01 Mar 2018

COT's top four commercial issues - February 2018

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Welcome to February's edition, which no doubt finds you huddled around a heater with your colleagues until the Siberian blanket of snow lifts.

This month's edition sees regulators trying to stop the cryptocurrency music, a frustrating use of a defence, slip-ups when terminating and narrowly excluding one's liability.

Grab yourself an extremely hot beverage, wrap up warm and enjoy.

Regulating cryptocurrency

The European Securities and Markets Authority ("ESMA"), the European Banking Authority ("EBA") and the European Insurance and Occupational Pensions Authority ("EIOPA") (the "European Authorities") have issued a joint warning to consumers on the risk of buying virtual currencies.

The main risks that the European Authorities emphasised to consumers are: 

  • Extreme volatility: The European Authorities are particularly concerned about the volatility of these currencies. The warning stated, as an example, that the value of Bitcoin increased sharply in 2017 from around €1,000 in January to over €16,000 by mid-December, and then fell almost 70% to €5,000 in early February 2018. Therefore consumers could lose a large amount, or even all, of the money that they invest. Additionally, the price formation of virtual currencies is often not transparent. The information made available is in most cases incomplete or hard to understand and so consumers may be unsure of the value of what they are buying.
  • Absence of protection: The European Authorities warn that virtual currencies are merely a digital representation of value that is not guaranteed by a central bank and does not have the legal status of currency. This follows a similar warning from the Chief Executive of the Financial Conduct Authority who, in December, said that neither central banks nor the government stood behind the "currency" and therefore it was not a secure investment.

    Whilst it could be argued that governments and public bodies have been slow to regulate this space, banks are starting to take their own action. For example, Citibank, in the US, has stopped its customers from borrowing money on credit cards to buy cryptocurrency. 
  • Lack of exit options: Buyers of virtual currencies are at risk of not being able to exchange them for traditional currencies. The European Authorities warn consumers therefore that virtual currencies are unlikely to be suitable for people with short term investment goals and people who wish to have more certain investment targets and timelines, for example those saving for their pension.

Despite governments and regulators trying to deter people from purchasing cryptocurrencies, the trend is showing no sign of slowing down. It has recently been reported that cryptocurrency mining is due to use more energy in Iceland this year than the Icelandic population uses to power its homes!

Defence of frustration

The recently litigated case of The Flying Music Company Limited v Theater Entertainment SA reaffirmed the court's approach to frustration. An event will only be deemed to fall within the doctrine of frustration if (i) it renders performance under the contract impossible or transforms the obligation into something "radically different" from what was reasonably contemplated at the outset (it is not enough to show increased expense or trouble in performance); (ii) it occurs after the contract was concluded; and (iii) it was not caused by the fault of either party.

In March 2010, The Flying Music Company Limited, producer of theatrical productions including "Thriller Live", commenced negotiations with the defendant, Theater Entertainment, a Greece-based theatrical promoter, about taking the show to Athens and Thessaloniki. Ticket sales and marketing began in late April 2010, even though the contract was not concluded until 21 May, with a total of 32 performances planned in June that year. Concurrently, austerity measures were being imposed on Greece which saw road closures, demonstrations and violence erupting, especially in May and June. Due to poor ticket sales, various performances were cancelled and the defendant failed to meet the instalment payments required under the contract. The defendant pleaded frustration, claiming that when the parties contracted in May, it was "not apparent at that time that the situation [could]…utterly disrupt the entire social fabric or economic balance of a nation" and that the prolonged nature of the tension was unexpected.

However, the court held that civil unrest in Greece was already evident in April and that, whilst the trouble continued, it had not worsened to such an extent that performance of the contract was "radically different" in June. The court rejected the defendant's argument that the prolongation of unrest was unexpected, stating that it was clearly a possibility when the contract was entered into.

This judgment provides a useful insight into the court's thought process in applying the requirements for frustration and it is clear that all the criteria need to be present.

The right way to terminate

The Phones 4U case is a timely reminder that terminating parties should take care as to how they phrase a termination notice if they wish to maximise the damages to which they are entitled when their counterparty is in breach. This was made clear in a High Court ruling on 18 January, which denied EE damages for loss of its contract with Phones 4U. Phones 4U had been a mobile phone retailer selling products and services on behalf of EE, under a set of terms between them known as the PAYG terms. Phones 4U became insolvent and EE served notice to terminate. However, the termination notice submitted by EE only mentioned EE's express contractual right to terminate due to Phones 4U's insolvency, rather than the other grounds for termination which existed under the agreement.

EE later alleged that Phones 4U had committed a repudiatory breach of contract, by ceasing to trade upon the appointment of administrators, meaning that Phones 4U was in breach of its contractual obligations to market and sell its products for the duration of the contract. EE therefore tried to claim substantial losses on the common law basis of the loss of bargain resulting from this alleged repudiatory breach. However, to maintain its loss of bargain claim, EE needed to show that the termination letter was an exercise of its common law right to terminate for repudiatory breach, and not simply a termination for insolvency under its contractual right to do so.

The High Court held that EE's termination notice "unequivocally communicated" that it was exercising its contractual right to terminate upon insolvency, a right which arose independently of the repudiatory breach. There was no mention of any breach (including repudiatory breach) in the notice. Since EE's right to terminate was exercised independently of any alleged breach, its claim for damages for loss of the contract at common law therefore failed. Even wording in EE's termination letter that reserved its rights did not help EE, because EE had not exercised its right to terminate for repudiatory breach in the first place.

If you are thinking of terminating a contract, the moral of the story is to draft your termination notices very carefully. If appropriate, notices should refer to a contractual or common law right to terminate for breach, even if the party doing the terminating also has grounds to terminate for non-breach (such as where the other party is put into administration).

Narrow exclusions

In a recent case of Interactive E-Solutions v O3B the Court of Appeal held that exclusion clauses form an essential part of a contract when allocating risks between parties and should not be construed narrowly.

Interactive and O3B entered into a master services agreement (MSA) for the provision of satellite services in Pakistan. The MSA governed involved specific orders of bandwidth from O3B's satellite.

A dispute arose when Interactive refused to pay O3B's fees, as they had not obtained the correct regulatory approval. O3B sought to terminate the MSA. Interactive commenced proceedings for specific performance and in the alternative damages.

The MSA contained a clause which excluded O3B's liability for anything apart from fraud. It transpired that in liaising with a local authority, O3B's sub-contractor's letter contained untrue statements. Upon discovery, Interactive sought to argue that O3B had made this application fraudulently but Interactive had not refused to make payment on this basis.

At first instance, the trial judge found that Interactive was unable to establish an arguable cause of action that was not precluded by the exclusion clause. He had held that only fraud and dishonesty claims fell outside the scope of the exclusion of liability. The Court of Appeal unanimously agreed, and dismissed the appeal.

In construing the exclusion clause in a master services agreement, it was noted that the traditional approach of the courts towards exclusion clauses was one of hostility, but now it is accepted that such clauses are an integral part of pricing and risk allocation in commercial contracts. Such a case is an interesting development considering how often the courts have intervened when considering the reasonableness of exclusion clauses and interpreting such clauses narrowly.

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