25 Aug 2022

Commercial and tech update - August 2022

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Welcome to this month’s edition of our commercial and tech update, which looks at when a liquidated damages clause could act as a general liability cap, the pitfalls of drafting post-termination restrictive covenants, the High Court's use of  the business common sense approach as well as an update on UK legislation relating to product conformity assessments. 

When could a liquidated damages clause operate as a general liability cap?  

A liquidated damages clause specifies the amount of damages payable upon the occurrence of a particular event. This allows the aggrieved party to recover damages without having to quantify their loss (which may be difficult and time consuming). Liquidated damages also provide the contractor with greater certainty as to their liability upon the occurrence of the relevant event.

In the 2021 decision of Eco World-Ballymore Embassy Gardens Company Ltd v Dobler UK Ltd [2021] ("Dobler"), the English Technology and Construction Court concluded that an otherwise void or penal liquidated damages clause could still operate as a limitation of liability for general damages. This creates a risk for contracting parties that a liquidated damages cap could be applied more broadly or narrowly than otherwise expected.

In the recent case of Buckingham Group Contracting Limited v Peel L&P Investments and Property Limited [2022] ("Buckingham"), the High Court considered the interpretation of a liquidated damages provision and whether it was unenforceable due to uncertainty. Whilst the High Court ultimately found that the liquidated damages provision was certain and enforceable, it considered whether the liquidated damages cap also operated as a limitation of liability clause on general damages for delay. In deciding that this was not the case, the High Court highlighted two key features:

  1. the liquidated damages cap expressly stated that it was a cap on the maximum liquidated damages amount; and
  2. the liquidated damages cap was contained in the schedule "exclusively concerned with" milestone dates and individual rates for liquidated damages applicable thereto.

The case does highlight the possibility of liquidated damages caps being construed as general limitations of liability. To minimise this risk, parties should include clear statements around the scope of any liquidated damages cap including:

  • a mechanism for the parties to adjust liquidated damages payable where partial completion takes place prior to a final completion date;
  • providing example calculations to clarify the practical operation of the liquidated damages clause; and
  • ensuring that any general caps on liability do not "cut across" any separate caps in the contract.

Caution advised with post-termination restrictive covenants

The Court of Appeal has recently ruled in Dwyer (UK Franchising) Ltd v Fredbar Ltd [2022] that a post-termination restrictive covenant in a franchise agreement was unenforceable for being unreasonable.

The court set out several factors that it will consider in assessing the reasonableness of a restrictive covenant including looking at the factual and contractual background and the relative bargaining strength of the parties. It also made clear that the issues of enforceability and reasonableness are to be determined at the time that the franchise agreement is entered into.

In this case, the court held that there was clearly an inequality of bargaining power between the parties. The claimant was a major plumbing company whilst the franchisee was "a man with a van" with no prior plumbing experience. Further, the fact that the franchisee had invested all his savings into the franchise demonstrated the inequality of bargaining power.

The restrictive covenant in question prevented the franchisee from being "engaged, concerned or interested in a business similar to or competitive with" the claimant's business for a 12-month period within a specific geographical area after termination of the franchise agreement. There was no evidence to suggest that these provisions had been discussed or negotiated and the agreement was presented on a take it or leave it basis. The court was of the view that it was reasonably foreseeable that the franchisee would not be able to comply with the covenant without serious risk of unemployment for the franchisee. Moreover, the franchise had only been running for eighteen months during which time the earnings and future projections were limited and there was very little to no goodwill which had accrued in the specified area. For these reasons, the court held the restrictive covenant to be unreasonable and unenforceable.

The court stressed that a 12-month non-compete restriction would not be considered unreasonable in all cases. In circumstances where a franchisee is well-established and successful or the franchisor has evidence of the need to protect its goodwill, it might be concluded by a court that such a restriction is reasonable.

Whilst the case is specific to the facts, franchisors must take care when drafting post-termination restrictions. In particular, parties should ensure that any such restrictions strike a reasonable balance between protecting the franchise business and restricting the franchisee's ability to earn a living once the franchise agreement has terminated.

High Court adopts business common sense approach to clarify position in contractual dispute

A recent case in the High Court provides an example of when the courts will take a business common sense approach when interpreting contractual clauses.

The case of BlackLion Law LLP v Amira Nature Foods Ltd [2022] concerned a dispute about the interpretation of a provision in a law firm's retainer.

In 2017, BlackLion was engaged by Amira Nature Foods Ltd ("AMF") on a retainer basis. The legal retainer contained a provision which stated that BlackLion would charge a fixed fee of £300,000 "subject to completion of the matter by 31 May 2017". The law firm completed a considerable amount of work for AMF, however, the matter did not complete by 31 May 2017. BlackLion issued invoices for their work, however, AMF withheld payment. BlackLion therefore pursued a claim against AMF for £300,000, alleging breach of contract.

The issue arose as a result of the ambiguous drafting of the abovementioned retainer provision, which resulted in both parties maintaining different positions in relation to the fixed fee payment:

  • AMF maintained that it was entitled to withhold the fee because work was not completed by the deadline.
  • BlackLion maintained that if the work had completed by 31 May 2017, it should be paid no more than the fixed fee amount – any work completed after this date would be charged separately and in addition to the fixed fee amount.

The trial judge accepted that the conditional element of the retainer provision was ambiguous. In order to reach a decision, the court assessed which interpretation was more consistent with business common sense. Such analysis made clear that BlackLion's interpretation was more consistent, as it was highly unlikely that they would have agreed to complete such a large amount of work on the basis that it may not receive any payment if the deadline was not met.

Although it is well established that the courts are entitled to apply business common sense when interpreting contracts, this decision serves as a reminder of the practical points to consider when drafting contractual terms. In particular, organisations should ensure that there is no ambiguity when drafting clauses that contain conditional elements.

UK Government releases updates to product conformity assessment law

The UK Government has announced changes to the application of the UK Conformity Assessed (UKCA) mark for products on the market in England, Scotland and Wales.

Under the previous rules, certain goods required a CE conformity marking and a reverse epsilon for sale on the EU market, including within the UK. Following Brexit, the UK introduced the "UKCA" mark to indicate conformity to legislation within Great Britain. The UKCA mark became mandatory on 1 January 2022 with a year's grace period for using the previous marks. The changes announced are intended to make it easier for businesses to apply the new UKCA mark to products for sale in Great Britain.

The changes cover a few points relating to the previous rules:

  • Conformity assessment activities carried out by EU bodies before the end of 2022 may be used by manufacturers as the basis for applying a UKCA marking. This will be supported by further domestic legislation but should prevent the need for re-testing products.
  • Products with the "CE" marking imported from the EU will be allowed to be sold in Great Britain, without specifically meeting UKCA requirements, provided that they were imported before the end of 2022. This applies to existing stock already on the GB market.
  • Spare parts for products with the old markings can go onto the UK market provided that they comply with same requirements in place at the time of the original products/systems they were used to repair, replace or maintain being put on the market.
  • Legislation will be introduced so that importer details can be provided on a sticky label or accompanying documentation rather than the goods themselves (if from the EEA and, in some cases, Switzerland). This is until 31 December 2025, after which the details must be affixed to the product.

The affected business sectors include manufacturers of electronics, mobile phones, pyrotechnics, machinery, certain outdoor equipment and PPE among other things. Certain business sectors have to follow additional rules to place goods on the market in Great Britain including medical devices, construction products, tobacco products, cosmetics and other products. The UK government is running a series of webinars on the changes and guidance on the UKCA can be found here.

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