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28 Feb 2022

Commercial and tech update - February 2022

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Welcome to this month’s edition of our commercial and tech update, which looks at when incorporating terms by reference may not be sufficient, the importance of dealing with timing, how the courts might measure "reasonable endeavours" obligations as well as new consumer rules for the digital age which came into force at the beginning of 2022.

"Be Care-ful" about incorporating T&Cs by reference

In the business world, we often see companies that incorporate various additional terms and conditions into their contracts by referring out to them - for example by including a link to their website. This is a well-trodden path across many industries, so it is worth taking note from the recent revelation in Blu-Sky Solutions Ltd v Be Caring Ltd [2021], that incorporating terms by reference may not always be sufficient.

In this case there was a contract for Blu-Sky Solutions Limited ("Blu-Sky") to supply a mobile network service to Be Caring Ltd ("Be Caring"). Be Caring signed an order form with Blu-Sky which referred out to a set of terms and conditions from the signed document, as follows:

"[a]ll orders and contracts are subject to and incorporate our standard terms and conditions by signing this document I agree I have logged on to the Blu Sky website at www.bluskysolutions.co.uk, have read agree and fully understand all terms and conditions regarding the contract and the policy protection scheme & free trial (*where applicable) and am bound by the same. I give Blu Sky permission to have third party access to my account. I am duly authorised to sign on the company’s behalf."

Although Be Caring did not actually review the terms of the order form or log on to Blue-Sky's website, the judge in this case held that the reference in the signed document was sufficient to incorporate Blu-Sky's terms generally. However, it was not sufficient to incorporate the cancellation clause set out in Blu-Sky's terms. This was because the cancellation clause was held to be "onerous or unusual", specifically because the cancellation fee was for £180,000 when the maximum loss from breach was only around £23,000.

For clauses in signed contracts, the fact that a term is included in the signed contract itself is usually enough to bring the clause to the signing party's attention, and therefore there are no issues with incorporation in that clause. However, in circumstances where the document that has been signed merely refers out to terms and conditions and does not contain the relevant provisions itself, this is akin to incorporation by notice, and not always enough to incorporate unduly onerous or unusual clauses. In this case the Judge held that not enough had been done by Blue-Sky to bring the onerous cancellation clause to the attention of Be Caring when signing the contract. In the words of the judge: "the offending clause itself […] was cunningly concealed in the middle of a dense thicket which none but the most dedicated could have been expected to discover and extricate".

The lesson to learn from this case is that companies need to make sure that their T&Cs are sufficiently communicated to other parties they wish to contract with. Businesses also need to be careful not to 'sneak in' onerous or unusual clauses in their T&Cs as there is a risk that such clauses won't be incorporated into the contract, and therefore won't be enforceable.

A reminder to ensure timing is dealt with in commercial contracts

The High Court case of Pharmapac (UK) Ltd ("Pharmapac") v HBS Healthcare Ltd ("HBS") [2022] looked at whether Pharmapac was entitled to terminate a contract for the supply of facemasks when HBS failed to deliver the goods on time. The terms in place for the delivery were silent as to whether time was of the essence. However the High Court concluded that, based on the specific facts of the case, time for delivery was of the essence.

Making time of the essence in relation to a contractual obligation means that performance of the obligation prior to the relevant deadline becomes a condition of the contract (rather than merely a term). If the deadline is missed, even by a narrow margin, then the innocent party may terminate the contract. Section 10(2) of the Sale of Goods Act 1979 provides that whether time for delivery is or is not of the essence depends on the contract terms although this case demonstrates that, on occasion, the court may rule that such a term is a condition of a contract even where it is not expressly stated as such.

The case related to a contract between Pharmapac and HBS in March 2020 for the supply of a total of 5 million facemasks in ten weekly instalments. Delivery of the first batch was to be by a specified date and the further nine instalments were stipulated to be "weekly" with no specific date or day of the week on which the batch was to be delivered. Further, the contract did not specify the number of masks to be included in each batch nor the consequences of failure to deliver on time. HBS only delivered the first batch.

HHJ Cadwallader, sitting as judge of the High Court, looked at the specific facts surrounding the supply of the facemasks. He noted that the market was volatile in the context of the developing COVID-19 pandemic and there was a sense of panic for supply. Despite the lack of clarity of the terms which applied to the agreement and the supplier's lack of control over delays in its own supply chain, the judge concluded that time for delivery was of the essence and Pharmapac therefore had the right to terminate the contract. The decision was as a result of Pharmapac's "urgent commercial need" and the likelihood that the parties would have been aware of the urgency surrounding the supply at the time of entering into the contract.

This case serves as an important reminder to consider and expressly deal with timing in commercial contracts, particularly in relation to delivery and payment terms. Where timing is important, make sure this is expressly stated in the terms. It is particularly important to include an explicit statement that time is of the essence where other terms are incorporated into/absent from the contract in question such as:

  • there is no ascertainable date for performance (e.g. timing stipulated as "as soon as possible" and "within a reasonable time");
  • procedures allowing the parties to extend a deadline;
  • ·no explicit consequence of delay; or
  • a clause giving interest on late payments could indicate that time was not of the essence for payment.

Measuring "reasonable endeavours": an expensive obligation to get wrong

The reasonable endeavours of a property development company responsible for a zero-carbon "eco town" in Bicester, Oxfordshire, has been called into question in the High Court case Brooke Homes (Bicester) Ltd v Portfolio Property Partners Ltd and Others [2021] which considered the enforceability of obligations to negotiate and the scope of an endeavours clause.

Over a period of five years up until 2014, the Defendants acquired a portfolio of land for development and identified the Claimant as a suitable developer. The parties broadly agreed that, subject to the grant of planning permission and some other specific conditions, the Claimant would purchase land from the Defendants portfolio for development. This was later formalised in a Heads of Agreement and two associated contracts (the "Agreements").

Under the Agreements, the parties agreed to use "all reasonable endeavours" to enter into a conditional sale agreement, to act in good faith during the negotiation and to observe certain exclusivity provisions. The Agreements also purported to agree that the sale of the land was to be structured so as to achieve the best commercial and financial outcome for both parties.

Negotiations later broke down and the conditional sale agreement was never agreed. This led to the Claimant bringing a claim alleging the Defendant to be in breach of contract for the sale of the land. The court held that the Defendant was in breach of its positive obligations under the Agreements to use all reasonable endeavours and to negotiate in good faith, awarding damages of £13.4 million to the Claimant.

In considering what is required of a party when they commit to using "all reasonable endeavours, the judge held that "there is little difference with such a clause and the duty to use best endeavours” and that “active endeavour is required…where all reasonable endeavours are required: passivity or inactivity is likely to be construed as a breach”. Historically, "best endeavours" has been considered a more onerous obligation than "reasonable endeavours". However, this case sees the two likened to one another, seemingly narrowing the distinction between best and reasonable endeavours.

In addition, when ascertaining the meaning and reach of the ‘all reasonable endeavours’ clause, the court considered the obligations to negotiate in good faith and mutual benefit obligation, as indications of the parties’ overall positions. This serves as a reminder that when a court considers what constitutes "reasonable endeavours", the outcome will be directly impacted by the exact contractual wording and the specific circumstances of the case.

This case reminds us that great care must be taken when including endeavours clauses in commercial agreements. Where possible, parties should consider including explicit and measurable obligations as opposed to endeavours clauses so as to avoid a scenario in you are required to prove that your actions constitute "reasonable endeavours". Where an endeavours clause is relied on in drafting, parties should keep records of their actions so that evidence of compliance can be demonstrated if the reasonableness of the endeavours is ever called into question.

Our real estate team have looked at this issue in more detail here.

EU embraces new consumer rules for the new digital age

EU member states saw the EU Digital Content and Services Directive 2019/770 and the Sale of Goods Directive 2019/771 come into force on 1 January 2022 (the "Directives"). The Directives will apply to all contracts concluded on or after 1 January 2022 and under which EU consumers are sold digital content, digital services or digital goods. As a result, UK businesses supplying digital content, digital services and/or goods to EU consumers will need to comply with applicable member state legislation implementing the Directives.

The Digital Content and Services Directive sets out rules for the supply of digital content and digital services to EU consumers and applies to a broad range of digital products, including computer programmes, music and video files and e-books as well as to digital services designed to allow the creation of, processing of, accessing or storage of data in digital form, which importantly encapsulates software-as-a-service.

This new legislation offers various protections to consumers, including:

  • requiring digital products and services to conform in all respects with technical characteristics, quality, functionality;
  • ensuring all digital products and services are supplied with all accessories, instructions, including on installation, and customer assistance, as described in the contract of sale;
  • providing that consumers are entitled to a price reduction or full reimbursement where defects cannot be fixed within a reasonable amount of time; and
  • setting out a minimum guarantee period of 2 years (from the time the consumer receives the goods or services).

The Sale of Goods Directive sets out rights and remedies for EU consumers in relation to the supply of all goods (including those with a digital element), whether these are supplied on-premise, at a distance or online.

Although the Directives will apply to UK businesses supplying digital goods and services to EU consumers, the Consumer Rights Act 2015 will continue to apply to equivalent sales to UK consumers. As a result, there are some differences that UK businesses should note as regards standards to be met for EU consumers. For example, the Sale of Goods Directive expressly requires accessories and instructions to be delivered alongside the goods or services which is not a requirement under the Consumer Goods Act. In addition, under the Consumer Rights Act, where a consumer relies on the seller's skill or judgment, the goods or services must be fit for purpose. Under the Sale of Goods Directive, however, no such reliance is required in order for the goods or services to be fit for purpose. Lastly, whilst the both the Consumer Rights Act and the Sale of Goods Directive provide for a reverse burden of proof in favour of the consumer (i.e. the burden of proof is on the defendant to disprove the position put forward by the consumer), the Sale of Goods Directive provides for it to last for a year long period, whilst the Consumer Rights Act provides for a period of 6 months only.

Moving forward, therefore, UK businesses need to be sure they are providing the appropriate rights to EU consumers now the Directives have been implemented across EU member states.

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