29 Jun 2021

Commercial and tech update - June 2021

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This month’s update looks at two recent High Court decisions which will be useful for those drafting or interpreting contracts, as well as the decision of the CMA to investigate whether BA and Ryanair breached consumer law for failing to refund passengers for flights which could not be taken because of COVID-19 lockdown measures.

High Court decision serves as a reminder of the need to act with caution when terminating contracts

After a 32-day hearing in the Technology and Construction Court, a decision was reached in the case of CIS General Insurance Limited v IBM United Kingdom Limited [2021] EWHC 347 (TCC). The parties in this case, CIS General Insurance Limited ("CIS") and IBM United Kingdom Limited ("IBM"), entered into a contract for a high value digital transformation project involving the development of a new IT infrastructure. 

CIS disputed an invoice for payment of a licence fee. CIS believed that the invoice was not payable as other milestones in the project had not been achieved. The issue in dispute arose when IBM purported to terminate the contract as a result of CIS' failure to pay.  CIS argued that IBM had repudiated the contract and brought a claim for damages.

In reaching a decision, the court made two key findings:

  • CIS' challenge to the invoice was invalid; and
  • CIS had followed the correct procedure to dispute the invoice. Therefore IBM was not entitled to terminate the contract for non-payment as the invoice was still disputed.

In reaching the decision that CIS' challenge to the invoice had been invalid, the court looked at the contractual arrangement. As the contract was silent regarding the payment for one milestone being dependent on the achievement of other milestones, the court found that the inclusion of such a provision had not been intended by the parties.

IBM had intended to terminate the agreement on the basis of non-payment. However, despite finding that the challenge to the invoice was not valid, the court found that as CIS adhered to the contract requirements with respect to disputing the invoice, IBM had no right to terminate the agreement whilst the invoice was still disputed. This meant that IBM was in repudiatory breach of contract.

As a result of IBM's repudiatory breach, CIS was entitled to accept the repudiation and claim damages. It should be noted, however, that the contract contained a provision that limited IBM's liability. The court applied this liability cap and awarded CIS £15.9 million in damages (as opposed to the £128 million that had been sought by CIS in wasted expenditure).

High Court rules that an exclusion clause fails the Unfair Contract Terms Act ("UCTA") reasonableness test

In early June of this year, the case of Phoenix Interior Design Ltd v (1) Henley Homes Plc and (2) Union Street Holdings Ltd appeared before Freedman J in the High Court.

The case concerned interior design services supplied by the claimant, Phoenix Interior Design Ltd, for the refurbishment and fitting out of the 5-star Dunalastair hotel in the Scottish Highlands. The claimant was seeking payment for unpaid invoices in the sum of 50% of the contract value. The defendants argued that the sums were not due because the contract had not been completed on the basis of various allegations that the goods and services supplied had been defective. The defendants counterclaimed for damages for breach of warranty.

The claimant relied on an exclusion of liability clause contained within the interior design company’s standard terms and conditions. For context, the standard terms and conditions included a warranty from the interior design company that the goods supplied would comply with their specification. The specific exclusion clause provided that the interior design company had no liability under this warranty if the total price of the goods had not been paid by the due date for payment.

The court considered whether the exclusion clause satisfied the UCTA reasonableness test. In order to pass the reasonableness test, a contract term must have been "…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." The assessment of reasonableness generally looks to consider:

  • the strength of the bargaining positions of the parties;
  • whether any inducement was given to the customer to agree to the term or whether the customer had an opportunity of entering into a similar contract with other persons without having to accept a similar term;
  • whether the customer knew or ought reasonably to have known of the existence of the term;
  • where a term excludes or restricts 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; and
  • whether the goods were manufactured, processed or adapted to the special order of the customer.

The court held that the interior design company had failed to discharge the onus of showing that their exclusion clause satisfied the requirement of reasonableness under UCTA because:

  • there was no good explanation for why an anti-set off clause would not have sufficed;
  • it was an unusual clause tucked away in standard terms and conditions without any particular highlighting, and its consequences were not obvious;
  • the clause was potentially exorbitant because the consequence of even the slightest delay or deduction might bar all rights of redress against the claimant relating to the quality of goods supplied;
  • the actual application of the clause was difficult because there was ambiguity around the completion and due date for payment; and
  • payment was due on the date of completion as opposed to a number of days following it.

Although the High Court’s decision is specific to the case and does not create any new legal principles, it serves as a reminder of the various practical points to consider when dealing with limitation clauses, particularly in standard terms. In particular, organisations should ensure that harsh and unusual exclusions and limitations are visible and well signposted and also ensure there is no ambiguity when it comes to any conditions which must be met in order for exclusions to apply.

British Airways and Ryanair investigated over failure to offer COVID-19 refunds

The CMA has announced that it has launched an investigation into whether British Airways ("BA") and Ryanair breached consumer law by failing to offer cash refunds to customers who were prohibited, by COVID-19 lockdown measures, from taking flights. This investigation does not relate to refunds for flights that were cancelled due to COVID-19 (in these circumstances the position is clear that the passenger is entitled to a refund), it relates to those flights that went ahead, but the passenger was prevented from taking the flight due to lockdown measures.

Where customers were unable to fly, BA offered vouchers or the option to change the flight, whilst Ryanair only offered to change the flight. By failing to offer cash refunds, both BA and Ryanair may have breached consumer law.

Andrea Coscelli, the chief executive of the CMA, said: "Customers booked these flights in good faith and were legally unable to take them due to circumstances entirely outside of their control. We believe these people should have been offered their money back."

The CMA is working directly with both airlines to investigate these concerns which may include seeking redress for consumers. The CMA is unable to impose fines for breaches of consumer law, but it can enforce applicable legislation through the courts. The investigation is not a determination of wrongdoing, and only a court can decide whether these companies in fact breached the law.

This is part of the CMA's ongoing investigation into the airline sector (opened in December 2020) and the wider travel industry with regards to refunds, cancellations and price rises during the COVID-19 pandemic.

Further guidance on the CMA's position on refunds where goods or services are cancelled as a result of COVID-19 can be found here: Statement on coronavirus (COVID-19), consumer contracts, cancellation and refunds - GOV.UK (www.gov.uk). 

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