Contract Law Update – ThinkHouse Foundations – Corporate/Commercial Law

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On-demand webinar

Sarah Townsend and Joanna Rhodes provide a roundup of commercial
contract law, reviewing the developments of the last 12 months and
highlighting cases that should be at the top of your reference
list.

self

Transcript

Joanna Rhodes (Jo): Well, a very good
morning everyone and thank you for attending our Webinar this
morning, which is a Contract Law update. We give these sorts of
updates fairly regularly as we think it is always helpful to know
what are the new and interesting cases that have been coming
through.

Just to introduce myself, my name is Jo Rhodes, I am a Senior
Associate in our Commercial Litigation team and I am also one of
the Co-Chairs of ThinkHouse Foundations. Just to say a little bit
about that, the ThinkHouse Foundations is the partner programme of
our main ThinkHouse programme. While the main ThinkHouse programme
is aimed at senior In-House Lawyers all the way up GC level really,
ThinkHouse Foundations is aimed at the more junior end from Trainee
Solicitors, all the way up five or six PQE.

And what we do in Foundations is we try to focus on giving
practical assistance with the things that we think might be coming
across your desk from day-to-day. I am informed that we started
ThinkHouse Foundations with one talk and about ten people in
attendance so, looking at our participants for today, I think we
have come a little way since then. I have the pleasure of chairing
this webinar today which is the third and final in a series of
three ThinkHouse Foundations webinars for the spring/summer
season.

On 11 May Sam Cooper from our Planning and Environment Team
kicked off the spring/summer programme on the topic of “A New
Era For Environmental Law”, that was swiftly followed by a
panel discussion with the slightly thorny title of “Brexit -
What You Need To Know” in which I was joined by several
lawyers from across some of the firm’s key specialities and
talking about what they had been seeing most of in their practice
areas since Brexit, as well as things to look out for and what they
think might be coming down the track to the extent that anyone is
able to predict that.

If you were not able to make either of those, I do highly
recommend them. We record all of these sessions and the links to
all three for this season will be circulated to you all at the end
of the talk, so please do not worry if you could not make either of
them.

So, moving on to today’s talk then, I am very pleased to be
joined today by Sarah Townsend, who is a fellow Senior Associate in
our Commercial Litigation team and who joined the firm last year.
In the spirit of what we try to do with ThinkHouse Foundations,
Sarah is going to give a practical overview of some of the cases
which have been coming up over the last few months or so and which
we think relate to things that are likely to be appearing on your
desk from day-to-day.

We have just the last bit of housekeeping, we have activated the
Q&A function on Zoom, so please feel free to ask your questions
there and just to say that only we will be able to see them and
they are not visible to your fellow attendees. We will try to
answer as many as we can in the time allowed but if we do not get
to everyone’s, we will follow up after the session. And
equally, if there are any specific queries you would like advice
on, we will be very happy to follow up afterwards. I think that is
enough out of me. So without further ado, I will hand over to
Sarah.

Sarah Townsend: Thanks very much Jo. As Jo
said, I am a Senior Associate in the Commercial Litigation team. I
work with Jo, handling all manner of disputes, recently from VAT
fraud claims to breach of contract claims particularly arising out
of COVID-19, which is something that we are going to look at later
this morning. I should also mention to you that I worked in-house
as an NQ Litigation Lawyer at a finance company, so I very much
appreciate the demands placed on in-house counsel and especially
the sometimes impossible requirement to be an expert on all
matters, providing advice, often at very short notice and also
across a very broad range of subjects.

So, as Jo said the aim today is not a law lecture or to dig out
your potentially dusty books, it is looking at some practical cases
which have come through in the last year/year and a half, which we
think may have some interest and hopefully some practical
application on your day-to-day jobs.

So I hope you all have your morning coffees on this beautiful
morning. a perfect morning for a contract law update. So just to
highlight to you our agenda today, we are going to start by looking
at everyone’s favourite law school topic,
“frustration” and, in particular, recent decisions of the
Court considering both COVID and non-COVID cases, which we hope
might be of some relevance and some interest.

We are going to then move on to look at whether COVID-19 could
be used as a defence to money claims particularly which, again, we
hope is a fairly topical session. There is not a theme for the rest
of the topics that we are going to look at. It is really looking at
some common phrases which you no doubt have all come across in your
day-to-day jobs and that you have also read in, probably numerous,
contracts but do we actually know what they mean?

The first one is, what does “subject to contract”
mean? And in particular there has been an interesting court of law
decision which discusses and examines exactly that. What does
“subject to contract” mean in discussions? And what is
the consequences of it? We are then going to move on to, again,
another quite well recognised phrase, which I am sure you have all
come across and is “giving consent under contract”. And
this is particularly whether a party can impose conditions upon
giving consent under the contract.

And then we are going to end today’s session by looking at
another really well known phrase the duty of “good faith”
and the extent to which a party has to act in good faith under a
commercial contract. And so again we are going to consider briefly
what the courts have said and the background to the cases, but
again just kind of looking at the practical implications of that
and if you come across it in your day-to-day jobs, hopefully it
would have some practical application for you.

Right, so, time for our first topic of the morning which is
“frustration” and this is hopefully an interesting case
that is Dyer and Fashlays Street Surgery. And to start off
with the very basics, frustration, and it is something that you all
remember learning about at law school, probably has relatively
limited application, maybe in your day-to-day jobs but something
that always pops up now and again.

Well then not to drag you to your law books or to give you a law
lecture but what are the essential elements of frustration? Here it
really goes to the impossibility of performing a contract, as it is
something which makes a contract physically or commercially
impossible to fulfil. And another key phrase, which keeps popping
up in a lot of judgments is this fundamental, or radically
different obligation, and so it is looking at events which
basically really render the performance of a contract very
different from what the parties first intended.

So looking at this recent case of Dyer, just to give
you a bit of brief background as to what the case is about. Mr Dyer
and his partner ran a medical practice, along with two other chief
partnerships. The parties all entered into a number of contracts
for a lease of the premises and also facilities management
agreements. Unfortunately in 2015 the Care Quality Commission tried
to cancel Mr Dyer’s registration as a Doctor and his patients
were transferred to the other partnerships in the building.

Now, luckily for Mr Dyer, he appealed and his registration was
reinstated a year later. However, during this time MrDyer and his
partner did not meet any of the obligations under the contract,
including the lease and, to make matters worse, the other
partnerships sued for breach of contract and were awarded
£27,000. Now during the course of these disputes, Mr Dyer had
relied on frustration arguments and he argued that during the
period he was not practising, he was still obligated to pay the
running costs of the GP premises and that this had turned into an
obligation to make payments for nothing in return, and that was
radically and fundamentally a different obligation than that agreed
at the outset.

And going back to our definition of what frustration is. now the
Court unfortunately for Mr Dyer disagreed with his frustration
arguments but it noted that the lease had opposed an undertaking on
the tenants, to their best endeavours, to remain a GP and the other
documents in contract required the parties to covenant with one
another to all reasonable endeavours to remain a qualifying
practice. So when considered in the round, the contracts made
sufficient provision that possible cancellation of a party’s GP
registration and therefore frustration of the contracts had not
occurred.

Now it is also relevant here, and one of the kind of interesting
points is that upon the cancellation of their registration Mr Dyer,
by his actions, showed that he did not consider the contracts to be
frustrated. His decision to appeal the cancellation of his licence,
which was ultimately successful, showed that he wanted to continue
with the contracts rather than treat them as frustrated and simply
walk away and the court placed weight on that.

So the practical points to take home if you ever come across
this type of scenario or frustration argument in your practice or
in your work is that this judgment shows that, just because a
situation advises. which is outside the party’s control and has
very harsh consequences, discharge of the contract by frustration
will not always be available and is quite a difficult argument to
run. You have to consider all of the circumstances and contracts
together.

So here, particularly, the contracts did not refer to the
possibility that the GP’s licence may be terminated, which you
would think would be a good point in support of a frustration
argument. However, the court concluded that the general possibility
of cancellation had been envisaged. So practically it would be
prudent to take an expansive view of contractual provisions if you
are ever seeking to rely on a frustration argument. So just because
something has not been specially mentioned in the contract, you
have to see whether it has been envisaged by the contract and take
that wider view of the contract.

It is also important that you consider your actions immediately
following a potentially frustrating event. It is going to be
crucial when the court analysis the impact of the evidence. If you
or the other party do something which reaffirms the contract or
shows that you want it to continue, the court can place weight on
that and ultimately decide that you did not intend or you did not
consider the contract to be frustrated.

So moving on, we now look at frustration in the context of
COVID-19 which is something you have no doubt read legal updates on
and something which is particularly relevant at the present time.
Now this is a really interesting area and one which will likely
undergo some significant changes as parties increasingly seek to
rely on adoption of frustration in respect of trying to escape
various commercial contracts.

But in particular, from my own experience, one of the cases I am
currently working on relates to the cancellation of various
international cruises as the result of COVID-19. And one of the
interesting things of. or perhaps slightly off putting things if
you are caught up in a dispute of the data, is that there is a risk
that the courts may change their approach in dealing with
frustration cases in view of the sheer number of cases, which would
potentially most likely hit the courts in the coming months and
years. So it is very much “watch this space” as to how
the courts are now approaching these cases.

One of the interesting or recent cases which we wanted to flag
was Salam and Latam Airlines and this is probably your
typical frustration case and one which you would most likely
envisage having applications of frustration. it is an airline case.
So Salam was an airline operator in Oman which used a number of
aircrafts from a company called Latam. Under the lease Salam had to
pay rent in monthly instalments for six years and the lease said
that this obligation was absolute and unconditional and that is the
really key phrase in contractual provision.

The lease further required Salam to provide standby letters of
credit as an alternative to paying three months’ rent as a
deposit. Now obviously following the outcome of Coronavirus, the
Public Authority. the Civil Aviation issued a series of regulations
which prohibited all flights to or from Oman airports. The leases
were terminated by Latam in 2020 but at that point Salam had paid
no rent since March 2020 so there was a significant portion of rent
outstanding.

Now interestingly Salam took the initiative here and commenced
proceedings in London seeking to restrain Latam and demanding
payment. Salam argued that the aircraft leases had been frustrated
by both the Coronavirus pandemic and by the regulations which
prevented any flights from taking place and accordingly it argued
that no rent was payable.

It is quite a bold argument there but an understandable one to
pursue in the circumstances and you may think, as I said, that this
is your typical kind of Coronavirus frustration case and the court
would have sympathy with it, but unfortunately not. The court did
not agree with the arguments on frustration. The terms of the lease
held clear the obligation to pay rents was absolute and
unconditional irrespective of any contingency whatsoever. The
regulations may have prevented Salam from using and utilising the
aircraft in its business but it did not prevent either party from
performing its obligations under the contract.

So the take home point here that is that you may think that
there could not be a clearer example of a frustrating event than
COVID-19 and its impact on the airline and travel industry, however
this case is a really good warning that you must read the contract.
If obligations are expressed as being absolute and unconditional
you should tread carefully in seeking to rely on frustration
arguments.

But obviously that is not always going to be the case, you can
well image certain international contracts providing for
frustration as a result of pandemics which is a contract that I am
dealing with at the moment and therefore the courts may handle
completely differently. But just because something as significant
as COVID-19 and its obvious impact on something like the airline
industry does not mean that the court is going to take a
sympathetic attitude. It is going to want to hold parties to
contractual obligations and not seek to release them if the
contracts could not provide for it. So read your contracts
carefully as they vary, is the take home point.

So we are now going to move on to our next topic and again it is
looking at COVID-19 but now leaving behind the doctrine of
frustration and we are looking at something slightly different. So
whether COVID-19 can be used as a defence to a money claim. Now
this is one that might interest property lawyers that will
hopefully be of general relevance and interest to other lawyers as
well.

We are looking at a particularly case of Commerz (I am
not going to trying and pronounce the full name of company) and
TFS (Commerz Real Investmentgesellschaft mbh v TFS Stores
Ltd)
. This is quite interesting in that it is the first
judgment to be handed down relating to a claim or arrears of rent
and service charge for retail premises, where the tenant relied
upon the closure of retail units imposed during lockdown as a
result of COVID-19.

So to give you a little bit of background about what happened
here the tenant had a ten year lease of a unit at Westfield London
Shopping Centre. As a result of coronavirus, as a non-essential
retailer it had been required to close. Even during the period it
had been allowed to open, there were so few customers in Westfield
Shopping Centre that they did not make much money and as you can
imagine the tenants suffered financial hardship, which it claimed
prevented it from paying the rent and service charges due under the
lease.

Unsurprisingly again the landlord sued for a breach of rent and
service charge and the tenant sought to defend the claim. Quite
inventively in this case, quite creatively, one of the arguments it
raised was that the claim was premature as a result of guidance
given by the government for commercial property relationships
during the COVID-19 pandemic. And for those of you who have not
come across that particularly guidance. I certainly had not before
this case. the guidance encouraged landlords and tenants to work
together collaboratively with the aim of lessening the impact of
the pandemic and it was very much guidance for the parties
involved. It was not law, it was not statute.

At the hearing the tenant also sought to argue that it was an
implied term of the lease that the landlord should seek to claim on
its insurance before seeking payment of rent from the tenant. So it
was really creative and they tried every argument at the court to
escape its rent and its service charge obligations. Unfortunately
again the tenant’s defences were rejected by the court which
awarded summary judgment to the landlord for arrears of rent and
service charge.

And if we look particularly at what the court said in relation
to these COVID-19 arguments. so going back. firstly dealing with
the argument relating to the code of practice, it expressly stated
that it was not intended to alter contractual relationships between
the parties, it was merely guidance as to best practice.

The key point here is that a landlord still has the right to
bring a claim against a tenant for money. here for example for
outstanding rent arrears, even in the COVID-19 pandemic and I think
it is quite an interesting point because there are lots of
headlines about how landlords are pulling their hair out because
tenants can stay in rental properties during the COVID-19 pandemic
and of the financial hardship on landlords.

But here is a really useful bit of guidance to say no, that
isn’t the case at all, the landlord still has the ability to
pursue a judgment against a tenant for outstanding rent, even
during the very unusual time which we are in, which is helpful if
you are a landlord and not so helpful if you are a tenant.

Also in relation to insurance, again the courts rejected the
argument that the landlords should go to its insurer for payment of
rent before seeking payment from the tenant. The landlord was not
under any obligation to insure against risks other than those
specified in the lease. There was no implied term that the rent
would be suspended when the premises was forced to ceased training
or that the definition of damage extended to damage caused by the
pandemic. So again if you ever come across an argument or maybe you
are wanting to pursue it. that the landlord should go to his
insurer first, it is not going to apply if it becomes before the
court most likely in any event.

So turning to really to what are the take home points from this?
Well the judgment shows that it is incredibly. extremely difficult
to imply a term into a carefully drafted commercial lease that rent
will be suspended during a period where the premises are forced to
cease trading and closed due to government intervention. And whilst
it is undoubtedly the case that retail or other commercial tenants
have suffered significantly as a result of the pandemic, the court
can do little to alter contractual relationships between the
parties.

And so following on from previous cases that we have looked at
this morning, it is a really good example that notwithstanding the
devastating impact and devastating commercial impact that COVID-19
is having on parties including tenants, including airlines, the
courts are not going to have a sympathetic approach if the parties
have contracted with one another to fulfil certain obligations such
as paying rent and such as paying service charges, they are going
to want to hold them to their contractual obligations irrespective
of this very unusual circumstance. That is something to keep in
mind again if you are wanting to rely on COVID-19 or you are faced
with a COVID-19 argument to that effect.

So moving on away from COVID-19, which you may or may not be
relieved to hear, to our next subject and again as I mentioned at
the beginning the theme of the next case is very much going to be
looking at common used terms which I am sure you are all incredibly
familiar with, but do we know what they really mean? And in
particular there has been a spate of recent cases which have
considered these terms and so it may reaffirm your understanding or
it may challenge it.

So the first phrase we wanted to look at is “subject to
contract”. And again it is something which I have used on a
lot of discussions with other sides, a lot of settlement
discussions especially when you are trying to negotiate. In my case
normally settlement agreements, but no doubt the commercial and
property lawyers have used it while trying to negotiate commercial
contracts. It is no doubt a phrase which is littered in your email
correspondence with the other parties.

But just to reaffirm everyone’s understanding as to the
implications of using that phrase. And so the case that we want to
particularly consider is Joanne Properties and Moneything
Capital
. So here just to give you a flavour of the background
to the case, Joanne Properties owned a building in Wandsworth, it
borrows money from Moneything Capital secured by a legal charge
over the property. Now Joanne fell into arrears and Moneything
appointed LPA receivers. Joanne challenged the appointment and
issued a claim and an injunction to prevent LPA receivers from
taking any action.

The parties subsequently entered into discussions to see if the
dispute could be settled which is no doubt a very sensible solution
and something which we always encourage clients to do, if
particular circumstances lend themselves to it. Now they did this
successfully and agreed that the property should be sold and the
proceeds distributed between them. There was a formal written
compromise agreement which stated that the sum of £140,000 be
ring fenced and this sum represented any sums which may be payable
subject to the terms on which the claim was resolved between
them.

Now the claim actually went to the Court of Appeal and the
question before the Court of Appeal was whether the parties had
reached a further binding agreement obtained in communication
between their solicitors about how that sum of £140,000 was
to be shared between them. Now the parties had labelled their
various communications as “subject to contract” and
various offers had been made which had been headed “without
prejudice and subject to contract”. Something which, I am
sure, is used by many of you.

Further discussions resulted in an agreement to pay Moneything
and these had taken place also on a subject to contract basis.
However, the parties had not agreed all the terms, they had not
agreed, particularly relevant here, the mechanics of payment of
that £140,000 sum. Now later that month Joanne changed
solicitors before any consent order had been agreed. They sought to
backtrack and argued that there was no binding agreement because
the negotiations had been surprisingly subject to contract.

Moneything disagreed and made an application for an order on the
basis that there had been a concluded agreement between the
parties. Now the matter went before the Court of Appeal which held
that there had not been a concluded agreement on the basis that the
discussions had taken place on a subject to contract basis which I
am sure you are all breathing a sigh of relief about. It also took
into account that the parties contemplated drawing up a consent
order to reflect any agreed terms.

Now the consent order here would have been the equivalent to a
contract and it is clear that the parties had failed to draw up
such a document. The Court of Appeal helpfully reminded us what
“subject to contract” means. And here it was that neither
party intends to be bound either in law or in equity unless or
until a formal contract is made and that each party reserves its
right to withdraw until such time as a binding contract is made. It
also reminded us that once negotiations are stated as being
“subject to contract” that condition is carried all the
way through negotiations. So practically if you did want to switch
between discussions subject to contract and terms which were. you
consider to be a formal binding agreement between the parties you
would have to state so in communications.

So I am sure that many of you, as I was, are breathing a sigh of
relief when I found the Court of Appeal’s judgment and the
particular point here is that the judgment provides a welcome
reassurance that entering into negotiations subject to contract are
not visible in any wanted or any unforeseen contractually binding
agreements provided that the parties make it clear that their
discussions are and continue to be subject to contract. For example
by using that term in email subject headings.

And as I briefly mentioned earlier if you did want to change you
would be wise to explicitly state that in your communications with
the other side. And to continue just to make sure that that phrase
is included in your email correspondence for clarity and so that
the other side cannot take arguments such as Moneything did here
that there had been a binding agreement at some point. So it is a
welcome relief, I am sure, that you can go on using the phrase
“subject to contract” as you probably do already and that
there will not be any negative implications for that and indeed
only positive ones.

So moving on to another phrase we thought would be useful to
explore and it is giving consent under a contractual agreement. A
case that I particularly wanted to look at was Apache v
INEOS
, which I think I am pronouncing correctly, and just to
give you an overview this concerned whether a party can
legitimately withhold consent under a contract or make consent
conditional upon certain events taking place. Now all the property
lawyers out there will be extremely familiar with the requirement
of parties to give consent under leases, a kind of typical example
of something which I remember from law school days and my property
seminars.

But this case is particularly interesting in that it relates to
consent clauses outside of that usual landlord and tenant scenario
and so it will hopefully be of interest to any commercial lawyers
out there or any non-property lawyers who are not so used to
dealing with giving consent under a contract. So to give you a
little bit of background to what this case was about, it related to
an agreement for the transportation and the processing of
hydrocarbons. Now do not worry, I am not going to get into detail
about what that means. I have no idea (laughs), it is sufficient
for our purposes to know that Apache (the claimant) produced
hydrocarbons and transported them through INEOS’ pipeline.

So here annexed to the agreement was an attachment which
provided that if Apache wanted to amend its estimated production,
which really means if it wanted to transport more hydrocarbons,
then INEOS would not unreasonably withhold its consent to such an
increase provided, of course, that the pipeline had capacity to do
so. Now INEOS indicated that it would only consent to this if
Apache agreed to revise the tariff that it paid for the
transportation and traces of the hydrocarbons. So the court was
asked to determine whether INEOS was acting unreasonably or in
breach of contract by withholding consent on this basis.

Now here the court held that it was illegitimate and
unreasonable for a party to withhold its consent in commercial
contracts in order to obtain financial advantage from the other
party that it was otherwise entitled to under the contract. Now one
of the key considerations here was that the increased tariffs that
INEOS demanded was not compensatory in the future. So for example
if it was a payment that one party wanted to compensate it for, for
example, increased costs as a result of transportation it might
have been legitimate and reasonable and the court might have agreed
with that. This case was simply a result of INEOS wanting to make
more money and line its own pockets.

The court considered that the condition would have the effect of
altering the parties’ rights under the contract significantly
and that is a really key point in how it dealt with and how it
interpreted this particular agreement. So what is the take home
point from this case? Well, I should say it and stress that it is
possible for parties to impose conditions on the party giving
consent under a commercial agreement. The problem comes when the
parties try and increase their rights under the contract for
example by demanding more money as a condition of the consent being
granted.  Now if the money is genuinely to compensate one
party it may be acceptable, but you are advised to be cautious
about being greedy and imposing conditions in order to line the
pockets of the company. That is where the court are going to take
quite a strict view.

So moving onto another examination of perhaps a very commonly
known phrase and I am sure it is something again which, even if you
do not deal with in your day-to-day work, you probably remember
from your law school days or from reading your contractual books.
It is the phrase “good faith”. What does it mean when
parties are obliged under commercial contracts to act in good faith
towards one another? What does it mean?

Now this is a term which keeps popping up and you may be
familiar with if you have attended a previous contract law updates
in which we considered it quite a bit. But it is something which
the courts and parties clearly grapple with and it is something
again which the courts considered last year in Essex County
Council and UBB Waste
. Now I probably should have ended with a
more glamorous case than the present one that we are about to
discuss but I will leave it to your own judgment.

Just to give you a bit of background again about what this case
was about. Essex County Council entered into a contract with the
construction, operation and maintenance of a facility to treat
household waste in Essex. I did warn you that it was not the most
glamorous case to end our session on and I should have found a
better one (laughs) but again the legal principles at least, I
think, are quite interesting.

The facility was constructed and was required to pass acceptance
tests that would demonstrate that the facility could meet the
performance requirements set out in the contract. However, it soon
became clear after the construction of running that the facility
was seriously underperforming. Now UBB, the party who constructed
it, proposed making various changes to the facility to make it
easier to pass the acceptance test. However they failed to pass the
acceptance test by the required date.

Now here Essex Council argue that this failure meant that UBB
was in default of the contract and it was entitled to terminate in
accordance with the termination clause. Now UBB denied this and
rather amusingly alleged that the problem lay with the composition
of the waste that was used, and it kind of reminds me of that well
known argument used by train companies about the wrong type of
snow, or wrong type of leaves on the track in the autumnal and
winter months, but there we go. I do not want to know why the
composition of the waste was incorrect, we probably will not delve
into the finer detail of that argument!

But essentially they argued that it was the wrong type of waste.
They also sought to argue that the contract was a relational
contract and these are typically long-term agreements involving
substantial mutual commitment and extensive co-operation and
communication between the parties and above all that there was a
duty of good faith given the nature of the contract. Now UBB
alleged that the Council was in breach of this duty for a number of
reasons including a failure to agree the changes to both the
contract itself and the acceptance test which would have enabled
the facility to pass the commissioning period.

So it is quite a bold argument when you are alleging that the
other party are not working in good faith because they are not
working with you to make the passing of the acceptance test easier
to do. Now, perhaps unsurprisingly, the court found in favour of
the Council and rejected UBB’s arguments. It held that UBB was
in continuing breach of the contract and that the Council was
entitled to terminate the contract by default. On the key question
of “good faith” the court rejected the argument that the
Council had breached its duty of good faith.

It confirmed that whether a party had acted in good faith was an
objective test and it depended on the contract and all the
circumstances. It was not a necessary ingredient for a party to be
dishonest in order to claim there is a breach. The question is
whether the conduct will be regarded as commercially unacceptable
by reasonable and honest people.

So what are the practical points to take home here? And I hope
you do not come across contracts involving the disposal of human
waste but if you do and if you are faced with such an argument as a
contract passing an acceptance test, the judgment here really
emphasises the importance of agreeing the scope of the contract and
the testing is right at the outset. And if the contract is
impossible to perform the customer will not necessarily be obliged
to agree any proposed changes. The duty of good faith will not
stretch to allow parties to avoid their rights under a
contract.

And so it is such an important decision, one which has a lot of
practical relevance because a party cannot seek to agree to a
commercial contract purely as a lifeline if your contract advises
that and the other parties are amenable to that and it is something
which, if you come across a problem in a contract, something which
is not working, obviously parties have every right to see whether
they can have a discussion with the other party to agree changes to
it.

I think the point here is, when you are agreeing changes for
your own benefit and when it is something as fundamental as the
performance of a plant or the performance of mechanics or as here,
a waste disposal plant, if you are doing it to make your job easier
and to make you assured to pass any contractual obligations and the
other party does not agree, it is going to be a stretch if you want
to say that that party has not acted in good faith.

And again this is a contract and as this judgment highlights it
is all to do with the drafting of the contract so that this is not
necessarily an example of courts having a very unsympathetic
approach and it could well be that acting in good faith is found
given the circumstances of the contract and if it provides for it
and here you are going to have a difficulty once you pursue a good
faith argument but it is something very subjective and you are
alleging another party has not. basically is not playing ball with
you, so it is something to bear in mind going forward.

So that brings us to the end of our contract update. Again the
aim of this was not to give you a law lecture or to make you
revisit your dusty law books or your contract law sessions from
when you were a student. It is really looking at things which we
think are interesting, decisions of the courts which have been
handed down recently which may have some practical relevance to
you. Whether you are pursuing those types of arguments or whether
you are coming across contracts which phrase those types of
arguments or whether you are defending them.

And I think a really practical one which is a good example here
was that case where the tenant was alleging that COVID-19 rendered
it really difficult for them to make payments for rent and service
charges and I can imagine many situations where you may be pursuing
those types of arguments or you may be defending them and it is
something just to kind of flag and to have in your consciousness if
you are dealing with them. And maybe you can pose the argument or
raise the case in your correspondence with the other side and
hopefully it will be of some assistance.

But that brings us to the end. I hope you found it helpful. If
there are any questions, please do let me know and I will do my
best to answer them. But thank you very much for your continued
attention, especially on a lovely Tuesday morning and I hope you
found it interesting. Thank you very much.

Joanne: Thanks Sarah and I found that
interesting, so I hope everyone else did too. So I just wanted to
start by reassuring anybody who was not here at the beginning of
the session, the recording for today will be circulated and we will
also be circulating the slides, so not to worry if you think there
are any points you might have missed or if you dialled in late or
anyone has had to dial off early. That is no problem and that will
be coming round.

Sarah, a force majeure versus frustration has been a hot topic
in the Q&A, particularly around the Salam case. So the theme of
the question seems to be, what about force majeure in the Salam
case? Why, you know if something. if frustration was not going to
be allowed, why would they not be allowed to rely on force majeure?
And also whether it is better to rely on force majeure rather than
frustration? I mean my understanding has always been that it is
best to go with force majeure because that is the negotiated
position.

Sarah: It is absolutely and it is something.
and again it is kind of one of those points which sort of
emphasise. cases such as this, it always comes down to the
particular wording of the contracts entered into and negotiated
between the parties. Here I would have to have a look. I understand
that again with contracts that we come across on a day-to-day basis
it is very. it is not necessarily a standard term, so force majeure
clauses can absolutely appear in contracts and some that we have
seen do specifically mention pandemics.

So if you came across a force majeure clause in a commercial
contract which had that, then brilliant, it is always better to
rely on breaches of contract which are explicit and expressed,
rather than relying on the common law adoption of frustration which
can be more difficult. And I think it is especially more difficult
to pursue arguments on force majeure clauses basically because the
courts, as we have seen throughout these cases, are very eager to
hold parties to what they have negotiated and what they have
bargained and to the particular terms of the contract.

We don’t know how the courts are going to look at this going
forward, so it is a more risky argument, just because we’re
going to expect really a deluge of cases hitting the Courts in
coming months and years, and the Courts no doubt are going to
change their approach and they may make it even more difficult to
pursue frustration arguments going forward, and so if you’re a
party looking to rely on frustration, it’s going to be erased
and we always talk about litigation. Let us assume these arguments
that I think are going to be even more relevant going forward
because we simply don’t know what the position is going be and
the Court can take an even stricter approach and here we see the
Salam case and you think it’s going to be a typical case of
frustration and the Court didn’t agree.

Here if they could have relied on an explicit contractual
provision maybe the outcome would have been different but given
that they did not and given that they pursued the frustration
clause so the adoption of the frustration argument it led to an
unfavourable outcome because again the Court wanted to uphold the
explicit contractual obligation.

Joanna: I think that answers most of the
questions on that topic and just a related question then I think
you have answered as well how often do you see the Courts upholding
the argument that an agreement has been frustrated, I think
that’s rare isn’t it.

Sarah: Really rare and again I think this case
has really emphasised the fact that the Court will look at, you
know there is going to be very much evidence about how COVID-19 has
devastated parties such as airlines and the devastating
consequences of not being able to fulfil your business, not being
able to book flights and travel and not being able to open
professional premises and make profit and meeting all your, and you
know, meeting all your obligations in the contract such as the most
basic requirement paying rent.

The Courts see that and there is so much evidence that parties
can produce to the Court given the, you know, highlighting the
devastating pattern. It is something which as we are seeing, at the
moment anyway, the Court has very little sympathy with. If the
parties are negotiated that they are going to continue meeting
their obligation no matter what happens so again it comes back to
what is in your contract and being able to have a look at it. For
example on the rent case if the parties have negotiated that these
obligations are unconditional and they are not dependant in any way
on the ability of the parties to say open a shop or run the airline
they are going to have a really difficult time convincing a Court
that the contract has been frustrated.

Again I think one of the sticking points here is the conduct of
the parties in these very scenarios so if they parties raise
frustration arguments down the line but the Court looks back at
exactly what their conduct was at the time this event took place.
Whether they are trying to run the business and continue making a
profit or continue trying to run the airline and not treating
contracts as frustrated, that always seems to be relevant too. So
yes an uphill battle but again it all depends on your contract and
what is agreed with the other party.

Joanne: Thank you and I hope that helps with
the questions that are being asked around that. Kind of related
question again, has force majeure been accepted in COVID-19 cases?
I think we are still kind of waiting and seeing aren’t we.

Sarah: Very much, yes absolutely Jo it is very
much the case and kind of one of the frustrating things at the
moment and now obviously it’s a topical issue and we simply do
not have the case law at the moment. No doubt cases on those issues
will be either cases are being issued, cases have been run before
the Courts but we simply have not go the judgment yet and it is not
surprising given that this is a relatively new phenomenon in that
cases we have looked at have been the first to reportedly consider
these issues.

Jo: If the Judges do not know, we do not know.
As you say hopefully things will start to trickle through so we
will have a bit more guidance. OK what would be the best practice
to confirm to the other side that may not know what subject to
contract means that discussions are indeed subject to contract?

Sarah: Interesting question and I think when we
talk about subject to contract it is usually in the context of
parties being represented by solicitors who obviously know the
implications of that so the case we looked at before the Joanne and
Moneything case, both parties were represented by solicitors and
obviously for a lawyer it is fairly common place to use it. So I
suppose your question relates to whether the parties are
represented or whether you have one party who is represented and
another who is not. I think if that is the case there is never any
harm in heading your first communication subject to contract and in
the opening line of your email saying this email is being sent to
you on a subject to contract basis which means that the discussions
which take place forthwith are not intended to have a binding
effect.

Obviously a party may come back and ask further questions but I
think if you stated it and make it clear and it is a fairly clear
thing. I am not talking about a really complex legal arguments
here. It just means that if you are entering into those discussions
you are not going to be, you are not entering into a legally
binding agreement. So I think if you make it clear in the opening
email and proceed thereon and it is up to the other party if they
come back and if not you can ask questions about that. I think one
of the things I would tell clients in that situation and even
represented clients, you are not the lawyers of the parties. So if
the other party wants to get legal advice on that you maybe add a
sentence to say if any of this is unclear you recommend that you
seek independent legal advice but it is not for you to give them
advice. I would just make it clear that is your interpretation and
that is your intention entering into those agreement under those
subject to contract basis.

Jo: Yes I would agree with that, it is
certainly not your job to start giving the other side advice.
Another subject to contract question actually. In the absence of
the word subject to contract would the outcome of the Joanne case
be different do you think?

Sarah: Really interesting because here is this
case which is all about, I mean if the parties were really liberal
in their use of subject to contract, same with that subject to
contract heading. I think definitely there could be and for example
from a personal perspective when you are negotiating say settlement
and dispute with the other party necessarily not all your
communications with the other party will necessarily be headed
subject to contract. They may be headed just without prejudice,
they may have no heading whatsoever I don’t think a Court will
look at the substance of what you are saying with the other party
so if you have an email for example the other parties saying right
we are formally agreeing terms, here they are, ABC, so you are
using words to indicate that you intend to be legally bound by
these words. You are going to have a hard time wriggling out of
that but the other thing which is more typical, a more common
scenario is where you are negotiating terms with the other parties,
for example, making offers of payment you are negotiating the
mechanics of it. There could be a lot of proposals being put
forward by those different parties of how payments, for example,
could be made practically.

I think one of the key things highlighted in the Joanne case is
whether the parties find agreement and here it could be a formal
agreement, it could be an email just with the word, we agree that
ABC. It could be entering into a consent order. If you have not
done that and all you have are copies of emails which you have been
making discussions and proposals and counter proposals I think the
Court will look at that and look at and assess all the
circumstances. It is not a contract and there is not written
communication or not kind of telephone note saying aha today we
entered into a contract with the other party the Court will take it
for what it is.

So even if you only have emails with the subject line subject to
contract you are going to have an argument that clearly no contract
and no agreement had been reached here. So think for clarity it
would be better to limit any potential arguments in the future that
had somehow reached agreement for you to use words which makes it
really clear and again subject to contract is such a short easy
phrase to put in as I mentioned earlier in the email subject line
it does not have to be a really kind of forma, really kind of
always termed as long as it is used somewhere I think you have a
good argument that you are not getting yourself into some kind of
legally binding situation.

Jo: Thank you for that Sarah. Got a good faith
question just to mix it up. So in relation to the duty of good
faith case referred to could you raise similar arguments where the
contract requires parties to act reasonably where say a supplier is
speaking to move a delivery date?

Sarah: Absolutely and this case was
specifically considered, was specifically considered good faith but
there has been case law where they have considered what does a
party acting reasonably mean and how far do they have to go and
here a Court will always look objectively. So they are going to say
what was a reasonable commercial party and it is really about
whether one party in asking the question about acting reasonably or
seeking to dispute that one party has indeed acted reasonably.
Whether that is usable and whether that in an objective sense would
be how to be reasonable by the Court. I think here if you are
looking at a particular situation where one party hasn’t been
reasonable simply because they are not dealing with what you want
and particularly looking at the wording again of the agreement all
comes back to what the parties have agreed.

So if you are looking at a particular case where under the
contract they are not entitled to do that and they have no
obligation to act reasonably it is going to potentially be
difficult to argue that in that case just because they are not
playing ball with you they have acted unreasonably so a bit of a
sticking point is, it is not a subjective test it is an objective
one. I think the point here too is that I would not forget the
importance of potentially employing these arguments in negotiation
of the parties. So here like this morning how we have been
considering how the Court would interpret them. That has obviously
gone right through to you, contractual, pre-issue discussions right
through the litigation process to the Court. I think it is really
important if you are seeking to rely on these types of arguments or
seeking to defend them do not forget that in your pre-contract or
pre-litigation discussions they may be useful bargaining chips and
they may be useful for negotiation purposes so even you think that
legally looking at this case law there may be Court uphold that
they have acted reasonably or unreasonably.

It is always useful I think in given that you have a fairly
coherent argument of putting it into your correspondence or picking
up the telephone and saying I think there is an argument here that
you have not acted reasonably in exploring that and I think from a
strategic and putting a question and applying pressure on the other
party to get what you want and to reach an agreement. It is always
worth bearing in mind that yes maybe the Court haven’t given
you the answers that you are looking for in terms of its reported
judgment but it may be worth having a discussion with the other
side about it and raising it as an argument and seeing where you
get to.

Jo: Give it a go. OK so we are back to subject
to contract and another thing that litigators love which is without
prejudice. What is the difference in using without prejudice and
subject to contract in communication as applied to the case you
mentioned?

Sarah: That is very good. You are testing my
knowledge. So in this case as has been mentioned some of the
discussion, some of the email discussions were headed just subject
to contract and some are headed without prejudice and subject to
contract now as a litigator without prejudice you imply the phrase
either without prejudice or without prejudice save as to costs. If
you are genuinely trying to reach a settlement with the other party
and that is before you have issued a claim during the litigation
process it is a genuine attempt to settle the dispute and what it
means is it really has cost consequences so if you get all the way
to trial and are successful aha Judge I have tried to settle this
dispute and the other party kept rejecting it or would not engage
in the settlement discussion I should be awarded costs because of
their unreasonable behaviour.

You can potentially put settlement discussions before the Court
on the issue of costs and hope that the Court will pay money
because the other side should have settled and they did not. If you
had settlement discussions without prejudice in which case they
cannot go before the Court whatsoever and so it is a way that
parties can conduct settlement discussions basically in privacy and
the Court are never informed of it. If they are headed without
prejudice and save as to costs it means that the Court cannot be
informed on issues of liability, so for example who is right and
who is wrong but if you get to the Judgment and you win and the
Court are looking at costs then you can say basically put before
the Judge all your without prejudice subject to costs emails and
the Court may say well party A you have won, you tried to settle
it, I can see from all the settlement offers that you made some
really good offers, the other party should have accepted them and
if they did we would not be here today and penalise the other party
for not engaging sufficiently in engaging settlement discussions
with you.

So really it is kind a long way of saying without prejudice is
very relevant if you are in litigation and it is whether you want
the Court to know of your settlement discussions or whether you do
not. There is no obligation to you to head settlement discussions
without prejudice, we have some where everything is made on an open
basis so not without prejudice and everything is open before the
Court, shows exactly what the parties have been trying to do in
trying to settle.

So yes very relevant to litigation, very relevant for costs
considerations. Subject to contract again is very different because
you are not looking necessarily at litigations although I know a
lot of commercial and property lawyers out there who use subject to
contract having no regard really for anticipation that is going to
litigation but purely to ensure that not reaching a binding
agreement so really a very different consideration.

So probably litigators would most probably use a combination of
without prejudice and subject to contract again so with negotiating
something like a settlement agreement of dispute but as a
commercial and lawyer if it is not disputed and it is just a kind
of regular commercial negotiation you may be even use a without
prejudice. It is really dependent on the circumstances and whether
you think it is clearly headed towards litigation and maybe a
dispute with all parties.

Jo: Thanks Sarah and if something is marked WP
it attracts what we call WP privilege and if you are interested to
find out a bit more about privilege we did a session on that last
time around in the autumn and that can be found on the on demand
webinar section on our website if that is of interest.

OK we are bang on 11:30 so I am going to wrap it up there, I am
conscious that there are a few question we have not got to, we will
try to follow up those afterwards. So thank you very much for
attending, thank you to everyone who bared with us through the
question and answers and Sarah’s presentation and I hope you
all have a lovely day.


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