualifications of such arbitrator. The arbitration shall take place in [London] and shall be in accordance with the Arbitration Act 1996 or any re-enactment or modification of such Act for the time being in force. Precedent 4—Two arbitrators and umpire – Arbitration Act 1996 – short clause Any difference between the parties concerning the interpretation or validity of this agreement or the rights and liabilities of any of the parties shall in the first instance be referred to the arbitration of two persons (one to be nominated by each of the parties in dispute) or their mutually agreed umpire in accordance with the provisions of the Arbitration Act 1996. Precedent 5—Two arbitrators and umpire under agreed procedure Any dispute or difference between the parties in connection with this agreement shall be referred to two arbitrators. 1 The arbitration shall be held in [London]. 2 Each party shall appoint one arbitrator. The arbitrators so appointed shall forthwith appoint an umpire. The umpire shall attend all hearings, including preliminary meetings, but shall act only if the arbitrators appointed by the parties fail to agree. 73

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3 A party who has appointed an arbitrator shall be entitled to appoint that arbitrator to act as sole arbitrator in the reference if: (a) that party serves the other party with a notice to appoint one arbitrator, and (b) the other party fails to appoint an arbitrator within 7 clear days of service. 4 The procedure shall be agreed by the parties or, failing agreement, determined by the arbitrators or, if necessary, by the umpire. 5 If either party fails to comply with any procedural order made by the arbitrators or umpire, the arbitrators or umpire shall have power to proceed in the absence of that party and to deliver the award. Precedent 6—Reference to arbitral body – short clause In the event of any difference or dispute arising between the parties as to the construction of this agreement the difference or dispute shall be determined by an arbitrator appointed in accordance with the Rules of Arbitration of the London Chamber of Commerce. Precedent 7—Dispute resolution – reference through management levels – final determination by expert 1 Any dispute arising out of or in connection with this agreement will in the first instance be referred to the parties’ [Project Representatives] for discussion and resolution at or by the next progress meeting or at an earlier date if so requested by either party. If the dispute is not resolved at that meeting, the dispute will be referred to the second management level who must meet within [3] working days of the reference to attempt to resolve the dispute. [If the dispute is not resolved at that meeting, the escalation will continue with the same maximum time interval up to the third management level.] If the unresolved dispute is having a material effect on the Project, the parties will use their respective best endeavours to reduce the elapsed time in reaching a resolution of the dispute. 2 The levels of escalation are: Customer Contractor Second Level (specify) (specify) [Third Level (specify) (specify)] If any of the above is unable to attend a meeting, a substitute may attend, provided that such substitute has at least the same seniority and is authorised to settle the unresolved dispute. 74

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3 Each party will use all reasonable endeavours to reach a negotiated resolution through the above dispute resolution procedure. The specific format for such resolution will be left to the reasonable discretion of the relevant management level, but may include the preparation and submission of statements of fact or of position. 4 If the dispute is not resolved at the meeting of the [second or third] management level, then either party may (at such meeting or within [14] days of its conclusion) request that the dispute be referred to an expert to be agreed between the parties. 5 If the parties cannot agree on an expert to act within [14] days of the date of the request to appoint an expert, such independent expert will be appointed by [the President for the time being of the Chartered Institute of Arbitrators or the Centre for Dispute Resolution or the President for the time being of [name of body] on the application of either party. 6 Any person to whom a reference is made under Clause 4 or 5 will act as an expert and not as an arbitrator. The parties agree that the decision of the expert (which will be given in writing, stating reasons) will be final and binding on the parties. 7

Each party will provide the expert to whom a reference is made under this Clause [no] with such information as he may reasonably require for the purposes of his determination. If either party claims any such information to be confidential to it then, provided in the opinion of the expert that party has properly claimed the same as confidential, the expert will not disclose the same to the other party or to any third party.

8 The costs of the reference to an expert (including the costs of any technical expert appointed by him) will be borne in the first instance by the party making the reference. The expert will in his decision determine the liability for such costs, which decision will be final and binding on the parties. 9 Nothing in this Clause [no] will restrict, at any time while the above dispute resolution procedures are in progress or before or after they are invoked, either party’s freedom to commence legal proceedings to preserve any legal right or remedy or to protect any intellectual property or trade secret right. Precedent 8—Dispute resolution – reference to senior representatives assisted by neutral adviser/mediator 1 The parties will use their best efforts to negotiate in good faith and settle any dispute that may arise out of or relate to this agreement or any breach of it. If any such dispute cannot be settled amicably through ordinary negotiations by the [Project Representatives], the dispute shall be referred to the senior representatives nominated by the managing director of each party who will meet in good faith in 75

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order to try and resolve the dispute. If the dispute or difference is not resolved as a result of such meeting either party may (at such meeting or within 14 days of its conclusion) propose to the other in writing that structured negotiations be entered into with the assistance of a neutral adviser or mediator (‘Neutral Adviser’) before resorting to litigation. 2 If the parties are unable to agree on a Neutral Adviser or if the Neutral Adviser agreed upon is unable or unwilling to act, any party may, within [14] days from the date of the proposal to appoint a Neutral Adviser or within [14] days of notice to any party that he is unable or unwilling to act, apply to [the Centre for Dispute Resolution (‘CEDR’)] in London to appoint a Neutral Adviser. 3 The parties will within [14] days of the appointment of the Neutral Adviser meet with him in order to agree a programme for the exchange of any relevant information and the structure to be adopted for the negotiation to be held in London. If considered appropriate the parties may at any stage seek assistance from [CEDR] to provide guidance on a suitable procedure. 4

All negotiations connected with the dispute will be conducted in complete confidence, and the parties undertake not to divulge details of such negotiations except to their professional advisers who will also be subject to such confidentiality, and will be without prejudice to the rights of the parties in any future proceedings.

5 If the parties accept the Neutral Adviser’s recommendations or otherwise reach agreement on the resolution of the dispute, such agreement shall be reduced to writing and, once it is signed by their duly authorised representatives, shall be final and binding on the parties. 6 Failing agreement, any of the parties may invite the Neutral Adviser to provide a non-binding but informative opinion in writing as to the merits of the dispute and the rights and obligations of the parties. Such opinion will be provided on a without prejudice basis and will be private and confidential to the parties and may not be used in evidence in any proceedings commenced pursuant to the terms of this agreement without the prior written consent of all the parties. 7 If the parties fail to reach agreement in the structured negotiations within [30] days of the Neutral Adviser being appointed, such a failure shall be without prejudice to the right of any party subsequently to refer any dispute or difference to litigation but the parties agree that before resorting to litigation structured negotiations in accordance with this Clause [no] shall have taken place. 8 Nothing contained in this Clause [no] shall restrict either party’s freedom to commence legal proceedings to preserve any legal right or remedy or protect any proprietary or trade secret right. 76

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Precedent 9—Long form – dispute resolution by specialist expert or arbitrator 1 Definition For the purposes of Clauses 1 to 7: 1.1 ‘Dispute’ means a dispute, issue, difference, question or claim as between the Fund and the Developer relating to or arising out of this agreement. 1.2 ‘Party’ means a party to the Dispute. 1.3 ‘Specialist’ means a person qualified to act as an independent expert or an arbitrator in relation to the Dispute having experience in the profession in which he practises for the period of at least [10] years immediately preceding the date of referral. 2 Dispute Notice

Either Party may give to the other notice (‘Dispute Notice’) requiring a Dispute to be referred to a Specialist and: 2.1 proposing an appropriate Specialist; and 2.2 stating whether the Specialist is to act as an independent expert or an arbitrator.

3 Counter Notice

The Party served will be deemed to accept the proposals made in the Dispute Notice unless that Party within [10] Working Days of service of the Dispute Notice gives notice rejecting one or more of the proposals, or unless each Party serves a Dispute Notice on the other contemporaneously.

4 Type of Specialist

Unless the Parties agree or are deemed to agree the appropriate Specialist: 4.1 if the Parties do not agree which type of Specialist is appropriate to resolve the Dispute, either Party may refer that question to the President or next most senior available officer of [the Royal Institution of Chartered Surveyors] who will (with the right to take such further advice as he may require) determine that question and nominate or arrange to have nominated the appropriate Specialist; 4.2 if the Parties do agree the appropriate type of Specialist but do not agree the identity of the Specialist, he will be nominated on the application of either Party by the President or other most senior available officer of the organisation generally recognised as being responsible for the relevant type of Specialist; but if no such organisation exists then by the President or next most senior available officer of [the Royal Institution of Chartered Surveyors]. 77

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5 Expert or arbitrator

Unless the Dispute is of such a nature that it is not capable of being referred to an arbitrator or both Parties agree (or are deemed to agree) that a Specialist should act as an expert, the reference will be made to him as an arbitrator under the Arbitration Act 1996.

6 Experts Where a Specialist is to act as an independent expert: 6.1 each Party may within [10] Working Days of his appointment make written representations which will be made to him and copied to the other Party; 6.2 each Party will be given a further [5] Working Days to give him written comment on those representations; 6.3 the Specialist will be at liberty to call for such written evidence from the Parties and to seek such legal or other expert assistance as he may [reasonably] require; 6.4 the Specialist will not take oral representations from a Party without allowing to both Parties the opportunity to be present and to give evidence and to cross-examine each other; 6.5 the Specialist will have regard to all representations and evidence when making his decision which will be in writing [but he will not or and he will] be required to give reasons for his decision; 6.6 the Specialist will use all reasonable endeavours to publish his decision within [6] weeks of his appointment. 7 Costs

The liability for paying all costs of referring a Dispute to a Specialist under this Clause, including costs connected with the appointment of the Specialist [and or but not] the legal and other professional costs of any Party in relation to a Dispute, will be decided by the Specialist.

Precedent 10—Appointment of expert 1 Pursuant to Clause [no], Party A may serve notice on Party B (‘Referral Notice’) that it wishes to refer to an expert (the ‘Expert’) the questions set out in Clause [no]. 2 The Parties shall agree the identity of a single independent, impartial expert to determine such questions. In the absence of such agreement within 30 days of the Referral Notice, the questions shall be referred to an expert appointed by the President of the Law Society of England and Wales. 3 60 days after the giving of a Referral Notice, both Parties shall exchange simultaneously statements of case in no more than 10,000 78

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words, in total, and each side shall simultaneously send a copy of its statement of case to the Expert. 4 Each Party may, within 30 days of the date of exchange of statement of case pursuant to paragraph  3 above, serve a reply to the other side’s statement of case of not more than 10,000 words. A copy of any such reply shall be simultaneously sent to the Expert. 5

The Expert shall make his decision on the said questions on the basis of written statements and supporting documentation only and there shall be no oral hearing. The Expert shall issue his decision in writing within 30 days of the date of service of the last reply pursuant to paragraph 4 above or, in the absence of receipt of any replies, within 60 days of the date of exchange pursuant to paragraph 3 above.

6 The Expert’s decision shall be final and binding on the Parties. 7 The Expert’s charges shall be borne equally by the Parties. Precedent 11—Multi-arbitrator agreements Any dispute or difference between the Parties in connection with this agreement shall be referred to two arbitrators. 1 The arbitration shall be held in [London]. 2 Each Party shall appoint one arbitrator. The arbitrators so appointed shall forthwith appoint an umpire. The umpire shall attend all hearings, including preliminary meetings, but shall act only if the arbitrators appointed by the Parties fail to agree. 3 A Party who has appointed an arbitrator shall be entitled to appoint that arbitrator to act as sole arbitrator in the reference if: 3.1 that Party serves the other Party with a notice to appoint one arbitrator; and 3.2 the other Party fails to appoint an arbitrator within 7 clear days of service. 4 The procedure shall be agreed by the Parties or, failing agreement, determined by the arbitrators or, if necessary, by the umpire. 5 If either Party fails to comply with any procedural order made by the arbitrators or umpire, the arbitrators or umpire shall have power to proceed in the absence of that Party and to deliver the award. Precedent 12—Multi-arbitrator agreement – alternative form Any dispute or difference between the Parties in connection with this agreement shall be referred to arbitration in [London]. 1 The tribunal shall consist of three arbitrators and shall be constituted as follows: 1.1 the claimant shall nominate an arbitrator and may by written notice call on the other Party to nominate an arbitrator within 79

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30 days of the notice, failing which such arbitrator shall at the claimant’s request be appointed by [appointing authority]; 1.2 the third arbitrator [who shall serve as chairman of the tribunal] shall be appointed by the 2 arbitrators appointed under Clause [1.1] above or, failing agreement within 30 days of the appointment of the second arbitrator, on the nomination of [appointing authority] at the written request of either or both of the Parties; 1.3 if a vacancy arises because any arbitrator dies, resigns, refuses to act, or [in the opinion of his fellow arbitrators] becomes incapable of performing his functions, the vacancy shall be filled by the method by which that arbitrator was originally appointed. 2 The procedure shall be agreed by the Parties or, failing agreement, determined by the tribunal. 3

If either Party fails to comply with any procedural order of the tribunal, the tribunal shall have power to proceed in that Party’s absence and to deliver the award.

4 If necessary any award or procedural decision of the tribunal shall be made by a majority vote. If no majority vote is formed, the chairman shall make an award or procedural decision as if he were sole arbitrator.

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Purpose of the clause Introduction These words refer to the assignment of the rights and the transfer of the obligations of a party under a contract to another party. The term ‘assignment’ also has other meanings, which are not considered here (eg, the assignment of a patent means the transfer of legal title to the patent, distinguished from a licence under the patent).

The different elements There are three different elements: •

an assignment of rights;

•

a transfer of obligations; and

•

transfer of both rights and obligations.

The last of these three is known as ‘novation’.

Use of the word ‘assignment’ in an agreement It is not good practice to state in a contract that an agreement is being ‘assigned’, as the precise meaning may not be clear (see Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85 at 103, [1993] 3 All ER 417 at 427, HL). It is better to: •

use the word ‘assignment’ only in relation to a transfer of rights; and

•

use ‘transfer’ with regard to obligations.

If there is a reluctance to use both words then a compromise is to use a phrase such as ‘assignment of rights and obligations’, which at least has the merit of making it clear that both rights and obligations are involved.

Meaning of an assignment of rights Generally, a party may assign rights under a contract without the consent of the other contracting party (Caledonia North Sea Ltd v London Bridge Engineering Ltd [2000] Lloyd’s Rep IR  249). This general principle does not apply to contracts that: 81

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•

involve a personal relationship (eg agent or employee), or

•

include an express or implied term preventing assignment.

Meaning of a transfer of obligations Unless a contract states otherwise, a party cannot transfer an obligation under a contract without the consent of the other contracting party (Robson v Drummond (1831) 2 B & AD 303; Humble v Hunter (1848) 12 QB 310 at 317).

Meaning of a novation Where there is both an assignment of rights and a transfer of obligations (with the consent of the other party), there will be, in effect, a novation of the contract. Novations normally require the agreement of all three parties: the transferor, the transferee and the other contracting party (Rasbora Ltd v JCL Marine Ltd [1977] 1 Lloyd’s Rep 645; The Blankenstein [1985] 1 All ER 475; The Aktion [1987] 1 Lloyd’s Rep 283). There would seem to be nothing to prevent the parties to a contract agreeing, as a term of the contract, that rights and obligations of one party under a contract may in the future be transferred to a third party. It is possible to novate: •

only part of an agreement (see Telewest Communications plc v Customs and Excise Commissioners [2005]  EWCA  Civ 102, Seakom Ltd v Knowledgepool Group Ltd [2013] EWHC 4007 (Ch));

•

an agreement by acquiescence (ie agreement is or may be inferred from the conduct of a party) (see Telewest Communications plc v Customs and Excise Commissioners [2005] EWCA Civ 102), and that ‘the less the significance of the change to the customer, the more readily can acquiescence be inferred by conduct’ (from the judgment). This might mean that it is not necessary to enter into a formal agreement. It is possible to effect a novation by a supplier notifying a customer that it wishes to transfer its rights and obligations under the contract to a new supplier, and by the customer making payment to the new supplier.

Effect of a no-assignment clause The effect of a no-assignment clause (which forbids assignment of a contractual clause except with the prior consent of a party (which cannot be unreasonably withheld)) is that there can be no valid assignment: •

until the party provides its written consent; or

• a court has made a declaration that the party has unnecessarily refused to provide consent (see Hendry v Chartsearch Ltd (1998)  CLC  1382. See 82

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also Helstan Securities Ltd v Hertfordshire County Council [1978] 3 All ER 262 and Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85, [1993] 3 All ER 417 on the effectiveness of non-assignment clauses). The court in Hendry distinguished contractual assignments from lease assignments where if there was an assignment of a lease, such an assignment may still be valid despite prohibition and allow the lessor to sue the assignee on other covenants in the lease. If a contract contains a prohibition of assignment of contractual rights (or where there is no prohibition but the contract involves rendering personal services), but there is in fact such an assignment, the assignment will be ineffective at law. However it might be effective in equity as a declaration of trust between the assignor and the assignee (Don King Productions Inc v Warren [1998] 2 All ER 608; affirmed in Don King Productions Inc v Warren [1999] 2 All ER 218, CA; applied in Swift v Dairywise Farms Ltd [2003] 1 All ER 320), and it is clear that the parties had the intention to create a trust because to do so was the sole method of transferring the benefit of a contract (Co-operative Group Ltd v Birse Developments [2014]  EWHC  530 (TCC)). The effectiveness and extent of an assignment in equity is beyond the scope of this book, and is not without controversy.

Drafting issues •

Assignment: permitted/prohibited? Is the assignment of rights or the transfer of obligations permitted or prohibited? •

a common provision in many agreements is a general prohibition on any assignment or transfer except with the consent of the other party (see Precedent 1): eg, where the agreement is of a personal nature and it is intended that neither party should assign their rights or obligations, except with the consent of the other party, a clause prohibiting assignment may be inserted (eg see Don King Productions Inc v Warren [1998] 2 All ER 608, [1999] 2 All ER 218 or comments of Lord Browne-Wilkinson in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 at 105, [1993] 3 All ER 417 at 429, HL).

•

•

Who can assign/transfer? If permitted, can: •

Both parties assign or transfer? or

•

Can only one party assign or transfer?

What can be assigned/transferred? If permitted: •

Are assignments of rights only permitted? or

•

Can there be both an assignment of rights and transfer of obligations?

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•

Can a party or the parties transfer some or all obligations and/or assign some or all rights? Eg, an assignment of rights and transfer of obligations is often permitted where a corporate re-organisation is taking place (sale of part or all of the business of the assignor) and is usually subject to the condition that the assignee complies with the provisions of the agreement (see Case analysis below).

•

Can only some of the rights and/or obligations be assigned/transferred? Eg: •

the business relating to a party, or all or some assets;

•

the business or assets to which the agreement relates;

• the business or assets within a particular area/technical or business field. •

Is consent required? Is the consent of the other party required to assign rights and/or transfer obligations (see Precedent 1);

•

Who needs to provide consent? Is the consent of only one of the contracting parties required? Eg, where the agreement is more ‘personal’ to one of the parties, but less so to the other, eg a contract for services or an agency or franchise agreement, it is common to provide for assignment by one party only, and to prohibit any type of assignment by the other (see Precedent 2).

•

What type of consent needs to be provided? If one party is permitted to assign its rights or transfer his obligations, what type of consent is required by the other party? •

the other party has no right to refuse consent: the party proposing the assignment has the right to assign its rights or transfer its obligations, but is required to ask for the consent of the other party;

•

the other party has an absolute right to refuse to provide consent: for any assignment of rights or transfer of obligations to take place, the other party must give specific consent;

•

the other party can only refuse consent if ‘reasonable’ to do so. There is a special rule in property leases that if something may not be done ‘without the landlord’s consent’, it may be implied that such consent may not be unreasonably withheld. However, no such term is normally implied into a commercial contract. If the contract states something may be done by one party only with the other party’s consent, and if it is desired that such consent may not be unreasonably withheld, wording such as in Precedent 3 may be added. The agreement might then also provide: ‘This agreement and all rights under it may be assigned or transferred by [Party A]’. The potential effect of this provision should be realised by party B, perhaps

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a franchisee or licensee. Party B may have entered into the agreement based on the particular reputation and financial standing of Party A, and may find its rights devalued in the event of an assignment by Party A to an unknown buyer. •

•

•

the other party can only refuse to give consent, if the refusal is given within a specific period of time (eg, within 30 days of receiving a notice from the party proposing assignment);

When must consent be provided? Where a party needs to provide consent: •

Must that party give it within a definite time period? or

•

Must that party not unreasonably delay or withhold it?

Are there any conditions if an assignment is permitted? If assignment of the parties’ interests is permitted under an agreement: •

Should there be mechanisms in place to control such assignment?

•

Does a party need to provide its consent? If there is no control (such as not requiring the consent of the other party) then a party may find they face a considerable loss of control over the performance of the contract.

•

What types of control should be in place?

•

•

that the consent of the other party is required (see above); and/ or

•

the proposed assignee is required to undertake/covenant to the party not assigning that the assignee will perform the obligations of the assignor (see Precedent 5).

What can be assigned (see under ‘Extent of the assignment’)?

•

Sub-contracting: although it is only possible to transfer a party’s obligations with the consent of another party, they can usually be delegated or subcontracted, as long as the contracting party remains responsible for those obligations to the other contracting party (see also Sub-contracting). It may be necessary to take a decision on whether one party wishes to allow sub-contracting and on what terms.

•

Does the assignor continue to be liable after assignment? The traditional position with commercial leases was that, following an assignment, both the assignor and the assignee were liable under the lease, ie not just the assignee. In ordinary commercial contracts, this has never been the rule, but parties may wish to consider including a provision to this effect in the assignment clause.

•

Is partial assignment permitted? Some companies take the view that they wish to deal with just one contracting party, ie  the assignment clause should not allow partial assignments, which might result in a party owing some obligations to one company, and some to another, whilst receiving payments from a third. Hence the wording in Precedent 2, which refers 85

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to allowing transfer of ‘all the party’s rights and obligations’ and prohibits other transfers or assignments. Alternatively, a party may wish to allow more limited assignments, in which case the wording will need to be adapted. •

Is assignment allowed between companies in a group or to an affiliate? Assignment clauses sometimes specifically allow assignment to a member of the group of companies of which the assignor is a part or to an affiliate. In some cases, it may be appropriate to state that if the assignee or affiliate leaves the group, the agreement will be assigned back to the original assignor contracting party. A related topic is wording that states that a reference to a party includes that party’s successors and assigns (see Successors and assigns).

•

Will any assignment or transfer affect any third party contracts? If a party wishes to assign a particular business activity it may have an effect on the third party contracts it has entered into. For example, a software developer develops specialist business accounting software. It enters into a contract to develop software for a customer. While it is doing so, it decides it no longer wishes to be in the business of developing business accounting software and obtains the consent of the customer to assign its rights and transfer its obligations to another software developer. In order for the new software developer to develop the business accounting software it may need licences to utilities which the original developer licensed from third parties. The software developer may not be able to assign those third party licences to the new software developer, and if this issue is not dealt with before assignment, the new software developer may not be able to obtain licences to the third party software necessary to continue developing the accounting software for the customer whether at all or at a price it can afford. If the customer’s consent to the assignment is necessary then these matters will need checking before permitting the assignment. If issues such as the above examples are flagged then the customer and the software developer may need to enter into a further agreement which addresses the issues directly and specifically. For example, rather than the software developer being permitted to assign its rights and transfer its obligations, it is permitted to sub-contract the work to the new software developer with regard to the contract between the customer and the software developer.

Location in the agreement This clause is usually located in the Boilerplate section of an agreement.

Linkage and use This clause will stand alone, although in some cases its impact can reach quite far where one of the parties is contemplating assigning its rights or transferring its obligations, particularly: 86

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•

whether sub-contracting is permitted (see above and Sub-contracting);

•

whether reference to a party in an assignment clause includes its successors and assigns (see above and Successors and assigns);

• where specific assignment is permitted to an affiliate, the definition of affiliate may be crucial as to its extent, etc (see above and Affiliates); •

the position of any third party: • whether it can enforce a term under an agreement where rights and obligations have been assigned. Generally, the position is that a benefit provided to a third party cannot be enforced by that third party against the contracting party (because of privity of contract) (Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, HL); • whether the assignee (like the original parties to the contract) can enforce an obligation which was imposed on a third party in the original agreement. The general position is that the parties to a contract cannot enforce against a third party an obligation imposed on that third party (Port Line Ltd v Ben Lin Steamers Ltd [1958] 2 QB 146); These issues also involve consideration of the rights of third parties under the Contracts (Rights of Third Parties) Act 1999 and the use of novation agreements.

An issue related to assignment is whether to include a clause allowing a party to terminate the agreement if there is a change of control of the other party— see further the definitions of control in the section on Affiliates.

Sample precedent material Precedent 1—Prohibition on assignment Neither party may assign, delegate, sub-contract, mortgage, charge or otherwise transfer any or all of its rights and obligations under this agreement without the prior written agreement of the other party. Precedent 2—Limited assignment allowed Subject to the following sentence, neither Party may assign, delegate, sub-contract, mortgage, charge or otherwise transfer any or all of its rights and obligations under this agreement without the prior written agreement of the other party. A Party may, however, assign and transfer all its rights and obligations under this agreement to any person to which it transfers all of its business, provided that the assignee undertakes in writing to the other party to be bound by the obligations of the assignor under this agreement. Precedent 3—Prohibition of assignment without consent – all parties The rights and obligations under this agreement are personal to the parties and shall not be assigned or transferred by either of them except with the previous written consent of the other. 87

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Precedent 4—Prohibition of assignment without consent [Party B] agrees with [Party A] not to assign, charge or otherwise deal with this agreement in any way without the consent of Party A. Precedent 5—Consent not to be unreasonably withheld In the case of an intended assignment by [Party B] such consent shall not be unreasonably withheld in the following circumstances [set out circumstances, eg:] and provided that the proposed assignee shall agree directly with [Party A] to be bound by the terms of this agreement. Precedent 6—Prohibition of assignment without the ‘agreement’ of the other party Neither Party may assign, delegate, sub-contract, mortgage, charge or otherwise transfer any or all of its rights and obligations under this agreement without the prior written agreement of the other Party. Precedent 7—Prohibition on assignment, assignment subject to permission of other party and that assignee required to covenant Neither of the Parties to this agreement shall be entitled to assign this agreement or any of its rights and obligations under it except with the approval in writing of the other party and on terms that the assignee shall covenant with that other party to perform all the obligations of the assignor under this agreement. Precedent 8—Short form – no assignment without consent This agreement is personal to the parties and may not be assigned at law or in equity without the prior written consent of the other party. Precedent 9—One party free to assign – limited power for other party 1 [Party B] undertakes throughout the term not to assign, charge or otherwise deal with this agreement in any way without the consent of [Party A]. In the case of an intended assignment by [Party B] such consent shall not be unreasonably withheld in the following circumstances [set out particular circumstances eg: The proposed assignee shall agree directly with [Party A] to be bound by the terms of this agreement]. 2 [Party A] may assign, charge, transfer or otherwise deal in any or all of its rights and obligations under this agreement and [Party B] consents to all such dealings. Precedent 10—Limited power to assign – both parties This agreement shall be binding upon the Parties to this agreement and their respective successors and permitted assignees Provided that neither of the parties to this agreement shall be entitled to assign this agreement or any of its rights and obligations under this agreement except by a transfer [of that party’s shares in the Company which is permitted under the express terms of this agreement and/or which is made in accordance 88

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with the articles of association or which is otherwise] approved in writing by the other party to this agreement and [(in either case)] on terms that the transferee shall covenant with that other party to perform all the obligations of the transferor under this agreement. Precedent 11—Short form – assignees bound by agreement This agreement shall bind and endure to the benefit of the parties and their respective permitted assignees, personal representatives and successors in title. Precedent 12—Power to assign on transfer of business Either party may assign all its rights and obligations under this agreement to any company to which it transfers all or part of its assets or business [in the field of [specify]] provided that the assignee undertakes to the other party to be bound by and perform the obligations of the assignor under this agreement. Precedent 13—Prohibition on sub-contracting and consequences where permitted 1 [Party A] shall not be permitted to sub-contract any of its obligations under this agreement (or any part of the agreement) unless [Party A] has received the prior written consent of [Party B] (which shall not be unreasonably withheld or delayed). 2

Where [Party A] is permitted to sub-contract [as provided for in Clause 1 above] [Party A] shall be liable and continue to be liable for all and any acts or omissions of any sub-contractor. Accordingly, the meaning of ‘[Party A]’ shall also include a reference to a sub-contractor. Although a sub-contractor is used or permitted, [Party A] shall be and continue to be liable for its obligations under this agreement.

3 A sub-contractor shall have no rights under this agreement (or in law) [to enforce any right or obligation). Precedent 14—Minimum set of clauses for a novation agreement 1 X hereby novates and transfers to Y all of its rights and obligations under the Contracts. References to X in the Contracts shall be read as references to Y. 2 Y  undertakes to perform [any remaining] X’s obligations under the Contracts and to be bound by the terms of the Contracts in every way as if Y were a party to the Contracts in place of X. 3 Z  hereby consents to the said novation and transfer, releases and discharges X from all claims and demands whatever in respect of the Contracts, and accepts the liability of Y under the Contracts in place of the liability of X. Z agrees to be bound by the terms of the Contracts in every way as if Y were named in the Contracts as a party in place of X. 89

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4 Except as provided in Clause [no], this agreement does not create any right enforceable by any person who is not a party to it (‘Third Party’) under the Contracts (Rights of Third Parties) Act 1999, but this Clause does not affect any right or remedy of a Third Party which exists or is available apart from that Act.

Case analysis British Gas Trading Ltd v Eastern Electricity (1996) Times, 29 November (And see also the Court of Appeal’s judgment (18 December 1996, unreported, Transcript QBCMF 96/1647B), in which Leggatt LJ’s judgment provides a useful analysis of the law in this area.) In this case, a contract stated that assignment of the benefit and burden of the contract required the consent of the other contracting party, and that consent would not be unreasonably withheld. The claimant sought consent for an assignment it wished to make to a new, separately listed company, as part of a planned de-merger of its supply and transportation businesses. Consent was refused and the refusal was challenged in this case. It was held not to be reasonable to refuse consent on the grounds that: • the assignor was planning a corporate re-organisation that would have resulted in a change of control, and •

that change of control would have entitled the other contracting party to terminate the contract.

To avoid any risk that a consent obligation would carry with it an implied term that consent should not be unreasonably withheld, the clause should make clear that consent may be withheld at the discretion of the party whose consent is sought. Alternatively, if this is commercially unattractive, a party might consider using the words ‘without Party A’s agreement’, as it might be easier to argue that the word ‘agreement’ does not carry with it an implied duty not to act unreasonably. Oxford Gene Technology v Affymetrix Inc [2001] IP & T 93, CA, overturning the High Court decision [2000] IP & T 1006 In this case, the following clause came under consideration: ‘Subject to the following sentence, neither party may assign, delegate, subcontract, mortgage, charge or otherwise transfer any or all of its rights and obligations under this agreement without the prior written agreement of the other party. A party may, however, assign and transfer all its rights and obligations under this agreement to any person to which it transfers all of its business, provided that the assignee undertakes in writing to the other party to be bound by the obligations of the assignor under this agreement.’ 90

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The word ‘business’ was given a wide interpretation, and it was held that transference only of some patent licences, patents, notebooks and a few items of equipment could amount to a business. Sometimes clauses of this kind refer to ‘all or part of its business’ or ‘all of its business’. The dangers in such wording, in the light of the Oxford Gene Technology case, should be noted, because what might be considered the ‘business’ can have little to do with the common-sense meaning of the wording or may not cover all of the business being transferred. In drafting terms, if the word ‘business’ does not refer to all of the business of one of the parties, then what might be transferred should be considered and then separately defined in an agreement, rather than being construed by a court as happened in this case. The case is worth examining in some detail as it provides an example where the wording of a fairly standard boilerplate clause was interpreted in a way that is not straightforward. It is also notable for a number of other reasons: 1 the court carried out a detailed analysis of several clauses in a commercial agreement, interpreting the clause in light of the wording of other clauses; 2 the wording of several clauses was closely considered; and 3 the meaning of what is considered to be a ‘business’ was examined. The claimant was the owner of certain patents, and it granted a licence under them to the third defendant to develop and exploit them (including making products, and manufacturing and selling them). The assignment clause provided: ‘LICENSEE’S  [the third defendant, Beckman Coulter Inc] rights under this agreement and the licences herein granted shall pass to any person, firm or corporation succeeding to its business in products licensed hereunder as a result of sale, consolidation, re-organisation or otherwise, provided, such person, firm or corporation shall without delay, undertake directly with LICENSOR [the claimant, Oxford Gene Technology Ltd] to comply with the provisions of this agreement and to become in all respects bound thereby in the place and stead of LICENSEE.’

To simplify somewhat the facts of this long-running and complicated case, the third defendant purported to sell the business in products including the licence to the first and second defendants, Affymetrix Inc and Affymetrix Ltd. It was the wording of the phrase ‘business in products’ which came under particular scrutiny by the Court of Appeal. The third defendant undertook some development work, which included obtaining some further patents, but had in no way, it appears, created any products based on the patents licensed by the claimant or the new patents. What was sold by the third defendant to the first and second defendants included the benefit of the licence and some laboratory equipment, notebooks, and computer software. In the High Court it was held that the activities undertaken by the third defendant under the licence from 91

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the claimant could not be described as a ‘business’, as Jacob J stated (Oxford Gene Technology v Affymetrix Inc above, at paras 53, 54): ‘I think that the true meaning of “business” in clause 16.2 is simply that conveyed by the normal meaning of the words. No one would normally describe a few patents and some incomplete research work, even if the latter were modestly ongoing, as a “business”. Still less would they describe the mere transfer of the rights to such, without any associated transfer of any actual activity, as a “business”. Moreover where does the submission stop? Suppose that the [third defendant] had done even less research than they had – a few test tubes and the odd notebook – would that amount to a “business” too?’

Could they have assigned them after only a few months of research? The incomplete research is no more a ‘business’ than a half-built factory and probably less. ‘… the business begins broadly when the sales start. I do not think, however, that the line is that sharp. If a factory existed, and samples were on trial, that might have been enough to constitute a business in embryonic form. To some extent the question is one of degree. What I am clear about however, is that whatever was passed, or supposed to be passed, to the [first and second defendant] did not amount to the transfer of a business.’

This judgment was overturned by the Court of Appeal. In addition to analysing the contract, a business was held not to start at the point active commercialisation had started or where products were ready or nearly ready to be sold, and reliance was placed on a dictum quoted by the first and second defendants, ‘… anything which occupies the time and attention and labour of man for the purpose of profit is a business. It is a word of extensive use and indefinite signification’ (Smith v Anderson (1880) 15 Ch D 247 at 258, per Jessel MR).

The Court of Appeal rejected the submissions put forward by the claimant that the meaning of the phrase ‘business in products’ meant that the third defendant had products that were available for sale, and had moved on from mere research and development. The Court of Appeal interpreted the assignment clause by examining one of the recitals to the licence agreement: ‘[the third defendant] is in the business of designing, developing, manufacturing and selling bioanalytical instrument systems and it is interested in acquiring rights in and to the Licensed Patent Rights and related Technical Information’ (the “Second Recital”).’

As held by the Court of Appeal, the phrase ‘business in products’ was used, not to restrict assignment of the licence granted by the claimant to the third defendant to a third party as provided by the assignment clause, but ‘to distinguish those assets and activities of [the third defendant] from other assets and activities of [the third defendant]’ (Oxford Gene Technology v Affymetrix Inc above, at para 37). The Court of Appeal stated that the phrase ‘business in products licensed hereunder’ found in the assignment clause needed to be construed in the context of the whole agreement, and the court recited that the claimant’s aim was to have its patents licensed and that the claimant and the 92

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third defendant both realised that a substantial amount of research and development would need to be done to commercialise the licensed patents. Having a restriction that limited transfer of the business (including the licence granted by the claimant to the third defendant) of the third defendant where the third defendant had developed products was not something that would have been in the contemplation of either party. Furthermore, the court held that there was no: ‘limitation as to the type of business in products that are licensed. The products licensed are those referred to in Clause 5.1 (set out below) which grants the licence. They are all products covered by a claim asserted in good faith in the Licensed Patent Rights. Thus the licence covers the manufacture, use, sale and offer for sale of products. There is no requirement that such activity has to have reached the stage of commercialisation. That is made by Clause 6. Clause 6 requires an upfront advance and also provides for royalties after commercialisation. Thus the licence covers the period both before commercialisation and thereafter so that the words “products licensed hereunder” in [the assignment clause] include products made other than for commercial use. [The assignment clause] appears to provide for transfer of the licence upon a succession of the business of [the third defendant] even before commercialisation. That conclusion is, I  believe supported by the recitals. [The Second Recital] records that the [third defendant] is in the business of “designing, developing and manufacturing and selling …”. Thus the parties accepted that there can be a business in designing and developing.’ (Oxford Gene Technology v Affymetrix Inc above, at para 44).

Clause 5.1 reads: ‘[The claimant] hereby grants to [the third defendant], for the life of this agreement, a non-exclusive right and licence to practise all methods, and to make, have made, use and sell all products, covered by a claim asserted in good faith in the Licensed Patent Rights, throughout all countries of the world to the full end of the respective terms of any such patents included in the Licensed Patent Rights.’

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Purpose of the clause

Introduction If a party under a contract is liable to make payments to another party, and those payments need calculating by reference to some variable factor, then often the contract will include provisions to allow the receiving party to have the right to audit the records kept by the paying party. The variable factors may include such things as the number of sales made, number of products sold or the work carried out by the paying party. Such clauses are common, for example: •

in intellectual property licence agreements, such as a patent licence where a royalty is payable, which is dependent on the number of sales of licensed products or the price received on these sales by the licensee;

• in agency and distribution agreements where the agent or distributor is responsible for selling the products of the principal, and where the commission or other payments of the agent or distributor is dependent on the amount of sales of the products. Typically, such a clause will refer to: 1

an obligation on a party (such as a licensee or agent) to keep accounting and other records. In more sophisticated agreements such an obligation might go on to state the type of information the party will need to keep and the format in which it must keep it;

2 the right of the other party to inspect those records or to have a third party to inspect the records (such as an independent accountant); and 3 an obligation on the party required to keep the records for a particular length of time (and the period may extend beyond the termination of the parties’ agreement) as well as an obligation to send periodic reports to the other party.

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Other uses of ‘inspect’ and ‘records’ In other types of agreements a party may also be under a requirement to keep records of its activities in carrying out its obligations under an agreement. Eg: •

a party who is designing and manufacturing a product may need to keep records of the materials used in the manufacture of the product;

• a party providing a service may need to record its activities (how much time is spent on particular activities, etc); •

a supplier of a good or service may have to allow the other party: •

to visit the premises of the supplier at any stage to determine how the services or goods are being created, produced or supplied;

• to have access to a range of facilities to permit the carrying out of the inspection (such as an internet connection, telephones, offices, computers, photocopiers, car parking, etc); •

to provide access to, and the co-operation of the supplier’s staff;

•

to carry out tests, etc;

• to evaluate whether the goods or services are being created, produced or supplied according to particular standards (eg  as specified in the agreement or meeting some international standard). For example, a software developer may need to permit its customer access to its premises to carry out tests on the software being developed (if it is not possible to do so otherwise).

Drafting issues (Note: Much of the case law is found in old decisions regarding patent licences, ie not reflecting modern realities of the commercial world or the increased importance of other forms of intellectual property, such as the many different types of copyright.) •

Refusal to allow auditing and/or inspection. If the party who is to allow inspection refuses, what are the consequences to be? If the consequences are not clearly specified, then a refusal to do so where there is a clear obligation to allow auditing of the licensee’s activities under a licence may entitle the licensor to terminate the licence (Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd [1958] 1 All ER 11, [1958] 1 WLR 45, HL);

•

What records are to be examined? • Can the party providing the records impose a restriction on what records are to be inspected? or •

Will the party who will carry out the audit be able to demand other information and/or books that it believes are relevant? It appears that 95

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the position is that the auditing party can demand other information unless the contract specifies otherwise (Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co Ltd [1958] 1 All ER 11, [1958] 1 WLR 45, HL; Peter Pan Manufacturing Corpn v Corsets Silhouette Ltd [1963] 3 All ER 402, [1964] 1 WLR 96). • Does the party maintaining the records also need to obtain records from third parties if its records are based on the records of the third parties? In some circumstances there may be an obligation on the party to do so (Columbia Tristar Home Video (International) Inc v Polygram Film International BV (formerly Manifesto Film Sales BV) [2000] 1 All ER (Comm) 385 and see Case analysis below). •

Making copies of records. Can the auditing party make copies of the information and books inspected and disclose these to others?

•

Accuracy/relevancy of records. Is there an obligation on the party keeping records for them to reveal how any calculations or payments made were arrived at? Is there an obligation that the records must always be up to date?

•

How long can the right to inspect continue? Case law indicates that if a contractual obligation permits a grantor to inspect accounts then it will ordinarily continue in force even if the agreement is terminated (AngloAmerican Asphalt Co Ltd v Crowley, Russell & Co Ltd [1945] 2 All ER 324). In that case the licensee was ordered to allow inspection for six years back from the date of the writ, although royalty statements and payments had been accepted by the licensor throughout the life of the agreement.

•

Who should pay the cost of auditing? A licensee will wish to discourage overzealous auditing at its expense. Some auditing clauses make provision for the licensor to pay the cost of the audit, or for these to be shared between licensor and licensee, unless the shortfall is more than a certain percentage.

•

Who can carry out an inspection and/or audit? Who will actually carry out the auditing and inspection; can anyone from the licensor do so, or should it be an accountant? The party being inspected may not wish the other party to see its premises, or allow the other party to see what else it might be working on if it is particularly (commercially) sensitive or confidential. If only an accountant should do so, should the accountant be independent of the licensor, and should they have an appropriate professional qualification?

•

Confidentiality. Is the accountant required to keep all information learned or utilised during an inspection and/or audit confidential? Will the accountant (before they gain access) have to enter into a confidentiality agreement? Will the accountant be under restriction as to what they can pass on to the party instructing him? Eg, only such information as is necessary to confirm or deny the accuracy of any financial statement which is being provided by the party being inspected/audited.

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•

What records are to be kept (and how should they be kept)? Should the books and records be kept separately from the other accounting records of the licensee? For what period should they be kept?

Location in the agreement This clause is often located in the Main Commercial Provisions of an agreement, either in the Payments clause or perhaps in a separate clause, but following on from the payment provisions.

Linkage and use This clause is often part of the Payments clause or closely references it and makes use of various definitions relating to what is provided, sold or licensed under an agreement, and the descriptions of various sums (eg, in an agreement where royalties are payable, then there may be definitions of Gross Receipts, Net Receipts and so on).

Sample precedent material Precedent 1—Inspection of books The authorised representatives of each party shall be entitled at that party’s expense to inspect and audit the books, accounts and records pertaining to (subject matter of agreement) at all reasonable times. Precedent 2—Inspection of books – licensing agreement The Licensee shall permit the Licensor or its accredited representatives from time to time to examine the Licensee’s books in so far as these relate to sales of the Products. Precedent 3—Inspection of books – licensing agreement The Licensee agrees to keep proper records and books of account relating to all dealings with the Products and to make all such entries in such records and books of account as may be necessary to calculate the Royalties payable to the Owner, and shall allow the Owner or a firm of [chartered] accountants on the Owner’s behalf to examine such books and records in so far as they relate to the sale of the Products and to take copies and extracts of such books and records. Any such inspection shall be during normal office hours and not carried out more than twice in any calendar year and shall be at the Owner’s expense unless such inspection shall reveal an underpayment to the Owner of more than £…… in which event the Licensee shall bear the costs of such inspection. 97

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Precedent 4—Inspection of books – patent licensing agreement 1 The Licensee shall keep at its normal place of business detailed and up-to-date records and accounts showing the quantity, description and value of Licensed Products sold by it, and the amount of sublicensing revenues received by it in respect of Licensed Products, on a country-by-country basis, and being sufficient to ascertain the royalties due under this agreement. 2 The Licensee shall make such records and accounts available, on reasonable notice, for inspection during business hours by an independent chartered accountant nominated by the Owner for the purpose of verifying the accuracy of any statement or report given by the Licensee to the Owner under this Clause [no]. The accountant shall be required to keep confidential all information learnt during any such inspection, and to disclose to the Owner only such details as may be necessary to report on the accuracy of the Licensee’s statement or report. The Owner shall be responsible for the accountant’s charges unless the accountant certifies that there is an inaccuracy of more than [5%] in any royalty statement, in which case the Licensee shall pay his charges in respect of that inspection. [3 The Licensee shall ensure that the Owner has the same rights as those set out in this Clause [no] in respect of any sub-licensee of the Licensee which is sub-licensed under the Patents pursuant to this agreement.] Precedent 5—Inspection of records – licensing agreement 1 The Licensee shall send to the Owner at the same time as each royalty payment is made in accordance with Clause [no] a statement setting out, in respect of each territory or region in which the Licensed Products are sold, the types of Licensed Product sold, the quantity of each type sold, and the total Net Sales Value in respect of each type, expressed both in local currency and pounds sterling and showing the conversion rates used, during the period to which the royalty payment relates.

Case analysis Columbia Tristar Home Video (International) Inc v Polygram Film International BV (formerly Manifesto Film Sales BV) [2000] 1 All ER (Comm) 385 Facts 1 D granted C a ‘sole and exclusive’ licence of video rights to films acquired or controlled by D. 2 C paid an advance and royalties for each film. 98

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3 C was aware that D was not the producer of the film and that the production costs for licensed films were incurred by third parties. 4 Clause 17 related to the keeping of records: ‘Accounting: (a) Licensee shall maintain complete books and records with respect to the videograms and will render to Owner, on a calendar quarter basis (within sixty (60) days of the end of each quarter commencing with the quarter by which the first revenues are received by Licensee, a true and correct statement in reasonable detail of Gross Receipts and of Royalties (“statements”) … Any statement not objected to within twenty-four (24) months of receipt by Owner shall be deemed true and correct and binding upon Owner. (b) Owner shall have the right for a period of two (2) years from the rendering of each statement, upon reasonable notice … and for no longer than twenty (20) days, to examine and to take copies and extracts from Licensee’s books and records as they pertain to the Videograms, for the purpose of determining the accuracy of the statements … if any such audit reveals a discrepancy of 10% or more of the sums then shown to be due to Owner, Licensee shall pay the reasonable costs of the audit …’ ‘(d) Owner shall maintain complete books and records with respect to the Actual Negative Cost of each of the Programs and the P&A expended in connection with the Theatrical Release of each of the Programs. With regard to the P&A, Owner shall render to Licensee on a monthly basis (within sixty (60) days of the end of each month) commencing with the period during which the theatrical distributor first expends P&A [Prints and Advertising], a true and correct statement of the P&A expended … Licensee shall have the right upon reasonable notice but no more often than once a year and for no longer than thirty (30) days to examine Owner’s books and records pertaining to Actual Negative Costs and the P&A statements for the purpose of determining the accuracy of statements furnished in connection therewith … (e) any amounts revealed to be due and owing to either party as a result of an audit by such party shall be payable on demand by the other party with interest …’

5 After a number of licensed films were unsuccessful, C exercised its rights to audit D’s books under Clause 17(d). 6

Three months later C claimed that there was insufficient documentary evidence upon which to audit as information was stored with third parties.

7 C  believed there was a breach of Clause 17(d) and suspended its audit and refused to pay further advances until D could provide all the required information. 8 D sued for the advances not paid by C, and C counterclaimed for the expenses it had paid. Held 9 The CA held that D’s obligation to ‘maintain complete books and records’ extended: (i)

to obtaining documents from third parties; or 99

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(ii)

providing access to such documents (which may be at the place they are located – at the premises of the third parties).

10 The court’s analysis of the obligation (and extent of the obligation) to audit and maintain records is interesting: ‘29. […]cl 17(d) unequivocally imposes the obligation to maintain complete books and records in respect of ANC [Actual Negative Cost] (the principal element of which is the items making up the direct negative cost) on [D] alone and without qualification. This seems to me no more than a corollary of the logic which drove D to assert and C to agree […] that the direct negative cost expressed as “all documented direct out-of-pocket costs and expenses actually paid by Owner to unrelated third parties …” was a reference to all such costs paid by the actual producers. Again, although it was no doubt plain that the P&A expended would be expended throughout by [a subsidiary of C], a similar obligation to maintain complete records was imposed on Polygram in respect of P&A. 30. In deciding the question of the extent of the books and records covered by the obligation, I agree with C that the [at first instance] judge’s emphasis on the word “maintain” as largely providing the answer was misplaced. Nor does it seem to me that the answer lay simply in looking to see what documents Polygram in fact had in its possession. The ambit of the obligation to maintain complete books and records can best be ascertained by looking first at its immediate context and, second, at the purpose for which the books and records are to be kept. As to the first, it seems to me plain, that used in an accounting context in relation to items of cost, it plainly extends to contemporary documents relating to such items, such as invoices, receipts and other vouching documents. As to the second, the purpose of cl 17(d) is to protect the interests and serve the purposes of C rather than D and, in particular, to support Columbia’s right of audit of such books and records for the purpose of determining the accuracy of statements furnished to and paid by C in connection with the ANC. In such a context, C, as the auditing party, would need to see invoices and documents vouching the actual payments made to third parties in respect of the production costs itemised in exhibit “A”. At the same time, there was nothing inherent in the obligation to require Polygram personally to keep such documents in its possession in order to sustain C’s right to examine them, provided that C was afforded access to them when requested for the purposes of such examination. 31. I  would construe the obligation of D  to “maintain” complete books and records in the sense of “maintain by itself or through others” or “maintain or cause to be maintained”, such books and records unless there are strong contrary reasons for not doing so. I now turn to see whether a different conclusion is dictated by the commercial background to the agreement […]. 32. I do not consider that the fact that the parties knew that D was not itself to be the producer of any of the films is persuasive given that, despite that knowledge, an agreement was entered into which described and treated it as if it were. It is clear that the parties anticipated [who the principal producers were][…]. That being so, so far as cl 17(d) was concerned, an obligation on D to maintain complete records of the production costs would cause no difficulty. So far as the agreement also contemplated that its terms would extend to films produced by unassociated third parties, it could equally have been that the parties contemplated that D on entering into any third party agreement and/or as a condition of authorising a third party production to start, could and would require that the records relating to production costs be preserved by the producer for copying and/or access and inspection by D if required during a period sufficient to cover D’s obligation vis-à-vis C under cl 17(d). If that is so, 100

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Auditing, inspection and records the fact that the documents would be substantial in number would be neither here nor there. The question of bulk might well be influential in whether or not C decided to take advantage of its right of audit in respect of ANC (particularly bearing in mind the rarity of production costs being lower than the budgeted costs on the basis of which the advances were paid); however, it is not in my view an indication of whether C wished to reserve to itself a right of audit if it subsequently wished to question individual items of production costs.’

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Purpose of the clause It is possible for a party (or parties) to be under an obligation which is absolute or qualified.

Absolute obligations Examples of absolute obligations in a contract are: [Party A] shall complete the Project and deliver a final report no later than [date] or [Party A] shall pay the Price to [Party B] on the Date or [Party A] shall deliver the Goods to the address of [Party B] by the Delivery Date.

Failure to comply with any of these obligations is likely to be a breach of contract, even if there is a good excuse for the failure, for example, if Party A had a very heavy workload at the relevant time, or its bank fails to transfer the payment because there is a problem with the bank’s computer, or Party A’s courier loses the consignment of goods (particularly if the obligation stated above is coupled with a definition or other provision making time of the essence). A party will not normally wish to be under this type of absolute obligation, given the consequences if it fails to perform the obligation. If performance is impossible, the contract may be frustrated, but otherwise Party A is bound to complete the Project by the due date.

Qualified obligations Examples of a qualified obligation include: [Party A] shall use its best endeavours to complete the Project by [date] or [Party A] shall use reasonable endeavours to complete the Project by [date]. 102

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In these cases, the amount of effort that Party A  needs to use to fulfil the obligation is qualified by use of the phrases ‘best endeavours’ or ‘reasonable endeavours’. Failure to complete by the stated date, in the above two examples, will only be a breach of contract if it is possible to show that Party A has not used the amount of effort needed to meet a best endeavours or reasonable endeavours obligation. If Party A  fails to complete the Project by a particular date, it will normally wish to argue that it has used reasonable or best endeavours (depending on the obligation it is under) and the other party will wish to argue that Party A has not used the required amount of effort. If the parties cannot resolve this point, it will be for a court to decide whether the state of Party A’s workload, and the steps the party took to try to ensure that the Project was completed, are sufficient to pass the test of ‘best endeavours’ or ‘reasonable endeavours’. When approaching this question, the court will consider the resources of the party giving the undertaking, but there is a degree of objectivity in the test – it is not simply a subjective matter for Party A to say that it was too busy. In the event of a dispute, the use of a qualified obligation leaves the decision to someone (whether the parties or a judge) to determine if a party has fulfilled an obligation using the requisite amount of effort. The reasons for including a qualified obligation rather than an absolute obligation are varied. For the party under the obligation, the desire to avoid being bound by a definite obligation is obvious: avoiding a possible breach if it cannot fulfil the obligation for a reason outside of its control or where it is just more difficult to complete the task which is the subject matter of the obligation. Many suppliers of goods and services are now dependent on third parties in order to fulfil their obligations to purchasers of the goods and services. For example, a seller of goods, may be dependent on other parties, such as agency staff to pack the goods and on couriers to deliver the goods to the purchaser, all of which can stop the supplier being able to fulfil an obligation. The party who has the benefit of the obligation will prefer an absolute obligation, as it will promote greater certainty as to what it will be getting and when it will be getting it, and gives it rights to terminate if the supplier fails to meet the obligation. The above points reflect the (usual) opposing views of the parties to a transaction. However, the parties sometimes cannot agree on the exact level of an absolute obligation; and because they cannot agree, the parties decide that a reasonable or best endeavours obligation (or some other wording) will suffice as a way of making a deal. However, other than stating that a party will use reasonable endeavours, the parties will often not go on to evaluate what amount of effort is necessary to meet the obligation or think through some of the issues that might occur in trying to meet the obligation. For example, if a supplier of goods is to have an obligation to deliver the goods of the purchaser, and the purchaser wants them to be delivered within 24 hours of order, then it would be possible to define the obligation on the supplying party in a number of ways: 103

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•

as an absolute obligation: eg ‘Party A shall deliver each order of the Goods within 24 hours of the Order’;

• as a modified absolute obligation: eg  ‘Party A  shall deliver each order of the Goods within 24 hours of the Order, subject to the provisions of this Clause [ ]’, with the clause containing a number of specific situations when Party A will not be in breach; •

a best endeavours obligation: eg ‘Party A shall uses its best endeavours to deliver each order of the Goods within 24 hours of the Order’.

As the following commentary will show, the courts view ‘best endeavours’ undertakings as onerous commitments. By contrast, if Party A  had merely undertaken to complete ‘subject to its other commitments’ it would be much easier for Party A to avoid a breach of the contract term.

Obligations under a ‘best endeavours’ clause The level of commitment expected under a best endeavours obligation is high, but it is not possible to define the meaning of the term with precision. In the leading case in this area (IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335, CA, see also Case analysis below), the Court of Appeal stated that an undertaking by a party to use its best endeavours obliged the party to take all possible steps that a prudent and determined man, acting in his own interests, and wishing to obtain or achieve the defined obligation, would take, ie not only the steps that the party would need to fulfil its contractual obligations. In other cases, the courts have described best endeavours obligations variously, but all indicate a high level of commitment and effort (see Case analysis below).

‘Best endeavours’ versus ‘reasonable endeavours’ It is a common understanding among most English commercial lawyers that an undertaking to use reasonable endeavours is less onerous than an undertaking to use best endeavours (and the cases that have come before the courts support this understanding). The real problem with requiring a party to use ‘reasonable endeavours’ or ‘best endeavours’ to fulfil an obligation is that it is difficult in practice to describe what actions would be regarded as meeting one or other of the different levels. Since it is not possible to define objectively the standard a party is to reach to fulfil these obligations, it is only possible to describe how the courts have approached each individual situation that has come to their attention: •

reasonable endeavours – balancing contractual obligation against other commercial interests: In one case it was held that a reasonable endeavours obligation was considerably less onerous than a best endeavours obligation and the test for a reasonable endeavours obligation was a balancing act between

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the contractual obligations on one side and the other relevant commercial interests on the other side (UBH (Mechanical Services) Ltd v Standard Life Assurance Co (1986) Times, 13 November and see Case analysis below); •

reasonable obligations – party under the obligation not normally required to go against own financial interests: An obligation to use reasonable endeavours was not breached by failing to do something where it would have been financially disadvantageous to do so (Phillips Petroleum Co (UK) Ltd v ENRON (Europe) Ltd [1997] CLC 329, CA and see Case analysis below);

•

best endeavours obligation – the party under the obligation may be required to go against its own financial interests: in Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417 a party was required to act against its own financial interests if the nature of the deal it has entered into called for it to do so, although the requirement does not call for the party to act against its own financial interests where there was no expectation of achieving the subject matter of the best endeavours obligation (see below and Case analysis);

•

reasonable and best endeavours: a party under such obligations must carry on trying to achieve or complete the subject matter of the obligation until it is no longer possible to do so (until all reasonable efforts are exhausted or there is no prospect of success), ie the party under the obligation must not give up at the first attempt. For example, if a party seeks planning permission and it is refused then the party needs to make an appeal or take other action to obtain planning permission if there is a reasonable chance of success in having the refusal overturned on appeal or if another approach might obtain the necessary permission (IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335, CA; Sainsbury’s Supermarkets Ltd v Bristol Rovers (1883) Ltd [2016] EWCA Civ 160). In the latter case an obligation to ‘use all reasonable endeavours to procure the grant of [planning permission] as soon as reasonably possible …’ meant, as interpreted by the court, that the party under the obligation could only stop trying to obtain the planning permission when there were no other reasonable steps it could take. It seems the courts are prepared to allow a party to take some account of its own interests when the party is using its ‘reasonable endeavours’, but it is not always easy to predict how far a court will allow self-interest to predominate in an individual case.

All reasonable endeavours Another common ‘endeavours’ obligation is that of ‘all reasonable endeavours’. There is more limited case law regarding this type of obligation (and where it lies on the spectrum between reasonable and best endeavours) At one time this was thought to mean an obligation somewhere between a best endeavours and a reasonable endeavours obligation (such as in UBH (Mechanical Services) Ltd v Standard Life Assurance Co (1986) Times, 13  November, although not part of the decision). The more recent view 105

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appears to be that an ‘all reasonable endeavours’ obligation is the same as a ‘best endeavours’ obligation (see Rhodia International Holdings Ltd v Huntsman International LLC [2007] EWHC 292 (Comm), [2007] 2 All ER (Comm) 577, followed in Hiscox Syndicates Ltd v The Pinnacle Ltd [2008] EWHC 145 (Ch), [2008] 05 EG 166 (CS)). Most recently in Jet2.com Ltd v Blackpool Airport Ltd [2012]  EWCA  Civ 417 ‘all reasonable endeavours’ was equated (or rather, assumed to equate) with a ‘best endeavours clause’.

Other expressions In some agreements expressions other than ‘best endeavours’ or ‘reasonable endeavours’ are found, such as: •

‘good faith efforts’;

•

‘commercially reasonable efforts’;

•

‘to be diligent in undertaking’;

•

‘to use due diligence’;

• ‘entire endeavour’ (see City and General (Investment) Ltd v Razama Ltd [2009] EWCA Civ 1568, and Case analysis in Consent), etc. These expressions, like ‘best endeavours’ or ‘reasonable endeavours’, have no set meaning. They are, however, even less certain in meaning than ‘best endeavours’ or ‘reasonable endeavours’, as they have received little or no judicial scrutiny of note. Depending on the precise wording of the clause, they might have no (binding) meaning at all, such as ‘good faith efforts’. The use of the phrase ‘good faith’ in a clause specifying an obligation is particularly problematic, given that the courts have repeatedly indicated that a concept of ‘good faith’, except in very specific or very well-defined instances, is not binding (see Good faith).

Drafting issues •

Avoid using ‘best endeavours’, ‘reasonable endeavours’ or ‘all reasonable efforts’ expressions. The best option is either: •

the parties should define more specifically what they are expected to do under the contract; or

• if it is not possible to indicate specific reasonable obligations, then refer to a recognised standard or to the standard of a third party. Otherwise, the parties may find that the court’s view of what is expected of them under an ‘endeavours’ undertaking is different to their own view or that of their legal advisers. •

If it is not possible to be more specific: Sometimes, though, it is difficult to be specific. Where an agreement will include a best or reasonable endeavours

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obligation wording such as that in Precedent 1 may be used. An alternative approach is in Precedent 2. Whilst this is a far lengthier clause, or series of clauses, than the first example, it avoids many of the uncertainties of the first (as discussed above). •

If the customer or client is insistent on having an absolute obligation but the provider/supplier is resistant, then a compromise is perhaps to make the core obligation an absolute obligation but in case of certain eventualities occurring then the provider/supplier is under a best or reasonable endeavours obligation to fulfil the core obligation. For example, a consultant is hired to prepare a report for a client. The consultant is to report on whether another third party supplier (Software Developer) has developed software for the client in accordance with a specification agreed between the client and the Software Developer. The core obligation would be the provision of the report by the consultant by a specific date subject to certain eventualities. Some of the eventualities might be that the client has to provide its employees to meet with the consultant, and the Software Developer might need to provide a report of its activities up to a certain date (Software Developer Report). The work the consultant is to perform is set out in a specification (Report Specification). It would be necessary that the meetings are specified to take place on particular dates (Employee Meeting Dates) and the provision of the Software Developer Report is also required by a certain date (Supplier Date). In these circumstances then a (simple) clause which combines both an absolute obligation and a qualified obligation might read: ‘1. Party A shall deliver the Report by the Date, subject to the provisions of Clause 2. 2. If any of the following occur then, in place of the obligation under Clause 1, Party A shall use reasonable endeavours to deliver the Report by the Date: 2.1 If the Client wishes to change or changes the Report Specification; or 2.2 If the Client fails to provide or make available its employees to Party A by the Employee Meeting Dates; or 2.3 The Software Developer fails to deliver the Software Developer Report by the Supplier Date.’

While this clause might have the advantage of more clarity, one disadvantage is the extra effort on the parties’ representatives specifying the detail of when an absolute obligation becomes a qualified obligation. The parties may not be able to agree on the exact circumstances when the consultant should be relieved of its absolute obligation. As a commercial decision, the consultant might prefer to have an absolute obligation and take a chance that all the information it needs will be provided in time for it to prepare its report. If it is not, and the consultant cannot deliver the report by the required date, take a risk that the client will not terminate. Or the client may wish to have a reasonable endeavours obligation and it will take a chance that the supplier will not provide the report by the date. 107

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Location in the agreement A best endeavours or reasonable endeavours obligation could appear in any type of clause in an agreement, but generally appears as follows. •

Main commercial obligations, in the main operative clause of the agreement, which centrally sets out the core obligation of one or both of the parties (eg ‘The Manufacturer shall use its best endeavours to produce 100 units of the Products by the Delivery Date’); and/or

•

Other main and secondary commercial obligations, in any clause which requires one or more of the parties to carry out some task, obtain something, achieve some result or respond to some situation that has arisen or prevent some situation arising.

Sample precedent material Precedent 1—Best endeavours obligations Party A shall use [its best endeavours or reasonable endeavours] to complete the Project and deliver a final report to Party B no later than [date]. Precedent 2—Alternative approach avoiding best or reasonable endeavours distinction and clarifying nature of obligation and how breach may be determined 1.1 Party A shall use due diligence in: (a) applying for and prosecuting patent applications which claim the [Lead Compound] in all commercially significant territories of the World; (b) developing the [Lead Compound] product(s) for use in the Field; (c)

into

pharmaceutical

seeking all necessary regulatory approvals for such pharmaceutical product(s) in all commercially significant territories; and

(d) marketing and selling such pharmaceutical product(s) in all commercially significant territories. 1.2 For the purposes of Clause 1.1, ‘due diligence’ means exerting such effort and employing such resources as would normally be exerted or employed by a reasonable third-party pharmaceutical company for a product of similar market potential at a similar stage of its product life, when utilising sound and reasonable scientific, business and medical practice and judgment in order to develop the product in a timely manner and maximise the economic return to the Parties from its commercialisation. 1.3 If Party B considers at any time during the period of this agreement that Party A has without legitimate reason failed to use due diligence 108

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to develop and commercially exploit Licensed Product(s) from a [Lead Compound], Party B shall be entitled to refer to an independent expert the following questions: (a)

whether Party A has acted diligently; and if not

(b) what specific action Party A  should have taken (‘Specific Action’) in order to have acted diligently. 1.4 The independent expert shall be appointed in accordance with the provisions of Schedule [no] and his decision shall be final and binding on the Parties. 1.5 If the expert determines that Party A  has failed to comply with its obligations under Clause 1.1 and if Party A fails to take the Specific Action within [ ] months of the expert giving his decision in accordance with Schedule [no], Party B shall be entitled, by giving, at any time within [ ] months after the end of that … month period, not less than [ ] months’ notice to Party A to terminate this agreement. Precedent 3—Party to use best endeavours to obtain necessary approval The terms of this schedule are subject to the approval of the [ ] being obtained which the Parties shall use their respective best endeavours to obtain. Precedent 4—Party to use best endeavours to operate franchise [Party A] shall use its best endeavours to sell the Products and to offer for sale a minimum range and stock of the Products as specified in the Manual and to plan its re-ordering of such Products adequately in advance and [to procure the greatest volume of turnover for the Business consistent with good service to the public or to achieve a minimum turnover of …]. Precedent 5—Parties to use best endeavours to resolve dispute speedily If the unresolved dispute is having a material effect on the Project, the Parties will use their respective best endeavours to reduce the elapsed time in reaching a resolution of the dispute. Precedent 6—Parties to use best endeavours to secure advantageous loan [Party A] shall use its best endeavours to secure the Loan on the most favourable terms available. Precedent 7—Parties to use reasonable endeavours to resolve dispute Each Party will use all reasonable endeavours to reach a negotiated resolution through the [Dispute Resolution Procedure]. Precedent 8—Party to use reasonable endeavours to agree lease renewal [Party A] shall take over and conduct negotiations with [the Tenant] towards agreeing terms for the lease renewal and shall use all reasonable endeavours to conclude such agreement at the earliest opportunity. 109

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Precedent 9—Party to use reasonable endeavours to retain transferring employees on sale of business The Vendor shall use reasonable endeavours to retain the services of each of the Transferring Employees to the intent that their respective contracts of employment shall be continued until the Transfer Date and then (save insofar as such contracts relate to any occupational pension scheme) be transferred to the Purchaser by virtue of the Regulations. Precedent 10—Party to use reasonable endeavours to resolve dispute Each party will use all reasonable endeavours to reach a negotiated resolution through the above dispute resolution procedure. The specific format for such resolution will be left to the reasonable discretion of the relevant management level, but may include the preparation and submission of statements of fact or of position. Precedent 11—Party to use reasonable endeavours for delivery – but not time of essence [The Licensor] will use all reasonable endeavours to achieve delivery or installation by any specified or requested date, but each such date is to be treated as an estimate only and time shall not be of the essence. Precedent 12—Use of best endeavours and reasonable endeavours in confidentiality clause – shareholders’ agreement 1 Each of the parties to this agreement shall at all times use its best endeavours to keep confidential (and to procure that its respective employees and agents shall keep confidential) any confidential information which it or they may acquire in relation to the Company and its subsidiaries or in relation to the clients, business or affairs of any other party to this agreement or of the Company or of any of the Company’s subsidiaries and shall not use or disclose such information except with the consent of every other party to this agreement and/or of the Company or its relevant subsidiary (as appropriate) or in accordance with the order of a court of competent jurisdiction or, in the case of information relating to the Company or any of its subsidiaries, for the advancement of the business of the Company or the relevant subsidiary. 2 The parties to this agreement shall procure that the Company and its subsidiaries shall use all reasonable endeavours to ensure that the officers, employees and agents of each of them observe a similar obligation of confidence in favour of the parties to this agreement. 3 The obligations of each of the Parties contained in Clause [1] shall continue without limit in point of time but shall cease to apply to any information coming into the public domain otherwise than by breach by any such party of its said obligations Provided that nothing contained in this Clause [ ] shall prevent any Party from disclosing any such information to the extent required in or in connection with legal proceedings arising out of this agreement or any matter relating to or in connection with the Company. 110

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4 For the purposes of this Clause [no] the expression ‘Party’ shall include the subsidiary companies of any party and any other company controlled by that party and the employees or agents of that party and of such subsidiary or controlled companies.

Case analysis Best endeavours IBM United Kingdom Ltd v Rockware Glass Ltd [1980] FSR 335, CA In the leading case in this area, the Court of Appeal held that an undertaking to use one’s best endeavours obliged a party to take all the steps in a person’s power which he was capable of to bring about the desired result, ‘being steps which a prudent, determined and reasonable owner, acting in his own interests and desiring to achieve that result would take’. One of the Court of Appeal judges, Buckley LJ, said the obligation was not to be measured by reference to somebody who is under a contractual obligation, but to someone who is acting in his own interest. The case concerned an agreement for the sale of land under which one party had the obligation to use its best endeavours to obtain planning permission. Planning permission was refused and that party failed to appeal against that refusal. The Court considered that if the appeal offered a reasonable chance of success, the party was obliged to appeal. Sheffield District Rly Co v Great Central Rly Co (1911) 27 TLR 451

‘We think “best endeavours” means what the words say; they do not mean second-best endeavours… They do not mean that the limits of reason must be overstepped with regard to the cost of the service; but short of these qualifications the words mean that the … Company must, broadly speaking, leave no stone unturned…’

Terrell v Mabie Todd & Co [1952] 2 TLR 574

‘… contractual obligations to use due diligence and their best endeavours to promote sales under such contracts would not require the directors to carry on the manufacture and attempted sale to the certain ruin of the Company or to the utter disregard of the shareholders but before that extreme position could be reached …’

Pips (Leisure Productions) Ltd v Walton (1982) 43 P & CR 415

‘Best endeavours are something less than efforts which go beyond the bounds of reason but are considerably more than casual and intermittent activities. They must at least be the doing of all that reasonable persons reasonably could do in the circumstances.’

Rackham v Peek Foods Ltd [1990] BCLC 895 and Dawson International plc v Coates Paton plc [1990] BCLC 560 These cases concerned undertakings given by directors of a company (eg, to use best endeavours to obtain shareholders’ approval to a sale of 111

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shares). It has been held that ‘best endeavours’ undertakings given by a director do not override the director’s duty to act in the best interests of the company. Ault and Wiborg Paints Ltd v Sure Services Ltd (1983) Times, 2 July It was held that an implied term in a contract that a company would use its best endeavours to promote another’s products was to be construed in the context of the circumstances of the contract. Such a term was not inconsistent with the company being at liberty to promote, and promoting, similar products made by competitors of the other contracting party, but required the company to treat the other contracting party’s products at least as well as it treated the competitors’ products. Beta Investment SA v Transmedia Europe Inc [2003] EWHC 3066 (Ch), [2003] All ER (D) 133 (May) It was held in this case that the wording that the parties were to use ‘their best endeavours to negotiate and agree’ a final settlement within 90 days did not mean that the parties had to enter into a particular form, or any form, of actual agreement. This case is considered further in Case analysis of Subject to contract (and other denials of a legally-binding contract). Days Medical Aids Ltd v Pihsiang Machinery Manufacturing Co Ltd [2004] EWHC 44 (Comm), [2004] 1 All ER (Comm) 991 In a distributorship agreement a clause that required the claimant to ‘promote sales to the best of its ability in the UK and all countries in the schedule’ was found to be a best endeavours clause. Such an obligation had to be considered in the context that the claimant was an established, well-capitalised and skilled distributor of medical aids but that the market in the United Kingdom and other countries needed development. An obligation that ‘the claimant will endeavour to increase sales year on year’ was also a best endeavours clause. The judge, after being referred to the passages quoted above from IBM United Kingdom Ltd v Rockware Glass Ltd and Sheffield District Rly Co v Great Central Rly Co, stated: ‘Increased sales, provided they earned or commercially could reasonably be expected in the future to earn a reasonable return, were in the interests of both [the claimant and the defendant]. I agree with [counsel for the defendants] that where appropriate the obligation could require the claimant to invest and to take the risk or failure but only where there was a reasonable prospect of commercial success.’

These views expressed by the judge are obiter, as the case concerned issues of restraint of trade and whether the distributorship agreement was in breach of community law. Nevertheless, they are an interesting application of some leading cases to a distributorship agreement.

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Reasonable endeavours UBH (Mechanical Services) Ltd v Standard Life Assurance Co (1986) Times, 13 November Rougier J held that an obligation to use reasonable endeavours ‘must be [a] less stringent’ obligation than to use best endeavours. Where a lessee undertook to his landlord to use reasonable endeavours, the lessee could take into account other commercial considerations as well as his obligation to the landlord. This involved ‘a balancing act whereby [the defendants] were obliged to put in one scale the weight of the contractual obligation to [the plaintiffs], and in the other all relevant commercial considerations’. He was also persuaded that an obligation to use ‘all reasonable endeavours’ ‘probably’ lay between best and reasonable endeavours, but his observations on this matter were obiter dicta. This is the only case where it appears the court has ventured a view on the different ‘levels’ of endeavours. Phillips Petroleum Co (UK) Ltd v ENRON (Europe) Ltd [1997] CLC 329, CA In this case, on ‘reasonable endeavours’, an obligation to use reasonable endeavours was not breached by failing to do something where it would have been financially disadvantageous to do so. In this case, the key clause in a gas sales agreement read as follows: ‘Article 2.2: The buyer and seller shall use reasonable endeavours to agree … If the seller and the buyer are unable to agree prior to 25 April 1996 … then the Commissioning Date shall be 25 September 1996 and the Run-In test shall be conducted from 25 to 28 September 1996.’

The defendant refused to agree a Commissioning Date because of a fall in the market price of gas. The defendant would have to pay a higher price under the agreement than the market price for the gas to be supplied under the agreement. The defendant argued that it could take into account its own financial situation, not only operational and technical practicality (as the plaintiff contended). The court noted that there was a failure to set any reasonable criteria in this case. From the judgment of Kennedy LJ at p 342: ‘When the critical words in art  2.2 are read in their contractual setting, and with regard to the ensuring fall-back provisions, I find it impossible to say that they impose on the buyer a contractual obligation to disregard the financial effect on him and indeed everything else other than technical or operational practicality, when deciding how to discharge his obligation to use reasonable endeavours to agree to a commissioning date prior to 25 September 1996. If the obligation was to be strait-jacketed in that way, that is something which to my mind would have been expressly stated … this is not a situation in which it would be appropriate for the court to imply a term, not least because it is unnecessary to do so for the purposes of business efficiency. The fall-back provision expressly states what is to happen if no early commissioning date is agreed.’ 113

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Potter LJ said (at p 343): ‘Even if I were satisfied (which I am not) on the basis of the facts agreed for the purposes of the issue that, by acting solely in its financial interests, the buyer has not made reasonable endeavours to agree a commissioning date to 25 September, the requirement of “reasonableness” would nonetheless present acute difficulties to any court asked to decide from what date the buyer was in fact in breach and ought to be held liable in damages. For that purpose it might well be necessary to investigate at length, and form judgments upon, the availability of key personnel, designers or other specialists, the state and progress of the works, the stage at which the works might legitimately be regarded as ready from a practical and technical point of view including testing, the commitment of resources towards completion and finalisation of the facility, the completion of onsale arrangements and a variety of other considerations arguably reasonable to be taken into account before proposing and/or agreeing a commissioning date.’

The key point from this case is that if the parties are to ‘use reasonable endeavours to agree’ then there should be: • objective criteria as to what has to be done to meet the standard of reasonable endeavours; and •

what factors a party can take into account.

Patel v Brent London Borough Council [2004] EWHC 763 (appealed in [2005] EWCA Civ 644, appeal allowed, but issue relating to ‘reasonable endeavours’ not specifically overturned) In this case, the defendant was under an obligation to use reasonable endeavours to complete certain works by a certain date. The works were not completed by that date. It was held that it was necessary to imply, to give business efficacy to the agreement, that the defendant remained under an obligation to continue using its reasonable endeavours to complete the works in a reasonable time after the completion date. Stephen v Scottish Boat Owners Mutual Insurance Association (The Talisman) [1989] 1 Lloyd’s Rep 535, 1989 SC (HL) 24, 1989 SLT 283 The case involved the insurance of a fishing boat. The insurer would not be liable unless the boat owner used all reasonable endeavours to save the boat from loss or damage. The boat was lost and the insurer said that the owner did not use all reasonable endeavours to save the boat. The court held that the test of what is ‘reasonable endeavours’ is objective, ie the efforts of the boat owner needed to be measured against the efforts that an ordinary competent boat skipper would undertake. Yewbelle Ltd v London Green Developments Ltd (Knightsbridge Green Ltd Pt 20 defendant) [2006] EWHC 3166 (Ch), [2006] All ER (D) 122 (Dec) The case involved a party having an all reasonable endeavours obligation to obtain planning permission. In carrying out the obligation the person under the obligation did not have to sacrifice its own commercial interests, but the obligation required the person to meet that level of obligation until the point is reached at which all reasonable efforts are exhausted. 114

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Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417 In an agreement where the defendant airport was to provide facilities for the low-cost airline claimant the following clause came in for consideration: ‘1. Jet2.com and BAL will co-operate together and use their best endeavours to promote Jet2.com’s low cost services from BA and BAL will use all reasonable endeavours to provide a cost base that will facilitate Jet2.com’s low cost pricing.’

The requirement on a party under an endeavours type clause not to act against its own commercial interests was considered. The court in this case found that having regard to a party’s own financial interests depends on the nature, and the provisions, of the contract the party entered into. As regards the nature of the deal in this case, the defendant would need to allow the landing of the aeroplanes of the claimant outside normal hours, and which would involve a loss to the defendant. It was essential to allow the claimant to land its aircraft outside normal hours in order for the claimant to be able to operate its type of business. Therefore meeting the all reasonable endeavours obligation would require the defendant to operate at a loss given the nature of the deal between the parties: ‘[32] It was a central plank of BAL’s argument before the judge that the obligation to use best endeavours did not require it to act contrary to its own commercial interests, which, in the context of this case, amounts to saying that BAL was not obliged to accept aircraft movements outside normal hours if that would cause it financial loss. Some support for that conclusion can be found in the cases, notably Terrell v Mabie Todd and Co Ltd and Yewbelle Ltd v London Green Developments Ltd, but I think the judge [at first instance] was right in saying that whether, and if so to what extent, a person who has undertaken to use his best endeavours can have regard to his own financial interests will depend very much on the nature and terms of the contract in question… I approach with some caution the submission that BAL was entitled to refuse to accept aircraft movements outside normal opening hours if that caused it to incur a loss, because on the judge’s findings the ability to schedule aircraft movements outside those hours was essential to Jet2’s business and was therefore fundamental to the agreement. In those circumstances one would not expect the parties to have contemplated that BAL should be able to restrict Jet2’s aircraft movements to normal opening hours simply because it incurred a loss each time it was required to accept a movement outside those hours, or because keeping the airport open outside normal hours proved to be more expensive than it had expected. On the other hand, I can see force in the argument that if, for example, it were to become clear that Jet2 could never expect to operate low cost services from Blackpool profitably, BAL would not be obliged to incur further losses in seeking to promote a failing business.’

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Breach

Purpose of the clause A breach of contract is the breaking of an obligation which a contract imposes or the breaking of a term or condition in a contract. The word ‘breach’ is a technical, legal term, not used in everyday speech. A few contracts use the more modern word ‘break’, as in: ‘if X breaks this contract, Y may terminate it’.

However, this has not become common practice. Technically, there is – or some lawyers consider there is – a difference between breach of a contract’s terms and conditions and a failure to perform those terms and conditions. For this reason, some precedents for termination clauses refer to both breach and failure to perform. In the authors’ personal view, it is unlikely that a court would normally interpret a reference to breach as excluding non-performance, unless a distinction is made elsewhere in the contract between these two terms.

Meaning of ‘material’ or ‘substantial’ breach In some agreements a party is entitled to give notice to terminate (or to terminate) if the other party is in ‘material’ or ‘substantial’ breach of its obligations, eg: ‘if the other party shall commit any [substantial][material] breach of any of its obligations under this agreement and shall fail to remedy such breach (if capable of remedy) within 30 days after being given notice by the first party so to do’.

The aim of such a clause is not to allow a party to terminate an agreement where the other party has only committed a minor or trivial breach of the agreement (see DB  Rare Books Ltd v Antiqbooks (a limited partnership) [1995] 2 BCLC 306, CA, and Superior Overseas Development Corpn and Phillips Petroleum (UK) Co v British Gas Corpn [1982] 1 Lloyd’s Rep 262 for discussion of these terms). In many cases it is likely that there will be no difference in the meaning between ‘material’ and ‘substantial’, subject to the context (see Fitzroy House Epworth Street (No 1) Ltd v Financial Times Ltd [2006] EWCA Civ 329, [2006] 2 All ER (D) 463 (Mar)). The use of the terms ‘substantial’ or ‘material’ does not precisely define exactly what in a particular breach will be sufficient to amount to substantial 116

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or material. What is substantial or material for one party may not be for the other party. For example, a party may have an obligation to make payments on certain dates but makes one payment one day late. For the party making the payment, this may amount to a small breach, but to the other it may have serious consequences. The other party may need to pay its suppliers or to repay loans on terms that are draconian. If it does not have sufficient reserves then any delay in receiving payment, even by a small amount of time, could be serious or very expensive.

Not quantifying the level or seriousness of the breach An agreement may not specify the seriousness of a breach that would entitle a party to terminate the contract, but simply state that a party is entitled to terminate if there is a breach, such as: Each party shall be entitled to terminate this agreement immediately by notice in writing to the other party [(but not after 90 days of the event in question first coming to the attention of the party entitled to give the notice)] if any of the events set out below occurs. The events are: (a) if the other party commits any breach of any of its obligations under this agreement and fails to remedy that breach (if capable of remedy) within 30 days after being given notice by the first party to do so or…

The problem with this wording is that the view of the courts has changed as to whether this form of wording is sufficient to permit the party not in breach to terminate the contract where the other party commits any breach. There are decisions where such wording would only entitle a party to terminate where the breach was sufficient to amount to a repudiatory breach (Antaios Compania SA v Salen AB [1988] AC 191; Rice (t/a the Garden Guardian) v Great Yarmouth Borough Council [2000]  All ER (D) 902; Dominion Corporate Services Ltd v Debenhams Properties Ltd [2010] EWHC 1993 (Ch)). Other cases take a different view: that the courts should interpret the words of the contract actually used, and if the contract states that a party can terminate if another party breaches the contract, then that is exactly what the wording means. The courts should not be ‘reading in’ a meaning that this wording only allows the party to terminate if the breach of the other party meets the standard of a repudiatory breach (Leofelis SA v Lonsdale Sports Ltd [2008] EWCA Civ 640; ENE Kos 1 Ltd v Petrolio Brasiliero SA (No 2) [2012] UKSC 17; Newland Shipping and Forwarding Ltd v Toba Trading FZC [2014] EWHC 661 (Comm)). The contrasting views of the courts may be simply based on the facts of each individual case; but this does not permit the contract drafter to know with certainty that using only the word ‘breach’ will be sufficient to allow a party not in breach to terminate the contract where another party is in breach. One solution is to make any breach of an obligation sufficient to terminate through the use of clear wording. This may not always be commercially attractive or always possible (if the parties are not of equal bargaining strength). For example, to take the wording quoted above: (a) if the other party commits any breach whatsoever (however trivial) of any of its obligations under this agreement and fails to remedy that breach (if capable of remedy) within 30 days after being given notice by the first party to do so or… 117

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This is an exaggerated type of wording, but however such a clear statement is worded, it is unlikely to be acceptable, although it would clearly indicate to a court the meaning of the wording used.

Advantage of quantifying a breach by use of wording such as ‘material’ or ‘substantial’ The advantage of using words such as ‘substantial’ and ‘material’ permits the parties to set a (rough) standard as to the level of breach that entitles a party to terminate, although, in the event of dispute, a court will need to interpret the precise meaning against the circumstances of the case (see Dalkia Utilities Services plc v Celtech International Ltd [2006]  EWHC  63 (Comm) and Case analysis below). The courts will objectively judge whether a breach is material by reference to the facts (ie not the subjective views of the parties) (see Fitzroy House Epworth Street (No  1) Ltd v Financial Times Ltd [2006]  EWCA  Civ 329, [2006] 2 All ER (D) 463 (Mar); Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB)). When considering what involves ‘materiality’ the following facts will be taken into account: ‘…the actual breaches, the consequence of the breaches to [the innocent party]; [the guilty party’s] explanation for the breaches; the breaches in the context of [the a]greement; the consequences of holding [the a]greement determined and the consequences of holding [the a]greement continues’ (from Phoenix Media Ltd v Cobweb Information (unreported, 16 May 2000) 2004 WL 147 6680, quoted in the Compass Group etc case). One way of addressing this for a particular obligation might be by defining what level of failure by a party to meet an obligation would be a ‘material’ breach. For example, if a customer makes regular orders of goods and pays for those orders against invoices then, as regards the payments the customer needs to make, the meaning of ‘material breach’ could be defined as meaning that the party has failed to pay a certain number of invoices or that the amount owing is above a certain amount. A termination clause might include wording such as: Either party to this agreement shall be entitled to terminate this agreement immediately by notice in writing to the other party [(but not after 90 days of the event in question first coming to the attention of the party entitled to give the notice)] if any of the events set out below shall occur. The events are: (a) if the other party shall commit any material breach of any of its obligations under this agreement and shall fail to remedy such breach (if capable of remedy) within 30 days after being given notice by the first party so to do or… [… other events ]; and (x) If Party B shall fail to make any payment for Goods on any Payment Date (“Outstanding Payment”), then this failure shall amount to a material breach for the purposes of Clause (a), if: (i) [3] or more Outstanding Payments together have not been paid at any one time by Party B to Party A; or 118

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Breach (ii) the amount of Outstanding Payments owed by Party B to Party A exceeds £[5,000] regardless of the number of Outstanding Payments that Party B has.

Rather than trying to define the meaning of ‘material’ or ‘substantial’, other solutions could involve (before the contract is entered into) arranging for staged payment terms or making each stage of the performance of the contract conditional on the other party paying for the previous stage, together with good internal administration so that these provisions are strictly adhered to. The word ‘substantial’ has come in for consideration by the courts on many occasions (such as in cases involving payment of rent under a lease), and amounts for non-payment of less than 15% are generally not substantial. However, it is not clear the extent to which such decisions are applicable to commercial agreements.

Drafting issues Some preliminary questions need consideration as to the effect of a breach: •

which obligations or terms or conditions are considered sufficiently important that breach of them would be: •

sufficient to terminate an agreement?

•

not sufficient to terminate but the breaching party should be allowed to ‘perform’ again? eg a termination provision allowing for notice to be given to the party in breach specifying that the breach can be remedied within a set number of days.

•

•

not sufficient to terminate but the party in breach will face a sanction so it will, eg: •

be liable to pay liquidated damages;

•

be set a time limit which will be made of the essence (ie a failure to meet the time limit will entitle the party not in breach to terminate the contract);

•

be liable (in the case of non-payment) to pay interest;

•

have to allow a third party to perform some or all of its obligations and to pay the third party.

which failures to perform obligations or the terms and conditions will amount to breach? • will any of the obligations or terms or conditions, which are not performed or not performed ‘properly’, be a breach? •

will the party obliged to perform an obligation or term or condition only be in breach if it does not meet a standard, eg: •

where services are involved, if the party does not use reasonable care and skill (the standard set by the Supply of Goods and Services 1982); 119

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•

•

where goods are involved, if the goods made or supplied are not of satisfactory quality (the standard set by the Sale of Goods Act 1979);

•

does not use reasonable or best efforts or endeavours;

•

does not meet some specified specification; or

•

where the failure to meet the standard is ‘material’ or ‘substantial’?

will the party be in breach but excused from any liability because there are limitations and exclusions of liability in the agreement to cover the breach?

Location in the agreement There is not usually a stand-alone clause stating or setting out the circumstances when there is a breach. Provisions dealing with breach are usually found in: • the Main Commercial Provisions, such as the core operative provisions, which may state (either directly or by reference) the standard that a party needs to achieve and the importance of a failure to perform or performance of them below a required or expected standard; and/or •

in the Secondary Commercial Provisions, such as: • the Termination clause, which will set out either: • the general terms of what constitutes a breach (eg  a material breach of the agreement); or •

specific instances that constitute a breach (eg a failure by a party to meet a standard set in a specification or failure to obtain regulatory approval);

• the Warranty clauses, which will specify, in some cases, the standard that a party is stating that they are meeting, and the consequences of failing to meet them.

Linkage and use The subject of breach typically arises in termination clauses and liquidated damages clauses. Precedents to allow termination of the contract in the event of a breach of its terms appear in Termination for breach.

Case analysis Dalkia Utilities Services plc v Celtech International Ltd [2006] EWHC 63 (Comm) 1 The parties entered into a contract for the claimant to build and maintain a power plant for the defendant. 120

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2

The defendant failed to pay three instalments. The defendant claimed that it had no money to pay and that unless the agreement between the parties was renegotiated it would become insolvent. The claimant refused to do so.

3

The claimant sued for sums it claimed were payable on termination of the agreement.

4 The agreement included a variety of clauses concerning termination including: ‘14.2. In the event of one of the parties (the “DEFAULTING PARTY”) being in material breach of any of its obligations hereunder or under the LEASE being a breach which is capable of being remedied, and failing to remedy such breach within one hundred and twenty calendar days after receiving written notice of the failure from the other party (the “NON DEFAULTING PARTY”) requiring it to be remedied, or being a breach which is incapable of being remedied and which has continued for one hundred and twenty calendar days after written notice of such breach has been given to the DEFAULTING PARTY, then the NON DEFAULTING PARTY shall have the right to terminate this Agreement forthwith by notice in writing to the DEFAULTING PARTY.’

and ‘14.4. In the event of the CLIENT being in material breach of its obligations to pay the CHARGES the COMPANY shall have the right to terminate this Agreement immediately.’

5 If the claimant terminated the agreement under Clause 14.4 then the defendant would need to pay the claimant a sum of money (‘Termination Sum’). 6 It was assumed that a material breach was not the same as a repudiation (ie a party does not have an intention to perform the contract). For the judge material had to be sufficiently serious so that there was a justification for bringing the parties’ long term contract to an end (which the judge characterised as ‘involving something of a partnership endeavour between the parties’). 7 The judge held that the failure to pay was a material breach of the defendant’s obligations to pay in the circumstances of the case. 8 The judge set out the factual circumstances which made the breach serious enough to be ‘material’: (a)

three instalments were not paid, with the third instalment being on just due for payment (and therefore a less serious breach and of less significance than the other two);

(b)

the failure to pay the third instalment was the third payment not made (and all coming one after the other);

(c)

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(d) that the continued failure to pay was serious and the amounts involved were not minimal or trivial; (e) the amount of the instalments were small (over the lifespan of the agreement) but represented 25% of the instalments due in the year they were due to be paid and 8.5% of the total charges unpaid for the remainder of the initial period of the contract; (f)

that the defendant did not have the money to pay and was facing insolvency and needed a six months moratorium before it could start paying again. The defendant’s position was that unless the contract was renegotiated the defendant would not be able to continue paying in full. In effect the claimant would need to have the power plant running for six months without payment (although the defendant would still owe the instalments for those six months);

(g)

that unless the claimant terminated the agreement it would have to keep the power plant going for the defendant to be able to keep on payment of the Termination Sum;

(h) that on termination the defendant would need to pay a large sum (in effect the capital value of the plant) (because of a contractual provision allowing for this payment by the defendant to the claimant and which the judge held indicated the importance attached to prompt payment) and which if the defendant was unable to find finance would lead to a serious consequence (but the judge held was not draconian). 9 The principles the judge outlined to determine whether a breach was material were (and the consequences) (from paragraph  102 of the judgment, reformatted to ease reading): (a) ‘… In assessing the materiality of any breach it is relevant to consider not only of what the breach consists but also the circumstances in which the breach arises, including any explanation given or apparent as to why it has occurred.’ (b) ‘The reason why payment was not forthcoming in the present case was not because of some mishap, mistake or misunderstanding.’ (c)

‘It seems to me that a clause of this kind [ie allowing termination for breach of a material obligation], in this context, is designed to protect a client where the default is minimal or inconsequential or (even if it is not) is accidental or inadvertent, but otherwise to enable a supplier such as [the claimant] to bring the period over which it is effectively extending credit to an end where there is a failure to keep up the payment schedule established by the contract.’

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(d)

‘(…in relation to the question of material breach the primary focus must, as it seems to me, be on the character of the breach rather than the consequences to the “guilty” party if the “innocent” party avails himself of his contractual remedy).’

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Capacity (and authority)

Purpose of the clause Different meanings of ‘capacity’ In the context of entering a contract: • capacity concerns whether a person or an organisation can enter a contract at all; and •

authority concerns whether a person or organisation has the permission to enter into a contract (often on behalf of someone else).

Capacity The question of ‘capacity’ can arise in the following circumstances: 1 Usually an individual has the capacity to enter into most types of contract. There are categories of persons who cannot enter into a contract at all or only in limited or specific circumstances (such as minors, persons of unsound mind, drunks or bankrupts) (see Sale of Goods Act 1979, s  3(2)). Except for bankrupts, the other types of persons who do not have capacity are not often encountered in a commercial context. 2 To determine whether a legal entity has the capacity to enter into a contract, it is usually necessary to look at the relevant statute. For the principal corporate structures in England and Wales, there are statutory provisions allowing them to enter into contracts as follows: (i) companies incorporated under or governed by the Companies Act 2006 (particularly ss 39, 40 and 43); or (ii) bodies corporate (Corporate Bodies’ Contracts Act 1960, s  1). This will cover organisational structures such as those incorporated under Royal Charter or organisations created by or under statute (such as a local authority, the Information Commissioner etc); (iii) limited liability partnerships (Companies Act 2006, s  43, as implemented by the Limited Liability Partnerships (Application of the Companies Act) Regulations 2009, SI 2009/1804, reg 4). 124

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Capacity (and authority)

Authority The question may arise whether a person who purports to sign a contract on behalf of a contracting party (eg a person or a company) has the authority (ie, permission) to do so. This section considers, from a practical point of view, whether a person/ organisation has authority to enter into a contract on behalf of a contracting party. This point has direct implications for the ‘boilerplate’ language of the contract. Generally, under English law persons/organisations can sign or enter into contracts on behalf of others, without having to comply with any specific formality or obtain a particular qualification. (The main types of statutory provisions affecting companies and other organisations are referred to above.)

How it is possible to signify the authority of a person Use in attestation/execution clauses In the attestation/execution clause, it is common (although by no means universal) to find words such as, where an organisation is involved, it is signing or agreeing to the contract ‘through their authorised signatories’ or ‘through the duly authorised representatives of the parties’ (see Precedents 1 and 2). Use of warranties Within the agreement itself, there will be wording where one or more parties warrant that: •

they have the capacity (or are free) to enter into the agreement; and

•

the person signing on behalf of a party is authorised to do so by that party (see Precedent 3).

Use of boilerplate to indicate authority Also, in addition to a person/organisation having authority to enter into the agreement itself, boilerplate clauses are used to indicate that only an authorised representative of a party can: •

sign notices;

•

approve an action to be carried out under an agreement;

•

vary or amend an agreement;

or agree to any of these matters. The wording of these clauses will normally state that the authorised representative is: •

a named person; or 125

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•

an officer (such as a director and/or company secretary); or

• anyone who holds a particular position or role (such as the ‘finance manager’).

Drafting issues Where a party to an agreement states that someone is authorised to sign or do things on behalf of it, the following will need consideration: •

Senior person binding a company. In the absence of specific authority, it is possible that the position that the employee holds and the duties they undertake will mean that authority will be implied (and which the other party to a contract can rely on). There is much 19th century and early 20th century case law on this point. Generally, there is no presumption that an employee has authority to contract on behalf of its employer, and whether it is implied will depend on the position of the employee (see eg Walker v Great Western Rly Co (1867) LR 2 Exch 228). Authority is likely to be implied where the person entering into contracts is incidental to the employee’s duties for which they are employed (eg Richardson v Cartwright (1844) 1 Car & Kir 328; Graves v Masters (1883) Cab & El 73; Smith v Hull Glass Co (1852) 11 CB 897).



Accordingly, the more senior the person in a company who signs, the more difficult it will be for the company to disown the contract on the basis that the person who signed it was not authorised to do so.



Also senior employees are likely to have ‘apparent authority’ to sign contracts on their company’s behalf. Even medium-ranking employees may have apparent authority, particularly if the contract is within their area of work responsibilities (eg, a research manager placing a contract for test tubes).

•

Authority of a director or company secretary. It is even more difficult for a company to disown a contract signed by a director or the company secretary (Companies Act 2006, s  40(1)) The Companies Act 2006 provides that directors are free to bind (or authorise others to do so) irrespective of what the company’s constitution states (as long the person with whom the company is entering a contract is doing so in good faith).

•

Use of internal rules. Internal company rules about who has authority to make commitments will not bind people outside the company who are not aware of those rules.



If a very junior employee places an order with a supplier and the employer ‘honours’ the order, it may be difficult for the company to deny that the employee has apparent authority when placing similar orders in the future, even if the order exceeded that person’s delegated authority.

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•

Company providing notice as to who can bind the company. A company could give notice to a customer or supplier that only certain individuals are authorised to enter into contracts on behalf of the company. However, this would need careful management, and would need to be periodically restated, eg on changes of personnel within the customer’s or supplier’s organisation. A customer or supplier who knew that an employee of the other party was not authorised to enter into contracts at all, or the type of contract that the customer or supplier normally enters into with the other party, would have actual knowledge of the lack of authority and would not normally be able to bind the other party.

•

Where a person does not have authority to sign a contract. If a person does not have actual or apparent authority to sign a contract on behalf of his employer, nothing stated in the contract changes the position.



The inclusion of words in the contract such as: ‘the undersigned is authorised to sign this contract on behalf of XYZ Limited’



may give a right of action against the person signing if they are not authorised to sign, but will not make the contract binding on the company. Nevertheless, such words are sometimes considered useful to focus the mind of the signatory on the issue, and to prompt the signatory to check whether they do, in fact, have such authority. However, if a company holds out or represents that an employee or another person can enter into a contract on its behalf it may be later stopped from denying that it did not authorise it to do so (see eg  United Bank of Kuwait Ltd v Hammoud, City Trust Ltd v Levy [1988] 3 All ER 418, [1988] 1 WLR 1051, CA).

•

Obtaining a board resolution approving execution. The most certain way to ensure that the person signing has authority is to require the person’s employer to provide a certified copy of a board of directors’ resolution approving the execution of the contract and giving the individual signing delegated authority to sign it.



This is sometimes required for major contracts (and other company transactions). However, it is unrealistic for most contracts, particularly if the company is large, or all effective decisions are made by a controlling group company (which is based in another country), or it is difficult or impossible to organise a directors meeting in a timely manner.

•

Authority of directors. Although the Companies Act 2006 gives directors wide powers to run and bind their company, a party who wishes to enter into a contract with a company and does not obtain or seek a board resolution may need to consider whether there are any fetters on the directors’ authority, such as: •

previous board resolutions;

•

shareholders’ agreements; 127

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•

if the company is part of a group of companies;

•

third party financing.

These may restrict the power of the directors, although the other party may have no knowledge or may not be able to determine whether any of these are in place. However, even if there are such restrictions, given the wording of the Companies Act 2006 (in particular s  40), then the restrictions may not affect a party to a transaction with the company, as long as that party has acted in good faith. •

Other methods of ensuring that a person signing is authorised to do so on behalf of another. In addition to the points above, if a party wishes to check that a person is authorised to sign on behalf of another party: •

have a director sign the contract (after making a search at the Registrar of Companies that person named as a director is in fact so);

•

have business insurance to cover any loss;

•

obtain a parent company guarantee;

•

carry out due diligence on the other party and the person signing.

Some of these are only likely to be worthwhile if the contract is of sufficient value or importance to merit the work necessary to go down any of the routes suggested here. •

Is the contract to be signed as a deed? If the parties are companies incorporated or regulated by the Companies Act 2006 and wish to enter into the contract by deed and the parties are not to rely on the provisions of Companies Act 2006, s 44 then the person signing on behalf of the company will himself need to be appointed by deed (Companies Act 2006, s 47; Steiglitz v Egginton (1815) Holt NP 141; Berkeley v Hardy (1826) 5 B & C 355). Otherwise, the deed will need signing by a director (in the presence of a witness), two directors, or a director and the company secretary, and expressed to be executed by the company (ie  in accordance with Companies Act 2006, s 44).

Location in the agreement Matters concerning Capacity (or Authority) can be located in various sections of an agreement: • where indicating whether a person is authorised to sign on behalf of a party: •

in the Attestation/Execution Clause of the agreement;

•

and where the party is asserting as a fact that the person signing can do so, in Warranty clauses;

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• where indicating whether a person or job role has the authority to sign other types of document, other than the agreement itself, a Capacity clause might be located in the Boilerplate section of an agreement where a general statement is sometimes included stating who is authorised to deal with certain types of documents.

Linkage and use See Location in the agreement above.

Sample precedent material Precedent 1—Modern form of attestation/execution clause AGREED by the parties through their authorised signatories For and on behalf of [name of company] Precedent 2—Traditional form of attestation/execution clause AS WITNESS the hands of the duly authorised representatives of the parties to this agreement on the day and year before written. Precedent 3—Warranty as to authorisation The Company warrants that its duly authorised representative is [name] and that [name] has the necessary authority to enter into this agreement on the Company’s behalf. Precedent 4—Authority to vary or supplement agreement This agreement shall not be amended, modified, varied or supplemented except in writing signed by a duly authorised representative of each of the parties. Precedent 5—Authority to sign notices In the case of a corporation the notice may be signed by or on its behalf by a director or the secretary or by its duly appointed attorney or duly authorised representative. Precedent 6—Authority provided by resolution of the directors Pursuant to a resolution of the board of directors of the Company dated [date], [any director] or [[name of director], a director] of the Company has the necessary authority to enter into this agreement on the Company’s behalf. Precedent 7—Authority to give approval All approvals required pursuant to this agreement shall have no force or effect unless evidenced in writing and signed by a duly authorised representative of the Company. 129

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Precedent 8—Appointment of authorised representative [Party A] appoints [name] of [address] as its authorised representative for the purposes of this agreement and all statements of accounts and all money due under this agreement should be paid to the said representative who is hereby authorised to collect and receive such money and [Party A] confirms that the receipt of the said representative shall be a good and sufficient discharge in respect thereof. Precedent 9—Signature mandate by unincorporated society We confirm that the signatures set opposite their names in the table below are those of all the members of the [committee], the secretary and other officials authorised to sign, that such signatures are the genuine signatures of such persons and that such signatures operate as the specimen signatures of each of such persons.

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Charges

Purpose of the clause Background The word ‘charge’ can have a number of meanings in a commercial contract, including: •

fees or payments a party is to make under the contract, or the costs and expenses incurred by it (see Costs and expenses); or

•

legal and equitable charges (eg mortgages), as discussed in this section.

In addition, Retention of Title clauses often give rise to (legal) charges. The following paragraphs do not consider the drafting of legal or equitable charges, or the question of registration of charges. They instead focus on issues relating to the wording of boilerplate clauses that deal with the subject of charges. The area of law of the creation, enforcement and use of legal or equitable charges is beyond the scope of this book. Readers should consult specialist books (such as Goode on Commercial Law (5th Edn, 2017, Penguin Books), at Chapter 22, which sets out a summary of the available types of charges and other forms of security available), and/or obtain specialist advice.

Use of a Charges clause – to prevent charge over payments or assets Boilerplate language on charges is generally designed to prohibit a party from executing a charge in favour of a third party, eg: •

a charge over payments due under the contract; or

•

a charge over any assets that are the subject of the contract, eg  in a patent licence agreement, the licensed patents (a typical boilerplate clause prohibiting charges, in this example part of a patent licence agreement, might read as in Precedent 1).

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Drafting issues •

Extent of a ‘charge’. In some cases, the meaning of a charge may need to be defined, for example: •

an ordinary bank overdraft, which is routinely used by many businesses, may require the business to grant a floating charge over the assets of the business (for a discussion of the meaning and difficulties with such a charge see Goode on Commercial Law, Chapter 25). A  normal prohibition on charges clause may prevent a business obtaining the overdraft;

• if there is likelihood of the creation of a charge that will not come within a conventional meaning of a charge, then a definition can be used (see Precedent 8). For particular types of agreement, the type of financial structure used by a party may be complex or innovative, and this could include unusual or uncommon charges; •

•

Prohibiting the entering of a charge. The main purposes of prohibiting charges are likely to be: •

availability of assets: to ensure that the assets needed for the operation of the contract remain available for the contract, and

•

stopping an ‘undesirable’ third party acquiring an interest in a contract: to prevent a situation arising where a third party, eg  a bank, acquires an interest in the contract (eg  a right to receive payments), which might interfere with the smooth running of the contract or which the other (non-charging) party would find undesirable for some other reason.

Foreign parties. Certain types of charges may be only available in particular countries or have different names. Therefore, a contract drafted using English law terminology involving non-UK parties may not encompass the type of charging mechanism available to the non-UK party and therefore not work as intended (see Goode on Commercial Law at pp 736–737 for a discussion on why the floating charge referred to above was not adopted in the United States and other countries). For a contract with a non-UK party specialist advice is likely to be required so that appropriate language is used.

Location in the agreement The Boilerplate section of an agreement is likely to contain a Charges clause. For routine agreements, the prohibition on entering into a charge is likely to be one of a series of things or situations one or more of the parties to the agreements is not permitted to do, such as eg not to assign, mortgage, delegate or charge, etc. Such prohibitions are often put into one clause (often in an Assignments clause). 132

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Linkage and use The use of a Charges clause needs handling with care (whether as a stand-alone clause or part of an Assignments clause). Eg, inserting such a provision into an agreement could prevent a party obtaining a bank loan or overdraft to fund its normal day-to-day operations, where the bank takes a charge over the fixed/ floating assets of the party. Where a party is likely to be involved in obtaining funds, for example so that party can perform some of its obligations under an agreement, then a default ‘no charges’ clause will clearly be inappropriate as such. For example, a party who wishes to carry out research in order to create a product may need to raise funds to pay for the staff, assets and facilities whilst it is carrying out the research work. The party may need to license intellectual property to buy equipment etc. A commercial funder will often require that it has a charge over the intellectual property and/or assets to protect its investment. In such a case, wording will be needed to permit charges to be obtained/registered, and should normally be considered with the assistance of specialist advice.

Sample precedent material Precedent 1—Prohibiting charging in a patent licence agreement Neither Party shall assign, mortgage, charge, pledge, grant any lien or security interest over, or otherwise transfer or encumber, without the prior written consent of the other Party: (a) any rights or obligations under this agreement, nor (b) any of the Patents or rights under the Patents. Precedent 2—No charging clause Neither Party shall assign, mortgage, charge, pledge, grant any lien or security interest over, or otherwise transfer or encumber, any rights or obligations under this agreement without the prior written consent of the other Party. Precedent 3—No charging clause – patent licensing agreement Neither Party shall assign, mortgage, charge or otherwise transfer any rights or obligations under this agreement, nor any of the Patents or rights under the Patents, without the prior written consent of the other Party. Precedent 4—No charging clause – patent assignment The Assignee agrees with the Patentee throughout the Term not to sell, assign, mortgage, charge or otherwise transfer any right, title or interest in or to the Patent.

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Precedent 5—Warranty – properties free from charge Each of the Properties and their title deeds are free from any mortgage, charge, rent charge, lien, encumbrance or other third party right whether in the nature of security or otherwise. Precedent 6—No charging clause – agency agreement This agreement is personal to [CD], which may not without the written reasonable consent of [AB] assign, mortgage, charge (otherwise than by floating charge) or dispose of any of its rights under this agreement, or sub-contract or otherwise delegate any of its obligations under this agreement (such consent not to be unreasonably withheld or delayed). Precedent 7—No charging clause – joint venture agreement The Company shall not create or issue any debenture, mortgage, charge or other security over any assets of the Company (except for the purpose of securing sums borrowed by the Company from its bankers in the ordinary and usual course of business). Precedent 8—Definition of charge The expression charge shall be deemed to include any debenture, mortgage, charge, lien or encumbrance whether created by deed or document or by conduct or operation of law.

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Commencement date

Purpose of the clause Background The date when the parties sign an agreement may be different to when: •

an agreement comes into effect; or

•

some or all of the obligations under the agreement commence.

Default position—agreement commences on signature date Unless the parties explicitly provide otherwise: •

an agreement takes effect immediately upon all the parties signing it; or

• when the parties execute an agreement as a deed, the agreement takes effect upon delivery of the deed. Where the commencement date is different to the date on which the parties sign the agreement (or if a deed, it is delivered), there should be explicit wording in the agreement to make this clear.

Drafting issues •

Different commencement date and date of the agreement. Does the agreement come into effect or some obligations commence on a different date than when the agreement was signed?

•

Suggested best practice. If so, is there: •

a definition of ‘Commencement Date’ stating a date (see Precedent 1)?

• a clause (or wording in another clause) that indicates that the agreement takes effect or obligations commence on the date specified in the definition of Commencement Date (see Precedent 2)? •

Is there a need for different commencement dates? Do all parts of the agreement or all obligations commence on the same day? 135

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•

if so, is one definition of a Commencement Date still appropriate?

•

have all the parts of the agreement been clearly identified as to when they commence?

•

have the consequences been spelt out if one part does not commence on the correct date?

• if there is more than one commencement date, have all the obligations or rights been clearly referenced to the correct dates? For example, if some obligations start from the date of the agreement, but the main obligations start at a later date, is there a clear indication that any rights to terminate start from one date rather than the other? (eg  see BP  Exploration Operating Co Ltd v Dolphin Drilling Ltd [2009]  EWHC  3119 (Comm), and Case analysis below). Are any payments or deadlines calculated by reference to the commencement date? If so, is there a reference to the right commencement date? •

Confusing the commencement date and the date of the agreement. If using an existing precedent or a draft agreement provided by another party, is there any confusion between the commencement date and the date of the agreement? Eg: • if a party inserts the intended commencement date in the first line of the agreement rather than the date on which the agreement was signed. This is bad practice and may amount to forgery (Forgery and Counterfeiting Act 1981, s 9(1)(g)); If it is felt necessary to state the commencement date in the heading of the agreement, it can be done with wording such as that in Precedent 3; • using the American practice of beginning contracts with the words ‘This agreement dated as of (commencement date)’ is not recommended, as the phrase ‘as of’ may be ambiguous;

•

Is the commencement date before the date of the agreement? Where the work or tasks to be carried out under the agreement start before the agreement is signed by the parties, this should be clearly stated, normally in a clause with the Main Commercial Provisions. Otherwise, there may be a danger of confusion, as stated above (see Precedent 4). For example, the parties may have agreed to enter a contract orally and also agreed when they would start performing their obligations, but leave the signing of their written agreement to a later date.

Location in the agreement Where the phrase ‘commencement date’ is used in several places in an agreement (or there are references to that date in several places) then there can be a definition of ‘commencement date’, which can appear: 136

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•

in a Main Commercial Provision clause indicating when the agreement is to take effect or its obligations are to commence; or

•

in the clause dealing with termination issues, and will be used to specify the length of the agreement, or for the purpose of specifying when one or more of the parties can terminate the agreement.

Linkage and usage The definition of Commencement Date is normally linked to the: •

Main Commercial Provisions to indicate: •

when the core obligations are to commence: eg  ‘The Supplier shall supply the Services on the Commencement Date’; eg ‘The Manufacturer shall begin to manufacture the Products from the Commencement Date’;

•

when payment shall be made: eg  ‘The Customer shall make the Payment within 30 days of the Commencement Date’.

•

Secondary Commercial Provisions such as: •

the length of the agreement: eg  ‘The agreement shall commence on the Commencement Date and shall continue for a period of 12 months from and including the Commencement Date’;

•

when the agreement is to terminate;

• if the agreement is to automatically renew, and/or whether notice must be given to prevent automatic renewal.

Sample precedent material Precedent 1—Definition Commencement Date     shall mean [date] Precedent 2—Clause indicating date agreement will come into effect This agreement will come into effect on the Commencement Date. Precedent 3—Stating commencement date at head of the agreement This agreement is made on [date signed] and takes effect from [desired commencement date] (the ‘Commencement Date’). 137

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Precedent 4—Commencement date is before the date of the agreement (using a separate definition of commencement date) The agreement shall be deemed to have commenced upon the Commencement Date. Precedent 5—Commencement clause – fixed term This agreement shall commence on [date] (the ‘Commencement Date’) and continue for a period of [12] months unless terminated sooner by either party under Clause [no]. Precedent 6—Commencement date same as the date the agreement is signed Commencement Date shall mean the date set out at the head of this agreement. Precedent 7—Commencement date – between two periods Commencement Date shall mean a date between no earlier than 1 June 2017 and no later than 31 December 2017. (This definition will need linking to a substantive clause indicating the circumstances when the actual Commencement Date will be fixed (the occurrence of some event, the completion of some work, the agreement of the parties), and the notification of the date to the other party or parties.)

Case analysis BP Exploration Operating Co Ltd v Dolphin Drilling Ltd [2009] EWHC 3119 (Comm) 1 This contract involved the hiring of a drilling rig by the claimants from the defendants. 2

The defendants first needed to do some preparatory work and deliver the drilling rig to the location where it was to be used.

3 The use of the drilling rig to drill would take place from the ‘Commencement Date’. The definition of ‘Commencement Date was defined as: ‘The Commencement Date shall be no earlier than 1 January 2010 and no later than 31 March 2010.’ 4 The termination clause included the following words: ‘22.1 The COMPANY shall have the right by giving notice to terminate all or any part of the WORK or the CONTRACT at such time or times as the COMPANY may consider necessary for any or all of the following reasons: 138

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(a)

to suit the convenience of the COMPANY;

…’ 5 The defendant argued, in the context of the number of clauses dealing with termination, and several clauses dealing with payments in the event of termination, the clause needed to be read as allowing only for termination after the Commencement Date. If the claimant was entitled to terminate whenever it wished then the defendant would be entitled to a much smaller sum than if the termination could only take place after the Commencement Date. An additional point was that there was a severe economic downturn and the defendant would not be able to hire out the rig at anything approaching the rate agreed with the claimant. 6 Unsurprisingly the judge found that the wording of 22.1(a) quoted above was clear enough and did not lead to ‘commercial absurdity’. The case does not raise any new points of law or new interpretation of existing law, but does highlight the importance of carefully checking each part of the agreement against others so that the commercial objectives of a party are still met (or at least the party is aware of the consequences if they are not).

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Completion

Purpose of the clause In the sale of real property or the sale of a business or the business assets, completion is a well-understood stage in the process of sale (at least for lawyers experienced in those type of transactions): •

sale of real property. On completion, the formal conveyance document for the property is executed and delivered, and a number of other events occur, eg the hand-over of keys, manuals for the operations of equipment, guarantees provided by third parties;

•

sale of a business or business assets. The completion events here may include the execution of formal assignments of goodwill and intellectual property, and the delivery of papers, eg accounting and company secretarial records, as well as a number of other matters.

In effect, the formal stage in the transfer of ownership of these things occurs upon completion.

Drafting issues •

Meaning of completion. There is potential for confusion if a phrase such as ‘on completion of this agreement’ is used loosely in a contract, particularly in contracts involving the performance of work. Depending on how the phrase is used, it is possible to understand the word to mean: •

the formal coming into effect of the contract (the start of the contract); or

• the completion of work that a party or parties perform under the contract (the end of the contract). •

Suggested best practice. An agreement should only include the ‘completion’ where the meaning is unambiguous, eg: •

the contract provides for specific events to take place ‘on completion’; and

• the date or circumstances in which completion is to take place are defined. 140

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•

US practice. In contracts drafted by US lawyers, the expression ‘closing’ is used in a similar sense to ‘completion’.

Location in the agreement For a clause drafted as suggested, best practice is to place it: • in the Definitions section of the agreement, stating when the date for completing matters will take place (see Precedents 1, 2, 3, 4 and 5); •

usually in the Main Commercial Provisions, a clause indicating what the completion activities are.

Linkage and use Completion clauses are traditionally found in specialised areas of legal practice such as: •

conveyancing (commercial and domestic);

•

sale of a business (eg, sale of all the shares of a business, or the sale of its assets);

•

shareholder investments and fundraising (eg, in shareholders’ agreements and other related documentation);

•

intra-group re-organisations where assets etc are transferred or sold from one company to a company in the same group of companies.

The activities that are set for completion are sometimes fairly lengthy and the clause in an agreement dealing with completion often refers to a schedule, which sets out in greater detail what is to happen or what is to be transferred. With other types of agreements there may not be a ‘completion’ clause drafted in the sense suggested above, but there are often: •

a range of activities, which need to take place at certain times. This will often be drafted in a way such as that a party will be required to carry out the ‘Services’, for example: •

and the definition of ‘Services’ will refer to a schedule setting out a range of tasks and the dates when they need to be carried out by, or alternatively

• in accordance with the ‘Specification’, and the definition of the Specification will set out the range of tasks and the dates when such tasks need to be carried out. • a Consequences of Termination clause spells out what needs to be done at the time an agreement terminates. Completion clauses also have some features in common with Further Assurance clauses. 141

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Sample precedent material Precedent 1—Completion – definition Completion means completion of this agreement in accordance with Clause [no]. Precedent 2—Completion – alternative definition Completion means the performance by the Parties of their respective obligations under Clause [no]. Precedent 3—Completion – alternative definition Completion shall mean the performance by the Parties of the matters set out in Clause [no]. Precedent 4—Completion – definition in eg sale conditions Completion means actual completion of the sale and purchase pursuant to these Conditions. Precedent 5—Completion – definition in eg timeshare agreement Completion means the act of fully vesting in a Purchaser his interest as purchased under the [Timeshare Purchase Contract]. Precedent 6—Completion date ‘The Completion Date’ means the date of actual completion of the matters provided for in Clause [no] and Completion shall be construed accordingly. Precedent 7—Place of completion Completion shall take place immediately on the signing of this deed at [address] (‘Completion’). Precedent 8—Place of completion – alternative form Completion of the sale and purchase and payment of the balance of the Purchase Price [and of the value added tax] shall take place on the Completion Date at the offices of the Seller’s Solicitors or where they may direct. Precedent 9—Place of completion – alternative form Completion of the sale and purchase hereby agreed shall take place on [date] at the offices of the Vendor’s Solicitors or at such other place as the Vendor’s Solicitors and the Purchaser’s Solicitors may agree. Precedent 10—Place of completion – in eg sale of shares Completion of the sale and purchase and payment of the balance of the Purchase Price [and the [balance of the] VAT] is to take place on the Completion Date at the offices of the Seller’s Solicitors or where they may direct [and the Seller must provide the Buyer with a receipted VAT invoice addressed to the Buyer for the amount of the VAT paid by him]. 142

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Precedent 11—Banker’s draft to be delivered on completion At Completion the Purchaser shall deliver to the Vendor’s Solicitors (who are irrevocably authorised to receive the same) a banker’s draft in favour of the Vendor for £[ ]. Precedent 12—Documents to be delivered on completion – sale of business At Completion the Vendor shall deliver or cause to be delivered to the Purchaser: 1 duly executed assignments of the Goodwill and such of the Industrial Property Rights as are capable of assignment in the agreed terms; 2 a duly executed assurance or transfer in the agreed terms necessary to vest title in the Property in, or transfer the Property to, the Purchaser together with all deeds and documents relating to the title of the Vendor to the Property. Precedent 13—Completion money ‘The Completion Money’ means the Purchase Price (or any outstanding balance of it) as adjusted by all sums due between the parties at Completion. Precedent 14—Completion and sale of business agreement 1 Provided that this agreement has not been terminated pursuant to Clause [no], completion of the sale and purchase hereby agreed shall take place on [date] at the offices of the Vendor’s Solicitors or at such other place as the Vendor’s Solicitors and the Purchaser’s Solicitors may agree. 2 At completion the Vendor shall deliver or cause to be delivered to the Purchaser: (a) duly executed assignments of the Goodwill and such of the Industrial Property Rights as are capable of assignment in the agreed terms; (b) (etc). Precedent 15—Completion activities 1 Completion of this Agreement shall take place on the Completion Date [at the Completion Time] at [address] [or such other place, date and time as the Parties may agree]. 2 At Completion Party A  shall deliver or cause to be delivered to the Purchaser: (a) duly executed assignments of the Goodwill and such of the Industrial Property Rights as are capable of assignment in the agreed terms; (b) (etc). 143

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3 If Party A does not comply with any of the requirements of Clause 2 above on the Completion Date and at the Completion Time then Party B may at its discretion (without prejudice rights): (a) set another Completion Date and Completion Time, and give notice in writing to Party A  of the new Completion Date and Completion Time; or (b) continue with Completion to the extent possible (but without prejudice to its rights); or (c)

terminate this Agreement in accordance with the provisions of Clause [no].

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Conditions precedent and subsequent

Purpose of the clause Background In an agreement, the word ‘condition’ can have a number of meanings: 1 a contractual provision, breach of which entitles the other party to terminate the contract (ie a condition distinguished from a warranty); 2

in a more general sense, any type of contractual provision;

3

a condition precedent (or pre-condition); or

4

a condition subsequent.

This section considers the last two of these meanings.

Meaning of condition precedent Sometimes, contracts are made on the basis that certain events must take place before the contract, or a part or parts of an existing contract, will come into effect; for example: • a building contract might be made conditional upon a party obtaining planning consent for the building works; or •

a manufacturing contract may be dependent on a buyer first raising funds before it can place an order with the manufacturer; or

• a research and development agreement may contain an option to negotiate, the provisions of a licence to the results of the research and development, with the option only being triggered if the research and development produces the expected results. If planning consent is not obtained or the funds are not raised or the research and development is not successful, the contract either will not come into effect or, depending on how the condition is drafted, may be cancelled or performance suspended. Although the phrase ‘condition precedent’ is often used to indicate that certain events must occur before a contract or part of a contract will come into effect, this is not always the case. The phrase is also used (or interpreted by the 145

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courts) as meaning (during the existence of an agreement) that unless some action is taken or notice is given by one party, an obligation will not arise or duty to act will not occur for the other party. Eg: •

where one party had not allowed the other party to control the negotiations and settlement of any insurance claims, then the other party was not liable to pay any claim that the other party did not control (see Eagle Star Insurance Co Ltd v JN Cresswell [2004] EWCA Civ 602, [2004] 2 All ER (Comm) 244 and see Case analysis);

• a clause required a building contractor to notify an architect where the contract required an extension of time. Another clause stated that if the contractor failed to comply with the first clause then it would not be entitled to an extension of time. The failure to notify was a condition precedent and failure to do so meant the contractor did not get the extension time. This meant that the contractor would be liable to pay liquidated damages (because under a third clause he was not able to meet a completion date) (City Inn Ltd v Shepherd Construction Ltd [2003] BLR 468, 2003 SLT 885).

Meaning of condition subsequent It is possible to make a contract on the basis that if a future event takes place or does not take place during the life of the contract, the contract may be terminated. This is sometimes known as a condition subsequent.

Form To create a condition precedent or subsequent it is not necessary to use any particular form of words. Nor is any special interpretation given when such words are used. They are interpreted like any other contractual provision. The use of the phrases ‘condition precedent’ and ‘condition subsequent’ are simply convenient labels for any contractual provision of these general types. It is not necessary to use the words ‘condition precedent’ for the courts to interpret a clause as a condition precedent (see Eagle Star Insurance Co Ltd v JN Cresswell [2004] EWCA Civ 602, [2004] 2 All ER (Comm) 244) and Case analysis below). For example, words such as ‘provided that’, ‘provided always that’ or ‘if’ (WW  Gear Construction Ltd v McGee Ltd [2010]  EWHC  1460 (TCC); Burford UK Properties Ltd v Forte Hotels (UK) Ltd [2003] EWCA Civ 1800) could all be a condition precedent. Where a clause does not indicate that it is a condition precedent then the contract drafter should draft the clause so that it is clear: •

that it is necessary to perform one obligation before another obligation can become effective or needs performance; or

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• that the second obligation becomes effective or requires performance only in return for the first obligation (that is until the first obligation is performed there is no entitlement to the second) (Astrazeneca UK  Ltd v Albermarle International Corpn [2011]  EWHC  1574 (Comm) and Case analysis below).

Drafting issues When drafting a condition precedent or subsequent the following points are likely to need consideration: •

Until fulfilment of the condition is there a binding contract? If the parties sign an agreement which contains a condition precedent: •

have the parties entered into a binding agreement where all or some of the provisions will start operation once the condition is fulfilled (in traditional legal language, called a ‘contingent’ condition); or

• is there no binding agreement at all until the condition is met (in traditional legal language called a ‘promissory’ condition)? See the analysis in UR  Power GmbH  v Kuok Oils and Grains Pte Ltd [2009] EWHC 1940 (Comm). •

Is the condition so vague that it is void for uncertainty? In Lee-Parker v Izett (No  2) [1972] 2  All ER  800, [1972] 1  WLR  775, it was held that a condition providing: ‘This sale is subject to the purchaser obtaining a satisfactory mortgage’ was void for uncertainty. As a result, the contract was void.

•

What clauses does the condition apply to? Does the clause state clearly whether it is the entire agreement or only certain clauses, which do not come into effect (or, in the case of conditions subsequent, cease to have effect) if the condition is not met?

•

Is there is a time limit on the condition being met? This will often be desirable; if the contract is binding on the parties, but operation of other provisions is merely suspended until the condition is met, then one or both parties may not know when it is possible to terminate the agreement or what consequences flow if a party does so, unless the contract contains clear wording.

•

What is to happen if the condition is not met? If a condition is not met: •

does the agreement come to an end automatically? or

•

is performance of the agreement or obligations under the agreement suspended, and only resume when the condition is met (ie  the agreement continues in existence)? or

•

can a party waive the compliance with the condition? or 147

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•

•

will the party who is to comply with or perform the condition (as of right or with the agreement of the other party) get an extension of time for it to be met?

Is it clear whether either party has any obligation to try to ensure that the condition is met? If so, how extensive is that obligation? Such an obligation may be implied (Kyprianou v Cyprus Textiles Ltd [1958] 2 Lloyd’s Rep 60), but the extent of any implied term may be very limited. In C  Czarninkow Ltd v Rolimpex [1979]  AC  351, [1978] 2 All ER 1043, HL, it was held that a clause requiring a seller to ‘obtain’ an export licence did not imply an obligation to maintain it in force. Should the amount of effort that a party needs to use be specified (such as using a ‘best endeavours’ or ‘reasonable endeavours’ obligation or be more specific as to what the party needs to do)?

•

What is a party liable for if it fails to meet a condition? If a party is obliged to try to ensure that the condition is met, is that party to be liable for failure to meet the condition? Eg, should that party be required to reimburse the other party’s costs in negotiating the contract?

•

Is whether a condition has been met subject to the approval of another party? A  party may be responsible for obtaining permission to carry out some activity (eg, obtaining ethics committee approval in order to carry out a clinical trial), but once it has been obtained, should the other party have the right to decide whether what has been obtained is satisfactory?

Location in the agreement Conditions precedent and subsequent are normally found: •

where the agreement as a whole is to come into operation based on the condition precedent, at the beginning of the agreement with other Main Commercial Provisions;

•

where the agreement is to come to an end based on a condition subsequent, in or next to the provisions relating to termination of an agreement with other Secondary Commercial Provisions;

•

where a party is required to carry out some action or give notice, in various places in the agreement.

Linkage and use A  Condition precedent, although a freestanding clause, will often refer, or be linked, to several other clauses where some work is to be carried out. Where a party is required to obtain some consent or approval before the agreement otherwise commences there may be nothing to be done until the consent or 148

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approval is obtained. However, if some work is to be carried out or has been carried out then some of the provisions of the agreement may operate or come into effect. If the latter is the case, it may be necessary to specify which clauses come into effect and the consequences if, for example, the condition precedent is not met. Conditions precedent and subsequent are mainly used where: •

finance: a party may need to obtain finance, receive funds, letters of credit, etc;

•

regulatory: a party may need to obtain planning permission, licences or consents (eg, obtaining export licences, registration with the Information Commissioner, obtaining permission to carry out clinical trials, applying for or prosecuting registration of patents or trademarks, etc);

•

work to be carried out: an agreement may provide discrete stages for work to be carried out. Eg, a party may need to carry out work on a specification or design or work out technical aspects. The agreement can specify that this work should be carried out and, if successful, the rest of the agreement will come into effect. For example, a software development agreement may have an initial stage where the developer and the client discuss and agree the specification for the software that the developer will develop. Unless there is agreement on the specification then the second stage (the development of the software) will not take place;

•

payment: an agreement may provide that unless certain information is provided by a party requiring payment, then it will not receive payment;

•

extending or changing the work to be done: the agreement may provide for the possibility that a party may request more time to complete its obligations or change what work it will carry out. Is such a change dependent on the consent of the other party? If that is the case then obtaining the consent may be a condition precedent for the party requesting the extra time etc;

•

another agreement needs to be signed: it may be provided that an agreement will only be entered into once another agreement has been executed. Eg, in a sale of business assets, the asset purchase agreement will need to be entered into first, before a second agreement dealing with the assignment and licensing of any intellectual property. The second agreement may be drafted with a condition precedent that the asset purchase agreement must first have been executed.

Although it is not clear from the decided cases, it would appear that there are two practical points to consider in addition to the Drafting issues set out above: •

that if the phrase ‘condition precedent’ is not used, there may need to be an examination of whether the clause amounts to a ‘condition precedent’ (such as described above under ‘Form’); and

• for a clause to be considered a ‘condition precedent’ when it is not so named, there should be clear consequences spelt out for failure to meet the requirements of the clause. 149

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Sometimes the phrase ‘condition precedent’ will be used in Entire agreement clauses.

Sample precedent material Precedent 1—Condition precedent – planning consent This agreement shall not come into effect until Party A  has obtained Planning Consent for the Property. If Party A  fails to obtain Planning Consent for the Property on or before [date], this agreement shall not come into effect and neither party shall have any obligations to the other under this agreement. Precedent 2—Condition precedent – obligations in agreement The Planning Obligations contained in the second schedule to this agreement shall not come into effect until the Owner has begun development of the Land in reliance upon [specify the planning permission]. Precedent 3—Condition precedent – deed of adherence It shall be a condition precedent to the coming into effect of [this agreement or Clause [no] below] that Party A shall have executed and delivered to Party B no later than [date] a [Deed of Adherence] in the form attached to this agreement. If such condition is not met by that date, this agreement shall not come into effect. Precedent 4—Condition precedent – patent grant The obligations on Party A under Clause [no] of this agreement shall not come into effect until the day after the date on which Party A  receives formal notification from the Patent Office that the Patent has been granted. Precedent 5—Condition subsequent – minimum performance in agency agreement This agreement shall terminate in the event that the Minimum Performance is not achieved at any time. Precedent 6—Condition subsequent – company formation agreement This agreement shall terminate if, at any time, as a result of a transfer of shares made in accordance with this agreement by either party, that party holds no shares in the capital of the Company. Precedent 7—Condition subsequent – property management agreement If the Secretary of State withholds his consent under Clause [no] [consent to continuation of agreement] above this agreement shall terminate at the end of the relevant year or if later [6] months after the Secretary of State notifies the Council of his decision to withhold consent. 150

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Precedent 8—Condition subsequent – contract for services In the event that the Production is abandoned before the official opening night in the West End of London the engagement of the Designer under this agreement shall terminate.

Case analysis Eagle Star Insurance Co Ltd v JN Cresswell [2004] EWCA Civ 602, [2004] 2 All ER (Comm) 244) In a reinsurance contract the underwriters required that they controlled all negotiations of claims (see in particular sub-clause (b)): ‘CLAIMS CO-OPERATION CLAUSE The company agree (a) To notify all claims or occurrences likely to involve the Underwriters within 7 days from the time that such claims or occurrences become known to them. (b) The Underwriters hereon shall control the negotiations and settlements of any claims under this Policy. In this event the Underwriters hereon will not be liable to pay any claim not controlled as set out above. Omission however by the Company to notify any claim or occurrence which at the outset did not appear to be serious but which at a later date threatened to involve the Company shall not prejudice their right of recovery hereunder.’

It was held by the Court of Appeal that this clause amounted to a condition precedent: ‘19. …The question then arises whether it is a condition precedent to reinsurers’ liability that the opportunity to control negotiations or settlements should be afforded to them. 20. The answer to this question is Yes, because the clause says in terms that in the event of there being negotiations or settlements reinsurers will not be liable to pay any claim not controlled by them. The judge [at first instance] was able to avoid this conclusion by (inter alia) pointing out the clause did not use the term “condition precedent” as such […]. As to that, it is not essential that the very words “condition precedent” be used to achieve the result that reinsurers will not be liable unless a certain event happens. Other words can be used, if they are clear. Other words have been used which, in my view, are clear.’ ‘41. …The first sentence of para (b) [of the CLAIMS CO-OPERATION CLAUSE] does not use the language of condition precedent. Neither does the second sentence, at any rate in the sense that there is no express reference to “condition precedent” in it. However, it does provide that in the circumstances there contemplated the reinsurers “will not be liable to pay any claim”. Those are strong words, if not the language of condition precedent, at any rate the language of exclusion.’

Astrazeneca UK Ltd v Albemarle International Corpn [2011] EWHC 1574 (Comm) (further details under Options and Rights of First Refusal) A  supply agreement contained a clause giving the defendant a right of first refusal: 151

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Conditions precedent and subsequent ‘H-Switch to Propofol In the event that at any time BUYER reformulates or otherwise changes its Diprivan brand to substitute propofol for the PRODUCT, BUYER will so notify SELLER and will give SELLER the first opportunity and right of first refusal to supply propofol to BUYER under mutually acceptable terms and conditions.’

It also contained a clause concerning delivery: ‘2. DELIVERY – Goods shall be delivered on the date or during the period specified in the purchase order and seller shall give reasonable notice of the proposed time and date of actual delivery. The seller shall give notice of any likely delay in delivery as soon as practicable. All goods must be delivered at the delivery point specified in the purchase order. Buyer may refuse delivery of goods not so delivered or may, at its option, arrange for delivery to the delivery point at the expense and risk of the seller.’

The clauses were held not to be conditions precedent: ‘249. The first thing to note in relation to this contention is that there is nothing in clauses D […] or Condition 2 which expressly makes performance of one obligation contingent upon performance of the other. Whilst it is clear that, for performance of a provision in a contract to be a condition precedent to the performance of another provision, it is not necessary for the relevant provision to use the express words “condition precedent” or something similar, nonetheless the court has to consider whether on the proper construction of the contract that is the effect of the provisions: see DRC Distribution Ltd v Ulva Ltd [2007] EWHC 1716 (QB) paragraph 39. 250. …in the absence of an express term, performance of one obligation will only be a condition precedent to another obligation where either the first obligation must for practical reasons clearly be performed before the second obligation can arise or the second obligation is the direct quid pro quo of the first, in the sense that only performance of the first earns entitlement to the second. 251. In the present case, there is absolutely nothing in clause H  to suggest that performance of [the Claimant]’s obligations under it was contingent on performance by [the Defendant] or to suggest that [the Defendant] would not be entitled to exercise the rights clause H gave it, unless it had complied fully with its delivery obligations in respect of DIP. It would have been very easy for [the Claimant] to insist upon some express provision to that effect, but in the absence of such a provision, in my judgment, there is nothing to link performance of the one obligation with performance of the other. 252. Mr Odgers seeks to overcome this in two ways. First, it is contended that the wording of clause H: “[the Claimant] reformulates or otherwise changes its Diprivan brand to substitute propofol for the PRODUCT” contemplates that the product (DIP) is being provided by [the Defendant] under the supply agreement. In my judgment, this point is hopeless. Clause H is dealing with which ingredient [the Claimant] wants to use in its drug, Diprivan, and has nothing whatsoever to do with [the Defendant]’s delivery obligations under the supply agreement. 253. Second, it is contended that [the Defendant]’s willingness to supply DIP to [the Claimant] in accordance with its obligations must have been taken for granted when agreeing to give [the Defendant] the opportunity to supply propofol, and that the parties cannot have contemplated that if [the Defendant] was wrongfully refusing to supply DIP, [the Claimant] should still be obliged to use it to supply propofol. In my judgment that is no more than an assertion which reflects [the Claimant]’s internal attitude at the time – namely, why 152

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Conditions precedent and subsequent should it contract for propofol with a party which was refusing to supply the quantities of DIP which [the Claimant] wanted to build up before supply of propofol commenced in earnest. 254. However, there is simply nothing in the contract to suggest, either expressly or by implication, that any entitlement under clause H was contingent upon supplying whatever DIP [the Claimant] asked for. The reality is that, whilst [the Claimant] undoubtedly became disenchanted with [the Defendant] towards the end of January 2008, because [the Defendant] would not supply the DIP it wanted, there was no contractual term or linkage which justified translating that disenchantment into a refusal to accept an offer from [the Defendant] which otherwise matched the offer from the third party.’

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Confidentiality

Purpose of the clause The use of a confidentiality clause allows one or both parties to an agreement to keep matters connected with their agreement confidential. If the parties fail to include a provision in an agreement or otherwise indicate that the information the parties disclose to another is confidential then they will have to rely: •

on an equitable obligation of confidence arising; or

•

on a contractual term being implied into their contract by a court in the event of a dispute reaching the court.

The Trade Secrets Directive From 5 July 2016 a further form of protection is available to contracting parties, specifically that provided by the Trade Secrets Directive (2016/943), which is independent or in addition to the protection offered by the two methods stated above or any agreed contractual provisions. National governments have up to two years to implement the Directive into domestic law (which for the UK is likely to occur before the UK leaves the EU). Although detailed consideration of the Directive is outside the scope of this book, a few points concerning its provisions are included here, as for the first time in the UK a statutory and general form of protection is provided to one type of confidential information, ie  commercial confidential information. The Directive covers information that: 1

is secret; and

2

has commercial value because it is secret; and

3

is subject to reasonable steps by the person who is in lawful control of it to keep it secret.

A  principal aim of the Directive is to enable ‘trade secret holders’ to have access to procedures and remedies to ‘prevent, or obtain redress for, the unlawful acquisition, use or disclosure’ of the trade secrets of the ‘trade secret holder’. For the Directive:

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1

unlawful acquisition means the acquisition of a trade secret without the consent of a trade secret holder when carried out by ‘unauthorised access to, appropriation of, or copying of any documents, objects, materials, substances or electronic files’ as well as conduct which is not in accordance with ‘honest commercial practices’; and

2

unlawful use and disclosure means disclosure or use when carried out without the consent of the trade secrets holder, by a person who has acquired the trade secret unlawfully; or in breach of a confidentiality agreement; or in breach of a contractual provision which limits the use of the trade secret.

The Directive also provides some exceptions to the protection offered by the Directive to commercial confidential information, including where a person has obtained the trade secret by: •

means of independent discovery or creation; or

•

means of observation, study, disassembly or testing of a product which has been made available to the public and is in the lawful possession of the person who acquired the information (and that person is not under an obligation not to acquire the trade secret).

Some of the provisions overlap with the existing law of confidence in the UK as developed by the courts, principally from the case of Coco v AN Clark (Engineers) Ltd [1969] RPC 41. At the time of writing there was no information available about how the UK government will implement the Directive into UK law, but its initial view was that the UK equitable and contractual law of confidence was consistent with the Directive (according to the document submitted by Department of Business, Innovations and Skills in 2013 to a parliamentary committee, when the Directive was still in a draft form). Both the UK law of confidence and the Directive are concerned with information that is secret, and they both aim to deal with unauthorised use and disclosure. A key difference is that the Directive only deals with confidential information that is of commercial value. Other matters that the Directive covers, but which are not generally part of the UK law of confidence, include: •

unauthorised acquisition,

•

the Directive’s operation is not dependent on there being an obligation of confidentiality between the holder of the confidential information and the person who is not in lawful possession of it; and

•

the Directive includes specific exceptions (some of which are noted above). Although exceptions are not part of the general UK law of confidence, such exceptions (and others) are normally included in confidentiality agreements.

For analysis of the Directive (and comparison of the provisions of the Directive and the UK law of confidence) see Anderson and Warner Drafting Confidentiality Agreements (3rd Edn, Law Society, 2015). 155

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Contractual provisions Equitable or implied contractual confidentiality obligations are not likely to provide the kind of protection a party will want, let alone provide sufficient control over the uses that one party can make of the confidential information. Best practice is that the parties include, at a minimum, some wording indicating that the information that the parties disclose is confidential. Because, in the absence of such wording and a court not finding an equitable obligation arising or an implied term of confidence, the party in receipt of the information may be able to use that information to its competitive advantage, or to the competitive disadvantage of the disclosing party. How detailed such a clause should be will depend on the subject matter of the agreement and the relationship of the parties. In many cases a short general clause, as in Precedent 1, will often be sufficient. The wording in Precedent 1 has some deficiencies, but is suitable where a very brief clause is required, where the information that may be disclosed is not thought to be particularly significant, and that the fact that parties are in a contractual relationship is not something that the parties wish to keep secret. In particular, Clause 1.1 does not address the question of when information is to be regarded as confidential information; effectively, this is left for the court to determine. Where, however, as part of the agreement sensitive or valuable information is supplied by one party to the other (eg in a software licence, or a company takeover or merger), then the contract drafter will wish to use more detailed provisions. Sometimes it may be appropriate for them to enter into a separate confidentiality agreement, particularly if, prior to the parties signing a substantive agreement, they enter into negotiations that will call for the supply of confidential information by one party to another (for a basic form of precedent see Precedent 15). For a more detailed consideration of confidentiality obligations, see Anderson and Warner Drafting Confidentiality Agreements (3rd Edn, Law Society, 2015).

Drafting issues Typically, a confidentiality clause might cover some or all of the following issues. •

What information is covered by the confidentiality obligation? This can include: •

information learnt about the other party’s business and commercial affairs;

•

technical information, eg manufacturing know-how, provided by one party to the other;

•

information developed under the contract by either party (eg business information or technical information developed as a result of

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performing the contract or an invention that is not yet subject to a patent application); or • specific information, which can be identified as confidential information and can be listed in a schedule to the agreement. •

Which party(ies) are under an obligation of confidentiality? Depending on the situation or the nature of the contract, the obligation could be: • on Party B  to keep confidential information developed and/or disclosed by Party A, and vice versa; or • on Party B  to keep confidential information developed by it, and only to disclose it to Party A  (eg  if Party B  has been commissioned to carry out work on Party A’s behalf). Party A is free to disclose the information as it chooses; or •

•

on both parties to keep confidential information developed and/or disclosed by either of them.

In what circumstances will information be considered confidential information? The main options when addressing this issue are: • to state that all information disclosed by one party to the other, whether in writing, electronically, verbally or otherwise, is to be kept in confidence unless otherwise agreed; or •

to state that only information disclosed in writing and clearly marked as confidential is caught by the confidentiality provisions; or

• to state that written information must be marked confidential, and orally disclosed information must be stated to be confidential at the time of disclosure; or • to state that information disclosed orally must be reduced to, or confirmed in, writing within a certain time and will be confidential when so put in writing. The last option gives greater certainty as to which information is ‘caught’ by the confidentiality obligations, but may be unduly restrictive or bureaucratic for some parties. For example, parties involved in negotiations may not wish to be hampered by remembering to document everything of significance that is said and that is confidential. There are resource implications for some businesses in order to comply with such an obligation. If the representative of an organisation/company is not to do the documenting then there needs to be a second person involved in all the negotiations whose role will be to document what is said. Technology can play a part (such as recording any negotiations, but the recording will still need to be listened to in order to extract the confidential information). •

What can the confidential information be used for? The default provision should normally be that the confidential information may only be used for defined purposes, set out in the agreement. In the absence of contract wording one or more parties will need to rely, in the event of a dispute, 157

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on a court holding that the party who receives confidential information is under an equitable obligation of confidence or that there is an implied (contractual) term. Although in either of these cases the purpose to which the recipient can use the confidential information of the disclosing party is likely to be limited to the subject matter of the contract (eg from Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3  All ER 413). However, the scope of use will be subject to the view of a judge (if a dispute gets that far) and is unlikely to accord with the views of a least one party. A restriction on use is sometimes forgotten in confidentiality provisions, yet it can be very important (see EPI  Environmental Technologies Inc v Symphony Plastic Technologies [2004]  EWHC  2945 (Ch) (see Case analysis below), affirmed by the Court of Appeal in [2006]  EWCA  Civ 3). In appropriate circumstances, the parties should set out the specific things that the receiver of confidential information can and cannot do with the confidential information of the disclosing party. For example: • a definition of a permitted purpose, generally the subject matter of the agreement (eg  in a manufacturing agreement), the use of confidential technical information provided by a party is for use only in producing the product; •

a general definition of a permitted purpose, plus more specific things that the recipient cannot do with the confidential information: • not to replicate the confidential information (ie  independently to attempt to recreate, or succeed in recreating, the confidential information, not just make a straight copy of it); •

not to investigate aspects of the confidential information that are not provided to the recipient (or provided in a form which the recipient cannot access without ‘going behind’ what it is provided to the recipient and which is not something it would normally need to do to use the confidential information for its intended purpose);

• not to create new intellectual property using or based on the confidential information (and if the recipient does so to transfer ownership to the discloser); and • not to obtain any commercial benefit for the recipient (or any commercial dis-benefit to the discloser). For example, a software developer creates a software utility to process data. The software utility processes the data more quickly than any other similar utility in the market. The software developer has used several routines etc that are in the public domain, and by combining them together with the developer’s own routines in a particular way has been able to process data quicker. If the software developer provides the utility program (as a normal executable program) to a recipient together without a confidentiality agreement then the recipient may 158

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disassemble the utility program to determine how the routines are combined so that they do so themselves. With a properly drafted confidentiality agreement, that part of the utility program which is confidential (ie the method by which the developer has combined the routines) might be protected. •

Is the existence of the agreement also confidential? Eg: •

is the existence of the contract to be kept confidential (and/or that the parties are in any form of relationship with each other)? Or

• are press releases and other public statements about the contract permitted? Do such announcements require the prior agreement of (some or all of) the parties? •

Are there (stated) exceptions to the obligations of confidentiality? Such a clause will typically state some exceptions to the confidentiality provisions. These exceptions usually cover situations such as: • where the confidential information comes into the public domain other than through the fault of the party who received the confidential information; or • where the confidential information was already known to the party who received it prior to the parties agreeing to the obligations of confidentiality; or • where a third party has provided the confidential information to a party and that third party is not under an obligation of confidentiality to the disclosing party in respect of that confidential information.

•

Does the confidential information need specific security measures in relation to it? This might involve: •

the confidential information being held in a particular place by the recipient (such as in a locked cupboard/room, to which only certain people have a key, or on one particular computer, which is accessible to only certain persons and which is disconnected from the internet); or

•

the recipient not being permitted to make copies of the confidential information; or

• only particular representatives of a party having access to the confidential information, and those particular representatives not being permitted to disclose the confidential information to anyone else (sometimes including to other persons within their own company). •

Can the recipient disclose the confidential information to employees, agents and representatives of the recipient? Are there circumstances in which the information may be disclosed to employees of a contracting party? This may involve obligations to keep the confidential information in a secure place when it is not in use, to take all reasonably practicable measures 159

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to prevent the information falling into the hands of unauthorised third parties, and to limit access to the information to those of the recipient’s employees who need to know or use it (and who sign a written undertaking to maintain it in confidence). •

The duration of the confidentiality obligations. The confidentiality provisions may be stated to survive termination of the agreement, either for a defined period of time or indefinitely. A party who discloses confidential information may wish the obligation of confidentiality to be for an unlimited period, as it may believe that such an obligation will give it the greatest protection. However, the party under the obligation is likely to have reservations about being under an unlimited obligation. For example, that party may wish to file away documentation or ‘close’ a file for a matter that is no longer active or is concluded. Being under an obligation of unlimited duration may mean that the party under it needs to take account of such an obligation in its dealings with others (such as insurers, or where the party is involved in merger, take-over activity, etc), ie the party may be required to disclose that it is subject to obligations of confidentiality. An unlimited or lengthy period of obligation may not be relevant to all the information that a party may disclose. For example, the parties may be negotiating the terms of an agreement for the launch of a new product. In the period up to the launch, details of the new product may be confidential, but after the launch details of the product will be in the public domain. The party who has received the confidential information relating to the new product may be uncertain as to what part of it remains confidential and what part does not. A definite time period may be more appropriate. Also, the agreement between the parties may need to separate out confidential information that is no longer to be subject to obligations of confidentiality when a certain event occurs or for a specific time period, while another category of confidential information may be subject to longer or indefinite obligations of confidentiality. An example would be the information that relates to an invention. That part of the invention which will be put into a patent application will remain confidential until the patent application is published by a patent office, and the remaining information may remain confidential indefinitely (and it may be useful to a licensee of the patent application or patent in making use of the invention).

•

Where a party is a ‘public authority’ for the purposes of the Freedom of Information Act 2000. See Freedom of Information for a discussion about this.

Location in the agreement A  simple Confidentiality clause will normally be among the Secondary Commercial Provisions in an agreement. 160

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Linkage and use There are a wide range of issues that may need to be addressed in a confidentiality clause (what is set out above is only a summary of the main issues that need consideration). Some of these will be specific to the contract, and cannot be regarded as general ‘boilerplate’. Eg, in a research contract, there may be a provision allowing the researchers to publish scientific papers about the project, subject to certain safeguards to protect intellectual property. The precedents in this title focus mainly on confidentiality provisions of a general nature in commercial contracts, where the contract is not primarily concerned with the generation of confidential information, but it is nevertheless thought appropriate to include confidentiality obligations in relation to information learnt from the other contracting party. A confidentiality clause will need to be considered with the following: •

if the information that a party is to provide consists of a mixture of nonconfidential information and confidential information, then it may be necessary to identify each set of information as such to avoid arguments over which is which (see eg EPI Environmental Technologies Inc v Symphony Plastic Technologies [2004]  EWHC  2945 (Ch), [2004]  All ER (D) 374 (Dec)). If this has to be done then extra provisions may be necessary, such as: •

schedule(s) listing non-confidential material and a separate schedule identifying specific confidential information (perhaps by general description but without containing the confidential information itself);

•

an acknowledgment as to specific information being confidential or non-confidential.

•

if confidential information is disclosed in written or electronic documents, then when the agreement is terminated, a Consequences of Termination clause may be needed so that such documents (and any copies) are returned and/or destroyed;

•

confidential information is likely to be protected by one or more forms of intellectual property, most usually copyright and sometimes the database right. Any intellectual property provisions should normally be drafted to include statements about the ownership of confidential information disclosed under an agreement;

•

the action that can be taken if there is a breach may require that Termination provisions contain particular wording for such breaches;

•

whether any Warranties are required to be provided, for example: • that a party has the right to disclose the confidential information (with suitable limitations); • that such disclosure will not breach any third-party intellectual property rights; and/or 161

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• a statement that a party is not providing any warranties regarding confidential information disclosed, and in particular is not warranting that the confidential information is of any standard of quality or fit for any purpose, etc. •

Law and jurisdiction. If an agreement involves only English parties, where the provision (and use) of confidential information is particularly important, a non-exclusive jurisdiction clause may be appropriate if the confidential information is sent out, or used outside, of the English jurisdiction by the recipient. A  non-exclusive jurisdiction clause would enable the discloser of the confidential information to apply for remedies (such as an injunction) in foreign courts.

•

Affiliates. Where there is an affiliates definition, negotiation may take place as to whether a recipient of any confidential information can disclose it to any of its affiliates (and also whether the affiliate may use it). The discloser may have concerns about the use of the confidential information by an affiliate and the ability to control the actions of the affiliate (which may not be bound by the contractual agreement between the discloser and recipient of the confidential information).

Sample precedent material Precedent 1—Simple confidentiality clause 1 Confidentiality 1.1 Each Party shall keep confidential: (a)

the terms of this agreement; and

(b) any and all confidential information that it may acquire in relation to the business or affairs of the other Party.

Neither Party shall use the other Party’s confidential information for any purpose other than to perform its obligations under this agreement. Each Party shall ensure that its officers and employees comply with the provisions of this Clause 1.

1.2 The obligations on a Party set out in Clause 1.1 shall not apply to any information which: (a) is publicly available or becomes publicly available through no act or omission of that Party; or (b)

a Party is required to disclose by order of a court of competent jurisdiction.

1.3 The provisions of this Clause 1 shall survive any termination of this agreement for a period of [5] years from termination.

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Precedent 2—Very short form – general confidentiality Neither Party will disclose to any third party details of this agreement without the prior consent of the other. Precedent 3—Short form – general confidentiality The Parties to this agreement will at all times keep confidential information acquired in consequence of this agreement, except for information which they may be entitled or bound to disclose under compulsion of law or where requested by regulatory agencies or to their professional advisers where reasonably necessary for the performance of their professional services. Precedent 4—Short form – consultancy agreement The Consultant shall not disclose to any person, firm or company, except to [a partner in the Firm], any information of a confidential nature obtained by him in the course of carrying out [describe work]. Precedent 5—Longer form – general confidentiality 1 Each party shall at all times use its best endeavours to keep confidential (and to procure that its employees and agents shall keep confidential) any confidential information which it or they may acquire in relation to the business and affairs of the other party to this agreement and shall not use or disclose such information except with the consent of that other party or in accordance with the order of a court of competent jurisdiction. 2

The obligations of each of the parties contained in sub-clause [1] shall continue without limit in point of time but shall cease to apply to any information coming into the public domain otherwise than by breach by any such party of its obligations contained in this agreement provided that nothing contained in sub-clause [1] shall prevent any party from disclosing any such information to the extent required in or in connection with legal proceedings arising out of this agreement.

Precedent 6—Definitions of information and confidential information ‘Information’ shall include [all] information or material provided directly or indirectly by the Disclosing Party to the Receiving Party [including but not limited to] [information which is of commercial worth or usefulness to the Disclosing Party][marketing, business, information or technical information] in oral or documentary form or by way of models, [biological or chemical materials] or other tangible form or by demonstrations and whether before, on or after the date of this agreement. ‘Confidential Information’ shall mean: (a) in respect of Information provided in documentary form or by way of a model or in other tangible form, Information which at the time of provision is marked or otherwise designated to show expressly or by necessary implication that it is imparted in confidence; and 163

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(b) in respect of Information that is imparted orally, any information that the Disclosing Party or its representatives informed the Receiving Party at the time of disclosure was imparted in confidence[ and which is reduced to writing, marked ‘Confidential’ and sent to the Receiving Party within 30 days of the original disclosure]; and (c) any copy of any of the foregoing; and (d) the fact that discussions are taking place between us. Precedent 7—Longer form confidentiality clause – shareholders’ agreement Each of the Shareholders covenants and undertakes with the other Shareholders that he shall in all respects keep the secrets of the Company and shall not during the period of this agreement or at any time thereafter (except with the consent of the proper officers of the Company or under the authority of the board or the court) divulge or make known to anyone whomsoever or use for the benefit of himself or any other person, persons or corporation any of the secrets of the Company or any information of a confidential nature relating to any of the customers of the Company or to the businesses (including prospective businesses) from time to time carried on by the Company other than information or knowledge which comes into the public domain otherwise than by reason of his default. Precedent 8—Longer form confidentiality clause – business sale agreement In consideration of [the Vendors’ undertakings contained in clause [no]] the Purchaser undertakes to keep confidential all information [of a secret or confidential nature] (except for that which is already in the public domain) in relation to the Vendor or [the Business] which is disclosed to it or its advisors by the Vendor or its advisers and will not without the Vendor’s consent divulge such information save to its professional advisers and employees for the sole purpose of evaluating [the Business] with a view to entering into a binding contract to purchase it, and in particular the Purchaser undertakes that it will not use the information thus disclosed to solicit or entice away any employees, customers or suppliers of [the Business]. The Purchaser will ensure that its employees and professional advisors are made fully aware of these obligations of confidence to the Vendor. Precedent 9—Longer form confidentiality clause – software distribution agreement 1 The parties have imparted and may from time to time impart to each other certain confidential information relating to [the Software] or its marketing or support including specifications documentation and source codes. 2 Each party agrees that it shall use such confidential information solely for the purposes of this agreement and that it shall not disclose 164

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directly or indirectly to any third party such information other than as required to carry out the purposes of this agreement. 3 Where disclosure to a third party by either party is essential, the disclosing party, with the agreement of the other party will, prior to any such disclosure, obtain from such third party duly binding agreements to maintain in confidence the information to be disclosed to the same extent at least as the parties are so bound under the terms of this agreement. Precedent 10—Longer form confidentiality clause – eg technology licence 1 Except where the attainment of the purposes of this agreement require a disclosure, neither party shall disclose to any third party any information obtained from the other party in any document or correspondence marked ‘Confidential’ or any trade or business information obtained in confidence from the other party during a visit to that other’s trade premises, offices, laboratories or trial grounds in connection with this agreement. 2 The obligations in this clause relating to non-disclosure shall remain in force and shall survive this agreement unless the party seeking relief from the obligations can show that the information was public knowledge and known to that party at the time that party obtained it or has become public knowledge without the fault of that party since that party obtained it. Precedent 11—Full form confidentiality clause – shareholders’ agreement 1 Each of the parties to this agreement shall at all times use its best endeavours to keep confidential (and to procure that its respective employees and agents shall keep confidential) any confidential information which it or they may acquire in relation to the Company and its subsidiaries or in relation to the clients, business or affairs of any other party to this agreement or of the Company or of any of the Company’s subsidiaries and shall not use or disclose such information except with the consent of every other party to this agreement and/or of the Company or its relevant subsidiary (as appropriate) or in accordance with the order of a court of competent jurisdiction or, in the case of information relating to the Company or any of its subsidiaries, for the advancement of the business of the Company or the relevant subsidiary. 2 The parties to this agreement shall procure that the Company and its subsidiaries shall use all reasonable endeavours to ensure that the officers, employees and agents of each of them observe a similar obligation of confidence in favour of the parties to this agreement. 3 The obligations of each of the parties contained in Clause [1] shall continue without limit in point of time but shall cease to apply to any information coming into the public domain otherwise than by breach 165

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by any such party of its said obligations provided that nothing contained in this Clause [no] shall prevent any party from disclosing any such information to the extent required in or in connection with legal proceedings arising out of this agreement or any matter relating to or in connection with the Company. 4 For the purposes of this Clause [no] the expression ‘party’ shall include the subsidiary companies of any party and any other company controlled by that party and the employees or agents of that party and of such subsidiary or controlled companies. Precedent 12—Full form confidentiality clause – know-how licensing agreement The Licensee agrees: 1 not at any time during or after the Term to use (other than as may be expressly permitted under this agreement) or divulge or allow to be divulged to any person the Know-how or any other confidential information imparted to it by the Licensor other than to persons who have signed secrecy undertakings in the form approved by the Licensor; 2 not to permit any person to act or assist in [the Business] until such person has signed such an undertaking; 3 that all aspects of the Know-how shall be treated as confidential information by the Licensee and: (a) shall be disclosed only to those employees of the Licensee whose duties cannot be fulfilled without such disclosure and then only to the extent necessary to enable them to perform such duties; (b)

visitors to the premises where drawings or other elements of the Know-how are present or are in use shall be restricted so far as is necessary to minimise disclosure of all elements of the Knowhow;

(c)

the obligation of confidence shall continue after the end of the term until the Know-how is in the public domain; and

(d)

notwithstanding the obligation of confidence imposed under the terms of this agreement it shall not be a breach of this agreement for either party to disclose in general terms relevant items of the Know-how to customers or potential customers so far as it is bona fide necessary to do so in order to promote sales.

Precedent 13—Full form confidentiality clause (in eg joint application for production licence) Notwithstanding Clause [no] (termination date) all information and data acquired or received for the purposes of and discussions and negotiations pursuant to this agreement shall during the term of this agreement 166

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and for a subsequent period of 5 years be held confidential and shall not be made available or disclosed in whole or in part to any third party without the prior written approval of all the parties provided that any party may without such approval: 1 make available or disclose such data and information to any affiliate of such party upon obtaining a similar undertaking of confidentiality but of unlimited duration from such affiliate; 2 make available or disclose such data and information to any outside professional consultants upon obtaining a similar undertaking of confidentiality but of unlimited duration from such consultants; 3 make available or disclose such data and information to any bank or financial institution from whom such party is seeking or obtaining finance upon obtaining a similar undertaking of confidentiality but of unlimited duration from such bank or institution; 4 make available or disclose such data to the extent required by the production licence or by any applicable law or the regulations of any recognised stock exchange; or 5 disclose but not make available such data and information to any bona fide proposed new party provided that such proposed new party shall have previously signed an undertaking to keep such information and data confidential in terms acceptable to the parties making the relevant application. Precedent 14—Separate confidentiality agreement (eg by letter in respect of proposed joint project) (Appropriate headings) [Name of project] (‘the Project’) This letter is to confirm the terms and conditions pursuant to which [Party A] is prepared to disclose details of the Project to [Party B]. In order to induce [Party A] to disclose such details, and in consideration of the sum of £1 paid by [Party A] to [Party B] (receipt of which [Party B] acknowledges), [Party B] warrants, undertakes and agrees with [Party A] as follows: 1

This undertaking is binding upon [Party B] and all its officers, employees, servants or agents or professional advisers of such persons (together ‘Relevant Persons’).

2 This undertaking extends to all information of whatever nature in whatever form relating to the Project obtained from any source (‘Confidential Information’) but does not extend to information which, at the time it is obtained, is in the public domain. 3 [Party B] shall treat all Confidential Information as being strictly private and confidential and shall take all steps necessary to prevent it from being disclosed or made public to any third party by any 167

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Relevant Person or coming by any means into the possession of any third party. 4 [Party B] shall use the Confidential Information solely for the purpose of evaluating whether or not to enter into an agreement with [Party A] relating to the Project or to perform any obligations which B may undertake or have undertaken with [Party A] relating to the Project and [Party B] shall not use any part of the Confidential Information for any other purpose whatever. 5 [Party B] shall not use or disclose or permit the disclosure by any person of the Confidential Information for the benefit of any third party or in such a way as to procure that [Party B] may at any time obtain commercial advantage over [Party A]. 6 Neither [Party B] nor any of the Relevant Persons shall by any means copy or part with possession of the whole or any part of the Confidential Information. 7 The Confidential Information and its circulation shall be restricted to circulation and disclosure to individuals whose identity shall have been approved by [Party A] prior to disclosure in writing. 8 [Party B] shall keep all materials containing Confidential Information in a safe and secure place and return them to [Party A] immediately on determination of the discussions in relation to the Project or on [Party A]’s prior request. 9 [Party B] undertakes to indemnify and keep [Party A] at all times fully indemnified from and against any loss or disclosure of Confidential Information and from all actions, proceedings, claims, demands, costs, awards and damages arising directly or indirectly as a result of any breach or non-performance by [Party B] of any of [Party B]’s warranties, undertakings or obligations under this agreement. Precedent 15—Example of two-way confidentiality agreement (Letter on ABC plc stationery) [date] XYZ Limited Address For the attention of Mr/Ms [ ] Dear [name of company] [name of contact person] Two-Way Confidentiality Agreement Each of us is prepared to disclose to the other information which we regard as confidential, which the Receiving Party may use for the purpose of considering whether to enter into an agreement with the Disclosing Party relating to [state purpose] (the ‘Purpose’), subject to the following terms and conditions: 168

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1 Definitions ‘Disclosing Party’ shall mean the party to this agreement that discloses Information, directly or indirectly to the Receiving Party under or in anticipation of this agreement. ‘Receiving Party’ shall mean the party to this agreement that receives Information, directly or indirectly from the Disclosing Party. ‘Information’ shall include information provided directly or indirectly by the Disclosing Party to the Receiving Party in oral or documentary form or by way of models, biological or chemical materials or other tangible form or by demonstrations and whether before, on or after the date of this agreement. ‘Confidential Information’ shall mean: (a) in respect of Information provided in documentary or by way of a model or in other tangible form, Information which at the time of provision is marked or otherwise designated to show expressly or by necessary implication that it is imparted in confidence; and (b) in respect of Information that is imparted orally, any information that the Disclosing Party or its representatives informed the Receiving Party at the time of disclosure was imparted in confidence and which is reduced to writing, marked ‘Confidential’ and sent to the Receiving Party within 30 days of the original disclosure; and (c) any copy of any of the foregoing; and (d) the fact that discussions are taking place between us. 2  Confidentiality and non-use The Receiving Party undertakes to the Disclosing Party (a) to keep the Confidential Information secret at all times; (b) not to disclose it or allow it to be disclosed in whole or in part to any third party without the Disclosing Party’s prior written consent; and (c) not to use it in whole or in part for any purpose except for the Purpose. The Receiving Party undertakes to take proper and all reasonable measures to ensure the confidentiality of the Confidential Information. 3 Exceptions The above obligations of confidentiality shall not apply to any Information which the Receiving Party can show by written records: (a) was known to the Receiving Party before the Information was imparted by the Disclosing Party; or (b) is in or subsequently comes into the public domain (through no fault on the Receiving Party’s part); or 169

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(c) is received by the Receiving Party without restriction on disclosure or use from a third party lawfully entitled to make the disclosure to the Receiving Party without such restrictions; or (d) is developed by any of the Receiving Party’s employees who have not had any direct or indirect access to, or use or knowledge of, the Information imparted by the Disclosing Party. 4  Disclosure to employees The Receiving Party undertakes to permit access to the Confidential Information only to those of the Receiving Party’s directors and employees who reasonably need access to the Confidential Information for the Purpose, and on the conditions that such directors and employees shall have: (a) entered into legally binding confidentiality obligations to the Receiving Party on terms equivalent to those set out in this agreement (and such obligations extend to the Confidential Information); (b) been informed of the Disclosing Party’s interest in the Confidential Information and the terms of this agreement; and (c) been instructed to treat the Confidential Information as secret and confidential in accordance with the provisions of this agreement. The Receiving Party shall be responsible for ensuring that the Receiving Party’s directors and employees comply with the provisions of this agreement. 5  Return of information and property The Receiving Party acknowledges and agrees that the property and copyright in Confidential Information disclosed to it by the Disclosing Party, including any documents, files and other items containing any Confidential Information, belongs to the Disclosing Party. At the Disclosing Party’s written request, the Receiving Party will return immediately to the Disclosing Party all Confidential Information which the Receiving Party has received under this agreement and which may still be in the Receiving Party’s possession, including any copies made, and make no further use or disclosure of any of the Confidential Information. The Receiving Party may, however, keep one copy of the Disclosing Party’s Confidential Information in its legal adviser’s files solely for the purpose of enabling it to comply with the provisions of this agreement. The obligations on the Receiving Party under this agreement shall continue in force for a period of [5 or 10 or 15] years from the date of this agreement. 6  No implied rights This agreement shall not be construed (a) to grant the Receiving Party any licence or rights other than as expressly set out herein in respect of 170

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the Confidential Information, nor (b) to require the Disclosing Party to disclose any Confidential Information to the Receiving Party. No warranty or representation, express or implied, is given as to the accuracy, efficacy, completeness, capabilities or safety of any materials or information provided under this agreement. 7  Law and jurisdiction This agreement shall be governed by and construed in accordance with English law and shall be subject to the [non-]exclusive jurisdiction of the English courts. We shall be obliged if you will confirm your acceptance of these terms and conditions by signing and returning the attached copy of this letter. Yours faithfully For and on behalf of ABC plc Signature ___________________________ Title _______________________________ We accept the terms and conditions of this letter this [ ] day of [ ] 20[ ] For and on behalf of XYZ Limited Signature ___________________________ Title _______________________________

Case analysis EPI Environmental Technologies Inc v Symphony Plastic Technologies [2004] EWHC 2945 (Ch), [2004] All ER (D) 374 (Dec) 1 The parties entered into a manufacturing and know-how licence with incidental trade mark rights agreement (together with an appended confidentiality agreement) (the Licence). This agreement was amended several times. 2 The claimant supplied to the defendant an additive for the use in manufacturing film plastic products (‘DCP  509’) under the Licence. This was used essentially in the manufacture of biodegradable plastic bags. 3 The defendant created its own additive also for use in manufacturing film plastic products (‘BD92384’), including the manufacture of biodegradable plastic bags. 4 The agreement contained the following relevant terms: (a)

a restriction on disclosure of confidential information to affiliates of the parties; 171

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(b)

a restriction on the use of confidential information;

(c)

a prohibition on analysing or attempting to analyse DCP 509;

(d)

DCP 509 could only be used for the purposes of the Licence.

5 The claimant’s main claim was that BD92384 breached the confidentiality agreement between the parties and was a misuse of confidential information provided to the defendant by the claimant. 6 The defendant argued that in order for information or secrets to be protected by the law of confidence that information or secret must be confidential (ie not in the public domain). They argued that once it is published in a patent application or released by the owner of that information then as a matter of law it falls into the public domain and therefore it ceases to be secret. 7 The central argument turned on the following issues (and in particular around the first): (a) there must be a body of information which is private or confidential; and (b) that information must be ‘communicated to a person who knows or ought fairly and reasonably know it is to be regarded as confidential’. 8 The defendant argued that (a)

the contents of DCP 509 and the manufacturing processes were in the public domain;

(b)

if so then there can be no breach of confidence;

(c) (b) will hold even if they (the defendants) analysed what was provided to them by the claimant (ie  in breach of the clause prohibiting analysis, which the defendant denied in any case) or used public sources. 9 The claimant argued: (a)

the defendant could use the public domain information, as long as the defendant obtained that information from the public domain;

(b) but the defendant could not use the information if it was obtained from accessing it by analysing DCP 509 (which was supplied confidentially); (c) the defendant was not able to analyse DCP  509 to determine which information it contained was in the public domain and thereby be free to use that information (rather than going through the public domain route); and (d) it was possible to acquire a finished product (even though protected by a patent) and then analyse the finished product to determine its constituent parts (in this case to take a plastic bag). 172

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10 The judge summarised what the argument of the claimant was: to transform public domain material into private material by virtue of the confidential relationship that arises between the claimant and the defendant. 11 According to the claimant the key element that was confidential was ‘the make up of the additive that the particular formulation of it worked’. The judge had problems with this: ‘39. … It is self evident to my mind that the product works, because the Claimant are selling it. When the product is sold, it is sold with claims as to its suitability. If it did not work there would presumably be a contractual claim arising out of that sale. Mr Hobbs QC suggests that there is a particular confidentiality about each of the Claimant’s products. It seems to me that that is not sustainable. The whole world knows the Claimant sells additives that are added to plastic products for the purpose of making them degradable. The Claimant’s website pronounces that. Equally, the whole world knows (from the Claimant’s own website) that “totally degradable plastic additives (TDPA) are comprised of a proprietary blend of prodegradants, stabilisers and fillers in thermoplastic polymers for use in various products for photo, thermal and mechanical stress degradation of the finished products incorporating this additives.” Further information is freely available from the Claimant’s representatives. 40. It seems to me, that the fact that the Claimant generally provides additives comprised of ingredients in that way is in the public domain and none of those matters can be said to be private/confidential.’ 12 In essence the judge held that a confidentiality obligation will in reality only protect that part which is confidential and not that which is in the public domain. If a person receives information from another which is a mixture of public and private information, s/he must take care to use only that which is public information (and does not have to go to a public source to obtain that information which is in the publication but can even use it if provided by the provider of the information): ‘48. In my judgment, what Lord Denning [in Seager v Copydex Ltd (No 1) [1967] RPC 349] is saying is that a recipient of mixed information should take care only to use the public information. If he uses the private information he can only do so on pain of payment. Obviously the easiest way to establish that only public information has been obtained is to go to the public sources. It is instructive to see that Lord Denning was of the view […] that publication of the patent and the use of the information in the patent would not be actionable. It is clear in my judgment that, [referring to part of the judgment of] Lord Denning is acknowledging that it is open to the recipient of the information which is mixed public and mixed 173

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private to use the public information, but that he should not be in a better position than if he had gone to the public source. That to my mind means that if he is provided with information, which is in part public, provided that information is a public source, he can use it. It cannot be presumed that Lord Denning would expect the recipient of public source information to have to pay for it. It is clear from the next sentence of the judgment that when he is referring to paying and head start, he is referring to the extra private information that is provided contemporaneously with public information.’ 13 If the defendant had merely copied the finished product then the claimant would have succeeded in its action. But, in essence, if the defendant takes the public domain parts of the information supplied by the claimant and goes through the effort to make up the end result using only the public domain information then the claimant could not succeed. If the claimant had taken public information (such as what was in its patent application, what it had published on its website and else) and then gone through the process of creating a finished additive, then only the things which were contained or part of the process of creating the finished additive and which had not been released to the public domain would be capable of protection by the law of confidence. And as long as the defendant did not use those things that made up the process of creating the finished additive then the defendant would not be in breach of any confidentiality obligations to the claimant: ‘49… To my mind it is important to appreciate that if the product is supplied in confidence and is merely copied completely […] I can well see how complaint can be made. If that exercise is done only, the defendant has the product of the use of the claimant’s brains time and energy in producing a finished product, which they merely replicate. 50. If there is something secret or confidential which they thereby merely copied that would be actionable. However, a thing does not become confidential merely because it is supplied confidentially […]However, take one example. Suppose [the claimant] supplied the defendant with a formula for making a very special cake which would be very unique to [the claimant]. A  lot of the ingredients would be common ingredients, but it would be contended that the resultant product is arrived at by use of the secret formula. 51. Suppose the secret formula is not a secret formula at all, but is actually itself a copy of a cake formula that has been published generally for public use. The product and the formula that [the claimant] provide cannot therefore be confidential. 52. That must equally be true in my view in respect of constituent parts. I have already identified that [the claimant] itself proclaims what type the constituent parts of its products are. Equally, if there 174

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is other material in the public domain, which points to specific constituents, I do not see how that can be said to be private and I do not see how [the defendant] (absent a contractual provision) can be prevented even by examination and analysis of EPI’s product of using information they acquire as a result of that exercise which is in the public domain.’ … 62. In reality, it is, I suspect, a question of fact in each case as to seeing what is the secret, and what use has been made of it. I do not see … the specific products and their makeup prevents a party from analysing that product (provided the contracts allows them so to do) and utilising those parts of the constituents of the product and the method of making up, which are in the public domain. Otherwise, by signing a confidentiality agreement, Symphony would be the only organisation in the world that could not do that. That to my mind would be a bizarre result and is not what is intended by the law of confidence.’ 15 The judge specifically did not decide whether a clause preventing the analysis of confidential or other information provided by a person could be legally effective.

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Purpose of the clause In an agreement the word ‘Consent’ can have a number of different meanings or uses: eg: •

stating who is responsible for obtaining permission etc from a third party: that a contracting party is responsible for obtaining official consents necessary for the contract to proceed, such as: • in order for the building of houses by a developer, a party has the obligation to obtain planning permission; •

to conduct a clinical trial of a drug compound, the party conducting the trial has to seek an ethics committee opinion and approval from the Medicines Health Regulatory Authority; or

• a software developer has developed and will host online gambling software, and will need to obtain a licence from the GB  Gambling Commission before end users can start betting using the gambling software; •

a statement by a party that it has obtained (necessary, required) approvals, permissions: sometimes a party to an agreement will need to state (or warrant) that it has either obtained some specific approval or permission: eg, in a sale of business agreement, the seller may need to warrant that it had obtained all the licences and consents it needs to carry on the business that is being sold. Such a warranty might go on to state that the seller is not in breach of those licences and consents;

•

an obligation requiring one party to obtain the approval or permission from the other party: that a party may not take certain actions until or unless it has obtained the consent of the other party: eg, a party might be restricted from issuing a press release about the contract, unless the other party had given its prior written consent (see Precedents 1 and 2); eg  neither party being able to assign their rights and transfer their obligations unless each has the prior consent of the other party (see Precedent 3).

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Consent

•

acceptance: that a party is stating that something done under a contract by another party is in accordance with the provisions of the contract. In this sense, ‘consent’ has a meaning closer to that of ‘acceptance’. Eg, in an agreement where one party is to develop software for another party, the agreement may provide that when the software developer has reached a particular stage in the development of the software, then the other party will receive a copy of the software and, after testing, accept that the software is in accordance with the specification for the software or meets certain acceptance criteria and consents to the software development carrying on to the next stage.

This section deals with situations under the last two of these four points. See also Assignment.

Drafting issues •

Should the requirement for consent be subject to a provision that it cannot be unreasonably withheld? Such a term is not generally implied into ordinary commercial contracts. ‘There is no principle of law that, whenever a contract requires the consent of one party to be obtained by the other, there is an implied term that such consent is not to be unreasonably refused. It all depends on the circumstances’ (Price v Bouch (1986) 53 P & CR 257).

It seems the courts may make a distinction between a matter requiring ‘a general and unrestricted consent’ and consents to very specific matters, eg, approving ‘a title or plans which are free from any tenable objection’ (see Clerical Medical and General Life Assurance Society v Fanfare Properties Ltd (2 June 1981, unreported), but approved in Cryer v Scott Bros (Sudbury) Ltd (1986) 55 P & CR 183 at 194, CA)). In the latter situation, a court may more readily imply a term that consent will not be unreasonably withheld, if this is necessary to give business efficacy to the contract. If in doubt, the contract drafter should state whether consent may be refused at a party’s absolute discretion. •

Should the need to give consent be matched to a certain standard? If a party is required to give consent, does that party have an obligation: •

to consider certain matters or things?

•

to use a set of criteria or requirements?

• to have to give its consent if the set of criteria or requirements are matched or fulfilled? •

Leases and other real property transactions. If there is a provision concerning consent in a lease or other real property document there is often (but not always) an implied term that consent will not be unreasonably withheld (see eg  Cryer v Scott Brothers (Sunbury) Ltd (1988)  P  & CR  183, CA). 177

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Therefore, if the party whose consent is required is to have an absolute discretion as to whether it gives consent, this will need to be specifically stated. •

Time limit on consent? Should there be a time limit on the party deciding whether to give the consent, eg: •

an obligation not to unreasonably delay giving consent; or

•

to give or refuse consent within a certain time period; or

•

that consent is deemed to be given or refused if the party responsible for giving consent has not provided a response by the end of any specified time period.

•

Reasons for withholding consent? Does the party responsible for giving consent need to state reasons for withholding its consent?

•

What factors can the party who has to provide consent take into account? Eg, is the party required to provide consent only allowed to consider factors relating to the specific agreement or can it take into account its other business interests (see eg, Sargent v Macepark (Whittlebury) Ltd [2004] EWHC 1333 (Ch), [2004] 4  All ER  662, although that was a case relating to the Landlord and Tenant Act 1927, s 19(2))?

•

Consent provided but not in (exact) terms sought by party requiring the consent. If a party is required to obtain or provide consent then the consent may be provided in a form that is different from what one or all of the parties expect. If this is the case, what is to happen?; ie is it to be taken that the consent is not obtained or provided at all or is there to be some mechanism for deciding whether the consent is sufficient to meet the matter that required the consent? This is likely to be most relevant where a third party needs to provide a form of consent but does so in its owns terms. It may be possible, before the agreement is entered into, to determine the likely outcomes of the consent not being either forthcoming at all or in modified or different terms than the parties wish for. Alternatively the parties may put in place a mechanism where representatives of the parties meet and decide how the contract should be altered to cope with the modified consent (see City and General (Investment) Ltd v Razama Ltd [2009] EWCA Civ 1568, and Case analysis below).

Location in the agreement The requirement to give or withhold consent can appear in any clause which requires a party to agree to something before the other party can or cannot do it.

Linkage and use The requirement to give or withhold consent often appears in the following situations: 178

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•

In a Main Commercial Provision, where a party is required to state whether another party has performed its obligations under the agreement. Eg, in a software development agreement, the developing party will be responsible for developing a specification and then, after writing the software, will be required to test the software. At both these stages the other party will be required to give its consent that the specification and the software meet the required standard.

• In a Main Commercial Provision, where there may be a change in personnel or other type of change (a change in specification, change in quantity, etc) which requires the consent of a party. Eg, where a service is being performed, and a particular person is named as performing that service, if there is to be change then the other party may be required to give its consent. •

In the Boilerplate section clauses such as those dealing with: •

Assignment;

•

Announcements;

•

Amendment.

Sample precedent material Precedent 1—No press release etc without consent of other party Neither Party may issue any press release concerning the existence or terms of this agreement without the prior written consent of the other Party, which consent may not be unreasonably withheld or delayed. A Party who refuses to give a consent within 30 days of being requested to do so, shall promptly notify in writing the other Party of its reasons for such refusal. Precedent 2—No press release without consent of other party Neither Party may issue any press release concerning the existence or terms of this agreement without the prior written consent of the other Party. A Party may withhold or delay giving any such consent at its sole and absolute discretion and without giving reasons therefore. Precedent 3—Prior consent This agreement and all rights under it may not be assigned or transferred by either of the parties without the prior written consent of the other. Precedent 4—Consent not to be unreasonably withheld or delayed Should any individual leave the Agency, the Agency will, with the Client’s consent, appoint a suitable replacement, such consent not to be unreasonably withheld or delayed. 179

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Precedent 5—Consent not to be unreasonably withheld – time limit Prior consent shall not be unreasonably withheld or delayed and shall be deemed to have been given if it has not been reasonably withheld within 10 business days of receipt by the Borrower of any request therefore. Precedent 6—Consent not to be unreasonably withheld in specified circumstances In the case of an intended assignment by the Agent consent to such assignment shall not be unreasonably withheld in the following circumstances [set out particular circumstances eg:] 1 The proposed assignee shall agree directly with the Principal to be bound by the terms of this agreement; 2 etc.

Case analysis City and General (Investment) Ltd v Razama Ltd [2009] EWCA Civ 1568 1 The claimant sold a property to the defendant. The property had planning permission. However, the property was subject to a condition that the approval of Network Rail (‘Network Rail Condition’) was obtained before any building work was carried out as the property was near a railway line. 2 The contract between the claimant and the defendant required that the claimant obtained consent from Network Rail (‘Network Rail Consent’). The claimant had to obtain the consent prior to the completion date using its ‘entire endeavours’ to do so. 3 If the claimant failed to obtain the consent then, essentially, the defendant kept part of the purchase money for the property. Ie a certain sum would be held by its solicitors (ie not paid over to the claimant), and for every month that the consent was not forthcoming the defendant could withdraw a proportion of that sum until the balance was zero. 4 The Network Rail Condition was: ‘not at any time – (a) without previously submitting detailed plans and sections thereof to [Network Rail] and obtaining their approval thereto and (b) without complying with such reasonable conditions as to foundations or otherwise as [Network Rail] shall deem it necessary to impose to erect or add to any building or structures or to execute any works on any part of the land hereby transferred’. 5 The contract between the claimant and defendant defined the meanings of: (a) ‘entire endeavour’: ‘All those actions which a prudent and determined seller acting in its own interest and anxious to achieve 180

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development of the property in accordance with the planning permission dated 2nd November 2004 would take to obtain Network Rail consent but for the avoidance of doubt and the buyer acknowledge[s] that in taking those actions the seller shall not be obliged to incur any expenditure or liability actual or contingent whether as to capital expenditure fees costs expenses or other outgoings exceeding a maximum aggregate financial obligation of £50,000 excluding the VAT.’; and (b) ‘Network Rail Consent’: ‘Written approval whether by deed or otherwise pursuant to clause 1(a) of the British Railways Board transfer and referred to in entry (1) of the charges register to title no. NGL 775319 permitting development of the part of the property affected by the British Railways Board transfer in accordance with the planning permission dated 2nd November 2004 which consent may include covenants restrictions and impositions as are generally imposed by Network Rail for the protection and operation of the adjacent railway such consent to be in such form as the buyer shall approve such approval not to be unreasonably withheld or delayed.’ 6 Network Rail provided consent in the following terms: ‘Pursuant to the restriction, I confirm that Network Rail, as owner and successor in title to the British Railways Board, the railway situated on the land shown edged green on the plan in Appendix 1, approves the proposed development of the property as outlined in the planning permission issued by London Borough of Camden dated 2nd November 2004 and the drawings referred to in the planning permission (“the development”), copies of which are annexed hereto as Appendix 2. This approval is subject to (a) Network Rail approval of the further detail of the development in relation to foundations for the protection and operation of the adjacent railways to be undertaken as part of the development, and (b) compliance with any reasonable conditions which may attach to the approval referred to above in paragraph (a). The approval contained in this letter shall not constitute a form of release, waiver or variation of any of the restrictions and covenants and transfer which will continue in full force and effect.’ (‘Network Rail Letter’) 7 The case centred on whether the consent provided by Network Rail fell within the definition of Network Railway Consent in the contract between the claimant and the defendant. 8 In the court of first instance the judge found in the definition of Network Rail Consent the words ‘written approval’ (but only qualified by the words: ‘may include covenants restrictions and impositions as are generally imposed by Network Rail for the protection and operation of the adjacent railway’) required an unqualified approval. And this Network Rail had not provided in the Network Rail Letter. 181

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9 The Court of Appeal disagreed, deciding: (a)

it was necessary to interpret the Network Rail Consent against the commercial background;

(b)

the Network Rail Letter only reservation of consent on focussed on the foundations of the building (something which the original planning permission did not deal with);

(c)

the Network Rail Letter did approve the building work;

(d)

the reservation in the Network Rail Letter was written in narrower terms than found in the Network Rail Condition (at (b))

10 The Court of Appeal held: ‘It serves, to my mind, to emphasise that the development [in the Network Rail Letter] was agreed to in principle and that there could be no question of Network Rail frustrating its execution by reason of any dissatisfaction with proposed foundations. On the respondent’s case, the restrictions at (a) and (b) in the [Network Rail L]etter are repugnant to the generality of the approval contemplated in the [Network Rail Consent definition], and the judge agreed with that position. In my judgment, however, the nature of those provisions set out in the letter’s contents plainly demonstrate that the letter is in truth consonant with the [Network Rail Consent definition]. As I have said, the respondent was bound to design the foundations. Network Rail was, in truth, bound to reserve a right to approve their detail for the protection and operation of the railway. Given all these considerations the judge’s construction cannot be sustained. In those circumstances there was no reasonable basis on which the buyer might within the [Network Rail Consent definition] withhold approval of the consent and for these reasons for my part I would allow this appeal.’

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Consequences of termination (survival of terms)

Purpose of the clause Although an agreement has terminated (ie  the parties have performed the main obligations under the agreement), some rights or obligations may either come into existence or continue after termination. It is desirable to state which provisions (if any) continue after termination. In some cases: •

the surviving terms may continue for a limited time, eg: • a right for an agent or distributor to sell off existing stocks of the principal’s products, which may continue for a period such as six months;

•

•

on the termination of a patent licence, the licensee has a right to sell off any existing stocks of products; or

•

on the termination of consultancy services (say on a rolling month-bymonth basis), the party providing the consultancy may need to write a final report.

the surviving terms may need to continue either without limit of time or for a lengthy period, eg: •

obligations of confidentiality;

•

requirements to keep records and make payments for sales incurred before the date of termination (such as in a patent licence or an agency agreement);

•

any rights which were granted before termination but are to continue after termination, such as if a consultant provides consultancy services and provides reports where it retains ownership of the intellectual property, whether any licence to the client to use the reports may continue after termination of the agreement.

Note: if the termination arises from a party’s liquidation (see Insolvency, below), the liquidator has statutory rights to reject ‘onerous contracts’. This right could apply to ‘consequences of termination’ provisions as it does to the main contract.

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Drafting issues Not all agreements contain a ‘consequences of termination’ provision, either because the nature of the contract does not call for such wording or the parties have not addressed the issue. If there is to be a ‘consequences of termination’ clause then the following issues are likely to arise: •

Which provisions are to survive termination? A ‘consequences of termination’ clause may list these specifically, or the clauses that deal with the provisions may themselves state that they survive termination.

•

For how long will the provisions survive termination? Clauses such as obligations of confidentiality or maintaining records often last for a specified period after termination. However, not all the clauses that are to survive will survive for only a particular period, so it may be necessary to indicate which are limited to a particular period, often by including the limit within the clause itself rather than in the Consequences of Termination clause.

•

Does one or more of the parties need a ‘winding down’ phase or need to return materials/documents after termination? This may be appropriate in some agreements, such as: • agency or licensing agreements, which involve the sale of goods or production of goods involving materials, may need to hand back supplies or materials belonging to one party but in the possession of the other; •

confidentiality, and development or creation of intellectual property agreements often involve one party providing information and documents to another. On termination the party receiving the information and documents may be required to return these (plus any copies made);

•

a licensee that is a party to an agreement, which licenses intellectual property and which contains an obligation to pay royalties, may still need to make payments after the date of termination for sales made prior to the date of termination. The licensee may need time to make up its accounts (particularly if sales are also made by agents/ sub-licensees, and obtaining details of sales made, the amounts paid, stocks held etc is only done after the fact and not in real time).

•

Does a party need to make or return any payments after termination? There may be special payment provisions on termination, eg, to pay for work in progress, to pay for materials and stocks of components made before termination but which will not be of use, or to require the repayment of payments made in advance.

•

Are there any ‘accrued rights’ after termination? A provision that any ‘accrued rights’ survive termination (eg, an obligation to pay liquidated damages for a breach that occurred prior to termination).

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•

Have the parties included a ‘sweep-up’ provision? There may be a ‘sweep-up’ provision at the end of the Consequences of Termination clause, stating that except as stated in the clause, the parties to the agreement have no further obligations to one another.

•

Will the termination of one agreement affect or concern other agreements? If the agreement being terminated is part of a series of agreements (eg, a master agreement and a number of agreements made under it), do the agreements made under it terminate or some of their provisions terminate?

•

On termination are any new rights granted to a party? Particularly with licences of intellectual property there may be additional rights created on termination of an agreement, such as a licensee getting a licence to intellectual property to use for certain purposes although the underlying agreement has terminated.

Location in the agreement The wording of a Consequences of Termination clause is usually found with other Termination provisions located with Secondary Commercial Provisions of an agreement.

Linkage and use A Consequences of Termination clause usually refers to other clauses surviving termination. The following are the type of clauses that survive: •

Confidentiality clauses;

•

Indemnity clauses;

•

Warranty clauses;

•

Non-compete clauses;

• Maintaining records (eg, where an agent or licensee is required to sell products, it may be required to maintain records of its sales, expenses, costs, etc; or where a party is required for regulatory purposes to maintain records (eg, if conducting clinical trials); •

Payment clauses (eg, there may be a continuing obligation to make payments after termination, such as where a royalty is due under a patent licence on sales of patented products made shortly before the agreement is terminated);

•

Arbitration and ADR clauses.

•

Sub-licences. If there is a licence agreement that allows the licensee to sublicense: 185

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• will any sub-licences also terminate immediately on termination of agreement between the licensor and the licensee? or •

will sub-licences be allowed to continue for a period? or

•

will the licensor step into the shoes of the licensee?

Sample precedent material Precedent 1—Consequences of termination Upon termination of this agreement for any reason: (a) the provisions of Clauses […] and […] shall continue in force without limit of time and the provisions of Clause […] shall continue in force for a period of 5 years from the date of termination; (b) each Party shall return to the other Party any documents in its possession or control which contain or record any of the confidential information of the other Party; and (c) subject as provided in this Clause, and except in respect of any accrued rights, neither Party shall be under any further obligation to the other. Precedent 2—Survival of accrued rights Following termination of this agreement: (a) either party shall be entitled to exercise any one or more of the rights and remedies given to it under the terms of this agreement and the termination of this agreement shall not affect or prejudice such rights and remedies, and (b) each party shall be and remain liable to perform all outstanding liabilities under this agreement notwithstanding that the other may have exercised one or more of the rights and remedies against it. Precedent 3—Survival of rights up to termination Termination of this agreement shall not affect any rights of the parties accrued up to the date of termination. Precedent 4—Non-survival of terms No term [other than clause [no] (eg  arbitration provision)] shall survive expiry or termination of this agreement unless expressly provided. Precedent 5—Longer form survival of rights Either party shall be entitled to exercise any one or more of the rights and remedies given to it under the terms of this agreement and the termination of this agreement shall not affect or prejudice such rights and remedies and each party shall be and remain liable to perform all outstanding 186

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liabilities under this agreement notwithstanding that the other may have exercised one or more of the rights and remedies against it. Precedent 6—Alternative short form (eg in sale agreement) – survival of terms after completion This agreement shall (except for any obligation fully performed prior to or at the Completion Date) continue in full force and effect after the Completion Date notwithstanding completion. Precedent 7—Alternative form (eg in sale agreement) – survival of terms after completion Completion shall not in any way prejudice or affect the operation of any of the provisions of this agreement which contemplate or are capable of operation after completion and accordingly all such provisions shall continue in full force and effect after completion. Precedent 8—Alternative form– survival of terms For provisions of this agreement that state they are to continue after the termination or expiry of this Agreement, those provisions shall continue in full force and effect, regardless of the means of termination or expiry of this agreement.

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Consultation

Purpose of the clause Background A provision in an agreement might sometimes state that a party must consult with another party before taking certain actions. Eg, in certain agreements involving intellectual property: • in a research collaboration agreement, one party may be required to consult with the other party when making patent applications in respect of inventions made in the course of the research; •

in an agreement involving the licensing of intellectual property, one party may be required to consult the other about whether and which party should take infringement and other proceedings;

• in an agreement involving the licensing and further development and exploitation of that intellectual property, a licensee may need to consult on its plans and whether to grant (sub-)licences; or in other types of agreement a party might be required not to admit any liability or settle any claim or make any agreement with a third party without consulting the other party to an agreement (such as in an insurance agreement).

Consultation and consent distinguished An obligation to consult with another party is less onerous than an obligation to obtain the other party’s consent to the proposed action. It is more onerous, though, than an obligation merely to inform the other party of the proposed action.

Meaning and requirements for consultation There is case law on the extent of an obligation to consult. This case law is in the area of public law (such as in relation to a local authority’s duty to consult with interested parties in planning matters). Some of the principles established are as follows. •

What amounts to consultation?

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•

‘Genuineness’. The party who wishes to consult must communicate a genuine invitation to give advice (see Agricultural, Horticultural and Forestry Industry Training Board v Aylesbury Mushrooms Ltd [1972] 1  All ER  280) and must give genuine consideration of that advice (R v Secretary of State for Social Services, ex p Association of Metropolitan Authorities [1986] 1  All ER  164; Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 3  All ER  25, CA). The form of an offer to consult is not determinative of whether there is a genuine invitation to obtain the views of the person consulted. In Agricultural, Horticultural and Forestry Industry Training Board v Aylesbury Mushrooms Ltd [1972] 1  All ER  280 it was held that the sending of a letter constituted ‘… but an attempt to consult and this does not suffice. The essence of consultation is the communication of a genuine invitation, extended with a receptive mind’.

•

Sufficient reasons must be given. The party seeking to consult another party must: • give sufficient reasons for the matter or proposals that are the subject matter of consultation so that the party being consulted can give proper consideration and a proper response (R v North and East Devon Health Authority, ex p Coughlan [2001] QB 213, 258, CA); and • state the criteria on which a decision will be made and which factors were material (R (on the application of Capenhurst) v Leicester City Council [2004]  EWHC  2124 (Admin), (2004) 7  CCL  Rep 557).

•

Allowing sufficient time. The consulting party must allow sufficient time to the consulted party to enable it to do that, and the sufficient time must be available for the advice to be considered by the consulting party. Sufficient does not mean ample, but at least enough to enable the relevant purpose to be fulfilled (R  v Secretary of State for Social Services, ex p Association of Metropolitan Authorities [1986] 1  All ER 164; also R v North and East Devon Health Authority, ex p Coughlan [2001] QB 213, 258, CA).

•

Form of the advice. The advice should be helpful, which means sufficient and considered information or advice about aspects of the form or substance of the proposals or their implications for the consulted party, being aspects material to the implementation of the proposal as to which the consulting party might not be fully informed or advised and as to which the party consulted might have relevant information (R v Secretary of State for Social Services, ex p Association of Metropolitan Authorities [1986] 1 All ER 164).

• The person consulting must be receptive to views provided by the person consulted. The consulting party must do so ‘with a receptive mind’ (Agricultural Horticultural and Forestry Industry Training Board v Aylesbury Mushrooms Ltd [1972] 1 All ER 280 at 284). 189

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•

•

No response is required. The consulted party, once they have received a genuine offer to be consulted, does not need to accept the offer or provide any advice (see Agricultural, Horticultural and Forestry Industry Training Board v Aylesbury Mushrooms Ltd [1972] 1 All ER 280 at 284) otherwise the consulted party would have a veto.

In the commercial context. Although the above apply to non-contractual situations, they nevertheless provide useful criteria of the type of matters a party might wish to consider when consulting another party (and which might be reflected in the wording of a clause in appropriate circumstances). In summary, in the commercial context it seems that an obligation to consult is not met until: • the consulting party has properly considered the consulted party’s views on the matter on which it was consulted; and •

the consulting party must consider those views with a receptive mind.

Drafting issues Instead of accepting a contractual obligation to consult (with all that such an obligation implies), a party may wish to state specifically what it will do. Eg, the party may wish to state: •

at what point in the decision-making process it will inform the other party;

•

what information it will provide;

•

how much time the other party will have to give its views;

•

whether the other party needs to submit its views in a particular manner or format;

•

what level of obligation the consulting party has to take those views into consideration; and

•

what will happen if the other party fails to provide its views.

Location in the agreement A Consultation provision is usually located within another clause dealing with the parties making a decision or where some action can be proposed or taken when a particular situation occurs.

Linkage and use A Consultation provision can be found in many different types of clauses but is often found in clauses concerning: •

changes or appointment of persons carrying out tasks in an agreement.

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Eg, a research contract often specifies a lead researcher. If that person becomes unavailable, the sponsor of the research may have a right to be consulted as to the replacement. •

‘good faith’ negotiations;

•

appointment of a third party to resolve a dispute. In such clauses, parties are often asked to consult and then agree who will be the third party;

•

announcements. Where a party wishes to make an Announcement then it may be required to consult with another party as to its content, form and timing;

•

release of information. Where a party wishes to release information (such as confidential information, publications etc) it may be required to consult the other party before so doing.

Sample precedent material Precedent 1—Consultation clause – sale of business Where the debtor in question is a continuing debtor of the Business after the Transfer Date the Vendor shall consult with the Purchaser before instituting any legal proceedings. Precedent 2—Consultation clause – performing artist agreement The Artist shall consult with the Company and obtain the prior written consent of the Company in respect of the appointment of any new business manager or agent of the Artist. Precedent 3—Consultation clause – publishing agreement The Printer shall consult with and obtain the approval of the Publisher in relation to all aspects of the printing of copies of the Work including page size, paper weight and quality, binding and jacket design. Precedent 4—Consultation and consideration of recommendations The Company shall consult with the Producer and give good faith consideration to any recommendations made by the Producer. Precedent 5—Mutual consultation clause – infringement of intellectual property rights If either party believes that any third party is infringing any intellectual property rights in the Product, it shall notify the other party and the parties shall consult with each other as to the action to be taken. Precedent 6—Mutual consultation clause – timeshare agreement During the period of 3 months terminating 3 months prior to any expiry date the parties shall consult with each other with a view to establishing the terms on which each would be prepared to enter into a new management agreement. 191

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Precedent 7—Consult a licensor on grant of sub-licence by licensee Before granting a sub-licence under its rights under this Agreement to any person the Licensee shall first consult with the Licensor. When the Licensee wishes to consult with the Licensor concerning the granting of a sub-licence it: •

shall send a notice in the form specified in Schedule [ ] to the Licensor;

• shall allow at least [ ] days for the Licensor to respond to the notice (‘Notice Period’); •

if it receives reasoned and detailed points from the Licensor concerning the proposed provisions of the sub-licence or whether the sublicence should be granted at all (‘Response’) allow a further period of [ ] days to allow the Licensor and the Licensee to discuss the Response (‘Response Period’);

• shall not grant the sub-licence in question before the expiry of the Notice Period and also shall not grant the sub-licence before the expiry of the Response Period if the Licensee receives the Response before the expiry of the Notice Period; • shall use commercial diligent efforts to consider, with an open and receptive mind, all the points and matters contained in a Response and conduct any negotiations in good faith. • [On the expiry of either the Notice Period or the Response Period, whichever is later, the Licensee shall be entitled to grant the sublicence.] Precedent 8—Consult client before using third party supplier Prior to selecting a supplier to provide those Services which are to be provided by a supplier and not the Consultant (‘Third Party Services’), the Consultant shall first consult with the Client as to the Consultant’s choice of supplier. When the Consultant has chosen a supplier for the part of the Services in question: 1 the Consultant shall send a notice in writing to the Client; 2 the Consultant shall allow the Client at least [ ] days to respond to the notice and for the Client to provide any observations and points about the choice of the supplier; 3 The Consultant shall provide in the notice details about the services to be provided by the supplier, including copies of any quotation or estimates provided by the supplier and information it has supplied on how it will provide the services; 4 During the period specified in 2 the Consultant shall make itself available to discuss with the Client the choice of supplier and shall provide such additional information it already possesses as the Client may reasonably request; 192

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5 The Consultant shall consider any observations or points made by the Client with an open and receptive mind. 6 Although the Consultant has the obligation to consult the Client as to the choice of supplier in accordance with the provisions of this Clause [ ], the Client acknowledges and agrees that the decision of the supplier is that of the Consultant alone. 7

At the end of the period specified in 2 above or earlier if the Client signifies its agreement to the Consultant’s choice of supplier before the end of the period specified in 2 above, the Consultant shall have the right to appoint the supplier.

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Consumer contracts

Purpose of the clause Background For contracts entered into from and including 1 October 2015, there is now one legislative measure (the Consumer Rights Act 2015, ‘CRA 2015’) that is of principal relevance to the drafting of terms and conditions for a contract with a consumer, and concerning: •

limitation and exclusion clauses; and

•

whether a contractual provision is ‘fair’ or ‘reasonable’.

For contracts between businesses and consumers entered into prior to 1  October 2015, the old legislative regime continues to apply (involving consideration of the Unfair Contract Terms Act 1977 and the Unfair Consumer Contract Regulations 1999). Users should consult the previous edition of this volume and the fourth edition of Drafting and Negotiating Commercial Contracts. Although the CRA 2015 introduced several substantial changes, the legislative regime in the Act is not fundamentally different to what has gone before, being primarily a consolidation measure, and replaces provisions spread through several Acts and statutory instruments. Many of the changes are enhancements to existing rights or changes in detail, for example: • there is now one meaning of a consumer (and it can only mean an individual); • digital content is specifically recognised and treated in a similar way to goods (ie that the digital content must be of satisfactory quality); •

where there is a mixed contract (a contract for goods and services), then the rights that apply are those that relate to what is supplied (eg the rights and remedies available for goods apply to the goods part of the supply of the goods and services);

•

for goods there is now a tiered method of rights and remedies where goods do not conform with a contract: first a 30-day right to reject; then a right to repair or replacement (normally at the choice of the consumer), and then a right to reject (the requirements are more detailed, and replace previous, rights);

•

a number of smaller changes and additions, such as:

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•

goods now must not only match any description or sample, but also any model;

•

enhancements to the rights and remedies available for the supply of services, principally: •

what the trader says about himself or the services are now treated as terms of the contract; and

• clear requirements for the trader to repeat performance or reduce the price if the supply of services does not conform with the contract. For a detailed outline of the CRA 2015 and the changes made over previous legislation see the companion volume, Drafting and Negotiating Commercial Contracts (4th Edn, Bloomsbury Professional, 2016) Chapter 7. This section assumes that the contract drafter will have an adequate understanding of the provisions of the CRA  2015. Accordingly, this section needs to be read together with Chapter 7 from Drafting and Negotiating Commercial Contracts. The focus of this section remains on the drafting of contractual terms, and principally the provisions relating to unfair terms, which are now found in the CRA 2015, Part 2, ss 61–72, replacing the Unfair Terms in Consumer Contracts Regulations 1999. Most of the changes are modifications of provisions found in the 1999 Regulations, and for convenience are set out here: •

it is now possible for any contractual term to be assessed for fairness (under the 1999 Regulations only contractual terms which were not individually negotiated were assessed for fairness) (CRA 2015, s 62(4));

•

written contractual terms now need to be ‘transparent’, that is they need to be legible in addition to being in plain intelligible language (the latter being the requirement under the 1999 Regulations) (CRA 2015, ss 62(2), 62(3), 68);

• the core provisions (relating to the price and the subject matter of the contract) are, except for consideration for fairness, now more narrowly defined (CRA 2015, s 64), principally following on from the case of Office of Fair Trading v Abbey National plc [2009] UKSC 6; •

in order for a core term not to be assessed for fairness, not only must it be transparent but also it must be prominent (under the 1999 Regulations the term needed to be in plain, intelligible language) (CRA 2015, s 64(2)– (4)).

There are a few provisions that are new, including: •

an obligation on a court to assess the fairness of a term, whether or not a consumer who is a party to the litigation chooses to do so (CRA 2015, s 71);

•

notices (whether contractual or not) are subject to the same part of the CRA 2015 as unfair terms (CRA 2015, s 62(2), (6)) (formerly the Unfair Contract Terms Act 1977 applied to notices); 195

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•

the indicative list of terms that might be unfair has three additional items (see appendix to this section, paragraphs 5, 12, and 14). The other terms taken over from the 1999 Regulations remain largely unchanged.

The other substantive change is the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, SI 2013/3134, which replaces the Consumer Protection (Distance Selling) Regulations 2000 and the Cancellation of Contracts made in a Consumer’s Home or Place of Work etc, Regulations 2008 and also applies certain provisions of the Consumer Rights Directive (2011/83). The 2013 Regulations apply to contracts entered into from and including 4 June 2014. These 2013 Regulations now cover the information that a business must provide for a consumer, whether in a shop, a place other than a shop or at a distance, before a consumer will be bound by a contract with a trader. Unlike the previous legislation it replaces, the 2013 Regulations are drafted in a consistent way, and apply to most situations in which a consumer will interact with a trader. The 2013 Regulations also contain provisions that relate to the right for a consumer to cancel a contract. Although the 2013 Regulations do not directly affect the contractual provisions of a contract, like the legislative measures they replace, they contain important rights that a trader cannot avoid by contractual wording. A significant development is that the provisions in the 2013 Regulations which relate to the provision of information are now treated as a term of the contract between the consumer and the trader (CRA 2015, ss 11(4), 12, 3(3), 37, 50(3)). The purpose of this section is to provide some practical information concerning the following points: •

the main factors from CRA 2015, Part 2 (the provisions relating to unfair terms) that a contract drafter should consider when drafting an agreement for use with consumers; and

• some points relating to drafting style and choice of words, which the contract drafter should consider in drafting an agreement. In addition to the authors’ Drafting and Negotiating Commercial Contracts (4th Edn), other sources of information on the provisions of the CRA 2015 include the authors’ volume in the Encyclopaedia of Forms and Precedents, Volume 7(2), Commercial Contracts and Other Documents, Competition and Markets Authority Unfair contract terms provisions in the Consumer Rights Act 2015 (CMA37 2015) and the explanatory notes to the CRA  2015. The latter two should normally always be to hand when drafting the provisions of a consumer contract.

Drafting issues •

Do not attempt to exclude or limit liability for specific provisions where it is not possible to exclude or limit liability. It is not possible to exclude or restrict liability for a range of implied terms under the CRA 2015, such as those

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relating to satisfactory quality etc for goods and digital content (see below for the full list for goods, digital content and services). Although this might be an obvious statement, what is clear under the CRA 2015 is that traditional methods of limiting or excluding liability are unlikely to work. Eg, adding wording to limit the liability of a business for its breach of the implied term of satisfactory quality would be counterproductive, ie stating that the goods are of satisfactory quality but then limiting the business’s liability for a breach or limiting liability to a sum of money, or excluding any warranties. However, there is nothing to stop a supplier defining what ‘satisfactory quality’ means in relation to the particular goods that are being sold. • Use the wording of the statutory provisions to indicate matters clearly affecting quality, standard or the state of the goods (or services) being provided. Eg, the CRA  2015, s  9(2), (3) state the factors determining (satisfactory) quality: • description; • price; •

fitness for all the purposes of which goods of the kind in question are commonly supplied;

•

freedom from minor defects;

• safety; • durability; • public statements on the specific characteristics of the goods made about the goods by the seller, producer or his representative (particularly in advertising or on labelling). •

State clearly the ‘strengths’, ‘weaknesses’, ‘limitations’ and the requirements on a customer of a product or service: the supplier should provide a more descriptive meaning of the product or service, which can reduce or avoid liability, ie instead of attempting to exclude or limit liability, the seller or supplier can prevent liability arising at all (although in some cases it may be difficult to draw a clear distinction between avoiding liability arising in the first place and excluding or limiting liability). Eg, where a business sells LCD monitor products (which are manufactured or supplied by third parties) to consumers: •

instead of simply stating that goods that are ordered by a consumer will be supplied, perhaps state the meaning of satisfactory quality;

•

provide wording as follows: ‘We shall supply to you the goods that you have ordered. You should note that certain types of monitors occasionally suffer from minor errors in the manufacturing process. In particular, LCD monitors have one or two pixels which appear incorrectly (“pixel errors”). Such pixel errors are in accordance with industry standards for the manufacture of LCD monitors. 197

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Consumer contracts Monitors must be set up correctly using the instructions provided with the monitors. In particular setting up a monitor with the wrong display resolution is likely to damage a monitor. Monitors must be cleaned only as described in the instructions provided with a monitor. A monitor, because it contains electric and electronic parts, should never be cleaned with water or other liquids. In addition, the use of abrasive cleaners or rough cloths is likely to damage the casing or display of a monitor. In addition, our website contains further information concerning the monitors which you should read (www.xxxxyyyy.co.uk). We will not take responsibility for damage to the goods you have ordered where you do not set up or use the goods in accordance with the instruction manuals provided or statements or information which is provided with the monitor.’

Although this wording is perhaps excessive, it suggests a way of defining the meaning of satisfactory quality. •

Is the wording ‘transparent’, ie  drafted in plain intelligible language, and is it legible? The contract drafter should draft an agreement on the basis that an ordinary consumer can use and understand the agreement without the benefit of legal advice. This requirement will also mean that the consumer can understand the practical significance of the provisions including the consequences of a contractual term in the future, the reasons for its use; and how it relates to other provisions (see CMA 37, paras 2.45–2.48). Some points to consider: •

avoid legal ‘language’ (such as ‘consequential loss’, ‘time being of the essence’, ‘force majeure’, ‘all conditions and warranties are excluded’, ‘vicarious liability’, ‘indemnify’, ‘mitigation’, ‘this is without prejudice to your statutory rights’, see as well CMA 37, Annex A or Drafting and Negotiating Commercial Contracts (4th Edn) para  7.6). If avoidance is not possible, explain the meaning of such ‘jargon’;

•

use words in their normal sense;

•

use short sentences;

•

minimise cross-references;

•

avoid double negatives;

• make the document legible (eg  reasonable type size, use of wide margins, avoiding coloured paper, use of headings); •

adopt a ‘user-friendly’ drafting style (use ‘you’ and ‘us’);

•

provide explanations and summaries;

• there should be no references to statutory and official provisions alone; •

the consumer should understand the content of the provisions;

•

organise the terms and conditions in a logical way and group topics together where they cover similar matters.

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•

Is the wording concerning the subject matter of the contract and the price payable prominent? The CRA 2015 has introduced a new requirement for a core term not to be assessed for fairness, ie  the ‘core terms’ need to be prominent in addition to being transparent (ie  in plain intelligible language and legible) if they are to be excluded from assessment as to whether they are fair (CRA 2015, s 64(2)). Prominent will mean that the contractual terms have to be brought to the attention of the consumer, so that the average consumer will be aware of them (CRA  2015, s  64). The average consumer means a person ‘who is reasonably well-informed, observant and circumspect’ (CRA 2015, s 64(5)). This can be done by stating the core terms prior to the parties entering into the contract, early on in a contract or in other documents for example. A significant difference between the CRA 2015 and previous legislation is that a contract term cannot be assessed for fairness: ‘…to the extent that-- (a) it specifies the main subject matter of the contract, or (b) the assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it’ (CRA 2015, s 64(1)).

This provision of the CRA 2015 is ‘to be narrowly interpreted as two sides of a bargain made between the trader and the consumer (the trader agreeing to provide goods and services and the consumer willing to pay for them)’. The other types of price terms that appear in the indicative list support the view that there should be a narrow interpretation of the core exemption (from the Explanatory Notes to the CRA  2015, para  315, following the case of Office of Fair Trading v Abbey National plc [2009]  UKSC  6). One consequence of this is that the contract drafter should not attempt to bring within the scope of the core exemption matters that will create an unfair imbalance through the use of drafting techniques, particularly matters such as: •

cancellation provisions;

•

disproportionate financial sanctions;

•

exclusion clauses; or

•

other matters mentioned in the indicative list set out in the CRA 2015, Sch 2 (see CMA 37, para 3.4).

A second consequence is that the meaning of ‘price’ will also have a narrow and restricted meaning and will not normally include such matters as:

•

•

the timing of the payment of the price;

•

the method of payment;

•

any variation of the payment;

Has the contract drafter considered the indicative list of terms (in the CRA 2015) that are potentially unfair? Under the CRA 2015, terms in a contract need to be ‘fair’, that is to say, they must not cause a significant imbalance in 199

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the parties’ rights, which is contrary to the requirement of good faith, and causes any detriment to the consumer (CRA 2015, s 62). This requirement needs considering against an ‘indicative and non-exhaustive’ list of terms that are regarded as unfair (CRA 2015, s 63 and Sch 2 and see Extracts from legislation below). •

Has the guidance issued by the CMA been considered? The CMA provides guidance about unfair terms generally and for specific industry sectors. Where an agreement is being drafted, the drafter should consider: • the general guidance on the unfair provisions, together with the extensive set of wording held by the CMA as unfair (often with revised wording) (see CMA 37 and the Appendix to this); • unfair terms within particular sectors: the CMA has taken over guidance originally issued by the now-defunct OFT on the following (although this list has not been updated to reflect the changes introduced by the CRA 2015, they are still of relevance): •

Guidance on unfair terms in tenancy agreements (OFT356);

•

Guidance on unfair terms in health and fitness club agreements (OFT373);

•

Guidance on unfair terms in care home contracts (OFT635);

•

Guidance on unfair terms in consumer entertainment contracts (OFT667);

•

Guidance on unfair terms in package holiday contracts (OFT668);

• Guidance on unfair terms in IT consumer contracts made at a distance (OFT 672); • Guidance on unfair terms in holiday caravan agreements (OFT 734); • Guidance on unfair terms in home improvements contracts (OFT 737), •

Other statutory matters affecting contract provisions with a consumer. When drafting an agreement, in addition to considering whether: •

the provisions are unfair (CRA 2015, ss 61–72); or

•

whether the provisions exclude or restrict statutory rights and remedies (CRA 2015, ss 31 (for goods), 47 (digital goods), 57 (services), 65(1) (personal injury and death);

the contract drafter should also consider other matters that do not directly affect the actual wording of the consumer contract but impact on what a trader can do, such as: •

Will the right information be provided to the consumer prior to the consumer entering into a contract with the trader? Unless the relevant (prescribed) information is provided prior to the trader and consumer entering

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into the contract then the consumer will not be bound by the contract (2013 Regulations, regs 9, 10, and 13), and certain aspects of that pre-contract information will be treated as a term of the contract (CRA 2015, ss 12, 36, 50(3)). The information a trader needs to provide is set out in Sch 1 of the 2013 Regulations and varies depending on whether the contract is an on premises or, an off premises or distance contract, and also whether the right to cancel is available to the consumer. The information relates to the description of the goods or services, details about the trader, the amount the consumer will have to pay, details and pricing of delivery, the right to cancel and details on how to cancel and whether the consumer has to bear the cost of returning items, etc. The 2013 Regulations do not apply at all (that is the requirement to provide prescribed information or cancellation rights) to some contracts, and only some of the information requirements apply to some types of contracts. The 2013 Regulations (reg 6(1)) do not apply to the part of the contract that concerns: • gambling; •

participating in a lottery;

•

banking, credit, insurance, personal pension, investment or payment services;

•

the creation of immovable property or of rights in immovable property;

•

rental of accommodation for residential purposes;

• the construction of new buildings or substantially new buildings by the conversion of existing buildings; •

the supply of foodstuffs, beverages or other goods intended for current consumption in a household where the supply is made by a trader who makes regular rounds to the home, workplace or residence of the consumer;

•

package holidays and package tours;

•

timeshare, and long-term holidays.

The 2013 Regulations (reg  6(2)) also do not apply at all to contracts concluded by particular technical means (such as by a vending machine, through a public telephone, or which are concluded by a single connection by telephone, internet or fax, and the connection is established by the consumer). For some contracts the requirement to provide some or all of the prescribed information does not apply (eg  if the contract is worth less than £42, for the supply of medicines and transport, or if the supplier is providing services immediately and the payment the consumer is making is less than £170) (eg 2013 Regulations, reg 7). 201

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The 2013 Regulations are detailed. To set out that substantial detail so that all of the essential matters are mentioned is outside the scope of this book. But for the contract drafter, the detail is essential to ensure that any contract provision does not conflict with the 2013 Regulations. •

Has the trader provided details and complied with the provisions concerning the right to cancel? The 2013 Regulations also cover the right of the consumer to cancel a contract (normally 14 days after the goods are delivered to the consumer or 14 days after the entering into the contract for services and digital content, but extended up to 12 months if the prescribed information is not provided). The 2013 Regulations cover such matters as how the consumer can cancel, whether the trader can reduce the amount it repays because of the way the consumer has handled goods, the timing of repayments as well as setting out in detail the circumstances when the right to cancel is lost, particularly with regard to services and digital content (and the period for cancellation starts earlier than goods). For the right to cancel, the 2013 Regulations (reg 28(1)) contain a separate list of contracts where that right does not apply: •

for on-premises contracts;

•

where the consumer is paying less than £42;

•

for any part of the contract that concerns supply of medicines;

• for goods and services where the supply is dependent on the fluctuation in the financial markets (and the fluctuations are not in the control of the trader) other than the supply of water, gas, electricity or district heating; •

for goods or services made to the consumer’s specification;

• for the supply of alcohol other than for immediate supply and subject to other conditions; • where, following a request from a consumer, a supplier visits the consumer and carries out repair or maintenance on an urgent basis (but this will cover only the immediate repair or maintenance and any parts necessary), but any additional services or parts would be subject to the right to cancel (2013 Regulations, reg 28(2)); •

for contracts concluded at a public auction;

• for contracts for the supply of accommodation, transport of goods, vehicle rental services, catering or services relating to leisure activities where there is a specific date or specific date of performance. There are also some situations (rather than types of contract) where the right to cancel does not apply (2013 Regulations, reg 28(3)): 202

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• goods which are sealed and are unsealed by the consumer but are not suitable for return for health protection or for hygiene reasons; • audio or video records or software which are supplied sealed (ie on physical media) and which are unsealed by the consumer; • •

where goods are mixed with other items after delivery and it is no longer possible to separate them.

Is the supplier (or someone else, such as the manufacturer) offering guarantees? Some traders provide a guarantee (or the manufacturer does). The contract between the trader and the consumer may not contain the terms and conditions of the guarantee. Whether or not the trader’s terms and conditions contain wording concerning a guarantee, there are provisions in the CRA 2015 regarding guarantees of which the trader will need to take account. The CRA  2015, s  30 applies to a guarantee that is provided with a supply of goods, and is an undertaking offered by a person in the course of business without extra charge. The undertaking is that if the goods do not conform to their specification set out in the guarantee statement (or any associated advertising) then the consumer will be reimbursed for the price paid for the goods or the goods will be repaired, replaced or dealt with in some other way. The main provisions that a contract drafter needs to consider are: •

the guarantee does not apply to digital content but is not restricted as to how the consumer obtains the goods, ie whether the goods are sold by themselves as well as supplied under a contract for the supply of a service. For example, when a provider of services supplies the goods as part of providing the services (eg a plumber fitting a new boiler);

•

the guarantor should use plain intelligible language;

• the guarantee needs to contain the essential particulars for making a claim under the guarantee together with the length of the guarantee, its territorial scope, the contact details of the guarantor and a statement that the statutory rights in relation to the goods which are sold or supplied are not affected;

•

•

the guarantee must be written in English if the goods are offered in the United Kingdom;

•

the guarantee takes effect from the date of delivery.

Other points concerning risk and delivery. If the contract drafter is not familiar with drafting consumer terms and conditions, the default provisions regarding risk and delivery in the CRA 2015 are different from those found in the Sale of Goods Act 1979. An approach where such terms are drafted in favour of one party or another in a nonconsumer contract will not work in a consumer contract: 203

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•

•

Delivery: Unless the trader and consumer agree otherwise, delivery of goods means delivery to a consumer and is treated as a term of the contract (CRA 2015, s 28(2)). Also, unless the parties agree otherwise, goods are to be delivered without undue delay and in any event, no later than 30 days after the date on which the contract is entered into (CRA 2015, s 28(3)). There are further detailed rules as to what happens if delivery is not made;

•

Risk: Risk is to remain with the trader until physical possession of the goods passes to the consumer (or a third party, where the consumer has specified that a third party should take possession of the goods) (CRA 2015, s 29).

Provisions for which a trader cannot exclude or restrict liability. A contract term is not binding on a consumer if it attempts to exclude or restrict liability arising under any of the following provisions of the CRA 2015: •

goods (s 31): •

goods to be of satisfactory quality (s 9);

•

goods to be fit for particular purpose (s 10);

•

goods to be as described (s 11);

•

pre-contract information that is included in the contract as a term of the contract (s 12);

•

goods to match a sample (s 13);

•

goods to match a model which is seen or examined (s 14);

• where the contract includes installation of goods, if the installation is not carried out correctly, the goods will not conform with the contract (s 15); •

•

if goods include a supply of digital content, and the digital content does not conform to the contract to supply that digital content then the goods also do not conform to the contract (s 16); •

trader to have right to supply the goods (s 17);

•

delivery of goods (s 28);

•

passing of risk (s 29);

digital content (s 47): •

digital content to be of satisfactory quality (s 34);

•

digital content to be fit for particular purpose (s 35);

•

digital content to be as described (s 36);

• pre-contract information that is included in contract as a term of the contract (s 37); •

trader’s right to supply digital content (s 41).

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•

services (s 57): •

service to be performed with reasonable care and skill (s 49);

•

the information a trader provides on its service or itself is to be binding (s 50);

•

that a reasonable price is payable (s 51);

•

that there is reasonable time for performance of the service (s 52);

The above prohibition on excluding or restricting liability also means that a term of a contract is not binding to the extent that the term would (ss 31(2), 47(2), 57(4)): •

exclude or restrict a right or remedy concerning liability under one of the matters listed under the above bullet point;

• subject a right or remedy (or its enforcement) to a restrictive or onerous condition; •

permit a trader to put a person at a disadvantage if the person pursues a right of remedy;

•

exclude or restrict rules of evidence or procedure.

A reference to restricting or excluding liability also ‘includes preventing an obligation or duty arising or limiting its extent’ (s 31(3), s 57(5)). The above rights and remedies are automatically treated as terms of the contract between a consumer and a trader. •

What if it is not possible to prepare terms and conditions only for use by a consumer? Some businesses do not trade only with consumers or may only sell a small amount of what they offer to consumers. It may simply not be worth the time or effort to prepare a new set of terms. At a minimum there should be wording that the terms implied by the Sale of Goods Act 1979 are not limited or excluded (see Precedent 1).

Sample precedent material Precedent 1—Minimum wording where not possible to redraft an agreement for consumer use only 1 Any provision in this Agreement which seeks to or does exclude liability of the Supplier for breach of the terms implied by the [Sale of Goods Act 1979][Supply of Goods and Services Act 1982] shall apply where the Customer is a consumer. 2 Any provision in this Agreement where delivery is stated to be made by delivery to a courier shall not apply to a Customer who is a consumer. 205

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Precedent 2—Sample set of boilerplate provisions The terms and conditions of this contract We intend that the terms and conditions of our contract with you is set entirely in this agreement. Please read through it carefully before you [sign this agreement][other method for consumer to enter into agreement]. If you have any questions about these terms and conditions or wish to change them please contact us. You can contact us in the following ways [specify]. Amending or varying this contract If you or we wish to change any of the terms and conditions of this contract you and we will need to both agree to the change. We would prefer that any changes that are agreed are put in writing. Waiver If you do not comply with or follow any of the terms and conditions of this contract but we choose not to do anything about this, we can still do so (that is using any of the rights or remedies available to us) whether in relation to the specific failure to comply or following any future failure. Communications You may contact us by telephone, email or in writing. The details for each of these methods of communication are found at [specify]. If you contact us by email then you are authorising us to send you any notices, documents or other communications we need to send you under this contract by email to the email address you used in your email. If you do not wish us to use email please let us know. Law and jurisdiction These terms and conditions and the contract between you and us are subject to and governed by the law of England and Wales. We hope that you will discuss with us any problems you are having with us or [our goods][our services] but if we or you cannot resolve any problem or dispute between you and us, we or you will use only the courts of England and Wales to do so. Third parties For the purpose of the Contracts (Rights of Third Parties) Act 1999, only you or we can enforce any of the terms and conditions of this contract. Any person who is not a party to this contract cannot enforce any of the terms and conditions. 206

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Precedent 3—Sample wording for a guarantee We wish you to be happy with the [goods][name of product, model number etc] you have bought from [us (if the seller is also providing the guarantee)][name of supplier, if supplier and guarantor are different]. We would like to offer you the following guarantee: For a period [12][24] months starting from the date of your purchase, if the [goods][name of product, model number etc] breaks down, fails to operate or is defective we will either repair the [goods][name of product, model number etc] or replace it at our option. This guarantee will not cover the following situations: 1 if you deliberately or accidentally damage the [goods][name of product, model number etc]; 2

if you do not follow the instructions and guidance in the (user) manual or similar documents for the operation or use of the [goods][name of product, model number etc];

3

if you use the [goods][name of product, model number etc] other than for any normal domestic purpose;

4 if (a)

there is cosmetic damage; and/or

(b) parts of the [goods][name of product, model number etc] are damaged, defective or break down but which do not affect the normal operation of the [goods][name of product, model number etc]. To claim under this guarantee: 1 Please do not return [goods][name of product, model number etc] without please notifying first that you wish to make claim under the guarantee; 2 If we ask you to return the [goods][name of product, model number etc] please send or take it to the address below; 3 We will refund any of your reasonable costs in returning the goods (such as the cost of postage) unless we arrange to pick up the [goods] [name of product, model number etc] from you. This guarantee does not affect your statutory rights in relation to [goods] [name of product, model number etc]. [name of company providing guarantee and their address, if different to the seller].

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Case analysis Harrison v Shepherd Homes Ltd [2011] EWHC 1811 (TCC) (Case appealed and not on the issue set out below (appealed on the proper amount of damages payable). The appeal was dismissed: [2012] EWCA Civ 904.) 1 The defendant built a number of houses. The claimants purchased them. 2 The claimants’ claim related to a number of issues, including Clause 7.1 of the sale agreement between each claimant and the defendant. Clause 7.1 stated: ‘The Works shall be completed by the Seller in a good and workmanlike manner and shall be so completed and made ready for occupation with all reasonable despatch after the Agreement Date …’

Relevant defined terms: ‘Works’ meant ‘The house of the House Type and any ancillary works constructed or to be constructed by the Seller on the Site in accordance with the Specification’ and ‘Specification’ meant ‘the drawings and specifications relating to the Works previously approved by the relevant authorities and any amendment of them from time to time’. 3

The defendant argued that the meaning of Clause 7. 1 did not include a ‘…requirement that the Works are to be carried out to a professional design or that the property is to be “suitable” for occupation” [from 36]; that there was only a limited obligation to do the work necessary to achieve completion. The defendant argued that the phrase ‘in a good and workmanlike manner’ only applied to specific period (between the date of contract to the date of completion, and not before the date of contract.

4 The claimants had retained solicitors to deal with the conveyancing. 5 The above clause and the interpretation of the defendant came to be considered against the provisions of the 1999 Regulations (now the CRA 2015). 6 The judge repeated part of an earlier judgment he had made (Mylcrist Builders Ltd v Buck [2008] EWHC 2172 (TCC), [2009] 2 All ER (Comm) 259) as to the principles to be derived from earlier cases concerning the application of the 1999 Regulations: ‘(1) A term is unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer in a manner or to an extent which is contrary to the requirement of good faith. (2) There is “significant imbalance” if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour.

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Consumer contracts (3) The element of “detriment to the consumer” makes clear that the Regulations are aimed at significant imbalance against the consumer, rather than the seller or supplier. (4) The requirement of good faith is one of fair and open dealing in which: (a) Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate dis­ advantageously to the customer. (b) Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Sch 2 to the 1994 Regulations (an inducement to the consumer to agree to the term, whether goods or services were sold or supplied at the special order of the consumer or whether the seller or supplier dealt fairly and equitably with the consumer). The supplier should deal fairly and equitably with the consumer. (5) Schedule 2 to the Regulations is best regarded as a check list of terms which must be regarded as potentially vulnerable to being unfair. (6) Useful approaches include: (a) assessing the impact of an impugned term on the parties’ rights and obligations by comparing the effect of the contract with the term and the effect it would have without it. (b) considering the effect of the inclusion of the term on the substance or core of the transaction; whether if it were drawn to his attention the consumer would be likely to be surprised by it; whether the term is a standard term, not merely in similar non-negotiable consumer contracts, but in commercial contracts freely negotiated between parties acting on level terms and at arms’ length; and whether, in such cases, the party adversely affected by the inclusion of the term or his lawyer might reasonably be expected to object to its inclusion and press for its deletion. (7) Where the consumer has imposed the term either by their own choice or a choice made by their professional agent then it is unlikely that there would be any lack of good faith or fair dealing with regard to the incorporation of the terms into the contract.’

7 The judgment expanded on the meaning of good faith in the context of how the defendant in the case should act: ‘[112] … Fair dealing requires that [the defendant] should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Sch 2 to the 1994 Regulations (an inducement to the consumer to agree to the term, whether goods or services were sold or supplied at the special order of the consumer or whether the seller or supplier dealt fairly and equitably with the consumer). The supplier should deal fairly and equitably with the consumer. As I said in Mylcrist v Buck the requirement of good faith is one of fair and open dealing in which openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. 209

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8 The judge then went to consider whether the defendant’s interpretation of Clause 7.1 of the sales agreement (see para 3 above) accorded with the requirement to show good faith: ‘[113] If Cl 7.1 had the effect contended for by [the Defendant] then I do not consider that the term would have been expressed fully, clearly and legibly and it would have contained concealed pitfalls in not giving the Claimants an ability to claim for failure to complete the works in a good and workmanlike manner or for failure properly to carry out the design. I  consider that on that basis [the Defendant], although there is nothing to show that it would have been other than unconsciously, would be taking advantage of a house purchaser wishing to purchase a property with all the pressures on them which are familiar to those involved in such property transactions. Whilst they were advised by solicitors, the evidence indicates that the Claimants were not alerted to any problems with the terms and whilst the opportunity for them to be advised has to be weighed in the overall assessment of good faith, I  do not consider that it detracts sufficiently from the other matters to show that there would have been fair and open dealing in this case. I should say that I see nothing to suggest that there was anything in terms of the nature of the conveyancing role or fee or the way in which the solicitors were engaged by the Claimants which makes the particular circumstances in which the solicitors were engaged by the Claimants in this case different from any other conveyancing transaction. [114] I therefore consider that, if Cl 7.1 of the sales contracts had the effect contended for by [the Defendant] and meant that the Claimants could not, after completion, bring a claim against [the Defendant] for breach of the obligation to complete the works in a good and workmanlike manner and could not bring a claim for failure to carry out the design of the works properly then that term would be unfair because it was not individually negotiated and contrary to the requirement of good faith it would cause a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the Claimants as consumer.’

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Extracts from legislation Sections from the Consumer Rights Act 2015 (The terms that are new to the Schedule (5, 12 and 14) are marked with an asterisk.) SCHEDULE 2 Consumer Contract Terms which may be Regarded as Unfair (s 63) Part 1 List of Terms 1 A term which has the object or effect of excluding or limiting the trader’s liability in the event of the death of or personal injury to the consumer resulting from an act or omission of the trader. 2 A term which has the object or effect of inappropriately excluding or limiting the legal rights of the consumer in relation to the trader or another party in the event of total or partial non-performance or inadequate performance by the trader of any of the contractual obligations, including the option of offsetting a debt owed to the trader against any claim which the consumer may have against the trader. 3 A  term which has the object or effect of making an agreement binding on the consumer in a case where the provision of services by the trader is subject to a condition whose realisation depends on the trader’s will alone. 4 A  term which has the object or effect of permitting the trader to retain sums paid by the consumer where the consumer decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the trader where the trader is the party cancelling the contract. *5 A term which has the object or effect of requiring that, where the consumer decides not to conclude or perform the contract, the consumer must pay the trader a disproportionately high sum in compensation or for services which have not been supplied. 6 A term which has the object or effect of requiring a consumer who fails to fulfil his obligations under the contract to pay a disproportionately high sum in compensation. 211

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7 A  term which has the object or effect of authorising the trader to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer, or permitting the trader to retain the sums paid for services not yet supplied by the trader where it is the trader who dissolves the contract. 8 A term which has the object or effect of enabling the trader to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so. 9 A term which has the object or effect of automatically extending a contract of fixed duration where the consumer does not indicate otherwise, when the deadline fixed for the consumer to express a desire not to extend the contract is unreasonably early. 10 A term which has the object or effect of irrevocably binding the consumer to terms with which the consumer has had no real opportunity of becoming acquainted before the conclusion of the contract. 11 A term which has the object or effect of enabling the trader to alter the terms of the contract unilaterally without a valid reason which is specified in the contract. *12 A term which has the object or effect of permitting the trader to determine the characteristics of the subject matter of the contract after the consumer has become bound by it. 13 A term which has the object or effect of enabling the trader to alter unilaterally without a valid reason any characteristics of the goods, digital content or services to be provided. *14 A term which has the object or effect of giving the trader the discretion to decide the price payable under the contract after the consumer has become bound by it, where no price or method of determining the price is agreed when the consumer becomes bound. 15 A term which has the object or effect of permitting a trader to increase the price of goods, digital content or services without giving the consumer 212

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the right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded. 16 A  term which has the object or effect of giving the trader the right to determine whether the goods, digital content or services supplied are in conformity with the contract, or giving the trader the exclusive right to interpret any term of the contract. 17 A term which has the object or effect of limiting the trader’s obligation to respect commitments undertaken by the trader’s agents or making the trader’s commitments subject to compliance with a particular formality. 18 A  term which has the object or effect of obliging the consumer to fulfil all of the consumer’s obligations where the trader does not perform the trader’s obligations. 19 A  term which has the object or effect of allowing the trader to transfer the trader’s rights and obligations under the contract, where this may reduce the guarantees for the consumer, without the consumer’s agreement. 20 A term which has the object or effect of excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy, in particular by-(a) requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, (b) unduly restricting the evidence available to the consumer, or (c) imposing on the consumer a burden of proof which, according to the applicable law, should lie with another party to the contract.

Part 2 Scope of Part 1 Financial services 21 Paragraph 8 (cancellation without reasonable notice) does not include a term by which a supplier of financial services reserves the right to terminate unilaterally a contract of indeterminate duration without notice where there is a valid reason, if the supplier is required to inform the consumer of the cancellation immediately. 213

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22 Paragraph 11 (variation of contract without valid reason) does not include a term by which a supplier of financial services reserves the right to alter the rate of interest payable by or due to the consumer, or the amount of other charges for financial services without notice where there is a valid reason, if-(a) the supplier is required to inform the consumer of the alteration at the earliest opportunity, and (b) the consumer is free to dissolve the contract immediately. Contracts which last indefinitely 23 Paragraphs 11 (variation of contract without valid reason), 12 (determination of characteristics of goods etc after consumer bound) and 14 (determination of price after consumer bound) do not include a term under which a trader reserves the right to alter unilaterally the conditions of a contract of indeterminate duration if-(a) the trader is required to inform the consumer with reasonable notice, and (b) the consumer is free to dissolve the contract. Sale of securities, foreign currency etc 24 Paragraphs 8 (cancellation without reasonable notice), 11 (variation of contract without valid reason), 14 (determination of price after consumer bound) and 15 (increase in price) do not apply to-(a) transactions in transferable securities, financial instruments and other products or services where the price is linked to fluctuations in a stock exchange quotation or index or a financial market rate that the trader does not control, and (b) contracts for the purchase or sale of foreign currency, traveller’s cheques or international money orders denominated in foreign currency. Price index clauses 25 Paragraphs 14 (determination of price after consumer bound) and 15 (increase in price) do not include a term which is a price-indexation clause (where otherwise lawful), if the method by which prices vary is explicitly described.

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Contra proferentem

Purpose of the clause Background The contra proferentem rule is a common law rule, which provides that unclear contract wording is interpreted against the interests of the maker or the party that benefits from the wording. The precise scope of the rule is not entirely clear from the reported cases. There seem to be three main strands: • in agreements concerned with the grant of rights to property, unclear wording is interpreted against the grantor (Johnson v Edgware Rly Co (1866) 35 Beav 480); •

in other types of agreements, unclear wording in a clause is interpreted against the party in whose favour the clause is made, ie the party which ‘proffered’ (put forward) the wording (Savill Bros Ltd v Bethell [1902] 2 Ch 523, CA);

•

as a third strand of the rule, it seems that in grants from the Crown, unclear wording is interpreted against the grantee, ie, the rule is reversed and the Crown has the benefit of the doubt; but it seems that this exception only applies to grants concerned with land (Earl of Londsdale v A-G [1982] 1 WLR 887).

Application of the rule to commercial contracts In relation to the second of these strands, the rule seems to be that wording is interpreted against the party who benefits from the wording, not that the wording will be interpreted against the party which drafted the wording (see Pera Shipping Corpn v Petroship SA [1984] 2 Lloyd’s Rep 363 at 356 and Youell v Bland Welch & Co Ltd [1992] 2 Lloyd’s Rep 127 at 134). The rule will not apply if: • the wording is clear and unambiguous (see also Quest 4 Finance Ltd v Maxfield [2007] EWHC 2313 (QB)); or • the wording does not clearly benefit one party, or benefits both parties equally; or •

the wording is a standard form of contract prepared by a representative body (Tersons Ltd v Stevenage Development Corpn [1963] 2 Lloyd’s Rep 333). 215

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Also the contra proferentem rule does not apply: •

to a clause that ‘emerged as a result of joint efforts’ (Levison v Fairn [1978] 2 All ER 1149 at 1156); or

• where there is ‘a joint drafting effort’ (Kleinwort Benson Ltd v Malaysian Mining Corpn Berhad [1988] 1 WLR 799); or •

to a clause that operated for the benefit of both parties (Oxonica Energy Ltd v Neuftec Ltd [2008]  EWHC  2127 (Pat); Steria Ltd v Sigma Wireless Communications Ltd [2008] BLR 79).

Parties might seek to take advantage of this line of authorities, by including a clause in the contract to state that the contract was the result of a joint drafting effort, as in Precedent 1. In practice, it is rarer to encounter a clause similar to Precedent 1 in a contract drafted by English lawyers. However, similar wording is sometimes encountered in contracts drafted by leading US firms of attorneys, as part of the ‘boilerplate’ provisions at the end of the contract. It appears that US courts are more prepared to consider the negotiating history of an agreement when interpreting its terms. Accordingly, in an English law contract a contra proferentem clause might be useful but is unlikely to be included in most cases.

Relevance of the rule While the rule may continue to exist as a possible way of interpreting a contractual provision, its relevance as a tool in interpreting a contractual provision is lessened, as: •

the courts will now see the rule as of little relevance to modern commercial contracts (CDV  Software Entertainment AG  v Gamecock Media Europe Ltd [2009] EWHC 2965 (Ch)). They will make use of it only as a last resort (Landlord Protect Ltd v St Anselm Development Co Ltd [2008]  EWHC  1582 (Ch)) and only where there is doubt or ambiguity (Joint London Holdings Ltd v Mount Cook Land Ltd [2005] EWCA Civ 1171, [2005] 3 EGLR 119); and

•

the rule runs across the trend that the parties are free to make whatever contract they wish and that the role of the courts is to interpret the words of the contract and apply them (Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98, HL and culminating most recently in Rainy Sky SA [2011] UKSC 50 and Arnold v Britton [2015] UKSC 36). One of the points coming from these cases is that if the wording of a clause is clear and unambiguous then the court must apply it even if it leads to an improbable result; the role of the court is not to make the wording of the clause accord with commercial common sense. Only if there is ambiguity can a court make a clause accord with commercial common sense.

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The consequence of these two points (particularly in regard to the second) is that the role of the contra proferentem rule is likely to be limited if the parties use clear language, and it will not protect a party who has made a bad deal or has agreed to wording which is not to its benefit. (For an outline of the modern approach to the interpretation of contracts, see the companion volume, Drafting and Negotiating Commercial Contracts (4th Edn, 2016, Bloomsbury Professional Publishing) Chapter 6).

Sample precedent material Precedent 1—Sample clause The Parties acknowledge and agree that this agreement has been jointly drafted by the Parties and accordingly it should not be construed strictly against either Party.

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Contracts (Rights of Third Parties) Act 1999

Purpose of the clause Background The Contracts (Rights of Third Parties) Act 1999 (1999 Act) made modifications to the common law doctrine of privity of contract. It allows a person who is not a party to a contract (‘third party’) the right to enforce certain terms of the contract. Generally, the 1999 Act will apply to most contracts for goods and services and the third party will have the right to enforce a term of a contract if the contract states that it can or if a contract confers a benefit on the third party. There are limitations and exclusions to this (see below). In practice, since the 1999 Act came into force most contracts now include standard boilerplate wording so that a third party cannot enforce any of the terms of the contract.

Who is a ‘third party? A third party is ‘a person who is not a party to a contract’ (1999 Act, s 1(1)).

What the 1999 Act allows a third party to do The 1999 Act allows a third party a right to enforce a term of a contract in two situations, namely where: •

the contract states explicitly that it may do so (1999 Act, s 1(1)(a)); or

• a term of the contract purports to confer a benefit on the third party (1999 Act, s 1(1)(b)). This provision only applies if on the proper construction of the contract it appears that the parties intended that the term be enforceable by the third party (1999 Act, s 1(2)). The word ‘benefit’ does not mean that a third party’s position is improved if the contract is performed, but that the language used by the parties to the contract shows that the parties had as one of the purposes of their bargain the 218

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intention to benefit the third party (rather than the third party incidentally getting a benefit from the contract being performed) (see Dolphin Maritime & Aviation Services Ltd v Sveriges Angartygs Assurans Forening [2009] EWHC 716 (Comm), para 74, with the judge focusing on the purposive effect of the word ‘confer’ in s  1(1)(b)). In an earlier case, identified in Dolphin Maritime, concerning the meaning of ‘purpose’, the purpose had to be a ‘predominant purpose or intent behind the term’, which purports to confer a benefit on a third party (Prudential Assurance Co Ltd v Ayres [2007] EWHC 775 (Ch)).

New rights in addition to other rights This new right is in addition to any other right or remedy that the third party may have independently of the 1999 Act (1999 Act, s 7(1)).

Modifies but does not replace existing law regarding privity of contract The 1999 Act amends the rules on privity of contract but does not abolish them. The common law doctrine of privity of contract will continue, unaltered, in situations where the 1999 Act does not apply. Moreover, the 1999 Act does not prevent a third party from relying on rights that exist apart from the 1999 Act, for example claims based in tort (see 1999 Act, s 7(1)). The doctrine of privity of contract generally provides that only the parties to a contract (the ‘contracting parties’) can have enforceable rights and obligations under the contract. Put another way, only a contracting party may sue another contracting party for breach of contract. It is, in general, not enough that a person is referred to in the text of the contract; to be contracting parties persons must generally sign the contract or have their agent or representative do so on their behalf. English law in this area has been fairly strict, compared with some other countries’ laws. The 1999 Act gives greater rights to third parties than they had under previous English law rules.

No formalities for enforcing a third party’s rights If a contract indicates that the third party can enforce a particular term then there is no further requirement necessary for the third party to do so (unless the contracting parties have specified some such requirement).

Exceptions to application of the 1999 Act The 1999 Act does not apply to all contracts. In particular: • certain categories of contract are automatically excluded from the 1999 Act (see ‘Is the subject matter of the agreement excluded by the 1999 Act?’ under Drafting Issues below); 219

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•

the 1999 Act only grants rights to a third party who meets the criteria set out in the 1999 Act (1999 Act, s 1(1)), and those rights are qualified by the other provisions of the 1999 Act;

•

it does not apply to contracts entered into before 11 November 1999 (and before 10 May 2000 unless the parties otherwise agree) (1999 Act, s 10).

Remedies given to third parties If a contract allows the third party to enforce a term of that contract by virtue of the 1999 Act, s 1(1) then it will have available ‘any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract’ (1999 Act, s 1(5)). The 1999 Act provides also that the rules regarding damages, injunctions, specific performance and other reliefs are to apply accordingly (1999 Act, s 1(5)). A third party is provided with the same remedies as if it was one of the contracting parties. The third party can recover damages for loss of bargain and the principles of remoteness and mitigation which apply to the parties would also apply to the third party. The third party does not become a contracting party (1999 Act, s 7(4)).

Third party beneficiary examples Contract with contracting party that is part of international group of companies The contracting party may wish the contract to benefit other companies in the same group as itself. An example might be a licence agreement covering several territories, in which the licensee is a major international company. It is not uncommon for such a licensee to seek to include in the contract a definition of ‘affiliate’ (eg  its subsidiaries in particular territories covered by the licence) and provide that both it and its affiliates may exploit the licence. Under some countries’ laws, such a provision may give the affiliates enforceable rights under the contract. By contrast, the English law rules in this area have been quite strict; prior to the coming into force of the 1999 Act, the affiliates would not have had direct, enforceable rights against the licensor. This assumes that the affiliates are not contracting parties. Sometimes, techniques are used to overcome this difficulty, eg, the licensee might expressly enter into the contract as the agent of its affiliates. However, such techniques have their own difficulties, eg  how does the licensee obtain its agency authority? The 1999 Act will make it much easier, in this example, for the affiliates to enforce the contract directly against the licensor. Research contract between sponsoring company and university Research contracts with universities will often provide for research work to be done by, or under the supervision of, a named academic scientist who will 220

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usually be an employee of the university. Sometimes that scientist is referred to in the research contract; and sometimes, but not always, he is asked to be a signatory to the research contract. Where he is not made a contracting party, he would (prior to the coming into force of the 1999 Act) have had no enforceable rights or obligations vis-a-vis the sponsoring company. Eg, the contract may provide that he will chair a steering committee that will review the progress of the research project, or that he will have confidentiality obligations to the sponsoring company. On occasion, such contracts have been drafted (generally by non-lawyers) without due attention being given to the rules on privity of contract and have not given the scientist enforceable rights or obligations. With the coming into force of the 1999 Act, enforceable rights (but not obligations) may be given to the scientist who is not a contracting party but is named in the contract as having certain rights. Contract containing indemnity A detailed indemnity clause in a contract to which only A and B are parties, might include the following words: ‘A shall indemnify and hold harmless B, its affiliates, and their respective officers, employees, consultants, agents and representatives…’

Prior to the coming into force of the 1999 Act, B’s employees (for example) would not have enforceable rights against A  under the indemnity. B  might be able to enforce the indemnity on their behalf. Under the 1999 Act, B’s employees may well have directly enforceable rights.

Drafting issues The parties to a contract may need to clarify whether the contract, or any of its terms, is intended to benefit any third parties, and if so: •

Is the subject matter of the agreement excluded by the 1999 Act? The main excluded categories are (1999 Act, s 6): •

bills of exchange, promissory note or negotiable instrument;

• company memorandum and articles (no rights are conferred to a third party in the case of any contract binding on a company and its members under Companies Act 2006, s 33);

•

•

contracts of employment;

•

contracts of carriage of goods by sea, rail, road or air (except that a third party may in reliance on that section avail himself of an exclusion or limitation of liability clause in such a contract).

Who are the third parties? Is the third party expressly identified: •

by name? or

•

as a member of a class? or 221

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•

as answering a particular description (1999 Act, s 1(3))? In effect the third party has to be sufficiently identified against the benefit they are to receive under the contract, and because of the use of the word ‘expressly’ a court will not be allowed to interpret or imply that a third party is identified against a benefit (see Avraamides v Colwill [2006] EWCA Civ 1533, [2006] All ER (D) 167 (Nov), and Case analysis below). The third party need not be in existence at the time the contract is entered into (1999 Act, s  1(3)). This could include allowing contracting parties to confer enforceable rights on, for example: •

a company that has not yet been incorporated; or

•

a sub-licensee that has not yet been granted a sub-licence; or

• a named role, which is to carry a specific function under the contract, but from time to time may be changed, such as a project director in a hardware and software installation contract. Where it is intended to give enforceable rights to a third party, the parties should be careful not only to identify the third party, but also to make it clear that the term is to be enforceable by the third party (see Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003]  EWHC  2602 (Comm), [2004] 1 All ER (Comm) 481 and Laemthong International Lines Co Ltd v Artis [2005] EWCA Civ 519, [2005] 23 All ER (Comm) 167), and Case analysis below), and applied in Great Eastern Shipping Co Ltd v Far East Chartering Ltd and Binani Cement Ltd [2011] EWHC 1372 (Comm). •

Are the provisions of the contract made for a third party’s benefit? The 1999 Act provides two tests where a third party has a right to enforce a term of a contract: •

the contract states explicitly that it may do so (1999 Act, s 1(1)(a)); or

•

a term of the contract purports to confer a benefit on the third party (1999 Act, s 1(1)(b)). This provision only applies if on the proper construction of the contract it appears that the parties intended that the term be enforceable by the third party (1999 Act, s 1(2)).

•

Do the parties to the agreement wish for a third party to be able to enforce the agreement against the parties?

•

Does the party who accepts it has obligations to a third party wish to make such obligations subject to conditions or obligations, and if so, what are those conditions or obligations? Eg, a third party may be required to give notice to the party who is the promisor in the agreement of the third-party right, before the third party is able to exercise the right.

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•

Are the third parties’ rights assignable? This point appears not to be specifically addressed by the 1999 Act. If such rights are assignable, will the assignee also be able to enforce them in the same way?

•

Can the contracting parties agree to revoke a third party’s rights without the consent of the third party? Under the 1999 Act, once a third party is granted a right under an agreement then such a right cannot be taken away or varied if: • the third party has communicated its assent to the term in the agreement with the promisor (it appears that for the assent to be effective it can only be made to the promisor); •

the promisor is aware that the third party has relied on the term in the agreement; or

• the promisor can reasonably be expected to have foreseen that the third party would rely on the term in the agreement, and has in fact relied on it (1999 Act, s 2). •

Can the third party enforce the whole of an agreement or only specific provisions?

•

If a specific provision is for the benefit of a third party, can the third party have the benefit of any allied or related clauses? Eg, if payments are to be made to the third party, should any related payment clauses (eg specifying interest on late payments) also apply to the third party?

Location in the agreement A 1999 Act clause is usually located in the Boilerplate section of an agreement.

Linkage and use Often, it is suggested, the parties to a contract will not wish to ‘create any right enforceable by a person not a party to it’ and they will not expressly grant rights to any third party in their contract. Unless the agreement has been drafted with care (or been checked thoroughly for possible third parties) the danger for the parties is that such a case may arise where a term of the contract purports to confer a benefit on the third party. Eg, in a software licence between a software author and a distributor, there may be a clause that the software author should provide updates/improvements of the software to the distributor. If these are not passed on to a sub-licensee, then the term concerning updates/improvements may be enforceable by the thirdparty sub-licensee as against the software author, as it may confer a benefit on the third party sub-licensee (ie may make the software more competitive compared to the competition). 223

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Contracts (Rights of Third Parties) Act 1999

In most cases where it is not intended to give rights to third parties, a simple clause should be added to the ‘Boilerplate’ section of a contract stating that the third-party rights are excluded.

Sample precedent material Precedent 1—General exclusion clauses for purposes of Contracts (Rights of Third Parties) Act 1999 A For the purposes of the Contracts (Rights of Third Parties) Act 1999 [and notwithstanding any other provision of this Agreement] this Agreement is not intended to, and does not, give any person who is not a party to it any right to enforce any of its provisions. or B This Agreement does not create any right enforceable by any person who is not a party to it (‘the Third Party’) under the Contracts (Rights of Third Parties) Act 1999, but this Clause [no] does not affect any right or remedy of a Third Party which exists or is available apart from that Act. or C This Agreement is not made for the benefit of, nor shall any of its provisions be enforceable by, any person other than the parties to this Agreement and their respective successors and permitted assignees. Precedent 2—General inclusion clauses under the Contracts (Rights of Third Parties) Act 1999 A each of [[state names] or the persons identified in Clause [no]] may in his own right enforce the provisions of Clause [no]. or B The provisions of Clause [no] are made for the benefit of the persons named in that Clause [as well as [Party A]] and, accordingly, each of those persons may in his own right enforce those provisions in accordance with the provisions of the Contracts (Rights of Third Parties) Act 1999. or C [(state names) or The persons identified in Clause [no] by name, class or description, and whether or not they are in existence at the date of this Agreement [but only for as long as they remain within that class or description]] (‘the Third Parties’) may enforce the provisions of Clause [no], subject to and in accordance with the provisions of the Contracts (Right of Third Parties) Act 1999 and the following provisions: 224

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(a) the parties may [not] rescind or vary any provision(s) of this Agreement, including this Clause [no], at any time without the consent of the Third Parties; and (b) the parties may assign or otherwise transfer any or all of their rights or obligations under this Agreement, including without limitation their obligations to any third party, [by agreement between the parties] [in accordance with Clause [no]] and they will not need the consent of any third party in order to do so; and [(c) it shall be a condition precedent to any third party having any rights under this Clause [no] that the third party in question shall [have [executed a deed of adherence to this Agreement under which it shall have] undertaken [to Party A] to] comply with the provisions of [this Agreement or Clauses [insert nos as applicable]] as if it were [Party B]; and] [(d) [Party B] shall be liable to [Party A] for any failure by any third party to comply with the provisions of Clauses [insert nos as applicable] as if [Party B] had been in breach of those provisions; and] (e)

without limiting any other rights it may have, [Party A] shall have available to him by way of defence or set-off against any claim brought by a third party all those matters that would be available to [Party A] by way of defence or set-off against any claim brought by [Party B] [as provided for in Clause [no]]; and

(f)

each third party’s rights against [Party A] under this Agreement shall be subject to the same conditions, limitations and exclusions as apply to [Party B]’s rights against [Party A] under this Agreement, [except that the third party’s rights shall also be subject to the following conditions [state additional conditions etc]];

(g) each third party’s rights under this Agreement are personal to that third party and may not be assigned or otherwise transferred, in whole or in part; and [(h) neither party shall have any liability to any third party for any loss or damage (other than death or personal injury) resulting from that party’s negligence, where the negligence consists of the breach of an obligation to that third party arising under this Agreement]. and: D Except as provided in clause (no), this Agreement does not create any right enforceable by any person who is not a party to it (‘Third Party’) under the Contracts (Rights of Third Parties) Act 1999, but this clause does not affect any right or remedy of a Third Party which exists or is available apart from that Act. 225

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Precedent 3—Dispensing with third party consent Any rights that a person other than a party to this Agreement (‘Third Party’) may have to enforce any provision of this Agreement may be rescinded or varied by the parties to this Agreement without the consent of the Third Party. Precedent 4—Successors and assignees 1 Without prejudice to the provisions of clause [no] (ie  clause stating when assignment is permitted), references in this Agreement to a party shall include its successors and permitted assignees. However, this Agreement does not create any right for any successor or permitted assignee of either party to enforce any provision of this Agreement at a time when such a person is not a party to this Agreement. Or 1 For the avoidance of doubt, but without prejudice to the provisions of clause [no] (ie assignment clause) this Agreement shall be enforceable by any successor or permitted assignee of either party.]

Case analysis Nisshin Shipping Co Ltd v Cleaves & Company Ltd [2003] EWHC 2602 (Comm), [2004] 1 All ER (Comm) 481 This appears to be the first case to deal explicitly with the 1999 Act. It was held that: 1 if a contract is silent on how a person can enforce a provision that confers a benefit on him/her, such silence does not mean that there was no intention to grant any rights of enforcement; and 2 for s 1(2) of the 1999 Act to apply, there would have to be an express clause in the contract stating that the third party should not have rights to enforce the clause conferring a benefit on him/her. Facts 1 The case involved a series of charterparties. Each provided for payment of commission to Cleaves. 2 Cleaves, as brokers, negotiated a number of charterparties on behalf of Nisshin. 3 Cleaves was not a party to any of the charterparties. 4 The commission clause read: ‘A commission of 2 per cent for equal division is payable by the vessel and owners to [ ] and [Cleaves] on hire earned and paid under this Charter, and also upon any continuation or extension of this charter.’ 226

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5 An arbitration clause read (for most of the charters): ‘Should any dispute arise between Owners and the Charterers, the matter in dispute shall be referred to three persons at London, one to be appointed by each of the parties hereto, and the third by the two so chosen.’

For other charters the arbitration clause read: ‘All disputes or differences arising out of this contract which cannot be amicably resolved shall be referred to arbitration in London. Unless the parties agree upon a sole arbitrator, one arbitrator to be appointed by each party. This contract is governed and construed by English law in regards to substance and procedure, and there shall apply to all proceedings under this Clause the terms of the London [Maritime] Arbitrators Association current at the time when the arbitration proceedings were commenced…’

6 It accepted by Cleaves that none of the commission clauses stated that Cleaves could enforce such clauses directly against the owners. 7 There was a failure to pay commission due under the charterparties. 8 Cleaves referred the matter to arbitration, although it was not a party to any of the arbitration agreements. Nisshin sought a declaration that the arbitrators had no jurisdiction to hear a claim brought against it by Cleaves. Matters to be determined 1 Whether the clauses purported to confer a benefit on the brokers within s 1(1)(b); 2

Whether s 1(1)(b) was disapplied by s 1(2) because the parties, on the true construction of the clause, did not intend the term to be enforceable by the third party.

The owners submitted that 1 The arbitration clause did not make express provision for enforcement by a broker of claim for commission; 2 There was no positive indication that the parties had intended the brokers to have enforceable rights; and 3 The parties’ mutual intention on the proper construction of the contracts was to create a trust of a promise in favour of the brokers – a trust enforceable against the owners at the suit of the charterers as trustees. That being the proper construction of the contracts by reference to the state of the law at the time when the 1999 Act came into force, the very same contract wording did not, subsequently to that, evidence a different mutual intention. Accordingly, the mutual intention evidenced by the contracts was that the enforcement of the promise to pay commission would be at the suit of the charterers who must be joined by the brokers as co-claimants. 227

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Held As this is the first case dealing substantially with the 1999 Act it is worth setting out in some detail how it was applied: [21] It is accepted by [counsel], on behalf of Cleaves, that the brokers were not parties to the arbitration agreements as a matter of construction of those clauses. Her case is that the effect of s  8 of the 1999 Act is to impose the arbitration clauses on the owners and the brokers as the means of enforcement of the commission benefit conferred by the commission clause. […] However, for the purposes of the submission in relation to absence of intention to confer a benefit, the wording of the arbitration clauses is, in my judgment, of little or no materiality. Firstly, although the parties to the charterparties clearly expressed their mutual intention that their disputes should be arbitrated, that mutual intention is entirely consistent with a mutual intention that the brokers should be obliged to recover their commission by court action rather than by arbitration. Secondly, if, on the proper construction of the 1999 Act, the third party is obliged to enforce the commission benefit by arbitration, even where the agreement does not on its proper construction provide for any participants in an arbitration other than the parties to the main contract, identification of the intention to be imputed to the parties as to enforceability of the third party commission benefit clearly has to take this into account. That is to say, if, as a matter of law, it makes no difference to the broker’s ability to enforce his right to commission benefit that no express provision is made for this in the arbitration agreement, the strength of any inference derived from the absence of such express provision could be little more than negligible. [22] Secondly, it is argued by [counsel] on behalf of Nisshin that there is no positive indication in the charterparties that the parties did intend the ­brokers to have enforceable rights. There is no suggestion in those contracts that the owners and charterers were mutually in agreement that the brokers should be entitled to claim against the owners as if they were parties to the contract. [23] It is to be noted that s 1(2) of the 1999 Act does not provide that sub-s 1(b) is disapplied unless on a proper construction of the contract it appears that the parties intended that the benefit term should be enforceable by the third party. Rather it provides that sub-s 1(b) is disapplied if, on a proper construction, it appears that the parties did not intend third party enforcement. In other words, if the contract is neutral on this question, sub-s  (2) does not disapply sub-s 1(b). Whether the contract does express a mutual intention that the third party should not be entitled to enforce the benefit conferred on him or is merely neutral is a matter of construction having regard to all relevant circumstances. The purpose and background of the Law Commission’s recommendations in relation to sub-s (2) are explained in a paper by Professor Andrew Burrows (‘The Contracts (Rights of Third Parties) Act 1999 and its implications for commercial contracts’ [2000] LMCLQ 540) who, as a member of the Law Commission, made a major contribution to the drafting of the Bill as enacted. He wrote (at 544): ‘The second test therefore uses a rebuttable presumption of intention. In doing so, it copies the New Zealand Contracts (Privity) Act 1982, s. 4, which has used the same approach. It is this rebuttable presumption that provides the essential balance between sufficient certainty for contracting parties and the flexibility required for the reform to deal fairly with a huge range of different situations. The presumption is based on the idea that, if you ask yourself, “When is it that parties are likely to have intended to confer rights on a third party to enforce a term, albeit that they have not expressly ­conferred that right”, the answer will be: “Where the term purports to confer 228

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Contracts (Rights of Third Parties) Act 1999 a benefit on an expressly identified third party.” That then sets up the ­presumption. But the presumption can be rebutted if, as a matter of ordinary contractual interpretation, there is something else indicating that the parties did not intend such a right to be given.’ [24] In the present case, […] the charterparties are indeed neutral in the sense that they do not express any intention contrary to the entitlement of the brokers to enforce the commission term. [25] Thirdly, Mr Ashcroft submits that the parties’ mutual intention on the proper construction of the contracts was to create a trust of a promise in favour of the brokers—a trust enforceable against the owners at the suit of the charterers as trustees. That being the proper construction of the contracts by reference to the state of the law at the time when the 1999 Act came into force, the very same contract wording did not, subsequently to that, evidence a different mutual intention. Accordingly, the mutual intention evidenced by the contracts was that the enforcement of the promise to pay commission would be at the suit of the charterers who must be joined by the brokers as co-claimants. [29] What is the position arising from the contract itself following the coming into force of the 1999 Act? As a matter of analysis of the underlying relationship between the parties, it must be precisely the same. Thus, the charterer is no less the trustee of the owners’ promise to pay the commission, having regard to the fact that the charterer contracts for payment of the commission on behalf of a non-contracting party. Indeed, the only thing that has changed is the coming into force of the 1999 Act and the introduction of the statutory facility of a direct right of action for a non-contracting party on whom a contract purports to confer a benefit. [30] Accordingly, the argument advanced by the owners can only succeed if it is to be inferred from the existence of the underlying trustee relationship that it was the mutual intention of owners and charterers that the broker beneficiary should not be entitled to avail himself of the facility of direct action by the 1999 Act. [31] This proposition is, in my judgment, entirely unsustainable. The fact that prior to the 1999 Act it would be the mutual intention that the only available facility for enforcement would be deployed by the broker does not lead to the conclusion that, once an additional statutory facility for enforcement had been introduced, the broker would not be entitled to use it, but would instead be confined to the use of the pre-existing procedure. Indeed, quite apart from the complete lack of any logical basis for such an inference, the very cumbersome and inconvenient nature of the procedure based on the trustee relationship (described by Lord Wright as a ‘cumbrous fiction’) would point naturally to the preferred use by the broker of the right to sue directly provided by the 1999 Act. Not only would that original procedure be inconvenient, but it might involve risk that the broker would be prevented from recovering his commission, for example, in a case where the charterer had been dissolved in its place of incorporation or where, in the absence of co-operation by the charterer, proceedings had to be served on it outside the jurisdiction and service could not be effected. There are therefore very strong grounds pointing against any mutual intention to confine the brokers to the old procedure and to deny them the right to rely on the 1999 Act. [32]  I  therefore reject the third ground relied upon by Nisshin. In so doing I reach the same conclusion as the arbitrators. [33] It follows that Cleaves are entitled to enforce the commission clauses in their own right by reason of s 1 of the 1999 Act. 229

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Laemthong International Lines Co Ltd v Artis [2005] EWCA Civ 519, [2005] 23 All ER (Comm) 167) In this case, involving a letter of indemnity (to simplify the complicated set of facts), the indemnifier agreed to indemnify, inter alia, a party’s ‘agents’. On the facts of the case the ship owners argued they were agents and therefore entitled to enforce the indemnity against the indemnifier. The Court of Appeal held that there was nothing in the letter of indemnity to indicate that the parties to it did not intend it to be enforceable by a third party. Avraamides v Colwill [2006] EWCA Civ 1533, [2006] All ER (D) 167 (Nov) In this case the issue of whether the claimants were expressly identified (for the purposes of the 1999 Act, s  1(3)) in an agreement came under consideration by the court. The claimants contracted with a building company for two bathrooms to be built. The work was not carried out satisfactorily. The assets and goodwill of the company were transferred by an agreement to the defendants (the company being left with no assets) and there was nothing left to pay the claimants. The key wording from the agreement was: ‘The purchasers (sic) undertakes to complete outstanding customer orders taking into account any deposits paid by customers as at 31 March 2003, and to pay in the normal course of time any liabilities properly incurred by the company as at 31 March 2003. The Colwill loan account after adjustment to be transferred on by the partnership’. The court relied on the word ‘express’ in C(RTP)A, s 1(3). The court held that the use of the word ‘express’ did not allow a process of construction or implication and that although ‘customers’ were identified in the first part of the quoted extract from the agreement as beneficiaries, as far as the second part of the extract was concerned, it held that there was not sufficient precision in the phrase ‘to pay in the normal course of time any liabilities properly incurred by the company as at 31 March 2003’ to identify the customers (claimants), and could include a large number of unidentified classes (see in particular para 19 of the judgment).

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Costs and expenses

Purpose of the clause Costs The word ‘costs’ usually refers only to legal fees. The convention is that each party in negotiating and preparing a commercial agreement usually bears its own legal costs. Accordingly, it is often thought not necessary to include a clause on this point. The parties can, and may, wish to negotiate a different arrangement. If so, then the agreement should contain a clause to state specifically what cost the one party will bear of the other. Property leases and investment agreements sometimes provide that the lessee or investee will pay the legal costs of the landlord or investor in connection with the drafting and negotiation of the contract. These are perhaps the most common exceptions to the normal arrangement that each party bears its own legal costs. There is, however, nothing to stop the parties agreeing that one of them will bear the other party’s legal costs; this is a matter for commercial negotiation. Boilerplate language stating that each party is to bear its own legal costs is probably most useful in situations where there is a long-established practice that one party bears all costs, as, eg, in the case of property leases. If each party is to bear its own costs then a clause such as in Precedent 1 might be appropriate. The meaning of ‘costs’ as relating only to legal costs may be limited to where parties are represented by lawyers who will understand this limited use. It is also possible that the meaning may be simply how the supplier of goods or services refers to the amount that it charges for the provision of those goods and/or services.

Expenses Expenses are a slightly different category to costs, and references to expenses are often intended to cover expenditure involved in interactions with governmental and regulatory authorities, such as registrations, renewals of registrations and application costs. 231

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A  second meaning for expenses is sometimes found in agreements where a person is providing services to another party (eg  under a consultancy agreement) or where the person is an employee. In this sense expenses means those items of direct expenditure that the person incurs in providing the services (eg cost of transport, hotel bills, materials, obtaining the services of third parties and the like).

Drafting issues •

Is the default position to apply? Ie each party will be responsible for their own costs and expenses?

•

If so, is it necessary to specify what costs and expenses? If there might be any doubt about particular types of costs or expenses, it might be convenient to specify them;

•

If not, •

Who is to be responsible for costs and expenses?

•

What costs and expenses is a party to be specifically responsible for? Is a party to be responsible for all the costs and expenses or specific ones?

•

When are the costs and expenses to be paid? Are the costs and expenses to be paid as they arise or are they to be paid at the same time and in the same manner as other sums due under the agreement (as specified in the Payments clause)?

•

What are the consequences if a party responsible for costs and expenses does not pay?

Location in the agreement The Boilerplate section of an agreement will usually contain a default Costs and expenses clause.

Linkage and use Although the default position might be that each party is responsible for their own costs and expenses, the following are some of the common situations where one party might be responsible for another party’s costs and expenses: •

the purchaser of a business or business assets;

• a lessee will be responsible for the costs of negotiation, drafting and granting of a lease; •

a sponsor of a research project will often be responsible for the payment of the fees in filing, and prosecuting, a patent application;

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•

a company seeking funds from investors will be responsible for the costs of negotiation and drafting of the investment documentation and the transfer of the funds; or

• on formation of a company, the newly-formed company will often be responsible for the costs incurred by the persons who incorporated it.

Sample precedent material Precedent 1—Costs clause Each Party shall bear its own legal costs and other costs and expenses arising in connection with the drafting, negotiation, execution [and registration] of this agreement. Precedent 2—Costs clause Each of the parties shall pay the costs and expenses incurred by it in connection with this agreement. Precedent 3—Reimbursement of costs – company formation agreement Each of the parties will take such steps as lie within his power to procure that the Company reimburses AB in respect of all reasonable costs and expenses incurred by him in connection with the formation of the Company [and that the Company reimburses AB and CD in respect of all reasonable costs and expenses incurred by them respectively in connection with the preparation of this agreement]. Precedent 4—Reimbursement of costs – mortgage deed The Mortgagor shall pay to the Mortgagee or to its order on demand all costs and expenses whatever (including, without limitation, legal costs, registration fees, VAT and stamp duties) incurred by the Mortgagee in connection with the negotiation, preparation, completion, registration and perfection of this Mortgage and the maintenance, protection and enforcement of the security created by or intended to be created by or pursuant to this Mortgage or any of the Mortgagee’s rights whatever under this Mortgage. Precedent 5—Parties to pay own costs – assets sale The parties shall pay their own costs in connection with the negotiation, preparation and implementation of this agreement or any agreement incidental to or referred to in this agreement and the assignments of all the properties and assets hereby agreed to be sold and not transferable by delivery together with any Land Registry fees and fees for registration of assignments of industrial property rights and any licences required to be obtained in connection with the assets.

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Counterparts (or duplicates)

Purpose of the clause Background If each contracting party signs one copy of an agreement and then they exchange these copies then this is a situation where the agreement is signed in counterparts. The result is that each party keeps the copy signed by the other party. The agreement is made at the time of exchange of the signed copies of the contracts. In the traditional practice, where clients are using solicitors, the exchange of contract process is normally undertaken by the parties’ solicitors. It is still fairly common to find clauses in contracts on the subject of counterparts in some areas of practice (such as in domestic and commercial conveyancing). Note that in some conveyancing transactions (such as the granting of leases) the meaning of a counterpart is different; there is an original version of the document and then duplicates (called ‘counterparts’) are made. There is a presumption that the original is the authoritative version.

Commercial practice Most commercial contracts are signed on a different basis to that described above. Either: •

all parties are present at a signing ceremony where each party signs all the original versions of the contract (and each party keeps an original signed by all parties); or

•

the agreement is signed at different times by the parties, with each party signing all of the original versions of the contract and then passing all the originals onto another party so that they can sign all the originals. Once all parties have signed all the originals, the originals are distributed amongst the parties, so that each keeps one or more original versions of the signed agreement which is signed by all the parties; or

•

there is one version of the agreement which is signed by all the parties in one of the ways stated immediately above, and then certified copies are circulated to all the parties. On the copies there will be a statement similar to the following:

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Counterparts (or duplicates) ‘this is certified to be a true copy of the original’

with a signature and a printed name of the person signing and/or of the party certifying the copy. If a solicitor is acting for a party sometimes the certification is made by that solicitor; or • the parties use an electronic method, eg  prepare or receive the final version electronically and then, either • sign the signature page with a manual signature and then send a scanned copy of the signature page to the other party electronically (for the other party to attach to the final version of an agreement); or •

•

sign the signature page with a manual signature and then return the whole agreement including the scanned copy of the signature page (either as one document or two documents) by electronic means;

adopting either of the methods described in the previous bullet point but signing the signature page before the final version of the agreement is reached and then attaching the signature page to the agreement.

There are dangers to signing a signature page alone from the rest of the agreement (whether at the time the final version is agreed or prior to the final version being agreed). The dangers include attaching the signature page to the ‘wrong’ version of the agreement, whether by accident or design. For example: •

one party signs a signature page, scans it and then sends it alone without the rest of the agreement to another party. The other party signs the signature page it has received and returns it to the first party. But because its electronic filing system is in a muddle or it simply cannot find the final version of the agreement, it attaches the signature page to a version which is not the final, agreed version. The first party has the final version of the agreement and attaches its copy of the signature page to that version. But the second party attaches its copy of the signature page of the version of the agreement it has found. In the event of a dispute, there may be argument about which was the final version, and a need to examine file dates, modification dates and times of versions stored on the computers, examination of emails with attachments for the circulations of drafts (if any of these still exist if the dispute occurs several years after the parties enter into the agreement);

•

a variation on the above example: one party knowingly and deliberately attaches the signature page to the wrong version of an agreement. Perhaps at the last moment that party had to concede a point or agree to some provision or commercial reality not in its favour and which is not reflected in the final version, but in an earlier version. By doing so this party may hope that at some time in the future it can use that earlier version to its advantage against the other party. For example, by stating or claiming some benefit or entitlement in its dealings with the other party and hoping that the other party will not notice this. Consider this situation: a party sells goods, and it agreed a lower purchase price. An earlier version stated a higher price. After the agreement is signed, and 235

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an order is placed, then the party selling the goods might invoice the accounts department of the other party claiming the higher price and quoting from the agreement. Such subterfuge may not be brought to the attention of the persons involved in negotiating the agreement for the other party. These examples illustrate the dangers of exchanging signed signatures electronically without the rest of the agreement, and was highlighted by the case of R (on the application of Mercury Tax Group) v HM Revenue and Customs Commissioners [2008]  EWHC  2721 (Admin), [2009]  STC  743. Following the case the Law Society issued guidance on signing of documents and provision of documents electronically. Essentially the guidance states that documents which are deeds or relate to the sale or other disposition of land should never be signed other than as complete documents and the signature page should never be signed separately from the rest of the document. For other types of documents, the Law Society sets out suggested steps parties should take. These are set out in the companion volume, Anderson and Warner, Drafting and Negotiating Commercial Contracts (4th Edn, 2016) at 2.1), as well as in the authors’ The Execution of Documents (3rd Edn, 2015, Law Society). If one of these methods is used then there is no exchange of counterparts, and it is suggested that a traditional ‘counterparts’ clause is unnecessary. Precedent 1 refers also to ‘duplicates’ and therefore may be useful for commercial contracts signed as described in this paragraph. However, such clauses are often not included in modern commercial contracts.

Drafting issues •

Should a counterparts clause be used? Is it necessary or required that there be more than one copy of an agreement recognised as an ‘original’ copy (for regulatory, stamp duty purposes, company administrative or other purposes)?

•

If counterparts are to be used: •

do all copies need to be signed by all the parties?

•

at what moment will the agreement be executed? Eg: •

on exchange;

•

on delivery;

•

sending in the post;

•

when all counterparts have been signed by all the parties;

•

‘Original’. Is there a statement that each counterpart is an original?

•

Facsimile. If a counterpart is signed and sent by facsimile, is this an acceptable method of exchange? If so, should there be a requirement that the original then be subsequently sent?

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Counterparts (or duplicates)

Location in the agreement A Counterparts clause will be located in the Boilerplate section of an agreement.

Sample precedent material Precedent 1—Agreement in counterparts This agreement may be executed in any number of counterparts or duplicates, each of which shall be an original, and such counterparts or duplicates shall together constitute one and the same agreement. Precedent 2—Agreement in counterparts, alternative form Each counterpart shall constitute an original of this agreement and all the counterparts shall together be one and the same agreement. Precedent 3—Deed in counterparts This deed may be executed in any number of counterparts all of which taken together shall constitute one and the same instrument. Any party to this deed may enter into this deed by executing any such counterpart. Precedent 4—Agreement in counterparts or facsimiles – no binding agreement until all the parties have completed signed copies This agreement may be executed in one or more parts by the parties on separate counterpart or facsimile copies each of which when so executed by any party shall be an original but all executed counterpart or facsimile copies shall together when delivered constitute but one agreement. This agreement shall not be completed delivered or dated until each party has received counterpart or facsimile copies validly executed by all other parties. The date of this agreement shall be the date in the United Kingdom on which validly executed copies were received by all parties. Precedent 5—Agreement in counterparts This agreement may be executed in any number of counterparts and by the parties on separate counterparts but shall not be effective until such party has executed at least one counterpart. The expression ‘counterpart’ shall include any executed copy of this agreement transmitted by facsimile. Each counterpart shall constitute an original of this agreement but all the counterparts shall together constitute one and the same agreement. Precedent 6—Version of agreement to prevail The Parties can sign more than one copy of this Agreement. Each copy which is signed by one or more of the parties shall be an original and binding on all the parties to this Agreement. All of the signed copies shall together constitute one and the same agreement. [In the event of a dispute relating to or arising from the Agreement the signed copy that is held by [name of party] shall be the authoritative version.] 237

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Covenants

Purpose of the clause Background The traditional meaning of a ‘covenant’ is a promise made by deed (Rank Xerox Ltd v Lane (Inspector of Taxes) [1979] 3  All ER  657 at 663; Hagee v Cooperative Insurance Society [1991] NPC 92) with a secondary meaning whereby it is applied to any promise or stipulation, whether under seal or not (Rank Xerox Ltd v Lane (Inspector of Taxes) [1979] 3 All ER 657 at 659). In some types of agreement covenants are frequently encountered. For example in agreements relating to real property, where there are important legal distinctions between positive and negative covenants. Covenants in this sense are: • contractual undertakings (which only affect the parties to the original contract); and •

obligations that (in certain circumstances) may attach to the property and bind persons who were not party to the original contract.

Modern practice (use in commercial agreements) However, most clauses that are stated to be ‘covenants’ (those found in contracts that are not concerned with real property) are in reality no more than contractual undertakings. ‘Covenant’ is a word that in effect is saying ‘I am making a binding promise’. In this sense, the use of the word ‘covenant’ is a form of legal jargon. English contract law takes a relatively strict view on privity of contract (compared, say, with US law). In most cases, it will not be possible to make contractual undertakings binding on anyone other than the parties to the contract. Using the word ‘covenant’ in a contractual undertaking will not change the position. At least within the UK, the only sure way to bind a person to a contractual undertaking where the person is not a party to a contract is to make them sign a document as a deed. Sometimes the word ‘covenant’ appears to be used just to make a contractual undertaking sound more solemn and important. Outside the field of real property, a contract drafter wishing to draft contractual undertakings in 238

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plainer English may prefer to avoid the verb ‘covenants’ and use ‘undertakes’ (or just ‘shall’) instead (even in documents that the parties are to sign as deeds). In addition to using plainer English, the contract drafter can also state the consequences of not fulfilling the contract undertaking, eg: ‘Party A shall pay the Price for the Goods by the Date. If Party A fails to pay the Price by the Date then Party B has the right to terminate this Agreement, and Party A will not receive the Goods.’

In a commercial context, covenants are sometimes seen in employment contracts. Typically, such clauses prohibit an employee from competing with the employer (sometimes with an obligation not to disclose the trade secrets and/or confidential information of the employer). These are sometimes referred to as restrictive covenants. In other types of commercial agreement (even those executed as deeds) the word is less commonly seen.

Drafting issues •

If a party wishes to use the word ‘covenant’, are there better alternatives? If the agreement is a ‘mainstream’ commercial agreement, and depending on the nature of the ‘promise’, should the parties instead use words such as: • undertakes; • represents; • warrants.

Location in the agreement When the word ‘covenant’ is used then it is likely that its inclusion will be together with words such as ‘warrants’, ‘represents’ etc or in place of such words. The word is also used in clauses dealing with exclusions and limitations of liability.

Linkage and use Conventionally, ‘covenants’ are found in the following types of transactions: •

transactions relating to land and mortgages;

•

the sale or purchase of a business or the assets of a business, mergers and acquisitions, transactions relating to loans, finance, debentures etc;

•

employment contracts;

•

assignments of property (including choses in action) normally by way of a deed;

•

documents relating to trusts and settlements. 239

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Sample precedent material Precedent 1—Sample clause Party A [undertakes to or covenants with] Party B that it shall not disclose the Confidential Information to any person without Party B’s prior written consent. Precedent 2—Covenant to pay sums The Chargor covenants with the Bank to pay the Secured Sums to the Bank on demand on the due date for payment. Precedent 3—Covenant to perform obligations The Mortgagor covenants with the Bank to observe and perform the restrictions and obligations set out below. Precedent 4—Sample joint and several covenant The Purchaser covenants with the Vendors jointly and as a separate covenant with each of them that he will as from the date of this assignment keep the Vendors their estates and property indemnified against all claims, proceedings, costs, demands and expenses in respect of the Lease. Precedent 5—Sample restrictive covenants on sale of agricultural land The Buyer covenants with the Seller, which expression for the purposes of this covenant includes his successors in title and estate, that he will not, during the period of 5 years from the date of the conveyance or transfer of the Property under this agreement, permit any change of occupation of the property of a nature that would result in a notification to the [Minister of Agriculture, Fisheries and Food or the Intervention Board pursuant to the Regulations] unless he has first obtained in favour of the Seller and his personal representatives and estate a direct covenant from the incoming occupier to the same effect as that contained in Clauses [no] and [no] above. Precedent 6—Sample restrictive covenants on sale of business The Vendor covenants with the Purchaser: 1 not to solicit or approach customers of the Business in relation to the sale of [specify] for [period] from completion; 2

not to accept orders from or otherwise deal with the customers of the Business in relation to the sale of [specify] for [period] from completion;

3 not to be engaged or concerned directly or indirectly in a competing business operating within [ ] miles of the Property for [period] from completion; 4 not to solicit or employ the employees to be transferred for [period] from completion; 240

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5 not to disclose confidential information held by the Vendor relating to the Business. Precedent 7—Sample restrictive covenants on sale of business – longer form 1 With the object of assuring to the Purchaser the full value and benefit of the Business as a going concern and as well after as before completion and so that each of the following sub-clauses of this clause shall be deemed to constitute a separate agreement and shall be construed independently of the others the Vendor covenants with the Purchaser that he (whether alone or jointly with any other person, firm or company and whether directly or indirectly and whether for his own account or for the account of any other person, firm or company, and whether as shareholder, participator, partner, promoter, director, officer, agent, manager, employee or consultant of, in or to any other person, firm or company) will not: 1.1 without the prior consent of the Purchaser at any time after completion in any way indicate, suggest or publicise any continuing connection between the Vendor and the Business; 1.2 within [number] miles of the Business Premises during the period of [specify] from the Completion Date be engaged or concerned in any business which supplies goods and/or services which are competitive with or of the type supplied by the Business at the Completion Date. 2 Whilst the restrictions contained in Clause [1] are considered by the parties to be reasonable in all the circumstances and as going no further than is necessary for the purposes referred to in this agreement it is agreed that if such restrictions shall taken together be adjudged to be beyond what is reasonable in all the circumstances for the protection of the Business but would be adjudged reasonable if part or parts of the wording thereof were deleted the said restrictions shall apply with such words deleted.

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Cumulative remedies

Purpose of the clause Background—preventing argument that only one of a possible range of remedies can be used The use of the phrase ‘cumulative remedies’ is a convenient shorthand for a clause which provides that a specific remedy or remedies available under a contract are in addition to any other rights or remedies a party may have. Eg: •

a clause dealing with payments may state that a party may charge interest on late payments; however, the party may also wish to terminate the contract if payments are made persistently late (rather than just have the right to charge interest); or

•

(to take a different example) a clause may state that a party may terminate the contract if the other party is in breach of contract, but the party may also (or instead) wish to sue the other party for damages for breach of contract.

In these examples, a Cumulative Remedies clause is intended to prevent the party in breach from arguing: • (in the first example) that the other party (ie  the party not in breach) can only charge interest for late payment, as it is its sole remedy for late payment; and •

(in the second example) that its only remedy for breach of contract is to terminate the agreement.

The inclusion of one is the exclusion of another (Expressio unius est exclusio alterius) Cumulative Remedies clauses are sometimes used for a slightly different reason, namely to avoid the principle of construction known under the Latin title expressio unius est exclusio alterius. If the contract expressly provides a remedy in one situation, the court may infer that the same remedy is not available in similar situations which are not mentioned. The application of this principle of construction will depend on the view of the court as to status of the agreement. If the court has before it a detailed and consistently drafted agreement then it may apply the principle of construction (Shell UK Ltd v Total 242

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UK  Ltd [2010] EWCA Civ 180, [2010] 3  All ER  793). However if the court believes that a party has simply overlooked something, or if the intention was not to exclude something, or the agreement is not well drafted or is a collection of documents which are not entirely consistent, or the principle does not reflect the commercial purpose of the clause, then the principle may not apply (eg Aspen Insurance UK Ltd v Pectel Ltd [2008] EWHC 2804 (Comm); Griffon LLC v Firodi Shipping Ltd [2013] EWHC 593 (Comm); National Grid v Mayes [2001] UKHL 20, [2001] 1 WLR 864). Eg, in a facilities management agreement a contractor is responsible for maintaining the equipment. lighting, heating, air conditioning, etc. If there is a provision that the client can terminate the agreement in the event of failure on the part of the contractor to repair the office air conditioning within 24 hours, but there is no mention of a right to terminate in the event of a failure to repair the office heating or lighting systems then the court might interpret the words as impliedly not allowing the company to terminate the contract if the heating or lighting is not repaired within 24 hours. Appropriate ‘cumulative remedy’ wording is likely to remove this risk.

Drafting issues •

Use of the word ‘cumulative’. The word ‘cumulative’ is sometimes used in such clauses (see Precedent 1). This word may be thought rather imprecise, or as lawyer’s shorthand. It may be better to use a phrase such as ‘in addition to [other remedies]’ (see Precedent 4).

•

Extent. Will a clause dealing with Cumulative Remedies appear

•

•

together with wording dealing with specific remedies? or

•

as a stand-alone provision, which applies to all the remedies available to one or more of the parties under an agreement?

Use of a ‘general’ cumulative remedy. If used, is it appropriate to include such a clause if one of the parties wants a particular remedy for a particular situation to be the only remedy available? Eg a manufacturing agreement might provide that a manufacturing party must produce a product to a very tight tolerance. However, the manufacturer is unable to calibrate its machines to meet the requirements of its customer. The manufacturer may not wish the customer to have several remedies. A  general cumulative remedies clause might not be appropriate for the manufacturer and the manufacturer may wish to ensure that one remedy is available to the customer (eg, cancellation and not the right to sue for damages).

•

What remedies should be included in a Cumulative Remedies clause? Should the clause allow a party: •

access only to other remedies expressly provided for in the agreement; and/or

•

access to remedies which are available under general law. 243

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Location in the agreement A general Cumulative Remedies clause is often located in the Boilerplate section of an agreement. If a particular clause contains a remedy, then there might be a specific Cumulative Remedies clause as well.

Linkage and use Cumulative Remedies clauses are often included with the following type of provisions: •

Main Commercial Provisions: •

a clause that defines the core obligations of the parties: Eg, A  software developer is commissioned to write software to an agreed specification. The agreement provides that the parties will first negotiate and agree the terms of the specification. If the parties fail to agree the specification then the clause might give the right to one or more of the parties to terminate. A Cumulative Remedies clause here could indicate that a party can also consider other remedies;

•

•

a payment provision, which specifies that a party who is required to pay on a certain date, and fails to do so allows the supplier either not to perform its side of the agreement and/or to terminate the agreement. A Cumulative Remedies clause here could say that the supplier would be free to use other remedies (such as to sue for damages or charge interest).

Secondary Commercial Provisions. A Termination provision will often include different methods of terminating an agreement (depending on different circumstances). A Cumulative Remedies clause is often included to indicate clearly whether remedies to terminate are in lieu of other possible remedies.

A drafter should consider a Cumulative Remedies clause together with clauses which limit or restrict liability and with Entire agreement clauses. With clauses that restrict or limit liability there is also normally a ‘sweep-up’ clause which provides that other than provided for in the agreement the parties are not responsible for indirect loss etc. Such a clause might impact on a Cumulative Remedies clause if one or more of the parties wished to have particular remedies to be available. It will be necessary to include wording to address this situation. Similarly, with an Entire agreement clause, if the parties had discussed or negotiated specific remedies but had not included them in the agreement, but were relying on a generic Cumulative Remedies clause, then the specific remedies might be excluded. Again, specific wording would need inclusion.

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Sample precedent material Precedent 1—General The remedies provided in this agreement are cumulative and not exclusive of any remedies provided by law. Precedent 2—General The remedies provided in this agreement are in addition to, and not exclusive of, any remedies provided by law. Precedent 3—One party only Any remedy or right conferred upon the Purchaser for breach of this agreement (including the right to rescission) shall be in addition to and without prejudice to all other rights and remedies available to it. Precedent 4—Both parties Any remedy or right conferred upon any party for breach of this agreement shall be in addition to and without prejudice to all other rights and remedies available to it. Precedent 5—Both parties All rights granted to either of the parties shall be cumulative and no exercise by either of the parties of any right under this agreement shall restrict or prejudice the exercise of any other right granted by this agreement or otherwise available to it. Precedent 6—Specific remedy for one party Without prejudice to any other right or remedy it may have, [Party A may terminate this agreement…] or [Party A may charge interest …]. Precedent 7—Both parties Any right or remedy to which either Party is or may become entitled under this agreement or in consequence of the other’s conduct may be enforced from time to time separately or concurrently with any right or remedy given by this agreement or now or afterwards provided for and arising by operation of law so that such rights and remedies are not exclusive of the other or others but are cumulative. Any right or remedy expressly included in any provision of this agreement shall not be construed as limiting a Party’s rights or remedies under any other provision of this agreement.

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Currency

Purpose of the clause Background This provision specifies the currency a party is to use when making payments under an agreement.

Meaning of ‘pounds’ If the agreement refers simply to ‘pounds’ then in order to determine whether the currency is pounds sterling or some other currency it is necessary to look at the proper law of the contract (Bonython v Commonwealth of Australia [1951] AC 201, PC). In other words, if the proper law is English law, and the contract refers to pounds, UK pounds sterling will normally be the currency adopted. It appears that the use of a currency named as ‘pounds’ is restricted to a few countries (such as Egypt, Lebanon), and countries within the UK and Crown Dependencies (Guernsey, Jersey), the Isle of Man and Gibraltar.

If a currency provision is not specified Where a party is required to make payment in a foreign currency, that party is still required to make payment in full even if the pounds sterling value has fallen by a large amount and the fall is unexpected (Multiservice Bookbinding Ltd v Marden [1979] Ch 84).

Drafting issues •

Is a clause specifying a currency needed at all? If the agreement only involves parties based in the United Kingdom and involves only the supply of goods and services within the United Kingdom, then such a clause is not necessary.

•

In which currency are payments to be made? If a currency clause is required, is the currency specified? And is the currency sufficiently identified? For example, if the dollar is specified as the currency, which countries’

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dollar is being referred to? The dollar is used in a number of countries in addition to the United States of America (for example, Australia, Taiwan, New Zealand, Singapore, Hong Kong and Canada). The clause should identify the currency by relation to the country it belongs to avoid any doubt. For example: ‘All sums due under this agreement shall be paid in Canadian dollars.’

or ‘All sums due under this agreement shall be paid in Singaporean dollars.’

•

Is payment only permitted in the specified currency? •

What are the consequences if payment is made in the wrong currency, such as in US dollars instead of the specified pounds sterling?

•

Can the party receiving the payment refuse it?

• Will the party who receives the payment in the wrong currency but cannot reject that payment, or chooses not to, have the right to charge for its additional costs in converting the payment from the ‘wrong’ currency to the ‘right’ currency? •

How and when is the currency to be converted? Is a particular method of exchanging and converting payments to be used? If payments are to be received on particular dates, must the payment be made in time to allow for conversion so that it reaches the account of the recipient of the payment by the due date?

•

Who is to bear the risk of the currency exchange rate changing from what it was at the date of the agreement and when in fact payment is made? Eg: •

if there is no provision in the agreement, then the party paying will face the fall (or benefit) of the currency rate changing; or

•

that if the movement in currency rates is beyond a certain level, then the paying party has to pay more; or

•

that if the movement in currency rates is beyond a certain level, then the parties to the agreement either: •

decide that the agreement is terminated; or

•

agree to negotiate a new pricing structure.

Changing currency can also affect the party receiving payment, especially if they have bought a large amount of materials at one currency rate, but by the time payment is received in that currency the rate has worsened so that they will receive much less when they convert the payment (after conversion is made).

Location in the agreement A currency provision usually forms part of a larger Payment clause. 247

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Linkage and use As stated above, a currency provision will be part of a Payment clause, but will often be seen in: •

agency, distribution or licensing agreements, where payment can be made in other currencies; or

•

agreements involving buying materials either for manufacturing or resale where the materials are sourced from overseas.

Sample precedent material Precedent 1—Sample clause All sums due under this agreement shall be paid in pounds sterling by cheque made payable to ‘ABC  Offshore Account’. In the case of sales income received by the Company in a currency other than pounds sterling, the royalty shall be calculated in the other currency and then converted into equivalent pounds sterling at the buying rate of such other currency quoted by [name] Bank plc at the close of business on the last day of the quarterly period with respect to which the payment is made. Precedent 2—Right of payee to specify currency for payments For all sums due under this Agreement the Purchaser shall pay them to the Seller in pounds sterling or in another currency as the Seller may specify from time-to-time. [If the Seller requires the Purchaser to make any payments in a currency other than pounds sterling the Seller shall give prior written notice [of no less than 14 days] to the Purchaser. [The notice shall specify which payments shall be in a currency other than pounds sterling, the currency in which the payment shall be made and [specify any other conditions]]]. Precedent 3—If payment made in a currency other than the domestic currency All sums due under this agreement shall be paid in pounds sterling by the Purchaser to the Seller. If the Purchaser shall not make a payment in pounds sterling then Seller shall convert the payment into pounds sterling at the buying rate of such other currency and quoted by [name of bank] at [the date the payment is received by the Seller] (or) [the date that the Seller shall make or request the conversion of the payment by [name of bank]]. [If the amount in pounds sterling after conversion is less than the amount stated as due in pounds sterling then the Purchaser shall, within [14] days of receipt of a written notice from the Seller, pay any difference as stated in the notice.]

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Data protection

Purpose of the clause Background In the context of a commercial agreement, every person or organisation who processes the personal data of others is likely to be subject to the Data Protection Act 1998 (DPA 1998). However, for many commercial agreements, the parties will not need to address any issues that arise under the DPA 1998, in the agreement itself, if one or all parties will not be processing personal data in order to fulfil one or more of its obligations under the agreement. However, if one or all of the parties are involved in the processing of personal data, then the other party(ies) will want re-assurance that the party(ies) are doing so in accordance with the DPA 1998. The aim of this section is to outline how a mainstream commercial agreement can contain a provision to demonstrate that. If the parties wish to provide the detail of how one party will process personal data, then a specialist agreement will be necessary, which is outside the scope of this book. A  consideration of the requirements of the DPA  1998 is beyond the scope of this book (in particular the requirements and duties on a person who processes personal data (specifically the internal procedures and policies that such a person has to have in place and must comply with), notification to the Information Commissioner, handling subject access requests, exemptions or a person wanting to transfer data outside of the European Economic Area). However this section focuses on instances when some wording may be necessary in a commercial agreement, particularly: •

When one party needs to process personal data as part of carrying out its obligations under an agreement. If this is the case, the other party will want assurances or undertakings that the first party is doing so in accordance with the DPA 1998. Eg, a company hires a consultant to carry out a survey of persons to establish whether they are likely to buy the company’s product. The consultant may obtain personal data from the persons surveyed but need not pass that on to the company. In such a case the company may wish to have reassurance that the consultant is complying with the DPA 1998. See Precedents 1, 2, 3, 4 or 5.

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•

When one party (first party) is processing personal data provided by the other party (second party), and the first party is processing the personal data on behalf of the second party. In such a situation the second party: •

will not only want assurances and undertakings that the first party is processing data in accordance with the DPA  1998, but will want to more specifically control how and what the first party is doing with the personal data that the second party has provided; and

•

may also want the first party to acknowledge or make a statement that it is not a data controller for the purposes of the DPA 1998 (see below for a definition of ‘data controller’).

Eg, a company has details of customers (individuals) who have bought its products. It wishes to establish whether they are happy with the products and hires a consultant to carry out research with the customers. The company will pass on personal data of the customers to the consultant. In addition to assurances and undertakings, the company may also want to control how the consultant will use the personal data, eg only for the purposes of the agreement, not to transport the data outside the EEA, not to sub-contract processing of the personal data to a third party, etc. See Precedent 6. (This example assumes that the company has the permission of its customers to process the personal data of the customers in the way envisaged by the example.) From 25 May 2018, the EU General Data Protection Regulation (2016/679) (GDPR) is due to come into force throughout the EU, which includes the United Kingdom, despite the Brexit vote in June 2016. The GDPR introduces major changes to the processing of personal data, most of which will not affect the general type of provision within a mainstream commercial agreement, which is the subject matter of this section. The meaning of personal data under the GDPR is broadly similar to that under the DPA 1998 but: • more types of data can amount to personal data and accordingly come within the provisions of the GDPR (such as IP addresses); and • sensitive personal data now includes genetic and biometric data if in processing such data it can be used to identify an individual. There are increased obligations on those who process personal data, including a new ‘accountability’ principle, which requires a data controller to demonstrate their compliance with the data protection principles (these are similar to those found in the DPA  1998). The GDPR will require those who process personal data to adhere to more detailed procedures, policies, and record keeping to demonstrate how they are meeting the accountability principle (on such matters as the purposes for processing personal data, the categories of individuals and types of personal data processed, how long personal data is retained, and a description of the technical, organisation and security measures in place). The rights of data subjects are increased, so that a limited form of a ‘right to be forgotten’ is introduced as well as ‘data portability’ (ie that a person to whom the personal data relates has the right to receive it ‘in structured, commonly used and machine-readable format’). 250

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Key terms In order to deal with the commercial issues mentioned above, it is necessary to understand some words and phrases that have particular meaning in the DPA 1998. The equivalent meanings under the GDPR are set out in Statutory definitions below. The most important for the purposes of this section are: •

Personal data. Only if the data relates to one or more living individuals will the DPA 1998 apply. Business or technical information (of a company or other incorporated organisation) will not be subject to the DPA 1998. (‘Personal data’ is ‘data which relate to a living individual who can be identified: (a) from those data; or (b) from those data and other information which is in the possession of, or is likely to come into the possession of, the data controller’ (DPA 1998, s 1(1)). There is a further definition for ‘sensitive personal data’, which includes such information as a person’s racial or ethnic origin, political opinions, religious and similar beliefs, physical and mental health or condition, sexual orientation etc (DPA 1998, s 2).

•

Data controller. A  data controller is the person who determines the purpose(s) for which and the manner in which any personal data is processed (DPA 1998, s 1(1));

•

Data processor. If someone is processing data on behalf of someone else (other than an employee processing the data) then s/he is a data processor (DPA 1998, s 1(1));

•

Processing data in accordance with the data protection principles. A  data controller must comply with the eight data protection principles for the data for which it is the data controller (DPA 1998, s 4(4)). The eight data principles include that the data: •

is processed fairly and lawfully;

•

is obtained for a lawful purpose;

•

is accurate and up to date;

•

is not kept for longer than necessary; and

•

is not transferred outside the EEA (unless there are adequate levels of protection), etc.

The data protection principle regarding ‘processing personal data fairly and lawfully’ is subject to further requirements. These include: (1) obtaining the consent of the data subject for the processing of the personal data of the subject; or (2) that the processing of the personal data of a data subject is necessary: (a) to perform a contract (of which the data subject is a party); or (b) to enter into the contract (at the request of the data subject); or (3) the processing is necessary in order for the data controller to comply with legal obligations arising other than under 251

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contract. There are further requirements where the data is sensitive personal data (DPA 1998, Schs 2 and 3).

Drafting issues •

Will a party be generating or processing personal data? If the agreement calls for a party to generate or process personal data as part of fulfilling a specific obligation under the agreement then the other party may wish to have an assurance that the first party is doing so in accordance with the DPA 1998.

•

Will one party be providing personal data to the other party to process on behalf of the first? The first party will normally be acting as a data controller (see Key terms above) as it will be controlling the way that the personal data is processed on its behalf. The data controller remains responsible for its processing to others (such as the Information Commissioner) and will need to deal with subject access requests. Accordingly the data controller will wish to know that the second party is storing, handling and processing the personal data in a way that does not compromise the first party or make the first party liable for breaches of the DPA 1998.

•

Will a party who processes data on behalf of another party be acting as a data controller or data processor? The obligations are greater under the DPA 1998 on a data controller than a data processor. Accordingly a person who is only processing data in accordance with the instructions and to the requirements of another person is unlikely to wish to be subject to the requirements of the DPA 1998 as a data controller. Such a person is likely to wish to have in an agreement an acknowledgment that it is not acting as a data controller. However, in some contracts, both parties can be acting as data controllers if they are taking their own decisions on how to process the personal data. Each case will need examination to determine the reality.

Location in the agreement The location of a clause such as Precedent 6 is likely to be with Secondary Commercial Provisions. Clauses that deal with statements, etc, that a party will comply with the provisions of the DPA  1998 will often appear together with clauses dealing with Warranties and other similar clauses (such as representations, undertakings etc).

Linkage and use See discussion above.

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Sample precedent material Precedent 1—Short form–Statement that a party will comply with the DPA 1998 [Party A] shall comply with the provisions of the Data Protection Act 1998 [and with the data protection principles set out in the Data Protection Act 1998]. Precedent 2—Short form–Statement that a party will comply with the DPA 1998 and its replacement [Party A] shall comply with the provisions of the Data Protection Act 1998 [and with the data protection principles set out in the Data Protection Act 1998], and from the day that the General Data Protection Regulation 2016/679 is in force, [Party A] shall also comply with the provisions of the Regulation [and with the data protection principles set out in Article 5 of the Regulation]. Precedent 3—Short form–Statement that a party will comply with the DPA 1998 (and its replacement) and other laws [Party A] shall comply with the provisions of the [Data Protection Act 1998][General Data Protection Regulation 2016/679] and any other laws and regulatory provisions and requirements which apply to [Party A] and the obligations of [Party A] under this Agreement. Precedent 4—Representation and undertaking that a party will comply with the DPA 1998 (or its replacement) [Party A] represents and undertakes that it shall comply with [all] the provisions of the [Data Protection Act 1998][General Data Protection Regulation 2016/679] (to the standard of at least, or in accordance with the obligations imposed by, the data protection principles set out in the [Data Protection Act 1998][ General Data Protection Regulation 2016/679]. Precedent 5—Longer form–Statement that a party will comply with the DPA 1998 (or its replacement) Where [Party B] processes and/or stores personal data (as defined under the [Data Protection Act 1988] [General Data Protection Regulation 2016/679]) it shall: (a) comply with the provisions of the [Data Protection Act 1988][General Data Protection Regulation 2016/679]; and (b) act only in accordance with the data protection principles set out in the [Data Protection Act 1998] [General Data Protection Regulation 2016/679]; and (c) apply relevant guidance issued by the Information Commissioner; and 253

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(d) if it acts as a data controller (as defined in the [Data Protection Act 1998][General Data Protection Regulation 2016/679]) and at the date of this Agreement, have a valid entry in the register maintained by the Information Commissioner [as required under law][under the [Data Protection Act 1998][General Data Protection Regulation 2016/679]]. After the date of this Agreement Party A shall maintain and renew the registration for the period of this Agreement. Precedent 6—Provision where one party processes data on behalf of another Data protection 1 The parties acknowledge and agree that in order for [Party B] to provide the Services: (a) [Party A] shall supply data to [Party B] which is within the meaning of ‘personal data’ (the ‘Party A Personal Data’) as defined in the [Data Protection Act 1988][General Data Protection Regulation 2016/679]; and (b) [Party B] shall need to process the Party A  Personal Data on behalf of [Party A]; and (c) [Party B] shall be a data processor (as defined by the [Data Protection Act 1998][General Data Protection Regulation 2016/679]); and (d) [Party A] shall be the data controller (as defined in the [Data Protection Act 1998][General Data Protection Regulation 2016/679]). 2 [Party B] shall process and use the Party A  Personal Data only for the [Data Protection Purpose][purpose], in accordance with the provisions of this Agreement and together with any [reasonable] instructions from [Party A]. 3 [Party B] declares it shall, only to the extent necessary and only with the necessary means required to perform the Services, process the Party A Personal Data. 4 [Party B] shall not, except with the prior written permission of [Party A]: (a)

transfer or process any of the Party A Personal Data outside of the European Economic Area;

(b)

sub-contract any of its obligations regarding or in relation to the Party A Personal Data.

5 [Party B] shall employ such technical and organisation resources and measures as are necessary to comply with its obligations under the [Data Protection Act 1998][General Data Protection Regulation 2016/679] and to prevent any unlawful or unauthorised use or pro254

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cessing of the Party A  Personal Data or against accidental loss or destruction of, or damage to, personal data. Without prejudice to the generality of the forgoing sentence, [Party B] shall also comply with any reasonable instructions that [Party A] shall provide from time-totime. Within [ ] working days of the date of a written notice from [Party A], [Party B] shall provide to [Party A] such details as are specified in the notice regarding the technical and organisation resources used to comply with its obligations under the Data Protection Act 1998.

[Note: the first sentence of this clause tracks the wording of 8th data protection principle.]

6 Where a person makes a subject access request under the [Data Protection Act 1998][General Data Protection Regulation 2016/679] for any of the Party A Personal Data which relates to him or her and which is held or processed by [Party B], [Party B] shall co-operate to the extent necessary, and subject to the instructions and requirements of [Party A], in order for [Party A] to comply with its obligations under the [Data Protection Act 1998][General Data Protection Regulation 2016/679]. 7 Without prejudice to the provisions of [clause dealing with termination], on termination of this Agreement for any reason, [Party B]: (a)

shall stop processing the Party A Personal Data from the date of termination or such other date as the [Party A] shall specify;

(b)

shall return to [Party A] any of the Party A Personal Data (including all copies in whatever form the copies are held) or at the option of [Party A], [Party B] shall destroy the Party A Personal Data and any copies.

Statutory definitions The following words and phrases are defined in the GDPR: Personal data: Art 4(1): ‘“personal data” means any information relating to an identified or identifiable natural person (“data subject”); an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person’. Sensitive data: this is no longer a defined term, but Art 9 (with the heading ‘processing of special categories of personal data’ states, at Art 9(1): ‘Processing of personal data revealing racial or ethnic origin, political opinions, religious or philosophical beliefs, or trade union membership, and the processing of genetic data, biometric data for the purpose of uniquely identifying a natural person, data concerning health or data 255

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concerning a natural person’s sex life or sexual orientation shall be prohibited.’ Data controller: Art 4(7) ‘“controller” means the natural or legal person, public authority, agency or other body which, alone or jointly with others, determines the purposes and means of the processing of personal data; where the purposes and means of such processing are determined by Union or Member State law, the controller or the specific criteria for its nomination may be provided for by Union or Member State law’. Data processor: Art 4(8) ‘“processor” means a natural or legal person, public authority, agency or other body which processes personal data on behalf of the controller’. Processing data in accordance with the data protection principles: Art 5: ‘1. Personal data shall be: (a) processed lawfully, fairly and in a transparent manner in relation to the data subject (“lawfulness, fairness and transparency”); (b) collected for specified, explicit and legitimate purposes and not further processed in a manner that is incompatible with those purposes; further processing for archiving purposes in the public interest, scientific or historical research purposes or statistical purposes shall, in accordance with Article 89(1), not be considered to be incompatible with the initial purposes (“purpose limitation”); (c) adequate, relevant and limited to what is necessary in relation to the purposes for which they are processed (“data minimisation”); (d) accurate and, where necessary, kept up to date; every reasonable step must be taken to ensure that personal data that are inaccurate, having regard to the purposes for which they are processed, are erased or rectified without delay (“accuracy”); (e) kept in a form which permits identification of data subjects for no longer than is necessary for the purposes for which the personal data are processed; personal data may be stored for longer periods insofar as the personal data will be processed solely for archiving purposes in the public interest, scientific or historical research purposes or statistical purposes in accordance with Article  89(1) subject to implementation of the appropriate technical and organisational measures required by this Regulation in order to safeguard the rights and freedoms of the data subject (“storage limitation”); (f) processed in a manner that ensures appropriate security of the personal data, including protection against unauthorised or unlawful processing and against accidental loss, destruction or damage, using appropriate technical or organisational measures (“integrity and confidentiality”). 2. The controller shall be responsible for, and be able to demonstrate compliance with, paragraph 1 (“accountability”).’ 256

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Purpose of the clause The ‘date of an agreement’ means the date on which the agreement is executed (ie signed and, in the case of a deed, delivered): •

by all of the parties to the agreement; or

•

if the parties sign on different dates, it is the date on which the last party signs.

If the date on which the agreement is to start operating is different from the meaning immediately above then the parties should make this clear, conventionally by adding: •

a definition of ‘Commencement Date’; and

•

an operative provision stating when the contract (or parts of the contract) is to start operating (see Commencement date).

Drafting issues •

Agreement date stated at top of the agreement. By convention, the date of the agreement is stated at the beginning of the agreement text, above the names of the parties; The exact words differ from precedent to precedent (see Precedents);

•

Agreement date not typed in, but written in. By convention amongst English lawyers, the date is left blank until all the parties to the agreement have signed, and then it is written by hand. In some cases just the year is typed in or just the month and year is typed in; • If the parties’ solicitors are involved at this stage, they will usually agree the date between them; •

If there is no doubt that the agreement will be executed on a particular date, that date can be typed in, in advance. However, this runs the risk that the agreement will not, in fact, be signed on that date. Misstating the date of execution is bad practice and may amount to forgery (Forgery and Counterfeiting Act 1981, s 9(1)(g)); 257

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The above applies to conventionally signed agreements (ie where a person puts a real signature on paper). If an agreement is prepared electronically, and exchanged and commented on electronically, it may never in fact be printed out onto paper and signed (with real pen signatures). It still may be signed in the sense that the person signing will type their name in the place for signatures. However, if the date is stated in a ‘date of agreement clause’ and the date the parties signed is different, or each signs on a different date, then the date in the ‘date of agreement’ clause may not reflect when they signed. Such a practice should always be avoided (for the reason stated in the previous paragraph). The alternative is not to record within the agreement itself the date of the agreement, but the parties should add wording to the agreement to reflect the fact that they are signing the document other than through the use of real signatures. For example, the date when the agreement is executed may be communicated by the parties by an exchange of emails. If the parties use digital signatures, the date when a party uses their digital signature in applying it to the agreement will often include various data such as the date, which will be embedded in the file containing the text of the agreement. •

Where the agreement is not signed by all the parties on the same day. If the agreement is not executed by all of the parties on the same date, the agreement may be dated as follows: •

the date is inserted when the last party signs; or

• if the agreement is signed in counterparts, the agreement is dated upon exchange of contracts (see Counterparts); •

Reasons for dating an agreement. There are additional reasons for dating an agreement: • so that it is possible to identify the particular agreement at a later date, eg ‘the agreement between X and Y dated [date]’; • so that provisions in the agreement may take effect by reference to the date of the agreement, eg where a party needs to pay royalties on each anniversary of the date of the agreement, or where a party may not terminate an agreement until a certain period has elapsed since the date of the agreement (such as a party not being able to terminate before one year has passed after the date of the agreement); • where there are several contracts concerned with the same subject matter it may be essential to know the order in which they were made, eg as in the case of conveyancing agreements relating to the same plot of land or where there are several assignments of the same intellectual property; • where the agreement is signed in counterparts and the parties’ solicitors agree to date the versions in their possession, dating also acts as a formal acknowledgment that the agreement has come into existence (see Counterparts).

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Location in the agreement The Date of agreement is placed at the top of the agreement in conventionally drafted agreements.

Linkage and use The Date of agreement date is normally linked to the: •

Main Commercial Provisions to indicate: •

when the core obligations are to commence: eg: ‘The Supplier shall supply the Services on the date of this agreement.’ eg: ‘The Manufacturer shall begin to manufacture the Products from the date of this agreement.’

•

when payment shall be made: eg, The Customer shall make the Payment within 30 days of the date of this agreement.

•

Secondary Commercial Provisions, such as: •

the length of the agreement, eg: ‘The agreement shall commence on the date of this agreement and shall continue for a period of 12 months from and including the date of this agreement.’

•

when the agreement is to terminate;

•

whether the agreement is to automatically renew, and/or whether a notice must be given to prevent automatic renewal.

However, in many conventionally drafted agreements, even if the date of the agreement and effective/commencement date are the same, a definition of Commencement Date or Effective Date may still be used.

Sample precedent material Precedent 1—Date of agreement THIS AGREEMENT is made on the [day] day of [month] [year] BETWEEN: Precedent 2—Date of agreement THIS AGREEMENT dated [date] is made by and between: Precedent 3—Date of agreement THIS AGREEMENT is entered into on [date] 259

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Precedent 4—Date of agreement Entered into on this [day] day of [month] [year] Precedent 5—Date of agreement (US format) This [type of agreement] (the ‘Agreement’) is entered into as of [date] (‘Effective Date’).

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Purpose of the clause Background This section considers: •

when a document must be executed as a deed;

•

some situations when parties may prefer to execute a document as a deed; and

•

the formalities for executing a document as a deed.

When must a deed be used? Most contractual and commercial agreements do not need execution as deeds under UK law. There are, however, some situations or documents (which may or may not be a contract or commercial agreement, or be part of a commercial agreement) where execution must be by deed. These include: • documents that create powers of attorney, including documents that contain powers of attorney as well as other provisions (Powers of Attorney Act 1971, s 1); •

documents that convey or create a legal estate in land (Law of Property Act 1925, s 52(1));

• where the mortgagee or chargee is to have the statutory power of sale (Law of Property Act 1925, s 104); • any mortgage or charge, whether of land or other property (Law of Property Act 1925, s 109(1)); and •

various instruments to be registered under the Land Registration Act 2002 (and on specified forms) such as transfer of whole of a registered title (Land Registration Act 2002, ss 18, 21 and 25(1) and Land Registration Rules 2003, SI 2003/1417, rr 74, 75, 98 and 206–209).

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Situations when a deed is sometimes preferred There is often a preference to execute a document as a deed (even though it is not strictly necessary to do so) in the following situations: • a deed is often used to amend a previous contract if the amendments appear to be to the advantage of only one of the parties. This is often to avoid doubt as to whether the amendment is binding. Particularly, if no consideration is given for the amendment, it may not be legally binding unless executed as a deed; •

a purchaser of a company will require the vendors to execute a deed in which the vendors covenant with the company to indemnify the purchaser against certain tax liabilities;

•

a bank will normally require a guarantee of payments (which the bank has previously advanced) to be given by deed, unless it is clear that the bank is providing consideration, for instance, by refraining from exercising a right to call in the overdraft;

•

a deed is normally used for the release of security;

• the assignment of intellectual property (patents, copyright, designs, trademarks, etc) is by convention made by deed (although most statutory provisions relating to intellectual property only require that the assignment is in writing and signed by the assignor or mortgagee); •

contracts with local authorities are often executed as deeds;

• a settlement of a dispute (eg  a written agreement which records the settlement the parties have reached, either before or after court proceedings are commenced); •

a director resigning from a directorship.

Why deeds are sometimes preferred The main advantages of executing an agreement as a deed are: •

No need for consideration. Contracts under hand are generally not legally enforceable if consideration does not pass to or from the parties to the contract. Sometimes a nominal consideration (eg £1) is inserted into the contract to ensure that the contract does not fail for want of consideration. By contrast, contracts executed as deeds generally will not fail for lack of consideration. Parties sometimes execute their contracts as deeds to avoid uncertainty as to whether: •

consideration has passed from one party (from the promisee) to the other (Tweddle v Atkinson (1861) 1 B & s 393);

•

the consideration is past consideration (Re MacArdle [1951] Ch 66);

•

when a contract is amended, all the parties are providing consideration. Eg, the changes may be all for the benefit of one party;

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•

Extended limitation period. In most situations, a party to a contract has six years to sue for breach of contract by another party. If the contract is signed as a deed, then the limitation period is extended from six years to 12 years (Limitation Act 1980, s 5).

Varying a deed It is not normally necessary to use a deed to vary another deed (Plymouth Corpn v Harvey [1971] 1 All ER 623, [1971] 1 WLR 549; Mitas v Hyams [1951] 2  TLR  1215, CA). However, if there is any doubt about whether there is consideration for the document amending the deed, the safest course is to also execute the document varying the deed as a deed.

Formalities for executing deeds The law concerning the formalities for executing a deed is now mainly contained in: •

the Law of Property (Miscellaneous Provisions) Act 1989;

•

the Companies Act 2006 (ss 44, 46);

•

the Law of Property Act 1925 (s 72) (applying mainly to non-Companies Act 2006 companies/bodies corporate);

• the Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009, SI  2009/1917 (applying to non-UK companies). Note: the meaning of a ‘company’ below means a company formed or regulated by the Companies Act 2006, including a private limited company, public limited company, and company limited by guarantee (Companies Act 2006, ss 3 and 735). It also includes a limited liability partnership which, as far as execution of documents is concerned, is governed by the same provisions as a company (Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009, SI 2009/1804, reg 4), but references to director and secretary are replaced by references to two members of the limited liability partnership executing a document.

Requirements to create a deed Use of a seal •

Individual: A seal is no longer required (Law of Property (Miscellaneous Provisions) Act 1989, s 1(2)(b));

•

company (formed or regulated by the Companies Act 2006): A seal does not have to be used (but can be if the company so wishes) (s 45(1)); 263

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•

body corporate (not formed or regulated by the Companies Act 2006): A seal is still required to execute a deed.

Stating it is a deed (individuals, companies, body corporate) For a document to be a deed, it must state clearly that it is intended to be a deed by: •

describing itself as a deed: eg, commencing the document with the words ‘This deed…’;

•

expressing itself to be signed or executed as a deed (eg, see Precedent 1); or

•

otherwise by being described as a type of document that must be executed as a deed; eg, if the document is described as a ‘power of attorney’ (Powers of Attorney Act 1971, s  1) or a ‘lease’ which creates a legal estate of over three years (Law of Property Act 1925, s 52).

Law of Property (Miscellaneous Provisions) Act 1989, s 1(2)(a) The use of a seal alone will not meet the requirements of the Law of Property (Miscellaneous Provisions) Act 1989, s 1(2)(a) to make a document a deed (see Law of Property (Miscellaneous Provisions) Act 1989, s  1(2A)). One of the ways of stating that an instrument is intended to be a deed indicated immediately above must be used. Execution The document needs to be validly executed as a deed: •

by a person making it or a person authorised to execute in the name or on behalf of that person;

•

by one or more of the parties to the deed or a person authorised to execute in the name or on behalf of the parties.

Execution formalities The deed needs to be executed in the appropriate way. What this will mean will depend on the type of real or legal person executing the deed. A deed must also be delivered (see below). This applies whether the deed is being executed by: •

the person making it,

•

the parties to it, or

•

a person executing in the name or on behalf of the person making it or the parties to it (Law of Property (Miscellaneous Provisions) Act 1989, s 1(2)(b), (4A); Companies Act 2006, ss 44(8), 46; Law of Property Act 1925, ss 71(1A), 74A(1)(a)).

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A  ‘person’ is an individual, company, limited liability partnership, corporation, etc as the case may be. Where the word ‘sign’ is used, it includes an individual signing in the name of the person or party on whose behalf he executes the documents and making the person’s mark on the instrument: Law of Property (Miscellaneous Provisions) Act 1989, s 1(4).

Execution by different types of person Execution by an individual In addition to the document making clear on the face of the document that it is intended to be a deed by the person making the deed, it is possible to execute the deed: •

by the individual signing the deed in the presence of a witness, who attests the signature; or

• by the deed being signed in the individual’s presence and also in the presence of two witnesses, with the witnesses both attesting the signature. See the Law of Property (Miscellaneous Provisions) Act 1989, s 1(3). Execution by a company, formed or regulated by the Companies Act 2006 In addition to the document making clear on the face of the document that it is intended to be a deed by the person making the deed, a company can execute a deed by: •

where a company does not have or use its common seal: •

a director and the company secretary;

•

two directors; or

•

one director in the presence of a witness,

signing the deed; or •

where a company has and wishes to use its common seal then if the default articles of association apply (Art  49 in the Companies (Model Articles) Regulations 2008, SI 2008/3229, Sch 1) the seal is fixed and then: •

a director;

•

the company secretary; or

•

a person (previously authorised by the directors)

signing the deed. See the Companies Act 2006, s 44(2), (3). 265

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Corporation (not formed or regulated by the Companies Act 2006) A  document is deemed to be duly executed in favour of a purchaser when the seal of the corporation is affixed to the document in the presence of two directors or one director (or equivalent, ie, a member of the governing body of the corporation) and the clerk, secretary, or other permanent officer of the corporation. Other than this method of execution, a deed will be executed according to the method stated in the statute or royal charter (or other incorporating document) of the corporation. Foreign companies For a company incorporated outside of Great Britain in order to execute a deed: • it can use any manner permitted by the laws of the territory in which the company is incorporated for the execution of documents by such a company; or •

by two persons signing the document who, in accordance with the laws of the territory in which the company is incorporated, are acting under the authority (express or implied) of that company.

See the Overseas Companies (Execution of Documents and Registration of Charges) Regulations 2009, SI 2009/1917.

Delivery of deeds For the valid execution of a deed, the deed not only needs to be signed in the appropriate way but it must also be ‘delivered’ (Law of Property (Miscellaneous Provisions) Act 1989, s 1(3)(b); Companies Act 2006, s 46; Law of Property Act 1925, s 74A(1)(b)). For all types of companies and corporations, there is a presumption that an instrument is delivered upon execution, unless a contrary intention is proved (Companies Act 2006, s  46(2); Law of Property Act 1925, s  74A(2)). The practical consequence of this presumption is that a company or corporation that signs a document that contains wording such as ‘signed and delivered as a deed’, will be (irrevocably) bound as soon as it signs the document (see immediately below for more on this point). In practice: •

deeds are either stated to be delivered upon signature; or

•

delivery is not mentioned at all; or

•

the parties or their lawyers agree a different date for delivery.

In the final case, the lawyers agree to date the document and then write the date onto a physical copy of the deed (assuming that the deed is printed onto paper and has real signatures). 266

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Sometimes, deeds are signed by a party and then, by arrangement, are held in escrow by a solicitor, so that the deed only takes effect when the solicitor states that the deed is released from escrow and delivered. This usually happens when some condition has been met, eg in a contract of sale, when the contract price reaches the bank account of the seller. Deeds that have been delivered cannot be withdrawn (including those delivered in escrow). The only exceptions are where it is impossible for the condition of the escrow to be fulfilled or there is wording that clearly allows a party to withdraw the deed at its discretion. In consequence, a document executed as a deed is a different type of document to one executed under hand in several ways, but perhaps the concept of ‘delivery’ is the one most persons (even lawyers who do not have any working knowledge of the law relating to deeds) have difficulty in grasping or understanding its implications. For example, see Silver Queen Maritime Ltd v Persia Petroleum Services plc [2010] EWHC 2867 QB, where the lawyer working for a commercial law firm (who acted for the defendants) was unfamiliar with the binding consequences of a document that contained the wording such as that set out in Precedent 1 (see Case analysis below). Many deeds will be simply ‘delivered’ upon execution and will start operating immediately and not be subject to the fulfilment of a condition or requirement. However, a deed that is subject to a condition is in a way akin to a commercial agreement that contains a condition precedent; ie the parties are bound by the agreement although the condition precedent is not yet fulfilled or activated. As with a commercial agreement that contains a condition precedent, for a deed a party that signs the deed will be bound by it as soon as they sign (ie it is delivered as soon as they sign, unless there is clear and strong evidence that it is not delivered on signature). If the deed contains or is subject to a condition then the party who signed the deed cannot recall or cancel the deed (or the intention to be bound) while they wait for the condition to be fulfilled. If a party wishes to have control of the period between signing a deed and its delivery, then the deed will need to include wording that gives that party the power to recall or cancel the document at its discretion.

Execution only of complete documents Common practice nowadays is to circulate complete or parts of documents electronically, which could involve one or more parties to a document signing the signature page of the document separately to the rest of it (such as just printing off the signature page, signing it and then just returning a scanned copy, or signing the signature page in advance of agreement of the provisions of the document and then attaching the signature to the final version of the document). The interpretation of the Law of Property (Miscellaneous Provisions) Act 1989, s 1(3) by a court (in R (on the application of Mercury Tax Group) v Revenue 267

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and Customs Commissioners [2008]  EWHC  2721 (Admin), means that such practices are never acceptable where a deed is involved. Where a party must or wishes to sign a document as a deed: •

a party must only sign the document as a complete document; and

•

where the document is circulated it must be circulated only as a complete document; and

•

a party must never sign the signature page separately to the rest of the deed except as indicated in the next paragraph.

There is also guidance from the Law Society in England and Wales about how the parties should circulate by electronic means, and sign particular types of, document (see Drafting and Negotiating Commercial Contracts, 4th Edn, 2016, for further details). Documents that are deeds or contracts relating to the sale of land should never be circulated other than as complete documents. However, receiving a document as a deed by email, does not mean that the party must print on to paper the whole document. The party can print off just the signature page, sign that, scan it, and then return by email the other part of the deed and the scanned, signed, signature page (ie as two separate files) together to the other party, according to the guidance. According to the guidance such a practice would be sufficient to satisfy the interpretation of the Law of Property (Miscellaneous Provisions) Act 1989, s 1(3) by the court.

Aspects particular to companies •

More than one capacity. Where a person is a director or secretary of more than one company, and a document needs signing by those companies, then the person needs to sign separately for each of the companies (Companies Act 2006, s 44(6)). Eg, a company (the Subsidiary) is entering into an agreement, but the other party requires that the parent company of the Subsidiary (the Parent) guarantees that the Subsidiary will perform its obligations. In this case both the Parent and the Subsidiary are parties to the agreement. If a director of the Subsidiary is also a director of the Parent, then the director would have to sign the document twice, once in his capacity as director of the Subsidiary, then separately in his capacity as director of the Parent. The signature block should clearly indicate that there is a separate signature for the Parent and for the Subsidiary, or if the director is signing only once, then the signature block should state clearly that he is signing both as a director for the Parent and also for the Subsidiary

•

Where a director or secretary of a company is not an individual. Where a document is to be signed by a director or secretary, and that director or secretary is not an individual but a company, then the document can be signed by an individual authorised by the director or secretary on its behalf (Companies Act 2006, s 44(7)).

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•

Documents in favour of a purchaser. A document in favour of a purchaser is assumed to be executed when it is signed by a director and the company secretary or by two directors. (‘Purchaser’ means a purchaser in good faith for valuable consideration and includes a lessee, mortgagee, or other person who for valuable consideration acquires an interest in property) (Companies Act 2006, s 44(5)).

Drafting issues The following are some of the key issues which need to be considered if a party is contemplating signing a document as a deed: •

Must the party sign the document as a deed? See When must a deed be used?, above;

•

Is the situation, matter or transaction one where it is normal or expected for a document to be signed as a deed? See Situations when a deed is sometimes preferred, above;

•

Are all the necessary persons included in the deed? Are all the persons who are placed under an obligation or who are to be parties to the deed named in the document?

•

Does the document state clearly that it is intended to be a deed? See Stating it is a deed, above;

•

Is the person signing the deed signing in the correct capacity? If a person (individual, company, body corporate) is signing on behalf of another person, are they using the correct form for their status? Eg: • if an individual is signing a deed on behalf of a company or body corporate, the individual should be signing as an individual and having their signature witnessed; •

•

if a company is signing on behalf of an individual, then the company should be signing the document in that capacity, by having a director and the company secretary or two directors or a director in the presence of a witness signing the document;

Where a deed is to be executed on behalf of a person, has sufficient authority been given or seen? Although it is now specifically permitted for a deed to be executed on behalf of a person, the other party to the deed or a person receiving the deed may have concerns whether the person executing the deed has been properly authorised. It is suggested that: •

the deed should recite that the person signing has been authorised by the person making the deed or the relevant party to the deed;

•

the signature block clause should be adapted to state that the person signing on behalf of the person making the deed or the relevant party to the deed has been authorised to do so; and 269

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• that the person making the deed or the relevant party to the deed should provide written authority (such as a power of attorney, board resolution etc).

Location in the agreement Concerning describing the instrument as a deed then: • there will be an indication in the Date of the agreement clause that the instrument is a deed; and/or • there will be indication in the execution clause that the document is a deed (usually that it is being ‘executed as a deed’) (see Agreeing to enter and signing an agreement (execution and signature block clauses)). Regarding execution of the deed, the appropriate wording will need to be used depending on the status of the person signing the deed (and whether it is delivered or not). See Agreeing to enter and signing an agreement (execution and signature block clauses).

Linkage and use See points raised under Purpose of the clause, above.

Sample precedent material Precedent 1—Execution clause – agreement executed and delivered as a deed (delivery when signed) Executed and delivered as a deed by the parties. Precedent 2—Execution clause – agreement executed as a deed (delivery when deed dated) Executed as a deed by the parties and delivered on the date of this agreement. Precedent 3—Alternative form (delivery when deed dated) Executed as a deed by the parties and delivered when dated. Precedent 4—Alternative form (delivery when deed dated) Executed as a deed by the parties and delivered on the date which first appears in this agreement. Precedent 5—Execution clause – document executed by company as a deed (delivery when signed) Executed as a deed and delivered by [name of company] pursuant to a resolution of its Board of Directors duly passed, a certified copy of which was delivered upon the execution of this deed. 270

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Precedent 6—Alternative form (delivery when deed dated) Executed as a deed [(but not delivered until the date hereof)] by [name of company] and signed by [a director and the secretary or two directors]. Note: if only one director is signing then that director will need to sign in the presence of a witness, who will need also to sign and add their details. Precedent 7—Alternative form (document executed by company as a deed (delivery when signed) Executed as a deed and delivered by [name of company] acting through a [director and the secretary or two directors or a director] [on the date of this agreement]. Note: if only one director is signing then that director will need to sign in the presence of a witness, who will need also to sign and add their details. Precedent 8—Execution clause – delayed delivery/escrow (delivery when condition fulfilled, no explicit wording that not irrevocable) [Signed and delivered as a deed by the above-named [executing party] and placed in the hands of [custodian] of [address] to be delivered up to the above-named [other executing party] [when the above-mentioned sum of £… has been paid by [other executing party] to [custodian] as the agent and on behalf of [executing party] or [specify]] in the presence of: or Signed and delivered in escrow as a deed on condition that the deed is not to take effect [unless and] until [specify condition of escrow] in the presence of:] Precedent 9—Execution clause – delivery subject to a condition – alternative form (no explicit wording that not irrevocable) Executed as a deed and signed by [a director and the secretary or two directors or a director] and delivered on a fulfilment to a condition set out in Clause [no]. The clause in the condition could state: This Deed shall only be delivered on fulfilment of the following condition [set out the condition]. Precedent 10—Execution clause – delivery subject to a condition – alternative wording – power of recall or cancellation Executed as a deed and signed by [a director and the secretary or two directors or a director] and delivered on a fulfilment to a condition set out in Clause [no]. The clause in the condition could state: This Deed shall only be delivered on fulfilment of the following condition [set out the condition]. In the period between the signing of this Deed and 271

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the fulfilment [Party A] at its complete and unfettered discretion, shall be able to recall and cancel this Deed by a notice sent in writing to [Party B]. Precedent 11—Delivery of documents free from escrow [Party A] shall deliver to [Party B] fully executed copies free from any escrow of all documents referred to in Clause [no] of this agreement. Precedent 12—Assignment of rights free from escrow On the payment by the Company to the Owner of the sum provided in Clause [no] the Owner shall contemporaneously deliver to the Company or its nominee unconditionally and free from any escrow the Assignment of [the Copyrights] validly executed by the Owner.

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Definitions

Purpose of the clause Background A  definitions clause provides the meaning that certain words are to have when used in an agreement. The layout and styling of a definitions clause (if used at all) is a matter for personal preference. However, the aim is that the definitions aid the user(s) of an agreement in understanding the meaning and purpose of the agreement.

Reasons for the use of a definitions clause The reasons for doing so are: •

to avoid repeating a long list of words or complex phrases in several places in an agreement; eg  An agreement provides that particular rights and obligations affect some of the intellectual property that a party owns or has rights over. If the various types of intellectual property were set out each time a right or obligation affected them then the sentence containing the types of intellectual property would be unreadable (see the listing of the types of intellectual property found in the precedent material under Intellectual Property);

•

to avoid ambiguity as to what is, or is not, meant when a particular word is used. This is particularly important where a word is used in a sense •

other than its natural dictionary meaning, or

•

where there are several dictionary meanings.

Eg, the word ‘person’ in its natural meaning usually means a human being, but in a commercial agreement the meaning will also encompass a corporation and a partnership. The Interpretation Act 1978, s 5, Sch 1, includes a provision for the meaning of a person to include a ‘body of persons corporate or incorporate’. But this meaning is only for the purposes of an Act.

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Matters to avoid when defining or using a definitions clause The parties to an agreement should avoid the following when using a definition clause: •

Over defining. This means having a very complex or lengthy meaning for a word, ie trying to describe or set out every circumstance. See, for example, a precedent found in the Encyclopaedia of Forms and Precedents, Volume 19(2)(B), para 4064, where ‘control’ stretches to nearly 200 words: ‘means the possession, directly or indirectly, of the right or power to direct or cause the direction of the management policies of a person either by contract or through ownership of shares or securities carrying a majority of the votes ordinarily exercisable by the holders of all such shares or securities or through the ability to appoint the majority of the directors or other governing officers of a person or through ownership of shares or other securities which carry the right to receive the greater part of the income of such person (if all its income were to be distributed) or the right to receive the greater part of the assets of such person (if all its net assets were to be distributed) or howsoever otherwise and “controlled” shall be construed accordingly. A  “change of control” when applied to any party shall be deemed to have occurred if any person or persons who control such party at the date of the execution of this agreement (or the date such party becomes bound by this agreement if later) subsequently cease to control it or if any person or persons acting together subsequently acquire control of it’

The danger of such long definitions is that they fall subject to the legal Latin maxim expressio unius est exclusio alterius (the expression of one thing excludes another, see Cumulative Remedies). The fact that one situation or factor is not defined might mean that a court would hold that it has been deliberately excluded (see Seay v Eastwood [1976] 1 WLR 1117 at 1121). However, it is not always possible to avoid long definitions. Eg, a definition of intellectual property might include a large number of items because ‘intellectual property’ does not have one settled meaning, or the types of intellectual property which are subject of the agreement might vary from one agreement to another. •

defining more terms than are necessary. Eg: • defining technical words when the meaning is understood by the parties or the meaning is set by a recognised third party organisation; or •

where the meaning is clear from the context of agreement, or

• defining words where there already exists a meaning defined by legislation, such as: ‘month’ shall mean a calendar month (set out in the Interpretation Act 1978); or ‘holding company’ or ‘subsidiary’ etc (set out in the Companies Act 2006) 274

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•

including operative provisions in a definition. A definition should not include any wording concerning the obligations a party is to perform or any benefits it is to receive. That is, a definition should contain no more than the meaning of a word or phrase. Eg, a correctly used definition of ‘Services’ will state what services the consultant will provide to a client, such as: ‘Services’ shall mean the provision of advice, assistance and a report

but an incorrectly used definition would include an operative provision, and the definition might in consequence read: ‘Services’ shall mean the provision of advice, assistance and a report, which the Consultant shall provide to the Client on the 31 December 2017.

•

only referring to other definitions in a definition. If a definition consists of no more than a compendium of other definitions, then the user of the agreement will then have to refer to all of those other definitions in order to understand that particular definition as well as its meaning in the context of its use in the agreement itself.

None of these issues can, in themselves, make an agreement ineffective, but they will all contribute to making the agreement less logical in its layout and harder for users of the agreement to understand and interpret.

Other issues to consider when defining or using a definitions clause •

Use of ‘Unless the context requires otherwise’ or ‘where the context so admits’. The aim of these phrases is to cover the situation where there is a defined word, but it is used somewhere in the agreement in a sense other than its defined meaning. Sometimes the problem is that a party to, or user of, the agreement may not be clear as to when a defined word is being used ‘where the context requires otherwise’ or ‘where the context so admits’ (see Blue Metal Industries Ltd v RW Dilley [1970] AC 827, [1969] 3 All ER 437, PC; Floor v Davis [1980] AC 695, PC and Oxonica Energy Ltd v Neuftec Ltd [2009] EWCA Civ 668 and Case analysis below). For example, if intellectual property is defined as meaning only patents and use of the defined expression is with initial capitals (Intellectual Property), then writing the expression in lower case might mean that the use of the expression means something other than just patents. The difficulty is in knowing whether the user will spot the difference and also determining whether the drafter has not just made a mistake by failing to use initial capitals. The best solution, where the parties clearly wish a defined word to have a sense other than its defined meaning, is to: • clearly set out the meaning that it is to have in the part of the agreement in which it will be used; or 275

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•

create a separate definition just for the different meaning.

With each solution, the parties to, or the users of, the agreement will not be in doubt as to the intended meaning. •

Whether the meaning of a defined word as set out in the agreement expresses the intentions of the parties. If the parties to an agreement have used a definition for a word or phrase then normally that definition will prevail. If the parties negotiated their agreement on the basis that a word has a particular meaning, but that meaning differs from the definition as expressed in the agreement, they will normally be bound by the definition and not by their shared meaning (eg  Chartbrook Homes Ltd v Persimmon Homes Ltd [2007] 1 All ER (Comm) 1083; JIS (1974) Ltd v MCP Investment Nominees I Ltd [2003] EWCA Civ 721; T&N Ltd (In administration) v Royal & Sun Alliance plc [2003] 2 All ER (Comm) 939). It is possible for a court to depart from the defined meaning, but this is likely to occur only when, in the context of the agreement and its background, it is clear that ‘notwithstanding his chosen definition the draftsman just must have meant something else by the use of the term’ (see City Inn (Jersey) Ltd v Ten Trinity Square Ltd [2008]  EWCA  Civ 156). A court is likely to need strong and overwhelming reasons for so doing, particularly if the document is prepared by lawyers. The extent to which it is possible to do so is not clear (see Margerison v Bates [2008] EWHC 1211 (Ch), [2008] 3 EGLR 165). However it is likely to be slightly easier for a judge to depart from the chosen definition if the agreement includes the words ‘if the context otherwise requires’ (see Oxonica Energy Ltd v Neuftec Ltd [2009] EWCA Civ 668, and Case analysis below). A  further issue is that many parties use standard templates for their agreements and they do not carefully consider whether the wording used in a definition accurately reflects the parties’ shared meaning for the particular deal. The particular danger here is that definitions are sometimes seen as being akin to boilerplate and therefore not needing consideration. Consequently, their meaning may not be checked against the precise meaning that one or more of the parties has for the particular deal.

•

Using the word ‘including’ in a definition. A definition may define a thing or matter but may also state that it includes similar matters by using the word ‘including’, such as in the following definition: ‘IPR Agreements’ shall mean all agreements, options, understanding, and other arrangements that relate wholly or partly to any of the Business IPRs and/or the Intellectual Property Rights used or otherwise exploited in connection with the Transferred Business including but not limited to, the agreements set out in Schedule 3’.

Where used, the word ‘including’ will generally mean that the definition is not self contained, and can include similar items that have the same meaning as the defined term, in the context of the agreement (see Adelphi (Estates) Ltd v Christie [1984] 1 EGLR 19). 276

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Drafting issues When preparing or considering the wording of a definitions clause, a contract drafter will wish to take account of the following matters: •

•

Location. In which part of the agreement should the definitions appear? •

Beginning. Near the beginning (after the Parties clause and the Recitals): allowing the user to find the definitions easily;

•

End. Near the end (before the boilerplate or in a schedule): allowing the user to immediately read and deal with the key commercial provisions, without getting bogged down in the detail of the definitions. This layout method might be suited to the inexperienced user of commercial agreements or where the definitions run over several pages;

•

Within the clause. In some agreements the meaning of a word is defined within a particular clause. This is often because the defined word is used only within that clause;

•

Beginning and end. Where there are many definitions, the key definitions are located at the beginning of the agreement while the remainder are located near the end or in a schedule. This can avoid the user of the agreement being overburdened by too many definitions at the beginning before getting to the substantive provisions, and being able to see the key definitions easily as well. This approach is not recommended, as the user may need to keep going back and forth between the parts containing the definitions in order to find the definition the user is looking for;

Recognition of a defined word. It is possible to indicate a defined word in a number of ways: •

capitalising the first letter of a defined word: this will signal to anyone reading a clause in the body of the agreement that a particular word or term has a special defined meaning in that agreement. One of the difficulties with this style is a practical one of remembering to always capitalise a word as a defined word. If consistency is not maintained, a drafter may type a defined word other than in its capitalised form. In the event of a dispute a court may not treat it in its defined meaning when called upon to interpret a clause containing such a word. (Tip: Nowadays most people will realise that word processing software can carry out searches for all instances of a word or a phrase. However it is also possible to carry out a search for all instances of a word in its non-capitalised form only. For example, if ‘intellectual property’ is a defined term, appearing as ‘Intellectual Property’ in the agreement, then it is possible just to search for any instance of those words that appear as ‘intellectual property’ and ignore all instances of ‘Intellectual Property’.) 277

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•

using styling, such as making the word appear in bold or in italic, sometimes in addition to capitalising the first letter of a defined word;

•

highlighting the word by the use of characters such as ‘*’. Either of the above approaches allow a user of an agreement to see defined words more easily. However, for some users, having a section of an agreement that contains a lot of defined words may be irritating or distracting visually if those words are emboldened in the text.

•

Who will be using the agreement? Who will be the audience for the agreement? If the agreement is likely to be made with: • a person who is not experienced in dealing with conventionally drafted commercial agreements; or •

a consumer,

then a drafter may need to consider using a different layout or more explanation. •

Organisation of definitions grouped together. There are two conventional methods: • the definitions are sorted into alphabetical order: the advantage of this method is that a definition can be found easily in the list of definitions; •

•

the definitions are arranged in the order in which the defined words appear in the agreement: this is a more traditional method of setting out definitions and is probably only suitable for short agreements.

Laying out a definitions clause. There are two conventional methods of laying out a definitions clause: •

Columns. The first column has the defined word and the second column contains the definition (see Precedent 1); With word processing software, it is possible to use the table feature. The defined word and its definition will always be kept together on one row. New entries can be entered in any order, and then easily sorted into alphabetical order.

•

Continuous paragraphs. In this method the word is followed by its definition (see Precedent 2); Some word processing software can sort paragraphs, or a one-column table can be used to sort definitions alphabetically, if they are entered in this way;

•

Introductory wording in a definition clause. Definitions clauses are often introduced with a sentence to indicate that the words defined are to have particular meanings as set out below the sentence (see Precedent 3).

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Sample precedent material Precedent 1—Columns Commencement Date

shall mean 1 January 2018.

Parties

shall mean [Party A] and [Party B], and ‘Party’ shall mean either one of them.

Territory

shall mean France, United Kingdom and Italy.

Precedent 2—Continuous paragraphs ‘Parties’ shall mean [Party A] and [Party B], and ‘Party’ shall mean either one of them. ‘Commencement Date’ shall mean 1 January 2018. ‘Territory’ shall mean France, United Kingdom and Italy. Precedent 3—Introductory wording (before start of list of defined words) In this agreement the following words and expressions shall have the following meanings: [then list definitions, as in Precedent 1 or Precedent 2] Precedent 4—Introductory wording (before start of list of defined words) – alternative In this agreement the following words and phrases shall have the meanings set out below, unless the context requires otherwise: [then list definitions, as in Precedent 1 or Precedent 2]

Case analysis Oxonica Energy Ltd v Neuftec Ltd [2009] EWCA Civ 668 (The factual background to this case is set out below.) 1 This case could easily be held as being example of: (a) the need to check the meaning of defined words (eg  whether they cover the facts of a deal, or whether the meaning is what is intended by the parties, etc); or (b) how the courts will interpret the provisions of a modern commercial agreement to ascertain the meaning; or (c) being an example of poor quality drafting (not only on how wording in the agreement was used but also whether a ‘sanity check’ was undertaken).

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2 The court applied the now famous words (at least among lawyers) of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 2, [1998] 1 WLR 896 at 912–913: ‘the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.’

3 This exercise, the court noted, was more difficult if: ‘it is apparent to the reader that the draftsman of the document was inept or did not fully understand the legal background – as was the case here’, from para 11 of the judgment.

4 In constructing the meaning of a contract the judgment also relied on the guidance given in another case (Mitsui Construction Co Ltd v A-G of Hong Kong (1986) 33 BLR 14) that poor drafting itself provides: ‘no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used interpreted in the light of the relevant factual situation in which the contract was made. But the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis’.

5 Because of the poor quality of the drafting and the ambiguity in the meaning of a definition, the court felt able to in effect rewrite part of the contract to arrive at a meaning in keeping with good business sense and ignore the meaning and the use of a defined term altogether: ‘Initially I felt uncomfortable with ignoring the closing words “or Licensed Patent” in the definition of Licensed Products for the purposes of deciding what was royalty bearing. But in the end, I think that has to be done to make rational sense of this appallingly drafted document. At least the draftsman recognised that his definitions might not apply if the context otherwise required, and in this instance context requires just that.’

6 In this case the failure to consider carefully the definitions used had a clear financial impact on the amount one party would need to pay in royalties (and which the other parties expected to receive). Factual background to case 1 The defendant filed a patent application for technology it had developed. The application was filed under the Patent Co-operation Treaty. 2 The defendant wished to exploit the technology and granted, to simplify the facts, an exclusive patent and know-how licence to a spinout company of Oxford University, the claimant. 280

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3 The licence agreement provided that the claimant would pay royalties to the defendant on the sale of ‘Licensed Products’. The defined meaning of ‘Licensed Products’ was: ‘any product, process or use falling within the scope of claims in the Licensed Application or Licensed Patent’.

4 After the signing of the patent and know-how licence agreement the defendant’s patent applications proceeded through the application processes in a number of countries. The patents granted had claims which where narrower than those of the patent applications. (A claim is ‘a definition in words of the invention you want to protect’ and as set out in a patent application.) 5 The claimant took over research and its scientists developed a commercial product (Envirox), made sales and paid royalties to the defendant. It then developed a further product (Envirox 2) which was outside the claims of the patents granted, at least in Europe. The claimant refused to pay any royalties on Envirox 2. 6 However, Envirox 2 fell within the claims of the PCT application (but not that of the granted patents). 7 Therefore the dispute between the parties and the decision in the case fell on the precise meaning of the definition quoted above. The judgment of the court noted that the section of the agreement containing definitions (including the one quoted above in paragraph 3 of this factual background), started with the phrase ‘unless the context otherwise requires’, which meant that in different context a definition could have different meanings. 8 The court noted that interpreting the quoted definition could lead to three possible results: (a)

any product covered by the claims of the PCT patent application (ie the widest claims); or

(b) any product covered by the claims of a PCT patent application or a patent and therefore could be a later patent claim wider than the claim of an application; or (c) any product covered by the claims of a national application when and if it superseded the PCT application, and if in turn the national application was superseded by a granted patent, then the claims of the granted patent. In effect the words “as the case may be” would be added to the quoted definition above, and the royalty payable would be dependent on the particular patent position in each country. 9 The claimant argued that the third result applied, so that in a particular territory if a national patent with a narrower claim superseded a PCT application, royalties would be paid only on a product that fell within that narrower claim. 281

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10 The claimant further argued that if first or second results applied it would have to pay royalties on products that did not have any patent protection where they were sold, and such a position would not make any business sense (and the claimant would face competition from others who would not be paying royalties). If the first result was correct, then the phrase ‘or Licensed Patent’ in the quoted definition would make no sense. The claimant argued that to apply this result would mean that the court was rewriting the contract for the parties, which it is not normally permissible for a court to do. 11 The defendant argued that the claimant was not only getting a patent licence but also a worldwide licence to the defendant’s know-how and a world-wide non-competition clause. There was no reason in logic or business sense why royalties should be confined to the scope of the patents or patent applications at any one place or time. It was reasonable, it was argued, that the claimant payment of royalties should reflect that it was getting the benefit of the defendant’s knowhow rather than leave the claimant free of all royalty if it could find a way around a narrowed patent claim. Also the defendant argued that the third result above would be difficult to deal with, as with every sale it would have to consider the patent position in the country concerned, involving not only accountants but also an examination of the state of the patent or patent application locally. 12 The court decided that the first result was the correct approach to take. The court found that ‘it offends one’s business sense’ that the claimant could use the defendant’s know-how without making a payment for it in every country where there was no patent or a restricted patent (ie a patent whose claims were narrower than the know-how). While the claimant may have to compete with third parties in those countries where there was no patent or who got around the patent (if the patent was restricted), those third parties would have to develop their own know-how. The court, in interpreting the provisions of the agreement, found that the know-how to be provided by the defendant was significant and valuable. 13 The claimant’s argument that the first result would mean that the words ‘or Licensed Patents’ would have no meaning was rejected. However the court found that the words at the start of the definition section of the agreement stated that the defined terms would have the meanings given ‘except where the context otherwise requires’. The court distinguished the two primary purposes of the patent and know-how licence: (a)

to license all and any patents and know-how; and

(b)

to provide for the payment of royalties.

14 The contexts of licensing and payment were different. For licensing it was essential that the claimant got everything so that all applications and patents should be licensed. But for payments, it was not neces282

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sary to tie payment to what was being licensed. The court noted that payments not only covered the licensed patents but know-how and the non-competition clause. Therefore in the context of the payment of royalties the alternative of ‘or Licensed Patent’ should be read as not being applicable and in this context it makes no sense or an unreasonable sense. The court was initially not comfortable with disregarding the phrase ‘or Licensed Patent’ in the definition of Licensed Products for deciding what was royalty bearing, but it was necessary to do so to make rational sense of an ‘appallingly drafted document’.

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Deposits and part payments

Purpose of the clause Background In consumer transactions, everyone is familiar with the practice of ‘putting down a deposit’. Deposits are often used: • to reserve items that are purchased at a later date, or in circumstances where a supplier must incur costs before it can supply goods or services (eg, a tailor who orders cloth to make a suit; a builder who needs to buy materials before being able to start building). If the customer fails subsequently to purchase the item, the deposit is kept by the tradesperson; • as a sum paid by a tenant to a landlord as a security against damage to the landlord’s property. There is long-established case law as to the circumstances when a landlord must return or can forfeit a deposit (as well as now statutory provision for the protection of deposits for assured tenancies). The courts have found ways round the strict wording of contracts, when deciding whether deposits must be returned. This section will consider some of the drafting issues that arise in relation to deposits, particularly in the context of commercial (ie non-consumer) transactions.

Deposits and part payment distinguished Use of a deposit A deposit serves the dual purpose of: • going against the price for the goods or services if the transaction for them is completed; and •

acting as a guarantee that the buyer means business (it must be ‘earnest money’) (Soper v Arnold (1889) 14 App CAS 429; Linggi Plantations Ltd v Jagatheesa [1972] 1 MLJ 89 PC; Griffon Shipping LLC v Firodi Shipping Ltd [2013] EWHC 593 (Comm)).

The general position is that if the buyer fails to pay the rest of the price or accept the subject matter of the contract the supplier may repudiate the contract and the deposit is forfeited to the supplier (eg  see Hall v Burnell 284

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[1911] 2 Ch 551). The converse is also true, that if the supplier fails to fulfil its obligations (eg deliver goods, provide title to the goods etc) then the buyer may repudiate the contract and recover the deposit (eg see Alexander v Webber [1922] 1 KB 642). The distinction between a deposit and a part payment It is possible to distinguish a deposit from a part payment in the following way: • the payer of the deposit, in the absence of agreement to the contrary, generally cannot recover it (Howe v Smith (1884) 27 Ch D 89, CA; Omar v El Wakil [2001] EWCA Civ 1090); • but the payer of a part payment, in the absence of agreement to the contrary, can generally recover it (Mayson v Clouet [1924] AC 980; Dies v British International Mining Corpn [1939] 1  KB  724; Hillel v Christoforides (1991) 63 P & CR 301). Points about deposits Whether the party who has received a deposit is allowed to retain or must repay it will depend on the following points: •

a court may order the return of a deposit under its equitable jurisdiction, ie, if it is inequitable for the seller to retain the deposit (Stockloser v Johnson [1954] 1 QB 476, [1954] 1 All ER 630, CA; see bullet point below concerning Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573);

•

if a deposit is paid in stages, and not all of the stage payments are made, it may be possible to sue for the balance of the deposit that is due (Hinton v Sparkes (1867) LR 3 CP 161, 166 ff) or all of the deposit if the deposit is not paid at all (Griffon Shipping LLC v Firodi Shipping Ltd [2013] EWHC 593 (Comm));

• whether a deposit, while fulfilling its functions as being ‘earnest moneys’, must also be reasonable (importing an element of objectivity as to the amount demanded or paid, outside of the views or practices of a particular party) is not entirely clear (Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993]  AC  573; Amble Assets LLP (in administration) v Longbenton Foods Ltd (in administration) [2011]  EWHC  3774 (Ch), [2012] 1  All ER (Comm) 764). In Workers Trust this appeared to be the case. So that in the latter case, the defendants paid a deposit of 60%. On the facts of the case the deposit was not unreasonable (given it was a distressed sale of equipment, and there were alternative buyers who could pay in cleared funds). The judge also found as persuasive that the parties were agreeing to the provisions of a commercial agreement and that the parties should be held to their agreement. However, this was only a preliminary hearing and not a decision based on a full trial of the issues; 285

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• in a later case (Cadogan Petroleum Holdings Ltd v Global Process Systems LLC  [2013]  EWHC  214 (Comm)) the court found that the rules regarding penalties did not apply if the amount of the deposit is excessive (‘penal’), although the court did retain equitable jurisdiction to grant forfeiture of a deposit if the party retaining the deposit had engaged in fraud, sharp practice or unconscionable conduct (Galbraith v Mitchenall Estates Ltd [1965] 2 QB 473), although the deposit may exceed the actual amount of damages that the party who wishes to retain the deposit has suffered (Griffon Shipping LLC  v Firodi Shipping Ltd [2013]  EWHC  593 (Comm)); • a deposit paid before the parties have entered into a binding contract is recoverable (such as one paid while the parties are negotiating the provisions of an agreement) (see Chillingworth v Esche [1924] 1 Ch 97); •

the receiver of an amount may need to repay in particular instances, such as purchase of an interest in real property (Law of Property Act 1925, s 49(2)), a debtor-creditor relationship (under the Consumer Credit Act 1974, s 100, if the loss sustained by the creditor is less than the amount of one half of the total price or there is an unfair relationship based on certain factors) or in a consumer transaction (Consumer Rights Act 2015). Consideration of these are outside the scope of this book, except as noted below.

Part payment If the advance payment is a ‘part payment’ rather than a deposit, and the contract is terminated; the payer of the part payment may be able to recover some or all of it, even if the contract was terminated because of the customer’s default. However, this will depend on the provisions of the agreement (Cadogan Petroleum Holdings Ltd v Global Process Systems LLC  [2013]  EWHC  214 (Comm)). In this case the sale of a gas plant was to be paid for in instalments, and the seller was to retain title until all the instalments were paid. The judge held that the instalments were not a deposit and the rules relating to deposits did not apply. The judge also held that the instalments were contractually agreed amounts to be paid at particular times, and since they were not paid on a breach of contract the rules relating to penalties also did not apply. Whether a part-payment is returnable will depend on whether the payment is conditional or unconditional upon performance of the contract (Griffon Shipping LLC  v Firodi Shipping Ltd [2013]  EWHC  593 (Comm); Cadogan Petroleum Holdings Ltd v Global Process Systems LLC [2013] EWHC 214 (Comm)). If unconditional then the receiver of the part-payment can retain it. The tradesman would, however, be able to counterclaim for any loss he had suffered (Dies v British and International Mining and Finance Corpn Ltd [1939] 1 KB 724). In other words, it seems that to retain a ‘part payment’ one must prove one’s loss, unlike the position with deposits. 286

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The problem in distinguishing a deposit from a part payment It is not always easy to ascertain whether an advance payment made by a customer/party is a part payment or a deposit. The fact that the seller usually returns the advance payment if the buyer refuses, whether rightly or wrongly, to accept delivery is not conclusive and the payment may nevertheless be a deposit. There is also the separate issue that can arise where a supplier sues for the entire contract price. For many contracts, there is a requirement to pay in stages and for some stages to be paid in advance. To avoid uncertainty the parties should use clear wording as to the status of any advance payment, and clearly indicate what is to happen if the contract does not proceed (eg the party making the advance payment wishes to withdraw, the other party fails to perform some obligation, etc).

Drafting issues •

•

Purpose of advance payment. What is the purpose of the advance payment? Eg: •

is it a means to show that the purchaser of the good or service is in earnest? Or

•

is it to enable the supplier to pay for materials that it needs to perform the contract?

Can the supplier retain the advance payment? If there is a default by the purchaser, can the supplier retain the advance payment? •

in what circumstances can the supplier retain it?

•

can the supplier retain all of it?

• does the supplier need to prove that it has suffered loss equal to at least the amount of the advance payment? •

If there is only partial performance? What is to happen if some, but not all, of the contract is performed? For example, if a contract concerns the manufacture of goods but not all the goods are manufactured or for some other reason the manufacturer fails to fulfil its obligations? Is the purchaser entitled to receive the uncompleted goods?

•

Deposits. If the parties wish to make the advance payment a deposit: • at what amount is it to be set? (If set unjustifiably high, the court might consider it to be a penalty, and order its refund in full (see the summary of law, above). •

is retention of the deposit the supplier’s only remedy if the purchaser fails to complete the contract? That is, will there be wording to indicate that it is without prejudice to the other rights and remedies specified in the contract or available under law? 287

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Location in the agreement The Main Commercial Provisions section is often the location of a deposit or part payment clause, for example within the Payment clause or other clauses that deal with defining the price.

Linkage and use Although many of the issues to be dealt with will concern the price and payment, the consequence of a non-payment of a part payment or failure to carry out obligations by any party will involve considerations concerning: •

Consequences of termination;

•

Termination;

•

Exemptions;

•

Warranties (if any given about part payments etc).

Consumer law A deposit or part payment may in certain circumstances be unfair, if there is: ‘A term which has the object or effect of permitting the trader to retain sums paid by the consumer where the consumer decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the trader where the trader is the party cancelling the contract.’ (Consumer Rights Act 2015, Sch 2, para 4).

This paragraph of the Consumer Rights Act 2015, Sch 2, makes it clear that a payment by the consumer which is retained by a supplier is in itself not unfair. It is only unfair where an equivalent remedy is not provided to the consumer where the supplier cancels the contract. What is perhaps less clear is, where a payment is made and the supplier uses some or all of it to buy materials etc so that it can perform the contract, and the consumer then refuses to perform the contract but the supplier does not provide an equivalent remedy as specified in Sch 2, para 4, whether, in these circumstances, the holding of the advance payment/deposit is unfair.

Sample precedent material Precedent 1—Deposit [Party A] shall pay to [Party B] a deposit of £[ ] forthwith on signature of this agreement. If [Party A] fails to pay the balance of the Contract Price by [date] or seeks to terminate the Order, [Party B] may retain all of the deposit. [[Party A] acknowledges that the amount of the deposit is reasonable and that it is reasonable for [Party B] to retain all of the deposit 288

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in the event of [Party A]’s default, bearing in mind [Party B]’s anticipated costs and expenses.] Precedent 2—Deposit Where the Customer places a firm order for Goods to be ordered from a manufacturer, a non-returnable deposit of one-third of the contract price will be required from the Customer. [If the Company agrees to refund all or part of the deposit for any reason: (a) the refund will be by credit note or cheque at the discretion of the Company; and (b) the Company will be entitled to retain 10% of the contract price to cover expenses.] Precedent 3—Receipt of deposit as part payment Received by [Party A] the sum of £[ ] being a preliminary deposit and part payment on the purchase of [ ] by [Party B] from [Party A]. Precedent 4—Deposit as part payment – sale conditions The Purchaser shall pay to the Vendor’s solicitors as [stakeholders or agents] the sum of £… by way of deposit and in part payment of the said purchase price pending completion (‘the Deposit’). Precedent 5—Share option price not to be part payment The option itself will cost £[ ]. This sum is non-refundable and shall not in any circumstances be or be deemed to be a part payment of the subscription price for any shares. Precedent 6—Appropriation of part payment – loan agreement In the case of a partial payment, the Lender may appropriate such payment towards such of the obligations of the Borrower or the Guarantor under this agreement as the Lender may decide. Any such appropriation shall override any appropriation made by the Borrower or the Guarantor. Precedent 7—Refund of advance payment – supplier’s warranty In the event of cancellation of the agreement we shall immediately remit to the Customer any sum paid by him and/or the value of any part exchange which we allowed in either case by way of advance payment. Precedent 8—Refund of advance payment – consumer rental agreement We reserve the right to refuse to enter into this agreement without stating a reason. In that event, we shall refund to you any amount you have paid us by way of advance payment. Precedent 9—Deposit When you place your order we may require that you pay a deposit before we will accept your order. The purpose of the deposit is to show your firm commitment to ordering [specify]. The deposit will also be used by 289

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us to purchase materials and other supplies in order to fulfil your order. Once we have accepted your order you will not normally be able to cancel the order. If you do cancel your order after we accept it, we will normally retain the deposit you have paid to us and in addition you will need to pay any costs and other losses we reasonably incur because of our cancellation over and above the value of the deposit. If the amount of your costs and other losses are less than the value of the deposit then we will refund the difference. If we cancel the contract between you and us then we will pay any costs or other losses that you reasonably incur because of our cancellation. Precedent 10—Provision within payment clause for the payment of a deposit 1. [Party A] requires payment of the Fee for the Services it provides to be made in two ways, either: 1.1 at the time [Party A] completes carrying out the Services, or 1.2 by way of a staged payments: requiring: 2.1.1 that [Party B] makes payment of a deposit, comprising […]% of the Fee, before [Party A] commences performing the Services, and 2.2.2 payment of the balance of the Fee when [Party A] completes carrying out the Services or the payment of the balance of the Fee in a number of fixed payments. 3. [Party B] shall make payment of the Fee to [Party A] in the way specified by Clause 1.1 or Clause 1.2 as indicated on the [estimate OR quotation OR order form OR [as required]]. 4. All amounts stated, whether orally or in writing, are exclusive of VAT, which will be added at the rate currently in force.

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Disclaimers

Purpose of the clause A contracting party will sometimes include wording in a contract stating that it disclaims responsibility for a particular fact or state of affairs. Typically, disclaimers appear next to warranties, as they often seek to exclude warranties that might otherwise be implied into the contract. Eg, in a contract for the sale of goods, the contract might state that the supplier disclaims any express or implied terms of satisfactory quality or fitness for purpose (such as those implied by the Sale of Goods Act 1979, s 14) or that any terms, warranties etc are only those that are found in the agreement, eg  wording such as the following type of disclaimer (although the word ‘disclaimer’ itself is not used): ‘4.1 The warranty, obligations and liabilities of seller, and the rights and remedies of buyer set forth in the agreement are exclusive and are in lieu of and buyer hereby waives and releases all other warranties, obligations, representations or liabilities, express or implied, arising by law, in contract, civil liability or in tort, or otherwise, including but not limited to a) any implied warranty of merchantability [satisfactory quality under the Sales of Goods Act 1979] or of fitness for a particular purpose, and b) any other obligation or liability on the part of seller to anyone of any nature whatsoever by reason of the design, manufacture, sale, repair, lease or use of the aircraft or related products and services delivered or rendered hereunder or otherwise.’

(reformatted to improve readability, and considered in Air Transworld Ltd v Bombardier In [2012] EWHC 243 (Comm), see Exemption clauses). A  disclaimer of this kind is distinguishable from an exemption (exclusion or limitation of liability) clause. In the above example, the disclaimer seeks to prevent a condition or warranty arising that the goods were of satisfactory quality or fit for any purpose stated by the purchaser (ie the conditions that are implied by the Sale of Goods Act 1979, s 14) But if the seller provides a warranty, an exemption clause in the same contract would seek to exclude or limit the liability the supplier has for breach of that warranty. The exemption clause does not deny that the warranty exists, but attempts to limit its application. 291

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See further Exemptions. Sometimes, though, the wording in a clause of an agreement will use the word ‘disclaimer’, but in the same sense as an exemption clause.

Drafting issues •

Is the purpose of the wording disclaimer to stop: •

legal liability arising (whether express or implied)?

•

some statement, representation or action being effective? Or

•

some statement, representation, action or warranty being relied on?

If so, then in effect a disclaimer is being created.

Location in the agreement Any disclaimers used in the sense meant in this section normally appear with a Warranty clause.

Linkage and use The word ‘disclaimer’ itself is often not used, but other words are, such as: • ‘admits’; • ‘acknowledge’; • ‘agree’; •

‘acknowledge and agree’;

• ‘makes’, etc. They are more often used to create the disclaimer. But the choice of wording for this type of issue is unlikely to be determinative, as in the wording quoted above, where ‘disclaimer’ or any of the words mentioned immediately above are not used. The key words used are ‘waives and releases’, but in the context of the clause (and the other clauses relating to it): • it is clear that the only warranties etc offered are those which the seller provides (in exchange for those implied etc by law); •

the only warranties are those found elsewhere in the agreement; and

•

there is an exclusion of liability also found elsewhere in the agreement.

(See Air Transworld Ltd v Bombardier In [2012]  EWHC  243 (Comm), (see Exemption clauses)). Without clear wording it may not be immediately obvious whether the wording used is to limit or exclude liability or to prevent the liability arising in the first place. 292

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Sample precedent material Precedent 1—Disclaimer in patent and know-how licence 1 Each of the Licensee and the Owner acknowledges that, in entering into this agreement, it does not do so in reliance on any representation, warranty or other provision except as expressly provided in this agreement, and any conditions, warranties or other terms implied by statute or common law are excluded from this agreement to the fullest extent permitted by law. 2 Without limiting the scope of Clause 1, the Owner does not give any warranty, representation or undertaking: (a)

as to the efficacy or usefulness of the Patents or Know-how; or

(b) that any of the Patents is or will be valid or subsisting or (in the case of an application) will proceed to grant; or (c)

that the use of any of the Patents or Know-how, the manufacture, sale or use of the Licensed Products or the exercise of any of the rights granted under this agreement will not infringe any other intellectual property or other rights of any other person; or

(d) that the Know-how or any other information communicated by the Owner to the Licensee under or in connection with this agreement will produce Licensed Products of satisfactory quality or fit for the purpose for which the Licensee intended; (e)

as imposing any obligation on the Owner to bring or prosecute actions or proceedings against third parties for infringement or to defend any action or proceedings for revocation of any of the Patents; or

(f)

as imposing any liability on the Owner in the event that any third party supplies Licensed Products to customers located in the Territory.

Precedent 2—Disclaimer The Purchaser admits that: (a) the assets agreed to be sold have been inspected by him or on his behalf; and (b) he has entered into this agreement on the basis of such inspection and not in reliance on any representation, warranty or statement written or oral made by or on behalf of the Vendor other than replies to written enquiries and other statements given in writing by the Vendor’s solicitors to the Purchaser’s solicitors.

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Entire and final agreement and acknowledgment of non-reliance

Purpose of the clause Background A contract may be formed between two parties by: •

one written document; or

•

a number of documents (including letters and other written terms) taken together; or

•

oral statements; or

•

a mixture of oral statements and written documents.

It is therefore essential, particularly where there has been a period of negotiation leading up to the contract, that the parties are quite clear as to what constitutes the provisions of their agreement. They should also be clear about whether the contract should consist of the final written agreement alone or should also include: • other documents (eg  sales literature containing technical specifications for goods being sold); or •

any statements made by either party, which may have induced the other to enter the contract; or

•

any other contractual documentation.

In the absence of an express provision, it will generally be a matter of interpretation whether a document forms part of the contract and whether a statement by a party is to be regarded as a contractual term or a representation or as a statement having no legal effect. A  court may apply the so-called ‘parol evidence’ rule to exclude such statements and documents from the contract, or the courts may find there is an actionable misrepresentation or a collateral contract. In this area, it seems that the courts have some flexibility as to which ‘principles of construction’ are to be applied. The contract drafter may wish to try to avoid such uncertainties by including an ‘entire agreement’ or ‘whole agreement’ clause.

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Purpose of entire agreement and non-reliance clause Generally, it is in the interests of all parties that all the applicable terms and conditions are stated in one place. There is no legal difficulty in having a contract made up of both oral and written statements, and for written statements not to be contained in the one document. Not doing so can cause problems in proving, in the event of dispute, whether a particular statement is a term of the contract at all, and also deciding which statement is the one that is a provision of a contract, particularly if there are several statements all dealing with the same issue. The principal aim of an ‘entire agreement’ or ‘whole agreement’ clause is to state that all the terms and conditions of a contract are contained within a written agreement between the parties to the contract (eg Inntrepreneur Pub v East Crown [2000] 2 Lloyd’s Rep 611). Most ‘entire agreement’ clauses aim to fulfil two purposes: •

an exclusion of liability: the parties are excluding liability for any (prior) agreements or representations not found in the agreement (that the current agreement supersedes them); and

•

(usually but not always) a statement of non reliance: the parties are stating that they are only relying on the representations and warranties found in the current agreement (and are not relying on pre-contract representations).

In consequence, such a clause attempts to exclude other documents or statements from forming part of the contract. These might include, eg: •

statements made by a party’s sales representatives, which may have induced the other party to enter into the contract; and/or

• statements provided or matters etc set out in documentation provided during the course of pre-contract negotiations; and/or • any documents such as sales literature or exchanges of correspondence between the parties; and/or •

any prior agreements that the parties entered into.

Whilst, in the above examples, the seller might wish to exclude overenthusiastic statements from forming part of the contract, the purchaser might well wish them to be included. Therefore, an entire agreement clause should not be automatically included. A  party might wish to include in the contract warranties reflecting any statements made by the other party that induced them to enter into the contract. As long as appropriate warranties are included, that party might be content for the inclusion of an entire agreement clause. Entire agreement clauses have been considered effective by the courts in many cases (see Watford Electronics v Sanderson CFL  Ltd [2001]  EWCA  Civ 317), and recent cases have spelled out the reach that an entire agreement clause can have. 295

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•

An acknowledgment of non-reliance, such as ‘… and the parties confirm that they have not entered into this agreement on the basis of any representations that are not expressly incorporated in this agreement’

is effective to exclude any liability for pre-contract representation (see EA  Grimstead & Son Ltd v McGarrigan [1999]  All ER (D) 1163, CA; Watford Electronics v Sanderson CFL  Ltd [2001]  EWCA  Civ 317, [2001] 2 All ER (Comm) 596). These cases did not require that the wording of such a clause as above must explicitly exclude liability for pre-contract representation (as the earlier case of Thomas Witter Ltd v TBB  Industries [1996] 2 All ER 573 appeared to suggest). •

However, it is now clear that a failure to use such ‘non-reliance’ wording is likely to permit a claim concerning pre-contract misrepresentation (see BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC)). Also a failure to clearly indicate that liability for pre-contract representation is excluded is likely to mean that such liability is not excluded. An entire agreement clause such as the first part of Precedent 1: ‘This agreement contains the whole agreement between the Parties [in respect of (subject matter of agreement)] and supersedes and replaces any prior written or oral agreements, representations or understandings between them [relating to such subject matter]’

will be limited to identifying the provisions of the contract and not be sufficient to exclude pre-contract representations (Deepak Fertilisers & Petrochemicals Ltd v Davy McKee (London) Ltd [1999] 1 All ER (Comm) 69; BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC)). •

If a party wished to exclude liability for pre-contract liability then an entire agreement clause must use clear words to do so (BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC); Axa Sun Life plc v Campbell Martin Ltd [2011] EWCA Civ 133).

•

An acknowledgment of non-reliance will, in effect, stop any consideration of whether there is liability for representations that are subject to consideration under the Misrepresentation Act 1967, because the parties are stating they are not relying on pre-contract representations.

•

It may not be necessary to state that an entire agreement does not exclude liability for fraud. Following Thomas Witter Ltd v TBB  Industries it was thought necessary, for an entire agreement clause to be effective (or more likely to be effective), to include wording such as that set out in Precedent 2 (‘However, nothing in this agreement purports to exclude liability for any fraudulent statement or act’). However, following cases such as Granville Oil & Chemicals Ltd Davies Turner & Co Ltd [2003]  EWCA  Civ 570 and HIH  Casualty & General Insurance Ltd v Chase Manhattan Bank [2003]  UKHL  6 it may no longer be strictly necessary (although many agreements prepared by commercial lawyers now include such wording by default).

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•

Whether the agreement under consideration is the whole agreement. For example, a collateral agreement may not be excluded when wording such as ‘[t]his Contract represents the entire agreement of the parties hereto and supersedes all previous negotiations, statements or agreements whether written or oral’ are used. The quoted words were considered in Ryanair Ltd v SR Technics Ireland Ltd [2007] EWHC 3089 (QB) and it was held that a collateral agreement was not a previous agreement, after the judge looked at the admissible background and found that the parties had proceeded on the basis that the collateral agreement would be honoured. The entire agreement meant the agreement that contained the quoted clause and the collateral contract.

• Following from the previous point, another agreement may not be excluded if it is part of a package of agreements or is not inconsistent with the subject matter of the agreement under scrutiny by the court (see Cheverny Consulting Ltd v Whitehad Mann Ltd [2007]  EWHC  3130 (Ch); Satyam Computer Services Ltd v Upaid Systems Ltd [2008]  EWCA  Civ 487 (where wording similar to Precedent 1 was in use). • An entire agreement clause can cover breaches of collateral warranties, implied terms based on usage and contracts or agreements made by conduct (eg  Exxonmobil Sales and Supply Corpn v Texaco Ltd [2003]  EWHC  1964 (Comm); SERE Holdings Ltd v Volkswagen Group UK Ltd [2004] EWHC 1551 (Ch)).

Drafting issues •

Is the agreement to be limited only to its written terms? If: • there has been an extensive course of dealing between the parties before; or •

particular statements or representations (whether oral or in writing) are relevant or need to be incorporated in the present agreement,

then a ‘general’ entire agreement clause will not be appropriate. Eg, if the parties have entered into a series of agreements, which are all linked to the same deal (eg  asset purchase agreement, assignments of intellectual and real property, novation agreements, etc), statements, representations, etc made in one agreement might be relevant to another agreement. •

What is to be included in the entire agreement clause? It should be made explicit where the entire agreement clause will deal with the following subjects: •

prior written agreements;

•

prior oral agreements;

•

prior agreements made by conduct; 297

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• representations; •

breach of collateral warranties;

• promises; • conditions; •

implied terms based on usage and custom;

• other agreements, side letters etc which are related to the same transaction. •

Do the parties wish to exclude all or some pre-contract representations? An acknowledgment of non-reliance is likely to be effective (such as in Precedent 1), and it may be necessary to use very clear wording. However, this may not be the intention of the parties, or may need additional wording to identify any specific representations that one or more of the parties do wish to rely on, such as adding to the end of Precedent 1: ‘except for the representations set out in Schedule [ ]’.

•

Are the schedules or attachments to an agreement included within the entire agreement clause? Reference may need to be made in an entire agreement clause to any schedules or attachments added to the agreement for the sake of completeness or to avoid any uncertainty. An entire agreement clause might start as set out in Precedent 3.

•

An entire agreement clause should not seek to avoid liability for fraud.

Location in the agreement An Entire agreement clause will usually be located in the Boilerplate section of an agreement.

Linkage and use An Entire agreement clause is one of the most important ‘boilerplate’ clauses, as it effectively controls which documents and statements are part of an agreement. As can be seen, these clauses have received extensive and critical scrutiny by the courts in recent years. An Entire agreement clause cannot be considered in isolation, as it can impact particularly on clauses dealing with warranties, limitation and exclusion of liability and indemnities. Another aspect that will need consideration is an administrative issue, that of handling and analysis of the various documentation generated and statements made during the negotiation and drafting of an agreement. For routine types of agreements this may be of little importance. For substantial transactions there may be many documents generated during the course of negotiations, 298

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as well as meetings and discussions held. One or more of the parties may wish that some of those documents and the records or notes of such meetings and discussions are included in an agreement. Unless there is a formal process to document which of those documents and records are to be included or part of the agreement, an Entire agreement may exclude them. For example, as the negotiations proceed one party requiring that the documents and records are included in a Warranties clause or disclosure letter. Although an Entire agreement clause may appear (by convention) with other boilerplate language, it is far from standard and routine wording to include in a contract. Each element (as described under Purpose of entire agreement and non-reliance clause) will need separate consideration.

Sample precedent material Precedent 1—Short form This agreement contains the whole agreement between the Parties [in respect of (subject matter of agreement)] and supersedes any prior written or oral agreement between them [relating to that subject matter] and the parties confirm that they have not entered into this agreement on the basis of any representations that are not expressly incorporated in this agreement. Precedent 2—Longer form This agreement contains the whole agreement between the Parties [in respect of (subject matter of agreement)] and supersedes and replaces any prior written or oral agreements, representations or understandings between them [relating to such subject matter]. The parties confirm that they have not entered into this agreement on the basis of any representation that is not expressly incorporated into this agreement. Without limiting the generality of the foregoing, neither party shall have any remedy in respect of any untrue statement made to that party upon which it may have relied in entering into this agreement, and a party’s only remedy is for breach of contract. However, nothing in this agreement purports to exclude liability for any fraudulent statement or act. Precedent 3—Including schedule This agreement, including its Schedules, contains the whole agreement.

Consumer issues Particular care needs to be taken concerning the inclusion of an Entire agreement clause in a consumer contract. See in particular the Consumer Rights Act 2015, Sch 2, para 17, which lists, among the terms which may be regarded as unfair, terms having the object or effect of limiting the seller’s 299

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or supplier’s obligation to respect commitments undertaken by its agents or making its commitments subject to compliance with a particular formality. Guidance issued by the Competition and Markets Authority does not explicitly state that an entire agreement clause is completely contrary to the Consumer Rights Act 2015 (Unfair Terms – Main Guidance, CMA37, CMA). The reasoning of the CMA is that consumers do rely on what is said to them, particularly if they are induced to enter into a contract on what is said to them by an employee or an agent of a business. Even if an entire agreement clause is not used for unfair means, it lessens the incentive for the trader to use care in the pre-contract statements it makes or its agents make. The CMA’s view is that while an entire agreement clause promotes certainty, it has the effect of lessening the remedies available to consumers when they have relied on pre-contract misrepresentations to enter into a contract. Consequently the use of an entire agreement clause, which then disclaims liability for such statements, has the potential for bad faith. The CMA guidance does indicate that a statement in a contract that the written provisions are the terms and conditions of a binding agreement can be included, as long as accompanied with an appropriate warning (such as that document is binding document, that the consumer should it read it carefully and ensure it contains all that s/he wants to include etc). Perhaps the practical consequence of using an entire agreement clause in a consumer contract is to avoid wording that seeks to exclude liability for pre-contract misrepresentations (such as the second sentence of the first paragraph in Precedent 2).

Case analysis Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 1 In this case the judge held that a clause seeking to exclude liability for pre-contractual misrepresentations was ineffective. 2 The case involved a dispute over a contract for the sale of a carpet manufacturing business. The seller had provided management accounts to the buyer prior to entering into the contract of sale. The buyer subsequently alleged that the accounts misrepresented the financial position of the business. The contract included a provision in a fairly standard form, which read as follows: ‘This agreement sets forth the entire agreement and understanding between the parties or any of them in connection with the Business and the sale and purchase described herein. In particular, but without prejudice to the generality of the foregoing, the Purchaser acknowledges that it has not been induced to enter into this agreement by any representation or warranty other than the statements contained or referred to in Schedule 6.’

3 It is convenient to quote the following paragraphs from Jacob J’s judgment: ‘The defendants say this [the above-quoted clause] prevents any liability for misrepresentation… The first thing to do is to construe the clause. … 300

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Entire and final agreement and acknowledgment of non-reliance in my judgment the first sentence does not operate to exclude remedies for pre-contractual misrepresentations. It simply does not say it does. If it said, for instance, “The vendor [should be ‘purchaser’?] agrees that he will have no remedy in respect of any untrue statement made to him upon which he relied in entering this contract, and that his only remedies can be for breach of contract” the clause would probably have done the job. Then if he is sold a pup, he will have no remedy unless it is a contractually warranted pup… Unless it is manifestly made clear that a purchaser has agreed only to have a remedy for breach of warranty I am not disposed to think that a contractual term said to have this effect by a roundabout route does indeed do so. In other words, if a clause is to have the effect of excluding or reducing remedies for damaging untrue statements then the party seeking that protection cannot be mealy-mouthed in his clause. He must bring it home that he is limiting his liability for falsehoods he may have told.’

4 The judge went on to analyse the second sentence of the clause (an acknowledgment of non reliance), which referred to Schedule 6, which contained a warranty that (in effect) the disclosure letter was not misleading. He made a number of comments about this sentence including the following: ‘…To my mind, if [this clause is] intended to exclude liability for misrepresentation if that misrepresentation has become a warranty of the agreement, they are ineffective. Section 1 of the Misrepresentation Act 1967 specifically deals with this… I think that where a man has been sold a pup, even if it is a warranted pup, there is nothing, unless the contract expressly says so, [preventing] the man also treating it as a misrepresented pup, if that was indeed the case. What he relied on is a question of fact.’

5 The judge went on to consider the ‘academic’ question of whether the second sentence of the clause would be effective to exclude misrepresentations of fact that were not set out in Schedule 6 (see the wording of the clause, above): ‘Would the second sentence preclude the purchaser from saying he had relied upon this? I rather doubt it. Again, the point of exclusion of liability is not made explicit. It is perfectly possible to read the clause as doing no more than attempting to set out such representations as the purchaser thinks he was relying on at the time…’

6 The judge next considered the effect of the Misrepresentation Act 1967, s  3, as substituted by the Unfair Contract Terms Act 1977, s 8, and in particular whether the exclusion was reasonable. He concluded that because the clause did not specifically exclude fraudulent misrepresentation the width of the clause was too great and it was therefore unreasonable and unenforceable. 7 Following the decisions of EA  Grimstead & Son Ltd v McGarrigan [1999]  All ER (D) 1163, CA and Watford Electronics v Sanderson CFL  Ltd [2001]  EWCA  Civ 317, [2001] 2  All ER (Comm) 596, the judge’s view that the acknowledgment of non-reliance by itself was not sufficient without additional wording excluding liability is no longer likely to be correct. But this case is still included to indicate how judicial views can change. 301

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Deepak Fertilisers & Petrochemicals Ltd v Davy McKee (London) Ltd [1999] 1 All ER (Comm) 69 1 The entire agreement clause in this case read: ‘This contract comprises the entire agreement between the parties, as detailed in the various Articles and Annexures and there are not any agreements, understandings, promises or conditions, oral or written, expressed or implied, concerning the subject matter which are not merged into this contract and superseded hereby. This contract may be amended in the future only in writing executed by the parties.’

2 The Court of Appeal agreed with the judge at first instance that this entire clause excluded liability in respect of collateral warranty (but not misrepresentations): ‘34. As to [the entire agreement clause] Rix J  was plainly correct to hold that this excluded liability in respect of collateral warranty. The combination of the opening words, coupled with ‘and there are not any agreements, understandings or promises oral or written’ clearly covers such a warranty. [Counsel for the first defendant] also submits they cover misrepresentations; furthermore, he submits that it is highly technical to draw a distinction between misrepresentations and collateral warranties based on the self same representations. But we do not think the opening words themselves exclude misrepresentations and they cannot be brought within the specific words. In our judgment the judge was right on his construction of art 10.16.’

Inntreppreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611 1 The entire agreement clauses in this case read: ‘Any variations of this Agreement which are agreed in correspondence shall be incorporated in this Agreement where that correspondence makes express reference to this Clause and the parties acknowledge that this Agreement (with the incorporation of any such variations) constitutes the entire Agreement between the parties’.

2 The court held that an entire agreement clause that denied a statement of contractual force did not reduce the statement’s effect as a misrepresentation: ‘An entire agreement provision does not preclude a claim in misrepresentation, for the denial of contractual force to a statement cannot affect the status of the statement as a misrepresentation. The same clause in an agreement may contain both an entire agreement provision and a further provision designed to exclude liability eg for misrepresentation or breach of duty.’

Watford Electronics v Sanderson CFL Ltd [2001] EWCA Civ 317, [2001] 2 All ER (Comm) 596 1 A different approach to Thomas Witter Ltd v TBP Industries Ltd was taken in interpreting an entire agreement clause. The entire agreement clause was in similar terms (in essence) to that found in the Witter case: 302

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Entire and final agreement and acknowledgment of non-reliance ‘Entire Agreement. The parties agree that these terms and conditions (together with any other terms and conditions incorporated in the Contract) represent the entire agreement between the parties relating to the sale and purchase of the Equipment and that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract.’

2 In this case, the court disagreed with the judge at first instance, where that judge stated that an entire agreement clause is ‘one that excludes liability rather than precludes liability from ever occurring’. The Court of Appeal disagreed with this and indicated that an entire agreement clause aims to prevent a party to whom a representation was made from asserting that it relied upon it. The Court of Appeal repeated passages from an earlier judgment of that court about the effectiveness of an acknowledgement of non-reliance: ‘In my view an acknowledgment of non-reliance … is capable of operating as an evidential estoppel. It is apt to prevent the party who has given the acknowledgment [of non reliance] from asserting in subsequent litigation against the party to whom it has been given that it is not true. That seems to me to be a proper use of an acknowledgment of this nature, which, as Mr Justice Jacob pointed out in the Thomas Witter case [Thomas Witter Ltd v TBP  Industries Ltd [1996] 2  All ER  573], has become a common feature of professionally drawn commercial contracts.’

and ‘There are, as it seems to me, at least two good reasons why the courts should not refuse to give effect to an acknowledgment of non-reliance in a commercial contract between experienced parties of equal bargaining power -a fortiori, where those parties have the benefit of professional advice. First, it is reasonable to assume that the parties desire commercial certainty. They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed. They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings. Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party – or, more usually, the purchaser – is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give. The tighter the warranties, the less the risk and (in principle, at least) the greater the price the vendor will require and which the purchaser will be prepared to pay. It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted.’

(Passages from EA Grimstead & Son Ltd v McGarrigan [1999] All ER (D) 1163, CA.) 3

On the particular facts, the Court of Appeal held that just because the entire agreement clause may not achieve its purpose does not mean it is an exclusion clause to which the Misrepresentation Act 1967, s 3 applies: Watford Electronics v Sanderson CFL above at 604. In this case the judge at first instance had disregarded the entire agreement clause when examining the limitation of liability clauses. 303

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4 What was necessary, according to the Court of Appeal, was that limitation of liability and entire agreement clauses had to be interpreted together and in context. 5 Where the Court of Appeal differs in this case from the judge in Thomas Witter Ltd v TBP Industries Ltd is in the emphasis the Court of Appeal placed on the parties being able to negotiate and decide on the terms of a contract, and that the language used in the final agreement fulfils those intentions. As the court stated: ‘The importance of the entire agreement clause in the present context – and, in particular, the importance of the acknowledgment of non-reliance which constitutes the second part of that clause – is that the first sentence in [the limitation of liability clause, which reads ‘Neither [Sanderson CBL] nor [Watford Electronics] shall be liable to the other for any claims for indirect or consequential losses whether arising from negligence or otherwise’] has to be construed on the basis that the parties intend that their whole agreement is to be contained or incorporated in the document which they have signed and on the basis that neither party has relied on any pre-contract representation when signing that document. On that basis, there is no reason why the parties should have intended, by the words which they have used in the first sentence of the limit of liability clause, to exclude liability for negligent pre-contract misrepresentation. Liability in damages under the Misrepresentation Act 1967 can arise only where the party who has suffered the damage has relied upon the representation. Where both parties to the contract have acknowledged, in the document itself, that they have not relied upon any pre-contract representation, it would be bizarre (unless compelled to do so by the words which they have used) to attribute to them an intention to exclude a liability which they must have thought could never arise.’

BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC) 1 In this case the entire agreement clause read: ‘… this Agreement and the Schedules shall together represent the entire understanding and constitute the whole agreement between the parties in relation to its subject matter and supersede any previous discussions, correspondence, representations or agreement between the parties with respect thereto notwithstanding the existence of any provision of any such prior agreement that any rights or provisions of such prior agreement shall survive its termination. The term “this Agreement” shall be construed accordingly. This clause does not exclude liability of either party for fraudulent misrepresentation.’

2 The judge held that the clause did not exclude liability for misrepresentation, as the wording does not state that the misrepresentations are of no legal effect, but only that they superseded and are not terms of the contract. 3 In order for misrepresentations to have no effect, the wording used in the clause would have needed to go further. 4 While the wording indicated above regarding superseding any previous discussions, correspondence, representations etc regarding the subject matter of the agreement did not prevent other agreements or collateral agreements having effect: 304

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Entire and final agreement and acknowledgment of non-reliance ‘It did not supersede those mattes so far as there might be any liability for misrepresentation based on them.’

5

The clause includes a reference to representation; but there is nothing in the wording ‘that it is intended to take away a right to rely on misrepresentations’. If the entire agreement clause wished to exclude liability for negligent misrepresentation than clearer wording is needed (which the above clause did not provide).

AXA Sun Life Services plc v Campbell Martin Ltd [2011] EWCA Civ 133 1 In this case the entire agreement clause stated: ‘This Agreement and the Schedules and documents referred to herein constitute the entire agreement and understanding between you and us in relation to the subject matter thereof. Without prejudice to any variation as provided in clause 1.1, this Agreement shall supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing between you and us relating to the subject matter of this Agreement but this will not affect any obligations in any such prior agreement which are expressed to continue after termination.’

2 The court held that words such as ‘supersede’ and ‘representations’ is not language that excludes liability for misrepresentation, but rather is the language of defining contractual obligations. 3 A  clause such as this did not reflect the fact that the parties had reached agreement, that they had not made any representation nor that they had relied on any representation. 4 To exclude liability for misrepresentation required the use of clear wording: ‘[94] …nevertheless it seems to me that there are certain themes which deserve recognition [from previous case law]. Among them is that the exclusion of liability for misrepresentation has to be clearly stated. It can be done by clauses which state the parties’ agreement that there have been no representations made; or that there has been no reliance on any representations; or by an express exclusion of liability for misrepresentation. However, save in such contexts, and particularly where the word “representations” takes its place alongside other words expressive of contractual obligation, talk of the parties’ contract superseding such prior agreement will not by itself absolve a party of misrepresentation where its ingredients can be proved. [95]  I  would therefore conclude that [above quoted clause] does not exclude liability for misrepresentations of any kind. I  see no reason to distinguish between misrepresentations which do or do not relate to the terms of the contract. I am not sure I know the difference between them. Of course, I  can see that in an obvious case, for instance “There is no exclusion clause of any kind in my contract terms”, such a representation could be said to relate to the terms of an agreement. However, almost any representation which, if relied upon, alters the risk profile of an agreement, might be said in some sense or other to relate to the terms of an agreement. [96] In this context, I do not regard the [above quoted clause’s] language of “relating to the subject matter of this Agreement” to be of much if any assistance. That is not the same as “relating to the terms of this 305

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Entire and final agreement and acknowledgment of non-reliance Agreement”. It appears to be boilerplate wording. Plainly a representation which has nothing to do with the parties’ agreement at all (such as a misrepresentation about the weather) is neither here nor there. [97] In sum, on issue 1, collateral warranties are excluded; implied terms are not excluded; and I consider that misrepresentation as a whole is not excluded.’

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Exclusive, non-exclusive and sole

Purpose of the clause Background These words are most often seen in relation to: •

the appointment of agents and distributors; and

•

the licensing of intellectual property rights.

Eg, •

a manufacturer may wish to appoint an agent to sell goods on behalf of the manufacturer. The manufacturer may make the appointment on an exclusive, non-exclusive or sole basis for a defined territory; or

•

a patent owner may grant a licence to another person to exploit the patent (ie develop products, and then make and sell them). The licence that the patent owner can grant can be an exclusive, non-exclusive or sole licence, defined in terms of the territory, the technical field or some activity.

Meaning of ‘exclusive’, ‘non-exclusive’ and ‘sole’ There are no standard definitions that automatically apply to the meaning of these words when used in contracts. Generally the words have the following meanings (there is, however, a minority view that there is not such a clear distinction between ‘exclusive’ and ‘sole’). In cases of doubt, the drafter should specifically define their meanings in the contract. •

Exclusive. The grant of exclusive rights means that the grantor of the rights will not grant the same rights to any other person, nor will the grantor directly exercise those rights. Eg, the patent owner grants an exclusive licence under a patent to manufacture and sell licensed products (an electronic safety product) in a defined field (such as to doctors and hospitals) and in a particular territory (UK); this means that only the licensee can carry out these activities. It also means that the licensor cannot carry out these activities, nor grant any other licences to anyone else under the patent to manufacture and sell the licensed products in that same field and territory. But the patent 307

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owner could grant a further exclusive licence in a different field (ie where the field was care homes) and the territory was also the UK. •

Sole. The grant of sole rights usually means that the grantor of the rights will not grant the same rights to any other person, but the grantor may exercise those rights directly. Eg, based on the above example, the patent owner could grant a sole licence to manufacture and sell the electronic safety product in the field of doctors and hospitals within the UK and the patent owner could also do so, but the patent owner would not be able to grant a licence for others to do so.

•

Non-exclusive. The grant of non-exclusive rights does not restrict the grantor from granting similar rights to third parties and/or exercising those rights directly. Eg, based on the above example, the patent owner could grant several licences allowing several persons all to manufacture and sell the electronic safety product to doctors and hospitals within the UK.

Statutory definitions A  number of statutory definitions are consistent with some of the above definitions (see principally statutes relating to intellectual property; see Statutory definitions below), but they only apply to the matters referred to in the statutes. In the main, non-exclusive and sole are not defined in English statutes.

Drafting issues •

Avoiding ambiguity. Although the three main intellectual property statutes (those relating to copyright, trademarks and patents) all have a similar meaning for ‘exclusive licence’, this meaning however: •

is only for matters relating to those statutes;

• may not be a meaning understood by one or more parties to a transaction (particularly if they are not based in or familiar with the UK legal system); • may not be the meaning intended by one or more parties to a transaction; and • may not be appropriate or relevant to non-intellectual property transactions. Best practice suggests that the contract drafter should specify the exact meaning of exclusive, non-exclusive or sole in an agreement (see Precedent 1). 308

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•

Sole and exclusive licences. Sometimes exclusive licences are stated to be ‘sole and exclusive licences’. This wording seems to be an American import. If an exclusive licence is intended, it probably does no harm to call it a sole and exclusive licence, and it may be useful when interpreting the contract under foreign laws. But in contracts between English parties it is probably better to avoid this phrase.

•

Competition law issues. The grant of exclusive or sole rights is likely to raise issues under EU, and possibly UK, competition laws. The parties should obtain specialist advice in these areas when drafting agreements containing the grant of such rights.

•

Intellectual property issues. The grant of rights in relation to intellectual property can raise complex law issues, on which the parties should obtain specialist legal advice before entering into an agreement (for further reading in this area see Anderson (Ed), Technology Transfer (3rd Edn, 2010, Bloomsbury Professional (4th edn in preparation)).

•

Meaning of ‘exclusive’ for intellectual property statutes. The key point from the statutes is that: •

all other persons; and

•

the owner of the intellectual property

are excluded by the grant of the licence. However, none of the three principal statutes relating to intellectual property state that where a licensee is an ‘exclusive licensee’ that all the rights in and under the intellectual property in question are licensed to that licensee. Therefore it is possible for there to be more than one exclusive licensee. Eg, a licensor could license to several people the right to work the patent if they were all licensed in different territories: Courtauld’s Application [1956] RPC 208. •

Right to sub-license. The right to sub-license needs particular attention, especially where the wording of the agreement does not deal with it.

Location in the agreement Where the agreement primarily concerns, eg: •

the licensing of intellectual property, or

•

the grant of an agency or distributorship,

wording concerning the grant of exclusive, non-exclusive or sole rights will be found in the Main Commercial Provisions. This will often be the key operative clause (eg see Precedents 2 and 3). 309

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If it is necessary to define the meaning of ‘exclusive’, etc, the definition could appear either in a clause in the Definitions section or with the Interpretation clause.

Linkage and use Intellectual property The grant of an exclusive, non-exclusive or sole licence does not, by itself, define adequately what can be done with licensed intellectual property. There are other key aspects of licensing, which should be addressed: •

whether it is possible to sub-license rights;

•

which of the ‘infringing acts’, defined by statute for the particular category of intellectual property, the licensee is permitted to do; eg, a patent might be licensed to enable the licensee to manufacture and use a patented product but not to sell it (although this in practice would be unlikely, but entirely possible). Another example is where a person writes a novel, the rights to publish in book form could be (non) exclusively licensed to one person, while the rights to publish the novel in digital (e-book) form could be (non) exclusively licensed to another, and so on;

•

the territory in which the rights can be exploited;

•

the length of time for which the rights are licensed;

•

the field in which the rights can be used; eg, the same patent could be licensed to one person for the field of treatment of heart disease, while it could be licensed to another person in the field of treatment of cancer (if the product, process, invention etc covered by the patent permitted such application);

•

in addition to the ‘usual’ issues such as those above, there are secondary issues, which can directly impact the rights granted, such as: • whether a licensee can sub-contract (as distinct from sub-license) some of the rights granted to the licensee; •

whether a licensee can assign the licence to a third party.

Registering exclusive licences Registering the licences with national intellectual property offices may be desirable or necessary. Eg, in order for a patent licensee to recover damages for an infringement of the patent, the licence needs registration (in the UK) with the UK Patent Office in accordance with certain time limits (Patents Act 1977, s 68). 310

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Extracts from legislation Patents Act 1977, s 130(1) ‘“exclusive licence” means a licence from the proprietor, or an applicant for, a patent conferring on the licensee, or on him and persons authorised by him, to the exclusion of all other persons (including the proprietor or applicant), any right in respect of the invention to which the patent or application relates, and “exclusive licensee” and “non-exclusive licensee” shall be construed accordingly.’

Copyright, Designs and Patents Act 1988, s 92(1) ‘a licence in writing signed by or on behalf of the copyright owner authorising the licensee to the exclusion of all other persons, including the person granting the licence, to exercise a right which would otherwise be exercisable exclusively by the copyright owner.’

Note: this is the only statutory definition that requires the licence to be in writing (and signed) for the grant of exclusive use of a licence. There are similar definitions in s  119D (Performers’ rights) and in s  225 (Design rights).

Trade Marks Act 1994, s 29(1) ‘In this Act an “exclusive licence” means a licence (whether general or limited) authorising the licensee to the exclusion of all other persons, including the person granting the licence, to use a registered trademark in the manner authorised by the licence. The expression “exclusive licensee” shall be construed accordingly.’

Capital Allowances Act 2001, s 466 466  Grant of licences ‘(1) The acquisition of a licence in respect of a patent is to be treated as the purchase of patent rights. (2) The grant of a licence in respect of a patent is to be treated as a sale of part of patent rights. (3) But the grant by a person entitled to patent rights of an exclusive licence is to be treated as a sale of the whole of those rights. (4) “Exclusive licence” means a licence to exercise those rights to the exclusion of the grantor and all other persons for the period remaining until the rights come to an end.’ (Corporation Tax Act 2009, s 921 is also expressed in almost exactly the same fashion.) 311

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Commission Regulation (EU) No 316/214 of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements ‘Article 1 – Definitions 1. For the purposes of this Regulation, the following definitions shall apply: … (p) “exclusive licence” means a licence under which the licensor itself is not permitted to produce on the basis of the licensed technology rights and is not permitted to license the licensed technology rights to third parties, in general or for a particular use or in a particular territory; (q) “exclusive territory” means a given territory within which only one undertaking is allowed to produce the contract products , but where it is nevertheless possible to allow another licensee to produce the contract products within that territory only for a particular customer where the second licence was granted in order to create an alternative source of supply for that customer; (r) “exclusive customer group” means a group of customers to which only one party to the technology transfer agreement is allowed to actively to sell the contract products produced with the licensed technology’.

Sample precedent material Precedent 1—Meaning of ‘exclusive’ (for inclusion with an Interpretation clause or as a Definition) For the purposes of this Agreement, references to the grant of ‘exclusive’ rights shall mean that the person granting the rights shall neither grant the same rights to any other person, nor exercise those rights directly [for as long as this Agreement remains in force] [or to the extent that and for as long as the Licensed Products are within subsisting claims of unexpired Patents, or the Know-how is not public knowledge in the relevant country]. Precedent 2—Meaning of ‘sole’ (for inclusion with an Interpretation clause or as a Definition) For the purposes of this Agreement, references to the grant of ‘sole’ rights shall mean that the person granting the rights •

shall not grant the same rights to any other person, but

•

shall have the right to exercise those rights

312

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[for as long as this Agreement remains in force] [or to the extent that and for as long as the Licensed Products are within subsisting claims of unexpired Patents, or the Know-how is not public knowledge in the relevant country] Precedent 3—Grant of exclusive or non-exclusive or sole rights The Owner hereby grants the Licensee, subject to the provisions of this Agreement, [an exclusive or a sole or a non-exclusive] licence under the Patents in the Territory, to manufacture, use and sell the Licensed Products. Precedent 4—Appointment of sole agent The Principal hereby appoints the Agent, subject to the provisions of this Agreement, to be its sole agent [during the Term] for the supply of Products in the Territory. Precedent 5—Appointment of non-exclusive agent (where the agent is a small business (or non-experienced business person)) The Principal hereby appoints the Agent, subject to the provisions of this Agreement, to be its non-exclusive agent [during the Term] for the supply of Products in the Territory. The Principal shall have the right to appoint other agents who will also be the Principal’s agents for the supply of Products in the Territory in addition to and at the same time as the Agent.

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Exemption clauses

Purpose of the clause Background Most commercial agreements include provisions that seek to limit or exclude liability (together known as exemption clauses). Exemption clauses come in a variety of shapes and sizes. Eg, they may seek to do the following: • exclude obligations that might otherwise be implied into the contract (eg implied warranties of fitness for purpose under the Sale of Goods Act 1979); • allow a party unilaterally to vary its obligations under the contract (eg allow the party to supply different goods or services to those that were ordered); •

limit a party’s remedies in the event of another party’s breach of contract (eg prevent the party not in breach from terminating the contract);

• impose severe restrictions on the circumstances in which a party may exercise contractual remedies (eg  in a contract for the sale of goods, requiring claims for damaged goods to be made within a short period, such as within seven days of delivery); •

limit liability to a specified sum of money (eg to no more than the price paid by the purchaser);

•

exclude liability for certain types of losses (eg indirect and consequential losses);

•

exclude liability altogether.

Interpretation of exemption clauses by the courts The courts have considered exemption clauses extensively. The effectiveness of such clauses and their use is also restricted by legislation. Detailed consideration is outside the scope of this book; however, it is possible to make the following brief points: • the courts tend to look much more critically at exemption clauses than they do at other types of contract clause, especially: 314

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•

where the contract is between a commercial company and consumer; or

•

where the clause seeks to exclude all liability even for serious breaches of contract;

• the critical view of the courts has lessened in recent years, and they are more ‘willing to recognise that parties to commercial contracts are entitled to apportion the risk of loss as they see fit and that provisions which limit or exclude liability must be construed in the same way as other terms’ (Tradigrain SA v Intertek Testing Services (ITS) Canada Ltd [2007] EWCA Civ 154); and ‘at least in commercial cases (now subject only to the impact, if any, of the 1977 Act), words, even in exclusion clauses, mean what they say and the parties will be held to the bargain into which they have entered. Further, it is a matter of construction rather than law as to whether liability for deliberate acts will be excluded, though of course the wording must be clear’ (Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004] EWHC 1502 (Comm), [2005] 2 All ER (Comm) 783). See also Bikam OOD v Adria Cable Sarl [2012] EWHC 621 (Comm); • the law is more indulgent towards clauses limiting liability rather than those excluding it completely (Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 All ER 101, HL; EE Caledonia Ltd v Orbit Valve plc [1995] 1  All ER  174, [1994] 1  WLR  1515, CA; see also Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004] EWHC 1502 (Comm), [2005] 2 All ER (Comm) 783); •

the wording of an exemption clause is interpreted strictly, and if it does not ‘beyond the possibility of misunderstanding’ (see judgment of Denning LJ in White v John Warrick & Co Ltd [1953] 2 All ER 1021, [1953] 1 WLR 1285, CA) cover the type of liability that is the subject of the dispute, it will often not be found to exempt such liability. The words used must be clear: ‘…the general rule should be applied that if a party, otherwise liable, is to exclude or limit his liability or to rely on an exemption, he must do so in clear words; unclear words do not suffice; any ambiguity or lack of clarity must be resolved against that party’ (Dairy Containers Ltd v Tasman Orient Line CV [2004] UKPC 22). For example, if a party wishes to exclude conditions implied by law (eg that goods are of satisfactory quality), then the wording of the clause should normally specifically refer to conditions. But other wording (without referring to ‘conditions’ at all) can be sufficient (such as in Air Transworld Ltd v Bombardier In [2012] EWHC 243 (Comm), where wording such as ‘all other …obligations ….express or implied, arising by law’ did exclude conditions, see Case analysis below);

•

if the wording is ambiguous or unclear, it is interpreted against the interest of the party seeking to rely on it. Whilst this approach is taken to all types of contract clause (see Contra proferentem) the approach is particularly strict in the case of exclusion clauses. In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1984] 1 Lloyd’s Rep 555, Judge Kingham said ‘Such [limitation] clauses will of course be read contra proferentem and must be 315

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clearly expressed, but there is no reason why they should be judged by the specially exacting standards which are applied to exclusion [clauses]’; • there is no absolute principle that an exemption clause cannot cover a fundamental breach or a complete non-performance by a party of its obligations (see Photo Production Ltd v Securior Transport Ltd [1980] 1 All ER 556). It is possible to do so if the wording of the exemption clauses is clear enough, even more so with a more ‘literal’ approach now adopted by the most senior courts interpreting contracts, following cases such as Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, eg ‘where the parties have used unambiguous language, the court must apply it’ and Arnold v Britton [2015] UKSC 36. Accordingly, very clear language is needed to overcome the strong inclination of the courts to interpret the words in a way which does not completely exclude a party’s liability. Eg, in a contract for the supply of goods, if the supplier is to exclude liability for supplying completely different goods to those ordered, this would need stating explicitly, using words that might well be commercially off-putting to any purchaser: ‘We may supply you with completely different goods to those you have ordered, or supply you with no goods at all, and we will have no liability to you for doing so’. Language of this kind goes well beyond the typical ‘legal’ language of many exclusion clauses and is rarely encountered. It may have the effect of making the contract merely a statement of intent rather than a legally binding contract; • an exemption clause will not relieve a party from liability for its own negligence (or that of the party’s ‘servants’) unless this is stated specifically or is clearly intended by implication (see Canada Steamship Lines Ltd v R [1952] AC 192, [1952] 1 All ER 305, PC, a Canadian case, approved in Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400, [1973] 1 All ER 193, CA). If the exemption clause does not refer to negligence it may nevertheless be interpreted as exempting liability for negligence if the clause uses words that imply that negligence is covered. Eg, the exemption clause might refer to ‘all losses however caused’ or ‘from any cause whatsoever’. If the only possible basis of liability is negligence, it may not be necessary to refer to negligence specifically; • an exemption clause will only cover a repudiatory breach (a deliberate breach by a party to a contract) with the use of the clearest words, even more so where the deliberate breach is one which insurance is unlikely to cover (see Internet Broadcasting Corpn Ltd (t/a NETTV) v MAR LLC (t/a MARHedge) [2009]  EWHC  844 (Ch), [2010] 1  All ER (Comm) 112. If insurance is not available then (according to the judge in this case) it may be necessary to use words such as ‘including deliberate repudiatory acts by the Parties themselves’; •

an exemption clause that is intended to exclude a condition implied by the Sale of Goods Act 1979 should use the word ‘condition’. Otherwise it is necessary to use language that can only refer to a condition (see eg Wallis,

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Son and Wells v Pratt and Haynes, HL [1911] AC 394, [1911-13] All ER Rep 989; KG  Bominflot Bunkergesellschaft für Mineralole mbH & Co v Petroplus Marketing AG (The Mercini Lady) [2010]  EWCA  Civ 1145, [2011] 2  All ER (Comm) 522); Air Transworld Ltd v Bombardier In [2012] EWHC 243 (Comm); •

on public policy grounds a contracting party cannot exclude liability for its own fraud in inducing the other party to enter into a contract (HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 All ER (Comm) 349). Also, a party cannot exclude liability for its own fraud during the course of the agreement (Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004] EWHC 1502 (Comm), [2005] 2 All ER (Comm) 783). It may be possible to exclude the fraud or deceit of a party’s agent in inducing a contract, but general wording will not be sufficient. Such an intention ‘must be expressed in clear and unmistakable terms on the face of the contract’ (HIH case, at para  16, although the House of Lords in this case came to no final view on this point). It is possible to exclude liability for the deliberate wrongdoing of a party’s agent arising from the performance of the agreement (Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004] EWHC 1502 (Comm), [2005] 2 All ER (Comm) 783, see Case analysis below). In this case it was held that the following wording, as a matter of interpretation rather than law, was capable of covering deliberate wrongdoing: ‘the Company’s liability howsoever arising and notwithstanding that the cause of the damage be unexplained shall not exceed…’

Statutory control of exemption clauses Some of the main issues that need consideration when drafting exclusion or ‘limitation of liability’ clauses are as follows. This is only a brief summary; the detailed provisions of these laws must be considered when attempting to draft exemption clauses.

Unfair Contract Terms Act 1977 (UCTA 1977) •

A party cannot exclude or restrict liability, by a contract term or notice, for death or personal injury caused by that party’s negligence (UCTA 1977, s 2(1));

•

for other loss or damage caused by negligence, any exclusion or restriction of liability will not be effective unless it satisfies the requirement of reasonableness (UCTA 1977, s 2(2));

•

a party may not, among other things, exclude or restrict liability for breach of contract if the contract is made on that party’s written standard terms of business or the other party is a consumer unless the contract term satisfies the requirement of reasonableness (UCTA 1977, s 3); 317

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•

it is not possible to exclude liability for breach of the implied term as to title in contracts for the sale or supply of goods (ie the terms arising under the Sale of Goods Act 1979 (as amended) and the Supply of Goods and Services Act 1982 (as amended)) (UCTA 1977, s 6(1)).

Misrepresentation Act 1967 Contract terms that attempt to exclude or limit liability (or a party’s remedies) for misrepresentations made before the contract was made are of no effect, unless they satisfy the requirement of reasonableness as stated in the Unfair Contract Terms Act 1977, s  11(1) (Misrepresentation Act 1968, s  3, as substituted by UCTA 1977).

Drafting issues Limiting or excluding liability The following comments assume that the drafter’s objective is to limit or exclude liability to the maximum extent possible. •

Check whether the statutory controls on limitation and exclusion of liability apply at all. •

UCTA 1977 does not apply to some types of contracts, eg: •

contracts of insurance;

•

contracts to the extent that they relate to the creation, transfer or termination of an interest in intellectual property;

•

contracts relating to the formation or dissolution of a company etc;

•

any contract relating to the creation or transfer of securities or of any right or interest in securities;

• contracts relating to the creation, transfer or termination of an interest in land (UCTA 1977, s 1(2), Sch 1). • contracts in respect of international sale of goods (UCTA 1977, s 26). •

•

UCTA 1977 may also have limited application where the parties are sophisticated commercial parties of equal bargaining position (see JP Morgan Chase Bank v Springwell Navigation Corpn [2008] EWHC 1186 (Comm), [2008] All ER (D) 167 (Jun) paras 603–605 and Case analysis below);

Draft explicitly and precisely. Exemption clauses are not the place to engage in ‘constructive ambiguity’. It is very important that the language is clear and unambiguous. Liability clauses deal with technical legal subjects and some legal language (eg references to negligence and breach of statutory

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duty) may be inevitable. If it is the intention to exempt liability for what were once called ‘fundamental’ breaches of contract, this should be stated as explicitly and clearly as possible. •

Mention liability for negligence. If a party wishes to exclude or limit liability for negligence, include in the exemption clause words such as: ‘The liability of [Party A] under or in connection with this Agreement, whether in contract, tort, negligence, breach of statutory duty or otherwise, shall be limited to…’

•

Mention liability for deliberate (repudiatory) breach. If a party wishes to exclude or limit liability for repudiatory breach, include in the exemption words such as: ‘The liability of [Party A] under or in connection with this Agreement, whether in contract, tort, negligence, breach of statutory duty or otherwise (including repudiatory breach), shall be limited to…’

•

Correlate level of liability and insurance. If the party limits liability to a set sum (such as the price paid), this sum should bear a relationship to the amount of insurance and resources available to that party. It may be assumed that a supplier will normally carry insurance to meet liability in negligence for damage to physical property, at least up to a specified amount. In St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481, CA, the level of liability was capped at £100,000 by ICL, but their insurance policy was £50m. There is explicit provision for this in UCTA 1977, s 11(4). Whether insurance is available will not by itself be a determining factor as to the reasonableness of the exclusion clause, and the guidelines found in UCTA  1977, Sch  2. See, for example, Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 1 All ER (Comm) 981, [1999] 2 Lloyd’s Rep 273, CA, and Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317, [2001] 1 All ER (Comm) 696.

•

If a party is providing different things and/or services, consider separate exclusion and/or limitation for each thing or service that party is providing. If the agreement is to cover the provision of different things and/or services, consider whether one limitation/exclusion of liability clause is suitable for all the things/services being provided. An exclusion/limitation of liability clause may have been drafted to cover the provision of one type of service, but the agreement may cover other services, for which the clause is not appropriate or suitable. See Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 1 All ER (Comm) 981, [1999] 2 Lloyd’s Rep 273, CA, where it was held that a limitation of liability clause that limited liability for the delivery of items was reasonable for a courier to include, but that those same limitations of liability terms were not appropriate, and therefore unreasonable, where the courier was also to effect insurance.

•

Are any of the stated time limits within which a party is to act or notify in regard to a breach by another party too short? See Granville Oil and Chemicals Ltd v Davis Turner and Co Ltd [2003] EWCA Civ 570, [2003] 1 All ER (Comm) 819. 319

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•

Consider limitations of liability rather than complete exclusions. The reported cases suggest that limitations of liability are interpreted less strictly than total exclusions of liability. Moreover, it will generally be easier to satisfy the test of ‘reasonableness’ under UCTA 1977 (eg ss 2(3) and 3) if liability is limited to a reasonable amount rather than excluded entirely. What is a reasonable amount will be subject to consideration on a case-by-case basis by the courts, and (in the context of UCTA 1977) will take into account ss 11, 24 (in Scotland) and Sch 2.

•

Separate treatment of direct and consequential losses. It is fairly common in contracts to deal separately with so-called ‘direct’ losses and ‘indirect’ or ‘consequential’ losses, and to seek to exclude all liability for the latter types of loss. Whether such an exclusion would normally be regarded as ‘reasonable’ under the Unfair Contract Terms Act 1977 is not clear. It is also not entirely clear from reported cases where the boundary lies between these different categories of loss. It is usual to include wording to clarify what is meant by indirect and consequential losses. Best practice might suggest that in order to ensure that a total exclusion of liability for consequential or indirect loss is not considered unreasonable, a sum should be set for which liability for direct losses will be met.

•

Be very detailed about the loss that is to be excluded or limited.

•

Offer something positive and exclude implied terms. A clause is more likely to be reasonable if it offers some redress or remedy where there is a failure to perform the contract or an obligation under the contract, rather than one that merely excludes all liability. A clause that offers a reasonable but limited ‘warranty’ and seeks to exclude all other liability may provide the best solution for a party seeking a legally-enforceable exemption clause. Eg in a contract to provide services, the service provider may provide redress in the form that it will re-perform that part of the services which are not in accordance with any specification or with what was agreed with the client/customer.

•

Include ‘safety valve’ wording. The most obvious example of this is that (in appropriate cases) a clause dealing with the limitation or exclusion of liability should state that the limitation or exclusion does not: •

apply to death or personal injury caused by negligence; and

• fraud. Alternatively, include in the clause a more general statement that the exemption does not apply where liability may not be excluded or limited under applicable law. Eg, consider adding wording to the exclusion clause to read: ‘Except to the extent that liability may not be so excluded under applicable laws…’

•

Make third-party indemnities clear. Indemnity clauses are sometimes drafted very broadly, and it is not always clearly stated that they apply only to third-

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party losses, and not losses suffered by the other party to the contract. It may improve the chances of such a clause being upheld if this is made clear. Generally, bear in mind that indemnity clauses may be caught by the UCTA 1977, s 4 and are interpreted by the courts in a similar way to exemption clauses. •

Where possible, do not contract on ‘standard’ terms. The best policy is for the parties to negotiate and agree specific terms and conditions. This does not often reflect the reality of modern commercial practice, whereby one party will put forward their own terms and conditions and will only trade on them and not entertain any changes (or only minor changes). A further factor is that many contracts (even for high value standard items) are now entered into via online contracting and the business trading that way may not allow any other method of entering a contract with it. The restrictions set out in UCTA 1977, s 3(1) apply ‘where one of [the contracting parties] deals… on the other’s written standard terms of business’. If the wording of the exemption clause was specifically negotiated, s  3(1) will not apply (Fillite (Runcorn) Ltd v APV  Pasilac Ltd The Buyer, July 1995). However, there does not seem to be clear authority on this point, and the UCTA 1977 appears to make no such requirement). The meaning of ‘written standard terms of business’ is not defined or explained in the UCTA 1977. The advantage (or disadvantage) of having an agreement come within the meaning of a ‘written standard terms of business’ is that, among other things, provisions that attempt to exclude or limit liability are subject to a requirement of reasonableness. The cases below indicate the different ways the courts have sought to address the issue, not all of which are consistent or are necessarily based on earlier decisions. For example, even though some terms may have been negotiated and agreed in an agreement, a contract may still be regarded as on written standard terms (St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481, CA, both at first instance and at appeal). See the definition provided in McCrone v Boots Farm Sales Ltd 1981 SLT 103 (Case analysis below). It appears that it will be a matter of fact and degree as to whether the terms agreed were standard terms of the party putting them forward (Salvage Association v CAP  Financial Services Ltd [1995]  FSR  654 at 674), although it may be that if the exclusion or limitation of liability clause is not amended, then the agreement may be considered to be standard. In Watford Electronics Ltd v Sanderson CFL  Ltd [2001]  EWCA  Civ 317, [2001] 1  All ER (Comm) 696, [2001]  IP & T  588 (although a case not directly about the use of standard terms), the fact that standard terms were used was not a deciding fact in whether the exclusion and limitation of liability clauses were held to be unreasonable, and this case marks a step back from the approach found in St Albans City and District Council v International Computers Ltd above, and in particular South West Water Services 321

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Ltd v International Computers Ltd [1999]  BLR  420 (see also Case analysis below). In the Watford Electronics case the court, in effect, appeared to be stating that where parties are of equal strength or bargaining position, they should be allowed to decide the terms for themselves. In the South West Water case, although the concluded contract contained terms from each party’s standard contracts, and the fact that there had been extensive negotiations on terms and some changes to the limitations clauses (from an ICL contract and including South West Water, it appears, putting its own terms forward for exclusion and limitation of liability clauses), did not save ICL from the finding that they had used standard terms. Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 1 All ER (Comm) 981, [1999] 2 Lloyd’s Rep 273, CA laid down some guidelines as to whether terms provided by one party are standard terms: •

the degree to which the ‘standard terms’ are considered by the other party as part of the process of agreeing the terms of the contract;

• the degree to which the ‘standard terms’ are imposed on the other party by the party putting them forward; •

the relative bargaining power of the parties;

• the degree to which the party putting forward the ‘standard terms’ is prepared to entertain negotiations with regard to the terms of the contract generally and the ‘standard terms’ in particular; •

the extent and nature of any agreed alterations to the ‘standard terms’ made as a result of the negotiations between the parties; and

•

the extent and duration of the negotiations.

A  simpler (or more stringent) test is that for a contract to be made on standard terms a party needs to use those terms in almost all cases and without alteration (other than filling details of the particular contract) (Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC), [2010] All ER (D) 157 (May). The only relevant factor from the list above was the penultimate one, ie whether there was any significant difference between the terms offered by a party and the terms of the contract actually made. In the Yuanda case, there were two factual reasons why one party had not dealt on the other party’s written standard terms of business. The first was that material alterations were made to the standard terms, and the second was that other contractors entering into contracts also did not enter the contract on standard terms. In all cases, material changes were made to the standard terms and conditions. For terms to be ‘standard terms’ those terms must be used consistently over a period for nearly all of the contracts a party enters into. However, where the courts appear to differ is on the amount of change that needs to be made to turn standard terms into non-standard terms: • only minimal changes may be made (ie  such as just entering the names of the parties, the price) (such as in the Yuanda case); or 322

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•

more extensive changes can be made, such as the parties starting with standard terms and negotiating these terms with only some provisions remaining as originally proposed. In some cases, the terms that are not changed would be sufficient to come within the meaning of standard terms (Pegler v Wang [2000]  BLR  218, Commercial Management v Mitchell and Regorco [2016] EWHC 76 (TCC)).

For terms to be standard terms: (a) it is not enough that a party only prefers to use them; (b) the terms must be used as a matter of routine and are ‘intended to be adopted or imposed without consideration or negotiation specific to the individual case in which they were used’ (Hadley Design Associates v City of Westminster [2003] EWHC 1617 (TCC)); (c) there must be proof that the ‘terms are invariably or at least usually used by [a] party. It must be shown that either by practice or by express statement a contracting party has adopted [the contract terms] as his standard terms of business’ (British Fermentation Products Ltd v Compair Reavell Ltd [1998] TCC 577); (d) it is not enough that there is use of industry standard model terms (particularly if they have been subject to extensive negotiation and revision, and the parties have been represented by lawyers). In such a case ‘it will require cogent evidence to raise even an arguable case that the resulting contract is made on the written standard terms of one of those parties. I recognise that it might, in theory, be possible to demonstrate that one party to such negotiations has used the industry standard form as the basis for a set of terms it treats as its own, and that it will not in reality countenance substantive changes, but that would be an uncommercial and highly unlikely approach’ (African ExportImport Bank v Shebah Exploration & Production [2016]  EWHC  311 (Comm)). •

Tightly define contractual obligations to state clearly the terms on which the services or goods are being provided (separately from any wording excluding or limiting liability). State clearly (and in detail) in a contract how a supplier will provide goods and services as well as the limitations as to what it is doing. Such wording should be clearly separate and distinct from limitations and exclusions of liability wording. The aim is that the supplier, by adding such wording, is preventing any obligations arising to the client/customer in the first place, and therefore the supplier will not need to have exclusion or limitation wording to cover it (see JP Morgan Chase Bank v Springwell Navigation Corpn [2008]  EWHC  1186 (Comm), 2008] All ER (D) 167 (Jun) at para 602, following IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm), [2006] All ER (D) 268 (Nov). For example, •

if providing a service, state that the service is subject to the co-operation of the client/customer, or subject to any third party information being 323

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accurate, or subject to a physical thing or place being in a particular state or condition (ie making an assumption as to what that condition is at the start of the contract); • if providing goods, state that the implied condition of satisfactory quality is subject to the purchaser using the goods in accordance with a manual/guide, only using the goods for specific purposes (eg for domestic purposes) and stating whether there are any ‘inherent’ faults (eg  if there any manufacturing tolerances or statements that indicate minor blemishes or variations are likely); • •

if delivering goods, not committing to a firm delivery date, but stating that it will attempt to deliver by a stated date (but cannot promise).

Be aware that the exemption clause may be held to be invalid despite the most careful drafting. The most a contract drafter can do is make an educated guess as to the limits in amount and types of liability the court will find acceptable and try to draft clear language to reflect these limits.

‘Reasonableness’ As to how the degree of reasonableness affects the effectiveness of a particular limitation/exclusion of liability clause, the contract drafter, besides dealing with the specific points raised above (which reflect ‘best practice’ as drawn from specific cases), should consider the following points before including and/or drafting such a clause. This mixture of points would appear to be the broad range of factors which a court is likely to consider (see Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 1 All ER (Comm) 981, [1999] 2 Lloyd’s Rep 273 at 276, 277): •

the way in which the relevant conditions came into being and are used is generally relevant;

• the five guidelines as to reasonableness set out in UCTA  1977, Sch  2 (although UCTA 1977 indicates that these guidelines only apply to ss 6(3), 7(3) and 7(4), but also apply to s 3 of that Act (Stewart Gill Ltd v Horatio Myer and Co Ltd [1992] QB 600 at 608)); • the strength of the bargaining positions of the parties relative to each other, taking into account (amongst other things) alternative means by which the customer’s requirements could have been met; •

whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with another person, but without having to accept a similar term;

• whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to 324

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any custom of the trade and any previous course of dealing between the parties); •

where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;

• whether the goods were manufactured, processed or adapted to the special order of the customer. In addition to the above, it is necessary also to consider the following points: • the question of reasonableness must be assessed having regard to the relevant clause viewed as a whole: it is not right to take any particular part of the clause in isolation, although it must also be viewed as against a breach of contract which is the subject of the case; •

the reality of the consent of the customer/client to the supplier’s clause will be a significant consideration;

•

in cases of limitation rather than exclusion of liability, the size of the limit compared with other limits in widely-used standard terms may also be relevant;

• while the availability of insurance to the supplier is relevant, it is by no means a decisive factor; and • the presence of a term allowing for an option to contract without the limitation clause but with a price increase in lieu is important. The contract drafter who is drawing up an agreement or using an existing precedent for a party who will wish to rely on contract terms limiting or excluding liability will need, it is suggested, to carry out a careful analysis of the above points to ensure that contract terms will be effective (as far as one is able to do so), especially as it will be the party relying on the contract terms excluding or limiting liability who will have to show that they satisfied the requirement of reasonableness (UCTA 1977, s 3).

Location in the agreement Clauses regarding the limitation and exclusion of liability are normally grouped with clauses that deal with warranties and indemnities in the Secondary Commercial Provisions section of an Agreement.

Linkage and use See discussion above.

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Sample precedent material Precedent 1—Short form – limitation of liability To the extent permitted by law, and in circumstances where [Party A] has not effectively excluded liability to [Party B] under or in connection with this Agreement, the maximum limit of [Party A]’s liability to [Party B], whether in contract, tort, negligence, breach of statutory duty or otherwise shall be £[ ] in aggregate. Precedent 2—Short form-exclusion of liability Notwithstanding any other provision of this Agreement, no Party shall be liable to any other Party to this Agreement in contract, tort, negligence, breach of statutory duty or otherwise for any loss, damage, costs or expenses of any nature whatsoever incurred or suffered by that other Party or its Affiliates of an indirect or consequential nature including without limitation any economic loss or other loss of turnover, profits, business or goodwill. Precedent 3—Limitation of liability and exclusion of indirect and consequential losses 1 Except in the case of death or personal injury caused by [Party]’s negligence, [Party]’s liability under or in connection with this Agreement, whether arising in contract, tort, negligence, breach of statutory duty or otherwise, shall not exceed the sum of £1,000,000 (one million pounds sterling). 2 Neither party shall be liable to the other party in contract, tort, negligence, breach of statutory duty or otherwise for any loss, damage, costs or expenses of any nature whatsoever incurred or suffered by that other party: (a) of an indirect or consequential nature; nor (b) for any economic loss or other loss of turnover, profits, business or goodwill. 3 Nothing in this agreement excludes liability for a Party’s fraud. Precedent 4—Limitation of liability for defects after delivery We will make good, by repair or the supply of a replacement, defects which, under proper use, appear in the goods within a period of 12 calendar months after the goods have been delivered and arise solely from faulty design (other than a design made, furnished or specified by you for which we have disclaimed responsibility in writing), materials or workmanship: provided always that defective parts have been returned to us if we shall have so required. We shall refund the cost of carriage on such returned parts and the repaired or new parts will be delivered by us free of charge as provided in Clause [no] (Delivery). Our liability under this clause shall be in lieu of any warranty or condition implied by law as to the quality or fitness for any particular purpose of the goods, and save as provided in this clause we shall not be under 326

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any liability, whether in contract, tort or otherwise, in respect of defects in goods delivered or for any injury (other than personal injury caused by our negligence as defined in the Unfair Contract Terms Act 1977, s  1), damage or loss resulting from such defects or from any work done in connection therewith.

Case analysis McCrone v Boots Farm Sales Ltd 1981 SLT 103 A definition of a standard contract was provided in this case: ‘A “standard form contract” cannot be confined to written contracts in which both parties use standard forms. It is wide enough to include any contract, whether wholly written or partly oral, which includes a set of fixed terms or conditions which the proponer applies, without material variation, to contracts of the kind in question’.

This definition was adopted in Salvage Association v CAP  Financial Services Ltd [1995] FSR 654. Salvage Association v CAP Financial Services Ltd [1995] FSR 654 at 674 Consideration of standard terms. It would appear that in this case the fact that one party had taken legal and other advice on the proposed terms, and that changes were agreed, meant that the terms were not imposed on that party who received the original standard terms from the other party. In addition, the party putting forward the standard terms was prepared to enter into meaningful negotiations on them, and these negotiations took place over some length of time. Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 All ER 101 The judgment concerned the interpretation of exclusion and limitation of liability clauses in a contract for the provision of security services, with the limitation of liability clause stating: ‘[2f] If, pursuant to the provisions set out herein, any liability on the part of the Company shall arise (whether under the express or implied terms of this Contract, or at Common Law, or in any other way) to the customer for any loss or damage of whatever nature arising out of or connected with the provision of, or purported provision of, or failure in provision of, the services covered by this Contract, such liability shall be limited to the payment by the Company by way of damages of a sum…’

The House of Lords indicated that: 1 a limitation of liability clause, if it is to exclude liability for negligence, must be clearly and unambiguously expressed; 2 a limitation of liability clause was not to be interpreted as rigidly and strictly as an exclusion clause; 3

the clause reproduced above was adequate to cover a total as well as a partial failure to perform services; 327

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4 the validity of the clause was not affected, because it was to some extent inconsistent with another clause (dealing with exclusion of liability for certain events); It is worth reproducing the words of Lord Wilberforce where he succinctly set out the position: ‘Whether a condition limiting liability is effective or not is a question of construction of that condition in the context of the contract as a whole. If it is to exclude liability for negligence, it must be most clearly and unambiguously expressed, and, in such a contract as this, must be construed contra proferentem. I do not think that there is any doubt so far. But I venture to add one further qualification, or at least clarification: one must not strive to create ambiguities by strained construction, as I think the appellants have striven to do. The relevant words must be given, if possible, their natural, plain meaning. Clauses of limitation are not regarded by the courts with the same hostility as clauses of exclusion; this is because they must be related to other contractual terms, in particular to the risks to which the defending party may be exposed, the remuneration which he receives and possibly also the opportunity of the other party to insure. It is clear, on the findings of the Lord Ordinary (Wylie), that the respondents were negligent as well as in material breach of their contractual obligations. The negligence consisted in a total or partial failure to provide the service contracted for […]. It is arguable, in my opinion, that the failure was not total, in that some security against some risks was provided, though not that which was necessary to prevent the actual damage which occurred. But I  do not think that it makes a difference as regards the applicability of the clause of limitation whether this is right or not, and since their Lordships in the Inner House were of opinion that the failure was total, I will proceed on the assumption that this was so. […] This clause is on the face of it clear. It refers to failure in provision of the services covered by the contract. There is no warrant as a matter of construction for reading ‘failure’ as meaning ‘partial failure’, ie  as excluding ‘total failure’ and there is no warrant in authority for so reading the word as a matter of law… The appellants tried to find an ambiguity in this clause in three ways. (1) First they relied on the finding of the Lord Ordinary, with which the Inner House generally agreed, that there was such an inconsistency between the provisions of [the] condition […], excluding liability, and those of [clause] 2(f) as to create uncertainty as to the meaning of the former [clause excluding liability]. It was this inconsistency which led the courts below to conclude against the validity of the exclusion clause. So it was argued the same inconsistency and the doubts engendered by it must invalidate [clause] 2(f). But this is transparently fallacious. Because cl A casts doubt on the meaning of cl B, it does not follow at all that the converse is true and that cl B  casts doubt on the meaning of cl A. Clause B must be looked at on its own, and may turn out to be perfectly clear… (2) It was contended that the initial words “If, pursuant to the provisions set out herein” are ambiguous and that their ambiguity invalidates the whole subclause. But I accept on this the conclusion of Lord Dunpark that the words are “open to construction” […] The possibility of construction of a clause does not amount to ambiguity: that disappears after the court has pronounced the meaning.’ 328

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South West Water Services Ltd v International Computers Ltd [1999] BLR 420 In the South West Water case, the fact that the concluded contract contained terms from each party’s standard contracts, and that there had been extensive negotiations on terms and some changes to the limitations clauses (from an ICL contract), did not save ICL from the finding that they had used standard terms (including South West Water, it appears, putting its own terms forward for exclusion and limitation of liability clauses). This case is worth a little further consideration because of the amount of negotiation over the terms, with both sides putting forward their own terms, as the headnote to the case report makes clear: ‘The contract contained a variety of conditions, drawn from different sources: the basic form was taken from the draft contract included in South West Water’s invitation to tender. Attached to this were terms and conditions taken from ICL’s standard forms, but heavily amended in line with South West Water’s form of contract. The limitation of liability initially put forward by ICL was rejected by South West Water in the negotiating session, and ICL proposed another drawn from an internal precedent. This was accepted by South West Water’s in-house lawyer…’

The detailed history of the negotiations and events that led to the litigation is set out over 30 pages in the law report. However, it seems clear that if this amount of negotiation does not lead to the conclusion that the contract was not concluded on standard terms, it is difficult to see what will. Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317, [2001] 1 All ER (Comm) 696, [2001] IP & T 588 On the question of reasonableness, the starting point was with UCTA 1977, s 11: ‘[31] In order to decide whether the relevant contract term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made it is necessary, as it seems to me, to determine, first the scope and effect of that term as a matter of construction. It is necessary to identify the nature of the liability which the term is seeking in order to exclude or restrict. Whether or not a contract term satisfies the “requirement of reasonableness” within the meaning of Section 11 of the Unfair Contract Terms Act 1977 does not fall to be determined in isolation. It falls to be determined where a person is seeking to rely upon the term in order to exclude or restrict his liability in some context to which the earlier provisions of the 1977 Act (or the provisions of s 3 of the Misrepresentation Act 1967) apply.’

The Court of Appeal overturned the decision of the judge in the Technology and Construction Court, where the judge was held to have misconstrued a limitation clause as simply being an exclusion clause, where in fact it was a clause which for some liability excluded liability and for other liability, limited it, and failed to take into account an ‘entire agreement’ clause as an acknowledgment that the parties had not relied on any pre-contractual representations. Therefore, for any term, the court had to determine the scope and effect of the term in question as a matter of construction, and identify the nature 329

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of liability which the term was seeking to exclude or restrict. The Court of Appeal found other contextual elements using guidelines in the Unfair Contract Terms Act 1977, Sch 2. Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd [2004] EWHC 1502 (Comm), [2005] 2 All ER (Comm) 783 This case concerned the storing of a large quantity of the defendant’s mobile telephones at the claimant’s warehouse. The relationship was one of bailment. The bailment was governed by the standard terms of British International Freight Association. One provision (Clause 27(A)) stated: ‘27(A) Subject to clause 2(B) and 11(B) above and sub-clause (D) below the Company’s liability howsoever arising and notwithstanding that the cause of the loss or damage be unexplained shall not exceed … [the various limits set out in sub-clauses (A) to (C)] (D) By special arrangement agreed in writing, the Company may accept liability in excess of the limits set out in Sub-Clauses (A) to (C) above upon the Customer agreeing to pay the Company’s additional charges for accepting such increased liability. Details of the Company’s additional charges will be provided upon request.’

A large quantity of the defendant’s mobile telephones were stolen from the warehouse. Because of the way the theft was organised it was believed that an employee of the claimant in some way assisted in the theft. The judge found that the claimant was vicariously liable for the wilful default of the employee. The case turned on whether Clause 27(A) was capable of limiting the liability of the claimant for the wrongdoing of its employee. It was held, as a matter of construction, that the words ‘howsoever arising’ in the clause above were capable of limiting liability not only for negligence but also deliberate wrongdoing of an employee, but would not extend as far as covering the fraud of a party: ‘[138] It is true [that the words of the clause] are to be construed contra proferentem. It is further true that the wording is general; it does not in express terms refer to negligence or wilful default or employee dishonesty or deliberate wrongdoing. None the less, on any natural reading, the wording of cl 27(A) is wide indeed. As already remarked, there was no or no serious dispute that cl 27(A) entitled [the Claimant] to limit its liability in respect of the case of negligence advanced against it. To my mind, the clause does not stop there. As a matter of language, considered in isolation, I am amply satisfied that the wording was capable of extending to cover deliberate wrongdoing. If that be right, there is no good reason why, as a matter of language, the answer should be any different when the deliberate wrongdoing is comprised of or includes employee dishonesty; the words ‘howsoever arising’ are certainly broad enough to encompass dishonesty on the part of employees for whom FM is or may be vicariously liable. [139] What of the wording in context? Here, as it seems to me, the arguments are essentially one way. (i) The risk of employee wilful default is a real, foreseeable, commonplace risk. (ii) Clause 27(A) is a limitation clause. (iii) Both the nature of the clause and the commercial background against which it is intended to operate, suggest that the parties intended cl 27(A) to provide an uncomplicated safety net for [the claimant]; if, however, cl 27(A) 330

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Exemption clauses does not extend to the commonplace risk in question, then there would be a significant hole in that safety net. These considerations lend powerful support to the proposition that the parties intended the wording to mean what it said; “howsoever arising” meant just that—cl 27(A) scooped up [the claimant]’s liability, “howsoever arising”, including employee wilful default. (iv) Nothing in the authorities to which I  have referred tells against such an approach. To the contrary, this approach to cl 27(A) is consistent with both the Securicor and the Ailsa Craig cases; commercial contracts are not to be artificially construed and liability even for deliberate wrongdoing can be excluded, a fortiori limited, provided appropriate wording is used. While a suggested limitation of liability for employee wilful default does require close scrutiny, the [HIH  Casualty and General Insurance Ltd v Chase Manhattan Bank [2003]  UKHL  6, [2003] 1  All ER (Comm) 349)] case underlines that, so far as concerns deliberate wrongdoing in the course of performance of an admittedly valid contract, the matter is one of construction. (v) I add this; in practical terms, one or other party was to or would be well advised to insure against the risk of employee wilful default; the party directly at risk was [the defendant]; all other things being equal, it was likely to be better placed than [the claimant] to do so. The above construction of cl 27(A) would mean that the parties had addressed this risk and left it to [the defendant] to obtain insurance (for losses above the limit)…’

JP Morgan Chase Bank v Springwell Navigation Corpn [2008] EWHC 1186 (Comm) This case, in essence, concerned whether the claimants were responsible for (or indeed had provided any) investment advice to the defendants, and whether the claimants would be liable for the defendant’s losses arising from high-risk investments. The part of the judgment that is most relevant to this section concerns whether a supplier can avoid liability arising at all (ie by being under no obligation to the customer/client): ‘599. As is apparent from the documents themselves, they comprise various types of clause. There is a small number of genuine exclusions clauses…. The bulk of the terms, however, were not exclusion clauses but merely clauses which defined the nature of the services which [the claimant] was rendering to [the defendant] and which confirmed the basis on which the parties were transacting business. 600. By section 2(2) of UCTA, a person cannot exclude or restrict his liability for negligence (as a business liability) except insofar as the term or notice satisfies the requirement of reasonableness. By section 13, this includes clauses which make the liability or its enforcement subject to restrictive or onerous conditions, or exclude or restrict any right or remedy in respect of the liability. Section 3 of the Misrepresentation Act extends the ambit of the legislation to clauses which purport to exclude liability for misrepresentation. 601. I accept [the claimant’s] submission that most of the provisions within the contractual documentation do not fall within the scope of this legislation. There is a clear distinction between clauses which exclude liability and clauses which define the terms upon which the parties are conducting their business; in other words, clauses which prevent an obligation from arising in the first place. In Tudor Grange Holdings v Citibank, Sir Richard Scott, V-C stated that: “The Act of 1977 is normally regarded as being aimed at exemption clauses in the strict sense, that is to say, clauses in a contract which aim to cut down prospective liability arising in the course of the performance of the contract in which the exemption clause is contained.” 331

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Exemption clauses 602. Thus terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of UCTA. Otherwise, every contract which contains contractual terms defining the extent of each party’s obligations would have to satisfy the requirement of reasonableness. A  good example of this approach is to be seen in IFE v Goldman Sachs where the claimants sought to characterise all of the relevant terms, upon which reliance was placed, as exclusion clauses and thus open to challenge under the legislation. However, Toulson J concluded that they should not be characterised as a notice excluding or restricting a liability for negligence, “but more fundamentally as going to the issue whether there was a relationship between the parties (amounting to or equivalent to that of professional advisor and advisee) such as to make it just and reasonable to impose the alleged duty of care”. The Court of Appeal, as already indicated, took exactly the same approach, in characterising the clauses as determining the basis of the relationship between the parties.’

Air Transworld Ltd v Bombardier In [2012] EWHC 243 (Comm) 1 The claimant purchased an aircraft from the defendant. 2 The claimant sought a declaration that it had validly rejected the aircraft, and accordingly rescinded the contract between the parties, and was therefore entitled to the return of the purchase price. 3 The claimant argued that the aircraft did not correspond with the description and was unfit for purpose (within the meanings of Sale of Goods Act 1979, ss 13, 14). 4 The defendant argued that the provisions of the contract excluded liability under the 1979 Act and the contract provided warranties instead. The defendant argued that the aircraft did not breach those warranties. 5 The defendant also argued that the problems the claimant had with the aircraft were the type of issues normally encountered with a new piece of complex equipment, and therefore did not breach any term implied by statute. 6 The exemption clauses read: ‘ARTICLE 4. GENERAL PROVISIONS 4.1  THE WARRANTY, OBLIGATIONS AND LIABILITIES OF SELLER AND THE RIGHTS AND REMEDIES OF BUYER SET FORTH IN THE AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF AND BUYER HEREBY WAIVES AND RELEASES ALL OTHER WARRANTIES, OBLIGATIONS, REPRESENTATIONS OR LIABILITIES, EXPRESS OR IMPLIED, ARISING BY LAW, IN CONTRACT, CIVIL LIABILITY OR IN TORT, OR OTHERWISE, INCLUDING BUT NOT LIMITED TO  A) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE, AND B) ANY OTHER OBLIGATION OR LIABILITY ON THE PART OF SELLER TO ANYONE OF ANY NATURE WHATSOEVER BY REASON OF THE DESIGN, MANUFACTURE, SALE, REPAIR, LEASE OR USE OF THE AIRCRAFT OR RELATED PRODUCTS AND SERVICES DELIVERED OR RENDERED HEREUNDER OR OTHERWISE. 4.2 SELLER SHALL NOT BE LIABLE FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL, INCIDENTAL AND/OR PUNITIVE DAMAGES OF ANY KIND OR NATURE UNDER ANY CIRCUMSTANCES OR, WITHOUT LIMITING THE FOREGOING, FOR ANY LOST PROFITS OR ANY OTHER LOSSES OR 332

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Exemption clauses DAMAGES FOR OR ARISING OUT OF ANY LACK OR LOSS OF USE OF ANY AIRCRAFT, ANY EQUIPMENT, ANY ACCESSORY OF ANY SPARE PART FOR ANY REASON. 4.3 THE PARTIES HERETO HEREBY ACKNOWLEDGE AND AGREE THAT THE LIMITED WARRANTIES AND THE LIMITATION OF LIABILITY PROVISIONS CONTAINED HEREIN AND IN THE SPECIFICATION HAVE BEEN EXPRESSLY AGREED TO IN CONSIDERATION OF THE PURCHASE PRICE AND OTHER PROVISIONS OF THIS AGREEMENT. TO THE EXTENT APPLICABLE LAWS DO NOT ALLOW THE LIMITATIONS SET OUT IN THIS ARTICLE  4, SUCH LIMITATIONS SHALL NOT BE APPLIED OR INVOKED.’

7 The wording used in the above clauses does not refer to or mention conditions at all. Although there is no mention of the word ‘condition’, the wording in the first clause quoted above (‘all other … obligations … or liabilities express or implied by law’) was held to include conditions: ‘29. No person reading this Article could be in any doubt that every promise implied by law is excluded, in favour of the contractual promises set out in the APA. It is right that there is no term which purports to exclude the buyer’s right to reject the goods and recover the price, nor to the specific sections of the Sale of Goods Act, but the words “all other… obligations… or liabilities express or implied arising by law”, which the purchaser expressly waives, necessarily include the conditions implied by the Sale of Goods Act. In my judgment these are apt and precise words which are sufficiently clear to exclude those implied conditions and the Article, by necessary inference does negative the application of those implied conditions. The parties’ language is in my judgment fairly susceptible of only one meaning […] There is no express reference to the word “condition” but the language must necessarily be taken to refer to the implied conditions of the Sale of Goods Act, because they are obligations and liabilities “implied, arising by law”. Moreover, the illustration of the application of this general provision in Article  4.1(B) covers any other obligation or liability devolving on the seller, “of any nature whatsoever”, resulting from the design, manufacture and sale of the aircraft. No buyer could be in any doubt as to the extent of the rights he was getting and the limitation on the seller’s obligations. What the buyer was to get was the Warranty found in the APA and its Appendix in place of the terms implied by the Sale of Goods Act, whether conditions or warranties. 30. Article  4.2 exempts the defendant seller from liability for consequential losses and Article 4.3 reinforces Article 4.1 by saying that the limited warranties and liabilities provided in the APA and Appendix A were expressly agreed in the light of the agreed purchase price and the other provisions of the APA, which must be intended primarily to refer to the Warranty in Article 15 of the Appendix. The point is thus reinforced that the Warranty is given in substitution for all other rights which might be implied by the Sale of Goods Act. 31. In my judgment therefore […], this is […] a case where the words used do encompass contractual conditions implied by law and to adopt a different construction would amount to a distortion of the words used. There is no ambiguity in the clause. There is only one meaning which can fairly be given to it. It is what the parties agreed and the parties […] subject to any application of UCTA, should be kept to their bargain.’

333

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Expiry and termination at will

Purpose of the clause Some agreements are stated: •

to be for a fixed period. In such cases the parties will often intend that the agreement will terminate automatically by expiry at the end of that period. But it is better to state this rather than assume that this is implicit from the fixed term;

•

to allow a party to terminate the agreement on notice to the other party (ie without specifying a cause, such as for breach or insolvency).

If the agreement is silent as to its length, a party or the parties may (in some situations) be able to terminate it by giving reasonable notice (see eg MartinBaker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556, [1955] 2  All ER  722; Re Spenborough UDC’s Agreement [1968] Ch  139, [1968] 1  All ER 959). Accordingly it is always best to specify the length of the contract, to avoid such uncertainties, or the circumstances when an agreement can terminate (eg if the agreement is not for a fixed period then it will terminate when a party or the parties have completed their obligations).

Drafting issues •

Does the agreement state that it is for a fixed period? If not expressly stated, is the length of time that the agreement is to run clear from other provisions in the agreement? Eg is it clearly stated: •

that a party needs to complete performance of work or tasks etc by a certain date?

•

that a party needs to provide its approval or confirm that the work etc is completed?

Depending on the agreement, even such provisions may not be sufficiently clear as to when an agreement is to terminate. Eg, a software development agreement might provide that the software has to be written by a certain date or is taken as having been completed by passing an approval stage (or deemed to pass that stage). Other provisions (such as support) may 334

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continue, but are defined as not having a specific end date (eg, they will only terminate when the party paying for support stops paying). •

What happens at the end of the fixed period? Possible alternatives include: • all of the provisions of the agreement terminate by expiry (see Precedent 1); •

some of the provisions of the agreement terminate;

• the agreement terminates, but some provisions continue after termination (see Consequences of Termination). •

Is termination by expiry made subject to other forms of termination? If the agreement may terminate earlier than at the end of the fixed period, should the clause indicating the fixed period be made subject to earlier termination as provided elsewhere in the agreement? For example, if a public relations consultant is hired to provide public relations services for a fixed period of one year with payment of the consultant’s fee made in monthly instalments, should it be possible for the public relations consultant to terminate earlier than the fixed period if the client does not pay one or more instalments or becomes insolvent? If the consultant is allowed to do so then the clause indicating the fixed term should be made subject to the other clauses.

Location in the agreement Such a provision will normally be located: •

with other Termination provisions; or

•

with a provision that states when the agreement commences.

Linkage and use As indicated above, where an Expiry and termination at will provision is included it must be integrated and be consistent with other Termination provisions.

Sample precedent material Precedent 1—Termination by expiry Subject to any earlier termination under Clause [no] [and Clause [no]] below, this Agreement shall continue in force until the [ ] anniversary of the Commencement Date when it shall terminate automatically by expiry. 335

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Precedent 2—Termination by expiry – alternative This Agreement terminates automatically on the Termination Date[, unless a Party terminates this Agreement in accordance with Clause [no] below. Definition of Termination Date: ‘Termination Date’ shall mean [date].

336

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Force majeure

Purpose of the clause Background (common law doctrine of frustration, force majeure and circumstances beyond a party’s control) Where a contract: •

becomes impossible to perform; or

• because of some external event or situation, is capable of performance only in a manner substantially different from the original intentions of the parties, then, in the absence of express provision by the parties, further performance is likely to be subject to the common law doctrine of frustration. That is, in such situations, a contract will terminate and the parties no longer need to perform their obligations (and this will occur whether the parties wish this to occur or not). The types of situations where the doctrine of frustration has applied to a contract include: • where the contract is impossible to perform because of government interference; or •

where the contract becomes illegal to perform; or

•

where it is not possible to obtain any required permission or consent from a governmental or regulatory authority;

•

where there is an accidental destruction of the goods or other things that are the subject matter of the contract; or

•

where a person is physically unable to perform the contract (if the contract is one of personal service).

In many Continental jurisdictions, a party will be automatically excused performance of the contract if a force majeure situation such as those set out above exists or occurs, but without there being a termination of the contract (although the contract is often suspended). However, there is no equivalent concept under English law. Accordingly, there is need for a ‘force majeure’ clause in contracts under English law: 337

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• to define, more or less precisely, the circumstances in which a party to a contract is excused from performing its contractual obligations, that is where performance is hindered or made impossible by circumstances beyond that party’s control; and also •

to indicate whether the contract is terminated, continues or is suspended.

Consequences of relying on the common law doctrine of ‘frustration’ If a force majeure clause is not included in an English law contract, then the common law doctrine of ‘frustration’ of the contract may apply. Reliance on this doctrine may be in neither party’s interests, for a number of reasons: • the doctrine of frustration only operates where the frustrating circumstances are not due to the fault of either party (see Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699 at 725, [1968] 3  All ER  513, CA at 523, 533). However, it does not follow that in all contracts any act of negligence will deprive a party of the defence of frustration (see Joseph Constantine Steamship Line Ltd v Imperial Smelting Corpn Ltd [1942] AC 154 at 166, 167, 179,195, 205, [1941] 2 All ER 165 at 173, 182, 193, 199, 200, HL); •

if the contract is frustrated: • a party may be entitled to compensation for work done prior to termination (unless the expenditure does not result in any benefit to the other party); and •

a party may be able to retain any payments previously made under the contract, but this will not always be commercially appropriate; and

•

a party may no longer need to pay sums which the contract provides it needs to make;

(the position is governed by the Law Reform (Frustrated Contracts) Act 1943); •

termination of the contract may not be in either party’s interests. They may prefer merely to suspend the contract for the duration of the frustrating event;

• because: •

there is no definite list of frustrating events, and

•

the doctrine has developed on a case-by-case basis, and

• the doctrine is interpreted in a narrow way (Dais Contractors Ltd v Fareham UDC [1956] AC 696) it is not possible for a party to know whether any event will definitely be a frustrating event, if a dispute reaches the court. To illustrate the difficulty 338

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with the doctrine of frustration, for example, in The Super Servant Two [1990] 1 Lloyd’s Rep 1, where the defendant was contracted to carry the claimant’s oil rig in one of two barges, but that barge was destroyed due to an accident, it was held the accident was not a frustrating event as the defendant had chosen to use that barge.

Using ‘force majeure’ clauses To avoid bringing the contract to an end under the law of frustration, most contracts include a ‘force majeure’ clause, under which the parties expressly agree: •

to exempt one of them or each other from performance of the contract or liability for breach of contract where the failure to perform is due to factors beyond that party’s control; but

•

that the contract continues in force during this period; and

• that the contract is ‘re-activated’ if the ‘force majeure’ situation comes to an end (unless the contract also provides for termination, see eg Precedent 9). Such clauses are effective provided that they are not uncertain in their terms. Eg a provision that ‘the usual ‘force majeure’ clauses shall apply’ was void for uncertainty (British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 All ER 94, [1953] 1 WLR 280).

Contents of a ‘force majeure’ clause Typically, the clause will define what amounts to ‘force majeure’ (either in general terms or with an exhaustive list of events) and provide that if ‘force majeure’ prevents a party from performing its obligations under the contract: •

it is not to be liable or responsible for such performance; or

•

the time or method of performance is to be varied or delayed; or

• the time or method or performance can be varied or delayed and then subsequently terminated; or •

the contract is to be discharged with specified consequences.

The contract should define or state what are ‘force majeure’ events. If the ‘force majeure’ events are defined as events beyond the reasonable control of a party, the parties should consider expanding the definition to include disputes with employees and the acts or omissions of sub-contractors, as these may not qualify as being beyond a party’s control (British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 All ER 94, [1953] 1 WLR 280). 339

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‘Force majeure’ clauses are particularly useful in contracts that provide for a long-term relationship between the parties or where the parties need to use third parties (such as suppliers, sub-contractors, agents etc). In agreements that record one single main transaction, eg  most sale agreements, such a clause may not be necessary.

Types of ‘force majeure’ clause The ‘force majeure’ clauses found in commercial agreements generally either: •

set out a long list of events, which are deemed to be beyond the parties’ control (these often occur in older agreements and may contain references to events such as an ‘act of God’), eg: ‘fire, flood, earthquake, windstorm or other natural disaster … civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, nationalisation, requisition …’

The danger with using a long list of events is that it is subject to the (old Latin) maxim expressio unius est exclusio alterius (the expression of one thing excludes another) (see Definitions and also Drafting and Negotiating Commercial Contracts (4th Edn, Bloomsbury Professional, 2016) at 6.5.16.1); •

merely refer to: ‘circumstances beyond the control of the parties’

or: ‘any event beyond the reasonable control of either party’;

•

most commonly, list a few key events and then make a general sweeping reference to events beyond the parties’ control, eg: ‘in the event of national emergency, war, or prohibitive governmental regulations or if any other cause beyond the [reasonable] control of the parties renders performance of the agreement impossible.’

It appears that wording in a force majeure clause indicating that performance of an obligation is beyond the reasonable control of a party will not cover the breach of contract by that other party. If one party is prevented from performing its obligations under an agreement because of a failure of the other party to perform its obligations (causing a breach of contract), the first party will not be able to rely on a force majeure clause (Ministry of Sound (Ireland) Ltd v World Online Ltd [2003]  EWHC  2178 (Ch), [2003] 2 All ER (Comm) 823, paras 36, 38 and 39). Such a breach of contract would not come within the meaning of a force majeure event. The judge in this case said that if the force majeure ‘… did cover a case in which one party was prevented from performing its part of the bargain by the breach of the other party, its only effect would be to excuse the innocent party from its obligation to perform, so that it would not be in breach and could not be liable in damages; however, it did not necessarily follow that it could recover payments due under the contract which depended upon performance …’. 340

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‘Beyond the control’ – labour disputes Depending on the circumstances, the likelihood of industrial action by a party’s employees affecting performance of the contract and the possible difficulty of proving that this is beyond the control of that party, may need consideration. Although in the non-state sector in the UK the level of strikes is low, this is not necessarily true if one of the parties operates outside of the UK. So that such events are covered by the ‘force majeure’ clause, events such as ‘strike or lockout’ should be listed among the force majeure events and (depending on one’s point of view) followed by such words as: ‘(other than a strike or lockout induced by the party so incapacitated)’

or: ‘(including strikes or lockouts involving a party’s own employees)’.

In many areas, what a party needs to provide under a contract is in fact done by sub-contractors; the wording may need extending to the sub-contractors that a party will use in performing its obligations with wording such as: ‘(other than a strike or lockout induced by the party or the party’s sub-contractor so incapacitated)’

or: ‘(including strikes or lockouts involving a party’s, or the party’s sub-contractor, own employees)’.

Where the party to which a force majeure event occurs is responsible for its occurrence The parties should also consider whether to include a provision that a party which is subject to a force majeure event cannot benefit from a provision excusing or delaying performance where it has instigated or initiated the force majeure process. Eg, in Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD (No 2) [2003] EWCA Civ 1031, [2003] 2 All ER (Comm) 640) a force majeure clause stated: ‘Neither party shall be responsible for damage caused by delay or failure to perform in whole or part the stipulations of the present Agreement, when such delay of (sic) failure is attributable to […] compliance with request of any governmental or EC authority […] or other causes beyond the control of the party affected[…]’

The Macedonian government issued letters to the defendant, which requested the defendant not to perform the agreement between the claimant and defendant. The defendant failed to perform the agreement, citing the force majeure clause. It was found that the defendant instigated or initiated the process of procuring the letters. The words ‘request of any governmental or EC [(now EU)] authority’ had to be made independently of the party that receives the request. In this case, the request from the Macedonian government was not beyond the control of the defendant. 341

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Effect of force majeure event On the happening of a ‘force majeure’ event, a force majeure clause usually provides that, eg: ‘… both parties will be released from their respective obligations’

or: ‘the obligations of the parties shall be suspended for so long as the force majeure event renders performance of the agreement impossible’,

with additional wording, where appropriate, requiring that all money owing under the agreement shall be paid immediately.

Temporary stoppage It may be in the interests of one or both parties to keep the contract alive where the event of stoppage is likely to be temporary, eg • in a contract for a company to manufacture goods, the manufacturer may need parts which it obtains from third parties. There may be a delay in the supply of the parts, because of strike by a third party supplier, or the parts are destroyed because the ship on which they are carried is damaged or sinks. In such a case the customer of the manufacturer may wish to have the option to terminate the contract (and have someone else make the goods) or keep the contract alive and wait for a further delivery of parts, as the time in sourcing another manufacturer, negotiating with them and the price they charge may be less attractive than simply waiting; • in agency or franchise agreements, where the principal or franchisor may wish to have the option either to terminate the contract and engage another agent or franchisee or, if this is not feasible, to wait until the obstruction ceases and hold the original party to the agreement. The period during which the contract may be so kept alive is a matter for negotiation, but it is often stated to be between six and twelve months, eg: ‘Provided that this clause shall only have effect at the discretion of [Party] except when such event renders performance impossible for a continuous period of 6 calendar months.

A clause may also contain wording that during the period the party is prevented from fulfilling its contractual obligation it should attempt to overcome the event or situation causing the force majeure event: ‘… the party unable to fulfil its obligations shall immediately give notice of this to the other party and shall do everything in its power to resume full performance … If and when the period of such incapacity exceeds [6] months then this agreement shall automatically terminate unless the parties first agree otherwise in writing.’ 342

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The meaning of ‘beyond the (reasonable) control’ A force majeure provision will often contain wording (shown in italics below) to capture any other event not considered by the parties at the time of the agreement: ‘Neither party shall be liable for any default due to any act of God, war, strike, lockout, industrial action, fire, flood, drought, tempest or other event beyond the reasonable control of either party.’

When including this wording, the following points in particular need to be considered: •

in a clause that contains a number of specific events (such as ‘fire’ etc as in the above example), and which is followed by the phrase ‘or other event beyond the reasonable control of either party’ (or equivalent) it is not only the ‘other event’ which is required to be beyond the reasonable control of a party. All the specific events listed may be interpreted as requiring to be beyond the reasonable control of the party (eg Sonat Offshore SA v Amerada Hess Development [1988] 1 Lloyd’s Rep 145; Frontier International Shipping Corp v Swissmarine Corpn Inc [2005] 1 Lloyd’s Rept 390), depending on the specific wording used in the clause (Emeraldian Ltd Partnership v Wellmix Shipping Ltd [2010] EWHC 1411 (Comm), [2011] 1 Lloyd’s Rep 301). If a party wishes to only have ‘other events’ to be beyond the reasonable control of a party but not specific events, then the specific instances should be clearly separated out from the general circumstances (which is made subject to the reasonable control of a party) (see Precedent 8);

•

where a party wishes to rely on wording such as the above, then if there is a dispute, that party will have to demonstrate that: •

its actions or the force majeure event fall within the words used in the force majeure clause;

• it has carried out actions to avoid the force majeure event and also mitigate the effects of the force majeure event (Channel Island Ferries Ltd v Sealink UK Ltd [1998] Lloyd’s Rep 323); •

if a party has: •

made the force majeure event happen;

• asked someone else to create or make the force majeure event to occur (Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2003] EWCA Civ 1031, [2003] 2 All ER (Comm) 640); •

breached the contract and that breach has resulted in a force majeure event (Great Elephant Corp v Trafigura Beheer BV  [2013]  EWCA  Civ 905),

then that party will not normally be able to rely on the wording in a force majeure clause.

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Drafting issues When drafting a ‘force majeure’ clause, a contract drafter may need to consider: •

Effect of a ‘force majeure’ event. What should be the effect of a ‘force majeure’ event? Eg: •

are the parties released from their respective obligations? or

•

can the parties suspend or vary their obligations as long as the ‘force majeure’ event renders performance impossible? or

• can the parties suspend performance and then have the ability to terminate the agreement if performance cannot be resumed after a certain period? •

Consequences of a ‘force majeure’ event. What should the consequences of a ‘force majeure’ event be? Eg: • that any money owing under the agreement should be paid over immediately? or •

that if the agreement is at an end then there is no further liability? or

• that some or all sums paid over before the parties have completed performance should be returned? or • that one party can retain a sum or be paid a sum for any expenses incurred before the ‘force majeure’ event occurred? or • •

•

that some clauses should continue in effect?

Procedure to follow when ‘force majeure’ event occurs. What should be the procedure to be followed if a ‘force majeure’ event occurs? Eg: •

that the party relying on the clause is to give notice of the fact to the other?

•

when and in within what timescale should such notice be given?

Wording to be used •

•

if there is a long list of ‘force majeure’ events then a ‘force majeure’ clause could be held as including all the events which would be subject to ‘force majeure’. Wording should be added to avoid this such as: •

‘including but not limited to’;

•

‘without prejudice to the generality of this clause’;

should only general wording be used concerning: • the events that are covered, such as ‘circumstances beyond its reasonable control’; •

the length of time a contract can be suspended ‘for a reasonable time’;

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• •

determining the length of time the ‘force majeure’ event has run, such as ‘at the [complete] discretion of [name of party]’?

Curing the force majeure event. Is the party subject to a force majeure event required to take any steps to cure or resolve it? •

by outlining specific steps in particular circumstances?

•

by using ‘reasonable’ endeavours etc?

Location in the agreement A Force majeure clause will normally either: •

contain a definition of what constitutes ‘force majeure’ events and then have a separate clause in Secondary Commercial Provisions setting out the consequences of a ‘force majeure’ event arising; or

•

be a (generally short) ‘force majeure’ clause in the Boilerplate section of an agreement.

Linkage and use A widely drafted Force majeure clause can impact on many other provisions of an agreement (such as core provisions and Payment provisions). Also, a Force majeure clause may be subject to scrutiny as to whether it is ‘reasonable’ for the purposes of UCTA 1977. In other words, if it is drafted so widely that it allows one party to be excused performance of its obligations without liability it might be in effect an exclusion or liability limitation clause.

Sample precedent material Precedent 1—Short form Neither party shall be liable for any failure or delay in performance of this agreement which is caused by circumstances beyond the reasonable control of a party [including without limitation any labour disputes between a party and its employees]. Precedent 2—Short form Neither party shall be liable for any default due to any act of God, war, strike, lockout, industrial action, fire, flood, drought, tempest or other event beyond the reasonable control of either party. Precedent 3—Short form – termination by either party If this Agreement cannot be performed or its obligations fulfilled for any reason beyond either party’s reasonable control for a continuous period of 3 months then either party may, at its discretion, terminate this Agreement by notice in writing at the end of this period. 345

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Precedent 4—Short form – termination by either party If any force majeure delays or prevents the performance of the obligations of either party for a continuous period in excess of one month the party not so affected may give notice to the affected party to terminate this Agreement specifying the date (which shall not be less than 7 days after the date on which the notice is given) on which termination will take effect. Such a termination notice shall be irrevocable except with the consent of both parties and upon termination the provisions of clause 14 apply. Precedent 5—Short form – suspension of contract – immediate repayment of money due In the event of national emergency, war, prohibitive governmental regulation or any other cause beyond the control of the parties (‘force majeure event’) the obligations of the parties shall be suspended for so long as the force majeure event renders performance of the agreement impossible and upon the occurrence of a force majeure event all money then due to [Party] shall be paid immediately. Precedent 6—Short form – release at discretion of one party where stoppage temporary Both parties will be released from their respective obligations in the event of national emergency, war, or prohibitive governmental regulations or if any other cause beyond the [reasonable] control of the parties renders performance of the Agreement impossible, whereupon: (a) all money due to [principal] shall be paid immediately; and (b) [agent] shall forthwith cease to carry on the Business. Provided that this clause shall only have effect at the discretion of [principal] except when such event renders performance impossible for a continuous period of [12] calendar months. Precedent 7—Short form – release at discretion of one party where stoppage temporary Subject to Clause [severance clause] below both parties shall be released from their respective obligations in the event of national emergency, war or prohibitive governmental regulations or if any other cause beyond the control of the parties shall render performance of this agreement impossible, Provided that this clause shall only have effect at the discretion of [principal, franchisor or as the case may be] except when such event renders performance impossible for a continuous period of [6] calendar months. Precedent 8—Short form – some specific events, and others beyond the reasonable control of a party Neither party shall be liable for any failure or delay in performance of this agreement which is caused by : 346

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1 strike or lockout (other than a strike or lockout induced by the party (or the party’s sub-contractor) so incapacitated); 2 compliance with any request of any governmental, regulatory or EU authority; or 3 any other circumstances which are beyond the reasonable control of a party. Precedent 9—Longer form – certain labour disputes excepted – automatic termination after remedy period 1 If either party is prevented from fulfilling its obligations under this agreement by reason of any supervening event beyond its control including but not by way of limitation war, national emergency, flood, earthquake, strike or lockout (other than a strike or lockout induced by the party so incapacitated) the party unable to fulfil its obligations shall immediately give notice of this to the other party and shall do everything in its power to resume full performance. 2 Subject to Clause [1] above neither party shall be deemed to be in breach of its obligations under this agreement. 3 If and when the period of such incapacity exceeds [6] months then this agreement shall automatically terminate unless the parties first agree otherwise in writing. Precedent 10—Long form – supply agreement – temporary suspension for either party where stoppage notified 1 Neither party will be liable for any delay in performing or failure to perform any of its obligations under this agreement caused by events beyond its reasonable control (‘Force Majeure Event’). [However any delay or failure by a Sub-Contractor or supplier of the Contractor will not relieve the Contractor from liability for delay or failures except where that delay or failure is also beyond the reasonable control of the Sub-Contractor or supplier concerned.] 2 The party claiming the Force Majeure Event will promptly notify the other in writing of the reasons for the delay or stoppage (and the likely duration) and will take all reasonable steps to overcome the delay or stoppage. 3 If the party claiming the Force Majeure Event has complied with Clause 2 its performance under this Agreement will be suspended for the period that the Force Majeure Event continues and the party will have an extension of time for performance which is reasonable [and in any event equal to the period of delay or stoppage]. As regards such delay or stoppage: (a) any costs arising from the delay or stoppage will be borne by the party incurring those costs; 347

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(b) either party may, if the delay or stoppage continues for more than [30] continuous days, terminate this agreement with immediate effect on giving written notice to the other and neither party will be liable to the other for such termination; and (c)

the party claiming the Force Majeure Event will take all necessary steps to bring that event to a close or to find a solution by which this agreement may be performed despite the Force Majeure Event.

[4 So long as the Force Majeure Event continues the Customer may contract with others for the supply of any items and/or services which the Contractor fails to supply in accordance with the terms of this agreement.] Precedent 11—Long form – full definition of ‘event of force majeure’ – contract for services – one party power to suspend 1 Definitions (inter alia:) ‘Event of Force Majeure’ means an act of God including but not limited to fire, flood, earthquake, windstorm or other natural disaster; act of any sovereign including but not limited to war, invasion, act of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, nationalisation, requisition, destruction or damage to property by or under the order of any government or public or local authority or imposition of government sanction embargo or similar action; law, judgment, order, decree, embargo, blockade, labour dispute including but not limited to strike, lockout or boycott; interruption or failure of utility service including but not limited to electric power, gas, water or telephone service; failure of the transportation of any personnel equipment, machinery supply or material required by [the Company] for (exploitation of agreement); breach of contract by any essential personnel; any other matter or cause beyond the control of [the Company]. (then:) [no]  Suspension of Term [The Company] shall be entitled by notice to [person engaged] to suspend the Term and the (performance of the agreement) if: (inter alia:) 0.1 an Event of Force Majeure shall prevent [the Company] from (describe performance of agreement)

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Purpose of the clause Many commercial transactions have as one of the parties a governmental, regulatory, academic or health service body or organisation. These types of organisations are likely to come within the definition of a ‘public authority’ for the purposes of the Freedom of Information Act 2000 (FOIA). If an organisation is a public authority, then any person who is not a party to the agreement will have the right to make a request to that public authority to release information held by it. FOIA applies to most types of information held by a public authority, which can include information about commercial agreements entered into by that public authority. The statutory obligation to the release of information following a request from a person is subject to certain exemptions and limitations. The most relevant, as far as commercial agreements are concerned, are that the information: •

was obtained by the public authority from another person and its disclosure would constitute an actionable breach of confidence (FOIA, s 41);

•

constitutes a trade secret or would prejudice the commercial interests of a person (FOIA, s 43);

•

constitutes personal information (FOIA, s 40);

•

will be published by the public authority (FOIA, s 22); or

•

is subject to legal professional privilege (FOIA, s 42).

The first two exemptions would appear to permit a public authority to prevent release of much, if not all, information about a commercial agreement. Most commercial organisations are likely to wish to keep all details of their contract with the public authority secret, particularly commercially sensitive information, such as pricing, product or service specifications, technical information etc, which is not publicly available or otherwise known. Often this is for no other reason than its release might enable a competitor to use that information either to improve its own goods and/or services or to gain a competitive advantage over the other company. On introduction of FOIA the approach of many public authorities to requests for information about contracts was to cite confidentiality provisions or the commercial exemption and thus block the release of all information about a commercial agreement. However following several cases before the 349

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Information Tribunal and then the issuing of guidance by the Information Commission on almost all parts of FOIA, such a broad brush approach is unlikely to succeed. For public authorities and commercial organisations a more nuanced view is necessary, based on the fact that a public authority is likely to have to disclose most information requested of it. Consequently a commercial organisation should look to protect only specific categories and amounts of information that genuinely fall into an available exemption.

Some points to note • A  public authority has 20 working days to consider, and respond to, a request (to confirm whether they hold the information and to release it). • Exemptions are classified as ‘absolute’ or ‘partial’ exemptions. If of the latter type, then a public authority needs first to decide whether the exemption applies to the information. If the public authority decides that the exemption does apply, then it must carry out an assessment as to whether or not it is in the public interest to release or not to release the information (there is guidance issued on applying the public interest test in the Information Commissioner’s Freedom of Information Act Awareness Guidance No 3, The Public Interest Test). • Contract wording cannot override the obligation on a public authority to make the decision of whether or not to release information (or to prevent the release of the information if no exemption applies to that information). •

Any decision about whether or not to release information has to be that of the public authority, and a public authority cannot delegate that decision to someone else (although it can consult with, and seek representations from, third parties).

•

A public authority will also include wholly owned subsidiaries of a public authority (but does not cover a subsidiary in which, for example, the public authority holds a majority or even 99.9%, of the shares.

•

If a public authority decides not to release the information requested by a person, then a person requesting its release can ask the public authority to carry out an internal review, and thereafter ask the Information Commissioner and then a Tribunal to consider whether the information should be released.

• There is a separate disclosure regime for environmental information, which is similar to that under the FOIA (Environmental Information) Regulations 2004, SI 2004/3391). • The person (which can include a business) requesting the information from a public authority has only to provide limited information about itself. In normal circumstances, the person does not need to reveal why the information is requested. Eg a competitor of a commercial organisation 350

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can request a copy of the contract that the commercial organisation has entered into with a public authority from that public authority.

Confidentiality and contracts The relevant section (s 41) of FOIA states: 41.—(1) Information is exempt information if — (a) it was obtained by the public authority from any other person (including another public authority), and, (b) the disclosure of the information to the public (otherwise than under this Act) by the public authority holding it would constitute a breach of confidence actionable by that or any other person.

A commercial organisation may wish to keep as much information as possible regarding its contract, and sometimes its relationship, with a public authority away from public scrutiny. This might include: • treating the existence of the contract between the public authority and the commercial party as confidential; and/or •

treating the identity of the commercial party as confidential; and/or

•

treating all the provisions of the contract as confidential; and/or

•

treating certain provisions as confidential.

Some of this information is unlikely to be exempt from disclosure in most circumstances. For example, the name of the commercial organisation, or some or all of the provisions of the agreement, is unlikely to be exempt from disclosure as it would not contain information obtained by the public authority from a third party. This is on the basis that a concluded contract contains mutual obligations of the parties. Accordingly the contract between a public authority and a commercial organisation is their joint (or jointly agreed) document. The consequence of this is that any confidential information of the commercial organisation contained in the contract would not be or no longer be confidential information provided to the public authority. Although the implication of the previous sentences might be that no information which is included in a contract is classifiable as confidential; this is not so (see Derry City Council v Information Commissioner (EA/2006/0014; 11  December 2006); Department of Health v ICO (EA/2008/0081, 18 November 2008) and Information Commissioner Guidance: Information provided in confidence (s 41), 2015). Technical and business information, although included in a contract, may still remain as information provided by the commercial organisation and which is obtained by a public authority from a third party. It may count as material which is ‘in addition to the mutually agreed terms and obligations’ (from the ICO Guidance, para 19). Pre-contract information supplied by a commercial organisation is also likely to fulfil the requirements that it is information supplied to a public authority. 351

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Just because the information provided by the commercial organisation is marked as confidential, or provided under obligations of confidentiality, is not enough to protect it from disclosure. At the time of a request for disclosure the public authority will need to carry out its own assessment as to whether the information is still confidential. Ideally, genuinely confidential information should be placed in a separate schedule and the commercial organisation be made aware that the information it has provided might be released (see Information Commissioner Guidance: Information provided in confidence (s 41), 2015). The existing law of confidence applies; ie  the FOIA does not displace the existing law regarding what information is confidential, or when and how an obligation of confidentiality might arise (see Information Commissioner Guidance Information Provided in Confidence (s  41), 2015). The analysis in the guidance is based on the leading case of Coco v AN Clark (Engineers) Ltd [1968] FSR 415 and the decisions made by the Information Tribunal and the notices issued by the Information Commissioner. The detail of the guidance is beyond the scope of this book (and is primarily of interest to those in a public authority who have to decide whether the information requested by a third party is confidential). However, one element of the test as to whether there is an actionable breach of confidentiality in Coco was whether there is a detriment to the confider of the information. The guidance indicates that in order for a public authority to withhold confidential information from disclosure, it must be able to explicitly show that there is a detriment to the confider’s commercial interests (from the case of Higher Education Funding Council for England v ICO & Guardian News and Media Ltd (EA/2009/0036, 13 January 2010)). The implication for a commercial organisation is that it might provide genuinely confidential information, but it may still be disclosed if the public authority’s analysis leads the public authority to decide that the commercial interests of the commercial organisation are not adversely affected. This exemption is an absolute exemption. Consequently a public authority does not need to carry out an assessment as to whether it is in the public interest to release or not to release the information. However the law of confidence has its own public interest test, ie  whether it is in the public interest that confidential information should be made known to the public (eg Hellewell v Chief Constable of Derbyshire [1995] 1 WLR 804) or in the interests of public safety (eg W v Edgell [1990] 1 Ch 359). This will mean that the public authority will still need to determine whether it is in the public interest to release the confidential information of a commercial organisation. The guidance provides examples of where it is generally appropriate not to disclose confidential information of the confider, including the impact of disclosure on the interests of the confider and the wider public interest in preserving the principle of confidentiality. Where the confider is a commercial organisation then the impact will equate normally to the commercial impact of releasing the commercial organisation’s information in situations such as (see paras 88–100): 352

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•

damaging the commercial organisation’s ability to compete or competitive position;

•

undermining the commercial organisation’s future negotiations with the public authority (or other organisations);

•

the adverse affect on the commercial organisation’s relationship with the public authority (or other organisations).

Commercial interests and contracts The relevant section (s 43) of FOIA states: (1) Information is exempt information if it constitutes a trade secret. (2) Information is exempt information if its disclosure under this Act would, or would be likely to, prejudice the commercial interests of any person (including the public authority holding it).

The FOIA does not define ‘trade secret’ (for which the existing law of confidence is likely to apply). The guidance issued by the Information Commissioner (Freedom of Information Act Awareness Guidance No 5: Commercial Interests, 2008) envisages that it ‘…covers not only secret formulae or recipes, but can also extend[s] to such matters as names of customers and the goods they buy, or a company’s pricing structure, if these are not generally known and are the source of a trading advantage’. The guidance indicates that information about the design of equipment would amount to a trade secret but details about the equipment’s state of repair would not (the latter would not be ‘commercially sensitive’ as it does not generate profits), in effect whether the information is for the purpose of trade. Other factors that may be important in deciding if information will amount to a trade secret is whether its release would harm the owner of the information or benefit rivals, and whether the information is also publicly known and how easy is it for others to discover or reproduce the information. The other main part of the exemption – that the commercial interests of a person are likely to be prejudiced – is more difficult to categorise or quantify. The Information Commissioner and the Ministry of Justice have issued a large body of guidance on this area (eg Freedom of Information Act Awareness Guidance No  5: Commercial Interests, 2008). For example, the guidance notes that information that relates to financial matters does not necessarily relate to the commercial activity of a commercial organisation, and only the latter is likely to come within the FOIA. Types of information that can be caught by this exemption include: information about a public authority’s own commercial activities, policy development, policy implementation or procurement; the public authority’s purchasing position, regulation (ie where the public authority has regulatory functions) or private finance initiative/public private partnerships. Specific types of business information that could particularly damage commercial interests include: research and plans relating to a potentially 353

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new product; product manufacturing cost information; product sales forecast information; strategic business plans, including for example, plans to enter, develop or withdraw from a product or geographical market sector; marketing plans, to promote a new or existing product; information relating to the preparation of a competitive bid; information about the financial and business viability of a company; information provided to a public authority in respect of an application for a licence or as a requirement of a licence condition or under a regulatory regime. In addition to particular types of information, the Information Commissioner’s guidance provides an indicative list of factors or questions which will assist in determining whether there is prejudice to the commercial interests of a person: • Does the information (directly) relate to, or could it impact on, a commercial activity? • Is the commercial activity conducted in a competitive environment whether for the public authority or the commercial organisation? • Would there be damage to reputation or business confidence if the information is released? •

Whose (or rather, anyone’s) commercial interests are affected?

•

Is the information commercially sensitive?

•

What is the likelihood of the prejudice being caused?

Under other guidance issued by the Information Commissioner the public authority will need to provide an explanation (not speculation) on why the commercial interests of a third party are likely to be prejudiced. The guidance makes it clear that the views of the commercial organisation should be sought (if it is possible to do so). However, just because the commercial organisation believes its interests are prejudiced is not enough to prevent disclosure; it must be the public authority’s decision whether to release or not release the information. Ie, it is not enough that there is a mere assertion by an individual or a company that its interests will be prejudiced (see Ministry of Justice, Freedom of Information Guidance, Exemptions, Section 43 (‘Commercial interests’), 14  May 2008, p  5, where John Connor Press Associates Ltd v The Information Commissioner (EA/2005/0005), 25 January 2006 is cited in support of this point). As this is a qualified exemption, once the public authority has decided that the exemption does apply, the public authority will still be under a duty to determine whether it is in the public interest to release the information. It seems, as a general point, that the commercial interest exemption is likely to apply to very specific information (ie specific technical information or pricing information etc), which is not in the public domain (see eg Decision Notice FER0073984). 354

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For example: • a commercial organisation may provide a range of pricing information about its products to a public authority under a contract. The public authority will need to carry out its own assessment as that if the information is released it would impact on the ability of the commercial organisation to successfully trade in a competitive environment, to pick one factor that needs consideration; • a commercial organisation might offer a special low price to a local authority at the start of the contract. The release of that information may impact on its ability to charge a higher price to other customers, and therefore should not be released following a FOIA request. However, if the request for the price information is made five years after the commercial organisation and public authority enter into the contract, general or specific price information may no longer bear any relation to the prices the commercial organisation is charging for the same product or service (or the commercial organisation may not even be providing the product or service in question any longer or in the same way). In such circumstances the public authority could release the information about the price, as there would be little or no likelihood that the commercial interests of the commercial organisation would be prejudiced. Issues for a commercial party There are perhaps two areas that need specific attention: one which will arise before the contract with a public authority is signed, and the second after the contract is signed: •

pre-contract: • correctly identifying information or matters that are genuinely confidential and/or affect the commercial interest of the commercial party, and separating that information from other information, which does not fall into these categories; and • including provisions in the contract between the commercial party and the public authority which requires the public authority to inform the commercial party of a FOIA request from a third person, and permits the commercial party to review the proposed information to be released and to discuss the matter with the public authority; and

•

post signing of the contract: following any request for disclosure of information held by the public authority and prior to its disclosure, the commercial party has the opportunity of considering what information is proposed to be disclosed and discussing any issues with the public authority.

What information is released is not a decision that a commercial party can control with contract wording. It is a decision that rests (or whose responsibility rests) with the public authority, and which is subject to outside scrutiny (from the Information Commissioner and the Tribunal Service/courts). 355

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Freedom of information

Although a commercial organisation may have genuinely confidential information that will also affect its commercial interests, it cannot in all circumstances prevent persons other than the public authority seeing it. This is because if a person makes a request for information, which is turned down by the public authority, then if the person challenges that decision, and if the challenge is progressed, officials at the Information Commissioner and then at the Information Tribunal will see the information, so that they can form their own view as to whether the public authority has to release it.

Issues for a public authority For a public authority, the most important factor is likely to be that any contract it enters into does not contain provisions that make it liable to be in breach of any provision of the contract by complying with its obligations under FOIA, or fetter its ability to decide on whether information is released. This section only provides an outline of some of the key issues relevant to FOIA. For a detailed outline (including consideration of the exemptions relating to confidentiality and commercial interests and the guidance issued by the information commissioner) see Technology Transfer (4th Edn, Bloomsbury Professional, forthcoming).

Drafting issues •

Is the organisation a commercial party contracting with a public authority for the purposes of FOIA? If not, then FOIA will not apply at all. FOIA does not provide a definition of a ‘public authority’, but rather adopts a list approach. That is, for an organisation to be a public authority it needs to appear in a list of organisations set out in Sch 1 to FOIA or be designated a public authority by the Secretary of State. A ‘public authority’ includes the following types of organisations: •

government departments;

• local authorities (including county councils, the Greater London Authority, fire and rescue authorities, waste disposal authorities and so on); •

health-related organisations, such as primary care trusts, special health authorities, NHS foundation trusts, NHS  Trusts, persons providing general medical or dental services;

• education-related organisations, education colleges, etc;

such

as

universities,

further

• research and other types of councils and advisory groups (such as the Engineering and Physical Sciences Research Council, Medical Research Council). 356

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•

Does the public authority have to consult with the commercial organisation about the information that the public authority proposes to release? If the commercial organisation is given such a right: •

does it have a right to receive a copy of the information that the public authority proposes to disclose?

• does it have adequate time to consider the information and hold discussions with the public authority? •

does it have the right to know whether the public authority has carried out any analysis of whether of the potential exemptions apply?

• are there to be consequences if the public authority fails to consult with the commercial organisation? Precedent 1 provides example wording where a public authority has to inform a commercial organisation about the information that a public authority proposes to disclose together with an obligation on the public authority to consult with the commercial organisation. As noted above, a public authority cannot contractually agree to avoid its obligations under FOIA; and consequently may be reluctant to agree to facing any contractual penalties or other ramifications if it fails to fulfil its obligations under a clause such as Precedent 2. Additionally, it may be hard to adequately measure any losses that the commercial organisation has suffered if information it did not wish released was released and used by a competitor to underbid the commercial organisation for future work. •

Has the commercial party (and/or the public authority) carried out an analysis of which information in the contractual document or relating to the contract is genuinely confidential (or affects its commercial issues)? Given that simply stating that all information about or relating to a contract cannot be released is unlikely to work, the commercial organisation should consider identifying, eg the following: •

pricing information (eg which is particularly for, or only on offer to, the public authority);

• costing information (eg  what are the costs of manufacturing or supplying goods, or the costs of obtaining or providing its services); • information about the goods or services that are not in the public domain (eg product specification, technical information and knowhow); • information about how it markets, sells and promotes its (new or existing) products and/or services; • •

information about its plans for carrying on its activities in a particular market (whether to enter a market, withdraw from a market etc).

Will the commercial organisation and public authority separate out the information that is genuinely confidential or genuinely harms the commercial interests of the commercial organisation, and which is likely to be subject to an exemption from 357

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release from other information? The parties should discuss and decide what information falls into one of the exemptions. If the parties can: •

separate out the information that they consider falls into one of the exemptions;

•

place that information into a schedule; and

• write down why they consider the information falls into one of the exemptions, then if there is any request for that information at a later date, the public authority can more easily justify why the applicable exemption applies. See Precedent 3. Eg, a commercial organisation offers a product to a public authority at a special price (which is only available to the public authority and is very different from the price at which the commercial organisation normally sells such a product to the general public). The commercial organisation operates in a highly competitive environment. If the pricing information is placed in a schedule, together with the reasons why it will damage its commercial interest if made public, then the parties to the contract can demonstrate why it should not be released following a request. Ie releasing the information to a competitor who makes a FOIA request might enable the competitor to underbid the commercial organisation for other contracts from other public authorities.

Location in the agreement As one exemption under FOIA relates to confidential information, then the public authority may require that it will not be in breach of its obligations of confidentiality if it releases the information provided to it by a commercial organisation under obligations of confidentiality. Wording can be added to the list of situations where the public authority will not be in breach of its obligations of confidentiality (see Precedent 1 for example wording). Otherwise, depending on the extent of the wording necessary, Precedents 2, 3 and 4 would appear as stand-alone clauses in the Secondary Commercial Provisions section of an Agreement, usually in close proximity to the confidentiality provisions.

Linkage and use See above.

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Sample precedent material Precedent 1—Additional exception to obligation of confidentiality The above obligations of confidentiality shall not apply to any Information which the Receiving Party can show by written records: (a) was known to the Receiving Party before the Information was imparted by the Disclosing Party; or (b) is in or subsequently comes into the public domain (through no fault on the Receiving Party’s part); or (c) is received by the Receiving Party without restriction on disclosure or use from a third party lawfully entitled to make the disclosure to the Receiving Party without such restrictions; or (d) is developed by any of the Receiving Party’s employees who have not had any direct or indirect access to, or use or knowledge of, the Information imparted by the Disclosing Party; or (e) is required to be disclosed in order for the Receiving Party to comply with a statutory or legal obligation, including, but not limited to, releasing information under the Freedom of Information Act 2000 or the Environmental Information Regulations 2004. Precedent 2—Right of commercial party to be consulted 1 If [Party A] receives a request from a person (‘Requesting Party’) under the Freedom of Information Act 2000 (the ‘Act’) for the release of information held by [Party A] (‘Requested Information’), and (a) [Party A] has decided to release all or some of the Requested Information; and (b)

some or all of the Requested Information requested contains: (i)

information provided or supplied by [Party B] to [Party A] which concerns or is related to this Agreement; or

(ii)

information of [Party A] which concerns, is provided or supplied under or relates to this Agreement

then the following provisions of this Clause [no] shall apply. 2 [As soon as [Party A] has decided to release the Requested Information to the Requesting Party][within one working day of [Party A] having decided to release the Requested Information to the Requesting Party] [Party A] shall inform [Party B] of: (a)

the date when the Requesting Party made her or his request;

(b)

a description of the Requested Information;

(c)

that part of the Requested Information which is information provided or supplied by [Party B] to [Party A]; 359

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(d) that part of the Requested Information which is information of [Party A] which concerns, is provided or supplied under or relates to this Agreement; (e) the date when [Party A] is proposing to supply the Requested Information to the Requesting Party; (f)

any discussions, evaluation(s), meetings etc which [Party A] has had concerning which of any of the available exemptions available under the Act might apply to the Requested Information as well as details of what (if any) of the Requested Information [Party A] has decided not to release because it believes that one of the exemptions available under the Act apply (together with details of which specific exemption they believe applies and the written reasons for its application); and

(g) the name (and contact details) of the Requesting Party (where [Party A] is [lawfully] able to provide such information to [Party B]). 3 [Party A] shall [use reasonable endeavours][use its best endeavours]: (a)

to discuss with [Party B] the Requested Information that [Party A] wishes to release to the Requesting Party;

(b) to consider any representations that [Party B] wishes to make in relation to the Requested Information that [Party A] wishes to release to the Requesting Party. 4 [Party A] shall [use reasonable endeavours to][use its best endeavours to] supply a copy of the Requested Information it wishes to release to the Requesting Party at least [five] working days prior to the date it will release that information. Precedent 3—No liability for public authority if it discloses information in fulfilling its obligations under the Act [Party A] recognises and declares that [Party B]: 1 is a public authority for the purposes of the Freedom of Information Act 2000 (the ‘Act’); 2 is under a duty to release information held by [Party B] following a request from a third party for that information, including information supplied, provided or disclosed by [Party A] to [Party B] under this Agreement or otherwise; 3

if [Party B] decides to disclose to information following a request from a third party pursuant to the Act, shall not be in breach of this Clause [the clause containing confidentiality obligations] and nor any other provisions of this Agreement[; and

4 in its complete and unfettered discretion can decide 360

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(a) whether any information which is supplied or provided by [Party A] to [Party B] or any information which arises under this Agreement is subject to any exemption under the Act; and/or (b) whether any such information is to be disclosed following a request pursuant to the Act; and/or (c)

notwithstanding any requirement to consult with [Party A] under Clause [no], may disclose information requested pursuant to the Act without in fact consulting or notifying [Party A]].

Precedent 4—Statement about identification of information which might be confidential, etc 1 [Party A] recognises that [Party B] is a public authority for the purposes of the Freedom of Information Act 2000 (the ‘Act’); 2 Prior to the [date of the Agreement][the Commencement Date] the Parties entered into negotiations concerning information which might be supplied, provided or arise under this Agreement for the purpose of identifying which information was confidential, a trade secret or prejudiced the commercial interest of [Party A] and/or [Party B] (‘Exempt Information’). 3 At [date of the Agreement][the Commencement Date] the Parties have identified certain information which is Exempt Information of one or both of the Parties and have set out that Exempt Information in a schedule to this Agreement [at Schedule [ ]] together with an explanatory note why that Exempt Information is confidential, a trade secret, or prejudices the commercial interest of [Party A] and/or [Party B]. 4 After [date of the Agreement][the Commencement Date] further information may be supplied, be provided or may arise which is Exempt Information and the Parties will use their [best endeavours][reasonable endeavours] to co-operate to identify such information, document it as Exempt Information together with making explanatory notes. Precedent 5—Public authority not in breach of obligation of confidentiality (short form) [Party A] shall not be in breach of: 1 any obligation of confidentiality it owes to [Party B] under this Agreement; or 2 any other obligation under this Agreement; if [Party A] discloses any or all of [Party B]’s information to a third party following a request made under the Freedom of Information Act 2000. 361

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Precedent 6—Provisions for inclusion in a heads of terms, term sheet, letter of intent etc [Party A] is a public authority for the purposes of the Freedom of Information Act 2000 (‘the Act’). Should the negotiations between [Party A] and [Party B] lead to the execution of agreement relating to the [Proposal], then all or part of that agreement may be disclosed to any person who makes a freedom of information request under the Act. Subject to negotiation, the agreement may include provisions that [Party B] may have an opportunity to be consulted following a request for disclosure. However, [Party B] recognises and acknowledges that the information of [Party B] that [Party A] may disclose is solely at the decision, and in the unfettered discretion, of [Party A].

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Further assurance

Purpose of the clause Further assurances After completion of a transaction, one or both parties may need to take some further action or steps. These actions or steps often involve carrying out (sonetimes formal) tasks to implement aspects of the transaction, for example: •

on the sale or transfer of ownership of land or property: registering the changes in ownership with the Land Registry, or equivalent in other countries;

•

on the sale of a business by way of share sale, etc: notifying changes in shareholdings and directorships with the Registrar of Companies and other companies registries;

•

on the sale or change of ownership of patents and registered trademarks: notifying changes in ownership with patent offices and trade mark registries;

• other requirements to notify regulatory authorities, applying for permissions or otherwise complying with statutory and/or regulatory rules. A  Further assurances clause is often included to avoid argument or delay in respect of such matters, as well as setting out which party has the responsibility for carrying out these matters. Typically the clause will require one or more parties to execute any further documents that it may need to prepare, sign or otherwise deal with to give effect to the terms of the agreement of which the clause forms part. Sometimes a clause, in addition to requiring a party to execute further documents as envisaged in the previous sentence, may also go on to empower the other party to a transaction to sign such documents in place of the first party. Eg, in an agreement to sell a portfolio of patents, there is often a requirement to formally assign ownership from the seller to the buyer. The agreement may include a provision that the parties may agree to execute formal patent assignments (prepared by the parties) in a specified form (which they do at the time they sign the sale agreement). After this document is signed, these documents are then used to register the transfer of ownership with patent offices. However, a national patent office may insist on a particular form of assignment being executed (such as the use of its own form rather than the form of assignment signed by the parties) as a condition of registration of the new owner. The ‘further assurances’ clause would require the seller to execute 363

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such further assignments. If the seller refused to sign these further documents, and if the clause provided that the other party could sign in place of the seller, then the other party could do so. The clause may also require a party to provide assistance to the other party, eg by signing further papers that may be required (or possibly in some cases taking other steps).

Use of a power of attorney in a further assurance clause A clause where one party has the authority to sign in the name of the other, at least under English law, does not require any particular formality or need any particular wording, such as: ‘In the event that [Party A] shall have failed within 14 days from receipt of a written request from [Party B] to do any such act or execute any such instrument, then [Party A] authorises [Party B] to do any such act or execute any such instrument in the name of and on behalf of [Party A].’

However, as this is a simple form of permission, it can be easily countermanded by Party A at any time in the future. Accordingly where there are particular actions that need taking by a party at some time in the future, that party may be asked, as security for its undertaking to perform those acts, to give a power of attorney to the other party. Although doing so is partly a matter of form, creating the power of attorney creates more certainty where the party needs to rely on the wording of such a clause. Although the power of attorney, as with the simple form of permission, enables the other party to perform those acts in the name of the first party in the event of the first party’s failure to do so within a certain time, it is often coupled with wording that states it is irrevocable (see Precedent 5). The purpose of making the power of attorney irrevocable is to ensure that the party giving the authority to the other party to sign documents on its behalf cannot at some later point revoke the power of attorney. Also by stating it is irrevocable the Powers of Attorney Act 1971 operates and, to eliminate all doubt, the wording set out in Precedent 6 together with that in Precedent 7 may be added. Note: a power of attorney that states it is irrevocable will only be irrevocable if it is given to secure either a proprietary interest of the donee or the performance of an obligation owed to the attorney (see Powers of Attorney Act 1971, s 4(1)). It will not be irrevocable if the attorney is someone other than the person who has the relevant proprietary interest or to whom the obligation is owed.

Location of ‘further assurance’ clause containing a power of attorney An agreement (or any type of document) that includes a power of attorney (whether irrevocable or not) will need signing as a deed (Powers of Attorney Act 1971, s 1(1)). 364

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However, a commercial agreement, which includes a further assurance clause with wording creating a power of attorney, may not always be suitable for execution as a deed for practical reasons, such as: •

especially where large companies are involved, it may be difficult to get a director(s) and/or company secretary to sign the document;

•

signing a commercial document as a deed will extend any limitation period to 12 years for breaches of its terms (something one or more parties may not wish to occur); and

•

if at any point where the party who is appointed the attorney has to show by way of documentation the authority under which it is signing on behalf of the other party, then it will need to produce the whole agreement. Doing so will reveal its commercial provisions, which neither party may be willing to do.

In such a case, and particularly in connection with the last instance, the parties may wish to sign a short, formal, power of attorney at the same time as the parties’ substantive agreement (and the further assurance clause can require a party to sign it, see Precedent 8). Where a party is a foreign company (who is signing the agreement in its home country), the inclusion of a power of attorney within the commercial agreement may be an unfamiliar way of creating a power of attorney. The laws or practice of other countries may require that a power of attorney is created as a separate document or comply with some formality (such as signing before a specified number of persons, or before a notary etc), which again will make the inclusion of a power of attorney within the commercial agreement unsuitable. The converse is also true, in that a transaction that involves carrying out further assurance type tasks in other countries (such as making applications in company registers or patent authorities) may require a power of attorney that is signed before a notary (a common requirement with many civil law jurisdictions) or be in specified form or contain certain things (such as sealing) or be expressed in the language of that country. The main commercial agreement, which contains a power of attorney, may not be suitable for that task (as well as revealing all the provisions of the agreement to third parties). Accordingly in these two instances the best option will be also to prepare a separate power of attorney (or a power of attorney for each country involved) in the form required for that country. More formal types of document (such as an agreement whose only purpose is to formally assign the intellectual property of one party to another) that contain a further assurance clause are likely to be less problematic if they include a power of attorney.

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Drafting issues •

Simple or routine transactions. In most cases, a simple clause will be adequate to provide that a party will execute any necessary documentation (see Precedent 1).

•

Making a further assurance clause the responsibility of one party. In some circumstances it will be appropriate for a more specific assurance to be given by one party only (see Precedent 2). Eg, where only one party is to benefit from a transaction, or where it is conventional for that type of transaction for a party to be responsible and pay the costs of carrying out the further assurance activities.

•

•

•

Cost. The steps to be taken may involve more than just signing documentation, eg, where title to assets (such as intellectual property, land or property) or mortgages need to be checked against records or against what has been sold or transferred. This can, in some cases, be timeconsuming and attention may need to be given to who will bear the cost of such work. For routine tasks: •

the parties will either bear their own costs; or

•

the party that is to benefit from the execution of documents will bear the costs of the other party carrying out the further assurance tasks (eg, see Precedent 2).

Where operations or tasks continue after transfer: •

where a party transfers a business as a going concern, the transferee may agree or wish to honour all existing contracts after completion (see Precedent 3);

•

also, both parties may agree to co-operate in the subsequent assignment or novation of any such contracts where this proves necessary (see Precedent 4).

Finding the party after a transaction is completed. If there is some doubt or concern that a party who is to give further assurances may be difficult to find or who may refuse to sign any necessary papers, then the other party may wish to have the power to sign documents in the name of the first party. For example, if an inventor is an individual (such as a scientist who is an academic) they are assigning a patent to a company, then the company may wish to include in a further assurances clause the right to sign documents in the name of the inventor. Scientists and academics, particularly if they are still fairly early in their careers, frequently move from academic institution to academic institution and country to country (perhaps because they can only secure fixed-term positions). In these circumstances the company may be unable to find the inventor (although this is less likely to be a problem since the existence of the internet, as any moderately productive scientist will publish or contribute to research and scientific papers, which

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are often referenced online). Dealing with the formalities for transferring ownership of patents (particularly if there are patents (or applications) in several countries) can take years and accordingly the company may wish to include a further assurances clause in the form as in Precedent 5. Clearly there is a commercial issue as to whether this would be acceptable to the inventor. •

Effort. In most cases the further assurance tasks are often not particularly time sensitive, but if the requesting party wishes the other party to deal with the further assurances tasks in a timely manner, words such as ‘promptly’, ‘use all reasonable endeavours’, ‘within [ ] days of being requested by Party [ ]’ can be added.

Location in the agreement The Boilerplate section of an agreement will usually be the location for a Further Assurance clause.

Linkage and use The type of documents that are generated after a transaction are: •

formal assignments of contracts (eg on the sale of a business);

•

formal novation agreements (eg on the sale of a business);

• mortgages; •

investment documents and/or shareholder agreements;

•

(formal) assignments of intellectual property;

•

conveyances of real property;

•

(statutory) transfer documents for real property;

•

formal licences of intellectual property for registration with government bodies responsible for registration of intellectual property;

•

applications to governmental and regulatory bodies.

The subject of ‘completion’ has some features in common with ‘further assurances’ (see Completion).

Sample precedent material Precedent 1—Simple further assurance clause Each party agrees to execute, acknowledge and deliver such further instruments, and do all further similar acts, as may be necessary or appropriate to carry out the purposes and intent of this agreement. 367

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Precedent 2—Further assurance The Mortgagor shall at its own expense from time to time execute all such deeds and documents and do all such acts and things as the Mortgagee may reasonably require for the purpose of protecting or perfecting the security intended to be created by this Mortgage. Precedent 3—Carrying on of activities or contracts after transaction completed The Purchaser shall after completion carry out and complete for its own account [the Contracts] to the extent that the same have not been performed prior to completion. Precedent 4—Parties to co-operate after a transaction is completed In so far as the benefit of [the Contracts] cannot effectively be transferred by the Vendor to the Purchaser except by way of an agreement of novation with or consent to the assignment from the person, firm or company concerned, the Vendor and the Purchaser shall (if the Purchaser so requires and at the expense of the Purchaser) co-operate to do everything they reasonably can to procure [the Contracts] to be novated or assigned as aforesaid as soon as reasonably practicable. Precedent 5—Further assurance and power of attorney The Inventor shall execute such documents and give such assistance as the Company may require [at the expense of the Company]: (a) to secure the vesting in the Company of all rights in the Patents; (b) to uphold the Company’s rights in the Patents; and (c) to defeat any challenge to the validity of, and resolve any questions concerning, the Patents. The Inventor hereby irrevocably appoints the Company as his Attorney in his name to execute any document and do any act or thing which may be necessary to comply with the provisions of this clause. Precedent 6—Irrevocable power of attorney In the event that [Party A] shall have failed within 14 days from receipt of a written request from [Party B] to do any such act or execute any such instrument [Party A] irrevocably authorises [Party B] to do any such act or execute any such instrument in the name of and on behalf of [Party A] as the lawfully appointed attorney of [Party A] and [Party A] undertakes and warrants to confirm and notify and be bound by any and all of the actions of [Party B] pursuant to this clause. Precedent 7—Strengthening the irrevocable power of attorney … and such authority and appointment shall take effect as an irrevocable power of attorney pursuant to the Powers of Attorney Act 1971, Section 4. 368

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Precedent 8—Execution of a separate, irrevocable, power of attorney [Party A] shall execute an irrevocable power of attorney in the form set out in Schedule [ ] [on the date of this Agreement][on the demand of [Party B]] (at the expense of [Party B]) to enable [Party B] to become [Party A]’s attorney so that [Party B] can, in the name of [Party A], execute any document and do any act or thing which may be necessary to comply with the provisions of this clause. Precedent 9—Further assurance – short general-purpose form Each party to this [deed or agreement] shall at the request and expense of the other or any of them execute and do any deeds and things reasonably necessary to carry out the provisions of this [deed or agreement] or to make it easier to enforce. Precedent 10—Further assurance – assets sale agreement The Vendor undertakes with the Purchaser to execute and deliver any other documents and take any other steps as shall be reasonably required by the Purchaser to vest [the Assets] in the Purchaser. Precedent 11—Further assurance – rights assignment The Assignor agrees at any time and from time to time on the written request of the Assignee to execute and deliver promptly and duly to the Assignee any and all such further instruments and documents which the Assignee considers desirable or which are required by law for obtaining the full benefits of this assignment and of the rights and powers granted by it. Precedent 12—Longer form – rights assignment – further assurance with power of attorney [Party A] undertakes to do any and all acts and execute any and all documents in such manner and at such locations as may be required by [Party B] in its sole discretion in order to protect perfect or enforce any of the rights granted or confirmed to [Party B] pursuant to this agreement. As security for the performance by [Party A] of its obligations under this agreement in the event that [Party A] shall have failed within 14 days from receipt of a written request from [Party B] to do any such act or execute any such instrument [Party A] irrevocably authorises [Party B] to do any such act or execute any such instrument in the name of and on behalf of [Party A] as the lawfully appointed attorney of [Party A] and [Party A] undertakes and warrants to confirm and notify and be bound by any and all of the actions of [Party B] pursuant to this clause and such authority and appointment shall take effect as an irrevocable appointment pursuant to the Powers of Attorney Act 1971, Section 4. Precedent 13—Longer form – factoring agreement – further assurance with power of attorney 1 The Vendor shall execute, at any time and from time to time when requested by the Purchaser, an assignment in the form specified in 369

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Schedule [no] of all or any of [the Purchased Debts] in favour of the Purchaser and shall execute and do such further documents and things as the Purchaser may require effectively to vest full title to [the Purchased Debts] in the Purchaser. 2

The Vendor irrevocably and by way of security appoints the Purchaser and each and every director, officer or manager of the Purchaser for the time being the Vendor’s attorney in the Vendor’s name and on its behalf to execute any such assignment or documents and also to collect, enforce, realise and give receipts and discharges for any [Purchased Debts].

Precedent 14—Full form – assets sale agreement – further assurance – novation of contracts 1 The Vendor agrees and declares that it will after and notwithstanding completion of the sale and purchase under this agreement execute and deliver any other documents and take any other steps as shall reasonably be required from time to time by the Purchaser to vest in the Purchaser or as it may direct [the Business and the Assets]. 2 Subject always to Clause [3] below the Purchaser shall after completion carry out and complete for its own account [the Contracts] to the extent that the same have not been performed prior to completion. 3 In so far as the benefit of [the Contracts] cannot effectively be transferred by the Vendor to the Purchaser except by way of an agreement of novation with or consent to the assignment from the person, firm or company concerned: 3.1 the Vendor and the Purchaser shall (if the Purchaser so requires and at the expense of the Purchaser) co-operate to do everything they reasonably can to procure [the Contracts] to be novated or assigned as aforesaid as soon as reasonably practicable; 3.2 in the case of any assignment as aforesaid the Purchaser shall undertake to indemnify the Vendor against all costs, claims, liabilities and expenses arising by reason of or in connection with the non-performance or the defective or negligent performance by the Purchaser of [the Contracts] following such assignment; 3.3 unless and until any such [Contracts] shall be novated or assigned as aforesaid the Vendor shall hold the benefit of the said [Contracts] in trust for the Purchaser and shall account to the Purchaser accordingly in respect of any sums or other benefits received by the Vendor in respect thereof and otherwise act at the direction of the Purchaser and as its agent in all matters relating thereto subject to the Purchaser indemnifying and holding the Vendor harmless against any action, claim, demand, proceeding, damage, expense, charge, liability, cost or loss which the Vendor may have made or brought against it or suffer or incur as a consequence. 370

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Good faith

Purpose of the clause Background ‘Good faith’ can have a number of different meanings as far as a commercial agreement is concerned, ie: •

a (general) duty or way of behaving, which is: •

other than acting only in a party’s own interest; or

•

acting in a fair way (in the sense of a concept of fair dealing);

(there are other possible ways of defining good faith); • a specific obligation to use ‘good faith’ to do something or achieve something. In English law there is no general law or requirement that the parties need to act in ‘good faith’ to each other (unlike in many civil law countries or the United States). However there are specific situations in English law when a party or the parties to a contract will need to show, act in or use good faith, of which the most relevant in a commercial context are: •

contracts with a consumer (at least to the extent that the Consumer Rights Act 2015 applies to a consumer contract, ie  that a contract term is not contrary to the requirement of good faith, rather than operation of a contract, see s 62(4));

•

the relationship between agent and principal (in commercial agency, see regs 3 and 4 of the Commercial Agents (Council Directive) Regulations 1993, SI  1993/3053, the agent and the principal need to show good faith in the dealings with each other; see also the case of Page v Combined Shipping and Trading Co Ltd [1997] 3 All ER 656, CA);

•

a contract of insurance (and a contract where the parties or a party needs to show ‘utmost good faith’ (known also under its Latin name: uberimmae fidei)).

Although the parties to a normal commercial agreement may not need to show good faith, English law does provide specific duties or remedies, for example: goods must be of satisfactory quality; a supplier of services must perform the services with reasonable care and skill, as well as limiting the right to exclude 371

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liability for such matters with the Unfair Contracts Terms Act 1977; or a party cannot exclude its liability for its own fraud; to pick a few examples. In specific contractual matters a party may need to use or show good faith in its dealings with another party, although its meaning may be a specific rather than a general obligation. For example, with a right of first refusal, good faith can mean that the party giving the right of first refusal has to fully and fairly disclose certain details to the receiver of the right (see Option and right of first refusal, and Case analysis).

Duty to use good faith to do or achieve something The English courts are generally hostile to find any obligation to do something in good faith or an obligation on a party or parties to use good faith as binding on a party, particularly where the obligation on a party or the parties to use good faith is expressed in general terms. But not every use of a good faith obligation will not be binding. An obligation to use good faith that is found in an existing contractual relationship and where its fulfilment is referenced to objective criteria, and accordingly it is possible to measure the obligation, can be binding. Principally the problem is that an obligation to do something in good faith: •

lacks certainty; or

•

means that it is not possible to judge objectivity or against objective criteria whether a party has used good faith or not,

(eg  Walford v Miles [1992] 2  AC  128; Petromec Inc v Petroleo Brasileiro SA [2005] EWCA Civ 891 at 116, [2006] 1 Lloyd’s Rep 121; Shaker v Vistajet Group Holding SA [2012] EWHC 1329 (Comm)). However, as noted above, an obligation to use good faith may be enforceable: •

where there is a subsisting contract; and

• where there are set objective criteria within which the parties need to operate (see Petromec Inc v Petroleo Brasileiro SA  [2005]  EWCA  Civ 891 at paras 115–121; Shaker v Vistajet Group Holding SA [2012] EWHC 1329 (Comm)). In the Petromec case the judgment implies that if the court was not bound by the decision in Walford v Miles then it may have decided that the obligation to use good faith was binding. The judgment in Petromec referred to a key difference between it and Walford v Miles: the parties were in a contractual relationship, while in cases such as Walford v Miles there was no contractual relationship. Much of the case law turns on whether an obligation to negotiate an agreement in good in faith is binding (which is considered in the next section). 372

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‘Negotiate in good faith’ and ‘agreement to agree’ Much of the hostility of the courts has focused on the obligation to negotiate in good faith or the parties (purporting to) enter into an agreement to agree. That is, the parties may have entered into an agreement, but may not have been able to decide on some matters, or they have entered into a ‘working’ agreement but need at a certain point to enter into a further agreement. Examples of both these types of situations would be: • the parties have entered into an agreement where one party will supply goods in certain quantities to another party, and the provisions of the agreement state that the parties will need to negotiate the price, timing of supply, etc; •

the parties have entered into an agreement where one party carries out a research project funded by another. If the research project is successful (the research project generates (economically) valuable intellectual property) then there is a provision that the parties will negotiate the provisions of a licence agreement so that the funding party can exploit the intellectual property.

In both situations, the matters needing negotiation may be accompanied by an obligation to use good faith because the parties are not able to decide on all the points necessary to enter into an initial agreement, or a further agreement. Sometimes they may frame their attempts with language suggesting that they will use a certain amount of effort to achieve agreement (such as the phrase ‘negotiate in good faith’ or they will use ‘reasonable efforts to agree’). As noted above, such expressions or agreements to agree are not enforceable except in specific circumstances: •

a bare obligation to negotiate an agreement in good faith is not legally binding: (Walford v Miles [1992] 2  AC  128, [1992] 1  All ER  453, HL, see Case analysis below). This proposition will extend to where there is an existing agreement, but certain aspects under that agreement need to be negotiated in good faith (see Petromec Inc v Petroleo Brasileiro SA [2005] EWCA Civ 891, see paras 88–92);

•

an obligation to use reasonable endeavours or best endeavours to agree will also be unenforceable: with regard to using reasonable endeavours see Multiplex Construction UK Ltd v Cleveland Bridge UK Ltd [2006] EWHC 1341 and with regard to using best endeavours to agree see Little v Courage Ltd (1994) 70 P & CR 469 at 476; applied in London and Regional Investments Ltd v TBI plc [2002] EWCA Civ 355;

•

using good faith obligations to reach agreement with a third party is also not enforceable: see Scottish Coal v Danish Forestry [2009]  CSOH  171; Shaker v Vistajet Group Holding SA [2012] EWHC 1329 (Comm));

•

but an agreement not to enter into an agreement with a third-party may be binding (sometimes called a ‘lockout agreement’): an undertaking not to enter into an 373

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agreement with a third party during the period of the negotiations can be enforced under English law (see Pitt v PHH Asset Management Ltd [1993] 4 All ER 961, [1994] 1 WLR 327, CA). If the lock-out agreement contains no express duration provisions, it may be enforceable as a contract terminable on reasonable notice (see Global Container Lines Ltd v Black Sea Shipping Co [1997] CLY 4535, Ch D, Transcript 1422).

Other meanings of ‘good faith’ The meanings of ‘good faith’ discussed above have been primarily in the context of the parties negotiating (or attempting to negotiate) the provisions of an agreement, usually before the existence of the agreement. However, it is possible to have a contractual obligation of good faith in the sense of the general duty set out at the beginning of this section. In Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS  Trust [2013]  EWCA  Civ 200 a duty to co-operate in good faith required that the parties work constantly together at all levels of their relationship, including resolving problems that occur in a long-term contract as well as not taking unreasonable actions, which might damage their working relationship. This case and the cases that have followed have clearly indicated that, as far as contracts made in England and Wales are concerned, there is no overriding concept of good faith, whether as having a specific meaning or as a general concept, or which needs implying into a contract. Recent case law has indicated (Monde Petroleum v Westernzagros [2016]  EWHC  1472 (Comm); MSC Mediterranean Shipping v Cottonex [2016] EWCA Civ 789): • there is no general doctrine of ‘good faith’ that applies to English contract law; •

that only in certain types of contracts will a duty of good faith be implied (employment, between partners, where there is fiduciary relationship);

•

that, otherwise, a duty of good faith will only be implied where: •

a contract lacks commercial or practical coherence; and

• the requirements for implying a term are met (an example of this would be Astrazeneca UK  Ltd v Albemarle International Corpn [2011] EWHC 1574 (Comm), where an obligation to use good faith was implied, see Option and Right of first refusal and Case analysis); • there is case law that some long-term agreements, which involve a close working relationship, might require the parties to perform their obligations in good faith, but just because there are agreements of this type is not enough to indicate that it is necessary to imply an obligation of good faith (ie there is no special rule of interpretation for this type of contract); •

that to recognise a general doctrine of ‘good faith’ would be out of step with how the English courts develop solutions to problems of contractual interpretation;

374

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•

that if a general concept or principle of good faith was implemented, it would be used to weaken the terms that the parties have agreed.

For example in TSG  Building Services plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC) the parties stated in one clause: ‘The Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents…’

and in a later clause concerning termination: ‘13.3. If stated in the Term Partnering Agreement that this Clause 13.3 applies, the Client may terminate the appointment of all other Partnering Team members, and any other Partnering Team member stated in the Term Partnering Agreement may terminate its own appointment, at any time during the Term or as otherwise stated by the period(s) of notice to all other Partnering Team members stated in the Term Partnering Agreement.’

The judge indicated: ‘Even if there was some implied term of good faith, it would not and could not circumscribe or restrict what the parties had expressly agreed in Cl 13.3, which was in effect that either of them for no, good or bad reason could terminate at any time before the term of four years was completed’. Although it is reasonably clear that there is no general overall concept of good faith or that it will be implied, much of the case law is concerned with the implication of good faith into a contract rather than a specific obligation to use good faith, such as (in Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust) where: ‘3.5 The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract.’

The meaning of such an obligation, if it has any specific meaning, is likely to vary depending on the circumstances and context of the case. In this case the duty was limited: ‘[106] … The obligation to co-operate in good faith is not a general one which qualifies or reinforces all of the obligations on the parties in all situations where they interact. The obligation to co-operate in good faith is specifically focused upon the two purposes stated in the second half of that sentence. [107] Those purposes are: i) the efficient transmission of information and instructions; ii) enabling the Trust or any beneficiary to derive the full benefit of the contract.’

Accordingly where used it will be context sensitive and will need interpreting in the context of the case. In Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS  Trust it meant, according the court: ‘The parties will work together honestly endeavouring to achieve the two stated purposes’. With such a view expressed by the court, it is hard not to draw the conclusion that: is this not what one would expect the parties to be doing in 375

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any case (even without such wording)? In effect, although not stated by the court, the wording adds nothing.

Drafting issues •

An obligation to use good faith to agree (or variations such as using reasonable efforts to agree) are likely not to be binding. Avoid the use of ‘good faith’ type expressions, whether in a non-contractual or contractual document, if no further wording is used to define such an obligation.

•

if the parties wish to use an obligation of ‘good faith’ they should be strongly discouraged from doing so. The phrase will have no specific meaning and where used will normally be confined to the specific obligation in which the phrase appears.

•

if the parties insist on a party or the parties being subject to a good faith obligation, then define objective criteria as to its meaning and the circumstances in which it is to be used. If the parties are to have an obligation to use good faith to do or achieve something, then any wording should: •

be in a subsisting contract;

•

deal with a very specific issue, and if the parties cannot agree or cannot act in good faith then there are objective ways of dealing or measuring the issue, such as in the Petromec case (ie not a general obligation to act in good faith to agree); and

•

set out the intended goal or result that the parties will need to achieve when exercising an obligation to use good faith.

Case analysis Walford v Miles [1992] 2 AC 128, [1992] 1 All ER 453, HL The opinion of Lord Ackner sets out his view on US agreements to negotiate in good faith as well as the implications of an agreement to negotiate in good faith: ‘… Although the cases in the United States did not speak with one voice your Lordships’ attention was drawn to the decision of the United States Court of Appeals, Third Circuit in Channel Home Centers Division of Grace Retail Corp v Grossman (1986) 795 F 2d 291 as being “the clearest example” of the American cases in the appellants’ favour. That case raised the issue whether an agreement to negotiate in good faith, if supported by consideration, is an enforceable contract. I do not find the decision of any assistance. While accepting that an agreement to agree is not an enforceable contract, the United States Court of Appeals appears to have proceeded on the basis that an agreement to negotiate in good faith is synonymous with an agreement to use best endeavours and, as the latter is enforceable, so is the former. This appears to me, with respect, to be an unsustainable proposition. The reason why an agreement to negotiate, like an agreement to agree, is unenforceable 376

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Good faith is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively, a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined “in good faith”. However, the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. [Counsel for the appellants], of course, accepts that the agreement upon which he relies does not contain a duty to complete the negotiations. But that still leaves the vital question: how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an “agreement”? A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from these negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a “proper reason” to withdraw. Accordingly, a bare agreement to negotiate has no legal content.’

Shaker v Vistajet Group Holding SA [2012] EWHC 1329 (Comm), [2012] All ER (D) 141 (May) This case is an illustration of a recent application of the points made above concerning obligations to use good faith or reasonable endeavours. It indicates (together with other recent cases) that the courts are not prepared to move away from the principles outlined in Walford v Miles and the cases that have followed it. 1 The claimant and the defendant signed a letter of intent for the purpose of negotiating the purchase, operation and repurchase of an aircraft. 2

A provision in the letter of intent required the claimant to pay a deposit of $3.5m. The deposit was to go towards the purchase price of the aircraft. The claimant paid the deposit.

3 The claimant was to proceed in good faith and to use reasonable endeavours to agree, execute and deliver a number of documents (‘Transaction Documents’) by no later than a specific date (‘Cut-Off Date’). 4 The seller was to refrain selling the aircraft to another buyer before the Cut-Off Date. 5

If the parties failed to reach an agreement and deliver the Transaction Documents by the Cut-Off Date, despite their using their good faith and reasonable endeavours, then the letter of intent would terminate without penalty and that within 5 business days the defendant would return the deposit. 377

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6 The letter of intent was not binding except for the provisions relating to confidentiality and regarding the application, payment and refund of the deposit. 7 The parties extended the Cut-Off Date five times. The first time it was acknowledged that the claimant was seeking finance. The judge assumed for the purposes of his decision that the claimant undertook to exercise good faith and reasonable endeavours to secure written confirmation from a financing party before the Cut-Off Date. The last amendment provided: ‘We acknowledge that, notwithstanding the exercise of good faith and reasonable endeavours by all relevant parties, (a) a written confirmation from a financing party will not be obtained and (b) the agreement, execution and delivery of the Transaction Documents will not occur by the Cut-Off Date. We hereby agree that the Cut-Off date be extended to 23.59 CET on Monday 17 January 2011 and that any reference to the Cut-Off Date in the Letter of Intent be construed accordingly without prejudice to any of the parties’ ongoing rights and obligations thereunder.’

8 The claimant argued that he had proceeded in good faith and used reasonable endeavours to agree the Transaction Documents and to seek written confirmation from a financing party. The defendant argued that the defendant had not used good faith and reasonable endeavours. 9 The judge held: (a)

That obligations of the claimant to use good faith and/or reasonable endeavours were unenforceable: ‘There can be no doubt that the Claimant’s agreement to proceed in good faith and to use reasonable endeavours to agree the Transaction Documents and obtain written confirmation from the financing party does not give rise to an enforceable obligation in law. First, the “Nonbinding” clause expressly states that the LOI does not constitute a binding agreement to enter into the Transaction Documents. Second, an agreement to negotiate or agree further agreements is unenforceable in law…Thus agreements to use reasonable endeavours to agree or to negotiate in good faith are unenforceable. The reason for such unenforceability is that there are no objective criteria by which the court can decide whether a party has acted unreasonably and that a duty to negotiate in good faith is unworkable because it is inherently inconsistent with the position of a negotiating party. Agreements to reach agreement with a third party (such as the financing party in the present case) are also unenforceable for the same reason’ (from para 7).

(b) The judge rejected that the defendant’s argument that the use of good faith and reasonable endeavours was a condition precedent for the return of the deposit: ‘In my judgment the suggested condition precedent is unenforceable in law for the same reasons that an obligation to exercise reasonable endeavours 378

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is unenforceable in law. If the court is unable to draw a line between what is to be regarded as reasonable or unreasonable in an area where the parties may legitimately have differing views or interests and so cannot police such an obligation, the court is equally unable to police the suggested condition precedent. Similarly, if an obligation to negotiate in good faith is inherently inconsistent with the position of a negotiating party so is the suggested condition precedent’ (from para 12). (c) The judge also rejected a further argument of the defendant: that in a case such as Walford v Miles there was no binding agreement, while in this case there was a binding agreement as to the return of the deposit. A second argument of the defendant on this point was that the defendant, by agreeing binding provisions regarding the refund of the deposit, had ‘given up the right to act capriciously could also be made in the context of an obligation to exercise good faith and reasonable endeavours’ (from para 13). (d)

A further argument of the defendant was that there was a provision in the letter of intent that the defendant agreed to refrain from selling the aircraft to another person until the Cut-Off Date. The judge rejected this point as well because: ‘…the existence of such obligation does not enable the court to police the suggested condition precedent in the absence of objective criteria for doing so. The obligation to negotiate in good faith remains inherently inconsistent with the position of a negotiating party’ (from para 16).

(e)

The final argument of the defendant was that the obligation to negotiate in good faith could be enforceable in light of the judgment in Petromec Inc v Petroleo Brasileiro SA  [2005] EWCA Civ 891. The judge rejected this argument too, because in the Petromec case what was being negotiated was a specific issue (the extra cost to a party) and that there were objective criteria where the extra cost could be established in the absence of agreement by the parties. The judge held that the facts of that case were very different to that of this case: ‘I  recognise that Longmore LJ [in Petromec] said that it is “a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered” but an agreement to negotiate the terms of four further agreements [as in this case] and secure written confirmation from a financier contains no objective criteria by which such agreements or written confirmation could be produced for the parties by the court in the absence of agreement. Where there are no objective criteria the court is unable to enforce the parties’ agreement to agree; see Dhanani v Crasnianski [2011] EWHC 926 (Comm), [2011] 2 All ER (Comm) 799’ (from para 17). 379

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Indemnities

Purpose of the clause An indemnity is in effect a promise or undertaking by a party, separate from other contractual obligations, to pay for the loss or damage which another party incurs. The loss or damage that the indemnity will cover, when the indemnity operates, etc are all subject to the agreement between the parties. There is no requirement that an indemnity must be in writing or comply with any other specific formality, other than it must satisfy the normal rules concerning the creation of a binding contract. The parties may: •

include an indemnity together with the other provisions of an agreement to which the indemnity relates; or

•

make a separate agreement dealing specifically with the indemnity.

Whichever approach is taken, the consequence of a person giving an indemnity is that they are giving a separate promise to cover the losses and damages caused or suffered by the other party in addition to any other provisions of an agreement which states the liability or obligation of that person giving the indemnity (or which are implied by law) to which the indemnity relates. An indemnity that one party to a contract can provide in a contract normally falls into one of two categories: The first category: As this term is normally used in contracts, an indemnity is: •

an undertaking given by one party (A) (the indemnifier) to another (B) (the indemnified); that

•

A will make good any losses suffered by B; arising from

•

claims made against B by a third party;

•

in specified situations.

For example, Party A  licenses the use of material protected by copyright to Party B, in order for Party B to incorporate that material in a publication for sale. The indemnity that Party A provides to Party B may cover an issue such as if the licensed material infringes the intellectual property rights of a third party and Party B is sued for that infringement. Under the indemnity Party A will pay to Party B the amount that Party B has to pay to the third party to settle any case brought by the third party against Party B. 380

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An indemnity clause is a means, together with other provisions in a contract, such as warranties, representations, exclusions and limitations clauses (and insurance), of apportioning commercial risks between the contracting parties. The second category: This type of indemnity is : •

an undertaking given by one party (A) to another (B); that

•

A will absolve B;

•

against any liability that B may have against A.

Thus, if Party A is required to indemnify Party B against losses caused to Party B by Party A’s wrongdoing, this is, in effect, an exclusion clause. Under common law and statute (eg the Unfair Contract Terms Act 1977) an indemnity clause of this type is treated in the same manner as an exemption clause where it attempts to limit, reduce or negate liability as between the contracting parties, rather than deal with third-party liability (eg Smith v South Wales Switchgear Ltd [1978] 1 All ER 18; Canada Steamship Ltd v R [1952] 1 All ER 305), on the basis that it is unlikely or improbable that a party would wish to allow the other party to be responsible for its own negligence (see Gillespie Bros & Co Ltd v Bowles (Roy) Transport [1973] QB 400).

‘Hold harmless’ Sometimes indemnity clauses refer to the indemnifying party ‘holding the other party harmless’ against claims and liability. This language is more common in US contracts. It is understood that such words mean that the indemnifying party will not sue the other contracting party for recovery of the indemnifying party’s losses. It may be preferable to state any such obligation specifically rather than to rely on ‘formula’ phrases of this kind.

Drafting issues •

What will the indemnifier be responsible for? To what extent will the indemnifying party be responsible for costs incurred by or expended by the indemnified party?

•

Should there be a limit on the amount that may be payable by the indemnifier? The indemnifier may wish to have some control over possible escalating costs, either by stating:

•

•

that the costs incurred must be ‘reasonable’; or

•

by setting some financial or overall limit.

When should payment be made under the indemnity? •

as they are incurred; and/or

• at a particular stage of legal proceedings (eg  on commencement, when scheduled for trial); and/or 381

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•

on notification by the third party to the indemnified; and/or

•

when the matter reaches a final judgment; and/or

•

when there is a financial settlement by the indemnified party (ie when it has paid over any costs or damages).

Such payments could potentially be considerable, particularly where there may be foreign proceedings as, eg, in the case of intellectual property rights. Unless the parties agree otherwise, then the indemnified party could make a claim against the indemnifier as soon as the indemnified is liable to a third party (eg  Firma C-Trade SA  v Newcastle Protection and Indemnity Association, The Fanti [1991] 2 AC 1 at 28, [1990] 2 All ER 705 at 711–712, HL). This proposition is not exactly the same as the indemnifier being liable to pay the indemnified at the time the liability arises but following any (successful) claim, the net result might be the same. •

What should the indemnity cover? Typically an indemnifier can provide an indemnity for the following: •

breach of (specified) warranties;

•

negligent acts and other breaches;

•

any use of goods or services by the indemnified party;

• breach of the intellectual property rights of a third party or the indemnified party. If the facts indicate that there has been a proven or agreed occurrence of one of the above, would the indemnity operate? It may be anticipated that most third-party claims are likely to be settled out of court, in which case there will be no clear decision whether or not there has been a proven occurrence. To avoid doubt and to cover such settlements, the indemnity may be worded to cover losses etc arising out, eg of breach of warranty: ‘out of any claim by a third party based on any facts which, if substantiated, would constitute such a breach.’ •

Conduct of proceedings. Sometimes the indemnifier may require that, as a condition of giving the indemnity, it will have conduct of the proceedings itself. Eg, in an agreement for the sale of goods (which includes also the provision of software or other material covered by intellectual property rights), the seller may need to provide an indemnity to the buyer. The indemnity might cover any claims made by third party against the buyer in respect of (alleged) breaches of intellectual property rights of the third party. The wording of the indemnity clause might be: ‘If the buyer shall be subject to any claim from a third party that the goods infringe such third party’s intellectual property rights then the seller shall indemnify the buyer against such claims subject to the buyer allowing the seller to conduct any proceedings or negotiation (in the name of the buyer if the seller so requests) …’

382

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•

Should an indemnity extend to cover other persons? Will the indemnity reach, eg: •

where there is a sale and purchase of goods, to claims by sub-buyers and end-users. Such a clause implies an obligation to repair or replace defective goods even after they have been sold on by the original buyer. If the seller is to assume this risk, the existence of appropriate insurance cover must first be ascertained;

• •

employees, agents and/or representatives of the indemnified parties.

Restrictions on the actions of the indemnified party when there is a claim. In some cases, the indemnifier, when indicating that it will provide an indemnity, will make it a condition that the indemnified party will: •

not act against the interests of the indemnifier;

•

notify the indemnifier promptly if the indemnified becomes aware of a claim;

•

co-operate with the indemnifier in defending any claim;

•

not have caused any claim under the indemnity or assisted any third party in causing or making any claim under the indemnity;

•

allow the indemnifier sole conduct of the claim.

Location in the agreement An Indemnity clause will usually be located with provisions relating to warranties and exclusion and limitation of liability in the Secondary Commercial Provisions of an agreement.

Linkage and use As indicated above an Indemnity clause will fall to be considered together with provisions relating to the Warranties and Exemption clauses. In some industry sectors it is conventional to give particular types of indemnities (consideration of which is outside the scope of this book).

Sample precedent material Precedent 1—Short form general indemnity as to breach of warranty [Party A] undertakes that it will indemnify [Party B] and keep [Party B] fully indemnified against all actions, claims, proceedings, costs and damages (including any damages or compensation paid by [Party B] on the advice 383

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of its legal advisers to compromise or settle any claim) and all legal costs or other expenses arising out of any breach of the [above warranties] or out of any claim by a third party based on any facts which if substantiated would constitute such a breach. Precedent 2—Short form general indemnity as to injury to staff Each Party will be responsible for its own (and its Affiliates’) officers, employees, consultants, agents and representatives (‘Staff’) and will indemnify the other Party against all claims that may arise out of any injury, loss or damage suffered by such Staff in connection with the breach, performance or non-performance of this agreement or the use of any Delivered Items. Precedent 3—Long form general indemnity as to any claims in regards to goods 1 Each party (‘Indemnifying Party’) shall indemnify and hold harmless the other party, its Affiliates, and their respective officers, employees, consultants, agents and representatives (the ‘Indemnitees’) against all third-party Claims which may be asserted against or suffered by any of the Indemnitees and which relate to: (a)

the use of any Delivered Items, or

(b) the manufacture, distribution, sale, supply or use of any ­products or services which incorporate any Delivered Items, by or on behalf of the Indemnifying Party or its licensee or subsequently by any third party, including without limitation claims based on product liability laws. 2 For the purpose of Clause 1, ‘Claims’ shall mean all demands, claims and liability (whether criminal or civil, in contract, tort or otherwise) for losses, damages, legal costs and other expenses of any nature whatsoever and all costs and expenses (including without limitation legal costs) incurred in connection therewith. Precedent 4—Short form general indemnity to agent The Principal agrees with the Agent throughout the term to indemnify and keep indemnified the Agent from and against any and all loss, damage or liability whether criminal or civil suffered [and legal fees and costs incurred] by the Agent in the course of [conducting the management of the Property]. Precedent 5—General indemnity by agent The Agent agrees with the Principal throughout the term to indemnify and keep indemnified the Principal from and against any and all loss, damage or liability (whether criminal or civil) suffered [and legal fees and costs incurred] by the Principal resulting from a breach of this agreement by the Agent including: 384

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1 any act, neglect or default of the Agent’s agents, employees, licensees or customers; 2 breaches resulting in any successful claim by any third party alleging libel or slander in respect of any matter arising from the [supply of the [Products or Services] or conduct of the Business] [in the Territory]. Precedent 6—Short form indemnity for new partner The other Partners shall indemnify any new Partner joining the Partnership against all debts and liabilities of the Partnership business existing at the date on which the new Partner joins and against any claim against the Partnership arising from any act or omission which has occurred prior to that date. Precedent 7—Short form general indemnity by supplier of services [Party A] agrees with [Party B] throughout the term to indemnify and keep indemnified [Party B] from and against any and all loss, damage or liability (whether criminal or civil) suffered [and legal fees and costs incurred] by [Party B] resulting from a breach of this agreement by [Party A] including: 1 any act, neglect or default of [Party A]’s employees or agents; 2 breaches in respect of any matter arising from the supply of the services resulting in any successful claim by any third party. Precedent 8—Short form general indemnity by borrower The Borrower shall on demand indemnify the Lender against any cost, loss, expense or liability sustained or incurred by it as a result of the Lender making the Loan available or of any breach of the Borrower of its obligations under this agreement, or the non-fulfilment of any conditions precedent, or the repayment of any advance or part of any advance other than on the last day of the then current interest period, or any change in the law, or any compliance by the Lender with the requirements of fiscal or monetary authorities. Precedent 9—Longer form general indemnity to agent, franchisee etc The Principal agrees with the Agent throughout the term to indemnify and keep indemnified the Agent from and against any and all loss, damage or liability, whether criminal or civil, suffered [and legal fees and costs incurred] by the Agent in the course of conducting the Business and resulting from: 1 any act, neglect or default of the Principal or its agents, employees, licensees or customers; 2 the proven infringement of the intellectual property rights of any third party; 3 any successful claim by any third party alleging libel or slander in respect of any matter arising from [the supply of the [Products or Services] or the conduct of the Business] [in the Territory]; 385

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Provided that such liability has not been incurred by the Agent through any default in carrying out the terms of this agreement. Precedent 10—Full form indemnity by security contractor [Party A] (contractor) will indemnify [Party B] (owner or occupier), its servants and workmen against loss of or damage to property or bodily injury sustained by it or them by reason of any act of neglect of the security officers or other personnel of [Party A] whilst performing their duties within the scope of their employment with [Party A] and against the dishonesty of such officers or personnel whilst performing their duties within the scope of their employment with [Party A] provided that: 1 [Party A] shall be under no liability whatever in respect of: 1.1 loss or damage or any consequential or indirect loss sustained by [Party B] or its servants or workmen or third parties by reason of any act or neglect of the security officers or personnel in excess of [£1,000,000]; 1.2 loss of or damage to [Party B]’s property or property for which [Party B] is responsible or any consequential or indirect loss attributable to the dishonesty of the security officers or personnel in excess of [£100,000]; 1.3 loss, damage or injury or any consequential or indirect loss arising from the performance of or failure by [Party A] to perform a duty extraneous to this agreement which [Party A] or its security officers or other personnel may at the express wish of [Party B] have undertaken to perform (whether such loss, damage or injury or consequential or indirect loss be due to the negligence of [Party A] or of its servants or agents or to any other cause whatever) unless [Party A] has agreed in writing to carry out such extraneous duty and the written agreement is signed by a director or senior executive of [Party A]. 2 Notice of all claims by [Party B] in respect of any loss, damage or injury or consequential or indirect loss shall be given in writing to the address for [Party A] given at the head of this agreement within [7] days of the discovery of such loss, damage or injury or consequential or indirect loss and in default of such notice within such period [Party A] shall not be held responsible for such claim. Precedent 11—Full form indemnity by lessee of personal property (eg aircraft) 1 The Lessee indemnifies each of the Lessor and its employees and agents and shall keep each of them fully indemnified at all times against all actions, claims, demands, proceedings, costs, expenses, fines, penalties, taxes (other than taxes chargeable on the Lessor’s profits or chargeable gains in the United Kingdom), losses and liabilities whatever in any way arising out of or connected with [the Aircraft] 386

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or this agreement and arising during the period of this agreement, but whenever incurred, including in particular (without limitation) all those arising from, resulting from or connected with: 1.1 delivery, possession, use, operation, management, maintenance, insurance or repossession of [the Aircraft]; 1.2 loss, injury or damage sustained by the Lessee or any third party; 1.3 any refusal by insurers to meet in full a claim under any of the insurances; 1.4 seizure, condemnation or taking possession of [the Aircraft] by any person organisation or state unauthorised by the Lessor (including any payments or expenses in respect of [hijacking of or threats against the Aircraft or its passengers, crew or cargo] provided that no such payment shall be made without the prior agreement of the Lessor and the appropriate insurers); 1.5 any breach or non-compliance by the Lessee of or with any of the provisions of this agreement. 2 The Lessee further agrees to defend the Lessor against any action or proceeding relating to any such losses as are mentioned in Clause [1], to permit the Lessor (at its option) to become party to any such action or proceeding and to indemnify the Lessor against all costs (including legal costs) arising from any such defence. Precedent 12—Limited indemnity by licensor of eg software 1 Subject to Clause [no] (general limitations on liability) the Licensor will indemnify the Licensee for its reasonable costs and all damages awarded under any final judgment by a court of competent jurisdiction or agreed by the Licensor in final settlement to the extent that the Product as used in accordance with the Licence infringes the copyright [trademarks or trade secrets of any third party or and the intellectual property rights (other than patents) of any third party] Provided that: 1.1 the Licensee makes no statement prejudicial to the Licensor; 1.2 such infringement is not caused by or contributed to by acts of the Licensee other than the use of the Product in accordance with the Licence; 1.3 the Licensor is promptly notified in writing of the details of the claim; 1.4 the Licensor has sole control of the defence of such claim and all related settlement negotiations; and 1.5 the Licensee gives the Licensor all reasonable assistance at the Licensor’s expense in connection therewith. 387

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2 If at any time an allegation of infringement of any third-party rights is made, or in the Licensor’s opinion is likely to be made, in respect of the licensed materials the Licensor may at its own expense: 2.1 obtain for the Licensee the right to continue using the Licensed Materials; or 2.2 modify or replace the Licensed Materials so as to avoid infringement; or [2.3 if conditions 2.1 and 2.2 above cannot be accomplished on reasonable terms, refund the licence fee whereupon the Licence shall terminate]. 3

The Licensor will have no liability for any infringement claim based on: 3.1 use of other than the latest unaltered current release of the Product; or 3.2 use or combination of the Product with equipment, programs or data not supplied by the Licensor; or 3.3 the Licensee’s refusal to use modified or replacement licensed materials supplied or offered to be supplied pursuant to Clause [no].

4 This Clause [no] states the entire liability of the Licensor with respect to the infringement or alleged infringement of any third-party rights of any kind whatever by the licensed materials.

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Indexation (inflation)

Purpose of the clause An indexation clause has the purpose of allowing one or more of the parties to adjust prices for goods or services or salaries or wages to allow for the effect of inflation, usually while the agreement continues in existence. This clause deals with a different point than the amount that the supplier may charge for goods or services for any particular order. For example, a supplier may fix the price in the contract, by reference to a pricing list or by some other formula allowing for the price to increase or possibly decrease (eg the price for the goods or services increases by a set percentage on the anniversary of the parties entering into their agreement). The use of an indexation clause is more likely to be seen where the agreement will run for a period of time, or where the goods that the supplier will provide will either be supplied on a regular basis or have an extended lead time. For example: •

if the supplier is to construct an item which will take several months from order to delivery, and is dependent on parts from third parties, then in the interim between the order being placed and the supplier obtaining the parts, the parts may have increased in price if calculated taking account for inflation;

•

if the supplier provides services on a regular basis, such as so many hours’ consultancy each month, then over a long period, certain of the supplier’s costs may increase, such as the amount it pays to its consultants etc.

Drafting issues The following factors need consideration when including an indexation clause: •

Is an Indexation clause appropriate? Is this an appropriate method of allowing for the rise in prices? In some of the following circumstances, an indexation clause may not be appropriate: • if used, then the party wishing to increase prices will be restricted to a contractually fixed method, which does not give control to that party but leaves it subject to outside events (eg dramatic increases in 389

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raw materials if the party needs to source these during the life of the agreement);

•

•

the cost of items used in providing the goods and services may rise at a greater rate than whatever index is used;

•

the party providing goods or services may rely on supplies from third parties (eg raw materials or finished products) and the third parties can easily increase their prices, which the party providing the goods and services cannot control or pass on to its customers.

Where an Indexation clause is utilised: •

the date on which the indexation is to take place. Eg, the agreement may set a date, or it may be on each anniversary of the commencement of the agreement;

•

which index should be used? Often the UK  Retail Prices Index (RPI) is used, but it might not be the most appropriate one. Eg, if the agreement concerns the manufacturing of goods, then an index based on manufacturing costs may be more appropriate than one based on the price of retail sales;

•

which index month should be used for the calculation?

•

the method of calculation;

•

what happens if the method of calculating the index changes during the life of the contract?

•

what happens if the index is abolished or replaced by another index during the life of the contract?

•

should the increase happen automatically? Does the party paying the increase as a result of the Indexation clause have a right to object, be consulted or terminate the agreement if unhappy about the increase or if the increase is above a certain level?

•

notice. Is the party applying the Indexation clause required to notify the other party prior to an increase? If so, when is the party required to do so? Eg, a party may be required to give 30 days’ notice even if the Indexation clause takes effect the same time each year.

•

worked example. As the use of calculations can cause problems for some parties (and their lawyers) when drafting contracts, should the clause dealing with indexation include one or more worked examples, either within the clause itself or by referring to a schedule? (See, for example, Arnold v Britton [2015] UKSC 36, although not a case specifically about indexation or inflation, but one that clearly indicates the difficulty parties (or their lawyers) have in expressing themselves clearly when dealing with calculations). A clause dealing with calculating the price or rate for something based on inflation is likely to be one of these difficult areas.

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Location in the agreement The Payment clause will normally contain the Indexation clause.

Linkage and use See Payment terms.

Sample precedent material Precedent 1—Sample clause – short form On each [Review Date] [anniversary of the Commencement Date] [(date)] the Salary mentioned in Clause [no] shall be increased by the proportion by which the RP Index has increased during the preceding [year]. Precedent 2—Sample clause – longer form The Payments shall be adjusted at the Assessment Date by the Inflation Formula, where ‘the Inflation Formula’ means the following formula: P × RPI (2) RPI (1) Where: ‘P’ is the initial amount of the payment as specified in Clause X; ‘RPI(1)’ represents the all-items figure shown in the General Index of Retail Prices last published before the date of this Deed (namely (specify)); and ‘RPI(2)’ represents the all-items figure shown in the General Index of Retail Prices last published before the Assessment Date. PROVIDED that: (1) if the base rate or any other mathematical factor affecting the calculation of the all-items figure shown in the General Index of Retail Prices changes before the Assessment Date all necessary adjustments shall be made to ensure that RPI(2) is computed consistently with RPI(1); (2) if the General Index of Retail Prices or the all-items figure in it has ceased to be published at the Assessment Date the arbitrator shall adopt such official or other index as shall appear to him to be most appropriate for measuring the change in the value of money between the date of this Deed and the Assessment Date.

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Insolvency (termination for)

Purpose of the clause Background Commercial agreements often include a provision to allow a party to terminate the agreement if another party becomes insolvent, bankrupt or is liquidated. Such provisions are often regarded as classic ‘boilerplate’ clauses, which require little thought.

Insolvency and partnership In an agreement involving a degree of closeness and trust between the parties, such as a partnership agreement, the parties may agree that mere indebtedness at a certain level is to be sufficient cause for expulsion, eg: ‘If any partner shall be unable to pay, or have no reasonable prospect of paying, and the amount or the aggregate amount of the partner’s debts is equal to or exceeds the bankruptcy level (within the meaning of the Insolvency Act 1986, s 267), the partner shall enter into a compromise for the benefit of that partner’s creditors generally …’

or, less severely: ‘If any partner shall have a bankruptcy order made against her or him or shall suffer her or his share in the partnership to be charged for his separate debt under the Partnership Act 1890 …’

In agreements in which the parties are more at arm’s length, the following may be sufficient to denote the degree of insolvency comprising fundamental breach: ‘The levying of any distress or execution against (party) or the making by him of any composition or arrangement with creditors or (being a company) the liquidation of (party) (other than a members’ voluntary liquidation) …’

Insolvency and the corporate party The standard form of insolvency clause for a corporate party usually runs as follows: 392

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Insolvency (termination for) ‘… if [party] becomes insolvent or goes into liquidation, either compulsory or voluntary (save for the purpose of reconstruction or amalgamation), or if an administrator, administrative receiver or receiver is appointed in respect of the whole or any part of its assets, or if [party] makes an assignment for the benefit of, or composition with, its creditors generally’.

The following words, if added, will widen the effect of the clause considerably, but may be resisted by the other party or parties: ‘… or threatens to do any of these things, or if any similar occurrence under any jurisdiction affects [party]’.

Reference to similar events under any jurisdiction may be essential if one or more of the parties is an overseas company. Indeed, it may be necessary to obtain overseas legal advice on the equivalent insolvency events under that country’s insolvency laws. In an agreement in which some parties are individuals and some are companies, it will be necessary to make express reference to both the types of insolvency described above.

Insolvency: pre-1987 terminology It should be noted that in agreements drafted before the coming into force of the Insolvency Act 1986 it was usual to refer, when specifying insolvency events relevant to a corporate party, only to the appointment of ‘a receiver’ in respect of the party’s assets, and this form is still occasionally encountered in forms of agreement which have not since been revised. It is essential now to specify the officers appointable under the Insolvency Act 1986, ie administrators and administrative receivers. Reference to receivership (to cater for appointment eg  under powers contained in a debenture) should also be retained. Agreements made before 1987 also commonly referred, in the case of insolvency of an individual, to the committing of ‘any act of bankruptcy’. This term does not occur in the Insolvency Act 1986 and no longer has any special meaning. Reference is usually now made instead to the making of a bankruptcy order against a party (under the Insolvency Act 1986, s 264), and perhaps also (where a higher degree of solvency is to be maintained) to the making of an application for an interim order (under the Insolvency Act 1986, s 252), eg: ‘the presentation by any person against (party) of any application for an interim order or petition for a bankruptcy order within the meaning of the Insolvency Act 1986’.

Note, however, that the above provision is narrower in scope than the old ‘act of bankruptcy’. The current equivalent reference will be to indebtedness at the statutory bankruptcy level. A comprehensive provision might be worded as follows: ‘being an individual who: (a) is the subject of a bankruptcy petition or bankruptcy order; or 393

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Insolvency (termination for) (b) is the subject of an application or order or appointment under the Insolvency Act 1986, s 253 or 273 or 286; or (c) is unable to pay or has no reasonable prospect of being able to pay his debts within the meaning of the Insolvency Act 1986, ss 267 and 268.’

Similarly, reference to a ‘receiving order’ (found in pre-1987 documents) should now be avoided.

Drafting issues There are some commercial issues which may need consideration when drafting or reviewing a clause which permits termination due to insolvency, including: •

Do the parties wish the agreement to terminate in the event of insolvency of one of them? The insolvency of a party is almost always stipulated as an event entitling the other party to terminate the agreement. In the absence of such a provision, the bankruptcy or winding up of one party may of itself be insufficient to terminate the contract. It is always advisable to be specific when framing such a provision, as under modern law insolvency can comprise several stages.

•

When can the agreement be terminated? A  more central issue is when the contract may be terminated. Often, the drafter will wish to allow for termination prior to the commencement of formal winding-up proceedings (in the case of a company) or bankruptcy proceedings (in the case of an individual). Termination clauses are sometimes very lengthy, as they try to address a range of circumstances where the company is close to, but not yet at, the point of formal proceedings.

•

Foreign parties. ‘Termination on insolvency’ clauses tend to use formal legal language that describes different insolvency events (eg  appointment of administrators) that are recognised by English law. In the case of contracts with non-UK parties, the parties may require advice from lawyers in the jurisdiction of the non-UK party as regards the appropriate language to use to describe insolvency events in that jurisdiction. Alternatively, a sweep-up provision may be included in the clause referring to similar or analogous events in other jurisdictions.

•

Should the agreement always terminate in the event of insolvency or bankruptcy? Sometimes, a party will refuse to accept that, in the event of its insolvency or bankruptcy, the contract should terminate. Eg, a licensor licenses some intellectual property to a licensee (involved in a ‘high-technology’ area). The licensee may regard the intellectual property licence as a valuable asset, which in the event of insolvency the liquidator or administrator should be allowed to sell in order to raise money to pay creditors and shareholders. The licensee may argue in

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negotiations prior to the grant of the licence that as long as the licensor is receiving royalties, that the licensor should not be concerned about the licence continuing after insolvency. Moreover, the licensee may feel that it or its directors will be vulnerable to actions from shareholders if it allows the licence to be terminated on insolvency, particularly if the insolvency results in a corporate restructuring that enables the company’s business to continue (this is perhaps more of a risk with North American companies). Of course, the licensor is likely to resist such an argument. However, this example illustrates that there may be situations in which it is in a party’s interests to object to a right of termination in the event of insolvency. •

Liquidators. If a company is liquidated, the liquidator has a statutory right to reject ‘onerous contracts’. A  contract provision cannot override this right. In most cases, this is simply a fact of life, and there may be very little point in trying to address the issue in the contract. Occasionally, though, contracts do include provisions which seek to protect a party’s position in the event that a liquidator seeks to reject the contract. Such provisions are beyond the scope of this title.

•

Is the right terminology used in the agreement for the type of party involved? Eg is the terminology for a company being used when an individual is involved?

•

When should termination occur? Should termination occur: •

prior to formal proceedings occurring? Or

•

only at the moment they occur? Or

•

at the time when a company passes a resolution for winding up? Or

• at the time when an administrator or administrative receiver is appointed, etc? •

Should the termination refer only to specific types of insolvency? If specific forms of insolvency are mentioned in an agreement then if the law changes and another form of insolvency is created, and the party becomes insolvent by that new form, then the other party may not have the right to terminate. See the case of William Hare Ltd v Shepherd Construction Ltd [2010] EWCA Civ 283 (briefly considered in the Interpretation section).

Location in the agreement The Secondary Main Provisions section of an agreement will normally include the Termination for insolvency clauses.

Linkage and use The issues and use of a Termination for insolvency clause will fall for consideration with other Termination provisions. 395

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Sample precedent material Precedent 1—Simple termination for insolvency provision Without prejudice to any other right or remedy it may have, the Company may terminate this Agreement forthwith by notice given in writing to the Distributor at any time if: (a) the Distributor is declared or becomes insolvent; or (b) the Distributor convenes a meeting of its creditors or proposes or makes any arrangement or composition with or any assignment for the benefit of its creditors or a petition is presented or a meeting is convened for the purpose of considering a resolution or other steps are taken for the winding up of the Distributor (save for the purpose of and followed by a voluntary reconstruction or amalgamation previously approved in writing by the Company) or if an incumbrancer takes possession of or a trustee, receiver, liquidator, administrator, administrative receiver or similar officer is appointed in respect of all or any part of its business or assets or any distress execution or other legal process is levied threatened enforced upon or sued out against any of such assets; or (c) the Distributor shall abandon or announce that it intends to abandon the business of distributing Films. Precedent 2—More detailed provisions (addressing corporate and individual insolvency) Without prejudice to any other rights of the Landlord if: 1 the whole or part of the Rent remains unpaid 21 days after becoming due (whether demanded or not); or 2 any of the Tenant’s agreements in this Agreement are not performed or observed; or 3 the Tenant: 3.1 proposes or enters into any composition or arrangement with his creditors generally or any class of his creditors; or 3.2 is the subject of any judgment or order made against him which is not complied with within seven days or is the subject of any execution, distress, sequestration or other process levied upon or enforced against any part of his undertaking, property, assets or revenue; or 3.3 being a company: (a)

is the subject of a petition presented or an order made or a resolution passed or analogous proceedings taken for appointing an administrator of or winding up such company; or

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(b)

an incumbrancer takes possession or exercises or attempts to exercise any power of sale or a receiver or administrative receiver is appointed of the whole or any part of the undertaking, property, assets or revenues of such company; or

(c)

stops payment or agrees to declare a moratorium or becomes or is deemed to be insolvent or unable to pay its debts within the meaning of the Insolvency Act 1986, s 123; or

(d)

without the prior consent in writing of the Landlord ceases or threatens to cease to carry on its business in the normal course; or

3.4 being an individual:

4

(a)

is the subject of a bankruptcy petition or bankruptcy order; or

(b)

is the subject of an application or order or appointment under the Insolvency Act 1986, s 253 or 273 or s 286; or

(c)

is unable to pay or has no reasonable prospect of being able to pay his debts within the meaning of the Insolvency Act 1986, ss 267 and 268.

any event occurs or proceedings are taken with respect to the Tenant in any jurisdiction to which it is subject which has an effect equivalent or similar to any of the events mentioned in Clauses 1 to 3 above;

then and in any of such cases the Landlord may at any time (and notwithstanding the waiver of any previous right of re-entry) re-enter the Holding whereupon the tenancy granted by this Agreement will absolutely determine but without prejudice to any right of action of the Landlord in respect of any previous breach by the Tenant of this Agreement.

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Insurance

Purpose of the clause Background A clause concerning insurance will cover some or all of the following points: •

the warranties provided by a party as to the level and scope of insurance cover held by that party; and/or

•

the obligations a party has to insure against specified risks; and/or

•

the obligations a party has to arrange for the other party to be added as a ‘named party’ under the first party’s insurance policy.

Insurance, risk and exemptions clauses A clause stating that the one party is to insure against a risk does not mean that party is liable for any losses associated with that risk. Insurance clauses should not be used as a substitute for statements as to which of the contracting parties bears the risk of a particular event happening. The ability of a party to insure against a risk is a factor to be taken into account by the court when assessing whether an exemption clause is ‘reasonable’ under the Unfair Contract Terms Act 1977. See further Exemption.

The view of the insurers A  party may have concerns as to whether another party has an insurance policy in place and the extent and level of coverage of that policy. However, an aspect that is sometimes overlooked is whether the wording of any insurance and other clauses are acceptable to the insurers. The persons negotiating an agreement may be unaware of the terms and conditions of the insurance policy (or may have never seen it). Insurers often have concerns particularly about: •

whether the type of agreement being entered into is the type envisaged by the insurance policy;

•

which country’s law applies to an agreement;

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• the extent and type of warranties and exclusions from or limitations of liability that have been agreed to. In some organisations there are procedures in place to collaborate closely with the organisation’s insurance brokers, so that the insurers can see the type of agreements that are entered into and the type of clauses which are normally agreed to. This approach should ensure that agreements which fall outside the ‘usual’ type of agreements are seen and considered in a timely fashion by the insurers brokers and/or insurers.

Drafting issues •

Does a party need to have insurance? •

is a party required to state that they have taken out or have in force an insurance policy?

• is a party required to indicate that the policy is with a ‘reputable’ insurance company? For some industry or service sectors there may be a limited number of insurers/insurance brokers available. Whether they are reputable or not, the party seeking insurance may have no choice but to deal with them. •

•

Does the Insurance clause state what kind of incidents will be covered by the insurance? Is it: •

all activities or incidents arising from the contract? or

•

(any) breaches of the agreement? or

•

only negligence and/or wilful default of a party? or

•

injury or damage only to persons or individuals?

Warranty. Is the party required to warrant: •

that it has in place a valid insurance policy?

•

that the premiums have been paid?

• that it will not carry out any activity or omission to make the policy void or voidable? •

What level of cover is required? Is a party required to state the level of cover given by any insurance policy, eg: •

a general statement, such as ‘fully comprehensive’ or ‘all risks’, or ‘all liabilities, risks and losses’? or

•

limited to specific types of insurance such as:

•

•

public liability insurance? or

•

professional indemnity insurance? or

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•

•

What is the amount of cover for any claim? •

for general types of clauses this is often stated in general terms or no limit stated; or

•

for more specific type of clauses there are specified limits: such as a limit per an individual claim with an overall limit.

Interest of the other party to be noted. Sometimes a party will require that the other party is not only to have insurance in place, but also has the interest of the first party noted on that insurance policy. For some parties it may not be possible to carry out such a step. They may have a general policy which covers a range of risks and noting the interest of more than one person may not be appropriate or simply impracticable. Also, such noting may have implications for any other person wishing to claim.

•

Providing copies of insurance documentation and receipts that payment of the premium has been made. This is sometimes requested by some parties. While such a request may appear reasonable, it can be a time-consuming and bureaucratic addition to administering an agreement. Frequently such a provision is modified (if it is accepted at all) by requiring the party who wishes to see such documentation specifically to request it.

•

Maintaining the insurance policy. Is there a requirement on the party required to insure that they will not by act or omission invalidate the insurance policy?

Location in the agreement The Insurance clause is normally located with other provisions dealing with warranties, limitation and exclusion of liability in the Secondary Main Provisions section of an agreement.

Linkage and use An Insurance clause can be important: • when the Main Commercial Provisions are negotiated, in particular where the cost of insurance may affect the contract price. Eg, a supplier of services may have to pay an increased premium in order to obtain a level of insurance cover that the customer may wish the supplier to have; • for the limitation and exclusion of liability. As indicated above, the availability and amount of insurance cover is one of the factors which will be taken into account when deciding when liability is restricted to a specified sum of money (Unfair Contract Terms Act 1977, s 11(4)); •

in relation to the giving of a warranty as to having insurance in place.

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Insurance

Sample precedent material Precedent 1—Warranty as to insurances – assets sale agreement The Vendor warrants that: 1 There are in force policies of insurance in respect of the Assets [to their full reinstatement value] and against all other risks and liabilities (including but not limited to product liability and consequential loss of profits) usually covered by insurance by persons carrying on business of the same type as [the Business]. 2 To the best of the Vendor’s knowledge, information and belief there are no circumstances which could lead to any such insurance being revoked, vitiated or not renewed in the ordinary course. Precedent 2—Warranty as to insurances – share sale agreement The Vendors warrant that: 1 There are existing valid policies of insurance for full replacement values against all liabilities risks and losses (including but not limited to the losses caused by any unlawful act on the part of any person) against which it is normal or prudent to insure in respect of all property owned by and in the business carried on by the Company. 2 All premiums due in respect of the Company’s insurance policies have been paid in full. 3 Nothing has been done or has been omitted to be done which could result in any of the Company’s insurance policies being or becoming void or voidable. 4 The Vendors are not aware of any circumstances which would or might entitle the Company to make a claim under any of its insurance policies or which would or might be required under any of its insurance policies to be notified to the insurers. Precedent 3—Short form obligation to insure (eg business premises) [Party B] undertakes and agrees: 1

to maintain and pay all premiums in respect of a comprehensive insurance policy (in terms approved by [Party A] (owner/franchisor etc)) issued by an insurer [nominated or approved] by [Party A] in respect of (describe location) (‘the Location’) (excluding its main structure) and all the items stored there;

2 to note on such policy that: 2.1 [Party A] shall be covered by such policy in respect of all claims arising from activities at the Location which are risks covered by such policy; and 401

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2.2 the insurer shall notify [Party A] in the event of any late premium payment by, or any breach of the terms of such insurance on the part of, [Party B]; 3

not to cause or permit any breach of any such insurance nor any other insurance in respect of the Location.

Precedent 4—Short form obligation to maintain public liability insurance [Party B] undertakes and agrees: 1 to obtain and keep in full force and effect at all times in respect of (location) a policy or policies of insurance covering public liability for injury to persons or property with policy limits and provisions conforming to such requirements as [Party A] (owner/franchisor etc) may from time to time prescribe; 2 to deliver to [Party A] copies of all applicable insurance policies taken out pursuant to the provisions of this agreement and to ensure that [Party A] [and its other franchisees or tenants or as the case may be] shall be entitled to the benefit of such insurance.

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Purpose of the clause Value of intellectual property A  significant asset of many businesses is the value of various intellectual property rights which it owns. If the business is in a high technology market, a research-based industry, or involved with arts, media or other creative industries, these rights are likely to be of substantial value or sometimes the only asset of any value that business has. Eg: • a pharmaceutical business, will need to fully and adequately protect its inventions, processes and products principally by means of patents and trademarks, as these forms of intellectual property are likely to be critical to the value of the business as well as to its (ongoing) profitability. For example, if a pharmaceutical business fails to maintain in force a patent (by failing to pay renewal fees) then the patent will lapse and potentially will allow another business to start making products based on or using the invention formerly protected by the patent; •

if the business is a computer software company, the copyright position of the software it develops or licenses will be critical, to ensure that it does in fact have the right to license, use, exploit etc the software that it produces or has the right to use and sub-license any third-party software used to create its software;

•

if the business is based substantially on a franchise operation, trademarks and brand names will be fundamental; or

• if the business is in the market of obtaining information from different sources and supplying it in a structured or ordered fashion then the use of the database right will be critical to protect its investment in making the database. Ie the business may not own the copyright in the individual items making up the database, and therefore the only ‘asset’ that the business possesses is the database right. Intellectual property clauses can also be found in many agreements that are not primarily concerned with the creation or licensing of intellectual property. Eg, in a services agreement concerning the provision of advice where the advice is put in the form of a report, intellectual property issues may arise. The report will be subject to copyright (and potentially the database right). If the 403

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information contained in the report is financially or commercially sensitive information, and which the recipient of the report can exploit commercially, then the matter of who owns the information and what can be done with it can be critical. There are a number different issues that normally need addressing when intellectual property is involved, including: •

what meaning intellectual property has;

•

who is to own existing or newly-created intellectual property;

•

how and who will protect newly-created intellectual property;

•

what uses one or both parties can make of the existing and newly-created intellectual property;

• the payments that need to be made for the creation or use of the intellectual property; and • what action is to be taken (and which party has the responsibility for taking it) if there is an infringement of the intellectual property which is the subject of an agreement. Not all of these issues will need addressing in every agreement where intellectual property issues arise. To continue the example of the services agreement: if the agreement concerns the provision of consultancy services and the consultant is under an obligation to produce a report then the report may be the only tangible output, but the nature of the consultancy and the report is of a routine nature and of interest only to the recipient client then the agreement, in theory, could not address any of the six matters listed above. Instead the consultant could rely on the default provisions of the Copyright, Designs and Patents Act 1988, as it is likely that the Act would cover all forms of material in the report (such as text, pictures, tables, etc). The Act would govern: •

when protection would arise (ie as soon as the consultant commitments parts of the report in a permanent form: s 3);

• who would own the contents of the report by default (the consultant: s 9(1), s 11(1)). Unless there is specific wording in the contract, the client would only get a limited licence to use the report for the purpose of the agreement (eg Ray v Classic FM [1998] All ER (D) 105). However, if the information contained in the report is important, whether for the consultant or the client, then it will be in the interests of both parties to address in detail some of the matters in the list, particularly issues of ownership and what uses the recipient client can make of the information contained in the report. A  simple example (in favour of the consultant) is found in Reporting, Precedent 7.

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Meaning of intellectual property ‘Intellectual property’ refers to a number of different rights. There is no universal definition or meaning of ‘intellectual property’. Some legislation provides a meaning of ‘intellectual property’, and most include the following rights as being an ‘intellectual property’: •

patents (including supplementary protection certificates);

•

registered designs;

•

the separate protection known as design right;

• copyright (which itself is made up of a number of different forms of protection, such as words, music, film etc); •

database rights;

•

unregistered trademarks;

•

registered trademarks;

• know-how (both technological and commercial) and other confidential information; •

licences or other rights in respect of the above.

The meaning of ‘intellectual property’ will also cover the following: •

community trademarks;

•

community registered and unregistered designs;

•

similar rights under UK or foreign laws;

•

applications for registered intellectual property.

The above lists only those which are encountered within the UK. In other countries further types of intellectual property are sometimes encountered. The following are examples of statutes that define the meaning of intellectual property for the purposes of the statute concerned: Companies Act 2006, s  861(4); Value Added Tax Act 1994, Corporation Tax Act 2009. However, none provides a fully comprehensive list and none deal explicitly with the newer EU-wide intellectual property rights introduced (community registered and unregistered design or community trademarks) and are not consistent among themselves as to the meaning of intellectual property. The principal intellectual property statutes in the UK all fail to define intellectual property (Patents Act 1977, Copyright, Designs and Patents Act 1988 and the Trade Marks Act 1994).

Defining ‘intellectual property’ As there is no fully comprehensive meaning of ‘intellectual property’, it is usual to define the term ‘intellectual property’ in agreements. 405

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A  broad, general definition might read as in Precedent 1. In practice, this definition will need using in conjunction with a description of any specific intellectual property that is to form the subject of the agreement (often such a specific description is specified in a schedule). Eg: •

for a patent, it is usual to state the application or patent number, title etc;

•

for copyright, depending on the work, it might be necessary to describe the version number or date of creation etc to properly identify the copyright work in question. In some cases, the work in printed form is reproduced as a schedule to an agreement.

Know-how and trade secrets Know-how and trade secrets are not strictly forms of property in their own right, although they are often treated as a form of intellectual property and are often licensed in the same ways as intellectual property (eg the technical and practical information on how to work a patent is licensed together with the right to use patent). However, they both lack universally recognised definitions. It may be more accurate to describe them both as information which may be protected under the law of confidence. The terms could be used interchangeably, and a definition of ‘confidential information’ could equally be valid. As noted in the previous sentence, what is most important is the form of protection they attract, which is the law of confidence, not the actual term used in an agreement. The term ‘know-how’ often covers technical and practical information and one legislative definition which is broadly consistent with this is found in the Technology Transfer Regulation (EC Commission Regulation 772/2004): ‘“know-how” means a package of non-patented practical information, resulting from experience and testing, which is: (i) secret, that is to say, not generally known or easily accessible, (ii) substantial, that is to say, significant and useful for the production of the contract products, and (iii) identified, that is to say, described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality.’

For example, a company may create an invention (a new form of product). They protect this invention with a patent. They wish to license the patent to others who will actually manufacture the product and sell the product. The company making the invention may have carried out testing on how to manufacture the product, including how to set up machinery quickly and how to mix, eg, chemicals together, and how to use materials in the most economical way. It was not necessary to include any of this information in the patent applications. This information will be of use to a manufacturer (as such information will allow the manufacturer to save time in getting ready to 406

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manufacture and then manufacturing the product). If this information is not provided in confidence then the manufacturer would be able to provide it to others. If it is provided in writing the written record would be protected by copyright but the information contained in it would not. The law of confidence would be the only means to protect the information itself (and stops others from using it). Once the patent had expired for the products, the (technical) information related to it might still be valuable and if protected by law of the confidence could be licensed to anyone interested in manufacturing the product once outside of patent protection. Having access to the information would enable to a person wishing to manufacture the product to save a considerable amount of time and money in attempting and determining how to manufacture the product. The meaning of a trade secret often covers information that has a commercial value. There are various meanings that a trade secret may have, including: 1

that it includes ‘secret processes of manufacture such as chemical formulae, or ‘designs and special methods of construction’ or ‘other information that is of a sufficiently high degree of confidentiality to amount to a trade secret’, with the latter including information about prices (from Faccenda Chicken v Fowler [1986] 1 All ER 617);

2 that it ‘…covers not only secret formulae or recipes, but can also extend[s] to such matters as names of customers and the goods they buy, or a company’s pricing structure, if these are not generally known and are the source of a trading advantage’ (from Freedom of Information Act Awareness Guidance No 5: Commercial Interests, 2008, Information Commissioner). 3 as found in the Trade Secrets Directive: ‘to cover know-how, business information and technological information where there is both a legitimate interest in keeping them confidential and a legitimate expectation that such confidentiality will be preserved. Furthermore, such know-how or information should have a commercial value, whether actual or potential.’ (Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (2016/943), Recital 14). In English law a ‘trade secret’ also has a particular meaning in employment law, relating to that part of the employer’s confidential information that an employee, after the employee has ceased to be an employee, must continue to keep secret and confidential. Such information is distinguished from other employer information that the employee has knowledge or possession of, and which is confidential during the employee’s employment, but ceases to be confidential on termination of the employment of the employee (see Faccenda Chicken v Fowler [1986] 1 All ER 617). For the contract drafter, the use of the terms ‘know-how’ or ‘trade secrets’ by themselves will not be sufficient to identify the information that will be 407

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subject to protection (ie to distinguish a particular set of information which will attract protection from that which does not). If a party wishes to make sure that their information is protected, rather than rely on an equitable obligation of confidence arising, or a court implying a contractual obligation of confidence or relying on statutory protection offered by the Trade Secrets Directive (once in force in 2018), then an agreement should contain explicit contractual obligations of confidentiality as well as identifying the information that will be subject to the obligation (see Confidentiality).

Warranties as to validity of intellectual property rights The purchaser or licensee of intellectual property may wish to carry out a due diligence exercise to establish the extent, validity and enforceability of the rights in question and seek to back this up, so far as possible, with warranties from the vendor or licensor. These warranties will be designed primarily to cover the risk that there are no restrictions on using the intellectual property needed to operate the business and that, where necessary, continued registration of those rights has been effected and the appropriate fees paid. Examples of intellectual property warranties are given in Warranties, below.

Drafting issues The following are a few of the drafting and commercial issues that may need to be considered when addressing intellectual property issues in a commercial agreement: •

Type of definition to be used? What type of intellectual property will be created, used, licensed, transferred or is the subject matter of the agreement? •

should a ‘generic’ (or possibly no) definition of intellectual property be used? In routine agreements or agreements whose focus is not the creation, use, transfer etc of intellectual property then it may be appropriate not to add a definition of intellectual property;

•

should the agreement include an all-encompassing definition? In some agreements, where one party wishes to own or control all creation or use of intellectual property, an all-encompassing definition might be appropriate. A  possible danger here is that any definition used may not be encompassing enough as types of intellectual property are introduced, ie a court could hold that the definition sets out all the intellectual property that is covered by the agreement and no more. This is more likely to be a problem where the agreement covers the creation or use of intellectual property outside of the UK. However, wording can be added to extend the coverage such as: ‘and all other intellectual property rights’;

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•

should a very specific definition be used? If the agreement is only concerned with one type of intellectual property, then a specific definition might be utilised. Eg, in a patent licence, the definition of intellectual property might be limited only to patents, as the licensor would wish to license only a specific set of patents and patent applications to the licensee (see Precedent 2).

•

Should a number of different definitions of intellectual property be utilised? In some agreements there are two different definitions of intellectual property: • a general definition of intellectual property, usually concerned with intellectual property owned at the start of the agreement (and possibly covering that intellectual property generated during the course of the agreement but is not the focus of the agreement); and • a more specific definition, related to the specific purpose of the agreement, such as the creation or licensing of intellectual property within a specific area.

•

For what purposes can a party or the parties use the intellectual property? Can the parties use the rights granted under the agreement only for the stated purposes in the agreement?

•

Who is to own any new intellectual property developed or created under or during the contract? If one of the parties is to own it, will they grant the other a licence to use or exploit it?

•

Which party should apply for and maintain intellectual property? Which party is responsible for applying and maintaining registered rights (eg patents, trademarks and registered designs) and in whose name and at whose cost?

•

Third-party claims. Which party is responsible for dealing with third-party claims that use of intellectual property under the contract infringes thirdparty rights? Who bears the cost of any royalties or fees paid to third-party intellectual property owners?

•

Suing infringers. Which party is responsible for suing infringers of the intellectual property provided or licensed under the contract? Who keeps any damages obtained from infringers?

•

Use of intellectual property after termination. What rights does each party have to any intellectual property after the contract is terminated?

• In a licensing or technology transfer agreement, what rights are to be transferred? •

In a development, research or supply agreement where development or adaptation of a product may be involved, who owns the various rights that either exist prior to the contract (often called ‘background intellectual 409

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property’)? Who owns any intellectual property that arises during its execution (often called ‘foreground intellectual property’)? •

Non-intellectual property type agreements. Where an agreement does not have intellectual property as its focus, but it is likely that some intellectual property will be used or created, there should be: • a definition of the types of intellectual property to be used in the agreement; •

a statement that the intellectual property existing at the start of the agreement, and used during the course of an agreement, belongs to the party who introduces it;

•

a statement dealing with who owns the intellectual property generated during the course of the agreement (often called ‘foreground intellectual property’);

• a statement as to the purposes for which the background and foreground intellectual property can be used, eg only for the purposes of the agreement.

Location in the agreement In an agreement the use of intellectual property usually appears in four contexts: •

its meaning: • a clause in the Definitions section of the agreement setting out the meaning of intellectual property;

•

its use: • one or more clauses in the Main Commercial Provisions of the agreement concerning: •

the creation of intellectual property (eg who is to create and who is to own what is created);

•

the use of intellectual property (ie licensing);

• the transfer (assignment) of ownership of intellectual property (eg sale); •

payment: •

one of more clauses dealing with: • payment for the creation or (further) development of the intellectual property; • calculation of methods of payment for the use of intellectual property (eg  upfront payments, milestone payments, royalty rates, etc);

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•

the consequences of its use: •

one or more clauses in the Secondary Commercial Provisions of the agreement concerning such issues as: • establishing ownership, responsibility for registering and maintaining registration (and the costs of so doing); •

dealing with infringements, third-party infringements (eg setting out who is to be responsible for dealing with infringement and the costs involved), etc;

•

Warranties clauses, the warranties that will be given by a party in relation to the intellectual property;

•

Termination clauses (eg expiry of the agreement if the intellectual property is held to be invalid or is revoked or expires, termination for failure to use the intellectual property as set out in the agreement);

•

Consequences of termination clauses, for example dealing with such issues as to whether any licences or sub-licences terminate, whether any goods made or services using the intellectual property can continue, and what to do with products after a licence terminates, etc.

Linkage and use Clauses concerning the use of intellectual property are often seen in agreements dealing with: • the creation of intellectual property (such as a software development agreement, or a research-collaboration agreement); • the licensing of intellectual property (such as software licensing, patent licensing, use of trademarks); •

in services contracts (which may involve the creation and use of documents and associated copyright issues);

• in agency and distribution agreements (where the use of copyright material and trademarks will need attention); •

in manufacturing agreements (where the use of patents or trademarks will often be involved).

Sample precedent material Precedent 1—Sample definition of intellectual property ‘Intellectual Property’ means any and all of the following items, whether or not registered, applications for the following items (where registrable) and the right to apply for the following items (where registrable): 411

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(a) Patents; and (b) Copyright, [moral rights, performance rights,] design rights, [rights in respect of semi-conductor topographies,] registered designs, [utility models,] [plant variety rights,] [trademarks,] [Community trademarks,] [Community registered and unregistered designs,] rights in respect of confidential information, unfair competition rights, and similar rights in any country of the world. ‘Patents’ means patents and patent applications, including any continuations, continuations in part, extensions, reissues and divisions, and any patents, supplementary protection certificates and similar rights that are based on or derive priority from the foregoing in any country of the world. Precedent 2—Specific definition of intellectual property – patents only ‘Patents’ shall mean any and all patents and patent applications referred to in Schedule [ ], and any and all of the patents and patent applications (if any) which may be made during the term of this Agreement and which form part of the Project IPR, including any continuations, continuations in part, extensions, reissues, divisions, and any patents, supplementary protection certificates and similar rights that are based on or derive priority from the foregoing. Precedent 3—Specific definition of intellectual property – primarily copyright ‘Intellectual Property’ means any and all of the following items, whether or not registered, applications for the following items (where registrable) and the right to apply for the following items (where registrable): (a) Copyright, and all rights in the nature of copyright in the Work created for all the residue of the term of copyright in the created Work, and in the Work about to be created by the Creator for the full term of copyright, and all extensions and renewals thereof together with all accrued causes of action in respect thereof; (b) Moral rights, performance rights, design right, rights in respect of semi-conductor topographies, registered designs, unregistered and register Community designs, utility models, plant variety rights, trade marks and service marks, rights in respect of confidential information, unfair competition rights, and similar rights in any country of the world; and (c) Patents [(if any) including without limitation the Identified Patents (if any). ‘Patents’ means patents and patent applications, including any continuations, continuations in part, extensions, reissues and divisions, and any patents, supplementary protection certificates and similar rights that are based on or derive priority from the foregoing in any country of the world.] 412

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(If the user wishes to further specify the meaning of a patent the wording ‘[ ]’ may be used. It is also possible to include the complementary definition of ‘Work’) ‘Work’ shall mean any and all literary and artistic works, materials, documentation, medical or other information and/or software that the Creator may be commissioned [by Party A] from time to time to generate or may provide to Party A including without limitation the items described in the Schedule. Precedent 4—Definition of intellectual property – foreground and background IP ‘Background IP’: all technical know-how and information known to either of the Parties at the date of this Agreement together with all intellectual property rights owned by or licensed to the Parties at the date of this Agreement, all technical know-how and information and intellectual property rights owned by or licensed to the Parties which is not Foreground IP. ‘Foreground IP’: all information, know-how, results, designs, inventions and other matter capable of being the subject of intellectual property rights which is conceived, first reduced to practice or writing or developed in whole or in substantial part in the course of the Project. [This pair of definitions would be for use in an agreement where it was important to distinguish between intellectual property etc that the parties bring to the agreement (and which belongs to those parties) and intellectual property created during the project, and which is to belong to one party.] Precedent 5—Definition of intellectual property – foreground and background IP – alternative definition ‘Background Information’: (a) all technical know-how and information known to the Parties at the Commencement Date of a confidential nature and not in the public domain, together with (b) all intellectual property rights owned by or licensed to the Parties at the Commencement Date and (c) following the Commencement Date, all technical know-how and information of a confidential nature (prior to it coming into the public domain) and intellectual property rights owned by or licensed to the Parties which is not Foreground Information. ‘Foreground Information’ any inventions, discoveries, ideas, improvements, devices, products, know-how or the like, whether patentable or not (‘Inventions’), and copyright material that Party A, its staff or agents, alone or jointly with others, conceives, invents, makes, or produces during the course of the Project that relate directly to the [Product] [in the Field]. 413

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Precedent 6—Definition of intellectual property – for use in licensing of software – software ‘Technology’ shall mean intellectual property rights including copyright, to the Software, including without limitation the software source code and graphical user interface, the look and feel of the Software, the [any third party software such as development tools or runtime versions of such third party software] (which is licensed for use with the Software only), and the algorithms contained in the source code as supplied under this Agreement (but excluding any other algorithms). Precedent 7—Protection of intellectual property – simple form [Party A] agrees with [Party B] not to cause or permit anything which may damage or endanger the intellectual property of [Party B] or [Party B]’s title to such intellectual property or assist or allow others to do so. Precedent 8—Protection of intellectual property clause – agency/ franchise/services agreement [Party B] agrees with [Party A] throughout the term: 1 not to cause or permit any damage to [the Mark, the Know-How, the Methods or the Permitted Name] or the title of [Party A] to any of them or assist others to do so; 2

not to challenge the validity of any of the intellectual property of [Party A];

3 to notify [Party A] of any suspected infringement of the intellectual property or other rights of [Party A] or any member of its group of companies and to take such reasonable action thereupon as [Party A] directs at [Party A]’s expense; 4 not to use [the Mark, the Know-How, the Methods or the Permitted Name] except directly in [the Business]; 5 not to use [the Mark, the Know-How, the Methods or the Permitted Name] in any manner after the term or other sooner determination of this agreement and to compensate [Party A] fully for any unauthorised use by [Party B] of the same; 6 not to use [the Mark or the Permitted Name] or any derivation of the same in the corporate name (if any) of [Party B]. Precedent 9—Longer form protection of intellectual property clause – agency/franchise/services agreement [Party B] agrees with [Party A] throughout the term: 1 not to cause or permit anything which may damage or endanger [the Intellectual Property] or other intellectual property of [Party A] or [Party A]’s title to it or assist or allow others to do so; 2 to notify [Party A] of any suspected infringement of [the Intellectual Property] or other intellectual property of [Party A]; 414

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3 to take such reasonable action as [Party A] shall direct at [Party A]’s expense in relation to any such infringement; 4 to affix such notices to [the Products] or their packaging or advertising associated with [the Business] as [Party A] shall direct; 5 to compensate [Party A] for any use by [Party B] of [the Intellectual Property] otherwise than in accordance with this agreement; 6 to indemnify [Party A] for any liability incurred to third parties for any use of [the Intellectual Property] otherwise than in accordance with this agreement; 7 on the expiry or termination of this agreement forthwith to cease to use [the Intellectual Property] save as expressly authorised by [Party A] in writing; 8

not to apply for registration of [the Trade Name] as a trademark but to give [Party A] at [Party A]’s expense any assistance it may require in connection with the registration of [the Trade Name] as a trade mark in any part of the world and not to interfere with in any manner nor attempt to prohibit the use or registration of [the Trade Name] or any similar name or designation by any other licensee of [Party A];

9 not to tamper with any markings or name plates or other indication of the source of origin of the Products which may be placed by [Party A] on the Products; 10 not to use [the Intellectual Property] otherwise than as permitted by this agreement; 11 not to use any name or mark similar to or capable of being confused with [the Trade Name]; 12 not to use [the Intellectual Property] except directly in [the Business]; 13 not to use [the Trade Name] or any derivation of it in its [trading or] corporate name; 14 to hold any additional goodwill generated by [Party B] for [the Intellectual Property] or [the Business] as bare trustee for [Party A]; 15 that save that [Party B] acknowledges that [the Trade Name] is well known and valuable nothing in sub-clauses [1–14] shall be interpreted as prohibiting [Party B] from challenging the validity of any part of [the Intellectual Property]. Precedent 10—Protection of software – agency/franchise/services agreement [Party B] agrees with [Party A] throughout the term: 1 to use only [the Software] supplied by [Party A] in [the Processor] and only in [the Business]; 415

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2

to attend training in the use of [the Processor] and [the Software] or to procure that one of its employees does so;

3 when required by [Party A] to attend such further training in such use at its own expense; 4 not to cause or permit any person to make a copy of [the Software] at any time during the term except as permitted under sub-clause [11] below; 5 to permit [Party A] to inspect and operate [the Processor] and [the Software] [for the purpose of making copies] in accordance with Clause [no] of this agreement; 6

to notify [Party A] immediately it discovers any faults or defects in [the Software];

7

to co-operate fully with [Party A] in the diagnosis and cure of any such fault or defect;

8 to use only the current version of [the Software] stipulated in [the Manual] from time to time; 9 not to engage any person (except as authorised in advance by [Party A]) to provide support services for [the Software]; 10 to provide [Party A] at the expense of [Party B] with all necessary facilities, materials and records to enable [Party A] to supply such support services; 11 to keep a copy of [the Software] and all records maintained by it in [the Processor] in a secure place [away from premises used in [the Business or the Location]] on a sound disaster defence basis; 12 not to permit any person (except a person who has signed the nondisclosure and non-competition undertakings required by [Party A] and set out in [the Manual]) to use [the Processor] or [the Software]; 13 not to corrupt or interfere with any software or other processing material used by [Party A] from time to time. Precedent 11—Agreement as to intellectual property rights – eg product development joint venture 1 Each party shall be the owner of all existing Intellectual Property Rights in existence at the date of this agreement in any material which it has created or the creation of which was undertaken by a third party which it commissioned to create that material. [2 Where any new material is created for the purpose of this joint venture by either party then save to the extent that such material embodies the Intellectual Property Rights of the other party all the Intellectual Property Rights in such new Material shall belong to the party which creates it.] or, where intellectual property is to be held jointly: 416

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2

Any new Material created jointly by the parties shall save to the extent that it embodies Intellectual Property Rights belonging to either party at the date of its creation belong to the parties jointly and: (a)

where in the course of creating any Material to which this subclause [2] applies any Intellectual Property Rights are brought into existence such Intellectual Property Rights shall belong to the parties jointly and the parties shall at their joint expense take all reasonable steps necessary to protect the same by applying for UK patents and UK registered designs and such foreign rights corresponding to them or registrations of them as may be reasonable;

(b) if at any time during the subsistence of this agreement any Intellectual Property Rights belonging to the parties jointly are infringed by a third party then unless the parties agree jointly to take action in respect of such infringement either party may in the joint names of the parties on behalf of the parties as joint owners take all reasonable steps necessary to enforce the joint Intellectual Property Rights of the parties provided that the party taking such action shall indemnify the other party against all legal costs and expenses incurred in connection with such action (including any costs or damages awarded to such third party). Both parties shall use all steps and provide all information and assistance reasonably required for the purpose of such proceedings. Any sums recovered as a result of proceedings taken to enforce the joint Intellectual Property Rights of the parties shall after deduction of all legal fees and other expenses incurred in connection with such proceedings by the parties be divided equally between the parties. 3 Each party hereby grants a licence to the other to use its Intellectual Property Rights in accordance with this agreement. 4 Each party agrees not to use any of the Intellectual Property Rights belonging to the other party save for the purpose of this agreement. 5 On termination of this agreement each party shall: (a)

deliver up to the other party all materials provided by the other party together with any copies of any of them which remain in its possession power or control;

(b)

within 7 days destroy any materials created for the purposes of this agreement which embody any of the Intellectual Property Rights of the other party to this agreement.

6 If either party believes that any third party is infringing any Intellectual Property Rights in [the Product] it shall notify the other party of such belief. If either party wishes to take action against any third party for infringement of any of that party’s Intellectual Property Rights in 417

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[the Product] it shall give notice of such proposed action to the other party. Precedent 12—Agreement as to intellectual property rights – eg knowhow licence with product development The Licensee agrees: 1 not at any time during or after the Term to divulge or allow to be divulged to any person the Know-how or any other confidential information imparted to it by the Licensor other than to persons who have signed secrecy undertakings in the form approved by the Licensor; 2 not to permit any person to act or assist in the Business until such person has signed such an undertaking; 3 that all aspects of the Know-how shall be treated as confidential information by the Licensee and: (a) shall be disclosed only to those employees of the Licensee whose duties cannot be fulfilled without such disclosure and then only to the extent necessary to enable them to perform such duties; (b)

visitors to the premises where drawings or other elements of the Know-how are present or are in use shall be restricted so far as is necessary to minimise disclosure of all elements of the Knowhow;

(c)

the obligation of confidence shall continue after the end of the Term until the Know-how is in the public domain; and

(d)

notwithstanding the obligation of confidence imposed under the terms of this agreement it shall not be a breach of this agreement for either party to disclose in general terms relevant items of the Know-how to customers or potential customers so far as it is bona fide necessary to do so in order to promote sales;

4 not to use the Know-how otherwise than as permitted by this agreement; 5

to compensate the Licensor for any use by the Licensee of the Knowhow otherwise than in accordance with this agreement;

6 to indemnify the Licensor for any liability incurred to third parties for any use of the Know-how otherwise than in accordance with this agreement; 7 on the expiry of this agreement forthwith to cease to use the Knowhow save as expressly authorised by the terms of this agreement [or by the Licensor in writing]; 8 not to apply for registration of any trade name or designation associated with the Licensor as a trademark or service mark but to give the Licensor at the Licensor’s expense any assistance it may require in 418

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connection with the registration of any such trade name or designation as a trademark in any part of the world and not to interfere with in any manner nor to attempt to prohibit the use or registration of any such trade name or designation by any other licensee of the Licensor; 9 when required to do so, to become a registered user of any trademark registered in respect of [the Product] and to pay the expenses, including registry fees, involved in such registration as user; 10 not to tamper with any markings or name plates or other indication of the source of origin of [the Plant] or any part of it which may be placed by the Licensor on [the Plant] or upon the containers and packaging in which [the Product] may be supplied; 11 not to use any name or mark similar to or capable of being confused with any trade name or designation associated with the Licensor; 12 not to use any trade name or designation associated with the Licensor or any derivation of them in its corporate name.

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Interest

Purpose of the clause Common law and interest Under English common law, if a party makes a late payment of a contractual debt it does not need to pay interest, unless the parties to the contract have expressly agreed this or the payment of interest is implied from a course of dealing or trade custom.

Equity and interest In certain circumstances interest may be payable under equitable rules, eg, in the case of a mortgage where interest was not mentioned (see Mendl v Smith (1943) 112 LJ Ch 279); however, this should not amount to a penalty, as this would make the clause unenforceable. The rate of interest should therefore be made comparable to the likely cost of borrowing the money from a bank.

Statute and interest County Courts Act 1984 Until recently, there were only limited statutory situations where interest was payable (eg on county court judgment debts: County Courts Act 1984, s 74). Late Payment of Commercial Debts (Interest) Act 1998 The Late Payment of Commercial Debts (Interest) Act 1998 (LPCD(I)A 1998) provides for interest to be payable on qualifying debts in contracts for the supply of goods or services, where the purchaser and the supplier are each acting in the course of a business (LPCD(I)A 1998, s 2(1)). Keys features of the LPCD(I)A 1998 include: •

it applies to a ‘qualifying debt’: a debt created by virtue of an obligation to pay the whole or any part of the contract price (LPCD(I)A  1998, s  3). A  qualifying debt will include the payment of an instalment under a contract (ie  where a contract provides for the payments of sums due by instalments), see Fitzroy Robinson Ltd and Mentmore Towers Ltd; Fitzroy Robinson Ltd v Good Start Ltd (No 3) [2009] EWHC 3365 (TCC);

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•

it implies a term into contracts (LPCD(I)A 1998, s 1);

•

it does not apply to ‘excepted contracts’:

•

•

a consumer credit agreement;

•

a contract intended to operate by way of mortgage, pledge, charge or other security (LPCD(I)A 1998, s 2(5));

a statutory rate of interest applies (currently at 8% over the official dealing rate per annum) (LPCD(I)A 1998, s 6; Late Payment of Commercial Debts (Rate of Interest) (No 3) Order 2002, SI 2002/1675);

• that interest will start running from the day after the date agreed for payment of the debt (unless the parties agree otherwise) (LPCD(I)A 1998, s 4); •

it is possible, in the interests of justice, based on the supplier’s conduct, for the supplier either to receive a lower rate of interest or no rate of interest (LPCD(I)A 1998, s 5); For a court to exercise its powers under the LPCD(I)A 1998, s 5 it is the supplier’s conduct that needs consideration and not the rate of interest that the supplier was charging (see Ruttle Plant Hire v Secretary of State for the Environment, Food and Rural Affairs [2009] EWCA Civ 97);

•

that once the liability for interest begins to run, the supplier shall also be entitled to fixed sums payable in addition to interest and which are also an implied term into a contract. The amounts are £40 for debts less than £1,000; £70 for debts of more than £1,000 but less than £10,000; and £100 for debts of £10,000 (LPCD(I) A 1998, s 5A);

•

anti-avoidance measures. The parties cannot exclude the right to statutory interest under the LPCD(I)A 1998 unless there is a substantial contractual remedy in place for the late payment of the debt (LPCD(I)A 1998, s 8(1)). The parties are free to decide on what the substantial contractual remedy is (it can include something other than the payment of interest and/or be a different rate of interest than the statutory rate). A substantial remedy is one that compensates the supplier for late payment or deters late payment and where it is fair and reasonable to rely on the alternative to the statutory remedy taking into account all the relevant circumstances at the time the terms in question were agreed (LPCD(I) A 1998, s 9). In deciding whether a remedy should be enforceable in place of the statutory regime, regard will be paid to (a) the benefits of commercial certainty; (b) the strength of the bargaining position of the parties relative to each other; (c) whether the term (containing the remedy) was imposed by one party to the detriment of the other (via the use of standard terms or by other means); and (d) whether the supplier received an inducement to agree to the term (LPCD(I)A 1998, s 9(3)). The fact 421

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that a contractual rate is less than the statutory rate does not mean by itself it is not a substantial remedy (see Yuanda (UK) Co Ltd v WW  Gear Construction Ltd [2010] EWHC 720 (TCC)). In this case some observations were made about the rate of interest in relation to what amounted to substantial remedy: •

interest rates can vary, with the base rate at the date of the judgment being very different to that when the LPCD(I)A 1998 was passed;

• the LPCD(I)A  1998 does not automatically substitute the statutory rate of interest for that found in a contract; it only does so if the contractual rate does not amount to a substantial remedy; •

the statutory rate could be considered as penal, as at the date it was set it was double the base rate; and

• that in commercial cases coming before the courts the interest rate on damages was typically between 1% and 3% (usually at the lower percentage). On the facts of the case, and using the criteria found in the LPCD(I) A 1998, s 9(3), an interest rate of 0.5% over base rate was not a substantial remedy; •

that the statutory interest will also apply to any assignee of the creditor or other change in the identities of either party (LPCD(I)A 1998, s 13).

Consumer Credit Act 1974 The Consumer Credit Act 1974 imposes limits on extortionate credit bargains (ie credit agreements that stipulate grossly exorbitant repayments or grossly contravene ordinary principles of fair dealing), which may affect a contractual obligation to pay interest on loans. In the case of most commercial contracts, the main restriction on interest provisions is that they should not amount to a penalty, as this would make them unenforceable. The rate of interest should therefore be made comparable to the likely cost of borrowing the money from a bank.

Drafting issues •

Should a party have the right to charge interest?

•

If the right to charge interest is not permitted, has some other ‘substantial remedy’ been provided?

•

What rate should be charged? If the rate is above that set by the LPCD(I) A 1998 then the other party required to pay interest may claim that the rate set amounts to a penalty. If substantially below the rate set by the LPCD(I)A 1998 then the rate may not amount to a substantial remedy.

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•

What other rights does the party receiving payment have where a payment is late? In addition (or sometime in the alternative), a party has other rights, such as: • the right to withhold performance of the agreement (or further aspects of the agreement); •

the right to terminate the agreement (under Termination provisions).

Location in the agreement Where the charging of interest is permitted, the provision will normally be included with other provisions relating to Payment.

Linkage and use See Payment terms.

Sample precedent material Precedent 1—Interest on late payment – calculated from base rate All sums due from either of the parties to the other which are not paid on the due date shall bear interest from day to day at the annual rate of [ ]% over the current (name) Bank plc daily base rate with a minimum of ……% per year. Precedent 2—Interest on late payment – fixed rate [Party A] shall punctually pay to [Party B] all sums owing to [Party B] under this Agreement and in the event of any late payment all sums due shall bear interest at the rate of …% per month. Precedent 3—Interest on late payment –consumer agreement If any sum payable to us under this agreement is [10] days or more overdue, you must pay to us on demand (but without prejudice to any other right or remedy which we may have under this agreement or otherwise) interest on sums payable under this agreement which are [10] days or more overdue at (base rate) plus 5% per year on a day-to-day basis from the due date until the date of payment after as well as before judgment. Precedent 4—Interest on late payment – supply agreement Interest on overdue invoices shall accrue from the date when payment becomes due from day to day until the date of payment at a rate of [2]% above the (name of bank) base rate from time to time in force and shall accrue at such a rate after as well as before any judgment. 423

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Precedent 5—Interest on late payment including underpayments In the event of late payment of any money due to [Party A] under the terms of this Agreement (including without limitation any moneys found on an inspection carried out under Clause [no] (inspection of accounts) to have been underpaid) [Party B] shall pay to [Party A] interest accruing from day to day calculated at the annual rate of …% above the base rate from time to time of [name] Bank plc on all such money overdue from the due date for payment until the actual date of payment. Precedent 6—Interest where completion delayed – compounding In the event that Completion is delayed for any reason not attributable to default or delay of the Vendor in performing its obligations under this agreement interest shall be payable (as well after as before judgment) to the Vendor in respect of the consideration due on such date of Completion at the rate of ……% above the base rate from time to time of [name] Bank plc such interest to be calculated on a daily basis [and to be compounded at monthly rests]. Precedent 7—Interest on late payment – general – compounded interest If any sum payable under this agreement shall not be paid when due, [Party B] shall pay to [Party A] interest on such sum calculated on a daily basis and compounded quarterly from the due date until payment at the rate of [5]% per annum over the [name] Bank plc base rate from time to time in force.

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Interpretation

Purpose of the clause An interpretation clause typically provides for a number of matters in an agreement, including whether: • references to legislation include references to the legislation in an amended form, including changes during the life of the agreement; also whether any reference to that legislation is a reference to the amended version of the legislation; •

references to persons and genders (and the use of the singular or plural), are interpreted in too narrow a way. For example, where a reference to a ‘person’ means also ‘persons’;

•

a reference to a clause will mean a reference to a clause of the agreement, and avoiding repetition of words such as ‘hereof’; and

•

a heading used with a clause will or will not be used as an aid to interpreting the clause;

•

references to a schedule or schedules are references to schedules included with the agreement.

In some situations (see below), some of the above are implied into an agreement even though an Interpretation clause is not specifically included. A contract drafter will generally wish to include an interpretation clause in an agreement, except in very short contracts, where such a clause might be out of place.

Drafting issues Amendment/replacement of statutes •

Interpretation Act 1978. The Interpretation Act 1978 provides that where an Act repeals and re-enacts a previous enactment then a reference to that enactment in a document is taken as a reference to its re-enacted version, with or without modification (Interpretation Act 1978, ss 17(2) (a), 23(3)). This will apply unless there is a contrary intention and will apply in any deed or other instrument or document 425

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Note: the wording in the 1978 Act is likely to apply only to a limited range of changes to legislation: that is the repeal and re-enactment of an enactment (and is unlikely to cover anything other than an Act, and not subordinate legislative measures such as Statutory Instruments). However, it is likely to apply to an agreement, as it covers any form of ‘instrument’ or document. •

Catering for amendments and modification. However, most of the changes to legislation are not made by repeal and re-enactment, but by way of amendment and modification. Accordingly, where specific statutes are referred to in an agreement it is necessary to make wider provision than under the 1978 Act and cater expressly for amendment and other modification of statutes as well as repeal and replacement, eg: ‘Reference to any statute or statutory provision includes a reference to: (a) that statute or statutory provision as from time to time amended, extended, re-enacted or consolidated’.

•

Covering further amendments. It will also be necessary to make clear that the provision covers future amendment, repeals etc: ‘whether before or after the date of this agreement’.

•

Covering subordinate legislation. Statutory Orders, Rules and Regulations may also be covered by adding: ‘and (b) all statutory instruments or orders made pursuant to it.’

•

Should future amendments be included? Care should be taken to ascertain, in the case of each statutory provision referred to in the agreement, whether subsequent amendment of that provision, if automatically incorporated into the contract terms, is likely to affect any of the parties’ rights and duties. Eg, parties sometimes wish to define group companies by reference to the definition of ‘subsidiary’ used in the Companies Act 2006, and they may prefer the certainty of using the definition in force at the time the agreement was signed. In such cases, the reference should be to: ‘the (statutory provision) as originally enacted’

and to allow for an individual updating provision, where appropriate in the agreement, the statutes interpretation sub-clause should begin: ‘Unless provision is made to the contrary …’

If the agreement includes a clause that is based on or uses statutory wording but the clause makes no reference (whether in the clause or elsewhere in the agreement) as to the meaning of the clause changing if the statute is amended, then there is a danger that the clause will not be amended to take account of the change in the statutory wording. For example, in William Hare Ltd v Shepherd Construction Ltd [2010] EWCA Civ 283 the agreement made reference to the Insolvency Act 1986 and the circumstances when insolvency might occur. However a failure to use the wording of the updated version of the provision of the 1986 Act meant that a new way for a party to become insolvent was not covered. The court 426

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found that the words used in the agreement were clearly expressed and could not be used to cover the new way for a party to become insolvent. •

Persons/singular/plural. •

He/she/singular/plural. For the sake of brevity and to avoid any confusion, it is usual to make provision to the effect that in the agreement ‘he’ includes ‘she’ and ‘it’ and vice versa, thus avoiding any need to use the awkward ‘he or she’, ‘he or it’ etc throughout the agreement. The Interpretation Act 1978, s 6, provides similar wording. But this meaning is only for the purposes of any Act (see Rossetti Marketing Ltd v Diamond Sofa Company Ltd [2011] EWHC 2482 (QB) for an example of the use of the Act to interpret the word ‘Principal’ in reg 2(1) of Commercial Agents (Council Directive) Regulations 1993, where it was held that it could also mean the agent acting for more than one principal; ie it would not be interpreted as only referring to a single principal).

•

Person also means a corporate body. To make the point abundantly clear, the agreement should state that reference to a person also includes a corporate body. Eg: ‘Unless the context otherwise requires words denoting the singular shall include the plural and vice versa and words denoting any one gender shall include all genders and words denoting persons shall include bodies corporate, unincorporated associations and partnerships.’

The Interpretation Act 1978, s  5, Sch  1, also includes provision for the meaning of a person to include a ‘body of persons corporate or incorporate’. But this meaning is only for the purposes of an Act. The Law of Property Act 1925, s 61 may imply similar provisions (see under Extracts from legislation, below). •

References to clauses. To ensure a clear economical style of drafting, in general a reference to a clause, a sub-clause or a schedule is a reference to one of these in the agreement. This will avoid any need to refer to ‘clause 6 of this agreement’ or ‘the above clause 6’. Eg: ‘Unless the context otherwise requires reference to any clause, sub-clause or schedule is to a clause, sub-clause or schedule (as the case may be) of or to this agreement.’

In some agreements a reference to a clause, sub-clause or schedule, eg ‘… subject to the provisions of Clause [ ]’

is in the form of capitalising the first letter of the word ‘Clause’. This is a matter of personal preference, but can aid finding where references are made to clauses or schedules. Where there is any doubt about which agreement is being referred to it is possible to add wording such as: ‘of this Agreement’

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(eg, ‘…subject to the provisions of Clause [ ] of this Agreement’). This is advisable where there are several agreements being used in a transaction. •

Headings. The headings to the clauses of an agreement should succinctly indicate the contents of that clause, but the need to abbreviate may result in a generalised and possibly incomplete or misleading descriptive phrase. To avoid, in the event of a dispute, a heading being included as a relevant factor in interpreting the agreement, the drafter can include a brief disclaimer, eg: ‘The headings in this document are inserted for convenience only and shall not affect the construction or interpretation of this agreement’.

It appears, at best, that a heading to a clause will carry some weight in interpreting the clause it relates to, but will ‘not prevail over the express wording of the clause’ (Cott UK Ltd v FE Barber Ltd [1997] 3 All ER 540). It is sometimes provided that the headings ‘are not to be part of’ the agreement.’ Such a statement could cause confusion in the minds of persons reading the agreement who are not lawyers and is best avoided. The precedent given above is more logical and is quite adequate for the purpose.

Location in the agreement In traditional drafting practice, interpretation provisions are: •

combined with the Definitions clause. The heading will often be ‘Definitions and Interpretation’ (but the two should not be confused); or

• placed at the end of the agreement in the Boilerplate section of an agreement, with other standard boilerplate clauses.

Linkage and use It is possible to find wording more usually seen in an Interpretation clause in any parts of an agreement, but particularly important are those referring to statutes and other forms of legislation. In many types of agreements a party may be required to comply with statutory and regulatory requirements and often provide a warranty stating that they do comply. Such requirements and warranties may be true at the date of the agreement. If warranties in these terms are given and the Interpretation clause indicates that the references to legislation include any changes to it, and if the law changes and/or the regulatory requirements change, any continuing warranty may no longer be true and lead possibly to a breach of the agreement. This is unlikely to be a problem where the warranty is for a short duration, but in some cases some warranties are expressed to last for a lengthy period (sometimes years). Care should be taken in checking the provisions of an Interpretation clause, as it is often seen as a very routine and obvious piece of boilerplate. In the 428

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example given here, a party giving a warranty that they have complied with statutory and regulatory requirements might wish to exclude any references to changes in the law etc in the Interpretation clause.

Extracts from legislation Law of Property Act 1925 Section 61—Construction of expressions used in deeds and other instruments In all deeds, contracts, wills, orders and other instruments executed, made or coming into operation after the commencement of this Act, unless the context otherwise requires— (a) ‘Month’ means calendar month; (b) ‘Person’ includes a corporation; (c) The singular includes the plural and vice versa; (d) The masculine includes the feminine and vice versa.

Interpretation Act 1978 Section 5—Definitions In any Act, unless the contrary intention appears, words and expressions listed in Schedule 1 to this Act are to be construed according to that Schedule. Section 6—Gender and number In any Act, unless the contrary intention appears,— (a) words importing the masculine gender include the feminine; (b) words importing the feminine gender include the masculine; (c) words in the singular include the plural and words in the plural include the singular. Section 17—Repeal and re-enactment (1) Where an Act repeals a previous enactment and substitutes provisions for the enactment repealed, the repealed enactment remains in force until the substituted provisions come into force. (2) Where an Act repeals and re-enacts, with or without modification, a previous enactment then, unless the contrary intention appears,— 429

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(a) any reference in any other enactment to the enactment so repealed shall be construed as a reference to the provision re-enacted; (b) in so far as any subordinate legislation made or other thing done under the enactment so repealed, or having effect as if so made or done, could have been made or done under the provision re-enacted, it shall have effect as if made or done under that provision. Section 21—Interpretation etc (1) In this Act ‘Act’ includes a local and personal or private Act; and ‘subordinate legislation’ means Orders in Council, orders, rules, regulations, schemes, warrants, byelaws and other instruments made or to be made under any Act. (2) This Act binds the Crown. Section 22—Application to Acts and Measures (1) This Act applies to itself, to any Act passed after the commencement of this Act and, to the extent specified in Part I of Schedule 2, to Acts passed before the commencement of this Act. (2) In any of the foregoing provisions of this Act a reference to an Act is a reference to an Act to which that provision applies; but this does not affect the generality of references to enactments or of the references in section 19(1) to other Acts. (3) This Act applies to Measures of the General Synod of the Church of England (and, so far as it relates to Acts passed before the commencement of this Act, to Measures of the Church Assembly passed after 28th May 1925) as it applies to Acts. Schedule 1 ‘Person’ includes a body of persons corporate or unincorporate.

Sample precedent material Precedent 1—Interpretation clauses – statutes – singular and plural – clauses – headings 1 Reference to any statute or statutory provision includes a reference to: (a)

that statute or statutory provision as from time to time amended, extended, re-enacted or consolidated; and

(b)

all statutory instruments or orders made pursuant to it.

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2 Words denoting the singular number only shall include the plural and vice versa. Words denoting any gender include all genders and words denoting persons shall include firms and corporations and vice versa. 3 Unless the context otherwise requires reference to any clause, subclause or schedule is to a clause, sub-clause or schedule (as the case may be) of or to this agreement. 4 The headings in this document are inserted for convenience only and shall not affect the construction or interpretation of this agreement. Precedent 2—Interpretation clauses – particular statute – singular and plural – general statutes – headings 1 Unless the context requires otherwise: 1.1 words and expressions that are defined in the (name of statute) shall bear the same meaning in this agreement; 1.2 words importing the singular number shall include the plural and vice versa; 1.3 words importing any particular gender shall include all other genders; 1.4 references to persons shall include bodies of persons whether corporate or incorporate. 2 Any reference in this agreement to any statute or statutory provision shall be construed as referring to that statute or statutory provision as the same may from time to time be amended, modified, extended, re-enacted or replaced (whether before or after the date of this agreement) and including all subordinate legislation made under it from time to time. 3 Headings contained in this agreement are for reference purposes only and shall not be incorporated into this agreement and shall not be deemed to be any indication of the meaning of the clauses and sub-clauses to which they relate. Precedent 3—Interpretation clause – gender – singular and plural – general statutes – schedules – clauses In this Agreement unless the context otherwise requires: 1 words importing any gender include every gender; 2 words importing the singular number include the plural number and vice versa; 3 words importing persons include firms companies and corporations and vice versa; 4 references to numbered clauses and schedules are references to the relevant clause in or schedule to this Agreement; 431

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5

reference in any schedule to this Agreement to numbered paragraphs relate to the numbered paragraphs of that schedule;

6 where any obligation is undertaken by two or more persons jointly they are to be jointly and severally liable in respect of that obligation; 7 any obligation on any party not to do or omit to do anything is to include an obligation not to allow that thing to be done or omitted to be done; 8 any party who agrees to do something shall be deemed to fulfil that obligation if that party procures that it is done; 9 the headings to the clauses, schedules and paragraphs of this Agreement shall not affect the interpretation; 10 any sum payable by one party to the other shall be exclusive of VAT which shall where it is chargeable be paid in addition to the sum in question at the time when the sum in question is due to be paid; [11 any relevant perpetuity period shall be 80 years from the date of this Agreement;] 12 any reference to an enactment includes reference to that enactment as amended or replaced from time to time and to any subordinate legislation or byelaw made under that enactment. Precedent 4—Interpretation clause – exclusive rights Where there is a licence of intellectual property, then the drafter might add the following to Precedent 3 to explain clearly the meaning of ‘exclusive’ rights: ‘References to the grant of ‘exclusive’ rights shall mean that the person granting the rights shall neither grant the same rights to any other person, nor exercise those rights directly within the field and territory granted exclusively to the other party, subject to the other provisions of this Agreement.’

Precedent 5—Interpretation clause – headings Headings are used in this Agreement for the convenience of the parties only and shall not be incorporated into this Agreement and shall not be deemed to be any indication of the meaning of the clauses, schedules or exhibits to which they relate.

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Joint and several liability

Purpose of the clause Background The question whether an undertaking given by two or more persons is: •

‘several’; or

•

‘joint’; or

•

both ‘joint and several’

is in general one of interpretation and depends on the intention of the parties as evidenced by the terms of their agreement (Fell v Goslin (1852) 7 Exch 185).

Joint promisees In the absence of express provision, there is a presumption, where two or more persons join in making a promise, that generally their liability for performance is joint (eg, Kendell v Hamilton (1879) 4 App Cas 504 at 544, HL; Royal Albert Hall Corpn v Winchillsea (1891) 7 TLR 362 at 364, CA; Lockett v A and M Charles Ltd [1938] 4  All ER  170). Consequently, it will be necessary to join all the promisors as defendants to proceedings to enforce performance (eg, Kendell v Hamilton (1879) 4 App CA 504 at 544; Norbury Natzio & Co v Griffiths [1918] 2 KB 369 at 369). However, there are some exceptions (minors, an undisclosed sleeping partner, action brought in the county court). Similarly, where a promise is made to two or more promisees, it may be deemed to be made to them jointly, and all the promisees might therefore be required to join in proceedings to enforce performance.

Several liability By contrast, where there is ‘several’ liability, the liability is owed by each person separately and each can be sued separately (eg, Mikeover Ltd v Brady [1989] 3 All ER 618, CA). 433

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Joint and several liability

Joint and several liability Where two or more persons make joint and several promises, each person making a promise will have a joint and several liability (all persons are jointly promising and each party is separately promising) so that each person will have a joint and a several liability (eg, King v Hoare (1844) 13  M  & W 494 AT 505; Beecham v Smith (1858) EB & E 442; Owen v Wilkinson (1858) 5 CB NS 526). Accordingly, it is possible to sue one of them, some of them or all of them. The recipient of an undertaking given by two or more persons will generally wish the liability to be ‘joint and several’ as this gives the recipient the most flexibility in deciding who to sue and from whom to obtain satisfaction of the undertaking. For example, if a person is buying advertising services, and the provider of the services (design of the adverts, production of the artwork for the adverts, printing, buying of space in various media) are all divided into separate companies, then the person ideally would like that all of these separate companies are jointly and severally liable for the performance of the various obligations they are under, particularly if only one of the group of companies had any substantial trading history or assets. In the event of a dispute, the person could pick and sue the company in the group which had the most substantial assets. Where more than one party is stated to have an obligation under a clause of a contract, a simple way of ensuring that they have joint and several liability in respect of that obligation is to use the wording in Precedent 1. In more complex situations, separate clauses providing for joint and several liability may be appropriate.

Drafting issues •

Should there be a Joint and Several Liability clause at all? Eg: •

if a party consists of one person then such a clause will not have any application (or not be relevant to that party);

• if a contract has two or more parties who are performing separate obligations then, from those parties’ perspective, it may not be appropriate to make them jointly and severally liable for those obligations.

•

Eg, two parties may be responsible for providing (different) services to a third party under one agreement. If the two parties’ obligations are completely separate neither may wish to be responsible for the other’s obligations (eg a plumber and an electrician).

If there are several persons who constitute a party, should they be subject to joint and several liability? Eg, where there is a sale of a business or of shares, the persons who are involved are often required to jointly and severally provide a series of warranties.

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•

If there is to be joint and several liability, should this be for all the obligations under the agreement or just a particular obligation? If limited to a particular obligation, then the Joint and Several Liability clause should probably be located in the same clause as the clause in which the obligation appears. Also the agreement might contain wording to make it clear that the joint and several liability only applies to that obligation and not generally to the agreement.

•

Do the obligations refer to a definition of a single party, but in fact there is more than one party coming within the meaning of that definition? If so, should they have joint and several liability? Eg, a contract may provide that two accountants are hired to provide specialist tax advice to a company. They do not otherwise work together, but they are each experts on slightly different areas of tax law. The contract may have a party clause stating: ‘1. Jane Elizabeth Smith of [address]; and 2. Sara Eliza Jolly of [address]. (together the ‘Accountant’).’

And with the main obligation clause stating: ‘The Accountant shall perform the Services including delivery of a final report to the Company by 1 January 2018.’

In such a case, such wording may not make it clear whether the two accountants are jointly responsible for the obligation, or jointly and severally responsible. Best drafting practice would be to avoid such ambiguity in defining the parties and make clear with explicit wording whether the parties each have the obligation to perform it and what their liability is in relation to that obligation (eg joint, several, joint and several or only on the party who is to perform it). In some standard form contracts it may not always be possible. In such a case as the example above, if the intention is that all the persons/parties coming within the definition of an ‘Accountant’ are to have joint and several liability, then if there is an Interpretation clause there might appear in addition to the other wording the following: ‘a reference to the ‘Accountant’ shall be a reference to any one of the persons named in [eg the party clause] and/or all of them and any obligation on or to be carried out by the Accountant shall be joint and several on the persons referred to at [eg the party clause].’

See AIB Group (UK) plc (formerly Allied Irish Banks plc and AIB Finance Ltd) v Martin [2001] UKHL 63, [2002] 1 All ER (Comm) 209, which deals with the reach of a joint and several liability clause (that of imposing liability on one person for another’s debt), and see Case analysis below. •

Are the parties carrying out an obligation under an agreement as partners? If the parties who are carrying out an obligation under an agreement are partners (within the meaning given under the Partnership Act 1890) then, unless the agreement says otherwise, the 1890 Act assumes that the partners would have joint liability while they remain partners (1890 Act, s 9). 435

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Location in the agreement A Joint and Several Liability clause is generally found: •

in the Boilerplate section of an agreement; or

•

as part of a clause binding a party to an obligation; or

•

in an interpretation clause (see Precedent 3 under Interpretation).

Linkage and use The issues relating to joint and several liability arise, for example, in construction contracts where several contractors make a joint bid for the contract. A party that is contracting with several other parties acting together will invariably wish to insert a clause stating that liability is to be joint and several, as this will give the first party the ability to proceed against the most solvent and accessible of the co-contractors. This is a particularly useful facility if any of the contractors is not a UK resident. The advisers of the co-contractors may need to exercise care in the wording of any ‘joint and several’ obligations. They may, for example, wish to limit joint and several liability to breach of warranty or indemnity only and not extend it to all the obligations under the agreement, some of which the contractors may not be in a position to fulfil. Any one contractor may have no control over the other contractors’ activities or method of operation and it may therefore be dangerous for it to accept a joint and several liability clause such as in Precedent 4.

Sample precedent material Precedent 1—Short form [Party A] and [Party B] shall be jointly and severally liable for the performance of their obligations under this Clause [no]. Precedent 2—Short form Where any party comprises more than one person the obligations and liabilities of that party under this agreement shall be the joint and several obligations of those persons. Precedent 3—Alternative form All agreements on the part of either of the parties which comprises more than one person or entity shall be joint and several and the neuter singular gender throughout this Agreement shall include all genders and the plural and the successors in title to the parties. 436

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Precedent 4—Short form – joint and several obligations (eg contract for services) Each member of [Party] acknowledges that such member is individually contracted to the Company and that references to [Party] in this agreement shall be deemed to refer to each member and that all obligations on the part of [Party] in this agreement are joint and several obligations on the part of each member. Precedent 5—Longer form – joint and several liability – power of discharge and composition Where this agreement [and indemnity] is signed by or on behalf of a partnership or otherwise by or on behalf of more than one person, any liability arising under it shall be deemed to be the joint and several liability of the partners or of such persons as stated above and any demand for payment made or notice given by [Party] to any one or more of the persons so jointly and severally liable shall be deemed to be a demand made or notice given to all such persons. [Party] is to be at liberty to release or discharge any one or more of such persons from liability under this undertaking or to compound with, accept compositions from or make any other arrangements with any of such persons without in consequence releasing or discharging any other party to this agreement [and indemnity] or other­wise prejudicing or affecting [Party]’s rights and remedies against any such other party.

Consumer issues The phrase ‘joint and severally’ is not always clear to non-lawyers. An alternative formulation could be used for consumers, such as ‘separately, together or in any combination’ (see Butt, Modern Legal Drafting: A Guide to Using Clearer Language (3rd Edn, 2013, Cambridge University Press), 8.19). If the phrase ‘jointly and severally’ is to be retained and a consumer is to be a party to an agreement, an explanation of the phrase’s meaning might be used based on the definition found in the Glossary to the Civil Procedure Rules: ‘Parties who are jointly liable share a single liability and each party can be held liable for the whole of it. A person who is severally liable with others may remain liable for the whole claim even where judgment has been obtained against the others’.

Case analysis AIB Group (UK) plc (formerly Allied Irish Banks plc and AIB Finance Ltd) v Martin [2001] UKHL 631, [2002] 1 All ER (Comm) 209 1 The defendants (M  and G) were partners whose business was the purchase and development of property. 437

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2 One of the defendants (M) borrowed money from the bank and the partners jointly borrowed money from the bank. 3 All this borrowing was restructured and for the joint borrowing the claimant granted to the defendants a joint mortgage (on the standard form of the claimant) (Joint Mortgage). 4 The Joint Mortgage defined the borrowers (M  and G) as ‘the Mortgager’. 5 The interpretation clause of the Joint Mortgage dealt with the situation when there is more than one person within the definition of the Mortgager: ‘[it] shall be construed as referring to all and/or any one of those persons and the obligations of such persons hereunder shall be joint and several’

6 The Mortgager (ie the defendants) provided a covenant to the claimant bank in the following terms: ‘The Mortgagor hereby covenants with … the Bank … that it will on demand pay or discharge to the Bank … all sums of money … advanced to the Mortgagor by the Bank …’ [covenant as set out in the judgment].

7 The claimant bank called in the loans and wished to enforce the covenant and argued that defendants were liable for the Joint Mortgage and also each of them liable for the other indebtedness as well (under other loan agreements with the bank). Defendant M argued that he should not be liable under the covenant for the debt of G. 8 The House of Lords (as did the lower courts) held that M was liable for the debt of G, and that the true meaning of the covenant, reading it together with the interpretation clause, was that the parties were jointly and severally liable, which included M being liable for G’s debts to the bank as well: ‘[39] …The [covenant] starts with a joint covenant by Mr Gold and Mr Martin. It is not three separate covenants, one by them jointly and one by each of them individually. It is a single joint covenant. Their liability under this joint covenant is declared to be joint and several. This deals with the effect of their joint covenant. It does not turn a single covenant into three covenants. [40] But the critical issue is not whether Mr Gold and Mr Martin, as well as jointly covenanting to pay, have severally covenanted to pay. The critical issue is what have they covenanted to pay? Under sub-cl (1) they have covenanted to pay “all sums of money … advanced to the Mortgagor by the Bank”. The mortgagor means the two of them and/ or each of them. So they have covenanted to pay all sums of money advanced by the bank to the two of them and/or to each of them. I  do not understand how any process of construction can avoid the conclusion that they have covenanted to pay the sums advanced by the bank to Mr Martin alone as well as the sums advanced by the bank to them jointly. [41] The point is the same under sub-cl (2). Mr Gold and Mr Martin have covenanted to pay or discharge “all other indebtedness and/or liabilities 438

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Joint and several liability whatsoever of the Mortgagor to the Bank’ ie  ‘of the two of them and/ or each of them”. So they have covenanted to pay or discharge the indebtedness of Mr Martin to the bank as well as their joint indebtedness to the bank.’

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Language

Purpose of the clause The use of the English language is commonplace now in many international transactions. Parties to international transactions often prepare agreements in English, whether because: •

all the parties are based in countries which use the English language; or

• one (dominant) party is based in a country which uses the English language; or •

all the parties are from different countries and the English language may be the ‘common’ language among them.

However, the parties may prepare an agreement (or parts of it) in more than one language. In such agreements specifying the language of the agreement can have a number of advantages (see Precedent 1 for a typical clause). In addition to the main commercial agreement many formal documents (such as power of attorneys, formal assignments, technical or specification schedules and other such documents) may need filing with a country’s governmental and regulatory authorities. These documents are sometimes required to be in the language of that country. The same may be true for an agreement prepared in one language and used in a country where that language is not an official language. In such cases this may need translation into that country’s official language. It will also be advantageous to know which language version of the document prevails in the case of a dispute.

Drafting issues For agreements prepared in more than one language, consider the following points: •

Which language version prevails? If the agreement exists in different languages, it is desirable to state which is the authoritative version, in the event of a difference in meaning between the different versions.

•

Amendments. If there are to be any amendments to the agreement then the agreement should state that any amendments are made in the same language as the original.

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•

Which law and jurisdiction is to prevail? In some jurisdictions the language of the agreement may influence the court when deciding under which country’s laws the agreement is made, and which country’s courts should have jurisdiction. Ideally the agreement should state these matters specifically. Under English law, the language in which an agreement is expressed is unlikely to be a determining factor by itself (see eg Amin Rasheed Shipping Corp v Kuwait Insurance Co The Al Wahab [1983] 2 All ER 884, HL).

•

Documents related to the agreement also should be translated into the same language as the agreement. In some agreements documents referred to or generated under an agreement may not be in the same language. For example, for an agreement in the English language, it is desirable that there should be authoritative English versions of the other documents. The Language clause can be drafted so that any foreign documents are translated into English and certified by a party as being accurate (or are translated by a qualified/licensed translator) (see Precedent 3).

•

Language required by local law. For a few countries, the law of that country requires that a contract made under its law must be in the language of that country, or is authoritative where used. If either situation arises then the wording used in the contract may not be able to achieve the requirement. Only appropriate enquiries prior to the entering of the contract can deal with this point.

•

Documentation generated, or to fulfil obligations, under an agreement. An agreement may require one of the parties to supply documents or generate documents. For example, • a consultant may need to prepare a report to summarise the consultant’s findings and advice. If the party to whom she is providing the report has English as their working language then there will usually be no issue that needs addressing in the contract language. However, if the party (or the persons of the party) who will be reading the report do not have English as their working language then it may be necessary to specify which party is responsible for preparing a copy of the report in another language, as well as dealing with issues such as who will bear the cost, the type of translator that needs using etc (eg a heavily technical report may need a specialist translator); •

the supplier of goods which come with a manual or installation guide (or other supporting materials, such as YouTube videos, etc) may need to provide some of the manuals, guides or materials in other languages if the goods are intended for supply other than in an English-speaking country.

Location in the agreement The Boilerplate section of an agreement will usually include the Language clause. 441

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Language

Linkage and use Although a Language clause is generally free-standing, there are often other parts of an agreement that require that the language of documents or actions be expressed in a particular language, for example: • where documentation is required to be generated or provided in an agreement as part of the core obligations (eg, in a software licensing agreement, the language of user manuals (printed or electronic) may be specified); • where third parties are involved in matters arising from the agreement, such as arbitration or alternative dispute resolution, the language in which the third parties will operate may be specified.

Sample precedent material Precedent 1—English language version to prevail This agreement is made only in the English language. If there is any conflict in meaning between the English language version of this agreement and any version or translation of this agreement in any other language, the English language version shall prevail. Precedent 2—Documents in English to prevail Each document referred to in this agreement or to be delivered under it shall be in the English language or accompanied by an English translation of it certified as accurate by an officer of [Party]. In the case of conflict and unless [Party] otherwise specifies, the English language version of any such document shall prevail. Precedent 3—Documents in English to prevail – alternative version Any of the Reports that [Party A] is required to supply to [Party B] in accordance with Clause [no] or any notice that any Party wishes to give under this Agreement (‘Document’) shall be in the English language. If any Document is not in the English language, then the Document shall be accompanied by an English translation of it certified as accurate by an officer of the Party supplying or giving the Document. In the case of conflict [and unless the Party supplying or giving the Document otherwise specifies], the English language version of any such Document shall prevail. Precedent 4—Party’s language to prevail All agreements and all contractual arrangements in connection with (transaction) should be written in, or translated by a sworn translator into, [the] [an] official language of the country in which [Party] is established.

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Law and jurisdiction

Purpose of the clause Background A clause relating to law and jurisdiction indicates: • which legal system applies to an agreement or a dispute concerning or related to the agreement; and •

which country’s court will hear any dispute concerning or arising from the agreement.

Where there are only English parties to an agreement If the agreement concerns only English parties, as well as rights and obligations arising or taking place only in England, a law and jurisdiction clause will often be unnecessary. In practice, a law and jurisdiction clause is often seen as ‘default’ boilerplate wording and is included as a matter of course.

Where a foreign party or obligation is present Where there is a foreign element then an agreement should always include a law and jurisdiction clause. For example: •

where one or more parties does not operate or have a base in England and Wales; or

•

where a party has a place of incorporation outside England and Wales; or

• if either the offer or acceptance of the contract takes place outside England and Wales; or •

if a party is to perform any services outside of England and Wales;

•

if a party is a manufacturer or assembles goods in one country but is to deliver them to another country or to supply goods from one country to another; or

• where a party has significant assets (or all of its assets) in another jurisdiction to the one in which it operates, is incorporated, or in which the rights and obligations arise. 443

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Example one It is possible to construct a contract that involves several countries. For example: •

a company incorporated in Germany wishes to supply goods to a company incorporated in England;

•

representatives of the German and English companies meet in France and enter into the contract in France;

•

the German company purchases the goods from a Russian manufacturer for delivery to South Korea;

•

the English company arranges for payment through a subsidiary based in the United States to a subsidiary of the German company;

•

the payment is made from a bank in New York;

• the English company subsidiary is incorporated in Delaware and the German subsidiary is incorporated in California; •

the payment is made into the German subsidiary company’s French bank account.

If the contract does not specify which country’s laws apply and which country’s courts can hear any dispute then it may be difficult to decide (if the parties do not agree) which is the correct law or court.

Example 2 Two parties wish to hold negotiations as to whether one party will grant a licence to some intellectual property it owns to the second party. Prior to their substantive negotiations commencing, the parties wish to sign a confidentiality agreement, as the first party will have to disclose confidential information and know-how relating to the intellectual property in order for the second party to know whether it wishes to take a licence. After signature of the confidentiality agreement the first party discloses the confidential information to the second party. The second party misuses the confidential information (such as using it for a purpose other than as permitted in the confidentiality agreement or makes it publicly available). If the confidentiality agreement includes an exclusive jurisdiction clause (eg  exclusive jurisdiction of the English courts) and the misuse of the confidential information takes place outside of England, then the first party may not be able to take action directly in the courts of the jurisdiction where the other party has misused it. The first party may need to obtain a court order in England and then seek to enforce that court order in the courts of the other jurisdiction. In such a case, first obtaining a court order in England and then having to engage the procedures within the other country to have the judgment of the English court recognised may lead to substantial delay and expense. 444

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Law and jurisdiction

Which country has jurisdiction over an agreement or a dispute arising under or from an agreement? There are a number of legislative measures that deal with which court has jurisdiction over a matter. The main measure on how jurisdiction is determined where one or more of the parties are within the EU is the Brussels Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast). The Brussels Regulation deals (in simple terms) with disputes within the EU, and besides contractual disputes also ranges over matters other than those which are the subject matter of this book. In the absence of the parties choosing which country’s courts will have jurisdiction over a matter, then the Regulation provides as follows: • a person who is domiciled in a member state needs to be sued in that member state (regardless of their nationality) (Art 4); • it is possible to sue a person who is domiciled in one member state in another member state in specific situations, such as where a matter involves a contract. In such a case it is possible to use the courts ‘of the place of performance of the obligation’, which will normally mean in the courts of the place: (a) where goods are delivered (or supposed to be delivered) under a contract for the sale of goods, and for the place of performance of the obligation in question (Art 7(1)(a)); (b) where services are provided (or ought to have been provided) under a contract for the provision of services (Art 7(1)(b)). There are rules for deciding in which member state a person is domiciled who is not a national of a member state, or which member state’s court will have jurisdiction where a defendant is not domiciled in any member state. The above states how jurisdiction is dealt with where the parties do not choose which country will have jurisdiction. However, the Brussels Regulation does give the parties the freedom to choose which member state’s courts will have jurisdiction (whether or not any of the parties are domiciled in that member state), and whether the jurisdiction is exclusive or non-exclusive. If they do make that choice then the chosen court will normally have jurisdiction (and by default the jurisdiction will be exclusive unless the parties decide otherwise). There are a number of conditions for the parties’ choice to be valid, including (Brussels Regulation, Art 25): • that their agreement is not ‘null and void as to its substantive validity under the law of the member state chosen to have jurisdiction’; and •

that the agreement is in writing or evidenced in writing, or accords with a practice that the parties have established between themselves or (for international trade and commerce) accords with usage which is commonly known for contracts of the type the parties entered into. 445

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Exclusive jurisdiction If it is agreed that any proceedings between the parties in connection with the contract should only be brought in the English courts, the jurisdiction of those courts should be expressed to be ‘exclusive’. The effect of this will be reinforced by the Civil Jurisdiction and Judgments Act 1982, s 32, under which judgments given by a foreign court in proceedings brought contrary to an express agreement between the parties that another court should have jurisdiction will not be recognised or enforced. Note that the party seeking to invalidate such a judgment must not have submitted in any way to the jurisdiction of that foreign court (apart from contesting such jurisdiction): see the Civil Jurisdiction and Judgments Act 1982, s 33.

Non-exclusive jurisdiction If the parties specify that any dispute will be subject to the ‘non-exclusive’ jurisdiction of the English courts, it will be possible to bring proceedings in a foreign court on a matter over which that court has jurisdiction. Where cross-border rights (eg, intellectual property rights) are the subjects of the agreement, it may be in the owner’s interest to insist on the inclusion of this term in order to reserve the right to take protective action abroad. If the possessor of confidentiality wishes to obtain an urgent injunction (eg, to prevent disclosure of the confidential information), it is desirable to reserve the right to bring interim proceedings in the other party’s ‘home’ jurisdiction.

Which country’s law is to apply For parties domiciled in the EU, and for most types of contract made after 17 December 2009, the matter of which country’s law applies will be governed by the Rome I  Regulation (Regulation 593/2008) (except for Denmark where the Rome Convention continues to apply). The Rome I  Regulation applies directly in England (ie it does not need implementation by an Act of Parliament or a statutory instrument). The Rome Convention (which applied to contracts entered into after 1 April 1991) also deals with the question of which law is to govern the obligations of the parties in the absence of an express provision in the contract (the Convention was brought into force by the Contracts (Applicable Law) Act 1990, s 2). In essence, both the Regulation and the Convention allow the parties to a contract to choose which country’s law applies to a contract. The Rome I Regulation provides, as far as choice of law is concerned, that: •

the parties are free to choose the law of the contract (whether expressly or to be established by the provisions of their contract or the circumstances of the case) (Art 3(1)). The latter point may arise where they have not chosen a particular country’s law but their choice is clear because they

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have referred the matter to a particular country’s court or perhaps from a course of dealing; • the parties can choose different laws to apply to different parts of a contract as well as changing the law of the contract subsequent to the contract being entered into (Art 3(2)); • it is possible for the law of a particular country to apply to a contract despite the choice made by the parties; •

if the parties do not choose the law of the contract then the law chosen is based on what type of contract it is. For example for the sale of goods or services, the law of the contract is the one of where the seller/supplier is habitually resident. For a franchise agreement, the law is where the franchisee is habitually resident. Where none of these type of situations (or a mixture of them applies) then the law of the contract will be that of where the ‘party required to effect the characteristic performance of the contract has his habitual residence’. A final rule is that where none of the above apply then the law of the contract is that of the country to which it is most closely connected (Art 4);

•

where a contract involves a consumer, the law of the contract will normally be that of the country where the consumer is habitually resident. This provision is subject to the supplier of the goods and services providing the goods and services from that country or offering to provide the goods and services to the country where the consumer is habitually resident. It is possible for the law of the contract to be other than that of the country where the consumer is habitually resident, as long as the consumer rights of the consumer are not taken away (Art 6).

Law and jurisdiction rules and laws outside of the EU For contracts where the parties are not located in the EU, there is no international law or convention which universally applies to both law and/ or jurisdiction. The law will depend on how a particular country decides such matters; for example, the law governing the contract for a particular country may be based on where the parties are, or where a party is located, where the contract is performed or the country in which the contract is entered into. The main international convention (primarily only in relation to goods), the United Nations Convention for the International Sale of Goods 1980, will not normally apply to UK-based parties as the UK is not a signatory to this convention. It should be noted that specifying which law governs the contract will not necessarily override the laws of another country that may affect the contract, particularly where such laws are concerned with public policy issues. Eg, in a contract between English and United States parties in which the law of the contract is stated to be that of a US state, English competition laws may still apply (see the Chiron v Organon cases, eg Chiron Corpn v Murex Diagnostics Ltd (No 12); Chiron Corpn v Organon Teknika Ltd (No 12) [1996] FSR 153, CA). 447

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The subject of international conflicts of law and jurisdiction is a large and complex one. For further information, readers are referred to the specialised works on the subject, eg Cheshire, North and Fawcett, Private International Law (14th Edn, 2008, Oxford University Press) or Goode on Commercial Law (5th Edn, 2016, Lexis Nexis).

Drafting issues •

Is one or more of the parties located outside England and Wales? If so, then the law of the agreement should be clearly stated in order to avoid the default rules under the Rome I Regulation, any international treaty or another country’s legal system applying (to the extent possible).

•

Is the law of another country to apply? If so, • are there consequences or issues that might affect the agreement if this is so, eg, whether some wording which might be binding under another country’s laws would not be binding in England and Wales (eg, wording that the parties are to negotiate in good faith will generally not be binding under English law, but might be binding in some civil law countries); •

is a party’s insurer content with non-English law applying? Eg, some insurers will not provide cover (or subject the party insured to extra conditions, or will limit the cover they provide if the insurer provides it at all) if a contract is entered into with a party based in the United States (or Canada) or which may be subject to US jurisdiction or the law of a US state.

•

If another country’s law applies, is the jurisdiction expressed to be non-exclusive? If the law is other than England and Wales and if the agreement provides for exclusive jurisdiction in that country’s law then an English party may be prevented from taking any litigation steps outside that jurisdiction. A nonexclusive jurisdiction may permit an English party to take appropriate litigation steps in England or another country;

•

Should the jurisdiction be expressed to be non-exclusive even if the law is that of England and Wales? If: •

one of the parties is not based in England and Wales; and/or

•

some of the activities under the agreement are to take place outside of England and Wales; and/or

•

some of the assets of a party are based outside of England and Wales,

then it might be appropriate to have non-exclusive jurisdiction. Eg, if an English company grants a software licence to a licensee which operates in France, and the licensee operates outside of its licence, it may be easier for the licensor to obtain an injunction or other remedies in France with a non-exclusive jurisdiction clause, or if an English company 448

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sells goods to another English company (which is a subsidiary of a US parent) who has no assets or real presence in England, then it may be necessary for the seller to enforce any judgment in the US where the assets are located. Therefore a non-exclusive jurisdiction clause will be desirable. •

Which country’s law is to prevail in the UK? It is wrong to state in a law and jurisdiction clause that ‘the courts of the UK are to have jurisdiction’ or that ‘the courts will apply the law of the UK’. Neither exist, as the UK is made up of a number of countries, each with its own legal system and laws. See Exmek Pharmaceuticals SAC v Alkem Laboratories Ltd [2015] EWHC 3158 (Comm), where a jurisdiction clause referred to ‘The proper law of this Agreement is the law of the UK, and the Parties submit to the exclusive jurisdiction of the Courts of the UK and of all Courts having jurisdiction in appeal from the Courts of the UK’. In the context of the agreement, as it was one relating to international trade and that many disputes are dealt with by the English commercial courts, the court was able to indicate that English law and the English courts should deal with the dispute between the parties.

•

Is a country’s law correctly described? Eg: • there is no law of the ‘United Kingdom’, there are several. The principal ones are: •

the law of England and Wales;

•

the law of Scotland;

•

the law of Northern Ireland;

• there is no law of the United States as such, but there are laws for individual states, such as New York, Delaware, California etc. For example, companies are incorporated within a particular state; • there is no EU-wide law (although the EU passes directives and regulations and other measures that take effect across the whole of the EU).

Location in the agreement The Boilerplate section of the agreement will normally be the location for a Law and jurisdiction clause.

Linkage and use •

If a party is not based in England and Wales, but the law of England and Wales applies to the agreement, then it may be appropriate to appoint an English agent for the service of court documents on the overseas party, see Agents for service. 449

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•

If the parties to a contract choose a law other than that of England and Wales and an English party has insurance (eg, professional indemnity insurance or is required under the contract to provide insurance cover for certain incidents arising under the contract), the insurance policy may have been entered into on the basis that the law of England and Wales will apply, see Insurance.

Sample precedent material Precedent 1—Sample precedent The validity, construction and performance of this Agreement shall be governed by English Law. Any dispute arising under or in connection with this Agreement shall be subject to the [non-]exclusive jurisdiction of the English courts to which the parties to this Agreement hereby submit. Precedent 2—Sample precedent – alternative The validity, construction and performance of this Agreement shall be governed by English Law, and any dispute arising under or in connection with this Agreement shall be subject to the [non-]exclusive jurisdiction of the English courts to which the parties to this Agreement hereby submit. For the purpose of this Clause [no] ‘dispute’ shall mean any contractual or non-contractual dispute, matter or claim which relates to, concerns or arises from this Agreement. Precedent 3—Short form – English law The validity, construction and performance of this agreement shall be governed by English law. Precedent 4—Short form – English law and courts This agreement shall be governed by and construed in accordance with the law of England and Wales and each party agrees to submit to the [non-]exclusive jurisdiction of the courts of England and Wales. Precedent 5—Short form – English law and courts – interim injunction outside of UK This agreement shall be governed by and construed in accordance with the laws of England and Wales and each party agrees to submit to the exclusive jurisdiction of the courts of England and Wales, but any party shall have the right to apply for an interim injunction in another court of competent jurisdiction. Precedent 6—Short form – English law and courts – service of proceedings 1 This contract is subject to the law of England and Wales. 2 The parties submit to the [non-]exclusive jurisdiction of the courts of England and Wales and irrevocably agree that proceedings issued 450

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out of the said courts may without prejudice to the rules of service of such courts be served by delivering such proceedings in an envelope addressed to the party to be served at the address for such party set out in this contract. Precedent 7—Longer form – English law – exclusive jurisdiction of English courts unless purchaser decides otherwise 1 This agreement shall be governed by and construed in all respects in accordance with English law and the parties irrevocably agree that the courts of England and Wales shall have exclusive jurisdiction in respect of any dispute, suit, action arbitration or proceedings (‘Proceedings’) which may arise out of or in connection with this agreement provided that nothing contained in this agreement shall be taken to have limited the right of the Purchaser to bring Proceedings in any other jurisdiction or jurisdictions whether concurrently or not. 2 The Vendors expressly and specifically agree and accept that the terms of this clause are fair and reasonable and appoint [name] of [address] or such other firm as is mentioned in Clause [no] for the time being to accept service on their behalf of any Proceedings which may be commenced in England and Wales. Precedent 8—Longer form – English law – partially exclusive jurisdiction 1 This agreement shall be governed by and construed in accordance with English law. 2 The parties agree that the English courts have exclusive jurisdiction to adjudicate any dispute which arises in connection with this agreement save that, as such agreement conferring jurisdiction is for the benefit of [Party A] only, [Party A] shall retain the right to bring proceedings against [Party B] in any other court which has jurisdiction. 3 [Party B] represents and warrants that the choice of English law to govern this agreement is a valid choice of law under the laws of the country in which [Party B] is based and the submission by [Party B] to the jurisdiction of the courts of England and any other country in accordance with this agreement is valid and binding upon the Lessee. Precedent 9—Alternative form – English law – exclusive or non-exclusive jurisdiction 1 This agreement shall be governed by and construed in all respects in accordance with English law. 2 In relation to any legal action or proceedings to enforce this agreement or arising out of or in connection with this agreement (‘Proceedings’) each of the parties irrevocably submits to the jurisdiction of the English courts and waives any objection to Proceedings in such courts on the grounds of venue or on the grounds that the Proceedings have been brought in an inconvenient forum. 451

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[3 These submissions shall not affect the right of any party to take Proceedings in any other jurisdiction nor shall the taking of Proceedings in any jurisdiction preclude any party from taking Proceedings in any other jurisdiction.] [4 These submissions shall not affect the right of any party to take Proceedings with a view to obtaining interim relief in any other jurisdiction.] Precedent 10—Long form – UK/foreign jurisdiction (This provision has been drafted to take account of the Civil Jurisdiction and Judgments Act 1982.) 1

All the parties irrevocably agree that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this agreement and that accordingly any suit, action or proceedings (together in this clause referred to as ‘Proceedings’) arising out of or in connection with this agreement may be brought in such courts.

2 Without prejudice to Clause [1] each of [Party A] and [Party B] further irrevocably agrees that any Proceedings arising out of or in connection with this agreement may be brought in any [State Courts of, or Federal Courts in, the State of New York] and submits to the nonexclusive jurisdiction of each such court. 3 Each of [Party A] and [Party B] irrevocably waives any objection which it may have now or hereafter to the laying of the venue of any Proceedings in any such court as is referred to in this clause and any claim that any such Proceedings have been brought in an inconvenient forum, and further irrevocably agrees that a judgment in any Proceedings brought in the English Courts or in any [State Court of, or Federal Court in, the State of New York] shall be conclusive and binding upon [Party A] and [Party B] and may be enforced in the courts of any other jurisdiction. 4 Nothing contained in this clause shall limit the right of the Party C to take Proceedings against [Party A] or [Party B] in any other court of competent jurisdiction, nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not.

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Purpose of the clause Agreements often include provisions concerned with periods of time. It is crucial to know with certainty when an obligation or benefit is to commence and/or finish, including establishing whether a party has complied with its obligations or is in breach of its contractual obligations and liable for damages and other remedies. Case law provides some of the answers. Sometimes the legal position is surprising and unexpected. The following paragraphs summarise the legal position under English law.

Months, days, years and quarters Month Generally a month means a calendar month. This is provided: •

by the Law of Property Act 1925, s 61, and applies to all deeds, contracts and other instruments governed by UK law unless the contract otherwise requires;

•

by the Interpretation Act 1978, s 5, Sch 1, and applies to legislation;

•

at common law ‘month’ meant calendar month only in bills of exchange and other commercial documents. Otherwise it meant ‘lunar month’ (Hart v Middleton (1845) 2 Car & Kir 9, 10).

Note that ‘calendar month’ does not necessarily mean a month which commences on the first day of a month, but can mean a month commencing on any date (see General principles of calculation in months below). Year Unlike ‘month’, which has a statutory definition, ‘year’ is not defined. Consequently the agreement should state clearly what is meant by a year. Eg, in an agreement there might be an expression such as ‘year of this Agreement’. Does this mean: •

a year from a specified date? or

•

the year in which the date of execution occurs? or 453

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•

the year in which the agreement commenced (ie a date prior to the date of execution)? or

•

the period of 1 January to 31 December (ie a calendar year)?

To avoid any uncertainty, the expression ‘year of this Agreement’ is sometimes defined in the contract. Without a definition it may mean either a calender year or a period of 365 days (366 days in a leap year) starting from another date, depending on the context. It is possible also that a year (regardless of when the period of year begins) may be for a length other than 365 days, such as where ‘year’ has a particular meaning within a particular industry, trade etc (eg Grant v Maddox (1846) 15 M & W 737; Boufoy-Bastick v The University of West Indies [2015] UKPC 27). In the latter case, a year was held to be the length of an academic year. Day The word ‘day’ may mean: •

a calendar day, from midnight to midnight; or

• a period of 24 consecutive hours, depending on the context (see for example, Cornfoot v Royal Exchange Assurance Corpn [1904] 1 KB 40, CA, distinguished in Cartwright v MacCormack [1963] 1  All ER  11, [1963] 1 WLR 18, CA); or •

a ‘working day’, which is normally understood as a (complete) calendar day that is not a holiday, and not just the working hours of a day (Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1963] AC 691, [1963] 1 All ER 545, HL); or

• a ‘conventional day’ which begins at a defined time and ends 24 hours later (Reardon Smith Line Ltd v Ministry of Agriculture, Fisheries and Food [1963] AC 691, [1963] 1 All ER 545, HL); or • a ‘business day’, which is sometimes understood to mean the days on which a bank is open for business, while ‘working days’ will normally mean Monday to Friday but not Christmas, Easter and bank holidays (Lafarge (Aggregates) Ltd v Newham London Borough Council [2005] EWHC 1337 (Comm), [2005] 2 Lloyd’s Rept 577 even though one of the parties regularly carried out work on a Saturday). Quarters If reference is made to quarters of a year in an agreement (eg where a royalty is to be paid quarterly) then the agreement should state which quarterly periods are to be applied (eg, 1 January to 31 March, 1 April to 30 June). If the periods are not stated, a court may interpret the contract as referring to the traditional quarterly periods used in landlord and tenant law, which end on a ‘quarter day’. The ‘usual quarter days’ (as distinct from another set of quarter days that were used in the distant past) are: 454

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•

25 March (Lady Day);

•

24 June (Midsummer);

•

29 September (Michaelmas);

•

25 December (Christmas).

General principles of calculation in months Day on which time begins to run generally excluded from reckoning In calculating the period that has elapsed after the occurrence of the specified event such as the giving of a notice, the day on which the event occurred is excluded from the reckoning (Dodds v Walker [1981] 2  All ER  609, [1981] 1 WLR 1027, HL, also see Case analysis, below). Period ends on corresponding date in appropriate subsequent month (‘corresponding date’ rule) When the relevant period is a month or a specified number of months after the giving of a notice or the happening of an event, the general rule is that the period ends on the corresponding date in the appropriate subsequent month, ie, the day of that month that bears the same number as the day of the earlier month on which the notice was given (Dodds v Walker [1981] 2 All ER 609, [1981] 1 WLR 1027, HL, also see Case analysis, below). The following are recent illustrations of the corresponding rule being applied: • in Registrar of Companies v Radio-Tech Engineering Ltd [2004]  BCC  277, where a company was required to file its accounts within 10 months of the end of its accounting period (on what is now Companies Act 2006, s 442(2)), which was 30 September. The accounts were actually filed on 31 July. The Registrar applying the corresponding date rule argued that the expiry date for filing was 30  July, not 31  July. The court, following Dodds v Walker, agreed with the Registrar; • in Okolo v Secretary of State for the Environment [1997] 4 All ER 242, where by the Acquisition of Land Act 1981, s  23(4) applications to the High Court concerning compulsory purchase orders needed to be made within six weeks from the date of notice on which an order was first published, excluding the date of publication. The High Court’s application of the corresponding date rule was overturned by the Court of Appeal. The Court of Appeal indicated that there was no need for such a rule where the period is counted by weeks, as the period of a week was certain (ie a period of seven days). See Case analysis, below. Ends of months A notice which lasts for a month or several months and which is served on the last day of a month will expire on the corresponding day in the following day 455

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of the appropriate subsequent month, except where there is no corresponding day in the subsequent month. In such cases the corresponding day will be the last day of the month. Eg, a month’s notice: Served on 31 January 28 February 30 April 31 May 30 June

expires 28 February (29 February in leap year) 28 March 30 May 30 June 30 July

The following clauses clarify some intended meanings for days, months and years: ‘Day’ means a period of 24 hours expiring at midnight ‘Month’ means the period of a calendar month from [date] ‘Year’ means a period of 365 days from [date] (or, where that period includes a 29 February, 366 days)

Calculation of start and end points for defined periods of time At what time does a period expire? Fractions of a day are normally excluded. Eg, if a month’s notice must be given, the period will expire on midnight on the last day of the month (see Re Figgis, Roberts v MacLaren [1969] 1 Ch 123, [1968] 1 All ER 999). Therefore, ‘where a person under an obligation to do a particular act has to do it on or before a particular date he has the whole of that day to perform it’ (Afovos Shipping COSA v Pagnan [1983] 1 All ER 449, [1983] 1 WLR 195, HL). However, a provision which requires the giving of ‘at least’ or ‘not less than’ a specified number of days’ notice is often interpreted as requiring that number of ‘clear’ days, excluding not only the date on which a notice is served but also that on which it expires (see, eg, Re Hector Whaling Ltd [1936] Ch 208 on what is now the Companies Act 2006, s 320(1), (3)).

Dates calculated ‘from’ and ‘until’ etc If the agreement states that something must be done: • ‘from’, •

‘beginning from’, or

• ‘after’ a date or event, then that date is excluded (see Hammond v Haigh Castle & Co Ltd [1973] 2 All ER 289, and Trow v Ind Coope (West Midlands) Ltd [1967] 456

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2  QB  899, [1967] 1  All ER  19; affd [1967] 2  QB  899, [1967] 2  All ER  900, CA, considered in RJB Mining (UK) Ltd v NUM [1995] IRLR 556, CA). ‘Until’ a specified date includes that date (Henrich Hirdes GmbH v Edmund [1991] 2 Lloyd’s Rep 546, per Hirst J).

Stated length of an agreement If the period is stated to be: ‘X months from the date of this Agreement’

it seems that the date set out at the head of the agreement will be used as the reference point, even if the parties have mis-stated the date of execution of the agreement (Styles v Wardle (1825) 4 B & C 908). However, in this context it is not entirely clear whether the stated number of months is to run from the date of the agreement or the day after. It may be better to use phrases such as: •

‘on or before’,

•

‘from and excluding’,

•

‘from and including’,

•

‘to and including’ etc,

which specify which dates to apply. In some agreements drafted by US lawyers the interpretation clause defines exactly what is meant by expressions such as ‘until’. American drafters also use the term ‘through’ as in ‘through March 1st’ which means ‘up to and including 1 March’. To avoid ambiguity (or lack of understanding on the part of the commercial parties), the drafter may prefer to avoid the expressions in the left-hand column, below, and use instead the words in the right-hand column. Avoid ‘by’ ‘from’ ‘until’ ‘between’

Use instead ‘on or before’ ‘after’ or ‘from and excluding’. If it is intended to include the date referred to, use ‘from and including’ ‘to and including’ or ‘to but excluding’ state whether the period is to be inclusive or exclusive of the first day and the last day

Use of ‘business day’, ‘business hours’ etc Some agreements define periods by the use of phrases such as ‘business day’ or ‘business hours’, etc. One meaning of such phrases relates to the activities of banks and some definitions specifically relate, eg business hours as to the 457

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hours that a particular type of bank (and sometimes a specific locality such as the City of London) is open for business on a day. This is not always a common understanding, and such phrases (if used) should be defined to state specifically the days and times referred to, particularly if the parties operate in different industries or countries. What might be a conventional business day or business hours in one country or for a particular type of business may be very different for another. For example, a firm of traditional lawyers in a country with a high level of formality and tradition may be different to the supplier of security software, who works 24 hours a day.

Use of ‘public holidays’, ‘bank holidays’ etc An agreement may specify that something is done on a day other than a public holiday or bank holiday (such as the meaning of ‘business day’ above). Eg a supplier of goods may be under an obligation to make deliveries of goods on a business day. If the meaning of a holiday is not defined, then the following can provide guidance: • there is no statutory definition of a public holiday that is generally applicable; •

a public holiday, where defined, will normally include: •

non-statutory holidays: Good Friday, Christmas Day;

•

Bank holidays: for England: Easter Monday, the last Monday in May, the last Monday in August, 26  December (if it is not a Sunday), 27 December (in a year in which 25 or 26 December is a Sunday). For Scotland: New Year’s Day (if it is not a Sunday or, if it is a Sunday, 3  January), 2  January (if it is not a Sunday or, if it is a Sunday, 3  January), Good Friday, the first Monday in May, the first Monday in August, 30 November (if it is not a Saturday or Sunday or, if it is a Saturday or Sunday, the first Monday following that day), Christmas Day, if it is not a Sunday or, if it is a Sunday, 26 December). For Northern Ireland: 17  March (if it is not a Sunday or, if it is a Sunday, 18 March), Easter Monday, the last Monday in May, the last Monday in August, 26 December (if it is not a Sunday), 27 December (in a year in which 25 or 26 December is a Sunday).

See the Banking and Financial Dealings Act 1971. The above applies within the UK; for a contract with party incorporated or operating in another country the days that are public (or religious) holidays and where no work is normaly done are likely to be different.

Other time periods Rather than specifiy a particular period in which a party must undertake an obligation, a clause may specify in more general terms when the obligation 458

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will need to be fulfilled, such as ‘immediately, ‘forthwith’ or ‘as soon as possible’. None of these expressions have a precise meaning. The meaning of such expressions is likely: •

to be derived from the context in which the obligation appears together with other obligations which need performing within a specific time period in an agreement; or

•

to equate to being done within a reasonable period.

Rarely will the expressions equate to instant performance of an obligation. The courts have considered the words above (and others such as ‘promptly’, ‘directly’, ‘with all possible speed’) but not always in the context of interpreting a contract. The following are illustrations of how the courts have interpreted phrases such as ‘as soon as possible’ and ‘forthwith’ in a contract: •

‘as soon as possible’: a party was under obligation to make and deliver a part for a gun ‘as soon as possible’. It delayed doing so because it did not have a member of staff able to make the part. It was in breach of its obligation. The court held that ‘“as soon as possible” meant do it within a reasonable time, with an undertaking to do it in the “shortest practicable time”’. But it did not mean that the party under the obligation had to put aside other orders on which it was already working (Hydraulic Engineering Co Ltd v McHaffie Goslett & Co (1878) 4 QBD 670 at 3, per Bramwell LJ, CA);

•

‘forthwith’: a party was under an obligation to deliver goods ‘forthwith’. But payment for them was to be made within 14 days. In the context of the case ‘forthwith’ meant the party under the obligation had to deliver the goods no later than the date payment was due (Staunton v Wood (1851) 16 QB 638).

Location in the agreement The definitions of the meaning of time are usually located: • in the Definitions section of the agreement, ie, if there are one or two expressions of time being used; or • in the Boilerplate section of an agreement, eg, if several definitions of time are used, sometimes with the Interpretation clause.

Linkage and use Expressions of time are used extensively throughout agreements, but are most frequently seen in the following types of clauses: •

in the Definitions, such as: any definition for the length of the agreement: 459

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Months and other expressions of time ‘“Contract Period” shall mean the period of 180 days from and including the Commencement Date’ ‘“Business Day” shall mean any day other than Saturday, Sunday, bank or other public holiday in England and Wales’;

•

in Main Commercial Provisions, such as: Conditions Precedent and Subsequent provisions which define the core commercial obligations of the agreement. ‘[Party A] shall carry out the Services within 90 days of the Commencement Date’;

Payment, concerning the periods for when payments are due, such as:

•

‘the Purchaser shall make payment within 30 days of the Agreement’;

•

Reporting, provisions requiring a party to provide reports within a certain period;

•

in Secondary Commercial Provisions, such as: •

Confidentiality, which specify the length of time confidentiality obligations will continue: ‘The provisions of this Clause 5 shall survive termination of this Agreement for a period of 5 years’;

•

Warranties, stating, eg, the length of any warranties which are given and time limits on enforcing or claiming under them;

•

Termination, stating the period in which an agreement can terminated or a breach can be remedied; ‘A Party may terminate this Agreement at any time on 90 days’ notice’;

• Consequences of Termination, eg, stating any periods for when things must be returned or activities are allowed to continue post termination. •

in the Boilerplate section, such as: in a Notices clause, to state when a notice is deemed to have been received by a party: ‘…shall be deemed duly served … in the case of a notice sent inland by first-class pre-paid post, two clear business days after the date of dispatch’.

Sample precedent material Precedent 1—‘Month’ – definition ‘Month’ means calendar month. Precedent 2—Part of month Part of a calendar month shall count as a calendar month. 460

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Precedent 3—‘Month’ – notice period At least [one calendar month’s] notice of the intention to propose any new rule or alteration must be given to the secretary. Precedent 4—‘Month’ – notice period to coincide The period of such notice shall coincide with the end of a calendar month. Precedent 5—‘Month’ – completed calendar month Entitlement to holiday will accrue with each completed calendar month worked at the appropriate yearly rate. Precedent 6—‘Month’ – payment terms A  fee of £[amount] per [month] [(variable upwards at the discretion of [Party])] payable [monthly on the last day of every calendar month or quarterly on the first days of March, June, September and December] commencing [with a proportionate payment] on [date] … Precedent 7—‘Month’ – gross turnover calculation The gross takings of the [Franchise Operation] arising directly or indirectly from the conduct of the [Franchise Operation] during each calendar month of the Term (and for any period less than a complete calendar month) … Precedent 8—‘Day’ – definition ‘Day’ means a period of 24 hours. Precedent 9—‘Day’ – alternative definition A ‘day’ shall be 24 consecutive hours. Precedent 10—‘Clear day’ – definition ‘Clear day’ means 24 hours from midnight following the relevant event. Precedent 11—24 hours’ notice Party A may terminate such arrangement in whole or in part on 24 hours’ notice. Precedent 12—Completion period Party A undertakes and agrees to take all reasonable steps to ensure that such works shall be completed within [ ] days of their commencement. Precedent 13—‘Payment dates’ – definition The [last] business day (being a day on which banks are open for business in [England] of each [calendar month or quarter]. Precedent 14—‘Payment dates’ – alternative definition [on [Friday] of each week in respect of the Business during the immediately preceding seven (7) days or on the [tenth] day of each calendar month in respect of the Business in the immediately preceding calendar month]. 461

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Precedent 15—‘Due date’ The due date shall be extended to the next succeeding Business Day, unless that Business Day falls in the next calendar month, in which event the due date shall be the immediately preceding Business Day. Precedent 16—‘Year’ – definition ‘Year’ means calendar year unless otherwise specifically stated. Precedent 17—‘Year’ – alternative definition ‘Year’ means any period of 12 months from 1  January to the following 31 December. Precedent 18—‘Year’ – alternative definition ‘Year’ means each 12-month period commencing from the date of this Agreement or any anniversary of this Agreement. Precedent 19—‘Year’ – alternative definition ‘Year’ means a period commencing on [date] and expiring on [date] in the following calendar year or the date of termination of this Agreement, if sooner. Precedent 20—‘Year’ – alternative definition ‘Year’ means each period of 12 months starting on [the Commencement Date or [date]] and includes the period from the Commencement Date to the next [date]. Precedent 21—‘Year’ – alternative definition The Agency’s total remuneration for each year of the Term, beginning with the Commencement Date and its anniversaries (‘Year’) will not be less than £[amount]. Precedent 22—‘Year’ – alternative definition ‘Year’ in this byelaw means the interval between one annual general meeting and the next following annual general meeting. Precedent 23—‘Year’ – longer form definition A ‘year’ shall mean a financial year commencing on the 1st day of January and ending on the next 31st day of December Provided that the first year of the Term shall be deemed to commence upon the execution of this Agreement and that the final year of the Term shall be deemed to conclude upon the expiry or earlier determination of the Term. Precedent 24—‘Year’ – alternative definition – manufacturing licence ‘Year’ means each period of 12 months calculated from the calendar quarter day following the date on which the Licensee shall have commenced the manufacture of the goods for commercial purposes.

462

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Extracts from legislation Law of Property Act 1925 Section 61—Construction of expressions used in deeds and other instruments In all deeds, contracts, wills, orders and other instruments executed, made or coming into operation after the commencement of this Act, unless the context otherwise requires— (a) ‘Month’ means calendar month; (b) ‘Person’ includes a corporation; (c) The singular includes the plural and vice versa; (d) The masculine includes the feminine and vice versa.

Case analysis Dodds v Walker [1981] 2 All ER 609 Extract from the judgment of Lord Diplock: ‘In the instant case the (respondent) landlord’s notice was given on 30 September 1978; the (appellant) tenant’s application to the court for a new lease was made on 31 January 1979. The only question in this appeal is: was that one day too late? The registrar and the judge of Grantham County Court both thought that it was too late. They dismissed the tenant’s application on the ground that the court had no jurisdiction to entertain it. In the Court of Appeal ([1980] 2 All ER 507, [1980] 1  WLR  1061) opinion was divided. Stephenson and Templeman LJJ, agreed that it was one day too late; Bridge LJ thought that it was just in time; and leave was given by that court to appeal to your Lordships’ House. My Lords, reference to a “month” in a statute is to be understood as a calendar month. The Interpretation Act 1978 says so. It is also clear under a rule that has been consistently applied by the courts since Lester v Garland (1808) 15 Ves 248, [1803–13] All ER Rep 436 that, in calculating the period that has elapsed after the occurrence of the specified event such as the giving of a notice, the day on which the event occurs is excluded from the reckoning. It is equally well established, and is not disputed by counsel for the tenant, that when the relevant period is a month or a specified number of months after the giving of a notice the general rule is that the period ends on the corresponding date in the appropriate subsequent month, ie the day of that month that bears the same number as the day of the earlier month on which the notice was given. The corresponding date rule is simple. It is easy of application. Except in a small minority of cases, of which the instant case is not an example, all that the calculator has to do is to mark in his diary the corresponding date in the appropriate subsequent month. Because the number of days in five months of the year is less than in the seven others the inevitable consequence of the corresponding date rule is that one month’s notice given in a 30-day month is one day shorter than one month’s notice given in a 31-day month and is three 463

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Months and other expressions of time days shorter if it is given in February. Corresponding variations in the length of notice reckoned in days occurs where the required notice is a plurality of months. This simple general rule, which Cockburn CJ in Freeman v Read (1863) 4 B & S  174 at 184, 122  ER  425 at 429 described as being ‘in accordance with common usage … and with the sense of mankind’, works perfectly well without need for any modification so long as there is in the month in which the notice expires a day which bears the same number as the day of the month on which the notice was given. Such was the instant case and such will be every other case except for notices given on the 31st of a 31-day month and expiring in a 30-day month or in February, and notices expiring in February and given on 30th or 29th (except in leap years) of any other month of the year. In these exceptional cases, the modification of the corresponding date rule that is called for is also well established: the period given by the notice ends on the last day of the month in which the notice expires.’

Okolo v Secretary of State for the Environment [1997] 4 All ER 242 Extract from the judgment of Schiemann LJ: ‘The point in relation to the six weeks is very simple and, to my mind, one of first impression. In my judgment, if the notice is published on a Monday and you are given six weeks to challenge it, six weeks will have ended by midnight of the Monday in six weeks’ time. I equiparate six weeks with six times seven days. There are various cases to which reference has been made where, in the landlord and tenant field, one is construing periods of a month. There the courts have used what has been described as the corresponding date rule. “Month” is of course a rather more difficult word than “week” because “month” can be anything from 28 to 31 days and, therefore, it has no precise meaning. Parliament in the Interpretation Act 1978 has given it a definition in relation to statutes passed after 1850. The need for such a rule as to the corresponding date is one which has arisen because of this uncertainty. I see no need for such a rule in relation to a “week” where none of these problems arise. One notes that even in cases where the rule would normally apply there are modifications of it, for instance where a notice is given on the 31st day of a month containing 31 days, such as August, that would expire in a month with only 30 days in September, and one could not continue into the next month.’

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Net sales value (or net invoice price)

Purpose of the clause Definitions of ‘net sales value’ (or similar expressions, eg ‘net invoice price’) are often included in intellectual property licence agreements and other agreements where payments are calculated by reference to the amount paid of a party’s sales of goods (such as agency or distribution agreements). The concept of a net sales price or value implies that in calculating the amount payable to a licensor or principal, the licensee, agent or distributor may deduct certain items from the amount payable. Typically, items such as VAT, carriage and insurance charges are deducted. A  typical simple definition is seen in Precedent 1. The list of what is a permitted deduction will vary from industry sector to industry sector and will also depend on the bargaining position of the parties. The practical aim behind including such wording is to make it clear what the licensee, agent or distributor can deduct from the amount it needs pay to licensor or principal, both in terms of specific items and amounts. The bigger aim behind such a clause is as a type of anti-avoidance measure, particularly where intellectual property is involved. For example, a company develops technology which can render web pages more quickly. The company (the Licensor) licenses the technology to other software companies (OSC), such as those who make operating systems. The technology is embedded in the web browser that comes with the operating system. The Licensor licenses the technology on the basis that the Licensor receives a percentage royalty based on the price that the OSC sell each copy of their operating system. If the OSC decide to give the operating system away (make it freely available as a download) then there are no sales. Or perhaps the OSC decide to create a subsidiary which will be responsible for the development and sale of the operating system with the OSC sub-licensing the technology to the subsidiary. Again there is also no sale as such. Unless there are provisions to deal with these situations the Licensor will receive no royalties. However it will continue to be under an obligation to license their technology. To deal with this, and other situations, the definition of net sales value attempts to prevent the ways that some licensees have tried to avoid paying royalties. The ‘bigger picture’ purpose of this type of clause is: 465

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Net sales value (or net invoice price)

•

to make sure that the licensor is paid for the grant of a licence and the use of its intellectual property;

• to prevent the licensee avoiding making payments for the licence, such as by: •

making no charge for the products or items that contain the licensed intellectual property:

•

making no charge for the products or items that contain the licensed intellectual property, but charging for items, products or services that are related to or need the licensed intellectual property (such as if a product that contains the licensed intellectual property needs servicing or maintenance, and the licensee charges for the servicing or maintenance, but not for the product itself);

• transferring the licensed intellectual property to a company within the group of companies of which the licensee is a member (ie there is no sale); • selling items or products that contain the licensed intellectual property at below its market price; and •

to require that the licensee can only deduct sums from the amount it pays to the licensor for specific items it has actually charged its (the licensee’s) customers.

The use of a net sales value is normally based on the proposition that the payment mechanism for which it is used is a royalty or other type of payment per unit sold or made. Not all types of licensing, agency or distribution agreement are suited to that method of payment calculation. The discussion of other methods is beyond the scope of this book (but see Anderson, Technology Transfer, 4th Edn, forthcoming).

Drafting issues Where a party is using a Net Sales Value clause then depending on the negotiating position and strengths of the parties, some of the following points may also need consideration: •

What specific items can the licensee deduct? What is specifically deductible will vary from industry to industry but normally focuses on costs of actually making the sale of the licensed product (eg if the agreement concerns the licensing of intellectual property that leads to the sale of a product), and would include: •

the cost of packaging, insuring and delivering goods;

•

any VAT or other similar sales tax that the licensee needs to pay;

• any other taxes or duties etc that the licensee needs to pay (eg the licensee may need to pay import taxes on importing the goods into a particular country); 466

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Net sales value (or net invoice price)

•

any trade discounts a licensee needs to offer (as well as any credits it receives).

•

What income or price will be used as the basis for the deductions in a Net Sales Value definition? A licensee, in order to minimise royalty payments, could deliberately sell no products, but give them away or sell them in return for some other non-monetary payment, or sell them at a deliberately low price so that the price equalled the amount of deductions in a Net Sales Value definition. To meet this point the Net Sales Value will often include wording whereby the price is set against the invoiced price of the goods if sold to someone unrelated to the licensee in an arm’s length transaction. This aims to add an element of objectivity to the price set by the Licensee.

•

A cap on the amount deducted? Although the categories stated in Precedent 1 are measurable, the licensor or principal may wish to include a cap on the amount of deductions that the licensee/agent/distributor can make. Possible ways of addressing this include: • a general restriction so that the permitted deductions are no more than the level found in the industry or markets in which the licensee operates (ie are not more than the usual amounts or are average or reasonable amounts that are deducted), or • setting a maximum percentage deduction on the amount that a licensee may deduct from the sale price of the licensed products.

•

Does the Licensee receive income that is not derived from sales of licensed products? A licensee may not in fact make any goods but derives all or some of its income by granting sub-licences or from carrying out further development work involving the licensed intellectual property (if the agreement involves the granting of intellectual property rights). It is possible a licensee may not in fact grant any sub-licences at all but still receive income related to the licensed rights. For example, a third party may pay for the licensee to carry out further research work and/or take an option to obtain a licence in case the research work proves successful. There are other ways in which a licensee may derive ‘income’ from having a licence. If these types of income are normally obtained by a licensee then a Net Sales Value definition will not be appropriate, rather a definition of Net Receipts should be the basis for the calculation of royalties (see Precedent 3 for a very simple version of a Net Receipts definition).

Location in the agreement The Definitions section of an agreement will normally include the definition of Net Sales Value. The application of such a definition will normally be found in the Payment clause. 467

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Net sales value (or net invoice price)

Linkage and use A Payment clause will normally apply the definition of a Net Sales Value clause (see Precedent 2). In a licence agreement the royalty will be calculated using the definition of Net Sales Value. The greater the amount of deductions, the smaller the figure available to calculate a royalty. In licence agreements the Net Sales Value clause can assume significance, because of the amount of deductions that a licensee might wish to include. Wording included in the definition of Net Sales Value as to what expenses and payments are allowable can permit a licensee to deduct greater amounts and thus reduce the royalty payable to the licensor.

Sample precedent material Precedent 1—Sample definition – Net Sales Value ‘Net Sales Value’ means the invoiced price of Licensed Products sold by the Licensee or its Affiliates [or its sub-licensees] [to independent third parties] in arm’s length transactions exclusively for money, or, where the sale is not at arm’s length, the price that would have been so invoiced if it had been at arm’s length, after deduction of: (a) normal trade discounts actually granted and any credits actually given, and [provided that the amounts are separately charged on the relevant invoice] (b) any costs of packaging, insurance, carriage and freight, (c) any value added tax or other sales tax, and (d) any import duties or similar applicable government levies. The deductions shall be no greater than an amount which is reasonable and usual in the market or markets where products of the type of the Licensed Products are normally sold. Precedent 2—Application of a Net Sales Value definition in a payment clause Royalties The Licensee shall pay to the Licensor a royalty being a percentage of the Net Sales Value of all the Licensed Products [or any party thereof] sold by the Licensee [or its sub-licensees]. Precedent 3—Sample definition – Net Receipts – simple ‘Net Receipts’ the amounts received by Licensee or its Affiliates from the grant of sub-licences under the Patents and Know-how, less any VAT or other sales tax.

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Notices

Purpose of the clause A  Notices clause specifies the means by which parties to an agreement must (or can) communicate with each other when certain specified events under the agreement occur. All commercial agreements should provide for agreed methods by which the parties can or must send formal notices to one another. Providing a notices clause is useful, for example: •

to enable either party to communicate its intention to terminate or that it is terminating the agreement;

• for commercial agreements that contain various optional or interim powers, the exercise of which by one party is dependent on that party giving notice to the other party (eg  options to purchase property or rights); • for routine matters that arise during the operation of a commercial agreement such as to where a party should send: •

invoices or statements;

•

make payments;

•

reports or other documents.

• as there is often a degree of urgency involved in party-to-party communication, and it is therefore desirable to agree on a procedure for giving notice which avoids the need to trace the other party’s current address or whereabouts (or registered office) and the need to prove that the other party has actually had the notice placed in its hands. Following on from the last point, a practical reason why it is important to include a Notices clause is that once a party complies with any formalities regarding the notice as set out in the Notices clause (such as to its contents, who must send it, who must sign it, how a party must send it, when it must be sent, and when it assumed that it is received by the recipient, etc) there will be an assumption (if the agreement contains wording to that effect) that the notice is received by the other party. This assumption will depend on the Notices clause containing wording in accordance with the assumption. The advantages of including wording with the assumption is that it is taken as a fact that the recipient has received the notice, regardless of whether they do in fact receive or bother to read the notice. Such an assumption lends certainty to commercial transactions. 469

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Many lawyers consider a Notices clause is one of the most important ‘boilerplate’ clauses to be included in a commercial agreement. There is much case law relating to the service, and the timing, of notices. The great majority relate to landlord and tenant law. In some cases, mistakes in the entering of details within a notice (such as inserting the wrong date of termination) will not make the notice ineffective (see eg, Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945, HL – putting the wrong date was held to be an ‘immaterial error which would not have misled a reasonable recipient’). But where the mistake is deliberate or the error was not apparent (such as sending the notice to a wrong party – see Lemmerbell Ltd v Britannai LAS Direct Ltd [1998] 3 EGLR 67, CA – or to the wrong address) the notice will not be effective. However, where the form and content of the notice or the requirement for a notice at all is specified by law then any type of mistake in or concerning a notice makes the notice ineffective. This is likely to be on the basis that the courts interpret compliance with statutory and regulatory requirements more strictly than where commercial and other types of contracts are concerned. In most commercial agreements it is not normally necessary to send notices to comply with statutory or regulatory requirements. But they can sometimes arise, for example in situations such as: • in a sale/purchase of a business, the formal transfer of ownership will need submitting to the Land Registry; • in the licensing of some types of intellectual property (particularly with patents, where prosecuting or maintaining in force a patent requires the submission of forms, documentation and fees by particular dates). There are also rules concerning the service and effectiveness of notices when a contract is formed (the postal rule: Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) 4 Ex D 216, CA), and in administrative (such as judicial review proceedings), employment and civil proceedings, which are outside the scope of this book.

Drafting issues When preparing or considering the provisions of a Notices clause, a contract drafter will wish to take account of the following matters: •

Whether the notice must be given in writing. It is unlikely that where the parties use a written agreement, they will want notices sent other than in writing, but it does no harm to specify this: ‘Any notice given pursuant to this agreement shall be in writing …’

•

Whether only certain forms of writing are permissible. The parties may specify that only certain forms of communication will constitute ‘writing’ (although a clause indicating that a notice may be sent by a particular

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method may be sufficient indication that the notice itself may be prepared in a way suitable for that form of communication). Eg: ‘Any notice … shall be writing (which will include a letter written by hand or which is printed or which is prepared in a form suitable for sending by electronic mail)’.

•

Whether personal delivery is permitted. ‘Personal delivery’ has a particular meaning, it does not mean that an individual delivers the notice but rather that the notice is delivered (ie handed over) to a person. In the case of a corporate body, personal delivery will normally mean leaving the notice with someone authorised to receive it (such as a receptionist) (see Bottin (International) Investments Ltd v Venson Group plc [2004] EWCA Civ 1368, [2004]  All ER (D) 322 (Oct), para  47). Where a party is an individual, ‘personal delivery’ will normally mean handing the notice to the individual (Ener-G Holdings plc v Hormell [2012] EWCA Civ 1059). A  notice put through a letterbox or left at an unattended reception is unlikely to equate to ‘personal delivery’. These meanings of personal delivery will apply if not further defined or explained in the wording used in a notices clause. For example, if the parties wish that a notice which is served personally is sufficiently delivered by leaving at the reception desk or by putting the notice through a letterbox, then the notices clause should include wording to that effect. If parties are to work together on a project or in partnership, whether or not they are corporate bodies, then this simple direct method of giving notice should not be overlooked. To omit it may cause subsequent confusion, both as to whether due notice has in fact been given and as to the time of delivery (see below). ‘Any notice … shall either be delivered personally or …)’.

For a corporate body, if a party wishes to make sure that a notice must be brought to the attention of a more senior member of staff (such as a director or senior manager) then the notices clause should use clear wording to that effect. This may be difficult if it is not possible to easily reach a director or a senior manager, who might work from an office which is located within a building protected by security measures (such as with serviced offices or multi-occupancy office blocks, where in order to get into the building through security gates requires the permission of the corporate body itself). Lawyers, when asked to deliver notices, usually employ specialist process servers for such tasks, who will be experienced in reaching the right person. •

Whether the notice can be sent by post. Until the advent of electronic mail, it was common to send documents by post and to provide for the sending of notices by post, usually first class post within the UK, or airmail from overseas: ‘Any notice … shall be sufficiently given to any party if sent in a letter by first-class or airmail pre-paid post.’

For particularly important notices the parties might specify that the notice has to be sent by recorded delivery or another method. 471

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As a practical measure, the contract drafter may need to consider whether sending post by ordinary mail (or even recorded delivery (‘signed-for’) mail) is an adequate method. Particularly within the UK, such methods are not always reliable and do not always reach the intended recipient (or the Royal Mail does not indicate in its systems that an item has been ‘signed-for’, ie the Royal Mail continues to display that it is still delivering the item). For example, a business operating in a serviced office block may never get to see its mail, because the mail when it reaches the serviced office has to be collected from an office (ie the operators of the serviced office do not deliver mail within their office block) and the recipient does not bother to collect mail as it receives very little mail. In such circumstances, for written communications, using (within the UK) Royal Mail Special Delivery may be the only option: ‘Any notice … shall be sufficiently given to any party if sent in a letter and only by Royal Mail Special Delivery (or an equivalent if the notice is sent outside of the United Kingdom).’

•

Whether the notice may be sent by email. In many commercial agreements the sending of notices by email is the default position, and even more so in situations where a party is resident overseas, or where it is necessary to communicate promptly with the other party. Obviously, it is for the parties to specify what communication systems are acceptable to them, but where, as is usual, all currently available forms of message are specified it should be ascertained that each party has the means to receive them. An example in point is the use of facsimile machines. The presence of such machines in organisations is becoming uncommon; nowadays they are likely to be found only in larger organisations, and such an organisation may only have one machine so it will take extra effort for a received facsimile to be passed onto the intended recipient. The following simple form of wording might be inserted: ‘Any notice … shall be sent … by electronic mail’.

In an agreement of lengthy duration, it may be thought wise to add a simple form of wording to cover any new means of communication that may be devised in future, eg: ‘… or by any means of telecommunication in permanent written form’.

•

Whether communication other than by post must be confirmed by post. Where electronic mail is concerned, the automatic receipts generated by some emails programs can be turned off by the user of the email program. Just as with other means of electronic or traditional methods, the sender may have no idea whether a notice sent by electronic mail is received, but there are dangers unique to electronic mail. For example, if the recipient has a quota for the amount of email it may receive, and that quota is exceeded, then the email will not reach the server. Or if the email address of the recipient is valid, but the person(s) who has access to it has left the organisation, then no-one at the recipient may have arranged for such emails to be forwarded to another person in the

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organisation. The person responsible for specifying an email address as an address for service of notices may not be the same person as the one who deals with forwarding email sent to an email address of a person who has left organisation. Accordingly, sometimes parties will wish to have emails confirmed by post, with a view to reducing the risk that the notice was not received, eg: ‘Notices may be given by email (confirmed by post as provided above)’.

•

Does the notices clause state the address(es) to which a party needs to send any notice? Any notice should state the correct and current address of the recipient to which a notice should be sent. For postal purposes, this will usually be the address of the party set out at the beginning of the agreement. But a party may change its address, particularly during an agreement intended to run for some time. Accordingly a notices clauses should provide for the possibility of a change of address, eg: ‘… for notice sent by post, to the address of the party receiving such notice as set out at the head of this agreement, and for notices sent by electronic mail to the electronic mail address set out below in Clause [no], or as notified between the parties for the purpose of this clause’.

Preferably, the agreement should include these addresses, either by reference to the Parties clause or within the Notices clause itself: ‘The electronic mail addresses of the Parties are: [ ] for [Party A] and for [Party B] [ ]. [The address for the Parties for notices sent by post are: [ ] for [Party A] and for [Party B] [ ]. Notices to [Party A] shall be marked for the attention of [[name]] [job title]. Notices to [Party B] shall be marked for the attention of [[name]] [job title].’

•

When is the notice deemed as received. It may be very important to establish that a notice has been duly delivered; the time of delivery should therefore be specified. Such wording is important as by including a provision where delivery is considered received, then the matters specified in the notice may be carried out without being dependent on the recipient actually receiving or admitting they have received the notice. Without this wording it would always be open to the recipient to state they had never received the notice, or that they failed to read it and to argue that the notice only operates when it has come to the recipient’s attention. Accordingly, agreements often include wording so that delivery of the notice is considered made (or ‘deemed’) and that the recipient has received the notice. •

Personal delivery. ‘Any such notice shall be deemed duly served, in the case of a notice delivered personally, at the time of delivery;

or where personal delivery to an office is envisaged: ‘Any such notice shall be deemed duly served if left at the address of the party receiving such notice as set out at the head of this agreement’

or (alternate form): 473

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Notices ‘Any such notice shall be deemed to be given to and received by the addressee at the time the same is left at the address of or handed to a representative of the party to be served’.

Where it may be important for notice to be served promptly, eg in the event of a significant breach of contract, service by hand may be given priority and made operative even if the recipient is not present. For example, if an owner of a trademark licence (Licensor) has granted a licence to another person (Licensee) to permit the application of the trademark to goods that the Licensee sells, but the Licensee has not paid the royalties due for a substantial period, then the Licensor may wish to terminate the licence. The Licensor will also wish the Licensee to stop having the right to apply the trademark immediately (and therefore not continuing to generate sales and income based on the value of the trademark). Serving a notice by hand will bring such activities to an end more quickly than other methods. Eg: ‘The Licensor may serve any such notice by hand upon the Licensee at [the Premises] (whether or not the Licensee appears to be in occupation of [the Premises] at the time of service) whereupon in the event of any conflict between service by hand and service by any other means such service by hand shall prevail’.

As noted above, if it is important or critical to a party that the sender of a notice must physically hand over the notice to a representative of the recipient (and no other method will do) then clear explicit wording is necessary. In addition, the Notices clause should include wording to indicate that other forms of delivery are specifically excluded as acceptable means of service of the notice. It is likely that using words such as ‘personal delivery’ will be interpreted to include other forms of delivery than just physically handing over the document. In Primus Build Ltd v Pompey Centre Ltd [2009] EWHC 1487 (TCC), [2009] All ER (D) 14 (Jul) a Notices clause provided that a party could deliver a notice by ‘personal delivery or sent by fax’. The notice was sent by post and received and acted on by the recipient. The judge held that ‘personal delivery’ was not the same as ‘personal service’. For the judge ‘personal delivery’ meant ‘the actual delivery by an appropriate individual within [the claimant] to a similarly appropriate individual within [the defendant]. The document in question must actually be delivered. The method of delivery does not matter, provided that the document is actually delivered to the named address in [the schedule].’ •

Post. If only routine notices are envisaged, the following may suffice: ‘any notice so given shall be deemed duly served unless the contrary is proved to have been duly served at the time at which the letter would be delivered in the ordinary course of post’.

However, there may be a need to be more specific, eg: ‘… shall be deemed duly served, in the case of a notice sent inland by first class pre-paid post, [2] clear business days after the date of 474

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Notices sending, or, in the case of a notice sent to or from overseas by air mail, [7] business days (being business days in the place to which the notice is sent) after the date of sending’.

•

Electronic mail. In addition to mechanical failures, the internet as the carrier of electronic mail may also fail (servers fail to function, server software stops working, internet service providers’ machinery is stopped for repairs or maintenance). Additional to problems that are outside of the control of the sender or recipient, are problems with the recipient email program, ie that correctly addressed email is not sent to the correct email address but to a default address for all emails. Or the email address, although correctly used by the sender, has been deleted by the recipient company or the person to whom it is assigned or has to access emails sent to it has left the recipient company (ie because of some re-organisation or takeover or the role or person to who the email address is assigned has left the company) and no-one at the recipient has arranged for emails to that email address to be forwarded. These points are not the sender’s problem and are difficult to address in contract wording. However, a recipient needs to bear in mind, particularly if the contract is a long-term one and in an industry where re-organisations, mergers, takeovers etc are routinely frequent, that email addresses can change or become non-operative. An email that is sent to an email address which is no longer operative is unlikely to come to anyone’s attention, while a letter addressed to a person who has left or a role which no longer exists will still be seen by someone on receipt.

•

Is a method of proof that a notice has been received required? In contracts where the question of receipt of due notice may be especially important, it is advisable to insert express provision confirming the method of proof in the event of a dispute, eg: ‘In proving the giving of a notice for the purpose of any provision of this agreement it shall be sufficient to prove that the notice was left or that the envelope containing the notice was properly addressed and posted or that the notice was sent by the applicable means of telecommunication to the correct address and despatch of the transmission was confirmed and/or acknowledged as the case may be’.

•

Should the same address (and person) be used for all notices? For some types of agreements or situations it may not be appropriate for a party to send all notices and other documents to the same person or address of the other party. This will be especially relevant where a party is a large organisation (which is spread over several sites) or the agreement is long term. For example, it may be more appropriate to send a notice concerning: •

an invoice, statement etc for the attention of the accounts department;

•

delivery of goods to the delivery department; but

• breaches or termination to the chief executive, another senior manager or in-house counsel. 475

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A  related point is that some forms of communication may not be used for some notices because of the importance of the notice. Eg, in some agreements, notices such as those concerning breach or termination should not be sent by email. Notice to a party consisting of several persons. Eg, in partnership agreements between a large number of partners, it may be convenient to provide for a form of multiple notice to be given, eg:

•

‘A notice given by more than one partner may be in one or more copies each signed by one or more of them’.

Location in the agreement The Boilerplate section of an agreement will normally be the location for a Notices clause.

Linkage and use A Notices clause will have application throughout any agreement and all types of agreement.

Sample precedent material Precedent 1—First-class post Any notice given pursuant to this agreement shall be in writing and shall be sufficiently given to any party if sent in a letter by first-class or airmail pre-paid post addressed to that party at [the party’s last known address or place of business or that party’s registered office or the address of that party set out at the head of this agreement (or any alternative address notified by that party in accordance with this clause)] and any notice so given shall be deemed unless the contrary is proved to have been effected at the time at which the letter would be delivered in the ordinary course of post. Precedent 2—Short form – recorded delivery or registered post/telex/fax – proof of service after extensive period Any notice required or authorised to be given by either party under this Agreement to the other party shall be in writing and shall be sent by prepaid registered or recorded delivery post or by electronic mail to the other party at the address stated in this Agreement or such other address as may be specified by the parties by notice to the other from time to time. Any such notice shall operate and be deemed to have been served at the expiration of [14] days after it is posted or transmitted. In proving such service it shall be sufficient to show that the envelope containing the notice was properly addressed and posted or that the transmission was duly despatched and acknowledged as the case may be. 476

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Precedent 3—Longer form – personal delivery/post/fax/electronic mail – with confirmation All notices to be given under this agreement shall be in writing and shall either be delivered personally or sent by first-class or airmail pre-paid post, facsimile transmission or email and shall be deemed duly served: (a) in the case of a notice delivered personally, at the time of delivery; (b) in the case of a notice sent inland by first-class pre-paid post, two clear business days after the date of dispatch; (c) in the case of a notice sent overseas by airmail, 7 business days (being business days in the place to which the notice is dispatched) after the date of dispatch; and (d) in the case of electronic mail, if sent during normal business hours, then at the time of sending and if sent outside normal business hours then on the next following business day provided (in each case) that a confirmatory copy is sent by first-class pre-paid post or by hand by the end of the next business day. Each notice shall be addressed to the address of the party concerned set out in this agreement or to such other address as that party shall have previously notified to the sender. Precedent 4—Longer form – personal delivery/post/fax/electronic mail – proof of receipt 1 Any notice or other document required to be given under this agreement or any communication between the parties with respect to any of the provisions of this agreement [(other than notice given by [Party] pursuant to the provisions of Clauses [no] or [no] which may be oral)] shall be in writing in English and be deemed duly given if signed by or on behalf of a duly authorised officer of the party giving the notice and if left at or sent by pre-paid registered or recorded delivery post or by electronic mail, or other means of telecommunication in permanent written form to the address of the party receiving such notice as set out at the head of the Agreement, or set out in Clause [no] or as notified between the parties for the purpose of this clause. 2

Any such notice or other communication shall be deemed to be given to and received by the addressee: (a)

at the time the same is left at the address of or handed to a representative of the party to be served;

(b)

by post on the day not being a Sunday or public holiday 2 days following the date of posting;

(c)

in the case of electronic mail or other means of telecommunication on the next following day.

3 In proving the giving of a notice it shall be sufficient to prove that the notice was left, or that the envelope containing the notice was prop477

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Notices

erly addressed and posted, or that the applicable means of telecommunication was correctly addressed and despatched (and if available, delivery was confirmed and/or acknowledged as the case may be). 4 Communications addressed to [party] shall be marked for the attention of [name] [with a copy to [name and address of solicitors]]. Precedent 5—Alternative longer form – post/fax/electronic mail – proof of receipt 1.1. Any notice to be given under this Agreement shall be in writing and shall be sent by first-class mail or air mail, or by e-mail (confirmed by first-class mail or airmail), to the address of the relevant Party set out at the head of this Agreement, or to the relevant electronic mail address set out below, or such other address electronic mail address as that Party may from time to time notify to the other Party in accordance with this Clause [1]. At the date of the Agreement, the facsimile numbers and electronic mail addresses of the Parties are as follows: Party A (electronic mail address); Party B (electronic mail address). 1.2. Notices sent as above shall be deemed to have been received three working days after the day of posting (in the case of inland first-class mail), or seven working days after the date of posting (in the case of airmail), or on the next working day after sending (in the case of electronic mail, but only if received in the electronic mailbox of the person to whom the electronic mail is addressed to). 1.3. In proving the giving of a notice it shall be sufficient to prove that the notice was left, or that the envelope containing the notice was properly addressed and posted, or that the applicable means of telecommunication was addressed and despatched. Precedent 6—Long form – provision for urgent personal service with priority 1 Any notice to be served on either of the parties by the other: 1.1 shall be in writing; 1.2 shall be sent by first-class pre-paid recorded delivery post or by electronic mail or facsimile transmission; 1.3 shall be deemed to have been received by the addressee within 48 hours of posting to the address of the addressee set out at the start of this agreement or within 24 hours if sent by electronic mail to the correct electronic mail address of the addressee; 1.4 (in the case of any notice to be served by Party X may at the discretion of the Party X be delivered by hand to [the Premises] whereupon it shall be deemed to have been duly served on the Party Y immediately. 478

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2 Each of the parties shall notify the other of any change of address or number within 48 hours of such change. 3 The Party X may serve any such notice by hand upon the Party Y at [the Premises] (whether or not the Party Y appears to be in occupation of [the Premises] at the time of such service) whereupon in the event of any conflict between service by hand and service by any other means such service by hand shall prevail. Precedent 7—Short form–one way 1 If you wish to provide to us any communication or notice for the purposes of this agreement then you must provide in the ways set out in this clause. 2 The communication or notice must be in writing. ‘Writing’ means that you can write a letter by hand or which is printed, or which is prepared on a computer for sending by electronic mail. 3 You can send the communication or notice to us in the following ways: (a) by delivering the communication or notice by hand. You will need to deliver it to our [registered office] for which the address is set out [at the top of this agreement] [somewhere else]. [Please note that this address [eg] is a building with several businesses and a reception area which is for all of the business. If you deliver the notice to the reception area then you will not be delivering to us. You will need to ensure that the receptionist calls us and asks for one of our employees to come and take the letter from you. The reception area is only open between 9am and 6pm Monday to Friday.] (b) by sending it to us by post. You will need to address it to our [registered office] for which the address is set out [at the top of this agreement] [somewhere else]. You will need to address the letter for the attention of [specify]; (c)

by sending it by electronic mail. The electronic mail address you will need to use is [specify][found somewhere else].

4 We [cannot] [do not] accept any communication or notice from you if it is: (a)

sent by facsimile [or (specify)]; or

(b) provided orally, such as by telephone or when in the presence of one of our employees or agents. 5 As long as you have delivered the communication in the way described in 3(a) above or that you have correctly addressed your letter or electronic mail in the way described in 3(b) and 3(c) above then your communication or notice will be delivered to us as follows: 479

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(a) a communication or notice delivered by hand: the next business day. (b)

for a letter sent by post. If you send the letter by first class mail then 3 business days after the date you placed the letter in the post box. If you send the letter by second class mail then 5 working days after the date you placed the letter in the post box.

(c)

an electronic mail: the next business day.

A ‘business day’ means Monday to Friday which is not a public holiday or a bank holiday.

Case analysis Bottin (International) Investments Ltd v Venson Group plc [2004] EWCA Civ 1368, [2004] All ER (D) 322 (Oct) Key facts The case involved the interpretation of a notices clause in a commercial agreement (a share purchase agreement). 1

The defendants gave a number of warranties to the claimants. If there was a breach of a warranty and the claimants wished to bring a claim for such a breach, clauses in the agreement set out a procedure which started with the serving of a notice on the defendants: [From Clause 3 of the share purchase agreement] (h) A Warrantor shall be liable for breach of a Warranty …. only if notice of a claim is given to him, specifying such details of the event or circumstance giving rise to such claim as are available to the Investor and estimating (if capable of estimation by the Investor) its quantum, prior to the third anniversary of Completion. …. (o) No claim under the Warranties shall be deemed to have been made unless notice of such claim was made in writing to the Warrantors specifying such detail[s] of the event or circumstances giving rise to such claim as are available to the Investor and an estimate (if capable of preparation by the Investor) of the total amount of the Warrantors’ liabilities therefore claimed. (p) Any claim in respect of which notice shall have been given in accordance with Clause 3(o) above shall be deemed to have been irrevocably withdrawn and lapsed (not having been previously satisfied settled or withdrawn) if proceedings in respect of such claim have not been issued and served on the Warrantors not later than the expiry of the period of 12 months after the date of such notice.’

2 Clause 19 of the agreement specified how notices should be served: ‘Any notice, request instruction or other document to be given under this Agreement to any of the Parties by any of the others shall be in writing and 480

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Notices delivered personally or sent by pre-paid recorded delivery post to their addresses set out in this agreement. Any Party may change the address to which notices are to be sent to it by giving written notice of the change of address to the other Parties in the manner provided for in this clause for giving notice. Any notice delivered personally shall be deemed to be received when delivered and any notice sent by pre-paid recorded delivery post shall be deemed received 5 business days after posting.’

3 A notice under Clause 3(o) was served on the defendants (to simplify the facts of the case) by leaving the notice with the receptionist at the defendants’ registered office. Held 1 The Court of Appeal repeated points made by the judge at first instance that the notice clause would not be interpreted by reference to: (i)

CPR 6.4(4): requiring personal service of a document on a company by leaving it with a person holding a senior position in the company, or

(ii)

to the Companies Act 1948, s  725, where service of a document is by leaving it at or sending it to the company’s registered office,

as neither had been incorporated into the share purchase agreement. 2

The Court of Appeal disagreed with the judge at first instance by stating that service could be effected by leaving the notice at the registered office of the defendants. The Court of Appeal noted that a specific address was provided in Clause 19: ‘46. …There is nothing in clause 19 to require that the personal delivery to a party which is a company has to be at the company’s registered office, still less anything to suggest that personal delivery can be effected merely by leaving the document in question somewhere in the building which is the registered office. That gives no meaning to “personally”.’

3 The Court of Appeal agreed with the judge that a notice which is personally served can be left with a receptionist, as such a person is authorised to receive, inter alia, letters: ‘47. The judge went on to say that service at the registered office by leaving it with the receptionist was sufficient. Apart from the superfluous reference to the registered office, on the particular facts that conclusion is in my judgment correct. I agree with [counsel for the defendant] when he says that personal delivery of a notice to a company is effected by delivering the notice to somebody authorised to receive it. I disagree with him when he says that the only person to have such authority is somebody in a senior position in the company. The function of a receptionist ordinarily is to receive people visiting, and letters or parcels being delivered to, the employer of the receptionist. In the present case there was in evidence the witness statement of the process server […], who delivered the […] notice to the receptionist; that was accepted on the receptionist’s express assurance that it would come to the attention of a director. As the judge 481

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Notices pointed out, the Defendants did not adduce any evidence as to what happened to the […] notice after it was left with the receptionist. It is to be inferred that it did come to the attention of a director. In my judgment, the […] notice was delivered personally to Venson.’

482

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Option and right of first refusal

Purpose of the clause What is an ‘option’ An option is a contractual right for one party (the option holder) to elect to bring into force a term of an agreement. Usually, the option will arise in specific circumstances and will continue for a specified period and will be exercisable on pre-agreed terms or when particular circumstances occur. For example, an option clause may grant the option holder: •

a right to purchase land if a landowner decides to sell it;

•

a right to buy or sell shares if a company decides to allot more shares; or

• a right to take a licence to intellectual property generated under an agreement. To develop the final example, under a research agreement, a pharmaceutical company agrees with another company or organisation (researcher) to pay for research into a new treatment. The agreement may provide that if the researcher receives or achieves a particular goal then the company can exercise an option to either: •

immediately acquire an intellectual property licence to the results of the research. The provisions of the licence may have been agreed at the time the research agreement was entered into and the exercise of the option simply gives the company the immediate right to a licence; or

• give the pharmaceutical company the right to negotiate the provisions of the licence (and subject to the researcher and the pharmaceutical company agreeing, the pharmaceutical company can then acquire a licence). On exercise of the option, the parties will negotiate the provisions of the licence (including duration, price, scope of the licence, etc).

Right of first refusal distinguished from option Options are sometimes confused with rights of first refusal (sometimes also known as a ‘first option’ or ‘pre-emption’). A right of first refusal is exercisable only if the grantor of the right elects to make the right available. In other words it is the right to be given the opportunity to acquire what is the subject 483

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matter of the right of first refusal if the granter of the opportunity decides to do so, see Astrazeneca UK Ltd v Albemarle International Corpn [2011] EWHC 1574 (Comm), [2011]  All ER (D) 162 (Jun) and see Case analysis. Eg, under a franchise agreement, the franchisee may be granted a specified territory (Territory A) in which to exploit the franchise. The franchisee may wish to have an opportunity to acquire a neighbouring territory (Territory B). •

Option. If the franchisee is granted an option to acquire Territory B, then on the exercise of that option (depending on the detailed terms of the option), the franchisee may elect to purchase Territory B  during a specified period.

•

Right of first refusal. On the other hand, if the franchisee is granted a right of first refusal over Territory B, it has no automatic right to acquire Territory B if the franchisor does not make it available. A right of first refusal over Territory B might provide, for example, that if the franchisor negotiates terms with a third party for Territory B, then the franchisor must give the franchisee an opportunity to match those terms. If the franchisee does match the terms, the franchisor must grant Territory B to the franchisee rather than the third party. Sometimes, contracts include both options and rights of first refusal over the same opportunity.

The terms on which the right of first refusal is offered need to be sufficiently certain so that the party having the right of first refusal can accept them and enter into a contract, Accordingly, the right of first refusal amounts to ‘…a right to receive a contractual offer on terms which the party who has granted the right of first refusal is prepared to accept, even though the detailed terms of any contract may require further negotiation and might ultimately not eventuate in a contract at all’ (Astrazeneca UK  Ltd v Albemarle International Corpn [2011]  EWHC  1574 (Comm), [2011]  All ER (D) 162 (Jun), see Case analysis). The party providing the right of first refusal must not only provide a contractual offer, it also must be making a bona fide offer, ie where it sets a price for the thing which is the subject matter of the right of first refusal, the price must be one ‘…which, in good faith, it considers to be one which a genuinely interested offeree would be prepared to consider’ (QR Sciences Ltd v BTG International Ltd [2005] EWHC 670 (Ch)). The wording used by the parties (whether they call their document, clause etc an ‘option’ or a ‘right of first refusal’) is not determinative as to whether it is an option or a right of first refusal. A  court may interpret a document labelled an option as a right of first refusal and vice versa (see Woodroffe v Box [1954] ALR 474, 28 ALJ 90, Australian High Court; Fraser v Thames Television Ltd [1984] QB 44, [1983] 2 All ER 101).

Time limit to comply with the exercise of an option A date specified for the exercise of an option must be strictly complied with otherwise the option will lapse (see eg Millichamp v Jones [1983] 1 All ER 267, [1982] 1 WLR 1422; Haugland Tankers AS v RMK Marine Gemi Yapim Sanayii 484

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ve Deniz Tasimaciligi Isletmesi AS [2005] EWHC 321 (Comm), [2005] 1 All ER (Comm) 679) unless the agreement provides explicitly or by implication that the option is to be exercised in a reasonable time (Re Kawasaki Kisen Kabushiki Kaisha v Belships Co Ltd [1939] 2 All ER 108).

Drafting issues An enforceable, unambiguous option will generally cover the following matters: •

Is it clear what the option holder is to receive when it exercises the option? Eg, if it is an option to enter into a further agreement, eg a patent licence, are the terms of the licence attached to the option agreement, or is there an enforceable mechanism for agreeing those terms?

•

Does the option holder receive an exclusive, first option or a non-exclusive option? Ie is the giver of the option prevented from granting similar rights to any other person? This may be implicit in the wording of many option clauses (eg if it is an option to purchase a specific plot of land), or may not be an issue given the nature of the deal. In any case, it is preferable to state the position specifically.

•

Does the holder of the option provide consideration for it? Where the option forms part of a larger agreement, the consideration need not be directly linked to the option granted and may be found elsewhere in the agreement. If the option is not within a larger agreement, or it is not clear what is being provided in return for the granting of the option, then it may amount to no more than an ‘agreement to agree’ (Walford v Miles [1992] 2 AC, [1992] 1  All ER  453, HL, see Case analysis; Dany Lions v Bristol Cars Ltd [2014]  EWHC  817 (QB)) or may not be sufficiently certain to create a binding obligation.

•

Is there a clear description of the circumstances when the option holder will have the right to exercise it? Are the specific events clearly described which will allow the option holder to exercise the option? Can the option holder exercise the option at any time prior to the expiry date of the option? May it be made conditional upon certain events taking place (eg the grant of planning consents)?

•

Is there a clear statement of how the option may be exercised? Eg must the option holder give notice to the other contracting party or parties? Is there any particular form that the notice must take and/or time limits that need complying with? A requirement for a written notice that refers specifically to the option agreement may avoid uncertainty.

•

Is it possible to exercise the option if one or more of the parties has changed? Between the time an option is granted and the time it is exercised, one 485

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or more parties may have assigned their interest in the agreement which contains the option. The assignee(s) may not be the parties envisaged or contemplated at the time of exercise. Also, in the event of a dispute, the courts may interpret the option strictly so that an assignee may not be permitted to exercise the option (see BP Oil UK Ltd v Lloyds TSB Bank Ltd [2004]  EWCA  Civ 1710, [2004] 1  All ER (D) 336 (Dec)) but it is likely to depend on the words found in the agreement and the surrounding circumstances (Truegold International Ltd v Questrock Ltd [2010] EWHC 966 (Ch)). •

On how many occasions can the option be exercised? If not clear from the circumstances, can the option only be exercised once or can it be exercised on subsequent occasions?

•

What happens if the option is not exercised? If the right to exercise an option arises and the option holder fails to exercise do they lose the right to exercise after a specific period of time (the option is said to lapse)? Or will the right to exercise it again exist generally or when some specific circumstances arise?

Location in the agreement An Option clause, if contained in a wider agreement that concerns other matters of substance, will normally be included in the Main Commercial Provisions section.

Linkage and use Options Options and option agreements are widely used. In an agreement that deals with matters of substance other than the option, the following provisions may need attention. •

Notices. If any notices are required to be given, do they need to be in a particular form? The required form is sometimes attached as a schedule to an agreement.

•

Payment. If a specific payment is to be made on grant or exercise of the option, are any ‘normal’ payment provisions to apply (payment on invoice, set number days to pay) or are particular requirements to apply here (ie payment with exercise of the option means the payment must be in the bank account of the grantor of the option on the exercise date)?

•

Termination. In what circumstances will the option terminate? Eg an option may terminate (eg ‘lapse’) if it is not exercised by the option holder or terminate on it being exercised if the parties are unable to come to an agreement (see Precedent 1).

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Sample precedent material Precedent 1—Option to enter into licence agreement 1 Option 1.1 Subject to the provisions of this Clause 1, the [University] grants to the [Sponsor] an exclusive, first option (the ‘Option’) to acquire an exclusive, worldwide licence (with the right to sub-license) under the Resulting Intellectual Property to develop, manufacture, have manufactured, market, use and sell Products in the Field (the ‘Licence Rights’). 1.2 The Option shall be exercisable at any time during the continuation of this Agreement, and shall be exercised by the [Sponsor] giving notice thereof in writing to the [University] (‘Notice of Exercise of Option’). During the period of the Option and, if the Option is exercised, during the period referred to in Clause 1.3, the [University] shall not grant the Licence Rights to any other person. 1.3 Following the [University’s] receipt of the [Sponsor’s] Notice of Exercise of Option, the [University] and the [Sponsor] shall negotiate in good faith, for a period of up to 90 days from the date of such receipt, the terms of a licence agreement between them under which the [Sponsor] would be granted the Licence Rights. Upon agreement of such terms, the Parties shall forthwith execute a licence agreement between them on such terms. 1.4 If the Parties are unable to agree the terms of a licence agreement within 90 days of the [University’s] receipt of the [Sponsor’s] Notice of Exercise of Option, despite negotiating in good faith, the Option will lapse. Precedent 2—Option to purchase shares 1 Grant of Option In consideration of the sum of [£1] (the receipt of which is acknowledged by the Company) the Company grants the Director the right to subscribe for the Option Shares [or any of them] at the Subscription Price. 2 Right to exercise Option 2.1 Except where exercise is pursuant to Clause [no] the Option may not be exercised before [insert first exercise date]. 2.2 The Option may not in any circumstances be exercised after [insert final exercise date]. 2.3 The right to exercise the Option shall terminate forthwith upon the Director ceasing to be a director of the Company. 2.4 The Option is personal to the Director and he may not transfer assign or charge it. 487

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2.5 The right to exercise the Option shall terminate forthwith upon the director being adjudicated bankrupt. 2.6 The Option shall lapse on the earliest of the following dates: (a) [insert final exercise date]; (b)

the expiry date of any period during which the Option may be exercised;

(c)

the date on which the Director ceases to be a director of the Company;

(d)

the date on which a resolution is passed or an order is made by the court for the compulsory winding up of the Company; or

(e)

the date on which the Director does or omits to do anything as a result of which he ceases to be the legal and beneficial owner of the Option.

3 Exercise of Option The Option shall be exercisable in whole or in part [(but if in part then in respect of not less than [insert minimum percentage] of the Option Shares or the balance of the Shares comprised in the Option)] by notice in writing given by the Director to the Company. Precedent 3—Short form – right of refusal to be added to separate option clause in franchise agreement In the event that the Franchisor wishes to grant to a third party a franchise for a new Outlet in that part of the Development Area edged green on the Map during the Term [(which the Franchisor undertakes shall not occur prior to the expiry of [number] months from the date of this Agreement)] the Franchisor shall notify the Franchisee in writing of such desire and thereupon the Franchisee shall have 90 days from the date of such notice in which to notify the Franchisor in writing that it shall exercise the Option in respect of such Outlet failing which the Franchisor shall be at liberty to grant a franchise to a third party for such Outlet. Precedent 4—Short form – right of refusal to licensee of patents before licensor assigns patents to third party For so long as the Licensee is the licensee of the Patents, the Licensor shall not assign the Patents to a third party. If the Licensor wishes to assign the Patents to a third party it shall first provide an opportunity to the Licensee to obtain an assignment of the Patents to itself [subject to the Parties negotiating in good faith and agreeing the terms and conditions of the assignment]. 488

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Precedent 5—Short form – option to extend an agreement for a further period subject to agreeing a new price 1.1 Subject to the [remaining] provisions of this Clause 1, the Supplier grants to the Customer an option (the ‘Option’) to extend the period of this Agreement for a further period of [1 year]: 1.2 At the date that the Customer exercises the Option the Supplier does not have a right to terminate this Agreement for any of the events set out in Clause [no], or if the Supplier has previously exercised a right to terminate it is no longer continuing; 1.3 The Option shall be exercisable at any time by the Customer during the continuation of this Agreement but no later than 90 days before the end of the [Term]; 1.4 The Option shall be exercised by the Customer giving notice in writing to the Supplier; 1.5 Following exercise of the Option the Parties shall negotiate in good faith, for a period of up to 30 days from the date of the notice given under Clause 1.4 on the Price the Customer shall pay to the Supplier for the Services if the Agreement is extended for a further period. 1.6 If the Parties reach agreement on the Price then the Parties shall immediately execute an amendment agreement in the form as set out in Schedule  [1] to this Agreement, which will reflect the agreement between the Parties on the Price and the further period. 1.7 The Option shall lapse if: (a) the Customer fails to exercise the Option in accordance with Clause 1.3 above; or (b) the Parties are unable to agree the Price in accordance with Clause 1.5 above, despite negotiating in good faith.

Case analysis Haugland Tankers AS v RMK Marine Gemi Yapim Sanayii ve Deniz Tasimaciligi Isletmesi AS [2005] EWHC 321 (Comm), [2005] 1 All ER (Comm) 679 Facts 1 C  (as buyer) and D  (as builder) entered into a contract whereby D designed, built and delivered to C an oil tanker (hull 63). 2 On the same date as the above contract the parties entered into an option agreement granting C the option to buy an additional, identical vessel. 489

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3 The option agreement terms stated (amongst others) that once C declared the option by serving notice to D then C would be required to provide D  with simultaneous payment of 1% (the ‘Commitment Fee’) of the contract price for hull 63. 4 C declared the option in a letter to D. The letter did not refer to, nor did D pay, the Commitment Fee. 5 D contended that the option had not been properly exercised since the Commitment Fee had not been paid. 6 C sought a declaration concerning the valid exercise of the option. Held 1 The judge [(Langley J)] stated that the option agreement did not use the word ‘exercise’ but referred to C ‘declaring’ the option and paying the fee. 2 He held that the use of the word ‘simultaneously’ was much stronger than (eg) ‘upon giving notice’: ‘The notice and payment must be given and made at the same time and so, I think, usually as part of a single process in this case of exercising the option.’ 3 Further, the use of the term ‘Commitment Fee’ also suggested that the payment of the fee was required in order to secure D’s commitment to the contract. Accordingly, the offer contained in the option could not be accepted without the payment of the Commitment Fee at the same time. 4 Therefore the option had not been exercised validly. BP Oil UK Ltd v Lloyds TSB Bank Ltd [2004] EWCA Civ 1710, [2004] 1 All ER (D) 336 (Dec) Facts 1 The defendant bank was the tenant under a lease of office premises. The claimants were two BP companies and a Mobil company (the ‘Oil Cos’). 2

The terms of the head lease prevented D from granting an underlease of a part in the way the Oil Cos desired. Accordingly, the Oil Cos took an assignment of the lease on terms that D  entered into an option agreement that granted the Oil Cos an option to put the lease back on to D for no consideration (a ‘put option’). The put option was personal and non-assignable.

3 At the time of the option agreement the Oil Cos were in partnership, but this later had to be determined due to competition reasons. The arrangements included Mobil’s release of its interest in the lease and the Oil Cos assigned the lease to the two BP companies. 490

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4 The Oil Cos served notice on D to exercise the put option. D refused to take the lease back on the grounds that the assignees were not the original ‘tenant’ under the lease. The Oil Cos disagreed and issued proceedings. 5

At first instance the judge held (i) that there was not a valid exercise of the put option and (ii) the option might still be validly exercised if the lease was reassigned to the Oil Cos. The parties both appealed on the aspects adverse to them.

Held 1 On a true construction of the option agreement, the Oil Cos were defined as ‘the purchaser’. The option necessarily involved the purchaser being the tenant. Thus the exercise was invalid and would be whilst only two were tenants. 2 The option could be exercised if the lease had been reassigned back to the original three companies by the date of exercise of the option. Astrazeneca UK Ltd v Albemarle International Corpn [2011] EWHC 1574 Facts 1 The claimant sells an anaesthetic. During the life of the agreement between the parties the claimant manufactured an ingredient of the anaesthetic (propofol) by distilling material (2,6 Di-isopropyl-phenol (DIP)) made by the defendant. 2 The parties entered into a supply agreement in 2005, which was terminated in 2008. 3 At the time the parties entered into the supply agreement, the claimant was already contemplating ceasing distilling DIP, and buying propofol direct. 4 The supply agreement contained a clause reflecting 3 (the clause is reproduced below). That if the claimant did wish to directly buy propofol rather than distilling it then the defendant would have a right of first refusal to supply propofol. 5 The meaning of the clause and what it covered was the heart of the dispute between the parties. The defendant claimed that the claimant was in breach of the clause, and accordingly that the defendant could terminate the agreement. The claimant argued that the meaning of the clause had a different meaning to that given by the defendant and that the claimant gave plenty of opportunities to the defendant to match an offer made to the claimant by a third party for the supply of propofol. The clause dealing with a right of first refusal 491

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Option and right of first refusal ‘H-Switch to Propofol In the event that at any time BUYER reformulates or otherwise changes its Diprivan brand to substitute propofol for the PRODUCT, BUYER will so notify SELLER and will give SELLER the first opportunity and right of first refusal to supply propofol to BUYER under mutually acceptable terms and conditions.’

Held 1

The irreducible minimum for a right of first refusal was that it confers a right to obtain the subject matter of the right: ‘it confers a right to be given an opportunity to match any third party offer which the grantor of the right might be otherwise minded to accept, and, in the event that the grantee matches the offer, to be awarded the business to which the offer relates. That construction of the right of first refusal is supported by a number of authorities, which, albeit all at first instance, seem to me to support [what is the above] irreducible minimum.’

2 That the right of first refusal has to amount to a contractual offer, although the wording of the clause does not need to state that in clear wording: ‘… that the grantor of the right of first refusal is obliged to make a contractual offer, even though there is no express covenant to that effect in the term containing the right of first refusal.’

3 A right of first refusal is a right to receive a contractual offer from the grantor, even though all the terms and conditions of entering a contract are not settled or the parties will need to negotiate further to agree those terms and conditions: ‘… that a right of first refusal constitutes a right to receive a contractual offer on terms which the party who has granted the right of first refusal is prepared to accept, even though the detailed terms of any contract may require further negotiation and might ultimately not eventuate in a contract at all.’

4 In the situation where: (a)

the grantor has received an offer from a third party; and

(b)

the grantor wishes to accept that offer;

then the grantor, in order to comply with the obligation to grant a right of first refusal, has to provide an opportunity to the grantee to match that offer. It does not matter as “to the substance of the obligation that the grantor is in the position of accepting as opposed to making an offer”. 5 The court also recognised that a right of first refusal might also arise in different circumstances to the grantor refusing an offer from a third party. For example under a patent licence agreement a patent owner may be under an obligation not to assign any patent it owned without first offering to assign it to the licensee. Any offer made by the 492

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owner to the licensee would need to be based on prior contractual negotiations before the making the offer to assign, and the offer had to be sufficiently certain to allow the licensee to immediately accept it (ie just issuing an offer without making it possible for the licensee to accept would amount to no more than an agreement to negotiate): ‘… the relevant contractual negotiations would precede the making of the offer which the right of first refusal required, so that the “contractual offer” had to be one the acceptance of which created an immediately binding contract…that what is required for the grantor of a right of first refusal to comply with its obligation is a “contractual offer”, in the sense of an offer which contains the essential terms on which the grantor is prepared to enter into a contract. It matters not that detailed terms may require subsequent negotiation.’

(This point was based on the court’s analysis of an earlier decision in QR Sciences Ltd v BTG International Ltd [2005] EWHC 670 (Ch) (initial judgment) and [2005] EWHC 1500 (Ch) (supplemental judgment). 6 The court also held that the grantor had to use good faith by providing full disclosure to the grantee of the provisions of any agreement that the grantor was willing to accept from a third party. The court found that such obligations are ‘inherent or incidents’ of the right of first refusal: ‘… if there is a third party deal with which the grantor is minded to proceed, in order to enable the grantee to exercise its right of first refusal and match that offer, full and fair disclosure of that deal by the grantor is required. That seems to me to be an incident of the obligation on the grantor to act in good faith… [Other case law] recognises the importance of providing full details of whatever contractual “deal” is contemplated, so as to enable the right of first refusal to be properly exercised.’

7 That an obligation of good faith is in this context is not a generalised concept: ‘… what is required (consonant with the obligation to provide full and fair disclosure of any deal the grantor is minded to accept) is good faith in setting out the precise terms of the offer the grantee has to match and which the grantor is minded to accept. … without good faith in that sense, the grantee will not have the opportunity to which the right of first refusal entitles it contractually, to understand and have the opportunity of matching the third party proposal.’

8 The clause containing the right of first refusal contains the phrase ‘under mutually acceptable terms and conditions’ and the court explored what is to happen once the grantee has accepted the contractual offer or has matched the third party offer that the grantor is willing to accept. It is still possible for there to be no binding contract because there is difficulty between the parties on the detail of what will be supplied. The court held that in such circumstances: ‘… what the grantor is not entitled to do is to act in bad faith in relation to such detailed negotiations, declining ultimately to enter a contract with the grantee and then enter into a contract on essentially the same terms with a third party.’ 493

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Purpose of the clause Every contract should identify the parties to the contract unambiguously. One important reason for this is if a party wishes to start legal proceedings, then that party knows to whom (and to where) to serve legal proceedings for breach of contract. In agreements made under English law, it is conventional to state at the head of the agreement, in separate numbered paragraphs: •

the correct (full) legal name of each party;

•

if it is not clear from the name, their status, eg a private limited company, a (unincorporated) partnership or a company limited by guarantee, incorporated by Royal Charter;

• if appropriate, in the case of incorporated parties, the place of incorporation and their registration number; •

the address of each party, usually the registered office (in the case of UK companies incorporated under or regulated by, the Companies Act 2006) or the principal place of business (in other cases).

Each of these matters is now considered in turn. In relation to non-UK parties, see Agents for service.

Drafting issues •

Numbering and paragraphing. Conventionally, each party is described in a separate paragraph and numbered, as in Precedent 1. Often an agreement will have a shortened form of the name for referral purposes later in the agreement, such as in Precedent 1 (eg  ‘IBM’ for International Business Machines). Alternatively the parties are more usually referred to by their ‘roles’ in the agreement. If a party is manufacturing products then it is referred to in the agreement as the ‘Manufacturer’. This is often used where one party is entering a particular type of agreement on a frequent basis. Such an approach helps to reduce the number of changes needed for it to be made into a standard form of agreement.

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However, although describing a party by their ‘role’ is often done, a contract drafter should avoid this method, where possible, to avoid giving two parties similar sounding roles, such as ‘licensor’ and ‘licensee’. It is all too easy to confuse them, and for mistakes to be made in the drafting or typing as to the party referred to. For example, in a patent licence agreement, if the parties are described as ‘Licensor’ and ‘Licensee’ then a warranty found in patent licences might be: ‘The Licensor warrants, represents and undertakes to the Licensee as follows that the Licensor is entitled to license [the Patents] to the Licensee and has not previously licensed or assigned them or entered into any agreement relating to them or to the Technology, which might affect its ability to license [the Patents] to the Licensee in accordance with the provisions of this agreement or enter into this agreement or which would be inconsistent with the Licensor’s warranties and obligations under this agreement.’

If the contract drafter inadvertently types ‘Licensee’ for “The Licensor warrants, represents…” then the clause will become a nonsense, and the Licensee may lose the protection the warranty is designed to provide. The licensee, in the event of a dispute, will be reliant on a judge deciding that the incorrect description of the party in the clause was a clerical slip worthy of correction, if the Licensor was not prepared to agree to a correction. In such a case it would be better not to describe the parties in so similar a way. •

Where two differently-named parties are to be treated as one party in an agreement. If two differently-named parties are to be treated as one party for the purposes of accepting an obligation or receiving a benefit, the contract drafter should name each in a separate paragraph at the head of the agreement, but give the two parties a collective shorthand name (see Joint and several liability). See Precedent 2.

•

Name and status. The main purpose of stating the (full) legal name and status of a party in detail is to be clear as to their identity. It may also ‘flag up’ any issues that may arise in relation to their capacity to enter into contracts, and which may need further investigation. For example, if a party is an unincorporated trust, it may be necessary to consider whether it has the legal capacity to enter into a contract of the type contemplated. The following points are likely to need consideration: •

The full names of the parties should be set out, including any parts of the names which describe their status, eg ‘PLC’, ‘Limited’, or ‘LLP’. If a mistake is made in setting out the name of a company, this will probably be immaterial (F Goldsmith (Sicklesmere) Ltd v Baxter [1970] Ch 85, [1969] 3 All ER 733, applied in OTV Birwelco Ltd v Technical and General Guarantee Co Ltd [2002]  EWHC  2240 (TCC). See also Nittan (UK) Ltd v Solent Steel Fabrications Ltd [1981] 1 Lloyd’s Rep 633). However, it is better to avoid this risk.

•

The legal status of a party should be set out (if not obvious from its full name), for example: 495

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•

if a contracting party is a partnership, state if it is a partnership and/or it is a firm (see Precedents 7 and 8); or

•

if a company is limited by guarantee and/or is exempt from the use of the word ‘Limited’ in its name) (see Precedent 11); or

•

if an individual is a contracting party, sometimes for the avoidance of doubt, the party clause states that the person is an individual (see Precedent 13), together with any title that they might have (such as professor, doctor, etc); or

•

if it is a body corporate, state whether it is incorporated by statute (perhaps stating the statute) or incorporated by Royal Charter (see Precedent 12); or

• if it is a company based outside England and Wales it is usual to state the country and (if relevant, eg  in the USA) the state of incorporation and, in appropriate circumstances, for the avoidance of doubt, indicate that the foreign company has the capacity to enter into contracts. • To avoid uncertainty, the official or registered number with which a company (including a limited liability partnership) is registered is often stated. At least within the UK, a company/LLP may change its name, but the number will not change. Organisations and companies incorporated by statute or Royal Charter do not have a registered number in the same way as a company incorporated under a Companies Act. Such organisations are listed by the Registrar of Companies with companies. The number shown is that issued by the Registrar, but no other details are held by the Registrar. For organisations incorporated by Royal Charter the Privy Council is the body responsible for them. However, the Privy Council shows a different number (a reference number). Only all organisations incorporated from 1968 have a reference number; there are very few prior to that date. •

Address. For different types of party the agreement should state the following address: •

UK company limited by shares or a LLP: registered office;

•

a traditional (unincorporated) partnership: the home address of every partner and their business address;

•

overseas companies: the principal place of business, although this may be a company’s management headquarters, rather than the foreign equivalent of a registered office under the Companies Act 2006, s 287. It would certainly not be wrong to refer to a foreign company’s ‘registered office’: this is the term used, for example, by EC Council Directive 80/390 (a Listing Particulars Directive). An alternative is an ‘official address’, the term used in the Civil Jurisdiction and Judgments Act 1982, s 42;

496

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•

a body corporate: its principal or main address; and

•

an individual: the individual’s home address.

One reason for stating the parties’ addresses in the contract is to provide an agreed address for the sending of notices. It is conventional in English law agreements to state the addresses of the parties in the Parties clause. In agreements drafted in other countries, the parties’ addresses are often included in the notices clause rather than at the head of the agreement. In multi-signatory documents, eg  partnership agreements or some multi-party agreements common in some sectors, such as EU-funded collaboration agreements, it may be more convenient to list the names and addresses of the parties in a schedule, so that it is easier to make additions and subtractions and also to prevent ‘over-burdening’ the front of the agreement with pages of names and addresses (see Precedent 14 and 16). •

Using descriptive names. In all but the shortest of documents it is more convenient and clearer to refer to the various parties by such descriptive terms as ‘vendor’, ‘purchaser’, ‘guarantor’, ‘franchisee’ etc. These terms are so basic to the agreement that they are invariably set out at the head of the document as part of the descriptions of the parties, rather than consigned to the separate ‘Definitions’ clause.

•

Meaning of ‘party’ and ‘parties’. In most agreements there will be provisions which refer to all the parties, eg, many provisions found in the Boilerplate section are addressed to all the parties (such as Amendment, Assignment, Law and Jurisdiction, Interpretation etc clauses). For the avoidance of doubt, an agreement may include a definition to clearly indicate that a reference to the ‘parties’ is a reference to the parties named in the agreement and that a reference to a single ‘party’ is a reference to either one of them (see Precedent 3 for an example).

•

Is a person/organisation listed in the parties section in fact a party? Sometimes a person or an organisation is named whose role is not as a party to the agreement or at all or only to a limited extent. For example, in a services contract (such as one where there is the provision of consultancy or advertising services) the provision of the services of a particular individual might be critical. They may be named in the Parties clause. If so, then additional wording elsewhere in the contract may need adding to clearly indicate that they are not a party to the contract (or at least have no liability for any of the obligations). A second example is where a parent is providing a guarantee and the provisions of the guarantee are included in the contract between the subsidiary and a third party. Then the parent may be added as a party, but there should be wording in the contract to clearly indicate the liability etc of the parent (ie that it does extend to performing or being liable for the obligations of the subsidiary, except when the guarantee operates).

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Location in the agreement Definition of ‘Party’ and ‘Parties’ The Definitions section of the agreement will normally include a definition of the meaning of ‘Party’ or ‘Parties’. Alternatively such a definition might be located immediately after the names, addresses etc of the Parties (see Precedent 5).

The names, address, legal status and descriptive names of the parties An agreement will include this information: •

normally in the Parties section of the Agreement; and/or

•

if there are a large number of parties, there may be a short reference to the names of the parties in the Parties section but with the full details of the parties set out in a Schedule.

Linkage and use The definition of a Party and/or Parties will be used throughout the agreement and the descriptive names will also be similarly used. The key point is the consistent use of names (and the correct names), for example: •

if the definitions of ‘Party’ and ‘Parties’ are made and are capitalised, is the capitalised version used consistently? That is, sometimes ‘Party’ is used and sometimes ‘party’. In the event of a dispute, a court might find that the different use is deliberate and different meanings are meant;

•

if the descriptive names are close to each other or are not ‘plain’ English (‘Licensor’, ‘Licensee’, ‘Franchisor’, ‘Franchisee’), are they used correctly for each obligation/clause in an agreement? Mixing up similar names of this kind in the agreement is a common drafting error.

Sample precedent material Precedent 1—Default parties clause (1) ABC PHARMACEUTICAL DISTRIBUTORS OF LONDON LIMITED a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at 2 Mile End, London, SW12 0ZA (‘ABC’); and (2) SMITHSON PHARMACEUTICALS PLC a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at Unit 32, Business Park, Farmland Avenue, Seedbridge, Worcestershire, KT39 1PQ (‘Smithson’). 498

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Precedent 2—Where two differently-named parties are to be treated as one party in an agreement (1) ABC PHARMACEUTICAL DISTRIBUTORS OF LONDON LIMITED a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at 2 Mile End, London, SW12 0ZA (the ‘Company’); and (2) ABC GROUP PLC a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at 2 Mile End, London, SW12 0ZA (the ‘Guarantor’); (the Company and the Guarantor being referred to below collectively as the ‘Group’); and (3) SMITHSON PHARMACEUTICALS PLC a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at Unit 32, Business Park, Farmland Avenue, Seedbridge, Worcestershire, KT39 1PQ (‘Smithson’). Precedent 3—Sample definition of ‘Parties’ and ‘Party’ – two parties to an agreement ‘Parties’ shall mean [Party A] and [Party B], and a reference to a ‘Party’ shall mean a reference to either one of them. Precedent 4—Sample definition of ‘Parties’ and ‘Party’ – more than two parties to an agreement ‘Parties’ shall mean [Party A], [Party B] and [Party C] and a reference to a ‘Party’ shall mean a reference to any one of them. Precedent 5—Sample definition of ‘Parties’ and ‘Party’ – included with description of party (1) ABC PHARMACEUTICAL DISTRIBUTORS OF LONDON LIMITED a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at 2 Mile End, London, SW12 0ZA (‘ABC’); and (2) SMITHSON PHARMACEUTICALS PLC a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at Unit 32, Business Park, Farmland Avenue, Seedbridge, Worcestershire, KT39 1PQ (‘Smithson’). (together the ‘Parties’, and ‘Party’ shall mean either one of them) Precedent 6—Description of party with reference to particular department/section (1) ABC PHARMACEUTICAL DISTRIBUTORS OF LONDON LIMITED a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at 2 Mile End, London, SW12 0ZA acting through its Department of Pharmaceutical supplies whose office is at Unit 2, First Industrial Estate, Scarmore Road, Oxensmall, XP3 3PA (‘ABC’); and 499

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(2) SMITHSON PHARMACEUTICALS PLC a company incorporated in England and Wales [under company registration number [ ], and] whose registered office is at Unit 32, Business Park, Farmland Avenue, Seedbridge, Worcestershire, KT39 1PQ (‘Smithson’). Precedent 7—Description of party – partnership (first names and surnames of all partners) carrying on business in partnership at (place of business) under the [style or name] of (name of partnership firm) (the ‘Partners’). Precedent 8—Description of party – partnership – alternative The Partners carrying on business at (place of business) under the [style or name] (a firm). And within the agreement a definition of ‘Partners’: ‘Partners’ shall mean the names of the persons [together with their addresses], which are set out in Schedule 1, and who carry on business in partnership, and a ‘Partner’ shall mean any one of them. Precedent 9—Description of party – registered company (name of company) [Ltd or plc] registered in England and Wales under [Company Registration No [ ], and] whose registered office is at (address)] (the ‘Company’). Precedent 10—Description of party – limited liability partnership (name of LLP) LLP, registered in England and Wales under number [name, and] whose registered office is at (address)] (the ‘LLP’). Precedent 11—Description of party – company limited by guarantee (name of company) registered in England and Wales under [Company Registration No [ ], and] whose registered office is at (address)] [and who is exempt for the use of ‘limited’ in its name) (the ‘Company’). Precedent 12—Description of party – incorporated by statute or Royal Charter (name of organisation/company) a [type of organisation][company] incorporated by [statute or Royal Charter] the [chief][principal] office of which is at (address) (the ‘Company’). Precedent 13—Description of an individual [title, such as doctor, professor] [full name of individual, first name, middle name and last name], an individual of [home address]. Precedent 14—Description of party – single and collective The several banks and financial institutions, the names and addresses of which appear on the signature pages of this agreement (each ‘a Bank’ and together the ‘Banks’). 500

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Precedent 15—Description of party – single and collective – alternative form If any party or parties (individually or (if more than one) together the ‘Outgoing Party’). Precedent 16—Description by reference to schedule The persons whose signatures are set out in the schedule to this agreement (together the ‘Creditors’) being respectively creditors of (debtor) of (address) (the ‘Debtor’) Precedent 17—Description by reference to schedule – alternative form (1) AB of [address]; and (2) the several persons whose names and addresses are set out in the schedule below (together the ‘Parties’). Precedent 18—Description based on role of party ‘you’ or ‘your’ shall mean the person or organisation to whom we are supplying [goods][services] and who is required to pay for the [goods][services] that we are supplying.

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Purpose of the clause Some contracts: (1) fail to state a price a party will be paid for undertaking contractual obligations at all, or (2) state a price or rate for the party undertaking of the contractual obligations, but then fail to state when or how that price or rate is to be paid. In the first case, the courts may infer that the seller of goods or supplier of services should be paid a reasonable amount, for example: •

for goods, where the price of the goods is not stated the buyer must pay a reasonable price (Sale of Goods Act 1979, s 8); and

•

for services, where the price for the services is not stated there is an implied term that the party contracting with the supplier will pay a reasonable charge (Supply of Goods and Services Act 1982, s 15).

For (2) a court may be prepared to interpret such a contract as requiring payment within a reasonable period. However, it is always better to state specifically what the payment terms are to be.

Drafting issues The drafter should consider a number of factors when drafting a payment clause. The precise provisions will be deal specific, depending on the particular deal that the parties have made (such as the amount that the buyer/customer will pay for the goods, and whether the payment is made in stages etc), but other provisions are more ‘routine’ (such as whether any sums are exclusive of VAT, whether interest is chargeable for late payments). For example: •

The amount one party will pay to the other. This will often be one of the central commercial provisions of any deal. This figure might be stated in a number of ways: •

as a specific figure in a simple payment clause (eg, ‘The Buyer shall pay £5,000 to the Seller on the Date’); or

•

by stating the amount in a definition and then using the definition in the payment clause (eg The Buyer shall pay the Price to the Seller on the Date); or

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•

•

by defining the price to be paid as that stated in a list of prices which are included elsewhere in an agreement or outside of the agreement, such as a price list appearing on a supplier’s website (eg ‘The Price of the Goods shall be the price stipulated in the Seller’s published price list (at www.xxxx.com/pricelist) current at the date of delivery of the Goods’).

Timing and frequency of payments. The agreement might specify, for example, whether the payments are to be made: •

in advance of the provision of the goods and/or services;

•

on the date that the agreement is signed;

•

when the goods are delivered or the services are supplied;

•

a set number of days after the goods are delivered or the services are supplied;

•

a set number of days after the supplier has sent an invoice; and

•

periodically, and if so, how frequently; for example, that the customer/ client: •

needs to make a payment of a certain amount each month;

•

needs to make the payment of the price in defined stages (such as in Precedent 7);

•

makes payments as and when they order goods or services (such as under a long-term supply agreement, see Precedent 8).

The above are just examples. •

The method for calculating payment. If calculation of the amount owing is by reference to a rate (eg rate per task, per the number of goods sold or for time spent or as a percentage of sales revenue, as with patent royalties), the method of calculation of the rate should be clearly specified, eg using a suitable definition of ‘Net Sales Value’ (see Net Sales Value) or a specified price list; If the calculation is other than the most simple kind, then the parties should consider: •

using a formula with mathematical or algebraic notation rather than words; and

•

providing worked examples (whether the calculation is expressed in words or in algebraic notation).

Expressing calculations in words can lead to errors particularly if they are drafted by lawyers (see the comments in London Regional Transport v Wimpey Group Services Ltd (1986) 280  EG  898) or they are not tested sufficiently as to whether they produce the right result or whether all the financial or commercial consequences are shown, particularly for payments or calculated amounts which may run on for many years. Two of 503

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the most important cases on the interpretation of contracts (Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; Arnold v Britton [2015] UKSC 36) concerned payment clauses (of a type) and lack of clarity in their meaning (and they were expressed in words rather than as formulas). •

Whether the price stated includes VAT. For business to business transactions prices are normally exclusive of VAT, which will be charged in addition. If there is no indication as to whether VAT is included, there may be an implication that, if the transaction amounts to a taxable supply, the price includes VAT (Value Added Tax Act 1994, s  19(2)) (see Value Added Tax).

•

Method of making payments. How are the payments to be made (eg by cheque, letter of credit, credit or debit card, direct transfer etc)? If methods other than cheque or cash, the (bank) account of details of the receiving party will need to be specified.

•

Interest. Whether interest is to be payable on late payments, including the rate, at what date it starts being payable, and if interest is not payable, whether the party who is to receive payment is entitled to some other substantial benefit, etc (see Interest).

•

Time of the essence for payment. Whether time of payment is to be ‘of the essence’, ie termination of the contract is to be allowed for late payment. The default position is that time is not of the essence, eg Sale of Goods Act 1979, s 10 (see Time of the essence).

•

Currency. The currency in which payments are to be made (in contracts with an international element), any currency conversion method, and who is to bear any exchange risk (see Currency).

•

Deductions/set-offs. Whether deductions or set-offs are to be allowed (see Set-off and retention).

•

Refunds, deposits and part-payments. Whether any payments are refundable or to be treated as an advance against future payments (see Deposits and part-payments).

•

Ancillary costs. Who is to bear any ancillary costs, eg  packing, carriage, insurance?

•

Statements, receipts, invoices. Whether any statements, receipts or other documents are required to be provided in support of a payment claim.

•

Other records: •

whether a party needs to keep any, and what type of, records;

• how long the party must keep them (whether during the life of agreement, and also for how long after the agreement is terminated); • what information must the records contain (such as for a royalty statement, details on the number of products sold, the costs involved in selling them, etc; and 504

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•

whether the records are available for inspection by the party or only an agent of the other party.

•

Ownership of goods. A Payment clause may also deal with the ownership of property of goods sold and when it passes in relation to goods (often the supplier of goods will wish to retain ownership until it receives payment and/or it has cleared funds). Also the Sale of Goods Act 1979, s  18 provides detailed rules as to when property passes (unless the parties to an agreement have agreed otherwise) (see Title (or property) and risk).

•

Sending of invoices, use of order numbers etc. Do invoices need sending to a particular location quoting a reference number?

•

Guaranteeing of payment etc. Does the seller/supplier require that payment of the price for the goods or services is guaranteed by a third party? If this is required, then the agreement will need to include provisions making the guarantor a party to it as well as the precise provisions of the guarantee itself. The alternative is that the parties enter into a separate agreement with the guarantor dealing only with the guarantee. For example, will the seller/supplier wish the other party to enter into a parent company guarantee or have some form of insurance to cover a default of the other party in making payment?

Location in the agreement A  Payment clause is normally located in the Main Commercial Provisions section of an agreement. In some agreements there will be a definition of the amount that is to be paid (if not subject to a calculation), often such as ‘Price’.

Linkage and use A  Payment clause will often contain, where appropriate, the following other payment-related clauses such as: •

Currency (where payment may be made in a currency other than pounds sterling or payment may be made in more than one currency);

•

Interest (where the amount of interest and how and when it will be made is specified in the event of a late payment);

•

Net Sales Value (this definition might be added where a royalty is payable and the permitted deductions from the invoiced value of goods and services are specified before the royalty is calculated); and

•

Time of the essence (if there is a ‘generic’ boilerplate Time of the essence clause in the Boilerplate section of an agreement, and the clause relates to the timing of payment).

Also Termination provisions may specify exactly what is to happen in the event of non- or late payment in addition to general or other specific provisions 505

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in relation to termination. Whether to use a Retention of Title clause may also need to be considered.

Sample precedent material Precedent 1—Simple payment provision Payment of [the Price or the Seller’s Quoted Price or [specify]] shall be due within 30 days of the date of the Seller’s invoice. Precedent 2—Price by reference to list The Price of the Goods shall be the price stipulated in the Seller’s published price list current at the date of delivery of the Goods. Precedent 3—Payment by confirmed letter of credit The Buyer shall within [21] days open an irrevocable letter of credit with a bank to be confirmed in favour of (name of Seller’s bank) payable [30] days at sight against production of a commercial invoice for the Goods [and a clean on board bill of lading for the Goods]. Precedent 4—Royalty payment accompanied by statement On or before [date] in each year during the term of this agreement the [Licensee] shall make payment of the royalty due to the [Licensor] under Clause [no] in respect of [specify]. A statement shall accompany the payment showing the manner in which the total amount of royalty was calculated. Precedent 5—Payments to be made without deductions Payments made under this agreement shall be made without deductions (including taxes or charges). If the applicable law requires any tax or charge to be deducted before payment, the amount due under this agreement shall be increased so that the payment made will equal the amount due to [Party] as if no such tax or charge had been imposed. Precedent 6—Payments to be converted into sterling Any sum due under this agreement not expressed in sterling shall be converted into sterling at the official rate of exchange in London at the close of business on the [last day of the calendar month] during which [the Goods were delivered or as the case may be]. Precedent 7—Long form (eg services provided by consultant) – fixed payments, royalties on sales, VAT, currency and method of payment 1 Fixed amounts In consideration for the Services, the Company shall pay to the Consultant the following amounts on the following dates: 1.1 [£100,000] within 30 days of the date of this Agreement; and 506

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1.2 [£100,000] within 30 days of the first anniversary of the Commencement Date. 2 Royalty In further consideration for the Services, the Consultant shall pay to the Company a royalty of 5% (five per cent) of the Net Sales Value of all Products sold by the Company during the period of 10 years from the Commencement Date. 3 Payment terms 3.1 Royalties due under this Agreement shall be paid within 60 days of the end of each quarter ending on 31 March, 30 June, 30 September and 31 December, in respect of sales of Products made during such quarter and within 60 days of the termination of this Agreement. 3.2 All sums due under this Agreement: (a)

are exclusive of VAT which where applicable will be paid by the Company to the Consultant in addition;

(b)

shall be made by the due date, failing which the Consultant may charge the Company interest on late payments on a daily basis at a rate equivalent to [3]% above the base lending rate of [name] Bank plc then in force;

(c)

shall be paid in pounds sterling by cheque made payable to ‘[name] Offshore Account’, and in the case of sales income received by the Company in a currency other than pounds sterling, the royalty shall be calculated in the other currency and then converted into equivalent pounds sterling at the buying rate of such other currency as quoted by [name] Bank plc as at the close of business on the last business day of the quarterly period with respect to which the payment is made; and

(d)

shall be made without deduction of income tax or other taxes, charges or duties that may be imposed, except insofar as the Company is required to deduct the same to comply with applicable laws.

Precedent 8—Long form (eg payment for goods for long term supply of goods) 1 The Prices for the Goods are set out in the [Price List][website] of the Seller. 2 The Seller shall have the right to increase the Prices on each anniversary of the date of this Agreement at [specify percentage][by some specified external reference, such as the Retail Prices Index]. 507

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3

The Buyer shall make payment to the Seller within [[ ] days of the date of the Seller’s invoice][[ ] days of the end of the month following the month in which the invoice is dated].

4 The Seller may submit an invoice for the Goods [on Delivery][at any time after Delivery of the Goods]. 5 Where the Seller delivers the Goods in instalments the Seller shall have the right to submit to the Buyer an invoice for each instalment. The Buyer shall pay the invoice for each instalment in accordance with Clause 3 above. 6 The Buyer shall pay all sums due under this Agreement, without any discount, deduction, set-off or counterclaim whatsoever. 7

If the Buyer shall fail to make any due payment to the Seller, the Seller shall have the right, without prejudice to any other right or remedy (a)

not to make further deliveries [under this Agreement][under this Agreement and any other agreements that the Parties have entered into or will enter into];

(b)

to charge the Buyer interest on late payments on a daily basis at a rate equivalent to [3]% above the base lending rate of [name] Bank plc then in force;

(c)

to require that the Buyer pays in advance for [any further orders of Goods][ any further deliveries of the Goods if the Goods are supplied in instalments];

[8 Time for payment of all sums payable by the Buyer under this Agreement shall be of the essence.] 9 When making a payment the Buyer shall state the invoice number and any order or instalment number on any documentation which accompanies the payment. Precedent 9—Short form for goods (such as ordered on the internet) 1 The price for the goods you order shall be as stated at the time we accept your order. 2 We use our best efforts to state the correct prices of goods on our website [and our catalogues [specify any other places the supplier lists its goods]]. Our intention is to sell the goods at those prices, however this is not always possible because of the number of goods we sell, changes in the prices of the goods that our suppliers charge us or errors we may make when displaying details of goods and their prices on the website. The price you will pay will be as stated in Clause 1 above. 3 If at the time we accept your order, the price of the goods is different to the price when you placed your order, the following will occur: 508

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(a)

if the price is higher, then we will offer you the option to either pay the higher price or to cancel your order;

(b)

if the price is lower, we will charge you the lower price.

4 Our prices are shown inclusive of VAT [at the current rate of 20%]. 5 You will need to make payment for the goods at the time you place your order (although we will not charge your debit or credit card until we accept your order). By placing your order you are giving your permission to charge the debit or credit card you used when placing your order. 6 We only accept payment by [debit or credit card][and we do not accept cheques].

509

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Priority of terms

Purpose of the clause Often an agreement: •

consists of several, clearly identifiable and separate parts; ie, such as a part containing standard provisions and another part with specifically negotiated provisions;

•

is amending another agreement;

•

is amended by another agreement;

•

consists of one or more schedules; or

• contains some provisions which to some extent overlap with other provisions in the same agreement. There may be inconsistency or conflict between one part of the agreement or clause and another. Or even if there is not a (direct) inconsistency or conflict, but when the parts of the agreement(s) are read together, there may be doubt as to the meaning of the agreement or a provision. Eg, an agreement may consist of a set of standard provisions and then a separate section, which consists of specifically negotiated provisions. Some of the provisions cover the same issue but do so in different ways. If this is the case, it may not be clear which prevails. A Priority of terms clause will help to indicate clearly which: •

part of an agreement; or

•

which agreement; or

•

which provision of an agreement

takes precedence over the other. Although the purpose of a Priority of terms clause is clear, that purpose must be set against how the courts interpret the meaning of inconsistency. If there is a Priority of Terms clause it appears that the courts will be willing to find one clause inconsistent with another, although the bar is still high in order for a court to do so. For a contractual term to be inconsistent with another it must contradict or be in conflict with another so that ‘effect cannot be fairly given to both clauses’, or to put it another way, that inconsistency will only 510

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occur ‘when the provisions cannot sensibly be read together’ (Pagnan SpA v Tradax Ocean Tansportation SA [1987] 3 All ER 565, CA, applied in Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496 and see Case analysis). Although the decision in Pagnan SpA indicates that no preference should be given by a court to finding or not finding inconsistency, however, the likely reality is that the courts will operate on the following basis: 1

that all the provisions are terms of a contract; and

2 if there is ambiguity between contract terms in one part of a contract to another; and 3

it is not possible to reconcile them; then (and only then)

4

will a Priority of Terms clause come into effect (eg RWE Npower Renewables Ltd v JN Bentley Ltd [2014] EWCA Civ 150).

One consequence of this is that if a court can resolve any perceived ambiguity then, even if there is a Priority of terms clause, it will be of no use. In effect it will be ignored by the court. A second consequence is that a contract drafter needs to thoroughly go through different parts of a contract to determine whether provisions do overlap or conflict with each other, and either amend the wording which is overlapping or conflicting or make it clear which clause is subject to another.

Drafting issues •

Does an agreement refer to, deal with or is linked to another document or agreement? Even where the agreement is, as is usually the case, expressed to be the whole and final agreement between the parties (through an ‘entire agreement’ clause), there may be another document connected with the same transaction by which the parties have agreed also to be bound. The parties to a shareholders’ agreement, for example, are usually also bound by the provisions of the company’s memorandum and articles of association. To avoid doubt in the event of a conflict between the respective documents, the parties should decide which is to have priority (as in Precedent 1). In such a case, if there is an entire agreement clause, its wording will need attention, if it is worded in a standard way such as: ‘This agreement contains the whole agreement between the parties and supersedes any prior written or oral agreement…’

Either the entire agreement clause will need amending to make it clear that the agreement under consideration is to be read together with other agreements or use extra wording to specifically refer to the other agreements. •

If there is another document or agreement which is referred to etc, to what extent is it relevant to the agreement, and which is to prevail (if at all)? Where the provisions of some other document are to prevail, the parties must make themselves aware of those provisions in detail and as to their effect. 511

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Eg, in a franchise agreement it is common for the provisions of the franchisor’s manual (or equivalent document) to be incorporated by reference, but for the agreement itself to prevail (see Precedent 2). •

If several documents are incorporated into an agreement, does the agreement clearly state which document’s provisions are to prevail? If several documents are expressly incorporated into a contract, then it may be necessary to state the hierarchy of such documents, in case there are conflicting provisions in each (or between them). Eg, some construction contracts include standard conditions and schedules in which further provisions are to be found. In the absence of a clause specifying which provisions’ terms are to have priority, the court will need to interpret the contract to determine that priority. The court’s interpretation might differ from that intended by one or more of the parties. Case law indicates that ‘special conditions’ will normally be interpreted as having priority over standard, printed conditions (Bravo Maritime (Chartering) Est v Alsayed Abdullah Mohamed Baroom, The Athinoula [1980] 2 Lloyd’s Rep 481; and also Glynn v Margetson & Co [1893] AC 351, HL. Also see Data Direct Technologies Ltd v Marks and Spencer plc [2009] EWHC 97 (Ch), [2009] All ER (D) 198 (Jan), where the court needed to interpret apparently conflicting provisions dealing with the same subject matter in two schedules).

Location in the agreement The Boilerplate section of an agreement will usually contain the Priority of terms clause.

Linkage and use Such a clause is likely to be relevant in the situations outlined at the beginning of this section, particularly if the parties are using a standard template (which may emanate from different sources or parties) and the parties do not engage in a detailed comparison. Needing particular attention will be: • whether there are different termination provisions (when termination can take place, consequences of termination); •

whether the greater or more extensive limitations or exclusions of liability or warranties take priority;

•

whether there is any change to when risk and property passes, a right to reject or when acceptance takes place in relation to goods; or

•

whether there is a change in the timing and methods of payment.

If there is no other agreement (or any schedules or annexes) then such a clause will not be necessary or appropriate. 512

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Sample precedent material Precedent 1—Agreement to prevail In the event of any conflict between the provisions of this agreement and the provisions of [the Articles] the provisions of this agreement shall prevail. Precedent 2—Agreement/Manual to prevail All the provisions of the Manual as amended or revised from time to time or any new edition of it are incorporated into and form part of this agreement as though fully set forth in it and in the event of any conflict between a term of this agreement and a provision in the Manual this agreement shall prevail. Precedent 3—Agreement/special conditions to prevail To the extent that any provision of [this agreement or these Special Conditions] conflicts with [any provision in any schedule to this agreement or any of the Standard Conditions] [this agreement or these Special Conditions] shall prevail in all circumstances. Precedent 4—Agreement/schedules/standard conditions – order in which they are to prevail If there is any conflict in meaning between any provision of this Agreement, its Schedules and the Standard Conditions respectively, effect shall be given to the main body of this Agreement in preference to its Schedules or the Standard Conditions, and to the Schedules in preference to the Standard Conditions. Precedent 5—Agreement/schedules – particular schedule to prevail over the agreement and other schedules If there is any conflict in meaning between the provisions of this Schedule, the other Schedules or the Agreement then the provisions of this Schedule shall prevail. [In the event of a conflict between the provisions of the Agreement and the other Schedules which cannot be resolved by giving preference to this Schedule then, as between the Agreement and the other Schedules, the provisions of the Agreement shall prevail.] Precedent 6—Conveyance/standard conditions to prevail The Property is sold and conveyed upon the terms of this agreement and of the [[transfer or conveyance] in the agreed terms or Standard Conditions of Sale (…… Edition) so far as the same are applicable to a sale by private treaty and subject to the variations and conditions set out in the fourth schedule]. In the case of any conflict between [the [transfer or conveyance] or the Standard Conditions] and this agreement the provisions of this agreement shall prevail. 513

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Precedent 7—Agreement to prevail – shareholders’ agreement If any provisions of the memorandum or articles of association of the Company at any time conflict with any of the provisions of this agreement the provisions of this agreement shall prevail and the parties shall whenever necessary exercise all voting and other rights and powers available to them to procure the amendment of the memorandum and/or articles of association to the extent necessary to permit the Company and its affairs to be carried out as provided in this agreement. Precedent 8—Agreement/statute law to prevail Nothing contained in this agreement shall be construed so as to require the commission of any act contrary to law and wherever there is any conflict between any provisions of this agreement and any material statute law, ordinance or regulation contrary to which the parties have no legal right to contract then the latter shall prevail but in such event the provisions of this agreement so affected shall be curtailed and limited only to the extent necessary to bring this agreement within the legal requirements and all other provisions shall remain in full force and effect without change whatever.

Case analysis Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496 This case provides an example of how a court interpreted the provisions of a contract and found inconsistency between specially agreed terms and standard conditions. Key facts 1 The claimant obtained a ‘buy to let’ mortgage from the defendant. 2 An offer document (Offer of Loan) indicated that the mortgage was for 25 years, with the interest rate fixed for a period until June 2010 and then the interest would be variable, tracking the Bank of England base rate, with a premium of 1.99%. The Offer to Loan document also stated that standard terms and conditions applied. 3 The defendant’s standard mortgage conditions (Conditions) allowed the defendant (in summary): 1

to vary the rate; and

2

to require repayment on one month’s notice.

4 The claimant argued that the Conditions were inconsistent with the provisions of the Offer to Loan document, and that the provisions in the Conditions were not terms of the contract. The judge at first instance disagreed with the claimant. 514

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5 Clause 1 of the Conditions indicated that in the event of an inconsistency between the Offer of Loan document and the Conditions, the former were to prevail. 6 Clause 5 of the Conditions dealt with the circumstances when the defendant could change the interest rate. 7 Clause 17 allowed the defendant to demand repayment in various circumstances, including a ‘without cause’ right to terminate on one month’s notice. (Parts of these three clauses are set out below.) Application of earlier case law 8

The court applied two earlier cases: Pagnan SpA v Tradax [1987] 3 All ER 565 and Glynn v Margetson & Co [1893] AC 351.

9 In Pagnan SpA the court considered a contract where there was an inconsistency between standard terms and terms which were specific to the contract, together with a clause similar to Clause 1, except in Pagnan SpA the specific agreed terms were to prevail ‘in so far as they may be inconsistent’. Particularly relevant were the following points from Pagnan SpA: 1

That it would be ‘wrong to approach the contract on the assumption that there is no inconsistency’ since ‘by including the inconsistency clause the parties have acknowledged that there may be’.

2

It is also wrong to approach the question of inconsistency on the basis that there is one, as all the terms are part of the contract which the parties chose to form [their contract], including making the contract subject to the standard terms.

3

That a court, when interpreting an inconsistency clause, should avoid pre-conceived assumptions, which will mean that a court should not strive to avoid or to find inconsistency. A  court should interpret the contract in a ‘cool and objective spirit to whether there is inconsistency or not’.

4

For a court to find that contract terms are inconsistent: ‘it is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses’, or ‘where the provisions of the contract cannot be sensibly read together’.

10 In Alexander the court considered the Pagnan SpA case and found: 1

‘inconsistency’ is not limited to only clear and literal contradiction, but 515

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2

‘it extends to cases where clauses cannot “fairly” or “sensibly” be read together; not merely cases where they cannot literally be read together. One should approach that question having due regard to considerations of reasonableness and business common sense.’

11 In Glynn the court held that a printed standard term must not be used to override the main object and intent of a contract. 12 For the court in Alexander the Glynn case indicated ‘that the importance or centrality of the specially agreed term being considered may be a relevant consideration’: 1

if a specially agreed term contains what can be reasonably understood ‘to be the main purpose or object of the contract then a printed standard term which is inconsistent with that purpose or object is likely to be found to be a term which cannot “fairly” or “sensibly” be read together with it’; and

2

a standard term which gives a wide right or liberty may have the consequence of being inconsistent and ‘[t]he mere existence of the right or liberty may undermine and be inconsistent with the obligation apparently being undertaken by the special term’.

Court’s interpretation of the provisions of the contract 13 The court found in relation to the specific facts of the case: 1

that the Offer to Loan document clearly sets out the ‘specifically agreed, bespoke terms which describe and define the particular mortgage contract which is being agreed’ including that the rate of interest was fixed up to June 2010 and that afterwards that the variable rate is the same as the Bank of England Base Rate with a premium of 1.99% until the end of the mortgage term;

2

the Offer to Loan document contained no contrary indication that the interest rate will be other than the Bank of England Base Rate.

3

Clause 5 is drafted in wide terms and allows the defendant to vary the interest rates for a number of reasons including ‘to make sure our business is carried out prudently, efficiently and competitively’. There is in effect no limitation on the defendant’s power to vary the interest rate (unless it does so for an ‘improper purpose, capriciously, arbitrarily or in a way which no reasonable mortgagee, acting reasonably would do’).

14 The court held that Clause 5 is inconsistent with the description of the mortgage in the Offer to Loan document, because: 1

The description of the mortgage in the Offer to Loan document states how the defendant can vary the interest rate, but the

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Conditions allow for something completely different. Clause 5 is ‘inconsistent with that specially agreed term to incorporate a printed standard term which provides for an entirely different method of varying the rate. If, for example, Clause 5 had stated that rates may be varied in accordance with changes in the LIBOR rate that would be clearly inconsistent with a specially agreed term for variation by reference to changes in the Bank of England Base Rate. Variation at the discretion of the Lender is similarly a different method of varying the rate. It will no doubt be entirely appropriate when the [Conditions] supplement a standard variable rate or similar mortgage product. It is not, however, appropriately incorporated where the method of variation has been agreed in the terms set out in [description of the mortgage] of the [Offer to Loan document]. In my judgment variation of the rate at the discretion of the Lender is a different method of variation to that specially and specifically agreed [the description of the mortgage] and is inconsistent with it.’ 2

The description of the mortgage [in the Offer to Loan document] states in clear terms what type of mortgage the defendant is providing, but Clause 5 allows the defendant to provide something completely different, and its effect is not to modify the description of the mortgage but allows for the complete overriding of the description of the mortgage: ‘… a printed standard term which confers such a right is inconsistent with the specially agreed [description of the mortgage]. That is not a matter of qualification or modification; it is a matter of transformation and indeed negation. If the Lender has the right or liberty to replace the mortgage product as described in the specially agreed terms with some other product then there is effectively no enforceable obligation to provide that product.

3

The description of the mortgage contains the main purpose of the contract (for the defendant to provide a mortgage of the type set out in the description of the mortgage), but Clause 5 as a standard condition ‘which entitles the defendant to substitute a different product is inconsistent with that purpose or object’.

15 Clause 14 includes provisions where the Claimant was in breach or unable to pay the interest but also includes one provision that allows the defendant to terminate the contract at one month’s notice at its will. The court found that the Offer to Loan document makes it clear that the mortgage is for a period of 25 years, and does not indicate that the contract can be terminated at will, as well as other provisions which the court found inconsistent with an immediate right to terminate for no reason. 16 The court found that the arrangements put in place by the claimant (such as that rental income would fund the mortgage payments and that the claimant would have 25 years to pay off the mortgage, and 517

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the consequences to the claimant if the defendant gave notice, such as ending tenancies, selling the property or trying to arrange alternative finance at virtually no real notice) all point to inconsistency between the Offer to Loan document and Clause 14: ‘If one seeks to put the clauses together, such a clause would be to the effect that the Lender shall provide the mortgage loan set out in the [Offer to Loan document] until the end of the mortgage term of 25 years, subject to the Lender’s right at any time and for any reason to require repayment of the loan on one month’s notice in accordance with clause 14 of the Mortgage Conditions. Faced with such a clause a reasonable borrower would question what was being agreed and whether there was any obligation to provide the mortgage loan for 25 years. The answer would be that the Lender is only agreeing to provide the loan for 25 years unless and until he decides to require early repayment and that accordingly he is effectively under no obligation to provide it for that term. That again is negation; not modification or qualification.’

Clauses from the contract Clause 1 ‘These Mortgage Conditions incorporate any terms contained in the Offer of Loan. If there are any inconsistencies between the terms in the Mortgage Conditions and those contained in the Offer of Loan then the terms contained in the Offer of Loan will prevail.’

Clause 5 ‘5.1 Interest is payable by you .. .at the rate or rates specified in your Offer of Loan Letter which, except during any period in which interest is expressed to be at a fixed rate, may be varied by the [Lender] at any time for any of the following reasons: if there has been, or we reasonably expect there to be in the near future, a change in the Bank of England Base Rate or in interest levels generally; […] if investment interest rates have increased or decreased; to reflect market conditions generally; at the end of any period during which any fixed rate or concession or alternative rate (such as the Bank of England Base Rate) is in force; […] to reflect a change in the way the Property is used or occupied; to make sure our business is carried out prudently, efficiently and competitively’.

518

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Clause 14 ‘14 You may be obliged by us to repay the Loan in full together with any accrued interest and unpaid Charges and we will become entitled to exercise all the powers conferred on us under Condition 15 of these Mortgage Conditions immediately if any of the following events occur: we give you one month’s notice requiring such repayment; any Payment remains unpaid for longer than one calendar month; you are in breach of any of the other obligations or conditions contained in these Mortgage Conditions; the Property becomes subject to a Compulsory Purchase Order; you are made bankrupt; you enter into an arrangement with or for the benefit of your creditors or propose to do so; you die or become incapable of managing your affairs; you do anything which may damage or reduce the value of the Property or you fail to perform any obligation (whether to pay money or otherwise) imposed upon you as the owner of the Property; […]’.

519

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Receipts

Purpose of the clause The term ‘receipts’ can mean either: •

a reference to a source of money paid to a party to an agreement (as in the term ‘Publisher’s Net Receipts’, often found in standard contracts with authors where royalties are calculated as a percentage of such receipts); or

• an acknowledgment by a party that it has received a sum of money or some other item (eg a document); or •

a document which is evidence that the party has paid for something.

The latter two meanings are considered here. Receipts clauses are occasionally found in commercial agreements, usually as a formal acknowledgment that a party has received a payment or has made a payment. Eg: • in some agreements (such as assignments of intellectual property) where nominal consideration is provided, it is common to add an acknowledgment of receipt of the nominal sum; •

in the grant of an option (such as within an agreement), where nominal consideration is added in order to avoid argument that the option is not binding because it lacks consideration, an acknowledgment of that nominal sum will also be added.

Other uses of a receipts clause in a commercial agreement include: •

in a manufacturing agreement the manufacturer may need to indicate it has insurance to cover for any liability that might arise from the use of its products, and the clause covering this may require that the manufacturer produce the receipt showing that payment has been made for the insurance (in addition to or as an alternative to producing the certificate of insurance);

•

in a patent licence agreement the licensor or the licensee may have the obligation to maintain the patent in force, and in some licence agreements the party that has that obligation may need to produce a receipt from the patent office(s) that it has paid the renewal fees charged by the patent office(s);

520

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• in various types of agreements where a party has to confirm receipt of materials, documents or information. Sometimes these are often coupled together with a form of acknowledgment that a party has received all that it requires in order to perform its obligations (see Precedent 3).

Property transactions For payments receipted in a deed involving a property transaction, a receipt of payment contained in a deed, in favour of a subsequent purchaser, is sufficient evidence that the whole sum has been paid (unless the subsequent purchaser actually knows that the payment was in fact not paid) (Law of Property Act 1925, s  68). This will normally only apply where there is a (real) property transaction and the receipt is contained within a deed.

Drafting issues •

Is a receipts clause necessary? A receipts clause will only be appropriate when: • at the time the agreement is entered into, one or more parties is required to acknowledge that it has received something; and/or • during the life of the agreement, a party has an obligation to acknowledge receipt of a payment, materials, documents or something else;

•

If a receipts clause is needed, is the thing or payment sufficiently identified? Eg, if the receipt of a ‘disclosure letter’ is being acknowledged: •

is it identified by date?

•

does it include details of who provided it?

•

does it include details of who it was provided to?

•

does it include details of where it can be found (eg as a schedule to the agreement),

so that there is no doubt later about which document is referred to? •

Other than acknowledgment that a payment (or something) is received, does there need to be any statement that the obligation is fulfilled?

•

If a party needs to provide evidence that it has made a payment, how must they do so? Does the party who has made the payment need to supply the evidence: • to the other party as soon the first party receives it or within a set period? •

when the other party asks for it?

•

in a particular form? 521

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Location in the agreement A Receipts clause is usually contained within another clauses. Eg: • in an assignment of intellectual property, the clause assigning the intellectual property might include a receipt clause; or •

where one party is providing a supply of materials to another, to enable the other to manufacture a product using those materials, the receipt of the materials might be included within a clause dealing with the handling, storage and use of the materials.

Sample precedent material Precedent 1—Acknowledgment of sum paid (payment for option) In consideration of the sum of £1.00 (one pound sterling) paid by the Company to the Developer (receipt of which the Developer hereby acknowledges) the Developer grants, subject to the provisions of Clause [no], to the Company an exclusive option (the ‘Option’) to acquire an exclusive, worldwide licence to develop, manufacture, have manufactured, market, use and sell the Products. Precedent 2—Requirement to produce receipts of payment of renewal fees for maintaining patents in force The Licensee shall at its own cost and expense pay all renewal fees in respect of the Patents as and when due and shall provide to the Licensor the receipts for the fees paid [within [ ] days of making the payment][when the Licensor requires their production]. Precedent 3—Receipt that supplier has received information necessary to perform services At the date of this Agreement, the Supplier confirms that it has received: 1 the signed copy of the Specification; and 2 all the information it requires; in order for the Supplier to perform the Services.

522

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Recitals

Purpose of the clause The purpose of a recital is to explain the background to, or some facts about or relating to, an agreement, eg: •

to set out the history of the negotiations or the relationship between the parties;

•

to explain the status of the agreement and its relationship to other related agreements. Eg, if the agreement is an amending agreement then the recitals would provide details of the original agreement (title, date entered into etc) and recite the amending agreement is amending the original agreement;

• any resources, skills, experience etc that one or more of the parties are bringing to the agreement. Eg, state that a party who provides legal services has lawyers who have experience in dealing with matters, transactions or disputes which relate to subject matter of the agreement; •

to describe the nature and effect of the agreement;

•

to describe how a party is related to a third party. Eg, a party may be a subsidiary of another company (that is not a party to the agreement, but may have provided a guarantee in a separate agreement);

Recitals are not normally intended to be legally binding. It is bad drafting practice to include substantive provisions, eg obligations on the parties, in the recitals. There is case law on the legal effect of recitals. This case law may not bind a court in an individual case, as the intended legal effect of a provision set out in a recital is a matter of interpreting the individual contract. It is best to avoid the risk by including all substantive provisions only in the main body of the agreement. Older case law has formulated three rules concerning the legal effect of recitals (see Re Moon, ex p Dawes (1886) 17 QBD 275, CA at 286): • if the recitals are clear and the operative part is ambiguous, the recitals govern the construction; 523

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•

if the recitals are ambiguous and the operative part is clear, the operative part must prevail;

•

if both recitals and the operative part are clear, but they are inconsistent with each other, the operative part is to be preferred.

Recent cases have not departed from these propositions developed in the 19th century. See Communication Technology Investments Ltd v International Environmental Management Ltd [2005] EWHC 3292 (Ch) for a modern example where the judge was prepared to use a recital to interpret an operative clause (but found it unnecessary to do so as the operative clause in question was not, in the judge’s view, ambiguous); Gallaher International Ltd v Tlais Enterprises Ltd [2008] EWHC 804 (Comm), paras 992–1001, where the judge held that the operative provisions were clear and therefore it was unnecessary to consider the recitals. Accordingly, there is a strong presumption that a recital will not be used in interpreting the provisions of an agreement or contain any binding obligations on one or more of the parties to an agreement, particularly if the agreement is of a formal type (eg such as a document which is only concerned with the assignment of intellectual property or contains the provisions of a guarantee) and is prepared by a lawyer on behalf of a client). See Fairstate Ltd v General Enterprise and Management Ltd [2010]  EWHC  3072 (QB), [2011] 2  All ER (Comm) 497, where the judge stated: ‘… a recital [is] not an operative provision. In a formal contract such as this, which has been drafted by a lawyer, the section containing the recitals is not the part of the agreement in which the substantive obligations are usually expressed. It is therefore inherently unlikely that the parties intended any of the matters recited to give rise, by itself, to a substantive obligation’.

A  court may use the recitals to help in interpreting the provisions of an agreement where the recitals set out the steps the parties took in preparing to enter into the agreement (see The Square Mile Partnership Ltd v Fitzmaurice McCall Ltd [2006] EWCA Civ 1690, [2006] All ER (D) 262 (Dec)). In modern legal language used by the courts when interpreting contracts, a recital can form part of the admissible background (the ‘matrix of facts’, following the case of Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98) which a court may use to interpret an agreement (if relevant, ‘which have affected the way in which the language of the document would have been understood by a reasonable man’). See Rust Consulting Ltd v PB  Ltd [2010]  EWHC  3243, where a recital was used to interpret the meaning of an agreement; reversed on appeal in [2012] EWCA Civ 1070 but not relating to this point. However, although the cases mentioned above indicate that it is possible that recitals may be used in interpreting the operative provisions, this will normally only be the case when there is any ambiguity in the operative provisions of the agreement, not otherwise. There is other (older) case law where a recital can also have legal impact: where one party makes a clear statement in a recital clause, that party can later 524

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be prevented (estopped) from denying the truth of it (see eg Right d Jefferys v Bucknell (1831) 2 B & AD 278; Bensley v Burden (1830) 8 LJ (OS) Ch 85; Heath v Crealock (1874) LR 10 Ch App 22; Re Moon, ex p Dawes (1886) 17 QBD 275 at 286; Poulton v Moore [1915] 1 KB 400, CA). Eg, in a services agreement the party who is to provide the services may, in a recital, state explicitly that they have the necessary expertise and facilities to carry out the services as required by the client party. However the danger of making clear statements about such matters may mean that, independent of the provisions of the agreement, such a statement might amount to a precontractual representation. The consequence of which is that a party who has received services of a low standard might argue that it was induced to enter into the contract based on the statements made in the recital. A point to note about the case law in the older cases is that they were concerned with the use of recitals in deeds and/or in relation to various real property transactions. Care should also be taken where recitals are used in agreements or other documents relating to any real property transaction. In some cases the use of recitals may have unintended consequences (eg the doctrine of ‘feeding the estoppel’: Re Bridgewater’s Settlement [1910] 2 Ch 342; First National Bank plc v Thompson [1996] 2 WLR 293, CA) or may not be appropriate (transfer of registered land).

Drafting issues •

Is a recitals clause needed at all? Often the recitals included in routine commercial agreements provide no real background information about the agreement, the parties, the history of negotiation, etc. If there is nothing particular or specific to be stated, then the inclusion of a Recitals clause may not add anything to the agreement (also see under Linkage and use). Recitals may need inclusion where the parties wish to record the background to a transaction and/or the particular agreement is based on, varies, is related to or otherwise references other agreements or documents. If they choose to do so then whatever wording is used should be no more than what is objectively factual (and preferably explicitly agreed by both parties).

•

Avoiding binding obligations. The main point to emphasise is that the parties should not include obligations in the recitals. Nor should obligations appearing later in the contract be summarised, except with qualifying wording such as: ‘in accordance with the provisions of this Agreement’.

It is also suggested that words such as: ‘the parties have agreed’

are avoided, if all that is meant is that the parties are willing to sign the agreement of which the recitals form a part, since such words could be misunderstood as referring to a pre-existing agreement. 525

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•

Wording that should be included where recitals are used. Wording that the parties are: ‘willing’

or ‘wish’

or are ‘considering’

etc to enter into an agreement or undertake an obligation are used (see Precedent 4 for the recital clauses for the appointment of a consultant). •

Commencing a Recitals clause: A Recitals clause is normally headed with the following words: WHEREAS

or RECITALS

or BACKGROUND

Which of these terms is used is a matter of personal preference, although the first two terms are the most conventional, with the first being the most ‘traditional’ and seen in older or more formal documents. •

Layout considerations. Whilst not compulsory, the following suggestions follow English drafting practice for recitals and help to make the contract more easily readable: •

if there is more than one recital clause they should be put into separate paragraphs;

•

each separate recital should be numbered, and a different numbering system should be used for recitals compared to the main part of the agreement. ‘A, B, C’ etc can be used for recitals, and ‘1, 2, 3’ etc. can be used for the main part of the agreement. This helps to avoid confusion when cross-references are made.

Location in the agreement A Recitals clause will be normally located immediately after the Parties clause.

Linkage and use Extensive, too specific or wording creating obligations can cause problems in the event of a dispute. Despite including an Entire Agreement clause and 526

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exclusion and limitation of liability clauses, a party may make a claim for precontract misrepresentation citing the matters set out in the Recitals clause.

Sample precedent material Precedent 1—Sample recital – ‘Whereas’ WHEREAS the Sellers wish to have the Shares allotted to the Nominees in the proportions mentioned in the schedule below and the Company is willing to allot and issue the Shares accordingly. Precedent 2—Sample recital – ‘Recitals’ RECITALS: A The Owner is the [registered proprietor of or applicant for] the Patents [(as defined below)]. B The Owner is willing to grant to the Licensee, and the Licensee is willing to accept, a licence under the Patents in accordance with the provisions of this Agreement. Precedent 3—Sample recital – ‘Background’ BACKGROUND: (1) The Bank has agreed to make available to the Company a facility upon and subject to the terms and conditions set out in a loan agreement dated (date) and entered into by the Bank as lender and the Company as borrower (‘the Loan Agreement’). (2) The Bank may from time to time make available further banking facilities to the Company. (3) It is a condition of the Loan Agreement that the Company’s obligations under the Loan Agreement be secured upon and subject to the terms and conditions contained in this deed. Precedent 4—Sample recital – Appointment of a consultant A The Company is considering making an investment in a new business venture, more fully described in the Business Plan. B The Consultant is experienced in the provision of business consultancy services. C The Company wishes to commission the Consultant to investigate the potential market for the products described in the Business Plan and to prepare a report and recommendations, as is more fully described in the Specifications, and the Consultant is willing to provide such services, all in accordance with the provisions of this Agreement.

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Reporting

Purpose of the clause In certain types of agreement, a party will need to provide regular reports to the other parties about its activities under the agreement. Eg: •

in a consultancy agreement: the consultant will provide progress reports on the work they carry out or a report on what they have found, the advice, conclusions or proposals they wish to make, etc; or

•

in an agency agreement: the agent will provide reports as to the activities carried out and/or leads generated and sales made; or

•

in a licence of intellectual property: the licensee will provide reports on the granting of (sub)licences, sales made of products using the licensed intellectual property as well as providing information on income, expenses etc for use in calculating royalties.

Drafting issues When drafting a reporting clause, the following points will need consideration: •

What information should the report contain? •

Should the agreement contain a general statement that a report is provided as and when required? Eg, in a routine consultancy agreement, where a consultant is providing a limited amount of advice or assistance and only a short note or report is required, a general statement may be sufficient.

•

Should the agreement include a provision that the report(s) contain specific information? Eg, where an agent is appointed to sell a product, the principal will wish to know how well the agent is doing, such as the amount of sales, who the agent is selling to, at what price the goods are being sold, and so on.

•

Should only particular types of information be supplied? Eg, should a sales report list only the amount of sales, or should it name the customers (which in certain situations may give rise to competition law problems)?

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•

Only written reports? Although the usual requirement (or assumption) is that reports will be provided in writing, in some cases the requirement to provide reports will also be linked to meetings to monitor the progress of an agreement, etc. In some cases some or all of the report may need making through presentations or with the use of various technical aids or methods.

•

Rights of receiver of the information. Can the receiver of information demand further information and/or can it inspect the records of the provider of the report, to verify the accuracy of the information or carry out an inspection or audit at the premises of the sender?

•

Frequency. At what frequency should the supplier of reports do so?

•

Format of the report. Should the reports contain: •

a specified set of information?

•

be laid out in a particular way? Eg, a franchisee may have to report on its activities, and, for more structured franchise operations, the franchisor may have produced a manual for the operation of the franchise. The manual may not only specify the content of a report, but also its format (such as layout, headings, the way particular information must be formatted etc).

•

Reports from third parties. In some agreements reports are required from third parties. It may be necessary to deal with situations where the reports are either not produced or they do not contain the information or result that a party wishes to see. In such cases, the agreement should deal with whether the agreement can be terminated or remedial work be carried out, at one party’s expense, etc. For example, when entering into a lease of a property, a party may wish to obtain reports from surveyors, environmental consultants, searches with local authorities, and so on.

•

To what extent is any information given, confidential?

Location in the agreement Where the provision of reports is important to the operation of an agreement, a Reporting clause will usually be located with other Main Commercial Provisions. If the provision of reports is of less importance then it will be located with other Secondary Main Provisions or Boilerplate section clauses.

Linkage and use Although a Reporting clause is often related to a discrete activity, other clauses will or could affect the operation of a reporting requirement: 529

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•

Ownership of the reports. There should be a provision in the agreement to specify who is to own the intellectual property in the report and what use can be made of the report by either party. Most reports will be subject to copyright law (whether relating to written materials, sound, pictures etc), and the default position is that the creator of the report owns the intellectual property in the report. In the absence of specific wording to state otherwise, then in addition to the creator owning the intellectual property in the report, the party for whom any report was created will only get a minimal licence to use the report (which may not cover all the uses that the party has in mind for what it wishes to do with the report). That party will wish: • (best option), to own the intellectual property in the report (a simple clause is provided as Precedent 3); or • (second best option), to have a very wide licence to the intellectual property in the report, eg ‘The Consultant grants an exclusive, irrevocable, fully-paid licence to the intellectual property in the Reports.’

If the agreement otherwise deals with the creation, licensing or management of intellectual property then it is likely the issue of the ownership/use of the reports would be dealt within these clauses. •

Confidentiality. To what extent is the information that is provided in the reports confidential? If the reports provided are based on, or incorporate, confidential information provided by a party, then the Confidentiality clause should be checked so that it covers reports generated under the agreement.

•

Completion/Expiry/Termination. Mainly in a consultancy services type of agreement the supplier of the service may need to provide a final report. Wording in some agreements will provide: •

•

from the point of view of the party receiving the services: •

that the agreement will not terminate until this report is provided;

•

that the party supplying the report will not be paid some or the entire price until the report is provided;

from the point of view of the party supplying the services: • that the obligations of that party under an agreement will terminate/cease when that report is provided; •

•

that the other party will be liable for any uses made by it of the report or any information contained in the report.

Consequences of termination. The provision of reports may involve the generation of data and information, documents etc. In order to write the reports the party producing them may receive information and documents (on paper and electronically) from the other party. On termination, a Consequences of Termination clause might provide that all information and

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documents provided (including copies) are returned and that information and data etc generated (including copies) should be destroyed or handed to the other party.

Sample precedent material Precedent 1—Reports etc to be provided on request [Party B] shall supply such reports, returns and other information as [Party A] from time to time requests including sales forecasts and information with regard to products competing with or likely to compete with the (subject matter) in the Territory. Precedent 2—Alternative short form – reports to be provided at fixed periods [Party B] shall send to [Party A] every six months during the continuation of this Agreement and within 30 days of its termination for any reason, a written report giving details of its activities under this Agreement over the previous six-month period. The report shall be substantially in the form of, and give details of the matters described in, Schedule [1]. Precedent 3—Ownership of intellectual property in reports The Consultant undertakes that all intellectual property in the Reports shall belong to the Client. In consideration of the Fees paid by the Client to the Consultant under this Agreement, the Consultant shall assign forthwith on demand from the Client all intellectual property in the Reports at any time after their coming into existence [including after termination of this Agreement]. Precedent 4—Short form – report for where party carrying sales of products etc type of activities (such as agent, distributor) [At the end of each calendar] or [On the last day of each] month the Supplier shall supply to the Seller information on the sales the Supplier has made in the previous month. The Seller may specify the form in which the information is provided to it as well as such other information it requires. Precedent 5—Alternative short form – report for where party carrying sales of products and related activities, etc (such as agent, distributor) [At the end of each week] or [At the end of each calendar month] or [On the last day of each month] (the ‘Period’) the Supplier shall supply, in writing, to the Seller: 1 what activities it has carried out in relation to the Products for the Period; and 2 what activities it intends to undertake in the [following [week] or [month]] or [next [specify period]] regarding the Products; and 531

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3 how the activities mentioned in 2. above differ from those stated in the Plan. Precedent 6—Alternative short form – report for where party carrying sales of products etc (such as licensee of software) [At the end of each calendar] or [On the last day of each] month the Licensee shall supply to the Licensor information regarding: 1 orders for the Software; 2 projected orders for the Software; 3 licences or sub-licences to the Software that the Licensee has granted. The Licensee shall supply such information to the Licensor as the Licensor may reasonably require. Precedent 7—Report where consultancy or advice is provided 1 Provision of reports [The Consultant shall supply to the Client reports [at the times set out in the Specification] or [at the times set out in the Schedule]] or [The Consultant shall supply a report on the Consultant’s completion of the Service]. 2 Supply and use of the report(s) (a) The Consultant shall supply to the Client one copy of each report; (b)

The Client shall only use any Report supplied [[for its own internal business purposes] or [in relation to the Purpose]];

(c)

The Client shall not, whether directly or indirectly, allow or cause the publication, sale or supply of any report (or the contents of any report) to any third party;

(d) The Consultant shall own all intellectual property rights (including but not limited to copyright and the database right) in any reports supplied (or any other documents, information or material created or supplied) by the Consultant to the Client. 3 The contents and format of the report(s) shall be in the form set out in the Specification.

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Retention of title

Purpose of the clause Background Under a retention of title clause, a seller of goods seeks to retain ownership (property) of the goods until it receives payment for the goods. The wish to retain ownership in such a circumstance will continue even if the seller has delivered the goods to the buyer. Principally under the Sale of Goods Act 1979 property in goods passes from the buyer to the seller when the parties intend it to (determined by their contract, the circumstances of the case or their conduct) (Sale of Goods Act 1979, s 17). A retention of title clause will usually vary the general rule found in the Sale of Goods Act 1979, s  18, rule 1 (which will apply unless the parties express a different intention and make their choice about when property passes in goods). This rule provides that ownership of the goods will pass to the buyer at the time the contract is made, irrespective of whether the buyer has paid for the goods or the seller has delivered the goods. This rule will apply as long as the goods are in a deliverable state. The parties are free to vary or dis-apply the rule (as a retention of title clause seeks to do). From a seller’s point of view, it is particularly important to retain ownership of goods where the buyer becomes bankrupt or goes into liquidation before paying for them. Other than in the simplest cases, retaining title to goods can lead to complex legal issues and difficulties, some of which are summarised below. The more ambitious types of clause will often create a charge over the goods, which will be void unless registered (where it is possible to register it). In most cases it is impractical to register a charge in respect of every sale. Within particular industries (such as construction, see eg, ‘Who owns unpaid goods?’ Construction Law, July 2005, p 20) there are also difficulties upon which expert advice should always be sought.

Principle of retention of title Retaining title to goods has resulted in much discussion and comment (see eg, Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 2 All ER 552, [1976] 1 WLR 676, CA (the Romalpa case)). The limits on the efficacy of such 533

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provisions will need careful explanation to the seller, proceeding from basic principles. Firstly, what is retention of title and what is its significance? It is the right of the seller to retain ownership of the goods sold until payment, notwithstanding that the seller has parted with possession of the goods to the buyer. As a general rule, where the parties have entered into a contract for the sale of goods and where goods are in a deliverable state, under the Sale of Goods Act 1979, the ownership of the goods will pass to the buyer at the time the contract is made, irrespective of whether the buyer has paid for the goods or the seller has delivered them (Sale of Goods Act 1979, s 18, rule 1). Obviously retaining ownership in goods delivered to the buyer, but not paid for, is an extremely important right in the event of the buyer becoming bankrupt or going into liquidation. In the event of an insolvency and an insolvency practitioner who disposes of the goods or interferes with them, the seller could bring legal proceedings against the practitioner for wrongful interference with the goods and claim damages for their market value. There are, however, a number of practical problems, as are discussed below. In particular, many types of retention of title clauses create a charge over the goods and (in the case of a corporate buyer) that charge will be void unless registered with the Registrar of Companies. Registration is often considered not practical.

Classification of retention of title clauses Clauses concerning retention of title are sometimes described in the following ways: •

simple clauses: the buyer of the goods does not obtain ownership of the goods until they have paid for them;

•

‘all moneys clause: this is a variation of a simple clause. Here the buyer does not obtain ownership of the goods until they have paid for them as well as paying any other sums owing to the seller (Romalpa case, Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339, HL);

•

product or tracing clause: the buyer does not obtain ownership of the goods even if the goods are mixed with other goods, either by them becoming part of a new product or that they are used to make a new product. The essential point is that the goods the buyer has bought have lost their unique identity. The seller in effect is claiming ownership of what the goods now form part, or which the buyer has made using the goods;

•

tracing of proceeds clause: the seller wishes to have the right to the money that the buyer obtains in selling the goods to another person.

These are not set categories but simply convenient labels to attach to different types of retention of title clause. 534

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Legal problems with retention of title clauses The area of law concerning retention of title clauses is complicated and no clause should be drafted or included in an agreement without the help of a legal adviser with experience of drafting retention of title clauses. However, it is possible to give a number of pointers to the issues involved in the use of a more comprehensive clause than as set out in Precedent 1 for example: •

The most obvious remedy is recovering possession of goods on the buyer’s premises which are clearly identifiable as belonging to the seller (a ‘simple’ retention of title clause) (the Romalpa case). In Clough Mill Ltd v Martin [1984] 3 All ER 982, [1985] 1 WLR 111, CA, the Court of Appeal confirmed that a simple retention of title provision does not constitute a registrable charge.

Often, however, a seller will wish to go further than a ‘simple’ clause. A typical clause will seek to provide further extension of the rights of the seller as follows: • the clause may seek to secure not just the price of the particular goods sold, but all other goods supplied, which will include goods supplied and paid for by the buyer, but which are still identifiable (an ‘all monies’ or ‘current account’ clause). Such provisions are likely to be effective, provided that the goods are unused and still in the buyer’s possession (see the Romalpa case above; Clough Mill Ltd v Martin above). Such a clause is also likely not to constitute a registrable charge; • a provision may entitle the seller to trace the proceeds of sale of goods sold by the buyer which are the subject of the retention of title clause (a ‘tracing of proceeds’ clause). Such a provision is effective (see the Romalpa case above), but as its exercise is dependent on the seller establishing a ‘fiduciary relationship’ with the buyer (arguably not a common feature of a buyer/seller relationship) such clauses are usually resisted by insolvency practitioners. Furthermore, the courts will not readily infer the necessary fiduciary relationship (see Hendy Lennox Ltd v Grahame Puttick Ltd [1984] 2  All ER 152, [1984] 1 WLR 485). Where a fiduciary relationship is established, it means that the seller of the goods does have a proprietary claim or vested right to money, typically in a bank account, which represents the sale proceeds of the goods. In practice, this right is not going to be of much value. The reason for this is that if the buyer is insolvent, it is unlikely to have a credit balance in its bank account. It will also not help if the buyer has factored its debts or charged debts to a bank. • Clauses commonly seek to extend a claim to retain ownership of goods that have become mixed, processed or applied to other goods supplied by other suppliers (a ‘product’ or ‘tracing’ clause). This raises complicated issues of personal property law. 535

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If the goods sold have only suffered minor adaptation, then there is some prospect of asserting a valid claim (see Hendy Lennox Ltd v Grahame Puttick Ltd above). If the process goes further than this so that the goods lose their original identity, then the courts are likely to hold that the true nature of the arrangement between the parties with regard to such downstream products was not one of sale and purchase, but that the buyer was creating a charge over goods supplied to secure sums owing to the seller (see Re Peachdart Ltd [1984] Ch 131, [1983] 3 All ER 204; Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25, [1979] 3 All ER 961, CA). This charge would only be effective in law as against a limited company buyer if registered as such at Companies House under the Companies Act 2006, ss 860, 875. If the buyer is not a company incorporated in the UK or not a company at all but an individual, an organisation incorporated by Royal Charter etc then it would not be possible to register any type of charge. Wording such as in Precedent 8 may be appropriate to be included in sale conditions. It is, however, extremely unlikely that either the buyer or the seller would have taken the trouble to register unless the contract is financially significant or important to one of the parties. •

Creation of a charge: Clauses such as a product clause or a tracing clause (and as discussed in the last two bullet points) are likely to be interpreted as an equitable charge over the goods supplied (as the legal ownership of the goods passes to the buyer) (re Bond Worth Ltd [1979] 3 All 919) and accordingly the seller has no longer any legal title to the goods s/he has sold (see Clough Mill Ltd v Martin [1984] 3 All ER 982 at 990). As noted above, a failure to register will make the charge void against a liquidator or an administrator or a creditor of a company (Companies Act 2006, s 871(1)).

Drafting issues •

Retain full title. A retention of title clause should retain both the legal and equitable or beneficial title to goods.

•

Equitable or beneficial title only is to be retained. If the debtor: • is a company, will a charge be registered with the Registrar of Companies under the Companies Act 2006, ss 860 and 875? • is an individual, will the requirements of the Bills of Sale Acts 1878 and 1882 be complied with?

•

Is it set out clearly what a purchaser can do with the goods? It must be made clear whether the purchaser can: •

re-sell the goods; or

•

intermingle them with other goods; or

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•

incorporate them into other goods

prior to payment being made. •

Identifying the goods. Are the goods subject to a retention of title clause clearly identifiable when they have been delivered to the purchaser? Eg, is the purchaser required: •

to store the goods separately from others?

•

to mark the goods as being the property of the seller?

•

to allow the seller the right to inspect where the goods are stored from time-to-time?

•

If the goods are to be sold on before expiry of any time for payment by the purchaser. Is the seller entitled to reprocess goods during the period between delivery of goods and the expiry of time for payment?

•

If the goods are to be sold on whether before expiry or after expiry of any time for payment by the purchaser. Does the seller have the right to the proceeds of any sub-sale? (Title is likely to pass to the sub-buyer under the Sale of Goods Act 1979, s 21(1) or 25(1).) Is there a fiduciary duty between the buyer and seller? If not, does the agreement specify that there is a fiduciary duty? Note: there is authority that express provision in an agreement may in fact create a charge over the buyer’s property (see Tatung (UK) Ltd v Galex Telesure Compaq Computer Ltd (1988) 5  BCC  325; Re Weldtech Equipment Ltd [1991] BCLC 393; Compaq Computer Ltd v Abercom Group Ltd [1993] BCLC 603, [1991] BCC 484). But also, it appears that the courts will look at the true nature of the relationship between the parties rather than what is stated in the agreement.

Location in the agreement A simple Retention of title clause will often be included with Payment provisions. A lengthier version is often set out separately as part of the Boilerplate section of an agreement.

Linkage and use In addition to the points made above, the use of a Retention of title clause will often require the consideration of the following: •

Risk. A  retention of title clause often comes coupled with wording that states which party shall be responsible for the risk if something happens to the goods (and when they become responsible for the risk, such as when the parties enter into a contract, or when goods are ready for delivery (but still the possession of the seller) or on physical delivery to the buyer). See Precedents 2 and 4, and Title (or property) and risk. 537

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•

Payment. On a failure to pay or dealing with the goods in a way not permitted by the Retention of title clause, whether any of the provisions relating to payment should operate, such as charging interest.

•

Termination. Whether, and when, termination of the agreement (in part or in whole) can take place where there is a failure to pay or there is dealing with the goods in a way not permitted under a Retention of title clause.

•

Warranties. When a person: •

selling goods; or

•

transferring ownership in them, for example, when a business is being sold with its assets

is required to give a warranty, inter alia, that the goods are not subject to any retention of title. Main Commercial Provisions. If:

•

•

there is a failure to pay for some goods; or

•

there is dealing with the goods in a way not permitted

under a Retention of title clause, should other goods be supplied or should the agreement be ‘suspended’?

Sample precedent material Precedent 1—Short clause The Seller retains ownership in the goods delivered as against the Buyer until the full purchase price has been paid. Or All goods shall remain the property of the Seller until the full purchase price of such goods shall be paid. Or Ownership of the goods which are subject of this contract shall not pass to the Buyer until they are fully paid for, but the risk in the goods shall be borne by the Buyer from the date of the delivery by the Seller or its agents to the Buyer. Precedent 2—Detailed clause 1 The Goods shall be at the Buyer’s risk as from delivery. 2

In spite of delivery having been made, property in the Goods shall not pass from the Seller until: (a)

the Buyer shall have paid the Price plus VAT in full; and

(b) no other sums whatever shall be due from the Buyer to the Seller. 538

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3 Until property in the Goods passes to the Buyer in accordance with Clause [1] the Buyer shall hold the Goods and each of them on a fiduciary basis as bailee for the Seller. The Buyer shall store the Goods (at no cost to the Seller) separately from all other goods in its possession and marked in such a way that they are clearly identified as the Seller’s property. 4 Notwithstanding that the Goods (or any of them) remain the property of the Seller the Buyer may sell or use the Goods in the ordinary course of the Buyer’s business at full market value for the account of the Seller. Any such sale or dealing shall be a sale or use of the Seller’s property by the Buyer on the Buyer’s own behalf and the Buyer shall deal as principal when making such sales or dealings. Until property in the Goods passes from the Seller the entire proceeds of sale or otherwise of the Goods shall be held in trust for the Seller and shall not be mixed with other money or paid into any overdrawn bank account and shall be at all material times identified as the Seller’s money. 5 The Seller shall be entitled to recover the Price (plus VAT) notwithstanding that property in any of the Goods has not passed from the Seller. 6 Until such time as property in the Goods passes from the Seller the Buyer shall upon request deliver up such of the Goods as have not ceased to be in existence or resold to the Seller. If the Buyer fails to do so the Seller may enter upon any premises owned occupied or controlled by the Buyer where the Goods are situated and repossess the Goods. On the making of such request the rights of the Buyer under clause 4 shall cease. 7 The Buyer shall not pledge or in any way charge by way of security for any indebtedness any of the Goods which are the property of the Seller. Without prejudice to the other rights of the Seller, if the Buyer does so all sums whatever owing by the Buyer to the Seller shall forthwith become due and payable. 8 The Buyer shall insure and keep insured the Goods to the full Price against ‘all risks’ to the reasonable satisfaction of the Seller until the date that property in the Goods passes from the Seller, and shall whenever requested by the Seller produce a copy of the policy of insurance. Without prejudice to the other rights of the Seller, if the Buyer fails to do so all sums whatever owing by the Buyer to the Seller shall forthwith become due and payable. Precedent 3—Short agreement for sale of goods The Goods shall become the property of the Buyer on payment by the Buyer to the Seller of the cash price balance with interest to the date of payment at the stipulated rate and any other money payable to the Seller under this agreement. The Goods shall remain the property of the Seller 539

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until payment of all such money and the Buyer shall be a mere bailee of the goods. Precedent 4—Short form retention of title clause – eg long-term supply agreement Notwithstanding that risk in the Products shall pass to [Party B] upon delivery, full legal and equitable title and interest in all and any Products supplied to [Party B] shall remain in [Party A] and shall not pass to [Party B] until [Party A] shall have received payment in full of all amounts due and owing from [Party B] to [Party A] for the time being (including any interest accruing and owing to [Party A]) and from time to time in respect of all such Products [and all other goods supplied by [Party A] to [Party B] at any time]. Precedent 5—Full form retention of title clause – sale of goods agreement 1 The Goods shall be at the Buyer’s risk as from delivery. 2 In spite of delivery having been made property in the Goods shall not pass from the Seller until: (a)

the Buyer shall have paid the Price plus VAT in full; and

(b) no other sums whatever shall be due from the Buyer to the Seller. 3 Until property in the Goods passes to the Buyer in accordance with Clause [2] the Buyer shall hold the Goods and each of them on a fiduciary basis as bailee for the Seller. The Buyer shall store the Goods (at no cost to the Seller) separately from all other goods in its possession and marked in such a way that they are clearly identified as the Seller’s property. 4 Notwithstanding that the Goods (or any of them) remain the property of the Seller the Buyer may sell or use the Goods in the ordinary course of the Buyer’s business at full market value for the account of the Seller. Any such sale or dealing shall be a sale or use of the Seller’s property by the Buyer on the Buyer’s own behalf and the Buyer shall deal as principal when making such sales or dealings. Until property in the Goods passes from the Seller the entire proceeds of sale or otherwise of the Goods shall be held in trust for the Seller and shall not be mixed with other money or paid into any overdrawn bank account and shall be at all material times identified as the Seller’s money. 5 The Seller shall be entitled to recover the Price (plus VAT) notwithstanding that property in any of the Goods has not passed from the Seller. 6 Until such time as property in the Goods passes from the Seller the Buyer shall upon request deliver up such of the Goods as have not 540

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ceased to be in existence or resold to the Seller. If the Buyer fails to do so the Seller may enter upon any premises owned occupied or controlled by the Buyer where the Goods are situated and repossess the Goods. On the making of such request the rights of the Buyer under Clause [4] shall cease. 7 The Buyer shall not pledge or in any way charge by way of security for any indebtedness any of the Goods which are the property of the Seller. Without prejudice to the other rights of the Seller, if the Buyer does so all sums whatever owing by the Buyer to the Seller shall forthwith become due and payable. 8 The Buyer shall insure and keep insured the Goods to the full Price against ‘all risks’ to the reasonable satisfaction of the Seller until the date that property in the Goods passes from the Seller, and shall whenever requested by the Seller produce a copy of the policy of insurance. Without prejudice to the other rights of the Seller, if the Buyer fails to do so all sums whatever owing by the Buyer to the Seller shall forthwith become due and payable. 9

The Buyer shall promptly deliver the prescribed particulars of this contract to the Companies Registrar in accordance with the Companies Act 2006, Part 25. Without prejudice to the other rights of the Seller, if the Buyer fails to do so all sums whatever owing by the Buyer to the Seller shall forthwith become due and payable.

Precedent 6—Full form retention of title clause – eg franchise supply agreement 1 The Products and any other goods delivered by the Franchisor to the Franchisee shall remain the sole and absolute property of the Franchisor as legal and equitable owner until such time as all money due to the Franchisor has been paid to the Franchisee but shall be at the Franchisee’s risk from the time of delivery to it. 2 The Franchisee acknowledges that it is in possession of all such goods as bailee for the Franchisor until such time as they are delivered to a purchaser under the terms of this agreement. 3 Until delivery to a purchaser the Franchisee undertakes to store such goods on its premises separately from its own goods or those of any other person and in a manner which makes them readily identifiable as the Franchisor’s goods. 4 The Franchisee’s right to possession of such goods shall cease if it does anything or fails to do anything which would entitle a receiver to take possession of any assets or which would entitle any person to present a petition for the winding up of the Franchisee. 5 The Franchisor may for the purpose of examination or recovery of its goods enter upon any premises where they are stored or where they are reasonably thought to be stored. 541

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6 The entire proceeds of such goods shall be held in trust for the Franchisor and shall not be mingled with any other money paid into any overdrawn bank account and shall at all times be identifiable as the Franchisor’s money. 7 The Franchisee warrants that it is not at the time of entering into this agreement insolvent and knows of no circumstance which would entitle any creditor to appoint a receiver or to petition for winding up or to exercise any other rights over or against its assets. Precedent 7—Full form retention of title clause – eg long-term supply agreement 1 Notwithstanding that risk in the Products shall pass to B upon delivery, full legal and equitable title and interest in all and any Products shall remain in [Party A] and shall not pass to [Party B] until [Party A] shall have received payment in full of all amounts due and owing from [Party B] to [Party A] for the time being (including any interest accruing and owing to [Party A]) and from time to time in respect of all such Products [and all other Products supplied by [Party A] to [Party B] at any time]. 2

During such time as title in the Products remains in [Party A], [Party B] shall store or otherwise keep the Products in such a way as clearly to indicate at all times that the Products are owned by [Party A]and shall not remove, obscure or delete any mark placed on the Products by [Party A] which may enable the Products to be identified.

[3 If during such time as title in the Products remains in [Party A] any of the Products are incorporated in or attached to or used as material for or in the manufacture of other goods the property in the whole of such goods shall vest in and remain with [Party A] and [Party B] shall hold such goods as bailee of and to the order of [Party A] until [Party A] has received payment in full in respect of the Products and all [Party A]’s rights in relation to the Products (including its rights under this agreement) shall extend to such goods.] 4

During such time as title in the Products remains in [Party A], [Party B] shall have power to deal with or use the Products (and other goods in which the Products are incorporated) as fiduciary bailee of [Party A] in the normal course of its business and to dispose of the Products or such goods by way of bona fide sale at full market value.

5 If [Party B] shall sell any of the Products it shall hold all the proceeds of sale as trustee for [Party A] and shall (until payment of amounts due to [Party A]) place such proceeds in a separate bank account and hold the same to the order of [Party A] and if [Party B] shall sell any goods incorporating the Products it shall hold so much of the proceeds of sale as relate to the Products as trustee for [Party A] and shall (until payment of amounts due to [Party A]) place such proceeds in a separate bank account and hold the same to the order of [Party A]. 542

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6 Upon any such sale by [Party B] of the Products or goods incorporating the Products all rights which [Party B] may have against the purchaser of them shall automatically vest in [Party A]. [Party B] shall indemnify and keep indemnified [Party A] in respect of any proceedings, action or claim of any nature whatever made or brought by the said purchaser against [Party A] in respect of the Products or any of them. 7 Without prejudice to any other rights or remedies arising out of any breach of contract by [Party B], [Party A] shall be entitled to repossess all or any of the Products and to take possession of all or any of the goods incorporating such Products upon the happening of any of the events specified in Clause [no]. 8

For the purpose of any repossession pursuant to sub-clause [7] [Party A] or its agent shall be entitled to enter upon any relevant land or buildings with such transport as may be necessary. All costs incurred by [Party A] or its agent in such repossession shall be borne by [Party B].

9 The risk in all Products supplied under this agreement shall remain with [Party A] [during transportation to [Party B]’s place of business or as the case may be]. Notwithstanding that the title in the Products may not have passed in accordance with the provisions of this clause, the risk in all Products shall pass to [Party B] upon delivery of the item concerned [to [Party B]’s place of business]. [Party B] shall at its own expense take out and secure the continuance of an all-risk insurance policy in respect of all Products supplied in accordance with this agreement to their total value at replacement cost. Such policy shall cover the goods from and including the date on which they are delivered to [Party B]’s place of business. [Party B] shall procure that [Party A]’s interest in the Products shall be recorded by an endorsement on the policy specifying [Party A] as loss payee (and shall provide [Party A] with a copy of it) and (to the extent that [Party A] has not received full payment in respect of any Products) any sums which are received under any such policy may be credited against any sums owing from [Party B] to [Party A]. 10 B warrants that it is not at the time of entering into this agreement insolvent and knows of no circumstance which would entitle any creditor to appoint a receiver or to petition for winding up or to exercise any other rights over or against its assets. Precedent 8—Duty to register charge with the Companies Registrar The Buyer shall promptly deliver the prescribed particulars of this contract to the Companies Registrar in accordance with the Companies Act 2006, Part 25. Without prejudice to the other rights of the Seller, if the Buyer fails to do so all sums whatever owing by the Buyer to the Seller shall forthwith become due and payable. 543

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Schedules

Purpose of the clause Deciding if schedules are part of the agreement A  schedule to an agreement usually contains information about specific aspects of the agreement, such as: •

a list of property to be sold under the agreement;

•

the specification for the creation of a software program;

• a list of key staff (and their qualifications and experience) who are to perform a service; and sometimes •

operative provisions of the agreement.

Substantive operative provisions are occasionally set out in a schedule to ensure that the logical flow of the main part of the agreement is not interrupted and obscured with a great deal of detail. For example, in a research collaboration agreement, the detail of the research work the contractor will carry out, and the dates by which when the contractor needs to complete certain stages, are commonly set out in a schedule. A  further use is where a party trades on an unchanging set of terms and conditions. The specific commercial terms are set out in one document (such as an order form or an email, with the names of the parties, price, number of items to be sold, due dates, etc) and reference is then made to the detailed terms and conditions by reference to their location in a schedule. Whether or not a schedule contains obligations on a party (but particularly so if a schedule does), it is important to state in the main body of the agreement that the provisions of the relevant schedules form part of the agreement. This is to avoid argument that these obligations (because they are contained in a schedule) are not part of the agreement or that they are not legally binding on the parties. Sometimes a distinction is made between a schedule, which contains provisions affecting the parties’ rights and obligations under the agreement, and an attachment or annex, which is not part of the present agreement but is included for a special reason, eg to show the format of a licence that the parties will sign if certain conditions are met. 544

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Terminology There is no special significance in the use either of the term ‘schedule’ or the term ‘annex’; but what is more important is to state clearly the legal status of any documents attached to the main part of the agreement. Other terms used include ‘annexures’ and ‘appendices’. Wording such as that set out in Precedent 1 is commonly (and should be) included in the main body of the agreement with regard to the legal status of a schedule or schedules.

Drafting issues •

Does the agreement contain more than one schedule? Are the schedules clearly and separately identifiable, eg Schedule 1, Schedule 2? Is the identification or numbering schemes used consistently throughout the agreement?

•

Is the status of the schedule(s) clearly stated? If the schedules contain obligations, is there clear wording in the main part of the agreement to that effect? Eg: •

there might be a short statement in the main part of the agreement that the provisions relating to certain obligations are dealt with in a schedule; or

• a particular clause might in outline state the main obligation, and then refer to a schedule containing more detailed provisions relating to the main obligation, eg: ‘The Client shall pay the Price in accordance with the provisions of Schedule 2’ (with the Schedule setting out the timing of payment, what happens if payment is not made, VAT etc).

•

Are there any schedules which are not attached to the agreement but are referred to in the agreement. What is their status? An agreement may make reference to a schedule which is not attached to the agreement. As with any other schedule, its status (as to whether it is part of the agreement or not) needs making clear. For example, a long-term supply of services contract states that the services the supplier will provide are in accordance with those set out in a document which is available from the supplier on request or are displayed on the supplier’s website. The benefit to the supplier is that the specific support services it offers are set out in one place, and if they change, the details will need changing only in one place (such as the supplier’s website). It would not need, therefore, to inform all customers/clients about the change (unless the contract required this). The agreement might include a definition: ‘Services shall means the services set out on the Supplier’s website at http://www.extra1services.eu/services.htm [in the document named ‘Services we provide’ [dated [ ]][version [ ]].’ 545

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As noted above, the status of this type of document needs stating clearly. Additionally, as its provisions are not ‘fixed’ in a physical document and can be changed by the supplier (without notice), the agreement should state precisely whether: • the services described in this separate document are those in the version of a document at a particular date (ie  at the date of the agreement); or • the supplier may vary the details of the services as described in the document named [ ] which the supplier may vary from time-to-time. •

If there is more than one schedule, is there any overlap in the issues they deal with? This is a slightly different issue to that of whether there is an overlap between a clause in an agreement and a clause in the schedule, but rather if provisions in two schedules overlap or conflict (for which see Priority of terms). Eg an agreement may contain a number of schedules, such as in a software licence and maintenance agreement, where one schedule deals with the specific software licensed (including licence fee information and whether upgrades are covered) and another with the maintenance of that software (and the annual costs of doing so). The wording in each may overlap on one issue or may not be clear as to a particular outcome. For example in one recent case (Data Direct Technologies Ltd v Marks and Spencer plc [2009] EWHC 97 (Ch), [2009] All ER (D) 198 (Jan)) it was not clear whether the annual maintenance fee was automatically renewed (as provided in one schedule) or whether the licensee had to opt to have it renewed (as provided in another schedule), or which schedule was to prevail. There was wording in the agreement that the provisions of one schedule would prevail over the terms of the agreement, but there was not wording as to which schedule should prevail over the other.

Location in the agreement The clause indicating that the schedules are part of the agreement usually appears in the Boilerplate section of an agreement or together with other provisions in an Interpretation clause. The actual schedules will either appear: • after the last clause of the substantive provisions (such as after the Boilerplate section) but before the execution and signature block clauses; or •

after the execution and signature block clauses.

The second alternative is more common in agreements drafted in the United States. 546

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Linkage and use Usage Some of the detailed uses of a schedule are, for example: •

•

•

if the contract involves performance of work, for setting out: •

a detailed description of that work;

•

any standards or acceptance criteria;

•

a detailed timetable for completions of the work;

•

lists of materials and equipment a party will use or provide;

•

list of personnel who will carry out the work or provide the services (sometimes including their qualifications and experience); and

•

a detailed payment schedule;

if after the signature of the main agreement the parties need to sign or use further documents, the schedules may set out the agreed form of these documents, for example: •

(formal) assignments;

•

(formal) licences;

•

press releases and announcements;

•

format and layout of reports to be provided during the course of the agreement;

for setting out standard terms and conditions of a contract: Eg, an agreement may have outline provisions or specially negotiated provisions in the main part of the agreement and the standard provisions attached as a schedule;

•

•

for setting out information, such as: •

technical specifications;

•

lists of parts, services or facilities;

•

lists of assets to be used, licensed or sold, eg: •

a list of the patents which are the subject of a licence agreement;

•

agreements for the sale of companies often have schedules that specify the shareholdings of each of the sellers, the subsidiaries of the company being sold and the land and buildings held by that company and its subsidiaries, and the lengthy representations and warranties about the commercial and financial position of the company or business;

for removing transaction-specific details so that the main document can be more easily used as a standard form. Standard form distributor or agency 547

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agreements, for example, usually place details of the products, territories covered and sales targets within schedules.

Linkage If the schedules include any obligations a Priority of Terms clause may need to be included to indicate which part of the agreement will prevail in the event of a conflict or overlap in provisions.

Sample precedent material Precedent 1—Schedules to be part of the agreement The provisions of Schedules 1, 2 and 4 to this Agreement shall form part of this Agreement as if set out here. Precedent 2—Schedules to be part of agreement The schedules to this Agreement are and shall be construed as being part of this Agreement. Precedent 3—Schedules to be part of agreement – alternative form The schedules to this agreement are an integral part of this agreement and references to this agreement include references to such schedules. Precedent 4—Schedules to be part of agreement – alternative form References to clauses and the schedules shall be to clauses of and the schedules to this Agreement. Precedent 5—Schedules to be part of agreement – alternative form Clauses and schedules are references to clauses of, and schedules to, this agreement, and references to this agreement include its schedules. Precedent 6—Schedules to be part of agreement – alternative form The schedules to this instrument form part of it and shall have the same full force and effect as if expressly set out in the body of it. Precedent 7—Agreement to include schedules, annexures etc ‘Agreement’ means this agreement and any and all schedules, annexures and exhibits attached to it or incorporated in it by reference. Precedent 8—References to numbered schedules Save where otherwise stated, references to numbered clauses and schedules are references to the clauses and schedules of this agreement that are so numbered.

548

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Set-off and retention

Purpose of the clause Set-off in general A set-off refers to the following type of situation: •

Party A is under an obligation to pay a sum under a contract to Party B;

•

before Party A makes payment it deducts part of that sum before paying the balance to Party B.

This might occur because Party B  owes Party A  some money or has not performed some obligation to Party A as required under the contract. A set-off is in effect a deduction. There are situations where a party can retain a sum or some other right or benefit under the contract. For example: •

where the contract provides for the retention of a sum (ie is it ‘held back’). The contract can provide that a party will not pay part of the total price until the contract work is successfully completed; or

•

where the title to goods is retained by the seller until the price for those goods has been paid. See Retention of title for this topic.

The advantages to a party to a contract to whom money is owed under that contract being able to set the debt off against sums owed by it to the other party are both practical and procedural (see further 42 Halsbury’s Laws of England (4th Edn) para 401 ff). In general, whether there is power to set-off amounts owing will depend on the bargaining strength of the parties during negotiation. A seller of goods, for example, will obviously want a clause prohibiting set-off by the buyer, whereas buyers will wish to retain such a right. A set-off clause is valid as long as it satisfies the requirement of reasonableness under the Unfair Contract Terms Act 1977, s  3 (as extended by s  13) (see eg  Stewart Gill Ltd v Horatio Myer and Co Ltd [1992]  QB  600, [1992] 2  All ER 257, CA (an equipment supply contract); Fastframe Ltd v Lohinski (3 March 1993, unreported), CA (a franchise agreement); Axa Sun Life Services plc v Campbell Martin Ltd [2011]  EWCA  Civ 133; Rohlig (UK) Ltd v Rock Unique Ltd [2011]  EWCA  Civ 18). Accordingly, a party must take care, in all the circumstances, to avoid producing an agreement that is too one-sided. 549

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Under court rules The defence of set-off is available under English law. Where a defendant contends that it is entitled to money from the claimant, and relies on this as a defence to the whole or part of the claim, the contention may be included in the defence and set-off against the claim, whether or not it is also a counterclaim (see Civil Procedure Rules 16.6). A  discussion of the detailed circumstances in which set-off (and a related defence of ‘abatement’) are available under English law is beyond the scope of this book. Generally, the claim for set-off must be in some way related to the claim made by the claimant. Thus if the two claims concern unrelated contracts, set-off may not be available.

Drafting issues •

Should a party have the right to set off sums owed?—no right of set-off. Where payments are to be made in full, with no set-off, this must be expressly stated in the clearest possible terms. Eg, a supplier of goods or services may wish that the purchaser will not have a right to set-off.

•

What situations should a no set-off provision cover? A  statement that a party cannot deduct any sum may not cover all situations, and some provisions cover other possible ways. Therefore, it is usual also to rule out ‘counterclaims’, as that term is wider in scope than ‘set-off’ and may comprise a non-monetary claim, such as a claim for an injunction or specific performance. Eg, a provision that payments must be made without any discount, deduction, set-off or counterclaim whatsoever has been held to be valid (see Hong Kong and Shanghai Banking Corpn v Kloeckner & Co AG [1990] 2  QB  514, [1989] 3  All ER  513, applied in Coca-Cola Financial Corpn v Finsat International Ltd [1998]  QB  43, [1996] 3  WLR  849, CA, but distinguished in National Bank of Saudi Arabia v Skab (23 November 1995, unreported)). The word ‘set-off’ does not need to be used. For example, a lease which provided that rent should be paid ‘without deduction’ had the effect of excluding by agreement any right of set-off (see Famous Army Stores Ltd v Meehan [1993] 1  EGLR  73). But there are also contrary decisions: a provision in a lease that rent was to be paid ‘without any deduction’ was insufficient to exclude a tenant’s right of equitable set-off (Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4  All ER  834, [1994] 1 WLR 501).

•

Express right of set-off. Where one or both parties are to have the right to set-off debts owing to the other, it is nevertheless preferable, to avoid any

550

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possibility of uncertainty, to state this clearly in the agreement. The right of set-off may be framed widely, applying to all sums owing, whether under that particular agreement or otherwise, or it may be stated to apply only in relation to eg ‘the purchase price’. •

Extending right of set-off. A  provision extending the right of set-off to include all claims that one party may have against another (eg  arising under an unrelated contract) is valid (see eg Watson v Mid Wales Rly Co (1867) LR 2 CP 593 at 600, and Newfoundland Government v Newfoundland Rly Co (1888) 13 App CAs 199 at 210). If the right is to be extended, the clause will need careful drafting, for example to address whether: •

interest on a debt can be deducted; and

•

contingent or unascertained debts are to be included, and if so, how they are to be calculated.

If it is too broad, the clause may be interpreted as a penalty, in which case it will be unenforceable (see eg Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, [1973] 3 All ER 195, HL; considered in Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85, [1993] 3 All ER 417, HL). The clause may also amount to an exclusion clause under the Unfair Contract Terms Act 1977 (see Stewart Gill v Horatio Myer & Co Ltd [1992] QB 600, [1992] 2 All ER 257, CA, and Fastframe Ltd v Lohinski (3 March 1993, unreported), CA). A  further issue is if a contractual provision relating to a set-off clause tries to reach through to a liquidator of a creditor who is bankrupt: such wording is unlikely to be effective (see Goode on Commercial Law (5th Edn, 2016, LexisNexis) at pp 679–681.

Location in the agreement The Payment clause will normally include the Set-off clause. Alternatively the Set-off clause might be located separately in the Boilerplate section.

Linkage and use See above discussion.

Consumer issue A Set-off clause is likely to be unfair when used in a contract with a consumer (Consumer Rights Act 2015, Sch 2, para 1(b)). 551

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Sample precedent material (a): Set-off not allowed Precedent 1—No set-off – general clause [Party B] agrees with [Party A] throughout the term not to set-off for any reason any money payable by [Party B] to [Party A] [for supplies of the products or under this agreement]. Precedent 2—No set-off or deduction – general clause [Party A] agrees with [Party B] to pay promptly without demand, deduction or set-off any sum payable by [Party A] to [Party B] under the terms of this agreement. Precedent 3—No discount, deduction, set-off or counterclaim – all sums [Party A] shall pay all sums due under this Agreement without any discount, deduction, set-off or counterclaim whatsoever. Precedent 4—Waiver of set-off – sale agreement The Purchaser waives all or any existing or future claims and set-offs against any payment of the purchase price due under this agreement and agrees to pay the same regardless of any equivalent set-off or counterclaim on the part of the Purchaser against the Vendor. Precedent 5—No set-off – seller’s clause All payments made by the Buyer under this agreement shall be made in full without any set-off or counter-claim whatever. Precedent 6—No set-off – seller’s clause – alternative form The Buyer may not withhold payment of any invoice or other amount due to the Seller by reason of any right of set-off or counterclaim which the Buyer may have or allege to have or for any reason whatever. Precedent 7—No set-off – guarantee agreement All payments to be made by the Guarantor under this guarantee shall be made in full without set-off or counterclaim [(where the guarantor is situated outside the UK:) and free and clear of and without deduction of or withholding for or on account of any tax of any nature now or subsequently imposed by any country or any subdivision or taxing authority of any country or any federation or organisation of which any country is a member]. (b): Set-off allowed Precedent 8—Right of set-off – general clause Where [Party B] has incurred any liability to [Party A], whether under this agreement or otherwise and whether such liability is liquidated or unliqui552

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Set-off and retention

dated, [Party A] may set-off the amount of such liability against any sum that would otherwise be due to [Party B] under this agreement. Precedent 9—Right of set-off – buyer’s clause The Buyer may set-off against the price (including any applicable VAT payable) amounts due from the Seller whether under the applicable contract of sale or otherwise. Precedent 10—Right of set-off – buyer’s clause – alternative form The Buyer may set-off against any sums due to the Seller whether under this contract of sale or otherwise any lawful set-off or counterclaim to which the Buyer may at any time be entitled. Precedent 11—Right of set-off – sale agreement Without prejudice to any of its other rights and remedies, the Purchaser shall be entitled to set-off all or any of its liabilities to the Vendor against all or any of the Vendor’s liabilities to the Purchaser under this agreement or any other agreement or account. Precedent 12—Right of set-off/consolidation/currency conversion – loan agreement Following an [Event of Default] the Lender may without notice to the Borrower combine, consolidate or merge all or any of the liabilities of the Borrower and any associate of the Borrower and may set-off or transfer any sums from time to time owed to the Borrower or any associate of the Borrower in or towards the satisfaction of any of the liabilities of the Borrower and any associate of the Borrower and notwithstanding that the liabilities may not be expressed in the same currency the Lender is authorised to effect any necessary currency conversions at the rates then prevailing.

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Severance and invalidity

Purpose of the clause An agreement will include a severance clause to provide for the eventuality of a provision being held: •

unenforceable; or

•

unlawful; or

• void. The aim of a severance clause is that, if a judge or a law finds some wording illegal or unenforceable, the offending words are removed leaving the remaining part of the contract in operation, as far as it is possible to do so (see Precedent 1 for an example of a short version of such a clause). The effectiveness of a severance clause depends on the consequence of removing the words or provision(s) from the agreement. It is important to note what the courts will not do. The courts will: •

only sever a provision or wording where it is possible simply to strike it out without further modification or rewriting of the agreement (Re Davstone Estate Ltd’s Leases, Manprop Ltd v O’Dell [1969] 2 Ch  378, [1969] 2  All ER 849);

• not sever a provision if severance would completely alter the scope and intention of the agreement (Attwood v Lamont [1920] 3  KB  571, CA; Chemidus Wavin Ltd v Société pour la Transformation et l’Exploitation des Resines Industrielles SA [1978] 3 CMLR 514); • not remove one of the essential components of a contract, eg  the consideration (see Goodinson v Goodinson [1954] 2 QB 118, [1954] 2 All ER 255, CA); • only sever parts if the severed parts are independent of each other and the severing will not affect the meaning of the parts which are remaining (Attwood v Lamont [1920] 3 KB 571); •

not sever a provision in a contract where there is deliberate illegality (see eg Bennett v Bennett [1952] 1 KB 249, Frank W Clifford Ltd v Garth [1956] 1  WLR  570), such as the illegality touching the consideration or going against public policy (Royal Boskalis Westminster NV v Mountain [1997] 2 All ER 929 at 947, CA).

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There is also the so-called ‘blue pencil test’ developed by the courts. In certain circumstances the offending words (ie those containing the unlawful provision) are struck from the clause and if the remaining words of the clause make sense as a contractual provision, the remaining words will remain (and continue to operate) (eg Kall Kwick Printing (UK) Ltd v Rush [1996] FSR 114; Hashwani v Jivraj [2009] EWHC 1364 (Comm), [2010] 1 All ER 302). However, by doing so, the rest of the contract cannot be modified or be affected by the effect of applying the ‘blue pencil test’ (Francotyp-Postalia Ltd v Whitehead [2011] EWHC 367 (Ch), which applied the first three bullet points above, and see Case analysis below). Otherwise, the entire clause containing the unlawful provision is removed from the contract. If the unlawful provision forms a major part of the purpose of the contract, the whole contract may, in extreme cases, be held invalid.

Drafting issues •

Illegality and unenforceability. For obvious reasons, the parties should describe the eventuality in wording of wide effect, eg: ‘If any provision in this agreement shall in whole or in part be held to any extent to be illegal or unenforceable under any enactment or rule of law …’

or, wider still, to cover decisions by non-judicial authorities: ‘In the event that any provision of this agreement is declared by any judicial or other competent authority to be void, voidable, illegal or otherwise unenforceable or indications to such effect are received by either of the parties from any relevant competent authority…’.

•

Severance and enforceability of remainder. The words used to indicate the parties’ desire for severance in general vary little, eg: ‘… such provision shall to the extent required be severed from this agreement and rendered ineffective as far as possible without modifying the remaining provisions of this agreement and shall not in any way affect any other circumstances or the validity or enforcement of this agreement’

or, in simpler form: ‘such provision shall to that extent be deemed not to form part of this agreement and the enforceability of the remainder of this agreement shall not be affected’.

•

‘Rescuing’ defective clauses. However, attempts are sometimes made to provide for the ‘rescue’ of a defective clause by subsequent amendment of it by the parties, although it is doubtful whether this type of provision is enforceable under English law. The following words may at least indicate a declaration of intent by the parties: ‘… the parties shall amend that provision in such reasonable manner as achieves the intention of the parties without illegality’. 555

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•

Allowing one party to sever a clause. Where one party is in a stronger bargaining position, it may wish to retain an option to sever by adding to the above: ‘… or at the discretion of [party] it may be severed from this agreement’.

•

Providing for negotiation to take place if a clause is severed. Where the parties are on an equal footing and would wish the agreement to stand despite the deletion of a clause (eg in a joint venture type of agreement) they may provide for future negotiation to resolve the problem, although this is unlikely to be enforceable: ‘in the event of any such deletion the parties shall negotiate in good faith in order to agree the terms of a mutually acceptable and satisfactory alternative provision in place of the provision so deleted’.

•

Right to terminate if clause is severed. A party in a stronger bargaining position may wish to retain the power to terminate the agreement entirely if a key clause is declared unenforceable. In this case, the dominant party may wish that the remainder of the agreement is to remain effective unless it gives notice to terminate, eg: ‘the remaining provisions of this agreement shall remain in full force and effect unless A, in A’s discretion, decides that the effect of such declaration is to defeat the original intention of the parties in which event A shall be entitled to terminate this agreement by [30] days’ notice to B  and the provisions of Clause [no] (termination provisions in agreement) shall apply accordingly’.

Location in the agreement A Severance clause is usually located in the Boilerplate section of an agreement.

Linkage and use A Severance clause may be useful, for example, in relation to: •

post-termination restrictions in employment contracts;

•

restraint of trade clauses generally and clauses containing anti-competitive provisions that may be void under UK or EC competition laws;

•

industries that are subject to extensive and/or intensive regulatory control (such as those involving the development and testing of pharmaceuticals and chemicals);

•

agreements that contain provisions which reference or contain obligations subject to international treaties and laws (eg provisions dealing with the movement and carriage of goods internationally);

•

clauses requiring the performance of a criminal act; and

•

limitations of liability and exclusion of liability and warranties.

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Depending on the clause that is severed, there may be implications for: •

whether some or all of the obligations owed or tasks to be performed will continue;

•

whether some payments will still need to be made (and the timing of such payments); and

• whether the agreement (or some part of it or some of the obligations under it) should be terminated.

Sample precedent material Precedent 1— Short clause If any provision of this agreement is prohibited by law or judged by a court to be unlawful, void or unenforceable, the provision shall, to the extent required, be severed from this agreement and rendered ineffective as far as possible without modifying the remaining provisions of the agreement, and shall not in any way affect any other circumstances of or the validity or enforcement of this agreement. Precedent 2—Short clause If any term or provision in this agreement shall in whole or in part be held to any extent to be illegal or unenforceable under any enactment or rule of law that term or provision or part shall to that extent be deemed not to form part of this agreement and the enforceability of the remainder of this agreement shall not be affected. Precedent 3—Severance – alternative short clause If any provision of this agreement shall be prohibited by law or adjudged by a court to be unlawful, void or unenforceable such provision shall to the extent required be severed from this agreement and rendered ineffective as far as possible without modifying the remaining provisions of this agreement and shall not in any way affect any other circumstances of or the validity or enforcement of this agreement. Precedent 4—Severance and negotiated alternative If any provision of this agreement is held by a court or other competent authority to be unlawful, void or unenforceable, it shall be deemed to be deleted from this agreement and shall be of no force and effect and this agreement shall remain in full force and effect as if such provision had not originally been contained in this agreement. In the event of any such deletion the parties shall negotiate in good faith in order to agree the terms of a mutually acceptable and satisfactory alternative provision in place of the provision so deleted. 557

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Precedent 5—Amendment – option for one party to sever If any provision of this agreement is declared by any judicial or other competent authority to be void, voidable, illegal or otherwise unenforceable [or indications to that effect are received by either of the parties from any competent authority] the parties shall amend that provision in such reasonable manner as achieves the intention of the parties without illegality or at the discretion of [Party A] it may be severed from this agreement. Precedent 6—Severance – option for one party to terminate If any provision of this agreement is declared by any judicial or other competent authority to be void, voidable, illegal or otherwise unenforceable [or indications to that effect are received by either of the parties from any competent authority] the remaining provisions of this agreement shall remain in full force and effect unless [Party A] in [Party A]’s discretion decides that the effect of such declaration is to defeat the original intention of the parties in which event [Party A] shall be entitled to terminate this agreement by [30] days’ notice to [Party B] and the provisions of Clause [no] (termination provisions in agreement) shall apply accordingly. Precedent 7—Severance – restraint of trade clauses 1 Each covenant contained in Clause [no] (restraint provisions) shall be construed as a separate covenant and if one or more of the covenants is held to be against the public interest or unlawful or in any way an unreasonable restraint of trade the remaining covenants shall continue to bind the Vendor. 2 If any covenant contained in Clause [no] would be void as drawn but would be valid if some part of the covenant were deleted the covenant in question shall apply with such deletion as may be necessary to make it valid and effective.

Case analysis Francotyp-Postalia Ltd v Whitehead [2011] EWHC 367 (Ch) 1 The parties entered into a franchise agreement. 2 The agreement contained a number of post-termination covenants (Clause 21) and a severance clause (Clause 33). These are set out below. 3 The claimant (franchisor) acknowledged that the covenant in Clause 21.1.1 was too wide and in restraint of trade. 4 The claimant wished to apply the blue pencil test and remove the words after Territory in Clause 21.1.1, ie  to change the end of the clause from: “For the purpose of this clause 21 the “Restricted Area” means the Territory, the territory (in the UK) of any other franchisee of the Franchisor 558

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Severance and invalidity carrying on the Business and any other territory (in the UK) covered (in relation to the supply of Products) by the Franchisor and/or any dealer or distributor of the Franchisor;”

to: “For the purpose of this clause 21 the “Restricted Area” means the Territory;”

5 ‘Territory’ was defined elsewhere as various postcodes. 6 Both parties agreed that the non-solicitation clause was valid (Clause 21.1.3), although it referred to the Restricted Area, which would be affected by the removal of wording under the blue-pencil test. 7 The judge held that: 1

if Clause 21.1.1 was considered on its own, then it could be subject to the blue pencil test (as argued by the claimant);

2

the definition of Restricted Area is also found in other provisions: Clause 21.1.2 (competition provisions) and Clause 21.1.3 (non-solicitation provision).

3

if the wording from Restricted Area is removed as proposed by the claimant then there would be impact on the meaning of Clause 21.2.3.

4

for the wording of the Franchise Agreement to be sensible there can only be one definition of Restricted Area.

5

If the meaning of Restricted Area is changed then its new meaning would also be applied to Clause 21.2.3.

6

If the new definition was applied to Clause 21.2.3 then it is modifying that clause: ‘28 … that seems to me to be a modification of that clause. The clause as it stands is valid and the consequent modification of that clause means that the extent of the non-solicitation clause is similarly cut down. This is despite the fact that the extended clause is accepted as being valid and freely entered into by both parties. Thus the submission of the Claimant is that the blue pencil test can simply be applied to clause 21.1.1 there is then a consequent changed meaning given to the phrase Restricted Area in the following clauses. That means that the court has rewritten a part of the contract which is (a) accepted as valid and is thus (b) a variation of what the clause means.” 31. The fundamental difficulty facing the Claimant is that the Territory definition applies to all the covenants even those which are accepted as enforceable. It follows that if one applies the blue pencil test and excises the offending parts in the area covenant that necessarily has an impact on the other covenants. As they incorporate the definition of Territory from the area covenant the wording of the other covenants is necessarily reduced to a similar extent.

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Severance and invalidity 32. The effect of that therefore is necessarily to cut down a provision which the parties fully agreed and which is valid. 33. By transposing the same definition therefore into the valid covenants it seems to me clear that the proposed excision will fail to satisfy limb 1 [that the court will not make a new contract for the parties (from Chitty on Contracts volume 1 paragraph 16-196)] because it is modifying the wording of what remains by implication. 34. It also seems to me to fall foul of the clearly established principle that when the court is asked to apply the blue pencil test it will not make a new contract for the parties (Chitty ibid paragraph 16-196 above). 35. Further in my view that proposed amendment would mean that the contract is radically different because the area is cut down. It is however not necessary to come to that conclusion because in my view the proposed excision falls foul of limb 1 [that the court will not make a new contract for the parties (from Chitty on Contracts volume 1 paragraph 16-196)].’

Clauses 21 and 33 21 POST-TERMINATION COVENANTS 21.1 The Franchisee agrees that it shall not for the period of one year after the expiration or termination of this agreement (howsoever arising) whether itself or together with any other person firm or company directly or indirectly:21.1.1 be engaged interested or concerned in the Restricted Area in any capacity in any business venture which is competitive with the Business as previously carried on pursuant to this agreement (or with the business in the Restricted Area of any other franchisee, dealer or distributor of the Franchisor). For the purpose of this clause 21 the “Restricted Area” means the Territory, the territory (in the UK) of any other franchisee of the Franchisor carrying on the Business and any other territory (in the UK) covered (in relation to the supply of Products) by the Franchisor and/or any dealer or distributor of the Franchisor; 21.1.2 be engaged interested or concerned in the Restricted Area in the supply of the Products or any goods competitive with the Products; 21.1.3 solicit in the Restricted Area customers or former customers of the Business (being persons who are at the date of termination a customer of the Business or who have been a customer of the Business during the period of 12 months prior to termination, and such customers shall include any person to whom Products have been supplied by the Franchisor pursuant to this agreement) for the purposes of supplying them with goods competitive with the Products nor divert or seek to divert any custom (for Products) in the Restricted Area from the Franchisor or any other franchisee, dealer or distributor of the Franchisor nor to solicit any of their respective customers for Products; […] 21.2 The Franchisee shall procure that none of its employees (involved to any material extent in the sales and/or marketing of the Products) senior managers or directors (including without limitation the Individual(s)) shall: (a) for a period of one year after the expiration or termination of this agreement howsoever arising, or (b) in the case that any such person ceases to be connected with the Franchisee during the period of this agreement, for a period of one year after he ceases to be so connected:560

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Severance and invalidity 21.2.1 be directly or indirectly engaged interested or concerned in the Restricted Area in any capacity in any business venture which is competitive with the Business as previously carried on pursuant to this agreement or with the business in relation to the Products in the Restricted Area of any other franchisee, dealer or distributor of the Franchisor; 21.2.2 be directly or indirectly engaged interested or concerned in the Restricted Area in the supply of the Products or any goods competitive with the Products; 21.2.3 directly or indirectly solicit in the Restricted Area customers or former customers of the Business (being persons who are at termination (or as the case may be at the date upon which such person ceased to be connected as aforesaid) a customer of the Business or who have been a customer of the Business during the period of 12 months prior to termination (or as the case may be the date upon which such person ceased to be connected as aforesaid) and such customers shall include any person to whom Products have been supplied by the Franchisor pursuant to this agreement) for the purposes of supplying them with goods competitive with the Products nor divert or seek to divert any custom for Products in the Restricted Area from the Franchisor or any other franchisee, dealer or distributor of the Franchisor nor to solicit any of their respective customers for Products; […] 33 SEVERANCE 33.1 Each of the restrictions and provisions contained in this agreement and in each clause and sub-clause shall be construed as independent of every other restriction and provision and each shall be capable of being severed without prejudice to the remaining provisions of this agreement, subject to clause 33.2. It is nevertheless agreed that if any of the restrictions or provisions contained in this agreement shall taken together or separately be held to be void or ineffective for any reason but would be held to be valid and effective if part of the wording were deleted, or the period or area of application be reduced, that restriction shall apply with such deletions or with such reduced period or area of application as may be necessary to make it valid and effective. 33.2 In the event that any restriction or provision of this agreement shall be held to be invalid and/or unenforceable by a court of law or any other competent authority in a way in which in the sole opinion of the Franchisor materially adversely affects the right of the Franchisor to receive payment of fees or other remuneration or the terms on which the Franchisor supplies goods or services to the Franchisee or any territorial exclusivity conferred hereunder or the Method or the Business or the Trade Name then the Franchisor without any liability whatsoever shall be entitled to terminate this agreement by notice in writing to the Franchisee to that effect and in such circumstances the provisions of clauses 20 and 21 shall apply.”

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Stamp duty (and Stamp Duty Land Tax)

Purpose of the clause Background Certain types of written agreement and other ‘instruments’ attract stamp duty (Finance Act 1999, s 112). An ‘instrument’ is ‘every written document’ (Stamp Act 1891, s 122). Where a document attracts stamp duty the contract should state which party will be responsible for having the document stamped. Although a matter for commercial negotiation, usually it is the purchaser who wishes to rely on the stampable document in court, and it will be that party who will pay the stamp duty. A court will not admit documents which are stampable but have not been stamped. Also there are penalties for late stamping.

When is stamp duty not payable (when it was in the past)? Stamp duty is now payable in limited situations, following: • the abolition of stamp duty for transactions relating to intellectual property; and •

the replacement of stamp duty by the Stamp Duty Land Tax for conveyances of real property (see below).

Instances when stamp duty will be payable Stamp duty will now be payable principally only for instruments relating to some stock and marketable securities (see Finance Act 2003, s 125 and Sch 13; the Finance Act 1999 should also be consulted). Note: the commentary in this section is no more than a very limited outline of the types of subject areas which attract stamp duty. The rules relating to stamp duty are highly complex and change frequently, and specialist tax advice should always be taken.

Intellectual property Although of lesser importance given the passing of time, stamp duty ad valorem as a conveyance on sale is no longer payable in respect of transfers 562

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of intellectual property: ‘No stamp duty is chargeable on an instrument for the sale, transfer or other disposition of intellectual property’ (Finance Act 2000, s 129(2)(a)). ‘Intellectual property’ is defined as covering, inter alia, any patent, trademark, registered design, copyright, or design right, including any licence or right in regard to these forms of intellectual property (Finance Act 2000, s 129(2)). This change of the law applies to all instruments executed on or after 28  March 2000 (s  129(5)). If a certificate of value is needed to reduce or exclude the payment of stamp duty, the value of intellectual property is to be disregarded for the purposes of the certificate (Finance Act 2000, s 129(3), Sch 34, para 4).

Stamp Duty Land Tax (SDLT) SDLT is payable by a purchaser of an interest in, or right over, land, on the chargeable consideration paid or deemed to be paid (Finance Act 2003, s 85). SDLT is payable whether or not: •

an instrument is executed; or

•

the parties are resident or present

in the UK (Finance Act 2003, s  42(2)(b), (c)). But the land (or land over which the rights exist) must be situated in the UK in order for SDLT to be imposed (Finance Act 2003, s 48(1)(a)). SDLT replaced the type of stamp duty described above from 2003. The purchaser (ie, the person acquiring the subject matter of the transaction) is liable for SDLT and is either: •

a party to the transaction; or

•

has provided consideration for it (Finance Act 2003, s 85).

SDLT is a compulsory tax and the purchaser must account to the HM Revenue and Customs on a self-assessment basis (Finance Act 2003, s 76(3)) through the completion of a form (SDLT1). SDLT is a tax on land transactions (Finance Act 2003, s  43) and will be chargeable on a sale, purchase, grant, creation, lease, variation, surrender or other transaction (Finance Act 2003, s 43(3)) of any estate, interest, right or power in or over land in the UK or the benefit of any obligation, restriction or condition affecting the value of that estate, interest, right or power (Finance Act 2003, s 48(1)(a)) where the estate, interest, right or power is not exempt from the charge for actual or deemed chargeable consideration (Finance Act 2003, s 43(1)) where the effective date of the transaction is on or after the implementation date and where there is no relief from SDLT. There are certain exemptions and reliefs from SDLT which needed to be claimed when the form is completed, including (the most likely to arise in a commercial agreement): 563

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•

•

Exemptions: •

sales and leasebacks of property;

•

certain transactions involving partnerships;

•

transfers involving public bodies or their wholly-owned companies; or

•

compliance with planning obligations;

Reliefs: •

group relief;

•

acquisition relief;

•

reconstruction relief;

•

disadvantaged relief; or

•

charities relief.

Guidance should always be sought before claiming any exemption or relief.

Drafting issues •

Does the document/instrument attract stamp duty? Stamp duty is now payable only in limited circumstances (see above). Advice should always be sought in circumstances where stamp duty is likely to apply;

•

If stamp duty or SDLT is payable, who is to pay the stamp duty? Will convention be followed as indicated (ie  the purchaser will pay) or will the parties provide otherwise? Where convention is followed then wording such as in Precedent 1 might be used;

•

Does the present agreement rely on or is it linked to other transactions? In such circumstances, it may be appropriate to include a warranty in the agreement that prior transactions have been duly stamped. A  clause to this effect might be in the form of Precedent 2.

Location in the agreement The Boilerplate section of an agreement will normally contain a Stamp duty clause.

Linkage and use See above. 564

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Sample precedent material Precedent 1—Which party is responsible for paying any stamp duty? [Party A] shall [pay] [be responsible for paying] any stamp duty payable on this Agreement or on the [transfer of the Shares]. Precedent 2—Stamp duty warranty [Party A] warrants and represents that: (a) all documents in its possession or under its control to which it has been a party and which attract stamp duty or stamp duty reserve tax have been properly stamped; (b) no documents are presently subject to adjudication of claims for exemption or relief; and (c) there are no circumstances which may result in [Party A] [or the Purchaser] becoming liable for any interest or penalties in respect of any such duty or tax.

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Sub-contracting

Purpose of the clause Background A  sub-contract occurs where a party to an agreement (the contractor) arranges for another person (the sub-contractor) to perform some or all of the contractor’s obligations under an agreement. However, the contractor: •

remains responsible for the performance of those obligations which the sub-contractor will perform; and

•

remains (contractually) liable if the sub-contractor fails to perform those obligations (unless the contract specifies otherwise).

In this context, the term ‘sub-contract’ has a meaning similar to ‘delegation’ although delegation has a broader meaning (eg  the right of a board of directors to delegate authority to senior management). If the sub-contractor does not carry out the obligation properly, the customer will be entitled to sue the contractor.

Whether sub-contracting is permitted It is a matter of interpretation of the contract as to whether the contractor is permitted to sub-contract any of its obligations. Usually this will be allowed, unless expressly prohibited in the contract or the contract was one for personal services (see eg  British Waggon Co and Parkgate Waggon Co v Lea & Co (1880) 5  QBD  149; Nokes v Doncaster Amalgamated Collieries Ltd [1940]  AC  1014, [1940] 3  All ER  549, HL; Davies v Collins [1945] 1  All ER 247 at 249, CA, per Lord Greene MR; Southway Group Ltd v Wolff (1991) 57 BLR 33, CA; Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd, Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd and Imperial Portland Cement Co Ltd [1903] AC 414, HL; Stevenson & Sons v Maule & Son 1920 SC 335). In particular industries, terms may be implied preventing subcontracting (eg  an estate agent may not appoint any sub-agent without the client’s consent).

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Drafting issues •

Does a party need to sub-contract some or all of its obligations? Does a party need to have some of its obligations performed by a third party, or simply wishes to have the option to do so? Nowadays many industries rely extensively on the use of sub-contractors. Building is perhaps the most obvious, but many others will too. Accordingly, a general prohibition may be unrealistic or cause difficulties later on. For example: a catering company which a customer hires to cater an event may obtain: •

the waiting staff from an agency; and

•

the food from a company that cooks food for events; and

•

cutlery and linen service etc from a supplier of such things.

In effect, the engaged catering company being no more than a number of office workers whose role is to co-ordinate the activities of all the subcontractors. A  party when it is entering into a transaction with another company may wish to consider whether, in the circumstances, having a blanket no-subcontract clause is appropriate. In these circumstances attention may be better focussed on specifying the standards that the various sub-contractors will need to meet and the detail of how the catering company will meet its obligations so that everything works on the day of the event. •

If one party will allow another to sub-contract obligations, on what terms and conditions will it do so? •

will there be a general provision allowing one party to sub-contract? Or

•

will there be a provision which specifies what particular tasks and/or obligations a party can sub-contract?

Eg, a software developer may need to sub-contract the writing of a particular routine to another software developer who has expertise with those types of routines. The agreement could specify that only that aspect of the software development can be sub-contracted, but no other. Bear in mind that if there is confidential information involved, then it might not be appropriate for this to be passed on to a sub-contractor (see further below). •

Can the party who wishes to sub-contract obligations choose the sub-contractor without consulting the customer?

•

Does the client wish the contractor to carry out its obligations personally? If there is a particular person that a client wishes to carry out the tasks/ obligations under an agreement, then a no sub-contracting provision may be insufficient, as it will not deal with the circumstances when that person is no longer available. Eg: 567

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•

•

will the agreement terminate?

•

is a replacement acceptable?

•

should the client have a right of veto over a replacement, etc?

Where a contractor wishes to sub-contract obligations, will it be providing any confidential information of the customer? If any confidential information is disclosed under the agreement, then: •

should the contractor be permitted to disclose to a sub-contractor the confidential information?;

• if permitted, must the contractor enter into confidentiality provisions with the sub-contractor before disclosing the confidential information? In some agreements where the use of sub-contractors is permitted, there is an obligation that the contractor will enter into confidentiality obligations of a similar or the same nature as that between the contractor and the customer. If the confidential information of the client is particularly sensitive and/ or valuable then the contract between the client and the contractor may need to allow the client to enter into confidentiality obligations with the sub-contractor directly. •

If the sub-contractor creates any intellectual property, who is to own it? Where an agreement concerns the creation or use of intellectual property, if any work is given to a sub-contractor, there should be wording which requires the contractor to ensure that any intellectual property created by the subcontractor shall belong to the customer or contractor (depending on the wording of the agreement) and/or that the sub-contractor is required to assign the rights it has in that intellectual property. This should include Further Assurance wording as well.

•

If a party is not permitted to sub-contract but does so, what are the consequences? If a party is not permitted to sub-contract its obligations but does so without informing the other party, the other party may never learn about some sub-contracting. If the other party does learn about such sub-contracting, it can have concerns particularly about the following issues: • if the other party has provided any confidential information to the contractor, whether that information is provided under obligations of confidentiality to the sub-contractor; • if the other party wishes to have ownership of intellectual property created by the contractor, it will also wish to control the ownership of the intellectual property created by the sub-contractor; • if the quality of the work produced by the contractor is critical (whether the contractor needs to comply with a detailed or very specific specification, or there is a high level of regulatory control)

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then the other party will wish that such obligations are also imposed on the sub-contractor. If the contractor has sub-contracted in breach of an obligation to the customer not to do so, then the customer may wish to terminate the agreement. If this is the case then clear wording may be necessary (rather than just a non-sub-contracting clause) together with more detailed termination wording. In appropriate cases, the customer may require that any provisions as between the contractor and the sub-contractor include a right for the customer to directly enforce any provisions. Accordingly, the contract between the contractor and the sub-contractor will need not to use a ‘standard’ Contracts (Rights of Third Parties) Act 1999 clause, but one which allows the customer to directly enforce some or all of the provisions of the sub-contract.

Location in the agreement • If a particular sub-contractor is identified or specified then a definition should be included in the Definitions provisions of an agreement. •

Where the default provision is that no sub-contracting is permitted then a clause forbidding sub-contracting is usually included with an Assignment clause.

•

Where there is a general permission to sub-contract then a Sub-contracting clause will usually be included with other Boilerplate section clauses in an agreement.

•

Where specific sub-contracting provisions are required, then such a clause might be included with other Main Commercial Provisions.

Linkage and use Where sub-contracting is permitted (whether generally or in relation to specific tasks) then: • the tasks or work to be carried out by the sub-contractor should be specified in a clause in the Main Commercial Provisions (or detailed in a specification set out in a Schedule, eg: ‘The Contractor shall carry out the Services in accordance with the Specification except for the Services which the Parties have agreed shall be performed by the Sub-Contractor’.

•

confidentiality and Intellectual Property issues should be addressed (see above); 569

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• if the clause dealing with sub-contracting does not deal with the issue of liability of the sub-contractor, etc then the Exemption clauses should address this issue. Terms allowing or preventing sub-contracting are also found as part of a clause dealing with assignment (see Assignment).

Sample precedent material Precedent 1—‘Sub-contractor’ – definition ‘Sub-Contractor’ means any person whose services the Company engages or makes use of to perform the whole or any part of the services the subject of this contract. Precedent 2—‘Sub-contractor’ – alternative definition ‘Sub-Contractor’ means any person, firm or company (other than the Contractor) to whom is sub-contracted any part of the Project. Precedent 3—Sub-contractor – supervision All work undertaken or services provided by the Contractor, or by any sub-contractor to the Contractor, under the provisions of this agreement, will be done or performed by, or under the personal supervision and direction of, the Contractor. Precedent 4—Sub-contractor to be third party It is hereby declared that any sub-contractor of the [Carrier] and the employees and agents of the [Carrier] and any such sub-contractor and also any person deriving title to the goods from the [Customer] are third parties to this contract within the meaning of the Contracts (Rights of Third Parties) Act 1999 and shall be entitled to enforce the same accordingly. Precedent 5—Permitted (subject to consent) sub-contracting With the prior written consent of [Party B] (such consent not to be unreasonably withheld or delayed) [Party A] may perform any or all of its obligations under this Agreement through agents or sub-contractors, provided that [Party A] shall remain liable for such performance [and shall indemnify [Party B] against any loss or damage suffered by [Party B] arising from any act or omission of such agents or sub-contractors]. Precedent 6—Permitted (subject to consent) sub-contracting – alternative form You may sub-contract any of your obligations under this Agreement as long as you obtain our prior written consent first. We will not unreasonably withhold our consent. If you sub-contract any of your obligations under this Agreement you will still responsible for the performance of those obli570

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gations. You will also not be relieved from liability for the performance of those obligations. Precedent 7—Permitted sub-contracting of specific parts of a contract 1.  The Specification as set out in Schedule [ ] indicates the parts of the Services that the Consultant shall have the right to sub-contract, subject to the following: 1.1  At least 7 working days prior to the Consultant wishing to enter into legally binding obligations with a sub-contractor, the Consultant shall notify the Client in writing of the following matters: (a) the name of the proposed sub-contractor; (b) the part of the Services that the Consultant proposes to sub-contract to the proposed sub-contractor; (c) the provisions of the contract that the Consultant proposes to enter into with the proposed sub-contractor; 1.2  After notifying the Client under Clause 1.1, the Consultant shall consult with the Client and give good faith consideration to any recommendations made by the Client. 1.3  The Consultant shall remain liable for the performance of those parts of the Service which the Consultant shall sub-contract [and shall indemnify the Client against any loss or damage suffered by the Client arising from any act or omission of the sub-contractors].

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Purpose of the clause Meaning of ‘subject to contract’ The phrase ‘subject to contract’ is often used in correspondence or draft agreements. It normally means that the parties do not intend that the wording set out in their document is legally binding; and that they will not enter into legally-binding obligations until they execute a formal, written contract or comply with some formality (such as by signing a document containing the final version of what they have agreed). Once used, the phrase will normally extend to any negotiations between the parties and any subsequent documentation they generate or exchange. The main problem with using this phrase in a document arises in circumstances where the parties start carrying out obligations etc, but they have not reached final agreement as to the provisions of their contract and/ or complied with any specified formalities. The key problems that result from such conduct are: • whether they have entered into a contract at all (although they are carrying out what is envisaged to be the subject matter if there was a contract); and • what are the terms and conditions on which the parties perform what is envisaged to be the subject matter if there were a contract? These might be: •

the terms and conditions they have actually agreed up to the date that they start performing the rights and obligations;

• the terms and conditions of what they finally agree (if there are negotiations and the parties enter into an agreement subsequent to them starting to perform the subject matter); • neither of the above two alternatives, because the parties have not finally agreed any terms and conditions and consequently none of them apply; and if there is a contract, then the terms and conditions are those which are found in legislation or which will be implied. See further below under ‘Starting work before concluding the contract’. 572

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Contracts relating to land By convention all documents that relate to negotiations for the sale of land contain the words ‘subject to contract’ (other than the formal contract, which is executed). Such wording is no longer necessary following the implementation of the Law of Property (Miscellaneous Provisions) Act 1989, s  2. This section provides that many land transactions cannot come into existence until a written contract is signed by parties (or on their behalf). (See Extracts from legislation, below, for the wording of s 2.) Despite the clear wording of the Act, documentation relating to land transactions is almost always marked ‘subject to contract’. This is often for no other reason than the avoidance of doubt, but also to ensure that any possible ancillary but binding contract will not come into operation, such as an option, lockout agreement, or an equitable interest. For example, in Kinance v MackieConteh [2004] EWHC 998 (Ch), [2004] 19 EGCS 164 a lender provided £50,000 to a borrower. The borrower agreed to give a charge over a house (as security). The agreement to provide the charge did not comply with s 2 of the 1989 Act. It was held that the agreement was sufficient to create an equitable charge and was enforceable for the purposes of the Law of Property Act 1925, s 53.

Commercial parties and non-binding documentation Commercial parties often wish to conduct negotiations before entering into a contract, and accordingly will usually wish that whatever they say or write before they enter into the contract will not bind them. This wish not to commit themselves will extend to drafts of an agreement. Their intention will usually be that the only agreement that is binding is the final version that is signed by the parties. However negotiations or documents of this kind do not have any automatic legal status as to whether they are binding on the parties. If the parties do not wish such preliminary documentation to be legally binding, then the conventional practice is to use a phrase such as ‘subject to contract’. Equally, negotiations taking place orally may often be held subject to one or both the parties stating that they are ‘subject to contract’. In neither case is there any requirement to make or write such a statement (see eg  Winn v Bull (1877) 7 ChD 29; Whitehead Mann Ltd v Cheverny Consulting Ltd [2006]  EWCA  Civ 1303, [2007] 1 All ER (Comm) 124. It is possible to use other wording with the intention to lead to the same result: that there is no binding contract until the parties wish there to be so. By implication it may be clear that the parties are negotiating, whether orally or in writing, ‘subject to contract’. Parties involved in pre-contract negotiations often generate preliminary documents. These documents are designed for use in negotiations and/or to summarise the main commercial terms of a proposed contract. They are often labelled as: 573

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•

Heads of agreement; or

•

Heads of terms; or

•

Term sheet; or

•

Letter of intent; or

•

Comfort letter; or

•

Memorandum of understanding, or

•

Memorandum of agreement.

None of these are indicative of whether they are binding or not, unless the document itself spells out if it is binding or not. Best practice will be to label them with the phrase ‘subject to contract’ at a minimum, or to use clear wording as to the nature and effect of such a document. Better still is to set out in more detail: •

the purpose of the document;

•

that it is not intended to create legally binding obligations;

•

the circumstances in which legally binding obligations will arise (such that a binding agreement will only come into being on signing of an agreement containing all of the terms and conditions); and

• that the parties are under no legal obligation to each other regarding the document they have signed (so far) and that they need not continue negotiations, and are free to withdraw from negotiations. Precedents 2 and 3 are examples. For parties that are wholly based in England there is not normally any obligation to continue negotiations once started, nor any penalties if they wish to withdraw from negotiations (whether or not the parties have labelled their negotiations or documents with a phrase such as ‘subject to contract’). Documents such as those listed above and any negotiations, or any wording that the parties use in order to attempt to reach agreement (such as using reasonable endeavours to reach agreement, or use good faith to reach agreement) are not normally binding, for lack of certainty (eg Walford v Miles [1992] 2 AC 128, HL). However, if a party operates or is incorporated in another country, the position can be different, such as if a party pulls out of negotiations after the parties have reached a certain stage or have signed a preliminary document, such as a letter of intent

Drafting issues The following points are primarily directed to ‘heads of agreement’ type of documents: 574

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•

At a minimum, documents that are not intended to be legally binding or to create legal relations should state (clearly) they are ‘subject to contract’. Without such minimal wording it may be unclear from the documents and actions of the parties whether an agreement has come into existence (see DMA Financial Solutions Ltd v BaaN UK Ltd [2000] All ER (D) 411, for an illustration of this (see also Case analysis below)). Where the phrase ‘subject to contract’ appears in a document: • such a document and subsequent documents and negotiations will usually not lead to any binding legal relationship; but • there should be nothing in the conduct of the parties (whether by express agreement or implication) to make any documents or communications between the parties legally binding (ie  an offer being made by one party which is capable of being, and is, accepted, by the other party). See Confetti Records v Warner Music UK Ltd [2003] EWHC 1274 (Ch) (see also Case analysis below).

•

Indicating the status of a document with more certainty. Rather than just inserting the words ‘subject to contract’ at the head of the document, state more specifically what is the status of the document (as in Precedent 2).

•

Do not use phrases like ‘heads of agreement’ in a document or other similar wording without specifying the legal effect of the document. If the wording of the document does not contain at least the phrase ‘subject to contract’ then a court might interpret the document as legally binding (see Beta Investment SA v Transmedia Europe Inc [2003] EWHC 3066 (Ch) and Case analysis below).

•

Avoid, where possible, the more formal style and wording used in legally binding documents. In Petromec Inc v Petroleo Brasileiro SA Petrobras [2004] All ER (D) 10 (Feb), paras 26–30, the judge noted that in a memorandum of agreement the parties had used a formal drafting style, and the use of wording such as ‘…in consideration of the mutual covenants contained herein the parties hereto agree as follows…’ might mean that the parties were ‘seeking to achieve something beyond the recital of good intentions’. The case was limited to preliminary issues, but the judge, after consideration, found that the memorandum of agreement was not binding, but only, it appears, because of the complexity of the overall relationship between the parties. The avoidance of ‘traditional’ agreement wording might have removed such doubt (plus the use of words such as ‘subject to contract’).

•

Is there an intention that the one or more of the parties will be carrying out some obligation before the parties enter into a final binding agreement? The parties to a ‘heads of agreement’ document may while they are negotiating, wish to start work on some of the activities etc envisaged in the heads of agreement document or the draft agreement before the latter is actually signed. Sometimes the heads of agreement document itself will provide that the parties will carry out those activities. 575

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In either case it may not be clear as to the extent to which any document such as a ‘head of terms’ or any provisions within it is, or are, binding on the parties or if the activities are not dealt with in the heads of agreement document whether the carrying out of those activities or any agreed payment for them is binding (and on what precise terms). Clear wording should be added to set out which is which. This point is considered further below. •

Is the document with a party who is not based in England and Wales? Where the transaction is wholly within England and Wales (eg with English parties and with performance to take place in England and Wales etc), some of the provisions in Precedent 2 may be unnecessary. In international contracts, the law in some countries in Continental Europe may provide that a party is liable if it withdraws from negotiations without good reason after a defined stage, eg after signature of a Heads of Terms.

•

Is wording being used that could allow a binding contract to come into effect? If there is wording in the document, eg ‘subject to survey’, then if the thing or task which is specified is undertaken it may be held that a binding contract has come into effect.

•

Is the pre-contract documentation to contain some binding obligations? If the parties wish their negotiations and any negotiation to be ‘subject to contract’ but nevertheless wish some provisions to be binding, should the binding provisions and the other non-binding provisions be located in the same document? For example, the parties wish to keep their negotiations secret and confidential, and also possibly prevent one party to the negotiations negotiating with a third party for a defined period. The parties will wish to make these matters binding. They both might be included with a document that is ‘subject to contract’, and the wording of the document might make it clear that these provisions are binding. Rather than put all of these matters together in one document it might be better to create one document which only has binding provisions (such as a separate confidentiality agreement) and to put the non-binding matters in a second document, and to link to the two by reference to each to other.

Starting work before concluding the contract A common problem is that parties will: •

start performing some of the obligations of the agreement; or

•

carry out the subject matter of the proposed agreement,

before they have entered into an agreement or even where they have not agreed all the terms and conditions, and never do so. The are many dangers with doing this and no wording in a document labelled ‘subject to contract’, ‘heads of terms’, ‘letter of intent’ etc can avoid them. 576

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Despite any wording in such a document, if the parties act differently to the wording, then a court may decide, objectively, that there is a contract. Perhaps the real danger will be not that there is a contract but determining what its terms and conditions are. They may be different to what the parties agreed while they were negotiating ‘subject to contract’ (or that is recorded in their ‘subject to contract’ document). The case of RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Company KG (UK Production) [2010] UKSC 14 (see Case analysis below) is a perfect illustration of this. In this case, three different courts came to different conclusions on whether there was a contract and what its terms and conditions were. The best position is always to not start performing any obligations until the terms and conditions of a full contract are agreed. As the judgment in RTS Flexible stated: ‘The different decisions in the courts below and the arguments in this court demonstrate the perils of beginning work without agreeing the precise basis upon which it is to be done. The moral of the story is to agree first and to start work later.’

In the event that the parties agree to start performing some or all of the obligations of a proposed contract a court is likely to look at the following points to establish whether there is a contract between the parties: •

examining what the parties have communicated to each other and what they have agreed and whether the result of the examination leads to the view that the parties intended to create legal relations and what is agreed is sufficient to form a contract;

•

whether it is possible to waive any requirement in any document (such as a draft version of the agreement) that a contract can only come into being by complying with a particular formality (such as by signing a final version of the agreement). Such a waiver may be by conduct;

•

the stage the parties have arrived in their negotiations regarding the terms and conditions they have agreed, before they started work;

•

in the circumstances of a particular case it may be commercially unrealistic to assume the parties did not intend to create legal relations;

•

in creating a legally-binding relationship it is not necessary for the parties to agree all the provisions that are of economic or other significance (ie it is not a condition precedent that all or specific points need agreement before the parties can enter into binding legal relationships).

In essence, the court will take an objective view of what the reality is of the position the parties are in, irrespective of the documentation generated by the parties and what they have said or communicated to each other. From a commercial point of view, having a third party (a judge) decide on whether there is a contract, or what its terms and conditions are, and what one party will have to pay is likely to disappoint one or more of the parties. Best practice is always for the parties to explicitly enter into a contract on specifically agreed terms and conditions prior to starting any work. However, 577

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this approach will not always be possible. The reality is that the commercial imperatives of a deal make such an approach impossible. The parties may simply wish to get on with performing it but cannot agree all the detailed terms and conditions, or there may be commercial or financial imperatives that force them to get on with performing the subject matter of the proposed contract. In the face of such factors, the second best approach is that if there are parts of the subject matter of the proposed contract that need performing first, then the parties specifically agree that those aspects of the deal be performed and they reach agreement on the status and the terms and conditions of those discrete aspects in the document which are ‘subject to contract’. For example: •

the supply of manufacturing plant may first call for the supplier to carry out a survey, or

•

the creation of a software program may first require the supplier to analyse what software the putative licensee is using and how the putative licensee uses it and/or write a specification; or

•

an advertising agency may need to discuss with the putative client the details of the proposed advertising campaign (details about a product’s launch, target audience, etc) and prepare a report with its recommendations.

All of these might form a discrete project before the ‘main’ part of the project needs to start operating or the terms and conditions of it are agreed (ie making and installing the equipment, writing the software or creating the adverts and purchasing advertising space respectively).

Location in agreement The phrase ‘subject to contract’ will normally appear at the top of a document. Additional wording such as in the Precedents is normally seen in documents such as ‘heads of agreement’ or other documentation which are purely for the basis of negotiation, rather than documents which contain the draft of the final wording of an agreement.

Linkage and use See above.

Sample precedent material Precedent 1—Subject to contract At the top of all correspondence (emails, text messages, letters, and other documents): ‘Subject to contract’ 578

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or ‘Subject to contract. This document (or any other document) or any negotiations are not intended to create a legally binding relationship between us.’

or ‘Subject to contract. A contract will only come into existence when a written agreement is signed by us and you.’

Precedent 2—Sample clause These Heads of Terms set out the main commercial principles of a proposed agreement between (parties) (the ‘Parties’) relating to (subject matter). The Parties intend to negotiate and (subject to obtaining approval from their respective Boards of the negotiated terms) execute a full written agreement (the ‘Agreement’), no later than [90] days from the date on which they sign these Heads of Terms. The parties intend that the Agreement will include provisions based on the principles of these Heads of Terms and other provisions. However, [except for paragraph X below,] these Heads of Terms are not intended to be legally binding, nor to create, evidence or imply any contract, obligation to enter into a contract or obligation to negotiate. Either party may withdraw from the negotiations without incurring any liability to the other party, at any time prior to the execution by both parties of the Agreement. Precedent 3—Heads of terms not to be legally binding – sale of business This document sets out the terms which have been agreed, subject to contract, for the sale and purchase of certain assets and rights in respect of the Business by the Vendor to the Purchaser. It is not intended to create a legally binding contract save for the terms of paragraph [no] [and paragraph [no]] which are intended to be legally binding on the Vendor [and the Purchaser respectively], nor does it set out an exhaustive list of matters to be incorporated into a legally binding contract to be prepared in relation to the sale and purchase by the Purchaser’s solicitors. Without prejudice to the foregoing, the purchase is subject to the results of the Purchaser’s due diligence and review of the Business (including title to the property and assets of the Business, review of contracts debtors employee and pension obligations and information to be requested by the Purchaser’s advisers). The Vendor will produce and co-operate in producing such information as is thought necessary by the Purchaser to complete its due diligence work. Precedent 4—Clause in ‘lock-out’ agreement for sale of land This Agreement: 1 does not commit the parties to the Sale; 2 does not form part of any other contract; and 3 is personal to the Buyer and may not be dealt with by the Buyer in any way. 579

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Precedent 5—Letter of intent I hope this letter gives you the assurance you need, but please note that it is not intended to be legally binding.

Case analysis Confetti Records v Warner Music UK Ltd [2003] EWHC 1274 (Ch) Facts 1 C was the owner of the copyright in a music track. 2 D wished to use the music track on a compilation disk called ‘Crisp Biscuit’. 3 After negotiations, D sent to C a facsimile headed ‘Re Crisp Biscuit – Subject to Contract’. 4 At the bottom of the facsimile were words stating ‘Read and Agreed’ and a space for signature by C. 5 C signed the facsimile and sent it back to D. 6 C then sent the music track to D, stating it was a ‘cleared track’ and with an invoice. 7 The invoice stated that the music track was ‘Licensed to “Crisp Biscuit”. Granted for 3 years non-exclusive’. 8

Before payment was tendered and before any longer form agreement was entered into C wished to stop D using the music track and renegotiate payment. But D  had already used the music track and had had some compilation disks manufactured.

9 D contended that despite the wording ‘subject to contract’ that there was a binding contract. Held 1 The judge held that there was no binding agreement and that the words ‘subject to contract’ as used in the facsimile had the normal meaning (that is there was no binding agreement): ‘91. […] practices within the music industry cannot, in my judgment, change the law. I consider that I must decide, as a matter of construction of the deal memo in this particular case, whether a legally binding contract was created. I  am unpersuaded that the phrase “subject to contract” has a meaning within the music business which is precisely the opposite of the meaning that it bears in general commerce, and particularly in relation to land contracts. Nor am I  persuaded that a document that looks like a bilateral contract (apart from the heading “subject to contract”) can properly be construed as an option. The 580

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Subject to contract (and other denials of a legally-binding contract) licensee’s commercial freedom to choose not to use a track and not to pay an advance is preserved by holding that the deal terms “subject to contract” are not a contract at all. 92. I do not therefore accept that in the music industry (or in that part of it consisting of licensing music for inclusion on compilation albums) the phrase “subject to contract” bears a different meaning to its conventional meaning. 93. The use of the phrase “subject to contract” construed objectively, means, in my judgment, that the parties must be taken to have intended that the deal memo should not be binding. There is nothing in the deal memo itself which is inconsistent with that. As [counsel for C] said, it would be a strange contract which simultaneously bound the licensor to give a licence for the territories stated in the [facsimile] yet at the same time contemplated that the licensor might not control rights in all the stated territories. 94. In my judgment no contract was created by the signature of the [facsimile] […] 95. The remedy for the future lies entirely in the Defendant’s hands. All it has to do is to change its standard form to include a statement that the deal memo is to be binding and/or to omit the “subject to contract” heading, as many of its competitors do. 96. I should also add that in many cases an implied contract would come into existence when a putative licensee pays the licensor a royalty, or advance, which the putative licensor then accepts. So in many cases it may not matter very much when a contract is made. The problem in this case is that by the time the Defendant tendered payment of the advance, the Claimants had made it clear that they no longer wanted [the music track] to be included on the album.’

2 The judge also considered whether the delivery of the facsimile or the sending of the music track and an invoice amounted to a unilateral offer which was accepted when the defendants started compiling their record. 3 As regards the facsimile, the judge found that it was not a unilateral offer: ‘99. …The whole point of the label “subject to contract” is to prevent a “subject to contract” communication from being capable of maturing into a contract by acceptance. In my judgment it is not an offer at all.’

4 As to the sending of the music track and the invoice, the judge held that: ‘100. So far as the delivery of the track and the sending of the invoice are concerned, there is, I think, more force in [the defendant’s] point. In the ordinary way, once negotiations are begun “subject to contract”, that label governs all subsequent communications between the parties unless the label is expunged by express agreement or necessary implication (Cohen v Nessdale Ltd [1982] 2  All ER  97). I  do not see any evidence that the “subject to contract” label was expunged by express agreement. Was it expunged by necessary implication? […]that the sending of an invoice, together with the track, is regarded in the music licensing business, as an offer capable of acceptance. Having regard to the fact that [the facsimile] had been signed, the offer must, by necessary implication, be an offer to 581

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Subject to contract (and other denials of a legally-binding contract) contract on the terms of the signed [facsimile]. On that footing, if the offer is accepted, it seems to me that the “subject to contract” label on the deal memo is expunged by necessary implication.’

5 The judge found that in this case the ‘subject to contract label’ had been lifted: ‘I consider that signing of the [facsimile], and the sending of the cleared track plus the sending of the invoice did amount to a representation that the licence had been granted. To put it another way, it was a representation that the “subject to contract” label attached to the facsimile could be disregarded.’

Beta Investment SA v Transmedia Europe Inc [2003] EWHC 3066 (Ch), [2003] All ER (D) 133 (May) Facts 1 C lent D a sum of money against a promissory note. 2 C and D also entered into an agreement where D pledged as collateral all of its shares in another company, E. 3 The loan was not repaid. 4 C auctioned the shares. 5 But C was unable to control E effectively. 6 Negotiations took place regarding the repayment of the loan. 7

A document was produced entitled ‘Heads of Agreement—subject to more complete documentation’.

8 It provided, among other things: (a)

that the transfer of shares would continue without interruption; and

(b) that the parties would use their best endeavours to negotiate and agree a final settlement within 90 days. 9 This document replaced another document entitled ‘Settlement Agreement—subject to contract and without prejudice’. 10 Negotiations collapsed. Issue Did the Heads of Agreement have binding effect? D argued that the Heads of Agreement was binding and required the parties to reach some form of agreement. C  argued that the use of the words ‘Heads of Agreement’ meant the same, in effect, as ‘subject to contract’ or alternatively that there was an ‘agreement to agree’.

582

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Held 1 There were provisions in the document which were not conditional and were to be implemented. 2

These provisions included survival of agreement clause, entire agreement clause and ‘term and law’ clauses.

3 These provisions were held to be inconsistent with the document being not binding. 4 The use of the words ‘subject to more complete documentation’ did not stop the document having binding effect if the document as a whole was intended to have binding effect. 5 But the effect of the ‘heads of agreement’ document, although binding, was binding to a limited extent: that of the parties to use their best endeavours to negotiate to try to agree a settlement, but the parties were not bound to enter into a more specific form, or indeed any form of actual agreement. At the end of the period of negotiation, the parties were unable to agree. DMA Financial Solutions Ltd v BaaN UK Ltd [2000] All ER (D) 411 Facts 1 D produced a software program called Coda. 2 D wished to outsource training for the Coda computer program to C. 3 C and D had satisfactory dealings in the past. 4 Negotiations began, held by meeting, then email and telephone and a further meeting. Apparently all the provisions of a contract were agreed. 5 After the last meeting D  sent a fax with what D  thought was the agreed position between the parties. C and D spoke the next day to agree minor changes in the date for payments. 6 D consulted with their parent company and communicated with C by message to indicate ‘there are no problems on the agreement. The US team are studying the legal details. All should proceed as planned, by the end of the month’. 7 Then the parent company spoke with C on 16 December 1998, and agreed one minor change to the fax that was sent. 8 D  was apparently supposed to produce an agreement but did not do so. 9 C and D started implementing the ‘agreement’. 10 Eventually a standard form agreement was produced by D and sent to C, but differed from what had been agreed. 583

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11 There were some further exchanges about the written agreement to be produced. D then wished to pull out of the agreement. Issue for determination 1 For C: Was a contractual agreement formed between C  and D  for C to provide training to customers of an accounting software system owned by D? 2 For D: Was the case rather one in which pre-contractual negotiations took place but never reached the stage of a concluded contract? Held 1 The judge found that there was a binding contract: ‘51. […] C  submits that the change agreed on the telephone on 16 December 1998 […] was the last change to be made, and that there was then a fully binding agreement concluded between DMA and BaaN. I agree with him. There was nothing left unresolved, and there was nothing missing which was essential. The parties did expect that the agreement would be translated into a formal document drawn up by lawyers, […] I  consider on the facts of this case that this expectation did not mean that there was not yet a binding contract. I  also agree with [C] that the existence of an agreement is confirmed by the way that the parties were acting. […] stopped providing proprietary training itself, and supplied to DMA everything which DMA needed from it (including the assistance of BaaN personnel) to be able to provide the training itself BaaN had announced that DMA was taking over the proprietary training role, and BaaN passed on to DMA enquiries from customers about it.’ ‘52. For the foregoing reasons I  conclude that there was a binding contract formed between DMA and BaaN, and that it came into effect on 16 December 1998.’

2 The judge’s comments about the negotiations not being ‘subject to contract’ and whether any provision was missing from the agreement provide a useful analysis of the type of negotiations that commonly take place between commercial organisations: ‘35. No need for a formal written agreement. There was no evidence of it ever having been said in the negotiations, on behalf of either party, that the parties would not be legally bound until a formal written agreement had been drawn up and signed. No conventional expression understood as having that meaning – like “subject to contract” – was ever used. There was no evidence to satisfy me that, in the computer software industry, it is the generally understood usage that agreements are never binding until they have been drawn up by the lawyers and signed. […]I believe that this was a case where, if the parties did conclude their negotiations and did agree everything which had to be agreed, there was an immediate binding contract, ahead of the reduction of the contract into formal written terms.’ ‘37 …was there any matter which was not agreed, the presence of which would have been crucial to the existence of a binding contract? Putting it the other way round, did the agreement which DMA says was formed by the negotiations omit any element without which the alleged contract 584

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Subject to contract (and other denials of a legally-binding contract) was not a contract at all, probably because it would have been void for uncertainty? An example would be if some crucial element, like the price payable by DMA to BaaN for the training rights, was left over for future negotiation and agreement. I stress, however, that, if there was some point which was not raised in the negotiations but (and this is the critical matter) it was not an essential point, that would not prevent a contract from having been concluded. That remains so even if the point would in all probability have been covered by a written agreement, drafted by lawyers, had the matter gone to the stage of a written agreement. An example of this would be a proper law clause. BaaN’s lawyers would undoubtedly have put such a clause in a draft written agreement, and I imagine that DMA would not have jibbed at signing an agreement merely on the ground that it had in it a proper law clause which had not featured in the earlier negotiations. But the fact that the negotiators did not deal with the proper law would not in any way be fatal to their having reached a binding contract.’

3

The judge went through the course of negotiations and listed the matters which were discussed and agreed: (i)

the subject matter of the (proposed) contract: the provision by C of training for users of the Coda proprietary software systems;

(ii)

withdrawal by D from proprietary training;

(iii) territory; (iv) duration; (v)

price and payment dates;

(vi) accreditation; (vii) use of D’s materials; (viii) access to and use of D’s staff; (ix) passing on customer enquiries; (x)

promotion and endorsement by D of C’s training courses

in order to reach his conclusion that the essential provisions of an agreement were in place. RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Company KG (UK Production) [2010] UKSC 14 1 The parties entered into a letter of intent for the supply of machinery by the claimant to the defendant (project). The letter of intent contained some binding and non-binding provisions. The letter of intent included the price to be paid for the whole project. 2 The claimant commenced work on the project almost immediately after the signature of the letter of intent. 3 The letter of intent provided that the parties were to negotiate the full terms of a contract within a period of four weeks from the date of the letter of intent. The full terms of the agreement were to be based on the defendant’s standard template agreement. 585

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4 The defendant was to pay the expenses of the claimant prior to the signing of the full contract. 5 The full terms of the contract were not agreed within the four-week period. The parties continued to negotiate the terms of the contract and the expiry period of the letter of intent was extended by agreement. 6

Eventually the terms of the contract were agreed (on 5 July with some variations on 20 August), but the parties never signed it.

7 The claimant carried on working throughout the period. 8 The template contract contained a provision that a contract would only come into existence when signed by the parties (Clause 48). 9 Essentially the issue before the court was whether there was a binding contract and what were the terms on which it was concluded. The problem was particularly acute, as work started before the negotiations were concluded or a final contract was signed. 10 The court held that the terms on which such work was being carried out were not necessarily the same as those terms agreed ‘subject to contract’: ‘[45] The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement. [46] The problems that have arisen in this case are not uncommon, and fall under two heads. Both heads arise out of the parties agreeing that the work should proceed before the formal written contract was executed in accordance with the parties’ common understanding. The first concerns the effect of the parties’ understanding (here reflected in cl 48 of the draft written contract) that the contract would ‘not become effective until each party has executed a counterpart and exchanged it with the other’--which never occurred. Is that fatal to a conclusion that the work done was covered by a contract? The second frequently arises in such circumstances and is this. Leaving aside the implications of the parties’ failure to execute and exchange any agreement in written form, were the parties agreed upon all the terms which they objectively regarded or the law required as essential for the formation of legally binding relations? Here, in particular, this relates to the terms on which the work was being carried out. What, if any, price or remuneration was agreed and what were the rights and obligations of the contractor or supplier? [47] …in a case where a contract is being negotiated subject to contract and work begins before the formal contract is executed, it cannot be said 586

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Subject to contract (and other denials of a legally-binding contract) that there will always or even usually be a contract on the terms that were agreed subject to contract. That would be too simplistic and dogmatic an approach. The court should not impose binding contracts on the parties which they have not reached. All will depend upon the circumstances…’

11 The court held that there was a binding agreement and that an understanding between the parties that there would only be a binding contract on signature of a final contract was waived by their conduct. In effect the final version of the unsigned agreement was made without the ‘subject to contract’ understanding: ‘[55] In our judgment [in a subject to contract … case, the question is whether the parties have nevertheless agreed to enter into contractual relations on particular terms notwithstanding their earlier understanding or agreement. Thus, in the Galliard Homes case Lindsay J, giving the only substantive judgment in the Court of Appeal, which also comprised Evans and Schiemann LJJ, at 236 quoted with approval the statement in Megarry and Wade The Law of Real Property (5th edn, 1984) pp 568–569 that it is possible for an agreement ‘subject to contract’ or ‘subject to written contract’ to become legally binding if the parties later agree to waive that condition, for they are in effect making a firm contract by reference to the terms of the earlier agreement. Put another way, they are waiving the ‘subject to [written] contract’ term or understanding. [56] Whether in such a case the parties agreed to enter into a binding contract, waiving reliance on the ‘subject to [written] contract’ term or understanding will again depend upon all the circumstances of the case, although the cases show that the court will not lightly so hold. … [86] … Had the parties agreed to be bound by the agreed terms without the necessity of a formal written contract or, put another way, had they agreed to waive that requirement and thus [Clause 48]? We have reached the conclusion that they had. The circumstances point to the fact that there was a binding agreement and that it was not on the limited terms held by the judge. The price had been agreed, a significant amount of work had been carried out, agreement had been reached on 5 July and the subsequent agreement to vary the contract so that […] the variation was agreed subject to contract. The clear inference is that the parties had agreed to waive the subject to contract clause, viz cl 48. Any other conclusion makes no commercial sense. RTS could surely not have refused to perform the contract as varied pending a formal contract being signed and exchanged. Nobody suggested that it could and, of course, it did not. If one applies the standard of the reasonable, honest businessman suggested by Steyn LJ, we conclude that, whether he was an RTS man or a Müller man, he would have concluded that the parties intended that the work should be carried out for the agreed price on the agreed terms, including the terms as varied by the agreement of 25 August, without the necessity for a formal written agreement, which had been overtaken by events. [87] By contrast we do not think that the reasonable honest businessman in the position of either RTS or Müller would have concluded as at 25 August that there was no contract between them or that there was a contract on some but not all of the terms that had been agreed on or before 5 July as varied by the agreement of 25 August. …[I]nstead of signing the contract the parties here simply let sleeping dogs lie or, […] neither party wanted the negotiations to get in the way of the project. The project was the 587

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Subject to contract (and other denials of a legally-binding contract) only important thing. The only reasonable inference to draw is that by or on 25 August, the parties had in effect agreed to waive the ‘subject to contract’ provision encapsulated by cl 48…’

Extracts from legislation Law of Property (Miscellaneous Provisions) Act 1989, s 2: ‘(1) A  contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each. (2) The terms may be incorporated in a document either by being set out in it or by reference to some other document. (3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.’

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Successors and assigns

Purpose of the clause Use in general Contracts sometimes include a provision stating that references to a contracting party include its ‘successors and assigns’. These references are typically included as part of the definitions of the parties, or in a separate boilerplate clause. Provisions of this kind are often useful for at least two reasons: •

to avoid any doubt as to whether the agreement is only referring to the original contractual party in particular clauses. Eg, if the contract includes an indemnity against losses suffered by a party to the contract, does that indemnity apply to losses suffered by an assignee of that party?

•

to clarify whether the agreement is intended to be binding on and ‘endure to the benefit of’ a party’s successors in title. This is particularly relevant to contracts with individuals, where there may be uncertainty as to whether the contract is intended to benefit and bind the estate of that individual, following the individual’s death. It may also be relevant to a company’s successors in title, eg  following a merger. However, most UK company reorganisations are structured in such a way that a completely separate entity, rather than a ‘successor in title’ acquires the company’s assets or shares. In practice, there would probably be an assignment or novation of the company’s contracts.

Use in the UK and USA Provisions such as in Precedents 1 and 2 are not usually encountered in commercial contracts drafted by English lawyers; they are far more common in US contracts, perhaps because mergers are more often structured in a way that creates a genuine ‘successor in title’ to the merged company. Nevertheless, such provisions are sometimes useful in a UK context, either as: •

(briefly) with the Party clause; and

•

as a stand-alone clause, such a provision might be included in an Assignment clause. 589

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Successors and assigns

Drafting issues It is useful to consider the following points when drafting a Successors and assigns clause: •

Not contradicting any prohibitions on assignment. The ‘successors and assigns’ wording should not contradict any prohibitions on assignment set out elsewhere in the agreement. In Precedent 2 this is made clear. Without this specific wording, most agreements will contain a nonassignment clause (such as those found in Assignment and Novation). If the intention is to include a successors and assigns clause then the nonassignment clause will need amendment to permit the circumstances when the successors and assigns situations will apply.

•

Altering or increasing an indemnity. Whether any successor or assignee of one party will alter or increase an indemnity given by another party to an agreement. Eg: •

if Party A indemnifies Party B in respect of certain tax liabilities which might fall on Party B,

•

Party B assigns the agreement to Party C,

•

Party C becomes liable for tax of the type covered by the clause, but

•

if Party B had stayed as a party to the transaction, Party B would not (owing to its different tax position) have incurred the liability at all or would have done so but in a lesser amount than Party C.

Here Party C should be able to recover under the indemnity. •

Operation of law. Whether the operation of law (such as in bankruptcy) rather than the terms of the contract will affect a successor or assign.

•

Foreign parties. If one or more parties is domiciled or incorporated in a country whose succession and insolvency procedures have no English counterparts, then a Successor and assigns clause may not be appropriate or effective.

Location in the agreement Wording that a party includes its successors and assigns is normally included with the relevant Parties clause. Where an agreement calls for detailed wording, then the clause will contain that wording.

Linkage and use Further discussion of these topics generally will be found in Assignments. 590

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Sample precedent material Precedent 1—Successors and assigns wording with a party clause (1) XYZ LIMITED whose registered office is at 36 The Court Road, Richwood, Surrey TW99 6AN (the ‘Company’ which expression includes its successors and assigns). Precedent 2—Successors and assigns wording as part of an assignment clause This agreement shall be binding upon, and endure to the benefit of, the parties to this agreement and their respective successors and permitted assigns, and references to a party in this agreement shall include its successors and permitted assigns. However, none of the parties to this agreement shall be entitled to assign or transfer this agreement or any of its rights and obligations under this agreement except: (a) as may be approved in writing by the other party or parties to this agreement; and (b) (in either case) on terms that the transferee shall covenant with the other party or parties to this agreement to perform all the obligations of the transferor under this agreement. Precedent 3—Comprehensive successors and assigns clause (but not including or cross-referring to any prohibitions on assignment) In this Agreement references to the Company include references to a person: (a) who for the time being is entitled (by assignment, novation or otherwise) to the Company’s rights under this Agreement (or any interest in those rights); or (b) who, as administrator, liquidator or otherwise, is entitled to exercise those rights; and in particular those references include a person to whom those rights (or any interest in those rights) are transferred or pass as a result of a merger, division, reconstruction or other reorganisation involving the Company. For this purpose, references to the Company’s rights under this Agreement include any similar rights to which another person becomes entitled as a result of a novation of this Agreement. Precedent 4—Party to include successors and assigns 1 HUMMEL MOZART BEETHOVEN PLC, incorporated under company registration number [ ], and whose registered office is [ ] (the ‘Company’ which expression includes its successors and assigns).

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Successors and assigns

Precedent 5—Party to include successors and assigns – alternative form ‘The Bank’ means [name of bank] acting through its branch at [address] and shall include its successors and assigns. Precedent 6—Party to include associates, assignees etc [name of party] (the ‘Licensee’ which expression shall include all associates, sub-licensees and assignees and other persons with the prior written consent of the Company deriving title through or from the Licensee). Precedent 7—Successors to be bound This agreement shall be binding upon and endure to the benefit of the Contracting Parties and their respective successors and assigns. Precedent 8—Successors to be bound – alternative form Except where expressly provided to the contrary this Agreement and all provisions of this Agreement shall inure to the benefit of and be binding upon the parties to this Agreement their successors, assigns and licensees. Precedent 9—Power to assign [Party A] may assign all or any part of its rights or benefits under this deed without the consent of [Party B] and, thereafter, relevant references in this deed to [Party A], wherever used in this deed, shall include any assignee of [Party A], and every successor in title of any such assignee or of [Party A].

592

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Termination for breach

Purpose of the clause Background Most commercial agreements include provisions allowing for their termination in particular circumstances (such as if a party is in breach of some or all of its obligations). If the agreement does not contain express provisions, a court may imply a provision allowing termination on reasonable notice. This will depend on how a court will interpret the contract. There are some general principles that a court is likely to follow, such as: •

where an agreement is for a fixed period, a court is likely to find that it is not possible to terminate the agreement before the end of that period, except under an express termination provision or with the consent of all the parties (see eg Cutlan v Dawson (1897) 14 RPC 249, CA, and Guyot v Thomson [1894] 3 Ch 388, CA);

• where an agreement involves a continuing relationship between the parties then it may be possible to terminate the agreement on reasonable notice, such as a distribution agreement or a patent or know-how licence agreement, which contain no provisions for termination (see eg MartinBaker Aircraft Co Ltd v Canadian Flight Equipment Ltd (1955) 72 RPC 236; Jackson Distribution Ltd v Tum Yeto Inc [2009] EWHC 982 (QB), [2009] All ER (D) 107 (May), see Case analysis below). The law in this area is complex and is very likely, in each case, to turn on its facts. The latter case provides an illustration of the type of issues a court is likely to take into account. In any agreement with obligations of a continuing nature, one party will wish to be able to terminate the agreement if the other party is in serious default, such as if a party is not paying for the goods and/or services it receives. While common law provides that one party may rescind the contract where the other party has committed a serious or fundamental breach by defective performance or has repudiated the contract, it is best for the parties to specify expressly for the circumstances in which either party may treat the contract as at an end. In the absence of such a provision, it is not always clear whether a particular breach would entitle the innocent party to rescission; each contract will be interpreted on a case-by-case basis.

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Types of termination clause A termination provision in a contract will typically contain one or more of the following categories: •

termination for breach (sometimes known as ‘termination for cause’);

•

termination in the event of insolvency, bankruptcy, liquidation etc of one of the parties (see Insolvency);

•

termination ‘by effluxion of time’; eg if the contract is stated to be for a fixed period of time, then the agreement terminates at the end of that period;

•

termination without cause (or for ‘convenience’), eg allowing one party, or either party, to terminate the contract at any time on 30 days’ notice if the terminating party wishes to do so (ie without needing any specific reason, such as a breach, to occur);

•

termination as a consequence: •

of the parties having a disagreement (eg deadlock provisions in joint venture agreements); or

• of the parties being unable to come to agreement on some matter (eg  in an agreement containing an option and on exercise of the option, the parties needing to negotiate in good faith a further agreement but are unable to agree on terms); or •

of some event occurring or not occurring which is not in the control of the parties (eg  if the parties wish one party to manufacture products, but that party first needs to build a factory to do so, which is dependent on receiving planning permission from a local authority).

Often, it will be appropriate to include clauses that deal with what is to happen after termination occurs, that is describing the consequences of termination. Some terms (eg confidentiality provisions) may survive or there may be various matters that can only happen after the agreement is terminated (eg if a patent licensee has made products up to the date of termination, it may have stock left but not sold; the ‘consequences of termination’ clause can deal with what is to happen to the stock, such as the licensee being allowed to sell it after the date of termination) (see Consequences of termination). The drafter may wish to include wording in the termination clause stating that the right of termination is without prejudice to any other right or remedy that the terminating party may have. This is to avoid the argument that, for example, terminating the contract on grounds of breach is the terminating party’s only remedy, and that the party is prevented from claiming damages for the breach.

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Specifying the ‘quality’ of a breach Typically a commercial agreement will set out the specific circumstances when a party can terminate an agreement. Although the particular circumstances will vary from contract to contract, the following are the common situations: •

a failure to make a payment: eg: ‘Without prejudice to any other right or remedy it may have, either party may terminate this agreement at any time by notice in writing to the other party (‘Other Party’). The notice to take effect as specified in the notice: (a) where the Other Party fails to pay any amount due under this agreement in full within [5] days of any due date and fails to remedy such failure within [3] days of receipt of written notice to do so’;

•

a failure to meet a specified date: ‘Without prejudice to any other right or remedy it may have, the Customer may terminate this agreement at any time by notice in writing to the Supplier. The notice to take effect as specified in the notice: (a) where the Supplier fails to deliver any order for Goods made under this agreement within [5] days of any due date for that Order of Goods and fails to remedy such failure within [3] days of receipt of written notice to do so’; or

•

a failure to fulfil an important obligation: ‘Without prejudice to any other right or remedy it may have, either party may terminate this agreement at any time [immediately and without the need to provide notice] where a Receiving Party discloses any Confidential Information of the Disclosing Party in breach of any provisions of this Agreement’; or

•

a party becoming insolvent: ‘Without prejudice to any other right or remedy it may have, either party may terminate this agreement at any time by notice in writing to the other party (‘Other Party’), such notice to take effect as specified in the notice: […] 2 if the Other Party becomes insolvent, or if an order is made or a resolution is passed for the winding up of the Other Party (other than voluntarily for the purpose of solvent amalgamation or reconstruction), or if an administrator, administrative receiver or receiver is appointed in respect of the whole or any part of the Other Party’s assets or business, or if the Other Party makes any composition with its creditors or takes or suffers any similar or analogous action in consequence of debt.’

These types of provisions deal with specific instances where a party is in breach and this gives the other party a right to terminate. The other main approach is not to specify particular types of breach but to indicate that only if the breach by a party reaches a seriousness or certain level then the other party can terminate. Although in one of the examples above, a specific type of breach is accompanied by a ‘seriousness’ standard; only when the party under an obligation to make a payment has failed to do so for a specified period then the party not in breach has the right to terminate. 595

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To indicate the level of seriousness but not specify any particular type of breach is to state that a party may terminate for the other party’s breach, but the breach has to be more than minor, ie it must be significant, but without further specifying what will constitute a breach. The words most often used are that the breach must be a ‘material’ or ‘substantial’ breach. The objective is to stop the party not in breach terminating the agreement where the other party has failed to perform an obligation, but that party’s breach is of an insignificant or a minor nature. For example: •

a party provides social media and public relations services, which includes making a specific number of tweets on behalf of a client every week; and

• the party is under an obligation that ‘the Supplier shall provide to the Client a Report by 6pm each Friday during the Period’. The Report needs to state the number of tweets made and responses generated by those tweets; •

during the course of the year on two occasions the party fails to provide the reports until the Monday morning (ie  2 of 52 occasions, 4% approximately);

•

the client never reads the reports until the middle of the next week.

To avoid doubt as to whether these two failures are sufficiently serious to amount to a breach, and whether a delay of one working day is serious enough to entitle the party not in breach to terminate the agreement, the agreement should include clear wording, such as: ‘The Supplier shall provide to the Client a Report by 6pm each Friday during the Period (‘Deadline’). If the Supplier shall fail to provide the Reports on 2 or more occasions by the relevant Deadline during the period, then the Client shall have the right to terminate this Agreement.’

If the supplier has multiple obligations to fulfil and if the parties needed to specify the circumstances as to when a breach would be sufficient for the party not in breach to terminate for each obligation, then their agreement would be significantly lengthened or more detailed. As mentioned above, another approach is to specify that a party may terminate in more general terms; that the party not in breach can only terminate if the other is in ‘material’ or ‘substantial’ breach of any obligation; such as: ‘Without prejudice to any other right or remedy it may have, either party may terminate this agreement at any time by notice in writing to the other party (“Other Party”). The notice to take effect as specified in the notice: (a) if the Other Party shall commit any [material][substantial] breach of any of its obligations under this agreement and shall fail to remedy such breach (if capable of remedy) within 30 days after being given notice by the first party so to do or…’

Such a clause does not specify further the meaning of ‘material’ or ‘substantial’. If the parties do not wish to specify the meaning of ‘material’ or ‘substantial’, then if there is a dispute as to whether the breach by one party is sufficiently serious (ie  that it comes within the meaning of ‘material’ or ‘substantial’), 596

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then in order to entitle the other party to terminate, the following are likely to be the factors that a court will take into account: •

the clauses in the agreement under consideration;

•

the length of the agreement;

•

the breaches that have happened;

•

for the party not in breach, what are the consequences;

•

what explanation the party in breach can provide for the breaches;

• the importance or relevance of the breaches in the context of the agreement; •

the consequences of terminating the agreement; and

•

the consequences of permitting the agreement to continue.

See Glolite Ltd v Jasper Coran Ltd (1998) Times, 28 January; Phoenix Media Ltd v Cobweb Information (16 May 2000, unreported); Gallagher International Ltd v Tias Enterprises Ltd [2008] EWHC 804 (Comm). Where an agreement specifies that a party may terminate for a material breach, that wording does not mean that a breach has to be at the same level of seriousness as a repudiatory breach (Dalkia Utilities Services plc v Celtech International Ltd [2006] EWHC 63 (Comm)). The parties may choose not to qualify the word ‘breach’ with the words ‘material’ or ‘substantial’ or not to define more precisely whether any breach or whether a specific number of instances will entitle the party not in breach to terminate the agreement (eg if the parties just state that a ‘breach’ of the agreement will entitle the party not in breach to terminate). In such a case, the courts have taken two divergent approaches: •

one is that a breach must in effect amount to a repudiatory breach in order to entitle the party not in breach to terminate the agreement (Antaios Compania SA v Salen AB [1988] AC 191; Rice (t/a the Garden Guardian) v Great Yarmouth Borough Council [2000] All ER (D) 902; Dominion Corporate Services Ltd v Debenhams Properties Ltd [2010] EWHC 1993 (Ch));

•

the other is that courts should give effect to the words used in a contract; if the parties have included a provision that one party can terminate if the other party is in breach, then the court should give effect to that provision, and not import a meaning into the word ‘breach’ which is equivalent or matches that of a repudiatory breach (Leofelis SA v Lonsdale Sports Ltd [2008] EWCA Civ 640; ENE Kos 1 Ltd v Petrolio Brasiliero SA (No 2) [2012]  UKSC  17; Newland Shipping and Forwarding Ltd v Toba Trading FZC [2014] EWHC 661 (Comm).

Although the second approach appears to be the more current, the clear message is that the parties should specify the seriousness of the breach which will entitle a party not in breach to terminate (through phrases such as ‘material breach’ or ‘substantial breach’) or by setting a particular and specific level of failure. 597

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Whether the breach is specific, subject to a qualification (such as discussed immediately above) or is ‘unadorned’, a termination provision will often enable a party in breach to remedy their breach, such as: ‘Without prejudice to any other right or remedy it may have, either party may terminate this agreement at any time by notice in writing to the other party (“Other Party”), such notice to take effect as specified in the notice: (a) if the Other Party shall commit any [material][substantial] breach of any of its obligations under this agreement and shall fail to remedy such breach (if capable of remedy) within 30 days after being given notice by the first party so to do or…’

This termination provision allows a party not in breach to terminate (but that party does not have to) or that the agreement will automatically terminate if the party in breach fails to remedy their breach. However, such wording may not be sufficient to actually permit the agreement to terminate if the party in breach fails to remedy their breach. In such a circumstance the party not in breach needs to take further steps to terminate the agreement (see Bespoke Couture Ltd v Artpower Ltd [2006] EWCA Civ 1696, see Case analysis below). The further steps can include: 1 that the agreement includes (additional) wording which states that if the party in breach fails to rectify their breach then the agreement will terminate automatically (see Precedent 13); 2 the wording of the notice the party not in breach sends informing the other party that it is in breach and requiring the other party to remedy the breach should clearly state that the agreement will terminate automatically if the party in breach fails to remedy its breach by the period specified in the agreement; and 3 in the period between the party not in breach sending its notice and the end of the period when the party in breach must remedy its breach, the party not in breach must not do anything which is inconsistent with its wish that the agreement terminates at the end of the period the party in breach has to remedy the breach.

Drafting issues •

Is termination for cause permitted? At common law, a party to a contract may terminate the contract where the other party has committed a serious or fundamental breach or by defective performance has repudiated the contract. It is always best to state the circumstances in which either party may treat the contract as at an end. Without an express provision, it is not always clear whether a particular breach may entitle the innocent party to terminate it.



The following points need consideration: •

is termination allowed: •

for any breach; or

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• only for ‘material’, ‘substantial’ or persistent breaches; or (in addition) • for specified types of breach (such as a party failing to pay for goods or services, or a party failing to supply the goods or services)? • is prior notice required of a party’s intention to terminate for breach (such as giving notice that the party not in breach wishes to terminate); or if the breach is sufficiently serious can the party not in breach terminate immediately? •

is the defaulting party permitted to attempt to remedy the breach (if it can be remedied) within a short period of time? Eg, the contract can only be terminated after the defaulting party has been given an opportunity to make good its default (say within 30 days);

•

if it is permitted to remedy a breach: •

what length of time should the party in breach be given to remedy the breach?

• should the same amount of time be specified for all types of breach?

•





Eg, if the party in breach has failed to pay, then the period allowed to remedy the breach (ie pay) might be short, compared to where the party in breach has manufactured goods not in accordance with a specification, where it might take much longer to re-manufacture the goods (ie obtain new raw materials, set up machinery, arrange delivery, etc);

•

whether the party in breach, on receiving the notice that it is in breach, must respond to indicate that it will cure the breach.



There may be a separate clause allowing for termination for late payment of contract debts.

Termination without cause. This covers termination where: •

one or both parties to an agreement can terminate the agreement on the giving of notice even though there has been no breach and all the obligations under the agreement are being performed correctly and properly; or

•

where, for example, a party has provided a service and it has performed all of its obligations in return for the due payments. In such a case the recipient of the service or licence can terminate the agreement on notice.

The following points need consideration: •

when can termination take place? 599

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•

can termination take place at any time?; or

•

must a specific period of time elapse before a party can terminate?

Eg, in a research agreement which is for a period of three years, the provision to terminate without cause might not be exercisable during the first year; •

• •

when can notice be given? Eg, the notice may only be given at a certain time, for example: •

on a specific day in a month; or

•

not until after a specific date.

what length of notice must be given?

Termination by effluxion of time (agreements for a fixed period of time). Sometimes, agreements are stated to continue for a fixed period of time or expire in other circumstances, eg if the contract anticipates the making of a tender for a further contract, and the tender is unsuccessful. In such cases it may be helpful to clarify whether: •

the agreement terminates automatically at the end of the fixed period; or alternatively

• the agreement must be formally terminated by notice, as in Precedent 3. •

Relation of termination clauses to each other. It is possible (and often usual) that there will be several termination provisions that cater for the different types of terminations envisaged by the parties. It is important that they are made subject to each other and that there is not a gap where a party cannot terminate the agreement.

•

Does any notice that a party gives clearly indicate that the party is terminating the agreement or does the agreement need additional wording to that effect? Another way of putting the question is whether, at the end of a notice period will the agreement terminate automatically or does the party giving notice have to formally indicate that the agreement is at an end? If this is the case then Artpower Ltd v Bespoke Couture Ltd [2006] EWCA Civ 1696 illustrates the dangers of not using clear wording (and is based on a termination clause similar to Precedent 12). See Case analysis below. Perhaps, the practical outcome from this case is: (i) to add wording to this type of clause, which indicates that the agreement will terminate automatically without the party not in breach having to do anything further; (ii) that the notice that the party not in breach sends to the party in breach states that the agreement will terminate at the end of the period by which the party in breach has to remedy the breach; and (iii) the initial notice should state explicitly that if the breach is not remedied then the agreement will terminate automatically.

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Location in the agreement A Termination clause will be located with Secondary Commercial Provisions.

Linkage and use A Termination clause will need consideration together with other termination provisions in addition to those described above: •

Termination for insolvency;

•

Expiry: termination at will;

•

Consequences of termination;

The following also need to be considered: •

Breach. In what circumstances a party is entitled to terminate an agreement for breach?

•

Notices. Since termination of an agreement (or the notice that a party intends to terminate an agreement) is perhaps the most serious step that can be taken, attention should be paid as to the form and content of Notices. If the method of serving notices is not correctly followed then any notice of termination may be ineffective.

•

Rights of third parties. If any third parties have been granted rights or have obligations under an agreement, then where a termination is proposed, the position of the third parties should be carefully considered.

Sample precedent material Precedent 1—Termination for breach Either of the parties to this agreement shall be entitled to terminate this agreement immediately by notice in writing to the other party [(but not after 90 days of the event in question first coming to the attention of the party entitled to give the notice)] if any of the events set out below shall occur: (a) if the other party shall commit any [material] breach of any of its obligations under this agreement and shall fail to remedy such breach (if capable of remedy) within 30 days after being given notice by the first party so to do or… Precedent 2—Termination without fault This agreement shall terminate if at any time as a result of a transfer of shares made in accordance with this agreement [and/or the Company’s articles of association] either party holds no shares in the capital of the Company but without prejudice to any rights which either party may have 601

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against the other party arising prior to such termination (including without limit the provisions of Clause [no] below). Precedent 3—Termination on expiry of fixed term Subject to any earlier termination under Clause [no], this Agreement shall terminate automatically by expiry on the fifth anniversary of the Commencement Date. Precedent 4—Expiry clause Subject to any earlier termination under Clause [no] below, this agreement shall continue in force until the [second] anniversary of the Commencement Date when it shall terminate automatically by expiry. Precedent 5—Expiry clause – alternative form This agreement shall terminate: 1 On the Expiry Date (in definitions clause:) ‘Expiry Date’ means [date]. Precedent 6—Termination at will Termination at will Either party may terminate this agreement at any time subject to giving at least 30 days’ prior written notice of such termination to the other party. Precedent 7—Termination at will after fixed period Either party may terminate this agreement by giving not less than 3 months’ notice expiring at any time after the date of the (specify minimum period) anniversary of this agreement. Precedent 8—Termination of licensing agreement Without prejudice to the licences already granted pursuant to it this Agreement shall terminate at the expiry of [4 weeks’] notice served by either party in writing upon the other. Precedent 9—Termination of contract for services This agreement shall terminate at the end of the Term or if this agreement is continued beyond the end of the Term at the end of any [year] by either party giving to the other [3] months’ notice in writing. Precedent 10—Termination by one party to multi-party agreement Any of the Parties may at any time after [date] terminate this agreement forthwith by notice in writing to the other parties. The effect of the notice shall be to terminate this agreement as between the party serving the notice and the remaining parties but this agreement shall continue in full force and effect as between the remaining parties, if more than one, but not otherwise. 602

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Precedent 11—Termination for breach or insolvency – short form – termination on non-payment, liquidation or breach The Owner may by [6 months’] notice in writing to the Tenant determine the grant of [subject matter] (but without prejudice to any subsisting right of action of either party under this Agreement) in any of the following events: 1 if the rent is [30 days] in arrears; 2 if the Tenant goes into liquidation; 3

if there is any breach of the conditions [specified in the first schedule].

Precedent 12—Alternative short form – termination for non-remedy of breach or corporate insolvency Without prejudice to any other right or remedy it may have, either party may terminate this agreement at any time by notice in writing to the other party (‘Other Party’), such notice to take effect as specified in the notice: 1 if the Other Party is in breach of this agreement and, in the case of a breach capable of remedy within 90 days, the breach is not remedied within 90 days of the Other Party receiving notice specifying the breach and requiring it to be remedied; or 2 if the Other Party becomes insolvent, or if an order is made or a resolution is passed for the winding up of the Other Party (other than voluntarily for the purpose of solvent amalgamation or reconstruction), or if an administrator, administrative receiver or receiver is appointed in respect of the whole or any part of the Other Party’s assets or business, or if the Other Party makes any composition with its creditors or takes or suffers any similar or analogous action in consequence of debt. Precedent 13—Alternative short form – termination for non-remedy of breach – automatic termination on failure to remedy breach or corporate insolvency Without prejudice to any other right or remedy it may have, either party may terminate this agreement at any time by notice in writing to the other party (‘Other Party’), such notice to take effect as specified in the notice: 1 if the Other Party is in [material] breach of this agreement and, in the case of a breach capable of remedy within 90 days, the breach is not remedied within 90 days of the Other Party receiving notice specifying the breach and requiring it to be remedied then this agreement shall terminate automatically without further notice to the Other Party… Precedent 14—Longer form – termination on non-payment, failure to remedy breach or insolvency This agreement shall terminate: 603

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1 on the occurrence of any of the following events and any such event shall be a fundamental breach of this agreement: 1.1 failure to pay any amount due under this agreement in full within [5] business days of the due date and to remedy such failure within [3] business days of receipt of written notice to do so; 1.2 failure to comply with the terms of any Default Notice as defined in Clause [no] within the time stipulated; 2 if [either party or (specify party)] goes into liquidation either compulsory or voluntary (save for the purpose of reconstruction or amalgamation) or if an administrator, administrative receiver or receiver is appointed in respect of the whole or any part of its assets or if [either party or (specify party)] makes an assignment for the benefit of or composition with its creditors generally or threatens to do any of these things or any judgment is made against [either party or (specify party)] or any similar occurrence under any jurisdiction affects such party. Precedent 15—Alternative form – termination on non-performance, nonpayment or insolvency Where either party (in this clause referred to as ‘the party in default’): 1 for any reason whatever suspends its performance of all or any part of the obligations under Clause [no]; or 2 fails to proceed regularly and diligently to perform its obligations under Clause [no]; or 3 fails to pay any sum properly due under this agreement; or 4 goes into liquidation whether compulsory or voluntary (except for the purposes of a bona fide reconstruction or amalgamation with the consent of the other party to this agreement such consent not to be unreasonably withheld); or 5 has an administrator, administrative receiver or receiver appointed over any part of its assets or undertaking, then the other party (in this clause ‘the party giving notice’) may give but shall not be obliged to give a notice to the party in default specifying the default. If the party in default shall continue such default for [7] days [or shall at any time thereafter repeat such default] then without prejudice to any other rights of the parties the party giving notice may by notice immediately terminate this agreement. Precedent 16—Alternative form – termination on non-performance, nonpayment or insolvency If the [Licensee]: 1 expressly or impliedly repudiates this agreement by refusing or threatening to refuse to comply with any of the provisions of this agreement; or 604

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2 fails to comply with any of the provisions of this agreement and (in the case of a failure capable of being remedied) does not rectify such non-compliance within [14] working days of the [Owner’s] written notice of such failure; or 3 convenes any meeting of creditors or passes a resolution for winding up or suffers a petition for winding up; or 4

has an administrative receiver or receiver appointed over the whole or part of its assets or suffers the appointment of an administrator; or

5

being an individual has a bankruptcy order made against him or compounds with his creditors or comes to any arrangements with any creditors,

then (and in any such case) the [Owner] may, without prejudice to any other of its rights or remedies and without being liable to the [Licensee] for any loss or damage which may be occasioned, give written notice to the [Licensee] terminating this agreement with immediate effect. Precedent 17—Alternative form (eg for patent assignment) – termination for misconduct, default or corporate insolvency The following are fundamental breaches of this agreement, and this agreement will automatically terminate immediately on the occurrence of any of them: 1 if the Assignee engages in any conduct prejudicial to [the marketing of the Patented Articles]; 2 if the Assignee fails to comply with the terms of any default notice within the time stipulated; 3 if the Assignee becomes insolvent or goes into liquidation either compulsory or voluntary (except for the purpose of reconstruction or amalgamation) or if a receiver, administrative receiver or administrator is appointed in respect of the whole or any part of its assets or if the Assignee makes an assignment for the benefit of or composition with its creditors generally or threatens to do any of these things or any similar occurrence under any jurisdiction.

Case analysis Artpower Ltd v Bespoke Couture Ltd [2006] EWCA Civ 1696 1 The case concerned the licensing of the right to use some designs and trademarks of the claimant to the defendant. 2

The case involved (among other matters) the interpretation of a termination clause, which stated: 605

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‘9.1 Subject to earlier termination pursuant to Clause 9.1, this Agreement shall commence on the commencement Date and continue in force for a period of 7 (seven) years from the commencement Date; 9.2 In the six months prior to the expiration date, either the Licensor or Artpower may give notice to the other that it wishes to renew this Agreement for a further term of five years and the parties agree that they shall negotiate such renewal in good faith. 9.3 This Agreement may be terminated: (a)

by either Licensor or Artpower with immediate effect if the other commits a material breach of any term of this Agreement which in the case of a breach capable of remedy shall not have been remedied within thirty (30) working days of the receipt by the other of a written notice identifying the breach and requiring its remedy. Upon remedy, the party in breach shall provide proof of remedy within this same thirty (30) working days;

(b)

by either Licensor or Artpower with immediate effect if the other party shall have a receiver or administrative receiver appointed over it or any part of its undertaking or assets or shall pass a resolution for winding up (otherwise than for the purpose of a bona fide reconstruction); or is the subject of a bankruptcy petition or bankruptcy order or if the other shall enter into any voluntary arrangement with its creditors or shall be subject to an administration order or shall cease to carry on business or if a court of competent jurisdiction shall make an Order to the effect of any of the foregoing or any analogous matter;

(c)

by Artpower upon notice with immediate effect if:

(i)

the Designer is unable, over a continuous period of eight months, to provide the Licensor with the Sketches for the Red Label Collection in accordance with the terms of this Agreement; or

(ii)

the Designer suffers damage to his image and/or reputation as a result of matters involving moral turpitude which in the reasonable opinion of Artpower is likely to have a material adverse effect on the sale of the Licensed Products.’

3 The defendant wrote to the claimant stating that the claimant was in breach of a provision of the agreement and giving the claimant 30 days to remedy the breach. This letter did not state or refer to the termination provisions specifically or state explicitly that the agreement would terminate at the end of 30 days. (‘October letter’). 606

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4 The defendant’s solicitor sent a further letter (‘November letter’) stating (as regards termination): ‘Clause 9.3 of the Licence Agreement states that either party may terminate in the event of a fundamental breach which, ‘in the case of a breach capable of remedy shall not have been remedied within (30) working days of the receipt by the other of a written notice identifying the breach and requiring its remedy’. [The October letter] to your client clearly fulfilled the requirements of such a written notice and accordingly constitutes notice of intention to terminate with immediate effect in the event that the breach is not remedied within the prescribed period. Whether our client elects to terminate or not is a matter for it.’



This letter also did not state specifically that the defendant would terminate the agreement or that termination would take place.

5 A further letter stated (‘December letter’): ‘Pending that return date, Bespoke will undertake (notwithstanding and therefore without prejudice to its contention that the Licence Agreement will terminate on 10 December 2004) …’



This letter was not primarily concerned with the breach of the agreement or termination and also did not specifically state that the agreement would terminate.

6 In the High Court the judge held that the word ‘may’ in Clause 9.3 (‘This Agreement may be terminated’) did not introduce a requirement that the defendant needed to take any further steps. The agreement would terminate automatically because notice had been given in Clause 9.3(a). His view was supported, he argued, by the wording in Clause 9.3(c) (‘upon notice with immediate effect if’). 7 The Court of Appeal disagreed. The Court of Appeal found that the wording used in Clause 9 gives the right to a party to terminate, but the party does not have to do so: ‘[13] In my judgment cl 9.3 confers a right on the party, if he wishes to do so, to terminate the agreement in the circumstances described in that clause. But he is not bound to take that step… [14] In my judgment, the party who was not in breach had to take some positive step to bring the agreement to an end. He had to communicate his election to the other party if he chose to take that course. I do not think it is necessary to decide whether that party had to do so by a notice … or alternatively whether he was able to make his election in the case of a breach which was capable of remedying before the period of 30 days for remedying that breach had expired. On that basis, the question is whether the letters sent by Bespoke’s solicitors amounted to notice of termination of the agreement.

8 As for the letters sent, the Court of Appeal found: (a) the October letter only required that claimant remedies its breach; and (b) the November letter states only an intention to terminate, and the claimant could still operate on the basis that it could remedy its breach; and 607

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(c)

the December letter is expressing a future intention and

‘[19] … the letter is not saying that the agreement had already terminated by what had been said and done. So those words could not be a reference to a notice exercising the right to terminate the agreement under cl 9 of the agreement. In any event, the material parts of this letter constitute a proposal to [the Claimant] and nothing more.’

9 In effect, the Court of Appeal held that none of the communications from the Defendant had clearly communicated that the defendant was terminating the agreement under Clause 9.3. Jackson Distribution Ltd v Tum Yeto Inc [2009] EWHC 982 (QB), [2009] All ER (D) 107 (May) 1 The claimant was a distributor of sports and fashion items. 2 The defendant produced a sports product. 3 Their negotiations, and the preparation of different drafts of a written agreement, concerned the appointment of the claimant as the sole distributor of the defendant’s product in the UK. 4 The judge held there was an agreement between the parties but the provisions were not reflected in any draft agreement, particularly those in relation to when their agreement could be terminated (the terms, such as they were, were set out in an exchange of emails). 5 The judge also held that the notice period would need to be for a reasonable period, given that it was a business relationship and unlikely to be one which would last for ever. The judge needed to determine what notice period was reasonable. 6 The factors the judge held which were important on deciding on the period of notice (relying partly on the earlier case of Alpha Lettings Ltd and Neptune Research and Development Inc [2003]  EWCA  Civ 704): (a)

the degree of formality in their relationship;

(b) whether the distributor was prevented in competing with the product which is the subject matter of the agreement; (c)

the length of the parties’ relationship;

(d)

whether the distributor needed to make any (substantial) investment (eg money or time) at the start of the relationship to build up knowledge/business;

(e) what percentage of the distributor’s turnover represented the sale of product; (f)

whether sales of the product in question were influenced by seasonal factors;

(g) whether further investment was required or made (after the initial investment); 608

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(h) length of time needed by the distributor to find an alternative product and build the business up for the new product. 7 The judge quoted several paragraphs from the judgment of Alpha Lettings Ltd and Neptune Research and Development Inc [2003] EWCA Civ 704 and they are reproduced here as they provide a useful example of how the various factors indicated are interpreted: ‘30. There is little authoritative guidance on the appropriate notice for termination of exclusive agencies or (as lawyers sometimes prefer to call them) distributorships. One possible view is that the reasonable notice period should equate to the time needed to find an alternative supplier and get a new product approved. Another view is that it need only reflect the time required for an orderly winding down of the distributorship. The only common ground between the parties was that, in the absence of any express term, the question, of what notice of termination is to be taken as reasonable, must be determined as at the time of termination. 31. One very important consideration will be the degree of formality in the relationship. A completely formal agreement would probably have its own provisions for termination so no problem about assessing a reasonable period for termination will arise. But the more relaxed the relationship, the less likely it will be that the law would imply a lengthy notice period. There was evidence in the present case that at an early stage in the relationship. [the claimant] had wanted a more formal relationship than then existed and had proposed, among other things, a contractual period of notice of 12 months. [The defendant] did not, however, want any formal relationship and nothing came of the discussions. One result of not having any formal written contract was that [the claimant] were entirely free to sell products of other suppliers to their customers even if those suppliers were competitors of [the defendant]. No doubt not all products so supplied could be described as competitive products but the fact is that [the defendant]’s business only accounted for 20% of [the claimant]’s overall turnover. This is an indication that a lengthy notice period should not be implied. 32. [The advocate for the claimant] sought to emphasise the length of time which the parties’ relationship had lasted (15 years from 1983 – 1998) as a factor in favour of a lengthy notice period. He likened the position to that of a valued and long-serving employee who would be entitled to a longer period of notice than an employee who had served a lesser period of time. I do not consider that a contract of employment is sufficiently analogous to an exclusive agency or a distributorship contract to be helpful. In the first place a distributor may have to spend or invest considerable capital at an early stage of the relationship to build up the business which may thereafter run with moderate annual expenditure. This would militate in favour of a lengthier notice period in the earlier years of the relationship and perhaps a lesser period once the business is up and running. No doubt it is right to lay some stress on the length of the relationship but I would not myself regard that as, in any way, critical, since businessmen expect to run risks in the ordinary course of business while employees have a legitimate (and often contractual) expectation that their services, rendered for the benefit of their employers, will be properly and adequately recognised. As McNair J said in Martin-Baker Ltd v Canadian Flight and Murison [1955] 2 QB 556, 580–1, one of the few English cases to touch on the issue of reasonable notice for the purposes of a distributorship agreement:609

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Termination for breach “It is the common experience that people, who are prepared to put up capital for the development of new business, do run risks.” It follows from this that while initial capital investment and business expenses out of the ordinary run of things may well be relevant to the amount of notice, ordinary and recurring expenditure is unlikely to have much relevance. 33. It must not be forgotten that every distributorship is a bilateral contract. There was some debate before us as to the appropriate implied obligation of a supplier in the position of [the defendant] in the present case but, in the end, both parties were prepared to agree that it was necessary to imply a term that [the defendant] would accept and fulfill orders placed by [the claimant] in respect of both standard and special valves if such valves were in [the defendant]’s current range and were ordered in reasonable quantities. The existence of this implied term is, of course, of great importance when it comes to assessing any damages for breach of contract on the part of [the defendant] for giving an unreasonably short period of notice, once such breach is proved. But there will have been a correlative obligation on [the claimant], the extent of which was not debated before us, but is most likely to have been that [the claimant] were under an implied obligation to use their best reasonable endeavours to promote the sale of [the defendant]’s valves in the United Kingdom. The concept of a party to a contract being obliged to use his best endeavours to promote the products of the other party after notice of termination has been given (by whomsoever it may be given and in whatever circumstances) is a difficult one and must also militate in favour of a shorter rather than a longer period of notice. 36. We were not referred to any English authority apart from MartinBaker Ltd v Canadian Flight and Murison [1955] 2 QB 556 and DecroWall v Practitioners in Marketing Ltd [1971] 1 WLR 361. The first case concerned the distributorship in Canada of ejector seats from aircraft which had been manufactured and patented by Mr Martin Baker. The main issue was whether the agreement, which was in writing and provided that the distributor could not sell products of other suppliers which might compete with those of the supplier, was terminable by any notice at all or was intended to be permanent. It is not surprising to modem eyes that McNair J decided that it was terminable on reasonable notice; he held that such reasonable notice was a period of 12 months. DecroWall was much relied on by the judge in the present case and was case of a distributorship of French tiles in which the Court of Appeal held that a twelve month notice was appropriate. But there are three major distinctions between that case and the present. First, as in Martin-Baker, there was an express provision that the distributor was not to sell any goods competing with those of the supplier; secondly, the French tile business constituted 83% of the distributor’s turnover, unlike the 20% of turnover in the present case; thirdly, although (as in the present case) there was substantial initial investment (“expensive spadework”) in launching and promoting a new product in the United Kingdom, the agreement was terminated only three years after it began before any real reward for the initial expenditure could be reaped. In this case, there had been ample opportunity for the reward of initial investment to be earned. One way of regarding cases such as Decro-Wall might be to treat them as belonging to a category of case in which there is an implication that the agreement must exist for a reasonable time before any notice can be given. That would, however, not be open to us in this case.’

610

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Territory

Introduction Background In an agreement, a territory definition is normally for use where: •

an activity is permitted in or restricted to a particular country or a number of countries; and/or

•

an obligation needs performing in a particular country.

The use of a territory definition is likely to occur where the agreement requires the performing of obligations or activities in a country or countries other than the country or countries in which the parties to the agreement are based. For example: • an agreement concerning a supplier of goods in France selling and delivering one order of goods to an English company is unlikely to need a territory definition (the clause or schedule dealing with delivery instructions will normally be sufficient); however •

an agreement concerning the licensing of intellectual property between a French owner of copyright material and an English distributor of that copyright material is likely to need a territory definition to indicate in which countries the English distributor is licensed to distribute the copyright material. For example, the owner might grant a licence to the English distributor with a territory definition which covers all EU countries other than France, as the owner wishes to license the copyright to a French distributor. Without a definition of territory it will not be clear in which countries the English distributor can distribute the owner’s copyright material; or

•

an agreement between a French supplier of goods, who wishes to appoint agents to obtain orders for those goods in various countries, will wish to define clearly the geographical areas in which each agent can work, usually to avoid overlaps or disputes between agents and between agents and the supplier.

Territory and the UK, Great Britain, Britain, British Isles etc There are several countries and islands (and legal systems) which comprise the territory for the UK. If an agreement includes a territory definition of UK 611

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it is important to understand what countries or areas are meant by the titles which refer to parts of the UK. There are several possible ‘titles’. The following are the main legally defined labels: •

England and Wales: •

England: The area consists of the counties established by the Local Government Act 1972, s  1, Greater London and the Isles of Scilly (unless the boundaries are altered) (Interpretation Act 1978, s 5 and Sch 1);

•

Wales: The combined area of the counties which were created by the Local Government Act 1972, s  20 as originally enacted, but subject to any alteration made under Local Government Act 1972, s  73 (consequential alteration of boundary following alteration of watercourse);

•

Great Britain: countries included: England, Scotland and Wales (Union with Scotland Act 1706, Art  1 and Interpretation Act 1978, Sch  2, para 5(a));

•

United Kingdom: countries included: Great Britain and Northern Ireland (Interpretation Act 1978, s 5 and Sch 1), ie England, Scotland, Wales and Northern Ireland;

•

British Isles: countries included: UK, the Channel Islands and the Isle of Man (Interpretation Act 1978, s 5 and Sch 1).

Note: the meanings given in the Interpretation Act 1978 are to help understanding of these words in other statutory material and not for use as such in commercial documents. However, if they are used in commercial documents without further explanation, then their meanings as set out in the 1978 Act can provide guidance at a minimum in interpreting their meaning in a commercial document (see Navigators and General Insurance Co v Ringrose [1962] 1 All ER 97). Although the above definitions have a settled meaning, it is possible that one country of the UK etc may vote to become an independent state (eg if a second referendum in Scotland is successful).

European Union and other groupings The term ‘European Union’ is the latest label for the member countries (following the implementation of the Treaty of Lisbon in 2009). Other labels in the past have included the European Economic Community (EEC) and the European Community (EC). Currently there are 28 members and this may increase given past activity. A number of countries are seeking membership (currently Albania, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey – although there is now considerable doubt over the final country ever becoming a member). There is also the likelihood, that the number of member states will decrease, following the Brexit vote in June 2016, 612

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Territory

if or when the United Kingdom (or even, possibly, only parts of the UK) leave the EU. Agreements can use any of these labels in a territory definition without additional wording to specify which countries are included. There is also a distinction between full and associate membership. The other main grouping within Europe is the European Economic Area, which consists of the EU member states and Iceland, Liechtenstein and Norway.

Drafting issues •

Is the territory clearly defined? There is often not a clear meaning of such phrases or words as: • Europe; •

North America;

•

South America;

•

Caribbean basin;

• Asia; • Russia; • Africa, often because there is no settled meaning of the extent of the areas covered by these words. For example, ‘Europe’ can mean the countries of the EU, any number of the countries in the EU or could include countries outside the EU. There is also the issue of where ‘Europe’ exactly starts; for example, would Europe include the Russian Federation (parts of which are far more distant from a country such as Poland than Kazakhstan is from Poland). Another example is ‘Russia’, does the meaning just mean the Russian Federation or the countries within the former Soviet Union, or if the Russian Federation decides to annex part of neighbouring countries?; The safest course in a definition of a territory is normally to list the countries. •



At which date is the meaning of territory to be used? Should the countries included, or the extent of territory covered by a country or description, be taken as that: •

at the date the agreement is entered;

•

at the date any rights etc are granted or obligations are entered into;

•

at the date any dispute arises.

An example is given in Precedent 3 of how it is possible to deal with this issue. 613

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Territory

Location in the agreement The Territory clause usually appears in the Definitions section of an agreement.

Linkage and use The defined meaning of Territory will be: •

used in a Main Commercial Provision outlining the rights granted under the agreement;

•

in a Termination provision where some or all the rights might terminate on a country by country basis;

•

in a clause dealing with warranties, covenants etc being given;

•

in a clause dealing with payments, such as: •

the amount payable in a particular territory (for example, a licensee might need to pay a different amount for sales made in one territory rather than another because of market conditions);

•

the compliance with formalities or taxation requirements, etc.

The use of a Territory clause will usually be found in agreements concerning: •

the licensing of intellectual property;

•

option agreements (eg having the right, subject to the terms of the option, to acquire a franchise within a certain part of England and Wales);

•

agency, distribution and franchising agreements;

•

the provision of a service limited to a territory: eg, an advertising agency might arrange advertising within a county or region within the UK, or a company that services computers for a client might be only servicing the client’s computers within a particular area (see Precedent 1);

•

the right to exploit or find some natural material;

•

restrictive covenants in employment contracts: eg, that an employee may not work within a certain defined territory following termination of the contract of employment, usually for a defined period of time;

•

areas where sales staff might operate;

• assignment of rights and completion of formalities. When intellectual property rights are assigned, it may be necessary for the assignor at certain times to sign various documents which might be necessary for registration with governmental bodies, for example. It may be necessary to make it clear that the assignor is required to do this within certain countries. 614

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Sample precedent material Precedent 1—Definition of a territory Territory shall mean [name of countries/area] Precedent 2—Use of a definition in an operative clause The Client appoints the Supplier to provide the Services for the Period and in the Territory [on a non-exclusive basis][exclusive basis], and the Supplier accepts the appointment, subject to the provisions of this Agreement. Precedent 3—Use of a definition in an operative clause-alternative version The Licensor hereby grants an exclusive licence under the Patents to the Licensee to [specify permitted activities] within the Territory… Precedent 4—United Kingdom Territory shall mean the United Kingdom, which for the avoidance of doubt shall include England, Wales, Scotland and Northern Ireland. Precedent 5—European Union Territory shall mean the states which are [full][and associate] members of the European Union at the date of this agreement. [This definition of Territory shall [not] include any states which become members of the European Union after the date of this Agreement.] [For the avoidance of doubt, at the date of this Agreement the members are [list member states].] Precedent 6—European Union Territory shall mean the states which are [full][and associate] members of the European Union at the date of this agreement. For the avoidance of doubt, at the date of this Agreement the members are [set out in schedule [ ] to this Agreement or [list member states.]] [This definition of Territory shall [not] include any states which become members of the European Union after the date of this Agreement.] If any member of the European Union leaves the European Union after the date of this Agreement, this definition of Territory shall not change and shall remain as all the states who were members of the European Union at the date of this Agreement. Precedent 7—World Territory shall mean the world [and outer space if particular forms of technology are being licensed] but not including [names of specific countries]. 615

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Precedent 8—An area with exclusions European Territories  shall mean the European Union (being states which are [full][and associate] members of the European Union at the date of this agreement) but excluding [Germany, France and the United Kingdom]. Precedent 9—Europe Europe shall mean the following countries (whether or not they are members of the European Union or any other treaty). Precedent 10—Within a country Territory shall mean the [county of Surrey][the town(s) of [ ]][areas specified in Schedule 1 to this Agreement]. Precedent 11—United Kingdom United Kingdom shall mean England, Scotland, Wales and Northern Ireland. Precedent 12—Great Britain Great Britain shall mean England, Scotland and Wales.

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Time of the essence

Purpose of the clause Background If a provision of a contract is stated to be ‘of the essence’ to the contract, and if there is a breach of that provision then the party who is not in breach will have the right to terminate the contract. Another way of saying the same thing is to state that a provision is an ‘essential term’ or a ‘condition’ of the contract. A clause dealing with payments is the type of obligation where the user of an agreement will most frequently encounter ‘of the essence’ wording, such as: ‘The Company shall pay the Price to the Consultant within 30 days of this Agreement and the time for payment shall be of the essence.’

Although an ‘of the essence’ type of provision is most frequently encountered with payment obligations, payment provisions are not by default ‘of the essence’ in a ‘commercial contract unless the parties have agreed (either expressly or by necessary implication) that it should be’ (Valilas v Januzaj [2014] EWCA Civ 436). The expression ‘time is of the essence’ does not naturally convey its legal meaning, which needs to be learnt. Commercial contracts that are intended for use by non-experienced business people (or by those who do not have any meaningful understanding of contract law and practice) should set out the meaning in straightforward terms. Also, the phrase only deals with provisions or obligations that are concerned with time. It is possible for other provisions or obligations to be ‘of the essence’ as well (eg a failure to manufacture goods to a specification). For example, a clause prepared for lawyers might read: ‘The Manufacturer shall make the Goods in accordance with the Specifications and in accordance with the dates set out in the Specification.’

If it is prepared for use by non-experienced business people, it might set out the consequences specifically within the clause: ‘The Manufacturer shall make the Goods in accordance with the Specifications and in accordance with the dates set out in the Specification. If the Manufacturer fails [for any reason] to make the goods within the tolerances set out in the Specification the Customer shall have the right to terminate this Agreement by notice in writing which shall take effect from the date of the notice.’

An alternative formulation where the Customer can terminate the agreement is as follows, with the details for termination specified in another clause: 617

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Time of the essence ‘The Manufacturer shall make the Goods in accordance with the Specifications and in accordance with the dates set out in the Specification. If the Manufacturer fails [for any reason] to make the goods within the tolerances set out in the Specification then the Customer shall have the right to terminate this Agreement in accordance with Clause [ ].’

It is always preferable to indicate clearly in an agreement whether time or any other obligation is to be of the essence. Sometimes a party who will receive a payment, or take delivery of goods, will seek to make time of the essence for that payment or delivery. The other party will not wish to be subject to ‘of the essence’ obligations, given that any failure (even one that is not under its control) could entitle the other party to terminate the contract. If the parties cannot agree (or if one party does not have the stronger bargaining position to force the other to accept its position) then as a compromise a provision might state: •

that time is initially not of the essence; but

•

in the case of unreasonable delay, the party suffering from the delay may give notice; and

•

the notice will: •

set a reasonable time for performance; and

•

set a time for performance which is of the essence.

This is the position in law in any case. However the period of time set out in the notice must be reasonable (ie reasonable in the sense of giving sufficient time for the party in breach to carry out its obligation). Whether all, or any particular, provisions of an agreement are subject to the stipulation that time is of the essence will depend on the bargaining position of each party. Frequently, a general clause is inserted providing that time is to be of the essence in relation to all the provisions of the agreement. In such a case each party should scrutinise those provisions carefully to ensure that performance is feasible in accordance with the stated time periods or other requirements.

Wording needed to make a contractual provision ‘of the essence’ Although phrases such as ‘of the essence’ or ‘time is of the essence’ are the conventional phrases commonly seen, the contract drafter does not need to use such wording to make a time or other obligation ‘of the essence’ (Harold Wood Brick Co Ltd v Ferris [1935] 2 KB 198). It is possible to use other wording or phrases for a time stipulation, such as: • that the obligation is a condition or it is a condition precedent. These are sufficient to be of the essence of a contract (HHR Pascal BV v W2005 Puppet II BV [2009] EWHC 2771 (Comm)); 618

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• the wording used for the time stipulation is emphatic and the clause which contains the time stipulation concerns the exercise of rights and the contract does not contain any wording which indicates that the parties have a contrary intention (Tarkin AG  v Thames Steel UK  Ltd [2010] EWHC 207 (Comm)); •

wording that does not require compliance with a specific period or time, but indicates compliance has to occur ‘immediately’ or ‘as soon as possible’ (Société Italo-Belge pour le Commerce et l’Industrie SA v Palm and Vegetable Oils (Malaysia) Sdn Bhd, The Post Chaser [1982] 1 All ER 19).

What is important is not the words that the parties use in their contract, but whether (i) the intention of the parties is to create a condition; and (ii) the wording they have used in the context of the contract is sufficient to amount to a condition (the breach of which would amount to a repudiatory breach so that the party not in breach would have the right to terminate the contract).

Whether time is of the essence For non-mercantile contracts For non-mercantile contracts, the general position is that time will not be of the essence except where: •

the parties expressly state that one or more of them must strictly comply with conditions as to time; or

• the nature of the subject matter of the contract or the surrounding circumstances indicate that time must be of the essence (and would be the intention of the parties); or •

after an unreasonable delay, a party gives notice to the party in breach and the notice makes time of the essence (see 8 Halsbury Laws of England (4th Edn Reissue), para 931).

See United Scientific Holdings v Burnley Borough Council [1978] AC 904, [1977] 2 All ER 62, HL applied in Lancrest Ltd v Asiwaju [2005] EWCA Civ 117. For examples where time was not found to be of the essence in non-mercantile contracts, see: •

Lancrest Ltd v Asiwaju [2005] EWCA Civ 117 (notice to exercise an option to review the rent in a lease given later than specified in the lease); or

•

Keith Allardyce v Roebuck (Philip) [2004] EWHC 1538 (Ch) (option in will to purchase a house at a discount, the option was subject to acceptance by a certain date, time limit was not complied with).

For a recent example in a non-mercantile contract, where time was held to be of the essence see Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445 (where the payment of a deposit in a property transaction was seen as so important that the party who was to receive the deposit would not have otherwise entered into the contract). 619

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Mercantile contracts Where there is a mercantile contract, time being of the essence will be more readily applied (Bunge Corp v Tradax Export SA  [1981] 1  WLR  711 at 716); particularly time for performance, eg, where there is a fixed date for undertaking an obligation or task and the date is essential, such as in: •

sale of goods;

•

sale of shares;

•

opening of a letter of credit;

•

a charterparty.

For recent examples, see: •

International Asset Control Ltd (t/a IAC  Films) v Films Sans Frontieres SARL [1998] All ER (D) 476, CA;

•

Msas Global Logistics v Power Packaging Inc [2003]  EWHC  1393 (Ch), [2003] All ER (D) 211 (Jun); where a clause in an agreement concerning the time for completion of the sale of the entire share capital of a business was found to be of the essence (see Case analysis below);

• Multi Veste 226  BV  v NI  Summer Row Unitholder BV  [2011]  EWHC  2026 (Ch); where a provision requiring a party to provide a bank guarantee was not of the essence in the circumstances of the case (see Case analysis below). Making time of the essence when the contract does not expressly provide that a provision is ‘of the essence’ A clause in an agreement may not state that it is ‘of the essence’ or that it is a condition. However, it is possible for it to be so where a party is under an obligation and is in breach of that obligation. When this occurs, the party not in breach can send a notice to the party in breach. The notice can specify a (reasonable) period within which the party in breach needs to perform the obligation (eg make a payment, make a delivery etc). Such a notice in these circumstances will be of the essence. Where a provision is of the essence and the party in whose favour that provision is drafted does not enforce a breach of that provision, then the party not in breach will need to make it of the essence again, ie by sending a notice giving the party a reasonable period to comply (unless the giving of reasonable notice would not be of any use to the party in breach) (Etablissements Chainbaux SARL v Harbormaster Ltd [1955] 1 Lloyd’s Rep 303). Statutory provision In contracts relating to: •

goods: in relation to the sale of goods:

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•

stipulations as to time of payment are not of the essence of the contract unless a different intention appears from its terms (Sale of Goods Act 1979, s 10(1));

•

whether any other stipulation as to time is or is not of the essence of the contract depends on its terms (Sale of Goods Act 1979, s 10(2));

•

services: unless the parties to a contract specify otherwise, the supplier of a service is only expected to carry out a service within a reasonable time (Supply of Goods and Services Act 1982, s 14).

•

land: ‘Stipulations in a contract, as to time or otherwise which according to rules of equity, are not deemed to be or have become of the essence of the contract, are also construed and have effect as law in accordance with the same rules’ (Law of Property Act 1925, s 41).

Drafting issues •

Not essential to use the words ‘of the essence’ for a provision to be of the essence. It is not essential to use the words ‘of the essence’ in a contract, but it is desirable. However, by the use of such words, the parties are clearly signalling their intention to others (such as to a judge). If the words ‘of the essence’ are not used, the parties should use clear words as to the meaning of the provision if it is to be an ‘of the essence’ type of provision, eg:

•

•

•

by stating that the provision is a condition; or

•

by stating that the party who is entitled to the benefit of the obligation contained in the provision can terminate the agreement.

If time is to be of the essence, the consequences of failing to meet the set time should be spelt out: •

by indicating that the time to meet or undertake an obligation or task is ‘of the essence’; or

•

better still, to indicate clearly what is to happen if that time is not met (eg  that the agreement will automatically terminate or some other thing will happen or not happen).

If time for performance is to be of the essence. Are all times and dates given in the agreement to be of the essence (see Precedent 2) or just for particular clauses (see Precedent 3)?

Location in the agreement The following types of clauses will usually have wording in them to indicate that time is of the essence: 621

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• in Payment clauses, where a term may be included that ‘time of payment is of the essence of the contract’; in a Delivery clause, specifying dates and times when goods or services or things are to be delivered;

•

• giving of Notices for when certain matters in an agreement are to take place or will come into effect (such as the notices required to be given specifying a date for termination); Completion dates.

•

Sample precedent material Precedent 1—General provisions as time of the essence Time shall be of the essence of this agreement as regards any time, date or period mentioned in this agreement or subsequently substituted as a time, date or period by agreement in writing between the parties. Precedent 2—Short form – all clauses Time shall be of the essence for the purposes of any provision of this agreement. Precedent 3—Short form – specified clause Time is to be of the essence in Clause [no] of this agreement. Precedent 4—Time of the essence – extensions allowed Any date or period mentioned in this agreement may be extended with [party]’s consent but otherwise time shall be of the essence. Precedent 5—Time of the essence – one party only Unless otherwise stated, time shall be of the essence for the purpose of the performance of [party]’s obligations under this agreement. Precedent 6—Time of the essence – sale agreement Time shall be of the essence of this agreement both as regards the dates and periods specifically mentioned and as regards any dates and periods which may by agreement in writing between or on behalf of the Vendor and the Purchaser be substituted for them. Precedent 7—Time of the essence – sale conditions Time shall be of the essence of all Conditions which contain time limits. Where the time limited for any person to do anything expires on a Sunday, bank or other public holiday, or on the day next following any such day, then such Sunday or bank or other public holiday shall be excluded from the computation of the time. 622

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Precedent 8—Time of the essence – specified payments [Party B] agrees with [Party A] throughout the term to pay to [Party A] (or as [Party A] directs) [the Fees] on the relevant payment dates (time being of the essence). Precedent 9—Time of the essence – all payments Time for payment of all money payable by [party] under this agreement shall be of the essence. Precedent 10—Time of the essence – delivery term – standard conditions of purchase The Delivery Date is of the essence of this contract. If the Seller fails to deliver all of the Goods in accordance with the contract on the Delivery Date then without prejudice to the Buyer’s rights for breach of contract the Buyer may terminate the contract. In this event without prejudice to the Buyer’s other remedies the Seller shall promptly collect any Goods which have been delivered. Precedent 11—Time of the essence – payment term – standard conditions of sale Payment of the Price and VAT shall be due within [30] days of the date of the invoice. Time for payment shall be of the essence. Precedent 12—Time of the essence – payment term – standard conditions of sale The Company shall pay the Price to the Consultant within 30 days of this Agreement and the time for payment shall be of the essence. If the Company shall fail to pay the Price within 30 days of this Agreement then the Consultant shall have the right to terminate this Agreement [by notice in writing which shall take effect from the date of the notice][in accordance with Clause [ ]]. Precedent 13—Time not of essence – distribution or supply agreement – delivery term [Shipping] dates and estimates of time of arrival shall be the last available or known to [party] and shall not be of the essence of the contract. Precedent 14—Time not of essence – licence or supply agreement – delivery/installation term [The Licensor] will use all reasonable endeavours to achieve delivery or installation by any specified or requested date, but each such date is to be treated as an estimate only and time shall not be of the essence.

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Time of the essence

Case analysis Msas Global Logistics v Power Packaging Inc [2003] EWHC 1393 (Ch), [2003] All ER (D) 211 (Jun) A clause in an agreement for the sale of the entire share capital of business read: ‘[Clause] 4.2 Completion will take place at the offices of the Purchaser’s Solicitors at such date and time as the Vendor and the Purchaser agree following the satisfaction or waiver of the conditions set out at clause 3.1.1 to 3.1.4 but in any event no later than 10th January 2003 (unless the Vendor and the Purchaser shall agree otherwise).’

The time period was held to be of the essence. After reviewing a number of authorities relating to share sales, the judge said: ‘43. Ultimately, as it seems to me, the question is one of the interpretation of the particular contract, the words used being set in the factual context in which the contract is made and regard being had to the subject matter of the contract. In the present case, in my judgment, time was of the essence of the provisions of Clause 4.2. It seems to me that the very wording of Clause 4.2 is indicative of that – the more so, when set in the context of the provisions of Clause 3.2 and 3.4 which to my mind […] reinforce the view that completion was being required to take place by close of 10th January 2003 at the latest (unless, of course, the parties otherwise agreed). That time is of the essence of the provisions of clause 4.2 is also consistent with […] with the guarantors’ obligations and the warranties contained in the UK Agreement. 44. Moreover, such a conclusion, is, I  think, strongly supported here by the subject matter of the contract. What was being sold here was not just a parcel of shares in a private company: it was the entirety of the shares, legal ownership of which would give effective control of PEOL (and, hence, its subsidiaries). In effect, the whole business was being sold as a going concern…’

Although time was held to be of the essence, it was found on the facts of the case that the waiver in Clause 4.2 operated. Multi Veste 226 BV v NI Summer Row Unitholder BV [2011] EWHC 2026 (Ch) In this factually complex case one party was required to provide a bank guarantee and perform certain other obligations (such as deliver conveyances) all together by a certain date. The judge held that the obligation to provide the bank guarantee was not more important than the other obligations, and that because some of the other obligations in the agreement are normally not of the essence (such as entering into conveyances) there was a strong presumption that time was not of the essence as far as the provision of the bank guarantee was concerned (ie all the obligations were governed by the same provision governing time): ‘[190] In the present case the [Defendant]’s obligation to provide the bank guarantees was one of a number of obligations to be simultaneously performed. In my judgment it would be artificial to single out some obligations as having greater importance than others, when all are governed by the same time stipulation contained in the same clause. The other obligations included obligations to enter into conveyancing documents, in relation to which time 624

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Time of the essence has never been of the essence. To my mind this is a strong indication that time was not of the essence of cl 2.5. Moreover, the stringency of time being of the essence is that purported performance one day late would amount to a repudiatory breach. I  cannot see that the reasonable reader of the [Agreement], armed with the background knowledge of the parties at the date of the contract, would have concluded that delivery of the bank guarantees on the sixth business day after notice of satisfaction of the Council Pre-Condition would have such serious consequences as to entitle [the Claimant] to terminate the [Agreement] forthwith. I therefore reject the submission that time was of the essence of the obligation to deliver the bank guarantees.’

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Title (or property) and risk

Purpose of the clause When title and risk pass—statutory rules Contracts for the sale of goods often address the question of when: •

title (who owns the goods); and

•

risk (who is responsible for the goods if something happens to them)

in the goods passes to the purchaser from the seller. This issue also arises in some other types of contract, but less commonly. The parties to a contract are normally free to decide when title and risk pass. However if a contract for the sale of goods does not deal specifically with these issues, terms may be implied under the Sale of Goods Act 1979, especially ss 16–20 (see Extracts from legislation for the text of these sections). Although it is unlikely that commercial parties will have these sections of the 1979 Act in the forefront of their minds when negotiating or considering the provisions of a contract, the underlying ‘policy’ of contract law in the UK is based on a person having ownership (property) of goods; without ownership, the person has little or no rights or interest in the goods unless the contract states otherwise. Who is to bear the risk is clearly tied to ownership under the Act (Sale of Goods Act 1979, s 20, again subject to what is decided otherwise). What follows is a brief summary of the relevant provisions of the Sale of Goods Act 1979. • The Act distinguishes between specific or ascertained goods, and unascertained goods: •

Specific goods are defined as ‘goods identified and agreed on at the time a contract of sale is made’ (Sale of Goods Act 1979, s 61);

• ‘Unascertained goods’ are seemingly goods that are not identified and agreed upon at the time a contract of sale is made (41 Halsbury’s Laws of England (4th Edn Reissue), para 124). Unascertained goods might be: •

goods not yet manufactured or grown by the seller;

•

goods of a generic type;

•

goods which form an unascertained part of a specific bulk.

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Title (or property) and risk

•

Ownership in goods cannot pass until they are ascertained (Sale of Goods Act 1979, s  16). Once they are ascertained, ownership will pass at such time as the parties to the contract intend it to be transferred (s 17(1)). The intention of the parties is derived from the terms of the contract, the conduct of the parties and the circumstances of the case (s 17(2)). Unless the parties to an agreement agree otherwise, the Act provides five rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer (s 18).

• The risk in the goods will only pass when the ownership is transferred to the buyer, even if the goods are not delivered (s  20(1)). Note: for consumers, risk does not pass until the goods are delivered to the consumer (s  20(4)), which means, for a consumer, that the goods are physically in the consumer’s possession. This is no more than an outline; for further commentary on these matters readers should obtain advice or consult the standard works on the subject of sale of goods, for example Goode on Commercial Law (5th Edn, 2016, LexisNexis).

Modifying the statutory rules If the parties wish to alter the statutory provisions as to when title and risk should pass then the parties will need to draft specific clauses. A  seller of goods: •

will often not wish the title (ownership) in the goods to pass until it has received payment, even if it has physically delivered the goods to the buyer; but

• will wish that the risk in the goods passes to the buyer as soon as it has delivered the goods. See further Retention of title. For simple clauses dealing with the issue of passing of risk see below.

Title and risk in sales with an international element Introductory points Where contracts involve the export of goods, parties often agree to allocate risk and title using a series of standard terms laid down in INCOTERMS, a series of pre-defined commercial terms published by the International Chamber of Commerce. The latest version of INCOTERMS is the 2010 edition. Besides title and risk, INCOTERMS address a number of other areas such as: •

risk of loss (and thus responsibility for insurance) and who is responsible for obtaining it;

•

obtaining import/export licences;

•

where the seller is to make delivery to; 627

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• what notice period must be given by the seller that delivery has taken place. The most commonly encountered INCOTERMS are ‘Free on Board’ (FOB), ‘Cost Insurance and Freight’ (CIF) and ‘Ex-Works’ (EXW). Selected comparison of INCOTERMS By way of comparison of the various conventions under an FOB contract, the principal duties of the seller are: •

to provide goods in conformity with the contract;

•

to obtain at its risk any export licence/authorisation;

•

to deliver the goods on board the vessel named by the buyer at the named port of shipment on the date stipulated;

• to bear the costs incurred until the goods pass the ship’s rail and any official charges payable upon exportation; •

to give sufficient notice to the buyer that the goods have been delivered on board.

The buyer must: •

pay the price as provided in the contract;

•

obtain at its own risk any import licence/authorisation;

•

contract at its expense for the carriage of goods and arrange a contract of insurance;

•

bear all risks of loss of or damage to the goods from the time they have passed the ship’s rail.

This INCOTERM may be regarded as benefiting the seller who fulfils all delivery obligations as soon as the goods pass the ship’s rail. By contrast, use of other conventions place more extensive obligations on the seller. Eg, under the DDP (Delivery Duty Paid) INCOTERM, in addition to the obligations on the part of the seller listed above the seller must: •

contract at its own expense for a contract of carriage;

• place the goods at the disposal of the buyer on the date or within the period stipulated; •

pass all the costs of delivery including importation duties;

•

bear all the risks of loss of or damage to the goods until such time as they have been placed at the disposal of the buyer.

Under the INCOTERM CIF (Cost Insurance and Freight) the obligations upon the seller are less onerous than DDP but more extensive than FOB. In particular, the seller must arrange contracts of carriage and insurance. Risk still passes at the ship’s rail. 628

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Title (or property) and risk

Location in the agreement A clause dealing with when risk is to pass will often be included with Payment provisions or with a Retention of title clause. Alternative precedents to the ones below are included under those sections concerning when ownership is to pass.

Sample precedent material Precedent 1—Short form The risk in the Company’s Products shall pass on delivery to the Buyer or his agent. Precedent 2—Short form – risk to pass on delivery The risk in respect of the material sold under this Agreement shall pass to the Customer on delivery of the material by the Company (or its agents) to the Customer at the place specified by the Customer for delivery. Precedent 3—Short form – risk to pass on delivery The Goods shall be delivered to the Buyer at the Seller’s address. The risk in the Goods shall pass to the Buyer upon such delivery taking place. Precedent 4—Longer form – risk but not ownership to pass on delivery Ownership of the goods which are the subject of this contract shall not pass to the Buyer until they are fully paid for, but the risk in the goods shall be borne by the Buyer from the date of the delivery by the company or its agents to the buyer. Precedent 5—Full form – risk to pass on delivery – agency agreement The risk in all Products supplied under this Agreement shall remain with the Principal [during transportation to the Agent’s place of business]. Notwithstanding that the title in the Products may not have passed in accordance with the provisions of this clause the risk in all Products shall pass to the Agent upon delivery of the item concerned [to the Agent’s place of business]. The Agent shall at its own expense take out and secure the continuance of an all-risk insurance policy in respect of all Products supplied in accordance with this Agreement to their total value at replacement cost. Such policy shall cover the goods from and including the date on which they are delivered to the Agent’s place of business. The Agent shall procure that the Principal’s interest in the Products shall be recorded by an indorsement on the policy specifying the Principal as loss payee (and shall provide the Principal with a copy of it) and (to the extent that the Principal has not received full payment in respect of any Products) any sums which are received under any such policy may be credited against any sums owing from the Agent to the Principal. 629

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Title (or property) and risk

Precedent 6—Clause referring to Incoterms The Seller shall supply the Goods DDP to Buyer’s premises at 1 Reude, Geurre, Waterlooville, Belgium. Precedent 7—Property passing on payment Property in the Goods shall only pass when the Buyer has paid all sums due to the Seller under this Agreement. Precedent 8—Property passing on payment – alternative form Property in the Goods shall only pass when the Buyer has paid all sums due to the Seller under this Agreement and any other sums due to the Seller [including any interest due]. Precedent 8—Property passing on payment – alternative form We shall own the Goods until you have paid for them, whether or not we have delivered the Goods to you.

Extracts from legislation Sale of Goods Act 1979 Part III Effects of the Contract—Transfer of property as between seller and buyer 16

Goods must be ascertained

[Subject to section 20A below] where there is a contract for the sale of unascertained goods no property in the goods is transferred to the buyer unless and until the goods are ascertained. 17

Property passes when intended to pass

(1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. 18

Rules for ascertaining intention

Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. 630

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Title (or property) and risk

Rule 1—Where there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment or the time of delivery, or both, be postponed. Rule 2—Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until the thing is done and the buyer has notice that it has been done. Rule 3—Where there is a contract for the sale of specific goods in a deliverable state but the seller is bound to weigh, measure, test, or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until the act or thing is done and the buyer has notice that it has been done. Rule 4—When goods are delivered to the buyer on approval or on sale or return or other similar terms the property in the goods passes to the buyer: (a) when he signifies his approval or acceptance to the seller or does any other act adopting the transaction; (b) if he does not signify his approval or acceptance to the seller but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of that time, and, if no time has been fixed, on the expiration of a reasonable time. Rule 5— (1) Where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods then passes to the buyer; and the assent may be express or implied, and may be given either before or after the appropriation is made. (2) Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee or custodier (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is to be taken to have unconditionally appropriated the goods to the contract. (3) Where there is a contract for the sale of a specified quantity of unascertained goods in a deliverable state forming part of a bulk which is identified either in the contract or by subsequent agreement between the parties and the bulk is reduced to (or to less than) that quantity, then, if the buyer under that contract is the only buyer to whom goods are then due out of the bulk: (a) the remaining goods are to be taken as appropriated to that contract at the time when the bulk is so reduced; and (b) the property in those goods then passes to that buyer. 631

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(4) Paragraph (3) above applies also (with the necessary modifications) where a bulk is reduced to (or to less than) the aggregate of the quantities due to a single buyer under separate contracts relating to that bulk and he is the only buyer to whom goods are then due out of that bulk. 19

Reservation of right of disposal

(1) Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled; and in such a case, notwithstanding the delivery of the goods to the buyer, or to a carrier or other bailee or custodier for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled. (2) Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or his agent, the seller is prima facie to be taken to reserve the right of disposal. (3) Where the seller of goods draws on the buyer for the price, and transmits the bill of exchange and bill of lading to the buyer together to secure acceptance or payment of the bill of exchange, the buyer is bound to return the bill of lading if he does not honour the bill of exchange, and if he wrongfully retains the bill of lading the property in the goods does not pass to him. 20

Passing of risk

(1) Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer, but when the property in them is transferred to the buyer the goods are at the buyer’s risk whether delivery has been made or not. (2) But where delivery has been delayed through the fault of either buyer or seller the goods are at the risk of the party at fault as regards any loss which might not have occurred but for such fault. (3) Nothing in this section affects the duties or liabilities of either seller or buyer as a bailee or custodier of the goods of the other party. (4) In a case where the buyer deals as consumer or, in Scotland, where there is a consumer contract in which the buyer is a consumer, subsections (1) to (3) above must be ignored and the goods remain at the seller’s risk until they are delivered to the consumer.

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Value Added Tax

Purpose of the clause Background In general, Value Added Tax (VAT) is charged on all supplies of goods and services (including anything treated as being goods or services, such as intellectual property) made in the UK by a taxable person in the course or furtherance of the supplier’s business, unless the supplies are exempt (Value Added Tax Act 1994 (VATA 1994), ss 1, 4. VATA 1994 derives from Council Directive (EC) 2006/112 on the common system of value added tax, which has been amended several times. Transfers and assignments of intellectual property are classified as a chargeable supply, and are not in the category of exempt supplies (see VATA 1994, s 31, Sch 9). The purpose of a clause concerning VAT is to specify clearly whether any payments a person needs to make under an agreement are inclusive or exclusive of VAT. In the absence of any provision to the contrary, a payment will be deemed to be inclusive of any VAT, if it is chargeable. If there is a payment that relates to a taxable supply, HM Revenue and Customs (HMRC) will still treat payment as including VAT and require the supplier to account for the VAT element to them.

Drafting issues •

Is VAT included in any pricing or other payment provision? A taxable person for VAT purposes who makes a taxable supply must charge VAT on that supply, generally by issuing a VAT invoice at the time of the supply. In a written agreement involving any such supply it is therefore common, for the sake of clarity, to include a clause such as Precedent 1.

•

Does the wording indicate that VAT will be charged in addition to any price or pricing details? For a business, this is normally the default position, whereas for a contract with a consumer, prices will normally be shown as being inclusive of VAT.

•

Does the wording indicate that VAT will be charged at the prevailing rate at the tax point? This is particularly important where the supply of the goods and services will take place on more than one occasion. For example, a 633

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long-term supply of goods may take place during a period when there is a change (such as increase in rates). Is the supplier of the goods or services registered for VAT? Most commercial contracts are likely to be between parties whose turnover exceeds the threshold where registration is compulsory (at the date of this volume, the figure is an annual turnover of £85,000), however, a purchaser/customer may want reassurance that its supplier is registered for VAT purposes, will maintain its registration and will properly account to HMRC for VAT. This type of issue may be addressed by appropriate warranties, as well as the purchaser/customer carrying out its own checks with HMRC.

•

Location in the agreement A  Value Added Tax clause would normally be included with payment terms provisions in the Main Commercial Provisions of the agreement.

Linkage and use A  VAT clause will normally only be relevant with provisions relating to payment.

Sample precedent material Precedent 1—Sample clause All sums payable to (party making supplies) under this agreement are exclusive of VAT which shall, where applicable, be paid in addition at the rate in force at the due time for payment subject to (party making supplies) either supplying a VAT invoice to (party supplied) or informing (party supplied) of its VAT registration number. This applies where the supply is treated as being made outside the UK. Precedent 2—VAT exclusive – short form All sums payable under this agreement are exclusive of VAT or any tax replacing it. Precedent 3—VAT exclusive – purchase price The Price is exclusive of VAT which shall be due at the rate ruling on the date of the VAT invoice. Payment of the Price and VAT shall be due within [30] days of the date of the Seller’s invoice. Precedent 4—VAT exclusive – payment ‘net 30 days’ Payment of the Price and VAT shall be due on the last working day of the month following the end of the month in which the Goods are delivered. 634

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The Price is exclusive of VAT which shall be due at the rate ruling on the date of VAT invoice. Precedent 5—VAT exclusive – all payments All sums payable to [Party A] under this agreement are exclusive of VAT which shall where applicable be paid in addition at the rate in force at the due time for payment subject to [Party A] supplying a VAT invoice to [Party B]. Precedent 6—Long form VAT warranties – share sale agreement 1 For the purposes of this Clause [no] ‘the VAT legislation’ means the Value Added Tax Act 1994 and all regulations made or imposed under it and any other statutes or other provisions relating to VAT. 2 The Company is registered in the United Kingdom as a taxable person for the purposes of the VAT legislation and is not registered, nor required to be registered, in any other jurisdiction in respect of VAT or similar tax. 3 The Company has complied in all respects with the VAT legislation and has made and maintained full, complete, correct and up-to-date records, invoices and other documents appropriate or requisite for the purposes of such legislation. 4

The Company is not in arrears with any payment or returns due under the VAT legislation and has not in the past 3 years been in default in respect of any accounting period as the terms ‘default’ and ‘accounting period’ are used in the Value Added Tax Act 1994 Section 59 (the default surcharge).

5

The Company is not liable to any abnormal or non-routine payment of VAT or to any forfeiture or penalty or to the operation of any penal provision and has not been required by the Commissioners of Customs and Excise to give security.

6 [The Company is not treated as a member of a group of companies for VAT purposes. or All transactions by and between members of the Company’s Group have been made in accordance with a valid VAT group election and the Company will not be required to make good any default by any other member of such Group in relation to VAT.] 7 The Company is not and will not become liable for VAT by virtue of the Value Added Tax Act 1994 Section 47 (agent of any person who is not resident in the United Kingdom). 8 The Company has not been partially exempt for any VAT accounting period at any time in the 5 years prior to Completion and will not in respect of supplies invoiced to it prior to Completion be denied credit for any input tax. 635

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Value Added Tax

9 Neither the Company nor any company of which the Company is a relevant associate within the meaning of the Value Added Tax Act 1994 Schedule  10 Paragraph  3(7) has elected to waive exemption under Paragraph 2 of that Schedule in relation to any land [except as disclosed in the Disclosure Letter] and any such elections have effect. 10 No notice has been received by the Company and the Company is not aware of anything which indicates that the grant to the Company of any interest in or right over land or of any licence to occupy land is and will continue to be other than an exempt supply. 11 The Company owns no assets which are treated as capital items the input tax on which may be subject to adjustment in accordance with the VAT capital goods scheme. 12 The Company has not during the last 10 years acquired any assets in circumstances described in the Value Added Tax Act 1994 Section 44(1) (transfer of business as a going concern). Precedent 7—Tax deduction authorisation – short form [Party B] hereby expressly authorises [Party A] to deduct and withhold from all sums due to [Party B] under this agreement any sums which may be deductible in accordance with local laws or regulations from time to time. Precedent 8—Undertaking as to withholding taxes If any withholding or other taxes are required to be deducted from any money to be remitted to [Party A] pursuant to this agreement it shall be the responsibility of [Party B] to ensure that no improper deductions are made and that [Party A] is provided with all necessary receipts, certificates and other documents and all information required in order to avail [Party A] of any tax credit or other tax advantage. Precedent 9—Tax indemnity by independent contractor [Party B]’s relationship with [Party A] shall be as an independent contractor and [Party B] shall be neither a partner nor an employee of [Party A]. [Party B] shall be responsible for all tax and national insurance contributions in respect of [the Fees] and [Party B] undertakes to compensate [Party A] in full on demand for any liability [Party A] suffers if the HM Revenue and Customs or other relevant government department treat [Party B] in this case as an employee for the purposes of taxation and/or national insurance contributions.

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Waivers and releases

Purpose of the clause Background In the law of contract, the term ‘waiver’ is most commonly used to denote the granting of a concession by one party to a contract. The concession will concern the party making the concession not insisting on the precise performance by the other party of an obligation under the contract. A party can make the concession either before or after any breach of the contractual provision to which the concession relates (see generally 9(1) Halsbury’s Laws of England (4th Edn Reissue), para 1025 ff). There are other meanings of a ‘waiver’ (including a rescission of a contract or a variation of a contract). A party may make the concession by: •

a formal document (and supported by consideration): if made in this way it will be: •

a variation of the agreement (if occurring before breach); or

• an accord and satisfaction or a release (if occurring after breach), ie the parties agreeing to release the party in breach from having to perform the obligation; or •

implication based on a party’s conduct: an implied waiver may arise where there is a positive and intentional act of concession by a party with knowledge of all relevant circumstances, and where the other party acts in reliance on that concession. A waiver that is not supported by consideration can still be binding on the parties to an agreement, where: •

the person granting (grantor) the waiver does so unequivocally; and

• the person is granting a forbearance or concession (with the forbearance/concession relating to the grantor not insisting on precise performance of a provision in the contract); and •

the other party relies on the unequivocal waiver;

then the grantor may be prevented from going back on it (‘estopped’ in legal language). The courts have considered the precise effect of a waiver granted in this way (ie  one which is not supported by consideration) in many cases. 637

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However, each case will invariably turn on its own facts. For example, there is case law that indicates: • (unsurprisingly) that a buyer was not able to refuse delivery of goods that were made later than provided for in the contract where the buyer had asked the seller to do so (eg Hickman v Haynes (1875) LR 10 CP 598); •

(where a different conclusion was reached) that a party (first party) can let the other party (second party) to a contract believe that the second party could perform its obligations under the contract in a different way to that set out in the contract. However the first party could still reject this different performance on the part of the second party. Where this occurs the first party must then allow the second party a reasonable amount of time to comply with the provisions of the contract (if still possible to do so or it is not equitable to refuse the second party time to do so) (see eg Panoutsos v Raymond Haldy Corpn of New York [1917] 2 KB 473, CA).

Waiver and breach of contract Where a party breaches the provisions of a contract, the party not in breach has a number of options. The party not in breach may: • take action against the defaulting party for breach of contract (such as repudiating the contract or making a claim for damages); •

complain about the breach, but take no action; or

•

ignore the breach (just let the performance of the contract continue).

If the party not in breach does nothing about the breach, or takes a long time to react to it, it may lose any right to take action in respect of that breach. The party not in breach may also find that its ability to take action in respect of similar breaches in the future is compromised, as that party may be taken as having affirmed the contract (Tele2 International Card Co SA  v Post Office Ltd [2009]  EWCA  Civ 9; Force India Formula One Team Ltd v Ethad Airways [2010] EWCA Civ 1051). This is because a waiver clause does not deal with termination, or how a party (if it chooses to) may terminate an agreement when another party breaches a contract. If another party is in breach then the party not in breach has to take action in respect of the breach (such as notifying the party in breach) by using the provisions in the agreement concerning termination, because a waiver clause ‘does not deal at all with the issue of election of whether or not to exercise a contractual right. The general law demands that a party which has a contractual right to terminate a contract, must elect whether or not to do so’ from Tele2 International Card Co SA v Post Office Ltd [2009] EWCA Civ 9, [2009] All ER (D) 144 (Jan). 638

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The principal aim of a waiver clause is to deal with the type of situation indicated above, ie that if a party fails to take action in respect of a breach of the other party then it does not lose its rights to take action in respect of: •

a current breach; and/or

•

any subsequent breaches.

Waiver clauses Waiver clauses usually perform one of two functions (and sometimes both): • it will make it clear that any failure or delay in exercising a right under the agreement will not constitute a waiver of that right. This is the most common type of clause (see Precedent 1): ‘Where the agreement has as its main purpose one single transaction, it can provide that due performance of the contract does not automatically release the parties from their duties under it.’

This type of provision is often made in conjunction with a ‘survival of terms’ provision. Eg, a sale agreement provides, on behalf of the purchaser, that if it decides to go ahead and complete the purchase that does not imply that the purchaser waives some deficiency on the seller’s part (see Precedent 2); • it may also provide that, where there is a waiver of performance under a term of the agreement, it will not constitute a waiver of any future breach of that term or any other term. This type of provision is useful in agreements of some duration, eg  agency or franchise agreements or contracts for services, where it may at some time be necessary in business circumstances to suspend a contract requirement temporarily. One party may press for the clause to be worded so that only that party may derive benefit from it (see Precedent 3).

Waivers distinguished from releases A  release clause operates in a similar fashion to a waiver, in that the aim is generally to allow one party to be relieved from a particular obligation or claims and liabilities. The distinction between a release and a waiver is that a waiver is more usually confined to the situation where one party is in breach of an obligation, while a release can discharge a party from, or make a party no longer liable to perform, an obligation whether or not there is a breach of contract. A general clause releasing a party from its obligation might read as in Precedent 10. A party may release another party from all or from some obligations, claims and liabilities. A release clause should specify exactly the subject matter of the release, as in Precedent 11. 639

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Drafting issues Most waiver clauses in agreements are concerned with ensuring that any action (or inaction) by a party to not use its rights under an agreement will not constitute a waiver, whether for the current breach or any further breaches by another party: •

Should there be a provision concerning a waiver at all in the agreement? If the agreement is concerned with one transaction then dealing with situations where there is a failure by one or more parties may not be appropriate, especially where there are other provisions which spell out the consequences of failure to perform an obligation. In such cases, it might be made clear in other provisions that the agreement will be terminated or deemed terminated. However, if the agreement is concerned with one transaction but the transaction takes place over a lengthy period (or is broken down into clearly identifiable sections or events) then a waiver clause may be of use to one or more of the parties;

•

Should a waiver only come into existence with a particular formality or when a particular condition arises? In addition to the normal wording found in a ‘no waiver’ clause, additional wording may be used to state that any situations which amount to waiver must be confirmed or noted in writing (see Precedent 6 for an example).

Location in the agreement A Waiver and/or Release clause will usually be located in the Boilerplate section of an agreement.

Linkage and use As noted under Drafting Issues, the use of a waiver clause may not be appropriate if there are other provisions which deal with where a party fails to perform its obligations under an agreement. For example: •

the main obligations on a party may be expressed in ‘strict liability’ terms, eg ‘The consultant shall perform the Services by the Completion Date’, and then other wording expressing clearly the consequences if the party fails to do so (eg the agreement immediately terminating);

• certain obligations are expressed as being of the essence (such as provisions relating to payment of sums or by when certain obligations need performing); •

termination provisions detail when and how an agreement (or provisions) will terminate.

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Sample precedent material Waiver Precedent 1—Short form – no waiver No failure or delay by any party to exercise any right, power or remedy will operate as a waiver of it nor will any partial exercise preclude any further exercise of the same, or of some other right, power or remedy. Precedent 2—Waiver and completion Completion shall not constitute a waiver by the Purchaser of any breach of this agreement whether or not known to the Purchaser at the date of Completion. Precedent 3—No waiver of continuing breach etc Any waiver by the Franchisor of any breach of any of the obligations of the Franchisee under this agreement or otherwise shall not be a waiver of any continuing breach or of any other breach of any of those obligations. Precedent 4—Alternative short form – no waiver The failure by either party to enforce at any time or for any period any one or more of the terms or conditions of this agreement shall not be a waiver of them or of the right at any time subsequently to enforce all terms and conditions of this agreement. Precedent 5—Alternative form (eg sale agreement) – no waiver Completion shall not constitute a waiver by the Purchaser of any breach of this agreement whether or not known to the Purchaser at the date of completion. Precedent 6—Alternative form – no waiver unless in writing No delay or failure by either party to exercise any of its powers, rights or remedies under this agreement will operate as a waiver of them nor will any single or partial exercise of any such powers, rights or remedies preclude any other or further exercise of them. Any waiver, to be effective, must be in writing. Precedent 7—Alternative form (eg for mortgage) – no waiver No delay in exercising or omission by the Mortgagee to exercise any right or power given to it by this Mortgage shall impair such right or power or be construed as a waiver of or as an acquiescence in any default by the Mortgagor and in the event of the Mortgagee on any occasion agreeing to waive any such right or power such waiver shall not in any way prejudice or affect the right of the Mortgagee afterwards to act strictly in accordance with the powers given to it by this Mortgage. Precedent 8—Longer form – no waiver No failure or delay on the part of any of the parties to this agreement relating to the exercise of any right, power, privilege or remedy provided under 641

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this agreement shall operate as a waiver of such right, power, privilege or remedy or as a waiver of any preceding or succeeding breach by the other party to this agreement nor shall any single or partial exercise of any right, power, privilege or remedy preclude any other or further exercise of such or any other right, power, privilege or remedy provided in this agreement (all of which are several and cumulative and are not exclusive of each other) or of any other rights or remedies otherwise available to a party at law or in equity. Precedent 9—Short form – limited waiver – one party only Any waiver by the [Franchisor] of any breach of any of the obligations of the [Franchisee] under this agreement or otherwise shall not be a waiver of any continuing breach or of any other breach of any of those obligations. Releases Precedent 10—Short form [Party A] releases [Party B] from all his obligations under the (document). Precedent 11—Longer form The parties release each other from all claims and liabilities in respect of: (a) the (subject matter); (b) any right of contribution or indemnity which arises under the Principal (document); (c) otherwise for any claim for negligence or breach of contract or in the conduct of the (subject matter); except claims and liabilities under this (document). Precedent 12—Mutual release – short form The (parties) mutually release each other and their respective personal representatives from all actions, proceedings, claims and demands in respect of the [Property]. Precedent 13—Release of debtor – short form In consideration of the assignment the Creditors do and each one of them does release and discharge the Debtor from all debts due from the Debtor to them or any of them and from all actions, suits, claims, demands or other proceedings whatsoever in that respect. Precedent 14—Release of debtor – longer form In further pursuance of the agreement and for the consideration above the Creditors do and each of them does release and discharge the Debtor from all the debts for which the Debtor is or may be liable to the Creditors or any of them and from all claims, actions, demands or other proceedings by the Creditors or any of them in respect of such debts or any of 642

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them or in respect of anything done suffered or omitted or in respect of any liability whatsoever incurred by the Debtor in that respect. Precedent 15—Release on eg assignment of franchise In consideration of [Party A] agreeing to [Party B]’s assigning his interest as Franchisee pursuant to a Franchise Agreement made on [date] between [Party A] on the one part and [Party B] of the other part [Party B] releases, indemnifies and forever holds harmless [Party A] from all actions, proceedings, claims, demands, costs and expenses whatsoever which [Party B] had or may have against [Party A] in relation to or arising out of such Franchise Agreement. Precedent 16—Release in novation agreement The Customer releases and discharges the Vendor from all claims and demands whatever in respect of the Contract and accepts the liability of the Purchaser under the Contract in lieu of the liability of the Vendor and agrees to be bound by the terms of the Contract in every way as if the Purchaser were named in the Contract as a party in place of the Vendor.

643

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Warranties

Purpose of the clause Background A  warranty is a statement of a fact, forming part of the contract, which the party giving the warranty asserts to be true. Many commercial contracts contain warranties by one or both parties. These may include warranties as to matters that are central to due performance of the contract but are only in the knowledge of one party, or which only that party has records or details of, and which the other party cannot (or cannot easily) verify. The exact nature of the content of the warranties will depend on the transaction the parties are entering into. For example: •

in an agreement for the sale of a business: the seller will usually warrant that it has conducted the business properly, that it has not infringed any statutory restrictions, and that the accounts give a true and fair picture of the state of affairs of the business, as well as warranties on a wide range of other subjects;

•

in a licence of intellectual property: the licensor may warrant that it is the absolute owner of the licensed property and that it is not aware of any third-party rights over it.

Whereas some types of warranty are specific to the individual transaction, others are common to many types of commercial agreement. An example of the latter category will include that a party has the capacity/power to enter into the agreement.

Standard warranties as to due capacity and good standing Warranties as to: • a party’s ability (capacity) to enter into an agreement of the type in question (see Precedents 1 and 2), and •

to the ‘good standing’ of each party,

are sometimes inserted in commercial agreements 644

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Warranties of this kind are common in contracts drafted by United States lawyers and are increasingly common in UK contracts. They are perhaps most relevant to contracts that are directly concerned with the status of the contracting parties, eg a sale of business agreement. Capacity For most types of commercial contract involving UK corporate parties, it is possible to address the matter of whether a corporate party has capacity in ways other than providing a warranty. For companies incorporated under a Companies Act, the need to have a warranty of capacity is even less necessary, as the current Companies Act makes it hard for one party to claim a lack of capacity to another as: •

a provision in the company’s constitution (normally meaning its articles of association) which indicates that the company lacks capacity to carry out a particular act cannot be used to challenge the validity of that act (Companies Act 2006, s 39);

•

any limitation in a company’s constitution will not limit the power of the company’s directors to bind the company (or the ability of the directors to authorise others to do so) to any act or transaction (Companies Act 2006, s 40). This is subject to a proviso that a person (who is a party to the act or transaction) deals with the company in good faith. There are some conditions, including that the person is not required to find out whether there are any limitations on the powers of the directors for example (Companies Act 2006, s 40(2)).

In addition to the provisions of the Companies Act 2006, a party can undertake an independent due diligence exercise, including such activities as: • checking available public registers (eg  searches at the Registrar of Companies, etc); •

obtaining copies of the other party’s registers, minutes and resolutions as well as copies of (significant) agreements entered into;

•

obtaining credit checks (from companies providing such services);

•

obtaining parent company guarantees (if relevant);

•

obtaining warranties or undertakings from third parties who have provided information or carried checks for the other party (such as accountants, lawyers etc).

These checks (or the inclusion of warranties) can be in addition to other commercial provisions that a party might wish to include in an agreement such as: • withholding payment of some of the sum payable to the other party until: •

the other party has completely performed its obligations; or 645

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• a period of time has passed to see if any of the warranties provided by the other party are in fact not true or are breached by the party giving them; • obtaining insurance, to cover any failure of the other party to perform its obligations or if the other party breaches it any warranties or the warranties given turn out to be untrue. Good standing A warranty of good standing does not have a defined or accepted meaning as such. It is different to warranties relating to capacity, as when asked for or used often deals with the following points: •

that a party is indicating what type of legal entity it is (such as whether it is a company, limited liability partnership etc);

•

that the party has the right to be of the type of legal entity it has stated (and it is validly entitled to be of that type of legal entity);

•

that the party is current as regards its obligations to file documents, has complied with registration formalities and deadlines, and otherwise complies with the law for the country where the party is incorporated or otherwise required to register its presence.

An example of a warranty of good standing might be: ‘Party A  warrants that it is a [private limited company] which is incorporated in England and Wales and at the date of this Agreement is up-to-date with its requirements as to its filings and submissions to the Registrar of Companies of England and Wales and is in good standing and validly exists under the laws of England and Wales.’

In place of or in addition to such a warranty, a party can obtain a ‘certificate of good standing’ from the Registrar of Companies. Such a certificate can include a range of information regarding a company such as the registered office and name of directors. This type of information is freely available from the Registrar of Companies. However, what the ‘certificate of good standing’ will also state (which is not otherwise available from the Registrar of Companies) is that: ‘According to the documents on file and in the custody of the Registrar, the company is up to date with its filing requirements […]. The company has been in continuous unbroken existence since its incorporation and no action is currently being taken by the Registrar of Companies to strike the company off the register or to dissolve it as defunct. As far as the Registrar is aware, the company is not in liquidation or subject to an administration order, and no receiver or manager of the company’s property has been appointed.’

Terms and conditions of warranties In the longer type of agreement, it is frequent for a party to give numerous detailed warranties, for example by a seller and for these to be set out in a 646

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schedule to the agreement and for that party to give in the agreement an overall warranty as to the truth and accuracy of the warranties in the schedule. The purchaser in such a situation may wish to provide, for the avoidance of doubt, that its remedies are to continue to be available after completion, and also, to avoid any presumption of waiver, that its remedies should in no way be affected by any knowledge as to the vendor’s affairs obtained by the purchaser on investigation or otherwise (see Precedent 7). The vendor will often wish to put a time limit on the warranties, or to exclude minor claims below a specified value or to put a cap on its total liability for breach of warranty. It is also common to exclude from the scope of the warranties matters specifically disclosed by the warrantor to the warrantee. Typically, the disclosed matters are set out in a document known as a disclosure letter. These are all matters for commercial negotiation.

‘Knowledge’ warranties A party giving warranties will commonly seek to limit the warranties to matters that are within its knowledge. Eg, the seller of a patent may be unwilling to warrant that there are no third-party rights which would prevent the buyer of the patent from manufacturing the products claimed in the patent, not least because there is often an 18-month delay before a (European) patent application is published; the seller may therefore be unaware of relevant third-party applications. Instead, the seller might be willing to warrant that no such third-party rights exist as far as it is aware. Because, even beyond the grant of a patent, it is still possible for a third party to come forward and assert that its rights have been infringed, and if the assertion results in litigation, a court may agree with the third party that the seller’s patent infringes the third party’s intellectual property. Under English law and practice, there are two main types of ‘knowledge’ warranty: •

a warranty that ‘to the best of the warrantor’s knowledge, information and belief’ something is true, for example: ‘X warrants that to the best of its knowledge, information and belief it is not a party to any current legal proceedings’;

• a warranty that ‘as far as the warrantor is aware but without conducting any investigations’ something is true, for example: ‘X  warrants that as far as it is aware, but without having conducted any searches or investigations, it is not a party to any current legal proceedings’.

The first type of warranty will often be understood as implying that the warrantor has conducted appropriate investigations and taken all reasonable steps to find out whether the warranted statement is true, but this is less onerous than an unqualified warranty that the statement is true. Sometimes the drafter intends to give the latter type of knowledge warranty and uses words such as ‘as far as A  is aware’ but then fails to mention 647

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specifically that searches, enquiries etc have not been made. Some lawyers take the view that by omitting such words the warrantor is in effect giving a ‘best of knowledge’ type of warranty. Finally, it is recommended that the phrase ‘to the warrantor’s knowledge …’

should not be used in warranties. This wording is ambiguous: it is often intended to mean, in effect, ‘as far as the warrantor is aware’, but it could be understood as meaning ‘this matter is within the warrantor’s knowledge’ – a much stronger form of warranty.

Drafting issues •

Is a party prepared to give any warranty at all? If no warranties are offered then the terms implied by law may take effect, which may be wider or more extensive than a party is prepared to give.

•

Where goods or services are being provided. If goods or services are being provided by a party: •

Is that party prepared to offer warranties to the extent of what is implied by law? Eg, for goods that the goods are of satisfactory quality and comply with their description; Eg, for services, that the services were provided with reasonable care and skill.

•

Is the warranty itself subject to any restrictions? Eg: •

that only certain types of breach will render the party in breach liable; and/or

• that for any remedy to operate the innocent party will need to notify the party in breach; and/or •

that any remedy for the breach is available for a limited period; and/or

•

that the action to be taken by the party in breach is limited.

•

Where there has been a breach of a warranty, should any goods repaired or replaced or services re-performed be subject to the original warranty?

•

If any aspect of the agreement is not in conformance with a warranty (at the date of the agreement), has this been disclosed? Eg, if a software developer is warranting that the software developed is in accordance with a specification, except for one part, this can be handled by way of a ‘disclosure’ letter which will be attached to the agreement.

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•

Are there ‘standard’ types of warranties that should be provided? In some types of agreements there may be standard sets of warranties that mainstream commercial parties expect to see. Eg, in: •

sale of shares or business agreement;

•

agreements relating to tax matters, etc

there are often extensive sets of ‘standard’ warranties.

Location in the agreement Warranty clauses are normally located with Secondary Commercial Provisions, usually grouped with provisions relating to the limitation and exclusion of liability and indemnities.

Linkage and use A  Warranty clause will need careful consideration together with Exemption and Indemnity clauses as to the apportioning of liability, risk and other related factors.

Sample precedent material General warranties Precedent 1—Warranty as to power to enter agreement Each of the parties warrants that it has power to enter into this agreement [and has obtained all necessary approvals to do so]. Precedent 2—Warranty as to ability to fulfil obligations [Party] warrants and undertakes that it is not aware as at the date of this agreement of anything within its reasonable control which might or will adversely affect its ability to fulfil its obligations under this agreement. Precedent 3—Longer form – warranty as to ability to enter agreement, no conflicting agreement and third-party liabilities [Party A] warrants, agrees and undertakes with [Party B] that: 1 [Party A] is free to enter into this agreement and grant [Party B] the rights granted under it and is not under any disability, restriction or prohibition which might prevent [Party A] from performing or observing any of [Party A]’s obligations under this agreement; 2 [Party A] has not entered into and shall not enter into any arrangement which may conflict with this agreement; 3

all third-party liabilities shall be the sole responsibility of [Party A], and [Party B] shall not incur any liability for these. 649

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Precedent 4—Warranty as to negotiating documents The contents of all documents and all other information concerning [Party A] supplied in writing to [Party B], its solicitors or accountants by [Party A] or its agents during the course of negotiations leading to execution of this agreement were, when given, true, accurate and complete in all material respects and there is no fact or matter which has not been disclosed in writing which renders any such documents or information untrue or misleading at the date of this agreement or which on the basis of the utmost good faith ought to be disclosed to an intending purchaser of [ordinary shares in [Party A]]. Precedent 5—Warranty concerning equipment 1 The Seller warrants to the Customer that the Equipment conforms to the requirements of the [specific regulations] concerning [describe the specific matters the Equipment complies with the regulations]. 2 The Seller provides no warranty to the Customer that the Equipment: (a)

is fit for any purpose; or

(b) will attain or achieve any [set out either generally or specifically any operation standard that the Equipment can attain or achieve]. 3 Clause 3 is subject to: (a)

in respect of Clause 2(a), where the Customer has notified the Supplier in writing before the date of this Agreement the particular purpose for which it wishes to use the Equipment, and the Supplier has notified the Customer, before the date of this Agreement, that the Equipment can accomplish, achieve, execute or perform that purpose [, the notifications of the Customer and the Supplier are both set out in Schedule [ ] to this Agreement];

(b)

in respect of Clause 2(b), (i)

where the Supplier has notified the Customer in writing, prior to the date of this Agreement, that the Equipment will attain or achieve the operation standard and which is set out in Schedule [ ] to this agreement; and

(ii)

Clause 3(b)(i) is subject to the Customer operating the Equipment in accordance with, and subject to, the instructions and requirements for operating the Equipment as set out in the Equipment Manual, which is set out in Schedule [ ] to the agreement; and

(iii)

if the Equipment does not attain or achieve the operation standard as stated in Clause 3(b)(i) then the Customer’s sole remedy shall be limited to the payment of a sum as set out in Clause [ ] of this Agreement, unless the Customer fails to comply with Clause 3(b)(ii).

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[This clause will need additional wording to exclude all other warranties, and conditions etc implied by law etc.] Precedent 6—Short form warranty as to vendor’s warranties (eg on sale of business) – provision for disclosure letter The Vendor warrants to the Purchaser in the terms of the Warranties and so that the remedies of the Purchaser in respect of any breach of any of the Warranties shall continue to subsist notwithstanding completion [Provided that the Purchaser shall not be entitled to claim that any fact or combination of facts constitutes a breach of the Warranties if and to the extent that such fact or combination of facts has been fully, fairly and clearly disclosed in the Disclosure Letter]. Precedent 7—Longer form warranty as to vendor’s warranties (eg on sale of business) – provision for disclosure letter and scheduled limitations on warranties 1 The Vendor represents, warrants and undertakes to and with the Purchaser and its successors in title that the Warranties are at the date of this agreement true and correct in all respects [Provided that the Purchaser shall not be entitled to claim that any fact or combination of facts constitutes a breach of any of the Warranties if and to the extent that such fact or combination of facts has been fully, fairly and clearly disclosed in the Disclosure Letter]. The Vendor undertakes to the Purchaser to indemnify the Purchaser fully at all times from and against all costs, claims, proceedings, demands and expenses which the Purchaser may sustain, incur or pay by reason of any breach of any of the Warranties. 2 Where any Warranty refers to the knowledge, information, belief or awareness of the Vendor the Vendor acknowledges that it has made full enquiry into the subject matter(s) of the Warranty. 3 The remedies of the Purchaser in respect of breach of any of the Warranties shall continue to subsist notwithstanding completion. [4 The rights and remedies of the Purchaser in respect of any breach of the Warranties shall not be affected by any investigation made by or on behalf of the Purchaser into the affairs of the Vendor or by any information of which the Purchaser has knowledge (actual or constructive) or by the Purchaser failing to exercise or delaying the exercise of any of its rights or remedies or by any other event or matter whatever except a specific and duly authorised written waiver or release.] 5 Promptly upon the occurrence of or promptly upon the Vendor becoming aware of the impending or threatened occurrence of any event which would or might reasonably be expected to cause or constitute a breach (or would have caused or constituted a breach had such event occurred or been known to the Vendor prior to the date of 651

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this agreement) of any of the Warranties it shall give written notice of the same to the Purchaser and shall use its best endeavours promptly to prevent or remedy the same. [6 Schedule [no] (limitations on warranties) shall have effect in respect of the matters to which this Clause [no] applies to limit the liability of the Vendor in respect of the Warranties.] Precedent 8—Warranty as to good standing of business – assets sale The Vendor warrants to the Purchaser as follows: 1

that to the best of the Vendor’s knowledge, information and belief the Business complies in all respects with all relevant statutes, statutory regulations and requirements which are applicable to (describe business) as at the date of this agreement;

2 that save as disclosed in correspondence and replies to enquiries raised by the Purchaser the Assets are the absolute property of the Vendor free of any charge, lien, hire purchase agreement or other incumbrance; 3 that the Vendor is not engaged in any litigation affecting the Business or the Assets and to the best of the knowledge, information and belief of the Vendor no litigation is threatened or pending against the Vendor affecting the Business or the Assets; 4 that the Vendor has not received any complaints or notices about the conduct of the Business from any relevant authority or body; 5

that there are no employees of the Business other than the Employees (as defined) and that the details of the Employees and their qualifications, the starting date of their employment, hours, worked rates of pay per hour, holiday due, accrued holiday pay, pension rights and all other terms and conditions of their employment as stated in Schedule [no] are correct and accurate in all respects;

6 that the last [3 years’ accounts] of the Business as provided to the Purchaser by the Vendor give a true and fair view of the financial results of the Business for those periods and that the profits of the Business as shown in those accounts accurately represent the profits for the last [3] years and the figures given for weekly or monthly takings and any other figures relating to the Business provided by the Vendor to the Purchaser are true and accurate in all respects; 7 that the information contained in the Vendor’s replies to the enquiries raised by the Purchaser’s Solicitors is true and accurate in all respects. Precedent 9—Warranty as to good standing of business – share sale agreement The Vendors warrant and represent to the Purchaser as follows: 652

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1 No receiver, administrative receiver or administrator has been appointed nor any notice given, petition presented or order made for the appointment of any such person over the whole or any part of the assets or undertaking of the Company. 2 No petition has been presented, no order has been made and no resolution has been passed for the winding up of the Company or for the appointment of a liquidator or provisional liquidator of the Company. 3 No voluntary arrangement has been proposed or is in force under the Insolvency Act 1986 Section 1 in respect of the Company. 4 The Company has not stopped payment nor is it insolvent or unable to pay its debts as and when they fall due. 5 No unsatisfied judgment is outstanding against the Company and no demand has been served on the Company under the Insolvency Act 1986 Section 123(1)(a). 6 No distress, execution or other process has been levied in respect of the Company which remains undischarged nor is there any unfulfilled or unsatisfied judgment or court order outstanding against the Company. 7 There are not pending or in existence any investigations or inquiries by or on behalf of any governmental or other body in respect of the affairs of the Company. 8 None of the activities or contracts or rights of the Company is ultra vires, unauthorised, invalid or unenforceable or in breach of any contract or covenant. 9 The Company has at all times carried on business and conducted its affairs in all respects in accordance with its memorandum and articles of association for the time being in force and any other documents to which it is or has been a party. 10 The Company is empowered and duly qualified to carry on business in all jurisdictions in which it now carries on business. Precedent 10—Warranty as to vendor’s interests – share sale agreement The Vendors warrant and represent to the Purchaser as follows: 1 No Vendor [or Associate or person connected with any Vendor] has any interest (direct or indirect) in any other company or business which competes or has competed or is in the future likely to compete or has a close trading relationship with any business now carried on by the Company or intends to acquire any such interest. 2 No indebtedness (actual or contingent) and no contract or arrangement is outstanding between the Company and any Vendor or director of the Company or any person connected with any Vendor or director of the Company or in which any Vendor or director or 653

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persons connected with them are or may be interested (directly or indirectly). 3 No person is entitled to receive from the Company any finder’s fees, brokerage or other commission in connection with the sale and purchase of the Shares under this agreement. 4

There is not now outstanding and there has not at any time during the past [3 years] been outstanding any contract or arrangement to which the Company is a party and in which any Vendor or any director of the Company is or has been interested whether directly or indirectly.

5

The Company is not a party to, nor have its profits or financial position during the past [3 years] been affected by, any contract or arrangement which was not entirely of an arm’s length nature.

Precedent 11—Long form warranty as to no disputes and litigation – share sale agreement The Vendors warrant and represent to the Purchaser as follows: 1 The Company is not engaged, whether as plaintiff or defendant or otherwise, in any litigation or criminal or arbitration proceedings before any court, tribunal, statutory or governmental body, department, board or agency and no litigation, criminal or arbitration proceedings are pending or threatened by or against the Company, and having made due and careful inquiries the Vendors do not know of any facts which are likely to give rise to the same or which are likely to give rise to proceedings in respect of which the Company would be liable to indemnify any person concerned. 2 The Company is not subject to any order or judgment given by any court or governmental agency and has not been a party to any undertaking or assurance given to any court or governmental agency which is still in force nor are there any facts or circumstances which (with or without the giving of notice or lapse of time) would be likely to result in the Company becoming subject to such an order or judgment or being required to be a party to any such undertaking or assurance. 3 None of the Vendors, the Company, the directors of the Company or any of its employees is the subject of any investigation, inquiry, process or request for information in respect of any aspect of the activities of the Company by any governmental or European Communities body, department, board or agency or by any organisation charged with the supervision of any activities from time to time engaged in by the Company and no such procedures are pending or threatened, and having made due and careful inquiries the Vendors do not know of any facts which are likely to give rise to any such procedure. 4 There is no dispute with any revenue or other official department in the United Kingdom or elsewhere in relation to the affairs of the Company and there are no facts which may give rise to such dispute. 654

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5 There are no claims pending or threatened or capable of arising against the Company by any employee or workman or third party in respect of any accident or injury which are not fully covered by insurance. 6 The Company has not manufactured and/or sold products which are or have or will become in any material respect faulty or ­defective or which do not comply in any material respect with any warranties or ­ representations expressly or (whether by statute or otherwise) impliedly made by the Company. 7 The Company has not accepted any liability or obligation to service, repair, maintain, take back or otherwise do anything in respect of any articles or stock that would apply after any such article or stock has been delivered by it. 8 There has been no default by the Company under any agreement, trust deed, instrument or any arrangement to which the Company is a party and no threat or claim of default has been made and is outstanding and there is nothing which could cause: 8.1 any such agreement or arrangement to be terminated or rescinded by any other party, or 8.2 the terms of any such agreement or arrangement to be worsened or the Company prejudiced, as a result of anything done or omitted or permitted to be done by the Vendors or the Company. Precedent 12—Long form warranty as to compliance with statutes, permissions and data regulation – share sale agreement The Vendors warrant and represent to the Purchaser as follows: 1 The Company has obtained all licences, consents, approvals, permissions, permits, test and other certificates and authorities (public or private) necessary for the carrying on of its business in the places and in the manner in which such business is now carried on, all of which are valid and subsisting, and the Vendors know of no reason, nor any facts or circumstances which (with or without the giving of notice or lapse of time) would be likely to give rise to any reason, why any of such licences etc should be suspended, cancelled, revoked or not renewed. 2 The Company has established procedures under, and has complied with all requirements from time to time in force under, the Health and Safety at Work etc Act 1974 and all regulations made under that Act. 3 The Company has conducted and is conducting its business in all respects in accordance with all applicable laws and regulations (whether of the United Kingdom or elsewhere). 655

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4 The Company has complied in all respects with the provisions of the Data Protection Act 1984 and all regulations made under that Act and has established procedures to ensure continued compliance with all such legislation. 5 The Company has not received any notice from either the Data Protection Registrar or a data subject alleging non-compliance with the data protection principles or prohibiting the transfer of data nor has any individual claimed or will have the right to claim compensation from the Company under the Data Protection Act 1984 for loss or unauthorised disclosure of data. 6

No consumer credit agreement or consumer hire agreement made by the Company as creditor or owner or in respect of which it is the supplier under a debtor-creditor supplier agreement or linked transaction has been made in breach of the Consumer Credit Act 1974 or the regulations made under that Act.

Warranties as to intellectual property Precedent 13—General warranty as to ownership of intellectual property The Owner warrants, represents and undertakes as follows: 1 Subject to Clause [no] (indemnity clause) below, it is the absolute and unincumbered owner of [the Patents] and has caused its directors and employees to execute such assignments of [the Patents] as may be necessary to give title to [the Patents] to the Owner. 2 It has not done, and will not do nor agree to do during the continuation of this agreement, any of the following things if to do so would be inconsistent with the exercise by [the Licensee] of the rights granted to it under this agreement: 2.1 grant or agree to grant any rights in [the Patents] or any improvements thereto; or 2.2 assign, mortgage, charge or otherwise transfer any of [the Patents] or any of its rights or obligations under this agreement. 3 It is not aware that any third party owns or claims any rights in [the Patents]. 4 It is not aware (but without having carried out any investigation other than checking the actual knowledge of their employees and patent agents) that any third party owns or claims that it owns any rights which would be infringed by use of [the Patents] in accordance with the provisions of this agreement. Precedent 14—Alternative (pro-licensee) form – warranty as to ownership of intellectual property The Owner warrants, represents and undertakes to [the Licensee] as follows: 656

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1 It is the exclusive legal and beneficial owner of all rights, title and interest in [the Patents] and there are no liens, encumbrances or other charges over any of them. 2 Schedule [no] is a complete listing of all patents and patent applications [and other intellectual property] of which the Owner is aware relating to (specify) (‘the Technology’). 3 The Owner is entitled to license [the Patents] to [the Licensee] and has not previously licensed or assigned them or entered into any agreement relating to them or to the Technology, which might affect its ability to license [the Patents] to [the Licensee] in accordance with the provisions of this agreement or enter into this agreement or which would be inconsistent with the Owner’s warranties and obligations under this agreement. 4 It is registered as the proprietor of [the Patents] (or, in the case of patent applications, as the applicant), all registrations and filings necessary to preserve the rights of the Owner have been made and are in good standing, and the Owner has not done or omitted to do anything which may cause [the Patents] to lapse prematurely or be the subject of a compulsory licence. 5 It is not aware of any allegation or claim that it is not entitled to [the Patents] or to be registered as the exclusive owner of them. 6 [The Patents] are (or will be upon grant) valid and enforceable. 7 There are no allegations or proceedings, pending or threatened, which assert that development, manufacture, use or sale of any [Licensed Product] infringes or will infringe third-party rights or which challenge the validity or enforceability of [the Patents]. 8

The development, manufacture, use or sale of any [Licensed Product] will not infringe any third-party rights.

9 It has made a full and complete disclosure to [the Licensee] of all third-party relationships which may affect [the Licensee’s] full and complete exercise of rights under this agreement. 10 There is no information known to the Owner concerning any of the [Licensed Products] which indicates that [it may not be completely safe for administration to humans or that] the development and exploitation of the [Licensed Products] would not be commercially successful, or which might otherwise affect [the Licensee’s] decision to enter into this agreement other than information disclosed to [the Licensee] in writing [and attached to this agreement]. 11 In the event of the Owner becoming aware of any information which might affect its ability to give the warranties and representations set out above it shall promptly notify [the Licensee].

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Precedent 15—Warranties as to intellectual property rights – business sale agreement – short form 1 The Vendor has no interest in any intellectual property (whether registered or not) save for the rights set out in [the Disclosure Letter] all of which rights are legally and beneficially owned by it, are valid and in force and are not subject to any licence or authority in favour of another. 2 The processes employed and the products and services dealt in by [the Business] do not use, embody or infringe any intellectual property rights vested in any other party and do not give rise to a payment by the Vendor of any royalty or of any other sum. Precedent 16—Warranties as to intellectual property rights – business sale agreement – longer form 1 The Vendor is the absolute beneficial owner, registered proprietor or licensee of [the Intellectual Property Rights] and there are no subsisting licences or other agreements under which the Vendor has granted to any third party any rights or interest in connection with [the Intellectual Property Rights] or any rights to any know-how or confidential information relating to [the Business]. 2 [The Business] does not require any intellectual property rights (other than [the Intellectual Property Rights]) in order to use any of the processes employed in [the Business] and neither the operations of [the Business] nor its products infringe or are likely to infringe any patent or other rights of any kind vested in any other party or give rise to the payment of any royalty or similar sum or involves the use of any confidential information of any other party. 3 The Vendor owns the copyright in the designs of all its brochures, literature and marketing material and so far as the Vendor is aware none of the same infringes any right of any other person or involves the unlicensed use of confidential information disclosed to the Vendor by any person. 4 To the best of the Vendor’s knowledge, information and belief there has been no infringement of [the Intellectual Property Rights] at any time during the period of (specify period) prior to the date of this agreement. Precedent 17—Full form warranties as to intellectual property rights – business sale agreement A: TRADE AND SERVICE MARKS, TRADE AND SERVICE MARK APPLI­ CATIONS AND TRADE NAMES 1 The Vendor is the unincumbered sole beneficial owner of the trademarks set out in Part I of Schedule [no] and any devices and designs connected with the registrations (‘the Trade Marks’). The Trade 658

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Marks are registered in the name of the Vendor in all classes of goods covering the products sold under the relevant Trade Marks by the Vendor and: 1.1 no third party is in a position to prevent the use of the Trade Marks on the type of products now sold by or in respect of [the Business] as currently operated by the Vendor; 1.2 no third party is entitled to use names (with or without any associated design or device) which include the Trade Marks or words or devices similar to them on any goods within the classes in which the Trade Marks are registered or are now used or to do anything which would or might otherwise infringe any of the rights belonging to the Vendor; 1.3 the Trade Marks have full force and effect and are not the subject of and are not vulnerable to any proceedings for cancellation or rectification; 1.4 all registration and renewal fees have been fully paid up to [the date of this agreement or the date of completion] in respect of the Trade Marks and all other requirements of the Trade Marks Registry have been complied with. 2 The Vendor is the unincumbered and sole beneficial owner of the applications for trade marks (‘the Applications’) set out in Part II of Schedule [no]. Each Application has been validly made and is valid and subsisting at the date of this agreement and there is no reason why the Applications should not be granted. 3 The Vendor is the unincumbered sole beneficial owner of the trade names set out in Part III of Schedule [no] as well as the trade name represented by its corporate name (collectively referred to as ‘the Trade Names’). The Trade Names are registered in the name of the Vendor in all jurisdictions where they are used and are required to be registered. 4 After its registration (if registered) each of the Trade Marks was used within two years of its registration and has not since been unused for any period exceeding two years. 5 The Trade Marks and the Trade Names are all subsisting and nothing has been done or omitted to be done whereby any person will be able to seek the cancellation or rectification or any other modification of the registration of any of the Trade Marks or the Trade Names in any jurisdiction. 6 There is and has been no infringement of any of the Trade Marks or Trade Names by any third party. 7 None of the Trade Marks, the Trade Names or the names or words the subject of the Applications as used in [the Business] infringes the rights of any third parties. 659

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8 No licence has been granted to any third party in respect of any of the Trade Marks, the Trade Names or the Applications and there are no circumstances which could entitle a third party to call for such a licence. 9 There are no licences from third parties nor are any necessary for the use by the Vendor or the future use by the Purchaser of the Trade Marks, the Trade Names or the Applications. 10 No third party is able to challenge the use of the Trade Marks, the Trade Names or the Applications under any trade mark, unfair competition, passing off, copyright or analogous laws. 11 The Vendor is the [registered user or licensee] of the trademarks set out in Part IV of Schedule [no]. B: KNOW-HOW All know-how is adequately documented and to the extent that the knowhow is confidential or important to the manufacture of [the Products] or the provision of services by [the Business] no part of the same has been or will be disclosed to any third party by the Vendor, its officers, employees or agents. C: OTHER INDUSTRIAL PROPERTY 1 The Vendor is the unincumbered sole beneficial owner of each of the [patents and/or patent applications or registered designs] listed in Part V of Schedule [no] and no rights, licences, permissions or assignments dealing with any interest in any of such [patents and/or patent applications or registered designs] have been granted in favour of any third party. None of the Vendor’s rights under any of such [patents and/or patent applications or registered designs] is being challenged, violated or infringed by any person and the Vendor is under no liability to pay compensation pursuant to the provisions of the Patents Act 1977 Sections 40 and 41 or otherwise. 2 All registration and renewal fees have been fully paid up to [the date of this agreement] in respect of the patents listed in Schedule [no] and all other requirements of the Patent Office have been complied with. 3 [The carrying on of [the Business] does not require any licences or consents from third parties under any patents, patent applications, registered designs or other intellectual or industrial property rights. or All such consents and licences from third parties under any intellectual or industrial property rights as are required for the carrying on [the Business] have been applied for and granted.] 4 The carrying on of [the Business] does not infringe any patent, design or other proprietary rights of any third party. 660

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5 The Vendor is the unincumbered sole beneficial owner of all copyright in materials in which copyright subsists and of all unregistered designs which are used in connection with [the Business] and no rights, licences, permissions or assignments dealing with any interest in such copyrights and unregistered design rights have been granted in favour of any third party. Where necessary all such copyrights have been registered. 6 All such copyrights owned by the Vendor in connection with [the Business] are unincumbered and do not infringe the copyright of any third party. 7 There is no subsisting infringement by any third party of any of the copyrights owned by the Vendor in connection with [the Business]. 8 All advertising and marketing materials used by or proposed to be used by the Vendor in connection with [the Business] comply with all legal requirements in all countries in which these materials are used or proposed to be used. Such materials are not defamatory and there are no grounds under which such materials could be challenged for any reason whatever including without limitation defamation, trade libel or any other analogous law. 9 The Vendor is not a party to any secrecy agreement or other agreement which may restrict the use or disclosure of any information by it. Precedent 18—Full form warranties as to intellectual property rights – share sale agreement 1 All patents, trademarks, registered designs, design rights, applications for any of the foregoing, copyrights, trade or business names, inventions, processes, know-how and other industrial property rights (‘Intellectual Property Rights’) purported to be used or required by the Company are in full force and effect and are vested in and beneficially owned by the Company free from incumbrances. 2 [The Disclosure Letter lists all such or The Vendors have disclosed to the Purchaser in writing prior to the date of this agreement details of all] Intellectual Property Rights in respect of which the Company has been registered as proprietor or in respect of which application for registration has been made. None of the Intellectual Property Rights is being used, claimed, opposed or attacked by any other person nor does the use of such Intellectual Property Rights or any part of them infringe the Intellectual Property Rights owned or enjoyed by any third party. 3 There are no Intellectual Property Rights owned or used by the Company capable of registration which have not been so registered or in respect of which application for registration has not been made and is pending. 661

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4 None of the Intellectual Property Rights owned or used by the Company is the subject of any claim, opposition, attack, assertion or other arrangement of whatever nature which does or may impinge upon their use, validity, enforceability or ownership by the Company and there are no grounds or other circumstances which may give rise to the same. 5 The Company is not using any process which involves the exercise of rights owned by third parties or gives rise to a liability to pay ­compensation under the Patents Act 1977 or makes use of information confidential to a third party except under valid licences from such third parties all of which are in full force and effect [and are listed in the Disclosure Letter]. 6 No licences or registered user or other rights have been granted or agreed to be granted to any third party in respect of such Intellectual Property Rights. 7

No disclosure has been made to any person other than the Purchaser of any of the industrial know-how or the financial or trade secrets of the Company except properly and in the ordinary course of business and on the footing that such disclosure is to be treated as being of a confidential nature.

8 No act has been done or has been omitted to be done to entitle any authority or person to cancel, forfeit or modify any Intellectual Property Rights. 9

The Company does not carry on business under any name other than the name under which the Company has been incorporated [and the business names (names)].

10 The Company has complied in all respects with the requirements of the Companies Acts with regard to company names and business names and such names do not infringe the rights of any third party. Other warranties Precedent 19—Warranty as to non-infringement of competition laws The Vendors warrant and represent to the Purchaser that no agreement, practice or arrangement carried on by the Vendor and relating to the Business or its Assets: 1 has the object or effect of the prevention, restriction or distortion of competition within the UK contrary to the Competition Act 1998 or is or has been the subject of any enquiry, investigation or proceeding in respect of the same; or 2 is or has been the subject of an enquiry, investigation, reference or report under the Competition Act 1998 or any previous legislation relating to monopolies or mergers or the Competition Act 1980.

662

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Appendix Boilerplate Agreement

(See Recitals, below)

THIS AGREEMENT dated ______________________________ 201[ ] is made by and between: (1) ABC LIMITED, a company incorporated in England and Wales [under company registration number [ ] and] whose registered office is at 1 The Office Block, Office Street, London, EX1 2PP, United Kingdom (“ABC”); and (2) DEF, INCORPORATED, a company incorporated in Ruritania under State Ordinance 555 of 1983, whose principal place of business is at Company Buildings, City Street, Capital City, Ruritania (“DEF”).

RECITALS: A

This is a made-up Agreement, designed to illustrate some common boilerplate clauses. It includes a selection of the clauses that are to be found in this book. It is unlikely that all of the following clauses would be found in a single agreement.

B

The boilerplate provisions in clause 7 have been set out in alphabetical order to make it easier to cross refer to the sections of this book which discuss those clauses. In practice, boilerplate clauses are usually grouped in a more logical sequence, eg by putting 7.1, 7.4 and 7.22 together.

C

Before using any of these clauses it is recommended that readers refer to the section of the book in which the clause is discussed.

IT IS AGREED AS FOLLOWS: 1 Definitions In this Agreement, the following words shall have the following meanings, unless the context requires otherwise: 663

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Affiliate

In relation to a Party, any group undertaking of that Party, where ‘group undertaking’ has the meaning given in s  1161(5) of the Companies Act 2006 (as amended).

Commencement date

1 January 2018.

Parties

ABC and DEF, and ‘Party’ shall mean either of them.

Price

The sums of money described in the attached Schedule 2.

Project

The activities described in the attached Schedule 1.

Territory

Shall mean the countries comprising the European Union at the date of this Agreement.

2 Project 2.1 DEF shall perform the Project within the Territory. DEF shall use its best endeavours to complete the Project and deliver a final report to ABC no later than (date). 2.2 DEF shall send to ABC every six months during the continuation of this Agreement and within 30 days of its termination for any reason, a written report giving details of its activities under this Agreement over the previous six month period. The report shall be substantially in the form of, and give details of the matters described in, Schedule 1. 2.3 Copyright and other intellectual property in any reports, data and other materials prepared by DEF in the course of the Project shall vest in ABC. To the extent that such copyright and intellectual property does not automatically vest in ABC pursuant to this clause 2.3, DEF hereby assigns and agrees to assign by way of present and, where possible, future assignment, all such copyright and intellectual property to ABC. (See further clause 7.12.)

3 Payments 3.1 In consideration for DEF undertaking the Project, ABC shall pay DEF the Price, in accordance with the provisions of Schedule 2. Payment of the Price shall be due within 30 days of the date of DEF’s invoice. 3.2 All sums due under this Agreement: (a) are exclusive of Value Added Tax which where applicable will be paid by ABC to DEF in addition; (b) shall be made by the due date, failing which DEF may charge ABC interest on late payments on a daily basis at a rate equivalent to 31% above the base lending rate of [ ] Bank plc then in force; 664

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(c) shall be paid in pounds sterling by cheque made payable to ‘DEF Offshore Account’.

4

Duration and termination

4.1 This Agreement shall take effect from the Commencement Date. 4.2 Subject to any earlier termination under this clause 4, this Agreement shall continue in force until the [second] anniversary of the Commencement Date when it shall terminate automatically by expiry. 4.3 Without prejudice to any other right or remedy it may have, either of the Parties shall be entitled to terminate this Agreement immediately by notice in writing to the other Party [(but not after 90 days of the event in question first coming to the attention of the Party entitled to give the notice)] if any of the events set out below shall occur. The said events are: (a) if the other Party shall commit any [material] breach of any of its obligations under this Agreement and shall fail to remedy such breach (if capable of remedy) within 30 days after being given notice by the first party so to do; or (b) the other Party is declared or becomes insolvent, or convenes a meeting of its creditors or proposes or makes any arrangement or composition with or any assignment for the benefit of its creditors, or a petition is presented or a meeting is convened for the purpose of considering a resolution or other steps are taken for the winding up of the other Party (save for the purpose of and followed by a voluntary reconstruction or amalgamation), or if an incumbrancer takes possession of or a trustee, receiver, liquidator, administrator, administrative receiver or similar officer is appointed in respect of all or any part of its business or assets, or any distress execution or other legal process is levied, threatened, enforced upon or sued out against any of such assets, or any similar or analogous action is taken or suffered in any jurisdiction. 4.4 ABC may terminate this Agreement at any time on 90 days in writing to DEF. 4.5 Upon termination of this Agreement for any reason: (a) the provisions of clauses [ ] and [ ] shall continue in force without limit of time and the provisions of clause [ ] shall continue in force for a period of 5 years from the date of termination; (b) each Party shall return to the other Party any documents in its possession or control which contain or record any of the confidential information of the other Party; and 665

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(c) subject as provided in this clause, and except in respect of any accrued rights, neither Party shall be under any further obligation to the other. 5 Confidentiality (Note this is a very brief clause; more detailed provisions will be appropriate if valuable confidential information is involved) 5.1 Each Party shall keep confidential (a) the terms of this Agreement and (b) any and all confidential information that it may acquire in relation to the business or affairs of the other Party. Neither Party shall use the other Party’s confidential information for any purpose other than to perform its obligations under this Agreement. Each Party shall ensure that its officers and employees comply with the provisions of this clause 5. 5.2 The obligations on a Party set out in clause 5.1 shall not apply to any information which: (a) is publicly available or becomes publicly available through no act or omission of that Party; or (b) a Party is required to disclose by order of a court of competent jurisdiction. 5.3 The provisions of this clause 5 shall survive any termination of this Agreement for a period of 5 years from termination. 6

Warranties, liability and indemnities

6.1 Each of the Parties warrants that it has power to enter into this Agreement [and has obtained all necessary approvals to do so]. 6.2 DEF warrants and undertakes that it is not aware as at the date of this Agreement of anything within its reasonable control which might or will adversely affect its ability to fulfill its obligations under this Agreement. 6.3 Each of the Parties acknowledges that, in entering into this Agreement, it does not do so in reliance on any representation, warranty or other provision except as expressly provided in this Agreement, and any conditions, warranties or other terms implied by statute or common law are excluded from this Agreement to the fullest extent permitted by law. 6.4 Except in the case of death or personal injury caused by DEF’s negligence, DEF’s liability under or in connection with this Agreement, whether arising in contract, tort, negligence, breach of statutory duty or otherwise howsoever, shall not exceed the sum of £10,000,000 (ten million pounds sterling). 6.5 Neither Party shall be liable to the other Party in contract, tort, negligence, breach of statutory duty or otherwise for any loss, damage, costs or expenses of any nature whatsoever incurred or suffered by that 666

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other Party of an indirect or consequential nature including without limitation any economic loss or other loss of turnover, profits, business or goodwill. 7 General 7.1 Agency, partnership etc This Agreement shall not constitute or imply any partnership, joint venture, agency, fiduciary relationship or other relationship between the Parties other than the contractual relationship expressly provided for in this Agreement. Neither Party shall have, nor represent that it has, any authority to make any commitments on the other Party’s behalf. 7.2 Amendments etc This Agreement may not be released, discharged, supplemented, interpreted, amended, varied or modified in any manner except by an instrument in writing signed by a duly authorised officer or representative of each of the Parties hereto. 7.3 Announcements No Party shall issue or make any public announcement or disclose any information regarding this agreement unless prior to such public announcement or disclosure it furnishes all the Parties with a copy of such announcement or information and obtains the approval of such persons to its terms. However, no Party shall be prohibited from issuing or making any such public announcement or disclosing such information if it is necessary to do so to comply with any applicable law or the regulations of a recognised stock exchange. The Parties agree to the issue of a press release substantially in the form attached as Annex A, upon and following signature of this Agreement by both Parties. 7.4 Assignment Subject to the following sentence, neither Party may assign, delegate, sub-contract, mortgage, charge or otherwise transfer any or all of its rights and obligations under this Agreement without the prior written agreement of the other Party. A Party may, however, assign and transfer all its rights and obligations under this agreement to any person to which it transfers all of its business, provided that the assignee undertakes in writing to the other Party to be bound by the obligations of the assignor under this Agreement. 7.5 ‘Contra proferentem’ rule The Parties acknowledge and agree that this Agreement has been jointly drafted by the Parties and accordingly it should not be construed strictly against either Party. 667

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7.6 Contracts (Rights of Third Parties) Act 1999 Except as provided in clause [ ], this Agreement does not create any right enforceable by any person who is not a party to it (‘Third Party’) under the Contracts (Rights of Third Parties) Act 1999, but this clause does not affect any right or remedy of a Third Party which exists or is available apart from that Act. 7.7 Costs and expenses Each Party shall bear its own legal costs and other costs and expenses arising in connection with the drafting, negotiation, execution [and registration] of this Agreement. 7.8 Counterparts This Agreement may be executed in any number of counterparts or duplicates, each of which shall be an original, and such counterparts or duplicates shall together constitute one and the same Agreement. 7.9 Cumulative remedies Any right or remedy to which either party is, or may become, entitled under this Agreement, or in consequence of the other’s conduct, may be enforced from time to time separately or concurrently with any right or remedy given by this Agreement or now or afterwards provided for and arising by operation of law, so that such rights and remedies are not exclusive of the other or others but are cumulative. Any right or remedy expressly included in any provision of this Agreement shall not be construed as limiting a party’s rights or remedies under any other provision of this Agreement. 7.10 Entire Agreement This Agreement contains the whole agreement between the parties [in respect of (subject matter of agreement)] and supersedes and replaces any prior written or oral agreements, representations or understandings between them [relating to such subject matter]. The parties confirm that they have not entered into this Agreement on the basis of any representation that is not expressly incorporated into this Agreement. 7.11 Force majeure Neither Party shall have any liability under or be deemed to be in breach of this Agreement for any delays or failures in performance of this Agreement which result from circumstances beyond the reasonable control of that Party. The Party affected by such circumstances shall promptly notify the other Party in writing when such circumstances cause a delay or failure in performance and when they cease to do so. If such circumstances continue for a continuous period of more than 6 months, either Party may terminate this Agreement by written notice to the other Party. 7.12 Further assurances 668

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DEF shall execute such documents and give such assistance as ABC may require: (a) to secure the vesting in ABC of all rights in [the Copyright]; (b) to uphold ABC’s rights in [the Copyright]; and (c) to defeat any challenge to the validity of, and resolve any questions concerning, [the Copyright]. 7.13 Insurance ABC undertakes and agrees: (a) to maintain and pay all premiums in respect of a comprehensive insurance policy (in terms approved by DEF issued by an insurer [nominated] or [approved] by DEF in respect of (describe location) (‘the Location’) (excluding its main structure) and all the items stored there; (b) to note on such policy that: (i) DEF shall be covered by such policy in respect of all claims arising from activities at the Location which are risks covered by such policy; and (ii) the insurer shall notify DEF in the event of any late premium payment by, or any breach of the terms of such insurance on the part of, ABC; and (c) not to cause or permit any breach of any such insurance nor any other insurance in respect of the Location. 7.14 Interpretation In this Agreement unless the context otherwise requires: (a) words importing any gender include every gender; (b) words importing the singular number include the plural number and vice versa; (c) words importing persons include firms, companies and corporations and vice versa; (d) references to numbered clauses and schedules are references to the relevant clause in or schedule to this Agreement; (e) reference in any schedule to this Agreement to numbered paragraphs relate to the numbered paragraphs of that schedule; (f) any obligation on any Party not to do or omit to do anything is to include an obligation not to allow that thing to be done or omitted to be done; 669

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(g) any Party who agrees to do something will be deemed to fulfil that obligation if that Party procures that it is done; (h) the headings to the clauses, schedules and paragraphs of this Agreement will not affect the interpretation; (i) any sum payable by one party to the other will be exclusive of VAT which will, where it is chargeable, be paid in addition to the sum in question at the time when the sum in question is due to be paid; (j)

any reference to an enactment includes reference to that enactment as amended or replaced from time to time and to any subordinate legislation or byelaw made under that enactment.

7.15 Language This Agreement is made only in the English language. If there is any conflict in meaning between the English language version of this Agreement and any version or translation of this agreement in any other language, the English language version shall prevail. 7.16 Law and jurisdiction The validity, construction and performance of this Agreement shall be governed by English Law. Any dispute arising under or in connection with this Agreement shall be subject to the exclusive jurisdiction of the English courts to which the Parties to this Agreement hereby submit. 7.17 Notices (a) Any notice to be given under this Agreement shall be in writing and shall be sent by first class mail or air mail, or by fax or e-mail (confirmed by first class mail or air mail), to the address of the relevant Party set out at the head of this Agreement, or to the relevant fax number set out below, or such other address or fax number as that Party may from time to time notify to the other Party in accordance with this clause 7.17. The fax numbers of the Parties are as follows: ABC: [44] 1234 567 890; DEF: [999] 1234 123 456. (b) Notices sent as above shall be deemed to have been received three working days after the day of posting (in the case of inland first class mail), or seven working days after the date of posting (in the case of air mail), or on the next working day after transmission (in the case of fax messages, but only if a transmission report is generated by the sender’s fax machine recording a message from the recipient’s fax machine, confirming that the fax was sent to the number indicated above and confirming that all pages were successfully transmitted). (c) In proving the giving of a notice it shall be sufficient to prove that the notice was left, or that the envelope containing the notice was 670

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properly addressed and posted, or that the applicable means of telecommunication was addressed and despatched and despatch of the transmission was confirmed and/or acknowledged as the case may be. 7.18 Schedules The provisions of Schedules 1 and 2 to this Agreement shall form part of this Agreement as if set out here. 7.19 Set-off Where DEF has incurred any liability to ABC, whether under this Agreement or otherwise and whether such liability is liquidated or unliquidated, ABC may set off the amount of such liability against any sum that would otherwise be due to DEF under this Agreement. 7.20 Severance If any provision of this Agreement is prohibited by law or judged by a court to be unlawful, void or unenforceable, the provision shall, to the extent required, be severed from this Agreement and rendered ineffective as far as possible without modifying the remaining provisions of this agreement, and shall not in any way affect any other circumstances of or the validity or enforcement of this Agreement. 7.21 Sub-contracting With the prior written consent of ABC (such consent not to be unreasonably withheld or delayed) DEF may perform any or all of its obligations under this Agreement through agents or sub-contractors, provided that DEF shall remain liable for such performance [and shall indemnify ABC against any loss or damage suffered by ABC arising from any act or omission of such agents or sub-contractors]. 7.22 Successors and assignees (a) This agreement shall be binding upon, and enure to the benefit of, the Parties and their respective successors and permitted assignees, and references to a Party in this Agreement shall include its successors and permitted assignees. (b) In this Agreement references to a Party include references to a person: (i)

who for the time being is entitled (by assignment, novation or otherwise) to that Party’s rights under this Agreement (or any interest in those rights); or

(ii) who, as administrator, liquidator or otherwise, is entitled to exercise those rights; and in particular those references include a person to whom those rights (or any interest in those rights) are transferred or pass as a result of a merger, division, reconstruction or 671

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other reorganisation involving that Party. For this purpose, references to a Party’s rights under this Agreement include any similar rights to which another person becomes entitled as a result of a novation of this Agreement. (c) This clause 7.22 shall be subject to, and without prejudice to, the provisions of clause 7.4. 7.23 Time is of the essence Time shall be of the essence of this agreement as regards any time, date or period mentioned in this agreement or subsequently substituted as a time, date or period by agreement in writing between the Parties. 7.24 Waiver No failure or delay by the Bank in exercising any right, power or privilege under this letter shall impair the same or operate as a waiver of the same nor shall any single or partial exercise of any right, power or privilege preclude any further exercise of the same or the exercise of any other right, power or privilege. The rights and remedies provided in this letter are cumulative and not exclusive of any rights and remedies provided by law. AGREED by the Parties through their authorized signatories [on the date set out at the head of this Agreement]: [SCHEDULES 1 and 2] For, and on behalf of [ ]

For, and on behalf of [ ]

signature

signature

print name

print name

job title

job title

date

date

672

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Index

A Acknowledgment meaning, 11 account bank, from, of receipt of letter, 13–14 acknowledges and agrees, 12 contents, 10 contractual estoppel, 11 conveyance to contain, 14 copyright information, display of, 15 deeds, for production of, 14 drafting issues, 11–12 effect, 12 examples, 13–15 exclusion as, 11 fact, confirmation of, 10, 13 false underlying fact, effect, 12 form, 10 franchisee, by, 13 generally, 10–11 group undertaking as, 17 incorrect or false facts, as to, 10–11 interpretation, 12 linkage and use of clause, 12–13 location of clause in agreement, 12 non-commercial matters, in, 10 precedents, 13–15 purpose, 10–11 state of affairs, confirmation of, 13 transfer to contain, 14 use of, 10–11, 12–13 Advance payment see Deposit; Part payment Affiliate meaning, 16, 17, 19, 20 drafting issues, 16–18 linkage of clause, 19 location of clause in agreement, 18 party to agreement, as, 17 precedents, 19–21 purpose of reference to, 16 statutory definitions, use of, 16–17 use of definition, 19 Agency meaning, 29 agent: meaning, 29–30 assertion of relationship, 34 contractual relationship only, 33 drafting issues, 32–33 exclusion of other relationships, 32–33 existence of, 29–30 linkage and use of clause, 33 location of clause in agreement, 33 no undisclosed principal, 34

Agency—contd non-existence of, 33–34 precedents, 33–34 purpose of clause, 29 relevant contracts, 29 signing of agreement, role in, 32–33 Agent for service address for notices, 37, 38 appointment of, 36, 37 drafting issues, 35–36 failure to perform duties, 36, 37 legal issues, 35–36 linkage of clause, 37 location of clause in agreement, 37 notices clause, 37 precedents, 37–39 process agent, appointment of, 38–39 purpose of clause, 35 service of documents— address for, 38 drafting issue, as, 35–36 effective, 37–38 methods of, 37 time limit, 37 use of clause, 37 Agreement see Contract Agreement to enter see also Execution clause; Signature block purpose of clause, 40 Alternative dispute resolution see also Arbitration drafting issues, 67–72 generally, 66 ignoring recommendation to use, 66 precedents, 73–80 unsuitable, where, 66 Amendment accidentally made, whether having legal effect, 49 case analysis, 52–53 consideration for making, 50 drafting issues, 48–50 effect on other parts of contract, 49 form or procedure for, 49 formalities required, 51 informally made, whether having legal effect, 49 instrument in writing, by, 51 interest in land, sale or other disposition of, 50 interest rate, altering, 51 linkage of clause, 50–51 location of clause in agreement, 50

673

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Index Amendment—contd methods of making, 49 oral agreement, effect, 47 parties needing to agree to, 48 permissible, whether, 48 persons authorised to make, 49 precedents, 51–52 provisions subject to, 48 purpose of clause, 47–48 recording changes, 49 separate document, changes made by, 50 specifying clauses to be altered, 51–52 subsequent conduct, effect, 47 third parties, effect on, 50 use of clause, 50–51 value of clause, 48 Announcements agreement, whether needed, 56 approval— generally, 57 new company investment agreement, 57–58 sale agreement, 57 sale of assets of business in receivership, 58 share transaction, 58 benefits accruing from— certain companies, for, 55 generally, 54 confidentiality, and, 57 consent, whether required, 56 drafting issues, 55–56 employees etc making, 56 linkage and use, 57 location of clause in agreement, 56 necessary to make, whether, 56 no announcements, 58 permitted, whether, 55 persons allowed to make, 56 precedents, 57–59 press release, agreed form of, 58 public authority, party being, 57 purpose of clause, 54–55 restrictions on, 56 software, for development and release of, 59 subsequent use, whether permitted, 56 text, whether included with agreement, 56 timing and method of— generally, 55–56 importance of, 55 wording, agreement as to, 56 Appointment acceptance of, 61 agent, of, 62 clear wording, 61 consideration, existence of, 61 contents of clause, 60 definitions, use of, 61 drafting issues, 61 generally, 60 length of, 61 linkage and use, 61 location of clause in agreement, 61

Appointment—contd precedents, 61–62 purpose of clause, 60 service provider, of, 62 services, of party to provide services, 61 Arbitration see also Alternative dispute resolution advantages, 63 appeal from, excluding, 71–72 arbitral institutions— list of, 65 reference to, 74 arbitrator— disputes for consideration by, 70 expertise or qualification, whether needed, 69 method of choosing, 68–69 need for, 67 single or more than one, 68, 69 sole, 73 specialist, 77–78 two arbitrators and umpire, 73–74 confidentiality issues, 65 consumer issues, 72 disadvantages, 63–64 disputes for consideration, 70 drafting issues, 67–72 effect of agreement to submit to, 66–67 enforceability issues, 65 expert— appointment, 78–79 final determination by, 74–75 need for, 67 rather than arbitrator, use of, 64, 67 use of, 67–68 generally, 66–67 international arbitrations— enforcement, 65–66 language and law in, 71 international contracts, 65–66 length of agreement, 68 linkage and usage, 72 location of clause in agreement, 72 management levels, reference through, 74–75 multi-arbitrator agreement, 69, 79–80 post-termination issues, 72 precedents, 73–80 procedural rules, adoption of, 70–71 purpose of clause, 63 senior representatives, reference to, 75–76 specialist expert, involvement of, 77–78 statutory provisions, applicability, 65 types of contracts found in, 67 Assignment and novation agreement, assignees bound by, 89 assignment— affiliate, to, 86 between companies in a group, 86 limited, 87 limited power of, 88–89 one party free to assign, 88 permissible, whether, 83 prohibition see prohibition on below

674

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Index Assignment and novation—contd assignment—contd use of word in agreement, 81 assignment of rights: meaning, 81–82 case analysis, 90–93 conditions attached to, 85 consent— assignment without, 87–88 not unreasonably withheld, 88 persons able to give, 84 time for providing, 85 types of, 84–85 whether required, 84 drafting issues, 83–86 elements of clause, 81 extent of obligations and rights assigned, 84 liability after assignment, 85 linkage and use, 86–87 location of clause in agreement, 86 no-assignment clause, effect, 82–83 novation— meaning, 82 minimum set of clauses for, 89–90 partial assignment, 85–86 persons who can assign or transfer, 83 precedents, 87–90 prohibition on— agreement of other party, without, 88 assignee’s covenant required, where, 88 generally, 83 precedent, 87 subject to permission of other party, 88 without consent, 87–88 purpose of clause, 81 sub-contracting— generally, 85 permitted, consequences where, 89 prohibition on, 89 subject matter of assignment or transfer, 83–84 third party contracts, effect on, 86 transfer of business, power to assign on, 89 transfer of obligations: meaning, 82 Assigns see Successors and assigns Attestation clause see Signature block Auditing of records see under Records Authority see also Capacity meaning, 124 agreement, variation or supplementing of, 129 approval, to give, 129 attestation clause, use of, 125, 129 board resolution to approve execution, 127 boilerplate to indicate, use of, 125–126 circumstances surrounding question of, 125 company notice as to who can bind, 127 contract, unable to sign, 127 deed, whether contract signed as, 128 directors, of, 126, 127–128, 129 drafting issues, 126–128 execution clause, use of, 125, 129 internal rules, use of, 126 linkage and use, 129 location of clause in agreement, 128–129

Authority see also Capacity—contd methods of signifying, 125 notices, to sign, 129 precedents, 129–130 purpose of clause, 124 representative, of, 130 secretary, of, 126 senior person binding company, 126 signature, to provide, 127, 128 unincorporated society, signature mandate by, 130 warranties, use of, 125, 129 B Best endeavours see also Reasonable endeavours absolute obligations— examples of, 102 resistance to, 107 advantageous loan, to obtain, 109 approval, to obtain necessary, 109 avoidance of expression, 106, 108 case analysis, 111–112 drafting issues, 106–107 franchise, to operate, 109 location of clause in agreement, 108 obligations under— breach, determining, 108–109 clarifying nature of, 108 nature of, 104 precedent, 108 other expressions, use of, 106 precedents, 108–111 purpose of clause, 102 qualified obligations, examples of, 102–104 reasonable endeavours, compared with, 104–105 specific, difficulties in being, 106–107 speedy resolution of dispute, 109 Boilerplate meaning, 2, 9 commercial issues raised by clauses, 1 generally, 1–2 important clauses, 2–4 inclusion of clauses, matters for consideration, 2 lesser importance, clauses of, 1n1 location of clause in agreement, 4 no boilerplate, where, 3 origin of meaning, 9 potentially conflicting objectives, weighing up, 1 table of clauses and location, 4–9 types of clauses, 3–4 Boilerplate agreement agency, existence of, 667 amendments etc. 667 announcements, 667 assignment, 667 commencement, 663 confidentiality, 666 contra proferentem rule, 667 Contracts (Rights of Third Parties) Act 1999, effect, 668

675

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Index Boilerplate agreement—contd costs and expenses, 668 counterparts, 668 cumulative remedies, 668 definitions, 663–664 duration, 665 entire agreement, reference to, 668 execution and signature, 672 fiduciary or other relationship, existence of, 667 force majeure, 668 further assurances, 668–669 indemnities, 666–667 insurance, 669 interpretation, 669–670 joint venture, existence of, 667 language, use of, 670 law and jurisdiction, 670 liability, 666–667 notices, 670–671 parties, 663 partnership, existence of, 667 payments, 664–665 project, 664 recitals, 663 schedules, 671 set-off, 671 severance, 671 signature and execution, 672 sub-contracting, 671 successors and assigns, 671–672 termination, 665–666 time of the essence, 672 waiver, 672 warranties, 666–667 Breach of contract meaning, 116 case analysis, 120–123 conditions, breach of— failures amounting to, 119–120 importance of, determining, 119 liability, escaping, 120 drafting issues, 119–120 level of, not quantifying, 117–118 liability, escaping, 120 linkage and use, 120 location of clause on agreement, 120 material breach— meaning, 116–117 advantage of using such wording, 118–119 matters amounting to breach, 119–120 obligations, breach of— failures amounting to, 119–120 importance of, determining, 119 liability, escaping, 120 purpose of clause, 116 remedies for party not in breach, 638 seriousness of, not quantifying, 117–118 substantial breach— meaning, 116–117 advantage of using such wording, 118–119 terms, breach of— failures amounting to, 119–120

Breach of contract—contd terms, breach of—contd importance of, determining, 119 liability, escaping, 120 waiver see Waiver and release C Capacity see also Authority meaning, 124 circumstances surrounding question of, 124 determining, statutory provisions as to, 124 drafting issues, 126–128 linkage and use, 129 location of clause in agreement, 128–129 persons lacking, 124 precedents, 129–130 purpose of clause, 124 Charge meaning, 131, 134 drafting issues, 132 extent, 132 foreign parties, and, 132 linkage and use, 133 location of clause in agreement, 132 no charging clause, precedents— agency agreement, 134 generally, 133 joint venture agreement, 134 patent assignment, 133 patent licensing assignment, 133 patent licence agreement, prohibition in, 133 payments or assets, over, 131 precedents, 133–134 prohibition on entering of, 132 purpose of clause, 131 warranty as to freedom from, 134 Clauses see also Boilerplate generally, 1–2 importance, 2–4 location in agreement, 4 no boilerplate, 3 table of clauses and location, 4–9 types, 3–4 Commencement date agreement date— before, 136, 138 confusion with, 136 different to, 135 precedent, 137 same date, 138 between two periods, 138 case analysis, 138–139 default position, 135 drafting issues, 135–136 fixed term, 138 generally, 135 linkage and use, 137 location of clause in agreement, 136–137 precedents, 137–138 purpose of clause, 135 signature date, and, 135 suggested best practice, 135

676

Z02_Boilerplate_Index.indd 676

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Index Completion meaning, 140, 142 activities, 143–144 banker’s draft to be delivered on, 143 business or business assets, sale of, 140 completion money: meaning, 143 date: meaning, 142 documents to be delivered on, 143 drafting issues, 140–141 linkage and use, 141 location of clause in agreement, 141 place of, 142 precedents, 142–144 purpose of clause, 140 real property, sale of, 140 sale of business agreement, and, 143 suggested best practice, 140–141 Condition meaning, 145 precedent see Condition precedent subsequent see Condition subsequent Condition precedent meaning, 145–146 case analysis, 151–153 clauses applicable to, 147 deed of adherence, 150 drafting issues, 147–148 events encompassed by, examples of, 145 failure to meet, effect, 147–148 form, 146–147 liability for failure to meet, extent of, 148 linkage and use, 148–150 location in agreement, 148 meeting, whether subject to other party’s approval, 148 obligation to meet, clarity as to, 148 occasions for use of, 149 patent grant, 150 planning consent, 150 planning obligations, 150 precedents, 150–151 purpose of clause, 145–147 time limit for meeting, 147 uncertainty, whether void for, 147 whether binding contract until fulfilment of, 147 Condition subsequent meaning, 146 agency agreement, minimum performance in, 150 case analysis, 151–153 clauses applicable to, 147 company formation agreement, 150 contract for services, 151 drafting issues, 147–148 failure to meet, effect, 147–148 form, 146–147 liability for failure to meet, extent of, 148 linkage and use, 148–150 location in agreement, 148 meeting, whether subject to other party’s approval, 148 obligation to meet, clarity as to, 148 occasions for use of, 149

Condition subsequent—contd precedents, 150–151 property management agreement, 150 purpose of clause, 146 time limit for meeting, 147 uncertainty, whether void for, 147 whether binding contract until fulfilment of, 147 Confidential information see also Confidentiality meaning, 157 disclosure of— certain parties, to, 159–160 group of companies, party as member of, 18 Confidentiality affiliate, disclosure to, 162 agreement’s existence, whether confidential, 159 appropriateness of clause, 161–162 business sale agreement, 164 case analysis, 171–175 confidential information— meaning, 157, 163–164 circumstances giving rise to, 157 security measures, whether necessary, 159 use of, 157–159 consequences of termination clause, need for, 161 contract, whether existence confidential, 159 contractual provisions, need for, 156 disclosure to certain parties, 159–160 drafting issues, 156–160 duration of obligations, 160 exceptions to obligations, 159 failure to include clause, effect, 154 full form clause, 165–167 general confidentiality clause, 163 information— meaning, 163 covered by agreement, 156–157 know-how— licensing agreement, 166 obligation to protect, 408 linkage and use, 161–162 location of clause in agreement, 160 longer form clause, 164–165 non-exclusive jurisdiction clause, 162 parties under obligation of, 157 precedents, 162–171 production licence, joint application for, 166–167 proposed joint project, agreement by letter as to, 167–168 public authority, party being, 160 purpose of clause, 154 separate confidentiality agreement— precedent, 167–168 where appropriate, 156 shareholders’ agreement, 164, 165 simple clause, 162 software distribution agreement, 164–165

677

Z02_Boilerplate_Index.indd 677

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Index Confidentiality—contd technology licence, 165 trade secret— obligation to protect, 408 Trade Secrets Directive, effect, 154–155 two-way confidentiality agreement, precedent, 168–171 unlawful acquisition: meaning, 155 unlawful use and disclosure: meaning, 155 warranties, need for, 161 Consent meaning, 176–177 case analysis, 180–182 consultation distinguished, 188 different to what other parties expect, 178 drafting issues, 177–178 factors to take into account, 178 leases, 177–178 linkage and use, 178–179 location in agreement, 178 precedents, 179–180 press releases, 179 prior, where need for, 179 purpose of clause, 176 real property transactions, 177–178 requirement for, 179 time limit on, 178 withholding— reasons for, whether required 178 restrictions on, precedent, 179–180 Consultation meaning, 188–190 advice, form of, 189 commercial context, in, 190 consent distinguished, 188 drafting issues, 190 genuineness, need for, 189 intellectual property— agreements, 188 infringement of rights, 191 licensee’s sub-licence, on grant of, 192 linkage and use, 190–191 location in agreement, 190 mutual consultation clause, 191 need for, 188 no response required, 190 performing artist agreement, 191 precedents, 191–193 publishing agreement, 191 purpose of clause, 188–190 receptiveness to views of consulted party, 189 recommendations, and consideration of, 191 requirements for, 189–190 sale of business, 191 sufficient reasons, need for, 189 sufficient time, need for, 189 third party supplier, before use of, 192–193 timeshare agreement, 191 Consumer contract cancellation rights, provision of information etc as to, 202–203 case analysis, 208–210

Consumer contract—contd delivery, points concerning, 203–204 drafting issues, 196–205 financial services, legislation as to, 213– 214 guarantee— sample wording for, 207 whether offered, 203 impossibility of preparing terms and conditions for use by consumer, 205 information prior to entry into, provision of, 200–202 legibility, need for, 198 legislation see statutory provisions below liability— restriction on excluding etc, 204–205 problems as to exclusion or limitation of, 196–197 post-1 October 2015, 194 post-4 June 2014, 196 potentially unfair terms, need to consider, 199–200 pre-1 October 2015, 194 precedents, 205–207 price indexation clause, 214 price payable, prominence of wording as to, 199 purpose of clause, 194–196 requirements on customer, statement as to, 197–198 risk, points concerning, 203–204 statutory guidance, need to consider, 200 statutory provisions— extracts from, 211–214 financial services, as to, 213–214 price indexation clause, 214 relevant, 194–196 strengths, weaknesses etc, statement of, 197–198 subject matter, prominence of wording as to, 199 terms, list of, 211–213 transparency of wording, 198 Contra proferentem commercial contracts, application of rule to, 215–216 common law nature of rule, 215 inapplicable, where, 216 main strands, 215 precedent, 217 purpose of clause, 215 rarity of use, 216 relevance of rule, 216–217 Contract denials of legally binding see Subject to contract duties and remedies, 371–372 entire agreement and non-reliance clause see Entire agreement and non-reliance formation, methods of, 294 good faith see Good faith legally binding, denials of see Subject to contract parol evidence rule, use of, 294

678

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Index Contract—contd principles of construction, application of, 294 provisions, need to certainty as to, 294 standard form: meaning, 327 Contracts (Rights of Third Parties) Act 1999 application— exceptions to, 219–220 generally, 218 assignees, 226 case analysis, 226–230 drafting issues, 221–223 effect, 218 general exclusion clauses, 224 general inclusion clauses, 224–225 indemnity, contract containing, 221 international group of companies, contracting party as part of, 220 linkage and use, 223–224 location of clause in agreement, 223 precedents, 224–226 privity of contract— meaning, 219 effect in existing law, 219 purpose of clause, 218–221 research contract, 220–221 subject matter, whether excluded by Act, 221 successors, 226 third party— meaning, 218 additional nature of rights, 219 assignment of rights of, 223 beneficiary examples, 220–221 benefit of, provisions for, 223 conditions, imposition of, 222 consent of, dispensing with, 226 contractual provisions made for benefit of, 222 enforcement of agreement by, 222, 223 identifying, 221–222 no formalities for enforcement of rights, 219 obligations, imposition of, 222 privity of contract, and see privity of contract above remedies given to, 220 revocation of rights of, 223 rights of, under Act, 218–219 Control contract meaning, 27 Costs see also Expenses meaning, 231 approach to payment of, 231 assets sale, of, 233 company formation agreement, 233 drafting issues, 232 examples of clauses, 233 linkage and use, 232–233 location of clause in agreement, 232 mortgage deed, of, 233 parties to pay own, 233 precedents, 233 purpose of clause, 231

Costs see also Expenses—contd reimbursement— company formation agreement, 233 mortgage deed, 233 Counterparts meaning, 234 agreement in, 237 agreement to prevail, version of, 237 commercial practice, 234–236 deed in, 237 drafting issues, 236 effect of signing in, 234 facsimile, sent by, 236 generally, 234 location of clause in agreement, 237 no exchange of, where, 236 original nature of, 236 precedents, 237 purpose of clause, 234–236 signing signature page alone, dangers to, 235–236 use of, 236 Covenant meaning, 238 agreements encountered in, 238 agricultural land, sale of, 240 business, sale of, 240–241 commercial agreements, use in, 238–239 drafting issues, 239 employment contracts, in, 239 joint and several, 240 linkage and use, 239 location of clause in agreement, 239 modern practice, 238–239 obligations, to perform, 240 precedents, 240–241 purpose of clause, 238–239 restrictive covenants, 240–241 sums, to pay, 240 transactions found in, 239 Cumulative remedies case analysis, 342–243 ‘cumulative’, use of word, 243 drafting issues, 243 effect of clause, 242 entire agreement clauses, and, 244 extent, 243 inclusion of one as exclusion of another, 242–243 linkage and use, 244 location in agreement, 244 main commercial provisions, and, 244 precedents, 245 purpose of clause, 242–243 remedies to be included in clause, 243 secondary commercial provisions, and, 244 use of, 243 Currency conversion of currency, timing and method, 247 domestic, payment otherwise than in, 248 drafting issues, 246–247 exchange rate changes, bearing risk of, 247 linkage and use, 248

679

Z02_Boilerplate_Index.indd 679

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Index Currency—contd location of clause in agreement, 247 payment in full, following fall in value of sterling, 246 pounds: meaning, 246 precedents, 248 provision not specified, 246 purpose of clause, 246 relevant currency, 246–247 sample clause, 248 specified currency— right to specify, 248 whether payment only permitted in, 247 whether clause needed, 246 D Data protection agreement, data processing as part of obligations under, 249 circumstances, relevant, 249–250 compliance with statute, clause as to, 253–255 data controller: meaning, 251, 256 data processing principles, use of, 251–252, 256 data processor: meaning, 251, 256 drafting issues, 252 linkage and use, 252 location of clause in agreement, 252 party processing data on behalf of party providing data, 250 personal data: meaning, 251, 255 persons subject to DPA 1998, 249 precedents, 253–255 purpose of clause, 249–252 sensitive data: meaning, 255–256 statutory definitions, 255–256 Date of agreement meaning, 257 all parties not signing on same day, 258 drafting issues, 257–258 linkage and use, 259 location in agreement, 257, 259 precedents, 259–260 purpose of clause, 257 reasons for dating, 258 starting date different, where, 257 written not typed, 257–258 Deed capacity, person acting in more than one, 268 delivery— condition fulfilled, when, 271 deed dated, when, 270, 271 signed, when, 270, 271 subject to condition, 271–272 documents free from escrow, delivery of, 272 drafting issues, 269–270 escrow— assignment of rights free from, 272 delivery of documents free from, 272 execution— capacity, person acting in more than one, 268

Deed—contd execution—contd clause as to, 270–272 company, by, 265 complete documents, only of, 267–268 corporation, by, 266 delivery of deed, 266–267 director not an individual, where, 268 foreign company, by, 266 formalities, 263, 264–265 generally, 264 individual, by, 265 purchaser, document in favour of, 269 linkage and use, 270 location of clause in agreement, 270 precedents, 270–272 preference for, where, 262–263 purchaser, document in favour of, 269 purpose of clause, 261–269 requirement to use, where, 261 requirements to create, 263–265 seal, use of, 263–264 statement as to nature of, 264 statutory provisions, 264 variation of, 263 Definitions case analysis, 279–283 drafting issues, 277–278 introductory wording in clause, 278 laying out of clause, 278 location of clause in agreement, 277 matters to avoid when defining or using clause, 274–275 matters to consider when defining or using clause, 275–276 organisation where grouped together, 278 persons using agreement, need to consider identity of, 278 precedents, 279 purpose of clause, 273–276 reasons for use of clause, 273 recognition of defined word, 277 Deposit see also Part payment advance payment as, 287 consumer law, effect, 288 drafting issues, 287 linkage and use, 288 location of clause in agreement, 268 part payment, as— appropriation, loan agreement, 289 clause, 289 sale conditions, 289 share option price not to be, 289 part payment distinguished, 285, 287 partial performance, consequences, 287 payment clause, provision in, 290 payment of, 288–289 precedents, 288–290 purpose of clause, 284–287 purpose of payment, 287 refund— consumer rental agreement, 289 supplier’s warranty, 289

680

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Index Deposit see also Part payment—contd retention or repayment, points to consider, 285–286, 287 unfair, where, 288 use of, 284 Directors appointment or removal, legislative provisions, 24, 26–27 Disclaimer drafting issues, 292 exemption clause— effect, 291 distinguished from, 291 generally, 292 linkage and use, 292 location of clause in agreement, 291, 292 nature of, 291 patent and know-how licence, in, 293 precedents, 293 purpose of clause, 291–292 Duplicates see Counterparts E Entire agreement and non-reliance acknowledgment of non-reliance, 296 breach of collateral warranties, 297 case analysis, 295–297, 300–306 clarity of wording, need for, 296 collateral agreement, whether excluded, 297 Competition and Markets Authority guidance, 300 consumer issues, 299–300 contents, questions as to, 297–298 drafting issues, 297–298 effectiveness, 295–297 excluded documents and statements, 295 failure to use, consequences, 296 fraud, liability for, 296 handling and analysis of documentation generated, 298 importance of, 298 inconsistency of agreement with subject matter, 297 linkage and use, 298–299 location of clause in agreement, 298 package of agreements, and, 297 precedents, 299 pre-contract representations, whether excluded, 298 purpose of clause, 295–297 schedules or attachments, whether included within clause, 298 written terms, whether agreement limited to, 297 Exclusive, non-exclusive and sole ambiguity, need to avoid, 308 circumstances where relevant, 307 competition law issues, 309 drafting issues, 308–309 exclusive: meaning, 307–308, 309, 312 exclusive licence— registration of, 310 sole and exclusive licence, as, 309

Exclusive, non-exclusive and sole—contd grant of rights, 313 intellectual property issues, 309, 310 legislation, extracts from, 311–312 linkage and use, 310 location of clause in agreement, 309–310 non-exclusive: meaning, 308 non-exclusive agent, appointment, 313 precedents, 312–313 purpose of clause, 307–308 sole: meaning, 308, 312 sole agent, appointment, 313 statutory definitions, 308 sub-licence, right to, 309 Execution clause adding date to, 43 agreement under hand, forms of, 44 commencement, 41 deed executed by company, 45–46 drafting issues, 41–43 linkage and use, 44 location, 40, 43 nature of, 40 precedents, 44–46 purpose, 40 terminology, 40 Exemption agent’s fraud or deceit, and, 317 case analysis, 327–333 courts’ interpretation of clauses, 314–317 drafting issues, 318–325 fraud, in case of, 317 liability, limiting or excluding— defects after delivery, 326 deliberate repudiatory breach, 319 different things or services, separate exclusion etc for, 319 direct and consequential losses, separate treatment of, 320 explicit and precise drafting, need for, 318–319 generally, 318–324 implied terms, exclusion of, 320 indirect and consequential losses, 326 insurance, correlation of liability level with, 319 invalidity of clause, possibility of, 324 limitation rather than exclusion, consideration of, 320 negligence, mention of, 319 positive approach, need for, 320 potential loss, need for details of, 320 ‘safety valve’ wording, need for, 320 ‘standard’ terms, avoiding contracting on, 321–323 statutory time limits, application, 318 third party indemnities, need for clarity, 320–321 tight definition of contractual terms, need for, 323–324 time limits, length of, 319 linkage and use, 325 location of clause in agreement, 325 matters covered by, 314, 316

681

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Index Exemption—contd negligence, and, 316 precedents, 326–327 purpose of clause, 314–317 reasonableness, 324–325 repudiatory breach, whether covering, 316 Sale of Goods Act 1979, and, 316–317 standard form contract: meaning, 327 statutory control, 317–318 types of clause, 314 wording— ambiguous or unclear, where, 315–316 strict judicial interpretation of, 315 Expenses see also Costs meaning, 231–232 assets sale, of, 233 drafting issues, 232 linkage and use, 232–233 location of clause in agreement, 232 mortgage deed, of, 233 precedents, 233 purpose of clause, 231–232 reimbursement, 233 Expiry and termination at will drafting issues, 334–335 fixed period— earlier than end of, termination, 335 end of, termination at, 335 whether agreement for, 334–335 length of agreements, specifying, 334 linkage and use, 335 location of clause in agreement, 335 precedents, 335–336 purpose of clause, 334 termination by expiry— precedents, 335–336 whether subject to other forms of termination, 335 F First refusal see Option and right of first refusal Force majeure meaning, 339, 348 beyond reasonable control— meaning, 343 see also events beyond reasonable control of parties below consequences, 344 contents of clause, 339–340 curing the event, 345 drafting issues, 344–345 effect of event, 342, 344 effectiveness of clause, 339 events beyond reasonable control of parties— breach of contract, and, 340 examples, 340, 343, 346–347, 348 generally, 340 labour disputes, 341, 347 frustration, doctrine of— arising, where, 337 consequences of relying on, 338–339

Force majeure—contd frustration, doctrine of—contd further performance subject to, 337 situations applicable in, 337 unhelpful to parties, where, 338–339 generally, 337–338 linkage and use, 345 location of clause in agreement, 345 need for clause, where, 337–338 particularly useful, where, 340 party responsible for event, position where, 341 precedents, 345–348 procedure to follow following event, 344 purpose of clause, 337–343 repayment of money due, 346 supply agreement, temporary suspension, 347–348 temporary stoppage— position where, 342 release at party’s discretion, 346 termination by either party, 345–346 types of clause, 340 uncertainty, effect, 339 unnecessary, where, 340 use of clause, 339 wording to be used, 344–345 Freedom of information application for information— applicant’s right to secrecy, 350 right to make, 349 commercial interests, damage to— analysis to assess, 357 consultation see consultation below factors or questions determining, 354 information likely to cause, 353–354 Ministry of Justice guidance, 353–354 protection for interests, 353 qualified nature of exemption, 354 specific information not in public domain, 354–355 trade secret, 353 see also confidentiality and contracts below commercial party contracting with public authority, 356 confidentiality and contracts— analysis to assess likely damage, 357 commercial interests, damage to, 353–355 confidential, information marked as, 352 courts overseeing, 355 disclosure provisions, precedent, 362 exempt information— absolute nature of exemption, 352 additional exception, precedent, 359 commercial interests, damage to, 353–355 commercial reasons for withholding, 351–356 information not exempt, 351 qualified nature of exemption, 354 statutory definition of, 351, 353 trade secret, 353 existing law, application of, 352

682

Z02_Boilerplate_Index.indd 682

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Index Freedom of information—contd confidentiality and contracts—contd Information Commissioner’s powers, 355–356 issues for commercial party, 355–356 issues for public authority, 356 no breach of obligation, precedent, 361 post-signature issues, 355 pre-contract information, 351 pre-contract issues, 355 public interest test, 352–353 separating out of different types of information, 357–358 statement identifying confidential information, 361 technical and business information, 351 Tribunal Service overseeing, 355–356 consultation— process, 357 right of, precedent, 359–360 whether commercial party having right of, 357 delegation, prohibition on, 350 disclosure in accordance with statute, no liability where, 360–361 drafting issues, 356–358 environmental information, 350 exemptions and limitations— classification of, 350 confidentiality and contracts see confidentiality and contracts above exempt information, statutory definition of, 351, 353 generally, 349 linkage and use, 358 location of clause in agreement, 358 matters for consideration, 350–351 precedents, 359–362 public authority— meaning, 349, 356 confidentiality and contracts see confidentiality and contracts above disclosure in accordance with statute, no liability where, 360–361 examples of, 350 issues for, 356 response of, following introduction of duty, 349–350 right of application to, 349 public interest test, 352–353 purpose of clause, 349–356 refusal to release information, 350 statute, non-application of, 356 time to respond to request, 350 Further assurance assets sale agreement, 369, 370 carrying on of activities etc after transaction completed, 368 completion of transaction, action following, 363–364 co-operation by parties after transaction completed, 368

Further assurance—contd cost of work involved, 366 drafting issues, 366–367 factoring agreement, 369–370 finding party after transaction completed, 366–367 linkage and use, 367 location of clause in agreement, 367 novation of contracts, 370 operations or tasks continuing after transfer, 366 precedents, 367–370 power of attorney in— advisability of including, 365 deed, whether agreement suitable for execution as, 365 effect, 364 foreign company, involvement of, 365 foreign country, activities in, 365 irrevocability, reasons for, 364 location of clause containing power, 364–365 precedents, 368–369 use of, 364 purpose of clause, 363–365 responsibilities under, 363–364 responsibility of one party, where, 366 rights assignment, 369 rights under, 363–364 simple clause, 367 simple or routine transactions, 366 timely manner, tasks to be dealt with in, 367 G Good faith meaning, 371, 374–376 acting in, 371–372 agreement to agree, entry into, 373–374 case analysis, 376–379 context-sensitive nature of, 375–376 contractual remedies etc, 371–372 drafting issues, 376 duty to use— binding nature of, where, 372, 376 discouragement from advocating, 376 enforceable, where, 372 generally, 372 no general requirement to act in, 371 objective criteria, need to define, 376 problems associated with, 372 implied use of, 375 negotiation in, 373 no general law or duty as to, 371 no overriding concept of, 374–376 purpose of clause, 371–376 required, where, 371 responsibilities flowing from, 372 Group company meaning, 20 location in agreement of clause as to, 18 party to agreement, as, 17 Group of companies drafting considerations, 18

683

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Index Group undertaking meaning, 23 affiliate, as, 17 broadening definition of, 17 statutory definition, 16 H Holding company meaning, 20 rights attributed to, 25 statutory definition, 16 I Indemnity meaning, 380 agent— by, 384–385 to, 384, 385–386 borrower, by, 385 breach of warranty, 383–384 categories, 380–381 conduct of proceedings, indemnifier having, 382 drafting issues, 381–383 effect, 380 extent of, 382, 383 franchisee etc, to, 385–386 goods, claims as to, 38 ‘holding other party harmless’, 381 injury to staff, 384 lessee of personal property, by, 386–387 limit on amount payable under, 381 linkage and use, 383 location in agreement, 383 method of incorporating clause, 380 partner, for, 385 precedents, 383–388 purpose of clause, 380–381 requirements, lack of, 380 responsibilities under, 381 restrictions on indemnified party’s actions following claim, 383 security contractor, by, 386 software etc, by licensor of, 387–388 supplier of services, for, 385 third parties, whether covering, 383 time for payment under, 381–382 Indexation appropriateness, 389–390 circumstances for use, 389 date of, 390 drafting issues, 389–390 increase— automatic, whether, 390 notice, 390 linkage and use, 391 location in agreement, 391 matters for consideration, 390 precedents, 391 purpose, 389 relevant index, use of, 390 worked example, 390 Inflation indexation of see Indexation

Insolvency termination for see Termination for insolvency Inspection of records see under Records Insurance amount of cover for claim, 400 business premises, 401–402 copies of documentation, provision of, 400 drafting issues, 399–400 exemption clause, whether reasonable, 398 incidents covered by clause, 399 insurers, questions asked by, 398–399 interest of other party noted on policy, 400 level of cover required by, 399 location of clause in agreement, 400 linkage and use, 400 losses associated with risk, whether recoverable, 398 maintenance of policy, 400 matters covered by clause, 398 need for, 399 precedents, 401–402 premium payments, proof of, 400 public liability insurance, 402 purpose of clause, 398–399 warranty— assets sale agreement, 401 contents, 399 share sale agreement, 401 wording acceptable to insurers, whether, 398–399 Intellectual property meaning, 405, 411, 412, 563 agency agreement, 414–416 agreements in which clauses found, 403–404 application for, 409 background information: meaning, 413 background intellectual property, ownership of, 409–410 background IP: meaning, 413 consultation— agreements, 188 infringement of rights, 191 definition— approach to dealing with, 406 description of property, in conjunction with, 406 lack of, 405 need to provide, 405 precedents, 411–414 type to be used, 408 drafting issues, 408–410 due diligence, carrying out, 408 foreground information: meaning, 413 foreground IP: meaning, 413 franchise agreement, 414–416 issues to be addressed, 404, 408–410 know-how— accepted definitions, lack of, 406 confidentiality obligations, need for, 408 generally, 406–408 law of confidence, protection under, 406 legislative definition, 406

684

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Index Intellectual property—contd know-how—contd licence with product development, 418–419 scope of term, 406–407 technical information, need to protect, 407 term insufficient to identify protected information, 407–408 linkage and use, 411 location of clause in agreement, 410–411 maintenance, right of, 409 non-intellectual property type agreements, 410 ownership where created etc under or during contract, 409 patents: meaning, 412 precedents, 411–419 product development joint venture, 416–418 purpose for which property used, 409 purpose of clause, 403–408 rights, examples of, 405 services agreement— advice in form of report, 403 important information in— issues to address, 404 precedent, 532 limited licence to use report, 404 precedents, 414–416 software— licensing of, 414 protection of, 415–416 stamp duty on transfer of, 562–563 statutory provisions, 404, 405 suing infringers, 409 technology: meaning, 414 termination, use after, 409 third party claims, 409 trade secret— meaning, 407 accepted definitions, lack of, 406 confidentiality obligations, need for, 408 employment law, meaning in, 407 examples, 407 generally, 406–408 law of confidence, protection under, 406 term insufficient to identify protected information, 407–408 transfer of rights, 409 types of business, 403 value, 403–404 warranties as to validity of— due diligence, following, 408 purpose, 408 see also under Warranty work: meaning, 413 Interest base rate, calculated from, 423 common law, under, 420 completion delayed, compounding, 424 compounded, 424 consumer agreement, 423 consumer law, protection afforded by, 422

Interest—contd drafting issues, 422–423 equity, in, 420 fixed rate, 423 linkage and use, 423 location of clause in agreement, 423 precedents, 423–424 purpose of clause, 420–422 statute, under— Consumer Credit Act 1974, 422 County Courts Act 1984, 420 Late Payment of Commercial Debts (Interest) Act 1998, 420–422 supply agreement, 423 underpayments, including, 424 Interpretation Acts and Measures, use of, 430 amendment of statutes— catering for, 425 further amendments, 426 future, inclusion of, 426–427 generally, 425–428 Interpretation Act 1978, 429–430 subordinate legislation, 426 clauses, references to, 427–428, 430–432 drafting issues, 425–428 exclusive rights, 432 gender references, use of, 427, 429 headings, 428, 430–432 his/her references etc, 427, 429 Interpretation Act 1978, 425–426 legislation— amendment see amendment of statutes above extracts from, 429–430 licence, exclusive rights, 432 linkage and use, 428–429 location of clause in agreement, 428 month: meaning, 429 person: meaning, 429, 430 precedents, 430–432 purpose of clause, 425 replacement of statutes see amendment of statutes above short contract, omission from, 425 singular and plural, use of, 427, 430–431 J Joint and several liability meaning, 437 case analysis, 437–439 composition, power to accept, 437 compounding with persons, 437 consumer issues, 437 contract for services, 437 discharge, power of, 437 drafting issues, 434–435 effect, 434, 437 generally, 434 interpretation, 432, 433 joint promisees, presumption in case of, 433 linkage and use, 436 location of clause in agreement, 436

685

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Index Joint and several liability—contd nature of, 434 obligations extending to, 435 partners, parties acting as, 435 precedents, 436–437 purpose of clause, 433 several liability, effect, 433 several persons constituting party, where, 434 single party, reference to but more than one party within definition, 435 whether clause necessary, 434 wording to ensure, 434 Joint venture meaning, 32 denial of, clause as to, 32 drafting issues, 32 examples of, 32 group company as, 16 linkage and use of clause, 33 location of clause in agreement, 33 non-existence of, 33 precedents, 33–34 Jurisdiction see Law and jurisdiction K Know-how see under Intellectual property L Language amendments, 440 authoritative version, decision as to, 440 documentation, supply or generation, 441 drafting issues, 440–441 English— prevailing language, as, 442 wide use of, 440 law and jurisdiction, prevailing, 441 linkage and use, 442 local law, required by, 441 location of clause in agreement, 441 more than one, use of, 440 party’s language to prevail, 442 precedents, 442 purpose of clause, 440 translation required, where, 440, 441 Law and jurisdiction agreement or dispute, country having jurisdiction over, 445 another country’s laws, whether applicable, 448 Brussels Regulation, use of, 445 confidential information, disclosure and misuse, 444 dispute or agreement, country having jurisdiction over, 445 domicile, rules for deciding, 445 drafting issues, 448–449 England and Wales, party located outside, 448 English competition laws, whether prevailing in non-EU contract, 447 English parties only to agreement, 443 EU, parties not located in, 447–448

Law and jurisdiction—contd foreign element to agreement, 443–444 interim injunction outside UK, 450 international conflicts of, 447–448 jurisdiction— Brussels Regulation, use of, 445 determining, 445 English courts, of, 451 exclusive, 446, 451–452 non-exclusive, 446, 448–449, 451–452 partially exclusive, 451 precedent, 451–452 rules outside EU, 447–448 UN Convention, whether applicable, 447 law— applicable, determining, 448 correctly described, whether, 449 outside EU, 447–448 prevailing, 446–447, 449 Rome Convention, use of, 446 Rome I Regulation, use of, 446–447, 448 UK, determining whose laws to prevail in, 449 UN Convention, whether applicable, 447 linkage and use, 449–450 location of clause in agreement, 449 precedents, 450–452 purpose of clause, 443–448 Rome Convention, use of, 446 Rome I Regulation, use of, 446–447, 448 scope of clause, 443 service of proceedings, 450–451 several countries involved, 444 UK, determining whose law to prevail in, 449 UN Convention, application of, 447 M Meanings see Definitions Member meaning, 17 N Net invoice price see Net sales value Net sales value cap on amount deducted, inclusion of, 467 drafting issues, 466–467 generally, 465–466 income as basis for deductions, determining, 467 income not derived from sales of licensed products, receipt of, 467 items deductible by licensee, 466–467 linkage and use, 468 location of clause in agreement, 467 precedents, 468 price as basis for deductions, determining, 467 purpose of clause, 465–466 Non-exclusive see Exclusive, non-exclusive and sole Notices address, statement as to correct and current, 473

686

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Index Notices—contd case analysis, 470, 480–482 communication other than by post, mode of confirming, 472–473 different addresses for service, use of, 475–476 different parties for service, use of, 475–476 drafting issues, 470–476 effectiveness, 470 email, sent by, 472 fax, precedents for sending by, 476–478 importance, 470 linkage and use, 476 location of clause in agreement, 476 mistake in, effect, 470 multiple, 476 partnership, to, 476 personal delivery— meaning, 471, 474 clarity of wording advisable, 471 senior member of staff, on, 471 whether permissible, 471 post, sent by— generally, 471–472 precedents, 476–478 precedents, 476–480 purpose of clause, 469–470 receipt— deemed time of— electronic mail, 475 generally, 473 personal delivery, 473–474 post, 474–475 specification of time, need for, 473 method of proof required, whether, 475 proof of, 477–478 service— generally, 470 proof after extensive period, 476 urgent personal service with priority, 478–479 statutory etc requirements, whether necessary to comply with, 470 telex, precedent for sending by, 476 usefulness of clause, examples, 469 writing— types of, 470–471 whether need for, 470 Novation see Assignment and novation meaning, 82 O Option and right of first refusal case analysis, 489–493 drafting issues, 485–486 linkage and use, 486 location of clause in agreement, 486 option— meaning, 483 arising, where, 483 change of parties, effect on power to exercise, 485–486 clarity, need for, 485 consideration, provision of, 485

Option and right of first refusal—contd option—contd example, 483 exercise, statement as to, 485 extension of agreement, subject to new price being agreed, 489 lapse, 484 licence agreement, to enter, 487 nature of, 483 non-exercise of, consequences, 486 notices, 486 number of occasions for exercise, 486 payment, 486 right of first refusal distinguished from, 483–484 right to exercise, clear description of circumstances for, 485 rights under, 483 shares, as to purchase of, 487–488 termination, 486 time limit to comply with exercise of, 484–485 type to be received, 485 precedents, 487–489 purpose of clause, 483–485 right of first refusal— licence of patents, in, 488 option distinguished from, 483–484 precedents, 488 separate option clause in franchise agreement, added to, 488 P Parent company statutory definition, 16 Parent undertaking meaning, 23, 24 legislative provisions as to, 26–28 rights attributed to, 28 statutory definition, 16, 23 Part payment see also Deposit appropriation of, 289 consumer law, effect, 288 deposit distinguished, 285, 287 drafting issues, 287 linkage and use, 288 loan agreement, in, 289 location of clause in agreement, 268 partial performance, consequences, 287 precedents, 288–290 purpose of, 287 purpose of clause, 284–287 recovery of, 286 refund— consumer rental agreement, 289 supplier’s warranty, 289 retention, right of, 287 share option price not to be, 289 unfair, where, 288 use of, 284 Partnership meaning, 30 contractual relationship only, 33 denial of, clause as to, 31

687

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Index Partnership—contd drafting issues, 32 existence of, 30–31 liability arising from, 31 limited liability, 31 linkage and use of clause, 33 location of clause in agreement, 33 no intention to create, 31, 33 precedents, 33–34 purpose of clause, 29 Party meaning, 497, 498, 499 address, provision of, 496–497, 498 default clause, 498 description of party, 499–501 descriptive names, use of, 497, 498 differently named parties treated as one party, 495, 499 drafting issues, 494–497 head of agreement, mentioned in, 494 identification, need for, 494 linkage and use, 498 location of clause in agreement, 498 name and status, use of, 17, 495, 498 numbering and paragraphing, 494–495 precedents, 498–501 purpose of clause, 494 role, whether described by, 494–495 signature as, 17 status and name, use of, 495–496 whether person or organisation constituting, 497 Payment terms amount payable, statement as to, 502–503 ancillary costs, payment of, 504 confirmed letter of credit, payment by, 506 consultant, services provided by, 506–507 currency for payment, 504 deductions, 504, 506 drafting issues, 502–505 failure to state, consequences, 502 fixed payments, 506–507 frequency of payments, 503 guaranteeing of payment etc, 505 interest, payment of, 504 internet, goods ordered on, 508–509 invoices, sending of, 505 letter of credit, payment by, 506 linkage and use, 505–506 location of clause in agreement, 505 long term supply of goods, 507–508 method of calculating payment, 503–504 method of making, 504 order numbers etc, use of, 505 ownership of goods, 505 precedents, 506–509 price by reference to list, 506 purpose of clause, 502 records, 504–505 refunds, deposits and part-payments, 504 royalty payment— accompanied by statement, 506 sales on, 507 set-offs, 504

Payment terms—contd statements, receipts and invoices, 504 sterling, conversion into, 506 terms of payment, 507 time of essence, whether, 504 timing of payments, 503 VAT, whether payment including, 504, 507 Performance impossibility of, doctrine of frustration and see under Force majeure Priority of terms agreement dealing with or linked to another agreement, 511 case analysis, 514–519 conveyance to prevail, 513 drafting issues, 511–512 linkage and use, 512 location of clause in agreement, 512 manual to prevail, 513 particular schedule to prevail, 513 precedents, 513–514 prevailing agreement, 513 purpose of clause, 510–511 reference to other agreements etc, 511 relevance of other agreements, 511–512 several documents incorporated into agreement, 512 shareholders’ agreement to prevail, 514 special conditions to prevail, 513 standard conditions to prevail, 513 statute law to prevail, 514 Property and risk see also Title and risk delivery, risk passing on— agency agreement, 629 generally, 629 freedom of negotiation as to, 626 implied terms, in absence of agreement, 626 legislation, extracts from— intention to pass property, 630 need to ascertain goods, 630 right of disposal, reservation of, 632 risk, passing of, 632 rules for ascertaining intention, 630–632 location of clause in agreement, 629 ownership not passing on delivery, 629 payment, title passing on, 630 precedents, 629–630 purpose of clause, 626–627 sales with international element, in— buyer’s duties, 628 generally, 627–628 INCOTERMS, applicability of, 627–628, 630 seller’s duties, 628 time at which risk passes, 628 specific goods: meaning, 626 statutory rules— modification, 627 summary of provisions, 626–627 time for risk passing— generally, 626–627 see also delivery, risk passing on above unascertained goods: meaning, 626

688

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Index R Reasonable endeavours see also Best endeavours absolute obligations, examples of, 102 all— avoidance of expression, 106 case law, 105–106 generally, 105–106 avoidance of expression, 106 best endeavours, compared with, 104–105 case analysis, 113–115 delivery, for, 110 dispute resolution, 109, 110 drafting issues, 106–107 employees, retention of, on sale of business, 110 installation, to achieve, 110 lease renewal, agreement as to, 109 location of clause in agreement, 108 other expressions, use of, 106 precedents, 108–111 purpose of clause, 102 qualified obligations, examples of, 102–104 time of essence unnecessary, where, 110–111 Receipts meaning, 520 acknowledgment of sum paid, 522 drafting issues, 521 evidence as to payment, 521 identifying thing or payment, 521 information necessary to perform services, of, 522 location of clause in agreement, 522 necessity for clause, whether, 521 patent renewal fees, payment of, 522 precedents, 522 property transactions, in deed involving, 521 purpose of clause, 520–521 statement as to fulfilment of obligation, 521 types of agreement in which clause appears, 520 uses of clause, 520–521 Recital admissible background for interpretation of contract, as, 524 binding obligations, avoidance of, 525 case law on legal effect, 523–525 commencement of clause, 526, 527 consultant, appointment of, 527 drafting issues, 525–526 effect— case law on, 523–525 generally, 11–12 rules from case law, 523–524 estoppel, and, 525 inappropriate, where, 525 interpretive aid, as, 524 layout considerations, 526 legally binding, whether, 523 linkage and use, 526–527 location of clause in agreement, 526 necessity for clause, whether, 525

Recital—contd precedents, 527 presumptions as to, 524 purpose of clause, 523–525 real property transactions, use in, 525 transfer of registered land, 525 unintended consequences, 525 wording to be used in, 526, 527 Records auditing and inspection of— agreements, examples of, 94 books see inspection of books below case analysis, 98–101 confidentiality, 96 contents of clause, 94 drafting issues, 95–97 examinable records, 95–96 licensing agreement, 97, 98 linkage and use, 97 location of clause in agreement, 97 parties required to keep records, 95 patent licensing agreement, 98 persons permitted to carry out, 96 precedents, 97–98 purpose of clause, 94–95 refusal, consequences, 95 variable factors allowing for, 94 inspection of books— generally, 97 licensing agreement, 97 patent licensing agreement, 98 licensing agreement— inspection of books, 97 inspection of records, 98 Release see Waiver and release Reporting completion of agreement, on, 530 confidentiality, 529, 530 consequences of termination, 530–531 drafting issues, 528–529 expiry of agreement, on, 530 format of report, 529 frequency of information, 529 information required, 528 linkage and use, 529–531 location of clause in agreement, 529 other than in writing, 529 ownership of reports, 530 precedents, 531–532 purpose of clause, 528 receiver of information, rights of, 529 reports— consultancy or advice, provision of, 532 intellectual property in, ownership of, 531 licensee of software, sales by, 532 provision of— fixed periods, at, 531 on request, 531 sales by agent, distributor etc, 531–532 termination of agreement, on— generally, 530 return or destruction of information, 530–531

689

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Index Reporting—contd third parties, reports from, 529 types of agreement required in, 528 Retention of title meaning, 534 agreement, effect of breaches on, 538 all monies clause, 535 beneficial title, 536 change to goods, retention in case of, 535–536 charge over goods— creation of, 533, 534, 536 duty to register, 543 clarity, need for, 536–537 classification of clauses, 534 current account clause, 535 drafting issues, 536–537 equitable title, 536 extension of seller’s rights, clause providing for, 535–536 fiduciary relationship, establishing, 535 franchise supply agreement, 541–542 full title, whether, 536 generally, 533 goods losing original identity, 536 identification of goods, need for, 537 importance of retaining ownership, 533, 534 interest payment in case of, 538 legal problems arising, 535–536 linkage and use, 537–538 location of clause in agreement, 537 long-term supply agreement, 540, 542–543 payment in case of, 538 precedents, 538–543 principle, 533–534 product clause, 535–536 purpose of clause, 533–536 recovery of possession on buyer’s premises, 535 reprocessing of goods, right of, 537 risk, need to consider which party bears, 537 sale of goods agreement, 539–540, 540–541 termination of agreement under clause, 538 time for passing of property, 533 tracing clause, 535–536 tracing of proceeds clause, 535 variation of statutory rule, operating as, 533 warranty that goods not subject to, 538 Right of first refusal see Option and right of first refusal Rights disregarded, where, 26, 28 exercisable in certain circumstances, 25, 27 fiduciary capacity, held by person in, 25, 27 held by one person on behalf of another, 25, 27 holding company, attributed to, 25 legislative provisions as to, 25–26 parent undertaking, attributed to, 28 shares held by way of security, attached to, 25, 27–28 temporarily incapable of exercise, 25, 27

S Schedule agreement, whether part of, 544 attachment or index distinguished, 544 contents, 544 drafting issues, 545–546 linkage, 548 location of clauses in agreement, 546 more than one, agreement containing— identification, 545 overlap on issues dealt with by, 546 not attached to agreement but referred to in agreement, 545–546 numbering, 548 precedents, 548 purpose of clause, 544–545 status, clear statement as to, 545 terminology, 545 usage, 547 Set-off and retention retention— generally, 549 sum of money, 549 title to goods see Retention of title set-off— meaning, 549 availability of defence, 550 buyer’s clause, 553 consumer contract, and, 551 court rules, under, 550 drafting issues, 550–551 express right of, 550–551 extending right of, 551 generally, 549 guarantee agreement, 552 linkage and use, 551 loan agreement, 553 location of clause in agreement, 551 no right to, 550, 552 precedents, 552–553 purpose of clause, 549–550 right to, 550, 552–553 sale agreement, 553 seller’s clause, 552 situations covering no set-off provision, 550 types of situation envisaged, 549 validity of clause, 549 waiver, 552 Severance and invalidity blue pencil test, 555 case analysis, 558–561 contract failing, circumstances in which, 555 drafting issues, 555–556 effectiveness of clause, matters ensuring, 554 example of clause, 561 illegality, question of, 555 implications of severance, 557 judicial approach to, 554–555, 558–561 linkage and use, 556–557 location of clause in agreement, 556 negotiation after severance of clause, 556, 557

690

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Index Severance and invalidity—contd one party allowed to sever clause, 556, 558 post-termination covenants, examples of, 560 precedents, 557–558 purpose of clause, 554–555 remainder, enforceability of, 555 rescuing defective clauses, 555 restraint of trade clause, 558 termination following severance, right of, 556, 558 unenforceability, question of, 555 useful, where, 556–557 Shares meaning, 22–23 held by way of security, attached to, 25, 27 Signature block agreement under hand, forms of, 44 deed executed by company, 45–46 drafting issues, 42–43 linkage and use, 44 location, 42, 43 nature of, 40, 41 parties signing, 41 precedents, 44–46 terminology, 40 witnessing signature, 42 Sole see Exclusive, non-exclusive and sole Stamp duty see also Stamp Duty Land Tax admissibility of unstamped documents, 562 agreement linked to, or relying on, other transactions, 564 drafting issues, 564 instrument: meaning, 562 intellectual property, transfer of, 562–563 limited situations for payment, 562 linkage and use, 564 location of clause in agreement, 564 not payable, where, 562 payable, where, 562 payer, 564 penalties for late stamping, 562 precedents, 565 purpose of clause, 562–564 whether document attracting, 564 Stamp Duty Land Tax see also Stamp duty agreement linked to, or relying on, other transactions, 564 compulsory nature of tax, 563 drafting issues, 564 exemptions and reliefs, 563–564 linkage and use, 564 location of clause in agreement, 564 payable, where, 563 payer, 564 purpose of clause, 563–564 self-assessment basis of accounting, 563 whether document attracting, 564 Stamp duty reserve tax precedent for payment of, 565 Sub-contracting arising, where, 566 confidentiality, and, 568

Sub-contracting—contd contractor carrying out obligations personally, whether, 567–568 consultation with customer, whether necessary, 567 contractor’s responsibilities, 566 customer’s right to sue contractor, 566 drafting issues, 567–569 intellectual property created, ownership of, 568 linkage and use, 569–570 location of clause in agreement, 569 obligations sub-contracted— extent of, 567 terms and conditions applicable, 567 permitted, whether, 566, 570–571 precedents, 570 purpose of clause, 566 specific parts of contract, of, 571 sub-contractor— meaning, 570 supervision, 570 third party, to be, 570 without permission, consequences, 568–569 Subject to contract meaning, 572 case analysis, 580–588 commercial parties, approach of, 573–574 documents to be labelled, 575 drafting issues, 574–578 England and Wales, party not based in, 576 final binding contract, obligations carried out before entry into, 575–576 formal style and wording, avoidance of, 575 land, contracts as to, 573 legislation, extracts from, 588 letter of intent, 580 linkage and use, 578 location of clause in agreement, 578 location of phrase in documentation, 578–579 lock-out agreement for sale of land, 579 negotiations, during— generally, 573–574 foreign parties, involvement of, 574 non-binding documentation, generation of, 573–574 obligations performed prior to contract being concluded, 576–578 phrases, need for care in using, 575 precedents, 578–580 pre-contract documentation with binding obligations, 576 problems arising in use of phrase, 572 purpose of clause, 572–574 sale of business, 579 status of documents, indicating, 575 wording to create binding contract, inadvertent use of, 576 work begun prior to concluding contract, effect, 576–578 Subsidiary meaning, 20–22 absence of, 21

691

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Index Subsidiary—contd definition— alternative wording, use of, 17 extracts from legislation, 21–22 intention of parties, relevance, 17 statutory, 16, 20–21 legislation relevant to— definitions, 21–24 supplementary provisions, 24–26 location in agreement of clause as to, 18 member of: meaning, 17 statutory definition— generally, 16, 21–22 power to amend, 22 undertaking— fellow: meaning, 23 legislative provisions as to, 26–28 statutory definition, 16, 22–23 wholly-owned, statutory definition, 16, 22 Successors and assigns see also Assignment and Novation assignment clause, wording as part of, 591 associates, assignees etc, party to include, 592 binding nature of agreement on, 592 drafting issues, 590 foreign parties, effect of involvement, 590 indemnity, increase or alteration of, 590 location of clause in agreement, 590 operation of law, effect, 590 party clause, wording with, 591 party to include, 591–592 power to assign, 592 precedents, 591–592 prohibitions on assignment— contradiction of, avoiding, 590 no inclusion or cross-reference to, 591 purpose of clause, 589 use of clause— generally, 589 UK and USA, in, 589 Survival of terms accrued rights, survival of, 186 completion, after, 187 consequences of termination, 186 continuance for lengthy period etc, 183 documents etc, whether need to return, 184 drafting issues, 184–185 limited time, for, 183 linkage and usage, 185–186 liquidation, termination arising from, 183 location of clause in agreement, 185 materials etc, whether need to return, 184 non-survival of terms, 186 onerous contract, right to reject, 183 precedents, 186–187 purpose of clause, 183 rights up to termination, 186 types of clauses that survive, 185–186 winding-down phase, whether need for, 184 T Termination breach see Termination for breach

Termination—contd consequences of see Survival of terms insolvency, for see Termination for insolvency Termination for breach case analysis, 605–610 categories of termination provision, 594 cause, for, whether permitted, 598–599 cause, without, whether permitted, 599–600 circumstances for, consideration of, 601 common law rights, 593, 598 consequences of termination, clauses to cover, 594 corporate insolvency, 603, 605 default, for, 605 drafting issues, 598–600 effluxion of time, by see expiry of agreement, on below expiry of agreement, on— clauses, 602 fixed term, where, 602 generally, 600 matters to be clarified, 600 express provision, need for, 598 failure to remedy breach, 603–604 fault, without, 601–602 fixed period of time agreement, following expiry, 600, 602 generally, 603 importance of including clause in contract, 593 insolvency, 603–605 judicial approach to, 593 licensing agreement, 602 linkage and use, 601 liquidation, 603 location of clause in agreement, 601 misconduct, 605 multi-party agreement, by one party to, 602 non-payment, 603–605 non-performance, 604–605 non-remedy of breach, 603 notice of— form and content, need to consider, 601 ineffective service, 601 whether effective to terminate, 600 obligations of a continuing nature, breach of, 593 patent assignment, 605 points to consider, 598–599 precedents, 601–605 purpose of clause, 593–598 quality of breach, specifying, 595–598 reasons for— generally, 595–598 important obligation, failure to fulfil, 595 insolvency of party, 595 payment, failure to make, 595 seriousness of see serious breach, for below specified date, failure to meet, 595 relation of termination clauses to each other, 600 remedies available following, 594, 598

692

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Index Termination for breach—contd serious breach, for— judicial approach to, 597 material or substantial, use of wording, 596–597 minor nature, examples of, 596 multiple obligations, in case of, 596 need to specify seriousness, 597 ‘seriousness’ standard, use of, 595 significant nature of breach, 596 wording, need for clear and appropriate, 596 services, contract for, 602 simple clause as to, 601 steps to be taken to terminate, 598 survival of terms after, 594 third party rights, need to consider, 601 types of clause, 594 will, termination at— fixed period, after, 602 generally, 602 wording in addition to notice, whether required, 600 Termination for insolvency corporate party, in case of, 392–393 drafting issues, 394–395 foreign parties, 394 insolvency of one party only, 394 linkage and use, 395 liquidator’s rights, 395 location of clause in agreement, 395 onerous contracts, right to reject, 395 partnership, in case of, 392 pre-1987 terminology, 393–394 precedents, 396–397 purpose of clause, 392–394 specific types of insolvency, reference to, 395 terminology, correct use of, 395 time for termination, 394, 395 whether termination inevitable, 394–395 Territory agreements where clause likely, 611 British Isles: meaning, 612 clear definition, need for, 613 date at which definition used, 613 drafting issues, 613 England: meaning, 612 Europe: meaning, 616 European Economic Area, 613 European Territories: meaning, 616 European Union— meaning, 615 generally, 612–613 Great Britain: meaning, 612, 616 linkage and use, 614 location of clause in agreement, 614 precedents, 615–616 purpose of clause, 611 UK: meaning, 611–612, 615, 616 use, 610, 614 Wales: meaning, 612 within a country: meaning, 616 world: meaning, 615

Testimonium clause see Execution clause Time ‘after’, date calculated, 456–457 ‘as soon as possible’, use of expression, 459 bank holiday, use of expression, 458 ‘beginning from’, date calculated, 456–457 business day: meaning, 454, 457–458 business hours: meaning, 457–458 calculation, principles of— corresponding date rule, 455 day on which time begins to run, exclusion, 455 end of period, 455 month, end of, 455–456 calendar month: meaning, 453 case analysis, 463–464 conventional day: meaning, 454 day— meaning, 454, 456 precedents, 461 essence, of the see Time of the essence expressions generally, 458–459 ‘forthwith’, use of expression, 459 ‘from’, date calculated, 456–457 legislation, extracts from, 463 linkage and use, 459–460 location of clause in agreement, 459 month— meaning, 453, 456, 460, 463 end of, 455–456 general principles of calculation see calculation, principles of above notice, examples, 456 part of, 460 precedents, 460–461 precedents, 460–462 public holiday, use of expression, 458 purpose of clause, 453 quarters: meaning, 454–455 start and end points of defined periods, calculation of, 456 stated length of agreement, 457 ‘until’, date calculated, 457 usual quarter days: meaning, 454–455 working day: meaning, 454 year— meaning, 453–454, 456 precedents, 462 year of this agreement: meaning, 453–454 Time of the essence agreements in which found, 617 bargaining power of each party, relevance, 618 case analysis, 619, 620, 624–625 compromise provision, example of, 618 consequences of beach of term— generally, 617–618 need to set out, 621 contract not expressly providing for, 620 delivery term, standard conditions of purchase, 623 drafting issues, 621 extensions, allowing for, 622 feasibility of compliance with, 618

693

Z02_Boilerplate_Index.indd 693

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Index Time of the essence—contd general provisions, 622 generally, 617–618 location of clause in agreement, 621–622 mercantile contracts, in, 620 non-mercantile contracts, in, 619 not of the essence— case law, 619 distribution or supply agreement, 623 licence or supply agreement, 623 one party’s obligation only, 622 party not wishing to make, compromise clause, 618 payments, for— all payments, 623 payment term, standard conditions of sale, 623 specified, 623 precedents, 622–623 purpose of clause, 617–621 reasonable time, need for, 618 sale agreement, in, 622 sale conditions, in, 622 sample clause, 617 specified payments, for, 623 statutory provisions— goods, as to, 620–621 land, as to, 621 services, as to, 621 termination for breach, right of, 617 times and dates, need to set out, 621 use of exact wording not essential, 621 wording needed to make provision of the essence, 618–619 Title and risk see also Property and risk freedom of negotiation as to, 626 implied terms, in absence of agreement, 626 legislation, extracts from— intention to pass property, 630 need to ascertain goods, 630 right of disposal, reservation of, 632 risk, passing of, 632 rules for ascertaining intention, 630– 632 location of clause in agreement, 629 ownership not passing on delivery, 629 payment, title passing on, 630 precedents, 629–630 purpose of clause, 626–627 sales with international element, in— buyer’s duties, 628 generally, 627–628 INCOTERMS, applicability of, 627–628, 630 seller’s duties, 628 time at which risk passes, 628 specific goods: meaning, 626 statutory rules— modification, 627 summary of provisions, 626–627 time for risk passing, 626–627 unascertained goods: meaning, 626 Trade secret see under Intellectual property

U Undertaking directors, appointment or removal, 26–27 dominant influence, right to exercise, 27 member of another: meaning, 23–24 parent see Parent undertaking statutory definition— extracts from legislation, 21–22 generally, 16 voting rights in, 26 Unincorporated society signature mandate by, 130 Unregistered land deeds, acknowledgment for production of, 14 V Value added tax additional charge to price, whether wording suggestive of, 633 chargeable, where, 633 drafting issues, 633–634 inclusion of VAT in pricing or payment provision, 633, 634 linkage and use, 634 location of clause in agreement, 634 payment exclusive of, 635 payment ‘net 30 days’, 634–635 precedents, 634–636 prevailing rate at tax point, whether chargeable at, 633–634 purpose of clause, 633 share sale agreement, 635–636 supplier registered for VAT, whether, 634 tax deduction authorisation, 636 tax indemnity by independent contractor, 636 undertaking as to withholding taxes, 636 warranties, 635–636 Variation see Amendment Voting rights legislative provisions, 24 subsidiary, in, 26 W Waiver and release drafting issues, 640 generally, 637–638 linkage and use, 640 location of clause in agreement, 640 precedents, 641–643 purpose of clause, 637–639 release— assignment of franchise, on, 643 debtor, of, 642–643 mutual, 642 novation agreement, in, 643 precedents, 642–643 purpose, 639 subject matter, need to specify, 639 waiver, distinguished from, 639 waiver— meaning, 637 appropriate, whether, 640

694

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Index Waiver and release—contd waiver—contd breach of contract, and, 638–639 case law on, 638 completion, and, 641 continuing breach, no waiver of, 641 formal document supported by consideration, 637 functions of clause, 639 implication based on conduct, 637–638 limited, one party only, 642 method of making, 637 no waiver, 641 precedents, 641–642 purpose of clause, 639 release, distinguished from, 639 situation giving rise to, need for confirmation or note in writing, 640 time for making, 637 use of clause, 640 whether clause necessary, 640 writing, need for, 641 Warranty meaning, 644 agreement not in conformity with, 648 assets sale, good standing of business on, 652 business sale agreement, intellectual property rights, 658–661 common type of, 644 competition laws, non-infringement of, 662 compliance with statutes, permissions and data regulation, 655–656 conditions, 646–647 disclosure letter, provision for, 651 documents, negotiating, 650 drafting issues, 648–649 due capacity and good standing— capacity, 645–646 due diligence exercise, company undertaking, 645 generally, 644–645 good standing see good standing below other commercial provisions used in addition to, 645–646 standard nature of, 644 US, common in, 645 effect, 11 equipment, as to, 650–651 giving of, readiness as to, 648 good standing— business, of, 652–653 certificate of, 646 example, 646 lack of accepted meaning, 646 points dealing with, 646

Warranty—contd good standing—contd US, common in, 645 goods, provision of, 648 intellectual property— licence of, in, 644 precedents as to— business sale agreement, 658–661 industrial property, 660–661 know-how, 660 ownership, 656–657 share sale agreement, 661–662 trade marks etc, 658–660 knowledge, as to— examples, 647 generally, 647–648 types, 647–648 liability, cap on, 647 linkage and use, 649 location of clause in agreement, 649 matters excluded from, 647 minor claims, exclusion of, 647 no disputes and litigation, share sale agreement, 654–655 obligations, as to ability to fulfil, 649 power to enter agreement, as to— generally, 649 no conflicting agreement, where, 649 third party liabilities, 649 precedents, 649 purpose of clause, 644–648 repaired or replaced goods or services, whether subject to original warranty, 648 sale of business, on, 644, 651–652 scheduled limitations on, 651–651 services, provision of, 648 share sale agreement— compliance with statutes, permissions and data regulation, 655–656 good standing of business on, 652–653 intellectual property rights, 661–662 no disputes and litigation, 654–655 vendor’s interests, as to, 653–654 standard types of, provision of, 649 terms, 646–647 time limit, 647 ‘to the warrantor’s knowledge’, inadvisable use of, 648 trade marks etc, 658–660 transactions, relevance of, 644 types, 644 vendor’s interests, as to, 653–654 vendor’s warranties, as to, 651–652 Whole agreement see Entire agreement and non-reliance

695

Z02_Boilerplate_Index.indd 695

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Z02_Boilerplate_Index.indd 696

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