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20 Apr 2022

Commercial and tech update - April 2022

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Welcome to this month’s edition of our commercial and tech update, which looks at exclusion of liability for loss of profit clauses, the importance of clear drafting of variation clauses, how the courts might measure "reasonable endeavours" obligations in a force majeure context as well as the new Online Safety Bill.

Exclusion of liability for loss of profits does not exclude claims for wasted expenditure

In an exciting development in Soteria Insurance Ltd (formerly CIS General Insurance Limited) v IBM United Kingdom Ltd [2022], the Court of Appeal has found that a claim for wasted expenditure was not excluded by an exclusion clause which excluded liability for (amongst other things) "loss of profit, revenue [and] savings (including anticipated savings)" (the "Loss of Profit Exclusion ").

In making this determination, the Court of Appeal overturned the ruling on this point made by the Technology and Construction Court in CIS General Insurance Ltd v IBM United Kingdom Ltd [2021] ("Original Case") which was explored in detail in our article here.

Key points in the Court of Appeal's decision

In the Original Case, the primary judge heard a claim for wasted expenditure arising from IBM's repudiation of a contract for the delivery of an IT System to Soteria Insurance Ltd (formerly CIS General Insurance Limited) ("CISGIL"). More specifically, CISGIL had claimed wasted expenditure in anticipation of the delivery of the new IT System in the amount of £128 million. The judge in the Original Case determined that the claim was excluded by the operation of the Loss of Profit Exclusion.

Now the Court of Appeal has made the following key observations in determining that the Loss of Profit Exclusion did not exclude a claim for wasted expenditure incurred because of IBM's repudiation of the contract:

  • the natural and ordinary meaning of the Loss of Profit Exclusion Clause did not extend to "wasted expenditure", as "wasted expenditure" simply wasn't specified in the Loss of Profit Exclusion;
  • following the principle that "the more valuable the right, the clearer the language of any exclusion clause will need to be", the Court of Appeal concluded that there was nothing in the Loss of Profit Exclusion, or any other part of the exclusion clause to suggest that the costs incurred by CIGIL would not be recoverable upon IBM's repudiation of the contract;
  • loss of profits and wasted expenditure are distinct types of damages that may arise in the event of a repudiation of contract. The Court of Appeal referred with approval to Lord Denning's comments in Anglia Television Limited v Reed [1972] observing that when a contract is repudiated the victim could claim loss of profits or wasted expenditure, but not both;
  • the Loss of Profit Exclusion was not attempting to cover all losses which may arise from a loss of bargain. The loss of bargain was not merely the lost profits, revenue and savings, but the loss of the IT system that was otherwise due to be provided by IBM to CISGIL; and
  • wasted expenditure was not an appropriate method for calculating lost profits, revenues or savings and loss of profits and wasted expenditure constitute different methods for calculating damages arising from the loss of the bargain.

What do I do now?

It follows that if parties intend to exclude liability for "wasted expenditure", they need to specify this clearly in any exclusion clause. As a matter of practice, exclusion of liability for "wasted expenditure" is more likely to favour the supplier, so customers should be careful about agreeing to such an exclusion on the basis that any exclusion is "mutual".

It is also worth bearing in mind the principles of contract construction adopted by the Court of Appeal. In particular, a failure to be clear about scope and type of excluded losses can cause problems for the party seeking to rely on them.

But wait, there's more!

Look out for our next bulletin where we will explore the Court of Appeal's analysis on the application of liability caps in this case.

High Court warns caution when drafting variation clauses

The importance of drafting variation clauses as clearly as possible was highlighted in the recent judgment of Integral Petroleum SA v BANK GPB International SA [2022] where the High Court looked closely at the construction of a variation clause.

Integral Petroleum SA's ("Integral") business included the purchase and sale of commodities. In 2017, Integral entered into a commodity finance facility with Bank GBP International SA (the "Bank") to finance the purchase of commodities. In 2019, Integral faced a number of issues and experienced significant delays in respect of certain commodities. As a result of those delays, Integral became subject to several penalty payment obligations from its suppliers for the late lifting of the cargoes. Consequently, Integral became unable to repay the Bank's financing on time.

In this case, the Bank brought an unsuccessful application for a summary judgment in which it sought to recover the unpaid principal and interest owing under the facility agreement. Integral's defence included, among other things, that they were not in default of the facility agreement because the Bank had orally agreed to extend the maturity dates on the loan through various phone conversations. The Bank submitted that even if the parties had orally agreed to a repayment plan, the agreement was not legally binding as it had not been agreed in writing as required by the variation clause.

The variation clause in the facility agreement provided that: "any term of the Finance Documents may be amended or waived with the agreement of the Borrower or Lender in writing".

The Court considered the construction of the clause, focussing on giving the words their natural meaning. With this in mind, the judge noted that the clause does not use the word "shall" which would have provided more clarity as to the specific requirements for any amendment or waiver, but, on the other hand, the use of "in writing" strengthening the Bank's argument. In particular, it was considered that to interpret the clause such that amendments or waivers are permitted by agreement but that writing is not necessary would be to give no meaning to the words "in writing". The key area of ambiguity was held to lie in whether the words "in writing" require the amendment to be effected in a written document or whether it is sufficient for it to be evidenced in writing. The fact that this was summary judgment application meant that there was limited evidence available which Integral relied upon to evidence the oral agreement. When weighing the natural meaning of the language against the factual context, the court resolved that, given the ambiguity of the drafting, weight cannot be given to such minimal evidence and that oral agreements had taken place without oral evidence and cross examination. The judge therefore decided that this was a question for trial and could not be resolved by summary judgment.

Whilst the analysis carried out by the courts on interpretation of drafting tends to turn on the specific facts of the case, this case serves to highlight the importance of using caution when drafting simple boilerplate clauses. Parties should consider checking the wording of their variation clauses for anything which could be deemed ambiguous, particularly where the parties intend to prohibit oral variations to an agreement.

Reasonable endeavours in force majeure

Recently, the English Commercial Court held in MUR Shipping BV v TRI Ltd [2022] that in order to rely on a force majeure clause with a "reasonable endeavours" requirement, a party did not have to accept non-contractual performance.

Background

Mur Shipping BV (the "Owners") entered into a Contract of Affreightment (the "Contract") with RTI Ltd (the "Charterer") in 2016 for the shipment of bauxite from Guinea to Ukraine. In April 2018, sanctions were imposed by the US government on certain Russian entities (the "Sanctions") including the Charterer's parent company. The Owners issued a force majeure notice, claiming that the Sanctions prevented them from being able to perform the Contract because it would mean accepting payment from the Charterer in US Dollars ("USD").

The Charterers argued that (i) the Sanctions would not bind the Owners as they were not a "US person", (ii) the Owners should accept Euros instead of USD, and (iii) that the Sanctions did not interfere with cargo operations. On the other hand, the Owners took a view that they should not be expected to perform the actions required to ship the cargo without payment in advance and that freight must be paid for in USD, not Euros.

Arbitration

In the first instance, this dispute was heard by arbitration. The Tribunal took a view that the Owners, as a Dutch company, were not directly restricted under the Sanctions but recognised that parties would be "frightened of trading with [a] party that has been sanctioned". Accordingly, the tribunal recognised that US banks would exercise caution before making a payment involving a company subject to the Sanctions and so acknowledged that there could be a delay in payment being made to the Owners. Ultimately, the Tribunal did not uphold the force majeure relief claimed by the Owners on the basis that the force majeure event could have been "overcome by reasonable endeavours from the Party affected". Specifically, the Tribunal held that payment in Euros, with the Charterers footing the costs and any exchange loss, was a "completely realistic alternative". The Owners appealed this decision to the Commercial Court on a question of law.

Court

The Commercial Court held that the force majeure event did, in law, arise. The ruling explained that paying in the agreed currency was an important obligation and no other currency was provided for in the Contract. In other words, the right to payment in a particular currency was a contractual right and there was no general consideration of reasonableness that would apply here.

In addition, the Court held that the reasonableness of the endeavours should only be considered in terms of how they were exercised towards fulfilling the Contract, rather than achieving a different result. In this scenario fulfilment of the Contract could only be achieved by payment in USD.

What can we learn?

The facts of this case draw attention to the importance of "reasonable" endeavours as contrasted with "best" or "all". We reported last month on Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd and Others [2021] which found that there was "little difference with [reasonable endeavours] and the duty to use best endeavours". The apparent contrast in outcomes emphasises the point that the outcome in litigation will be directly impacted by the relevant obligation in the Contract to which the endeavours are directed, its exact wording, and the specific circumstances of the case. Parties should, where possible, include explicit and measurable obligations rather than relying on the court to agree that such endeavours were "reasonable". Where the issue relates to currencies or similar, exclusivity can be established to avoid complicating the payment.

Online Safety Bill introduced

The Government has introduced the Online Safety Bill ("OSB") into the House of Commons which creates a new regulatory regime to address illegal and harmful content online. Once passed, the OSB will apply to regulated "user-to-user services" which enable users to encounter content generated, uploaded and shared by other users ("U2U Services") as well as regulated "search services" which enable users to search multiple websites and databases ("Search Services").

Content

The OSB proposes that the following key duties be imposed on all providers of regulated U2U Services and regulated Search Services:

  • A duty to undertake an illegal content risk assessment that takes into account the risk profile of the services being provided
  • A duty to implement proportionate systems and measures to mitigate and manage the risks of harm to individuals and prevent / limit access to illegal content
  • A duty to use systems and processes that allow users and affected persons to easily report illegal content (including terrorism and child sexual exploitation and abuse)
  • A duty to operate a complaints procedure in relation to illegal content that is easy to access and use and allows for appropriate action to be taken by the provider.

Application

The OSB proposes that the new regime will only apply to "regulated" U2U Services and Search Services which have links with the UK by virtue of having a "significant" number of users in the UK or where the UK is one of their target markets. U2U Services and Search Services will also be deemed to have "links with the UK" if their services are capable of being used in the UK by individuals and there are reasonable grounds to believe that there is a "material risk of significant harm" to individuals in the UK. It is notable that the explanatory note does not provide further details or examples of how these tests would be applied – accordingly providers with users in the UK should take a conservative approach in assessing whether they are subject to the OSB.

The OSB does create specific exemptions at Schedule 1, including in relation to email services, SMS and MMS services, limited functionality services and internal business services. This means that user reviews, business intranets, productivity and collaboration tools and customer relationship management systems will not be subject to the regime in the OSB.

What do I need to do now?

The OSB lies at the centre of a broader regulatory framework for online safety, which is to include regulations and codes of practice and associated guidance published by OFCOM. Much of this is yet to be developed meaning that precise regulatory obligations are still unknown.

In the meantime, however, the Government has issued an Interim Code of Practice on terrorism and child sexual exploitation and abuse ("Interim Code"), which describes actions that companies can take to address terrorism and child sexual exploitation and abuse material online. Although the Interim Code is not mandatory, it is likely that key obligations and requirements would be flowed through to any formal codes of practice issued by OFCOM if the OSB is passed. Accordingly, companies who take the time to develop systems and implement procedures in accordance with the Interim Code are less likely to encounter problems once formal regulatory requirements are imposed.

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