Corporate and commercial | 01 April 2012

In County Leasing Asset Management Ltd & anor v Michael Green Plant Ltd & ors [2012] the Court of Appeal considered an appeal from Hampton J in the Northampton County Court on the correct measure of damages for a claim in negligent misrepresentation. The case presents an opportunity to revisit the rules on this area and provides helpful insight into the latitude afforded to judges when assessing damages on relatively small claims without the assistance of expert evidence.

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Corporate and commercial | 01 February 2012

The Court of Appeal was recently given the opportunity to consider the remedy of rescission in Howard-Jones v Tate [2011] and in doing so, stressed a distinction between the remedies that are available to an innocent party where there has been a repudiatory breach of contract, and those situations where rescission ab initio will be awarded.
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Corporate and commercial | 01 December 2011

Where two large businesses contract, there is an assumption that they appreciate the consequences of the contractual wording adopted. In such circumstances courts tend to give effect to the literal meaning of those terms in a contract. In Gesner Investments Ltd v Bombardier Inc [2011] the Court of Appeal was asked to interpret the terms of a contract for the construction and delivery of an aircraft and held that the terms should be interpreted in a literal sense even where those terms were commercially questionable. The judgment in this case provides an interesting opportunity to consider the court’s approach in these circumstances.
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Corporate and commercial | 01 November 2011

It is not often that a share sale of a business will be reversed so as to put the parties back to their pre-contractual position. However, when it can be shown that the buyer has been induced by a fraudulent misrepresentation on behalf of the seller, in some narrow circumstances, a court will uphold a buyer’s election to rescind the contract. The High Court’s recent ruling in Erlson Precision Holdings Ltd (formerly GG 132 Ltd) v Hampson Industries plc [2011] has provided a useful example of when inaction on behalf of a representer can lead to a fraudulent misrepresentation, thereby allowing the representee to rescind a share purchase agreement (SPA). [Continue Reading]

Corporate & Commercial | 01 October 2011

In the recent case of Destiny 1 Ltd v Lloyds TSB Bank plc [2011] the Court of Appeal was asked to consider whether Judge Richard Seymour QC was correct to reject a claim that a legally binding contract had been created where that agreement was one of many in a ‘contractual package’ and the negotiations for that package had subsequently broken down.

The decision provides useful guidance as to when a contract has been formed, and the impact upon the perceived intention to create legal relations where there have been negotiations for a number of different, but related, agreements. It is particularly relevant to those people that want to ensure individual contracts survive the breakdown of wider negotiations. [Continue Reading]

Corporate and commercial | 01 April 2011

Where a contract is formed on the basis of a mistake as to the law or certain facts, the contract can potentially be deemed void from its inception. In certain circumstances, however, the court has the authority to remedy the mistakes, by construing the contract in a way that will correct the mistakes, or by rectification. [Continue Reading]

Corporate & Commercial | 01 July 2010

In Durham Tees Valley Airport LTD v BMI Baby Ltd & anor [2010], the Court of Appeal overturned a ruling that a contractual term was void for uncertainty and instead looked at the factual circumstances surrounding the contract. In doing so it found that one party had failed to perform its obligations, even though those obligations were not clearly outlined in the contract. [Continue Reading]

Corporate and commercial | 01 June 2010

The modernisation of business practice dictates that companies need to adapt quickly to their business environments. As a result, parties to long-term contracts may need to change or modify their contractual rights for them to have a continued commercial effect. This can be done in one of two ways.

One option is for the parties to consent to the termination of the original contract and enter into an entirely new one. Thus, all of the contractual rights of the parties under the original contract will cease and the parties will only be able to rely on the rights as governed by the new contract. However, this can be expensive, time consuming and impractical. Where large and complex commercial contracts are involved, the parties will often only wish to change a certain number of terms, while keeping the majority of original terms in existence. In this situation, it is far more suitable to vary the existing contract to give effect to the new commercial needs of the parties.

However, as the recent BMS Computer Solutions Ltd v AB Agri Ltd [2010] demonstrates, ill-thought out variations can lead to unintended consequences.

Facts

Under the terms of a licence agreement between the parties, BMS granted a software licence to AB Agri for a period of ten years (the licence agreement). The parties simultaneously entered into a support agreement that granted AB Agri the right to technical support in relation to the licensed software (the support agreement). A termination provision in the licence agreement provided that:

‘In the event that the [support agreement] is terminated for any reason whatsoever this agreement [the licence agreement] shall be terminated forthwith (the termination provision).’

A variation agreement inserted a provision that varied the licence agreement period from ten years to one of ‘perpetual’ duration (the variation agreement). Several years after this variation, AB Agri terminated the support agreement. One issue before the court was whether the termination of the support agreement still had the effect of terminating the licence agreement, notwithstanding that the term of the licence agreement had been varied to last for a period of perpetual duration.

AB Agri submitted that the termination provision was incompatible with the term in the variation agreement, providing for a perpetual licence, and that therefore the licence agreement remained in effect. BMS disagreed and argued that the licence agreement and the support agreement were linked and should be read in conjunction with one another. As such it submitted that the licence agreement was validly terminated.

Decision

The judge at first instance, Sales J, basing his decision on general construction principles, favoured the submissions of BMS. He found the term ‘perpetual’ to mean ‘operating without limit of time’, and on that interpretation found that there was no incompatibility between the variation of the licence agreement and the disputed termination provision. He gave the following reasons for this decision:

    1. On an objective approach to construction, the variation agreement:

‘Was plainly not intended to wholly displace the licence agreement… the choice of words “will be extended” rather than a phrase such as “will be replaced by” indicate[d] that it [was] the same licence as in the licence agreement.’

  1. The omission by the variation agreement of references to all of the termination provisions in both the licence agreement and the support agreement indicated that those unmentioned provisions were intended to remain in force.
  2. There was a clear link between the continuation of the support agreement and the practical effect of the licence agreement. The variation agreement contemplated that the termination provisions of the support agreement would continue to operate. This implied that the termination provision in the licence agreement would also continue to operate.
  3. It would require ‘clear and explicit language’ to indicate that the contrary outcome was intended and that the termination of the support agreement was intended to have no effect on the licence agreement.

The effect of the judge’s ruling was that the licence agreement was terminated along with the support agreement. Clearly, this was not the outcome AB Agri had intended when it terminated the support agreement.

Comment

The decision in BMS highlights the importance of the need to consider the effect that a contract variation can have on all original contract terms. Express reference to the intent of a variation on terms that are important to the contractual relationship as a whole is the only safe way to avoid unintended outcomes.

 

drafting tips when varying contracts

  • Identify the commercial needs of the client and their objectives in making the variations.
  • Review all original terms of the contract with variation in mind.
  • Analyse the effect of the variations. Do they render any existing provisions incompatible?
  • Ask yourself whether the variations express the intentions of the parties.
  • If your client does not want/intend particular key terms to be impacted by the variation, state this expressly in the variation agreement.
  • Be thorough and precise with the language used.

Corporate and commercial | 01 May 2010

There is a situation more common than most people would think, particularly in the construction industry whereby parties commence work under a letter of intent, pending the negotiation and execution of a full written contract, setting out all the detailed terms and conditions governing contract performance. This often occurs where projects are time and cost sensitive.

The recent RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Company KG (UK Production) [2010] clearly demonstrates the perils of beginning work without agreeing the precise basis on which it is to be done and finalising a contract to that effect.

RTS FLEXIBLE SYSTEMS: FACTS

In January 2005 RTS Flexible Systems Ltd (RTS) won a tender for a project worth £1.68m to supply Molkerei Alois Müller GmbH & Company KG (UK Production) (Müller) with an automated system for packaging its yoghurt pots.

While negotiation of the full contract terms was on-going, Müller sent RTS a letter of intent (LOI) that set out the contract price and requested RTS to commence work immediately to meet Müller’s deadlines. The LOI also stated that the full contractual terms would be based on Müller’s standard MF/1 contract, and contemplated that the full terms and the relevant technical specifications would be finalised and signed within four weeks from the date of the LOI. RTS commenced work, the LOI expired but no formal contract was executed. Despite this, the work by RTS continued.

By 5 July 2005, a final draft contract was produced, which contained a clause stating that the contract would not become effective until each party had executed and exchanged a counterpart. No execution or exchange of counterparts of the draft contract was ever made.

On 25 August 2005, the parties had a meeting to discuss the project and certain variations to the delivery plan were agreed. RTS continued its work in the absence of any signed formal contract. Ultimately, a dispute arose between the parties leading to litigation.

A preliminary issue before the court was whether RTS and Müller had entered into a contract and, if so, on what terms.

High Court

Clarke J (the trial judge), at first instance, held that the parties had entered into a contract after the expiry of the LOI, based on conduct and negotiations that took place prior to the draft contract. He declined to uphold the draft contract of 5 July 2005 (which included Müller’s MF/1 terms) because:

  1. not all the essential terms of the 5 July 2005 contract were agreed; and
  2. by the effect of its counterpart clause (which the court viewed as a ‘subject to contract’ provision), the 5 July 2005 contract cannot have been validly concluded as no signed counterparts were exchanged.

Court of Appeal

RTS appealed the trial judge’s decision. The Court of Appeal, citing Goff J’s remarks in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984], held that the counterpart clause had the effect of preventing a contract from coming into existence until a written agreement was signed.

In particular, Waller LJ said that the factors that influenced Goff J to conclude that there was no binding contract in British Steel applied with equal force to the facts in RTS Flexible Systems. Those factors were:

  1. Where a supply of goods contract is made, it is generally subject to standard terms and conditions, which are usually the standard terms of the seller.
  2. If the buyer asks the seller to begin work pending the parties entering into a formal contract and the seller acts on that request, it is difficult to infer that the seller is assuming any responsibility for their performance, except for the responsibility that will rest on them under the terms of the contract that both parties confidently anticipate they will shortly enter into. It would be an extraordinary result if, by acting on such a request in those circumstances, the seller were to assume an unlimited liability for their contractual performance, when they would never assume such liability under any contract that they entered into.

As a result, the Court of Appeal found no contract had come into existence after the expiry of the LOI.

Supreme Court

Müller appealed the Court of Appeal’s decision. The Supreme Court unanimously held that the parties had reached a binding agreement on or about 25 August 2005 on the terms agreed on 5 July 2005, with subsequent variations on 25 August 2005 and that the counterpart clause had been waived by the conduct of the parties.

principles

Lord Clarke, in delivering the judgment, made it clear that in determining whether there was a binding contract between the parties and, if so, on what terms, the test was whether a ‘reasonable and honest businessman’ would conclude from the parties’ words and conduct that they intended to create legal relations and had agreed on all the terms that they regarded or the law required as essential for the formation of legally binding relations (ie terms without which the contract as a whole would be unworkable or void for uncertainty).

Further, Lord Clarke stated that where a contract is being negotiated ‘subject to contract’ and work begins before the formal contract is executed, it cannot be said that there will always or even usually be a contract on the terms that were agreed ‘subject to contract’. That would be too simplistic and dogmatic an approach. The court was not to impose binding contracts on the parties that they had not reached. All would depend on the circumstances of each individual case.

The contract and its terms

The Supreme Court agreed with the trial judge that it was unrealistic to suggest that the parties had no intention to create legal relations given that:

  1. the full contract price and all other essential terms were agreed;
  2. substantial works were carried out by RTS at the request of Müller;
  3. a no-contract solution would involve RTS agreeing to proceed with detailed work and to complete the whole contract on a non-contractual basis, subject to no terms at all; and
  4. the agreement was subsequently varied in important respects on 25 August 2005, without any suggestion that there was not a contractual variation.

The Supreme Court accepted the trial judge’s findings that the parties did not proceed on the basis of all the terms and conditions having been agreed conditions, and that not all of the schedules were agreed, but took the view that such failure did not prevent the contract from having a binding effect. The Supreme Court applied the ‘reasonable and honest businessman’ test and found that the parties had reached an agreement on all of the essential terms on 5 July 2005. The agreement was subsequently amended on 25 August 2005.

Subject to contract

The Supreme Court held that the requirements for signature and exchange of counterparts had been waived by the parties’ correspondence and conduct. This distinguished RTS Flexible Systems from British Steel on the grounds that all the terms that the parties treated as essential were agreed and the contract was being substantially performed without a formal contract being signed or exchanged, whereas in British Steel the parties were still negotiating terms that they regarded as essential. Lord Clarke found that the only reasonable inference to draw in RTS Flexible Systemswas that the parties had, in effect, agreed to waive the ‘subject to contract’ provision encapsulated by the counterpart clause.

 

at-a-glance guide

RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Company KG (UK Production)[2010] is a reminder to commercial parties and those advising them of the danger of beginning work before a contract has been finalised. The key points to take away from this decision are as follows:

  1. Whether a court will hold that a binding contract has been made will depend on all the circumstances of the individual case, but the test it will apply is an objective one from the perspective of the ‘reasonable and honest businessman’.
  2. The fact that work has commenced does not automatically mean that the parties must have entered into a binding contract. However, it is definitely an indicator of that position.
  3. By starting to perform your part of the contract, you may waive the protection offered by a ‘subject to contract’ provision.
  4. Businesses should review boilerplate counterpart clauses to check if they may be construed as a ‘subject to contract’ provision.

Corporate and commercial | 01 April 2010

In a contractual dispute (or indeed any dispute), involving at least one party domiciled in an EU member state, the choice of jurisdiction will be governed by Brussels II (Council Regulation (EC) No 44/2001). This regulation sets out when the courts of a member state should have jurisdiction. It also allows the parties to opt out of the regime and agree their own jurisdiction provisions, provided that the jurisdiction clause satisfies certain formal requirements contained in Article 23. As a minimum, the clause must be in writing or evidenced in writing. [Continue Reading]