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13 Jul 2022

Commercial and tech update - July 2022

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Recent High Court judgment provides useful guidance on implied terms in commercial contracts

The recent High Court judgment in Force India Formula One Team Ltd, Re [2022] provides a useful reminder on the principles a court will consider when determining whether a term should be implied into a commercial contract. In this case, the High Court found that it was "necessary and obvious" to imply a term into an agreement entered into between Force India Formula One Limited ("Force India") and Brandon AB for the manufacture and supply of uniform and merchandise for the Force India Formula One racing team (the "Team"). Force India owned the and operated the Team.

Under the terms of the agreement, Brandon AB was granted an exclusive licence to manufacture the Team's racing uniforms and trademarked merchandise. Brandon AB assigned its rights under the contract to Stichd Sportmerchandising BV ("Stichd"), who subsequently became the Applicant in the case.

The dispute arose when Force India became insolvent and joint liquidators sold Force India's business and assets to Racing Point UK Limited ("Racing Point"). No attempt was made to novate the agreement to Racing Point. Stichd brought a claim, alleging that the sale to Racing Point breached an implied term in the agreement which was that Force India would continue to operate the Team during the entire five year term of the agreement.

The trial Judge agreed with Stichd that an implied term arose under the agreement. In reaching this decision, the Judge referred to the following relevant factors:

  • The Judge considered the test set out by Lord Neuberger in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] AC 742 which states that the implication of a term is dependent on consideration of what "notional reasonable people in the position of the parties at the time" would have agreed, as opposed to the actual intention of the parties at the time of contracting. In the present case, the Judge found that the notional reasonable party would have expected Force India to operate the Team throughout the entire term of the agreement. The Judge considered the express terms of the agreement including the term, termination rights, the grant of licences, warranties and the specific description of Stichd's rights and obligations in the contract. The Judge found that Force India would be required to own the Team throughout the Term and that "Such ownership was sufficiently important that it appeared twice in the agreement, Force India had granted exclusive rights tied to the existence of the Team and had only limited rights of its own to terminate the agreement."
  • The Judge agreed with Stichd that the sale of the Team to Racing Point "robbed the agreement of its entire commercial rationale from Stichd's perspective". Without the implied term, Stichd could no longer profit from the territorial exclusivity rights and the five year term it had negotiated.

This case serves as a useful reminder on the court's approach to implied terms in commercial contracts. In particular, the courts will closely analyse the express terms of an agreement to ascertain the intention of the parties at the time of contracting as well as considering whether the implied term is necessary to give business efficacy to the agreement.

Aggregating Liability Caps – Court of Appeal Offers Practical Guidance

In April's commercial and tech update, we discussed the Court of Appeal's decision in Soteria Insurance Ltd (formerly CIS General Insurance Limited) v IBM United Kingdom Ltd [2022] in which the Court of Appeal found that a claim by Soteria Insurance ("CISGIL") for wasted expenditure was not excluded by an exclusion clause which excluded both parties' liability for "loss of profit, revenue [and] savings" (the "Exclusion Clause").

Because CISGIL's claim for wasted expenditure wasn't excluded by the Exclusion Clause, the Court of Appeal needed to consider how the liability caps in the contract applied to the claim.

Let's rewind

CISGIL had engaged IBM United Kingdom ("IBM") to provide a new IT system.  As explained in our earlier article, the implementation was not successful and following a disputed invoice and disputed attempt to terminate by IBM, CISGIL accepted IBM's repudiatory breach of contract and made a claim for wasted expenditure of £128 million.

In the first instance, the primary judge determined that the claim for wasted expenditure was excluded by the Exclusion Clause.  As such, it was not necessary for the primary judge to consider the effect of the liability caps on the claim.

The liability caps

In finding that the claim for wasted expenditure had not been totally excluded by the Exclusion Clause, the Court of Appeal was required to consider the operation of the liability caps in the contract.

The contract was structured as a Master Services Agreement under which the parties had entered into two Statements of Work ("SOW"); the Implementation Services SOW and the Managed Services SOW.  There were a series of liability caps under clause 23.5 of the Contract, with the relevant liability caps set out below:

          …[T]he Supplier's aggregate liability to the Customer Group:

(a)      for the Implementation Services, shall be limited to 150% (one hundred and fifty percent) of the Charges paid and/or would have been payable by the Customer if the Implementation Services had been performed in full and there had been no claims or deductions;

          …

(e)      Arising otherwise under and/or in connection with this Agreement shall be limited to the greater of:

i) £15.7 million (fifteen million seven hundred thousand pounds); or

ii) 125% (one hundred and twenty-five percent) of the total Charges paid and/or would have been payable for the Managed Services in the 12 (twelve) month period immediately preceding the first cause of action arising.

The provisions of this clause 23.5 shall operate as separate and additional liability limitations to all other limitations of liability in this clause 23.5 and clause 23 and any liability for any matters listed in this clause 23.5 shall not form part of any calculation of whether the limits of liability under any other provision of this clause 23 have been reached.

The decision

CISGIL argued that its claim for wasted expenditure arose under clauses 23.5(a) and 23.5(e) and that its claim would therefore be capped at the aggregate amount of those liability caps (roughly £96 million).  IBM contended that only clause 23.5(a) applied and that CISGIL's claim was therefore capped at roughly £80 million.

The Court of Appeal found that the claim only arose under clause 23.5(a).  In reaching this conclusion the Court of Appeal noted that:

  • the word "otherwise" in clause 23.5(e) did not mean that the caps in clause 23.5(a) and 23.5(e) were mutually exclusive
  • the biggest items of wasted expenditure related solely to the Implementation Services
  • there had been no payment for Management Services and the stage was never reached where the Management Services could be provided
  • in order to gain the benefit of the aggregated cap, CISGIL needed to demonstrate that it had incurred wasted expenditure in relation to both the Implementation Services and the Management Services, and
  • even though the Implementation Services SOW and Managed Services SOW were affected by IBM's repudiation, it did not entitle CISGIL to automatic aggregation regardless of the nature and scope of the claims made.

Key takeaways

When drafting liability clauses, customers should consider including a carve out so that the supplier's liability for losses arising from the supplier's repudiation of a contract remain uncapped.  This helps to prevent the supplier from strategically repudiating the contract and relying on the applicable cap to limit their liability (for example by repudiating the contract when it becomes unprofitable to perform).

If separate caps are to be included in the contract, the parties should also include drafting about whether those caps are capable of being aggregated.  If the caps are to be aggregated, the parties will need to carefully consider when a claim under the various caps will arise and ensure the drafting is clear on this point.  In these cases, the parties should also consider a "catch all" cap which would apply to the extent that a claim does not arise under any of the other specified caps.

Are your Heads of Terms binding?

A Heads of Terms (HoT) document sets out the main terms of a commercial agreement reached between the parties and usually describes the agreed basic terms of a contract before the finer details are negotiated. A key concern and a common dispute between parties is whether or not HoT are legally binding. In most cases, it will not be the intention of the parties to create a legally binding HoT however it is interesting to consider the court's analysis in a recent case, Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2022] where the High Court held that a signed document titled "Heads of Terms of Proposed Agreement" did not create a legally binding agreement, save for one specific provision.

Judge Wicks QC considered the familiar concept of whether the HoT demonstrated an intention of the parties to create legal relations. Key points which led to the High Court decision that the HoT were non-binding included:

  • The HoT included a statement which said that the parties agreed "not to enter into negotiations with third parties to the detriment of the term contained herein" until after 31 July 2014. Both parties agreed that this term was binding. Judge Wicks QC reviewed this term and held that it acted to provide the parties with a period of exclusive negotiation rather than making the HoTs entirely binding.
  • One of the previous drafts of the HoTs included a provision which required the parties to adhere "to all terms, pricing, conditions of these Heads of Terms until the Final Agreement is accepted and signed". The key point however is that this was deleted in the final signed version which demonstrated that the parties considered the binding nature of the provisions and agreed that this was not appropriate for the final version.
  • The HoT included details on the agreed site, term, rent and rent review provisions. Judge Wicks QC considered whether these terms were the essential terms for a legally binding agreement of this type of lease agreement. He concluded that because this particular deal involved the leasing of land to develop new technology and was therefore more difficult to identify exactly what would constitute the "essential terms" of the contract, additional terms would be necessary. Further, he considered that bespoke drafting would likely be required.
  • The HoT stated that the lease would be contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954. This supported the argument that there was in fact no intention for the HoTs to create an agreement for lease as the contracting out process must be completed before the tenant can be commercially bound to take the lease.

Other considerations included the absence of any "subject to contract" label which made no difference to the conclusion of the case.

Whilst not a new area of law, it is useful to consider the points raised by the High Court to ensure parties do not fall into common pitfalls when using HoT which they do not intend to be legally binding. If parties want to ensure HoTs are not binding, they should consider:

  • Including an express statement on the document providing that the parties do not intend for the HoT to create legally binding obligations save for any specific provision which the parties agree will be legally binding (such as confidentiality and exclusivity);
  • Take care with any previous drafts of HoT particularly when editing any provisions on the intention for the HoT to be binding. Whilst the previous drafts in the Pretoria case served to strengthen the argument that the HoT were non-binding, this could equally work against the argument that HoT are non-binding. For example, if the drafting around the binding nature of the terms is reinforced or added in to later versions of the HoT, a court may find that this serves to demonstrate an intention to create legally binding obligations; and
  • Do not include in the HoT details on all essential terms of the agreement. Consider whether it is appropriate to explicitly state that the terms set out in the HoT are not considered to be all the essential terms of the agreement and, where applicable, that bespoke drafting will be required in the final agreement.

ECJ rules on requirements for online order buttons

The European Court of Justice ("ECJ") has recently held in Fuhrmann-2-GmbH v B [2022] that clicking an online order button will only oblige a consumer to pay if the actual button is labelled in an easily legible and unambiguous manner with words indicating that placing the order places the consumer under an obligation to pay the trader.

Referred from the German courts, the case concerned a consumer who booked a hotel room by clicking an order button labelled "complete booking" on the accommodation website booking.com. The ECJ held that the button would only create an obligation to pay, if the term "complete booking" in everyday language and in the mind of the average, well informed, reasonably observant and circumspect consumer was reasonably, necessarily and systematically associated with the creation of an obligation to pay. While the ECJ left the referring German court to make that determination, the ECJ indicated that "complete booking" was too ambiguous.

The judgment appears to bring clarity to rules contained in the Consumer Rights Directive ("CRD"). Regulation 8(2) provides that online orders will only bind the consumer if: (i) the order button is labelled with the words "order with obligation to pay"; or (ii) a corresponding unambiguous formulation indicating that placing the order entails an obligation to pay the trader is present. The European Commission has also issued guidance on the CRD (the "Guidance") suggesting that "buy now", "pay now", or "confirm purchase" are also likely to be acceptable labels. The Guidance notes that "register", "confirm" or "order now" are less likely to meet CRD requirements.

Although this decision is not binding on UK courts, English law (derived from EU law) requires consumer terms to be transparent, pricing must be prominent and it must be clear what is being sold and therefore may serve as a useful starting point when considering the requirements for any online orders. Online businesses must ensure that online ordering buttons make it clear that the consumer is under an obligation to pay (including what must be paid and when) once the button has been clicked.

New EU and UK Vertical Block Exemptions: What you need to know…

The 2010 Vertical Block Exemption Regulation ("VBER") – one of the 'retained exemptions' from EU law that remained in UK law post-Brexit – expired at the end of May 2022. New vertical block exemptions came into force in each of the EU and the UK on 1 June 2022, ensuring that parties to vertical agreements still benefit from increased certainty regarding the legality of their arrangements with the competition rules in each jurisdiction.

For more information, please read this briefing which explores a number of the key changes implemented in the EU and the UK, as well as the extent to which the rules in each jurisdiction now diverge. Parties that operate in both the EU and UK will now need to ensure they are in compliance with both regimes.

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