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Contract law review: key themes of 2019

2019 was an interesting year for clarification of the courts’ views on several important contract law principles.

This review highlights the main developments on the following topics:  

Contractual interpretation

What happened?

Balancing the general principles of contract interpretation was a key theme in 2019. 

The case of Eleni Shipping Limited v Transgrain Shipping BV [2019] provided a concise summary of the principles of interpretation and confirmed that the court's task is to ascertain the objective meaning of the language chosen. The court must ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties at the time of the contract, would have understood the parties to have meant.

Although the text is always the starting point, this case demonstrated the court’s willingness to balance loyalty to the text with a broader range of principles, such as context and where the underlying risk of delay should lie.  The court considered that certain contracts (such as time charters) give rise to particular considerations because of the allocation of risk inherent in their nature.

Context was also significant in the case of Merthyr (South Wales) Ltd v Merthyr Tydfil CBC [2019]. The court clarified that it could look at previous documents that showed the context and explained the commercial purpose of the contract.  However, parties could not rely on pre-contractual negotiations to draw inferences about what the contract should mean.

The case of Classic Maritime Inc v Limbungan Makmur SDN BHD [2019]  provided a further example of the modern approach to contractual interpretation. The Court of Appeal highlighted that the outcome of the case hinged on how an exceptions clause should be interpreted, with reference to the language of the provision and an awareness of its context and purpose. It was acknowledged that had the parties wanted to explicitly draft an exception that relieved one of the parties of its obligations on the occurrence of an event, they could have done so. For more information, see our briefing here.

What does this mean in practice?

The obvious message for those drafting contracts is to ensure that the language used clearly reflects the parties' intentions.

Although the court is willing to consider the factual and legal background to a contract, it is advisable for parties to ensure that any background information or statements made in negotiations that they consider to be of significance are included in the contract (for example, in the recitals).

Variation 

What happened?

In the wake of the leading judgment on the issue the previous year, in NHS Commissioning Board v Vasant [2019] the Court of Appeal considered a no oral modification (NOM) clause. In this case the relationship of the NOM clause and the entire agreement provisions were considered together to uphold a contractual variation. For more information see our briefing here.

Referring to Rock Advertising v MWB [2018], the judgment acknowledged that it is now established that NOM clauses are, in principle, enforceable. In the Rock case, the Supreme Court unanimously held that the NOM clause was valid. The variation at issue was not set out in writing and signed on behalf of both parties and was therefore ineffective. For more information, see our briefing here.

What does this mean in practice?

There is now welcome clarity on the effectiveness of NOM clauses. Those drafting contracts can confidently advise the inclusion of such clauses and contractual parties can benefit from the certainty that they afford.

Implied duty of good faith

What happened?

Despite the case of in Yam Seng in 2013 which decided that a duty of good faith can be implied in certain types of long-term "relational" contracts, the courts have remained reluctant to recognise a general duty of good faith. 

The case of Bates v Post Office Ltd (No.3) [2019] provided a detailed analysis of the case law and unequivocally affirmed  that an obligation of good faith can be implied into relational contracts (in this case between the Post office and its sub-postmasters). The High Court also provided guidance on nine characteristics relevant to an assessment of whether a contract is relational (including the length of the relationship and expectations of loyalty).  For more information, see our briefing here.

Interestingly, in the subsequent case of New Balance Athletics, Inc v The Liverpool Football Club [2019] the parties agreed that there was an implied obligation of good faith to match a third party sponsorship offer, even though it was not expressly mentioned in the contract. The dispute lay in what this meant in practice.   The court considered that it was now clear from a number of decisions that the duty of good faith can be breached not only by dishonesty but also by conduct which lacks fidelity to the parties’ bargain. Referring to the Bates case, the judge explained that ultimately, the question for the court is whether reasonable and honest people would regard the challenged conduct as commercially acceptable based on the context, the nature of the bargain and the terms of the contract.  For more information, see our briefing here.

What does this mean in practice?

Following the Bates case, there is a danger that a large number of long term commercial agreements are likely to share the nine characteristics listed. Businesses will obviously be concerned that this could lead to an additional set of obligations being implied into their long term contracts (which may already contain lengthy and detailed obligations). It would of course be possible to expressly exclude a duty of good faith to avoid any uncertainty; however, this may be difficult for customers to accept without extensive negotiation on the issue. 

Going forward, it is possible that the courts may choose to distinguish the Bates case on its facts (particularly in view of the quasi-employment nature of the relationship) and continue to imply a duty of good faith only in exceptional circumstances. Without clarity from the Supreme Court, it looks like the debate on when a duty of good faith should be implied will continue.  In the meantime, parties should remember the requirement to conduct themselves in a manner likely to be regarded as “commercially acceptable” throughout the contract.

Frustration/Brexit

What happened?

In a much anticipated ruling in the case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019], the High Court ruled that a commercial lease was not capable of being frustrated by Brexit.  Both of the defendant’s frustration arguments were rejected, the first based on supervening illegality and the second on frustration of a common purpose. For more information, see our briefing here.

The EMA was granted permission to appeal the High Court's decision but subsequently announced that it had settled its dispute with the Canary Wharf group. 

What does this mean in practice?

This case serves as a reminder that the doctrine of frustration is likely to be applied narrowly by the courts, particularly where the frustrating event to be relied upon is Brexit. However it did leave open the possibility of establishing frustration as a result of Brexit in certain circumstances, such as where a party can demonstrate that it would be deprived of substantially all of the benefit of a contract.

Rectification for common mistake

What happened?

In a welcome clarification of the law on rectification, the Court of Appeal confirmed that the correct test of rectification will depend on whether or not there is a prior binding agreement: FSHC Group Holdings Ltd v GLAS Trust Corp Ltd [2019].

Rectification may be available if a document fails to give effect to a prior binding agreement and in such a situation an objective test will apply. In the absence of a binding agreement however, the court should apply a subjective approach to assessing the parties’ common continuing intention.  Disagreeing with the obiter comments of Lord Hoffman in Chartbrook v Persimmon Homes Ltd [2009], the Court of Appeal explained that the rationale for a subjective test is that rectification is an equitable remedy intended to correct a common mistake.

What does this mean in practice?

The Court of Appeal noted that applying a subjective test is likely to lead to fewer contracts being rectified, but it considered that it was the right that rectification should be difficult to prove.   

In contrast to the position discussed above in relation to contractual interpretation, evidence of pre-contractual negotiations will be admissible in cases of rectification to establish a common intention.  It is therefore advisable for parties to make and retain contemporaneous notes of discussions that may show the intention of the parties prior to entering into a contract, in case a mistake is made.  

Severance and blue pencil test

What happened?

The correct approach to severance in the context of restraint of trade clauses was clarified by the Supreme Court in the case of Tillman v Egon Zehnder Ltd [2019], an employment case.  Overruling a longstanding authority, the Supreme Court confirmed that the approach (as set out in the previous case of Beckett Investment Management Group Ltd v Hall [2007]) involves three steps:

  1. The application of the “blue pencil” test: the words to be severed must be capable of removal without the need to add to or modify the remaining words;
  2. The remaining terms must continue to be supported by adequate consideration; and
  3. The removal of the unenforceable provision must not generate “major change” in the overall effect of all post-employment restraints in the contract.

What does this mean in practice?

The decision will assist companies who are seeking the benefit of any restraint of trade clauses, not only in an employment context but also in commercial and corporate contracts such as agency and distribution arrangements and exclusive supply or purchasing agreements.   Clauses should be drafted so that each sub-clause can stand on its own, in order to maximise the chance of carving out any parts that go too far. 

It remains to be seen whether the meaning of a “major change” in the third part of test could give rise to further disputes.  It is therefore advisable to remain cautious and include an express severance clause as well.

One to watch in 2020:  Liquidated damages for delay

The case of Triple Point Technology Inc. v PTT Public Company Ltd [2019] attracted significant commentary in 2019. The Court of Appeal ruled that a contractual provision for liquidated damages for delay had no application in respect of software development work which was never completed. It also held that a limitation of liability provision imposed an overall cap on the contractor's total liability, which included liquidated damages for delay.  For more information, see our briefing here.

The law on liquidated damages for delay has been subject to conflicting approaches over the years.  Permission to appeal to the Supreme Court was granted in November 2019, so the position may finally be settled in 2020.  In the meantime, parties should ensure absolute clarity when drafting liquidated damage clauses alongside liability caps to reflect their intention about the allocation of risk and the impact of delays.


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