27 Jul 2018

COT's top four commercial issues - July 2018

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Welcome to this month's edition of our commercial review. For those of you heading off on summer breaks, we bring you some topical news on hotel booking sites, alongside case law updates on implied terms, reasonableness and basis clauses and a refresher in force majeure clauses.

Enjoy.

CMA enforcement action on hotel booking websites

If you're looking to book a last minute holiday this summer, you are probably familiar with messages telling you to 'Book now! One room left!' on hotel booking sites. This may become a thing of the past, with the Competition and Markets Authority (CMA) launching enforcement action against hotel booking websites late last month.

The CMA opened its investigation into hotel booking websites in October 2017 following concerns that common practices may be breaching consumer law. The CMA was concerned that the clarity, accuracy and presentation of information on sites could be misleading consumers and pressuring them into making uninformed purchasing decisions rather than taking time to find the best deal for them. In particular, the investigation examined:

  • Search results: the factors behind the ranking of search results and whether those factors were relevant to the customer's requirements;
  • Pressure selling: whether claims about how many people were looking at the same room, how many rooms were left or how long a price will be available for created a misleading impression of room availability or rushed customers into making a booking decision;
  • Discount claims: whether claims about discounts offered customers a fair basis for comparison; and
  • Hidden costs: whether sites included all costs in the price first shown to customers or whether there were hidden costs applied during the booking process.

Following its investigation, the CMA announced that it will be taking enforcement action against booking sites to address its concerns that some are breaking consumer protection laws, either by securing legally binding commitments that those sites concerned will change their business practices or, if necessary, taking them to court. Some cases have been referred to the Advertising Standards Authority for further investigation into misleading statements like "best price guarantee" and the CMA has also sent warning letters to sites, demanding that they review their terms and practices for fairness and compliance with consumer protection law.

To avoid falling foul of consumer protection laws, businesses should keep in mind the following:

  • Under the Consumer Protection from Unfair Trading Regulations 2008, an action is considered to be misleading if the overall presentation of information in any way deceives or is likely to deceive the average consumer about the existence or nature of the product, the nature of the sales process or the price and the manner in which the price is calculated (even if that that information is factually correct), and it causes or is likely to cause the average customer to enter into a transaction which it wouldn't have taken otherwise;
  • Any commercial practice that omits or hides material information, or otherwise provides material information in an unclear, ambiguous or untimely manner and causes or is likely to cause the average customer to enter into a transaction which it wouldn't have taken otherwise is considered a misleading omission and is prohibited under consumer protection law;
  • False statements that a product is available for a limited time, or will only be available on particular terms for a very limited time in order to elicit an immediate decision and deprive customers of sufficient opportunity to make an informed choice are considered unfair practice in all circumstances.

Implied terms

A recent case in the Court of Appeal (Bou Simon v BGC Brokers LLP [2018] EWCA 1525 (Civ)) provides a useful reminder that it is not appropriate to seek to imply a term in a commercial contract because it seems fair to do so with the benefit of hindsight. The case also provides insight into the circumstances where words that are deleted from a previous draft of a contract during negotiations can be taken into account in determining whether a term should be implied into a contract.

BGC Brokers made a payment to Mr Bou-Simon under a loan agreement which would be repayable if he became a partner as intended.  Mr Bou-Simon subsequently resigned without becoming a partner.  BGC claimed it was entitled to the money on the basis that there was an implied term in the agreement with Mr Bou-Simon that, if he left employment within an initial period as he did, the money became repayable in full. The judge at first instance agreed with BGC.

The Court of Appeal disagreed. It took the view that the judge at first instance had implied a term in order to reflect the merits of the situation as they now appeared rather than to the obvious intentions of the parties at the time of contracting. In fact, the matter should be looked at from the perspective of the reasonable reader of the agreement knowing all the circumstances at the time it was made. In this case, the implied term was not necessary to make commercial or practical sense of the agreement. It was also significant that the agreement would require significant re-writing to require repayment in the circumstances BGC were claiming.

The decision is also interesting for its discussion on deleted provisions in draft agreements. This was relevant because the parties had specifically deleted similar provisions from an earlier draft of the agreement. Mr Bou Simon claimed that the deleted wording demonstrated a clear intention by the parties not to include this term. In the event, the Court of Appeal rejected the implied term without reference to the deleted term, and so did not need to decide whether or not the deletions could be taken into account, but nevertheless expressed some interesting views on the question. According to Asplin LJ, deleted words from a draft agreement should only be admitted for the purpose of implication if they were part of the relevant surrounding circumstances and not merely part of the course of negotiations.  Singh LJ, however, suggested that a wider approach may be justified where "consideration of deleted words may negative the implication of a term in the form of deleted words".

Reasonableness and basis clauses

The case of First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018] EWCA Civ 1396 ("First Tower") has provided some much needed clarity to the question of whether or not basis clauses are subject to reasonableness.

Basis clauses are used widely in contracts to define the basis on which the parties are contracting, the scope of responsibility of the parties and, in particular, whether they have relied on any representations from the other side in entering into the contract. These clauses are often used by parties to avoid claims of misrepresentation, as the courts will uphold them and they will not be subject to any reasonableness test, as long as they clearly cover the duties in dispute.

Prior to First Tower, the key factor in deciding if the reasonableness test in the Unfair Contract Terms Act 1977 ("UCTA") applied was whether the basis clause was drafted as an exclusion clause or a no primary obligation clause.

In IFE v Goldman Sachs [2006] 1 Lloyd's Rep 264 Toulson J distinguished the two types of clauses using a car salesman as an example:

  • An exclusion clause is where the salesman makes a representation that the mileage reading was accurate, and later makes a statement that the representation cannot be relied on and therefore excludes liability for that representation.
  • A no primary obligation clause is where the salesman makes a statement that the mileage is a particular figure but that he has no idea about the accuracy of the reading and thus makes no representation about the accuracy of the reading.

Exclusion clauses were subject to reasonableness, whereas no primary obligation clauses were not. The cases of Peekay Intermark Ltd v Australia and New Zealand Banking Group [2006] 1 CLC 582 and Springwell Navigation Corp v JP Morgan Chase Bank [2010] 2 CLC 705 identified that basis clauses drafted as no primary obligation clauses arguably gave rise to a new kind of contractual estoppel, whereby if parties were free to agree the basis on which they were dealing then they would be held to their bargain and not subject to reasonableness.

First Tower held that a statement of non-reliance on a representation should be treated as exclusion clause and subject to the reasonableness test. Lewison LJ suggested in First Tower that the test for deciding whether a clause was an exclusion clause or a no primary obligation clause was to ask what the position would be in the absence of the clause i.e. whether or not that party could claim that a pre-contractual representation had been made and claim damages for negligent misrepresentation. On this basis, many basis clauses may now be subject to a reasonableness test regardless of whether they are drafted as exclusion clauses or no primary obligations clauses.

Notwithstanding this, Lewison LJ appears to think that in the majority of cases where both parties are sophisticated the test will be easily satisfied. However, the position may be different where one party is an individual or an SME. It is therefore entirely possible that the same clause may satisfy the reasonableness test in a contract with a sophisticated institutional investor and fail it in a contract with an SME.

Voldemort strikes back – a refresher in force majeure clauses

Whilst disappointingly this not the next part in the Harry Potter series, it is an important reminder that in order to rely on a force majeure clause: 

  1. under common law the force majeure event must be the sole cause of the failure to perform an obligation; and 
  2. when considering secondary obligations usually found in force majeure clauses (e.g. reasonable endeavours to avoid, overcome and mitigate the force majeure) consideration must be given to the interests of the other party in addition to your own.

 
The defendant Tullow was operating oil fields in Ghana and had hired from Seadrill, the claimant, a deepwater rig called West Leo. As Mr Justice Teare accurately states in his opening paragraph "drilling for oil is a risky business" and during the contract period two events happened which meant that there was no further work for West Leo: (1) a moratorium was imposed by the Government of Ghana in May 2015 which meant that no new wells could be drilled; and (2) in early 2016 the Government of Ghana refused drilling in a region called the Greater Jubilee Field where West Leo was due to drill.

The force majeure clause stated that:

"Neither the company nor the contractor shall be responsible for any failure to fulfil any term or condition of the contract if and to the extent that fulfilment has been delayed or temporarily prevented by an occurrence, as hereunder defined as a Force Majeure…and which by the exercise of reasonable diligence, the said party is unable to prevent or provide against. Both parties shall use their reasonable endeavors to mitigate, avoid, circumvent or overcome the circumstances of the Force Majeure." "Drilling Moratorium" was listed as a Force Majeure event.

Tullow ceased to pay the daily rate of hire and terminated the hire contract by reference to the force majeure clause in the contract (i.e. the drilling moratorium). Tullow's argument was undermined slightly by Seadrill's discovery, during the disclosure process, of Tullow's "Project Voldemort" which Seadrill alleged was a project devised by Tullow to find a way out of the West Leo contract due to the fall in oil prices and the hire rate of an oil rig – therefore counsel for Seadrill argued that Tullow's reliance on the force majeure clause was not legitimate. Naturally we assume that Tullow's management are big Harry Potter fans - not that the spirit of the project was analogous to the cunningness of Lord Voldemort's character.

The question that the judge asked himself was whether the moratorium was a force majeure event and, if so, whether Tullow had exercised reasonable endeavours to remedy or avoid the force majeure. If not, Seadrill was entitled to payment at the contract rate ($277.4 million in total).

On a reading of the clause the judge found that the question was whether "a force majeure was the cause" of Tullow being unable to fulfil its obligations - the judge acknowledged that although there were two causes of Tullow's lack of drilling programme, the refusal by the Government to let Tullow drill in the Greater Jubilee region (which was not a force majeure) was the effective cause of Tullow's failure to perform.  While the moratorium prevented Tullow from drilling a new well and completing it with West Leo, Ghana's failure to approve the Greater Jubilee plan was a greater impediment to the Tullow's plans.

In relation to the reasonable endeavours obligation, which due to the judge's finding in respect of causation was purely academic, Seadrill argued that: (i) Tullow had several wells requiring workovers in October 2016 when West Leo was otherwise idle; and (ii) Tullow failed to assign West Leo to those wells and so did not satisfy the reasonable endeavours obligation.

Tullow argued on the other hand that there was no business case for working on any of the wells suggested by Seadrill or that it was not in Tullow's commercial interests to do so. However the judge stated that the mere fact that a step is contrary to the commercial interests of a party is insufficient to show it has exercised reasonable endeavours and the party cannot ignore the commercial interests of the other party in the force majeure being avoided or circumvented.

In considering whether a party can rely on a force majeure event, the ultimate question is one of construction and so although the force majeure boilerplate often gets overlooked – where the commercial contract concerns "risky business" it is important to consider causation and what would or would not be expected from each party when exercising "reasonable endeavours".

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