19 Dec 2018

Professor Ewan McKendrick's annual contract law updates are a highly valued element of our Informed Counsel programme. Professor McKendrick's session opened our inaugural Informed Counsel conferences in London and Newcastle, and took us (in contractual terms) from cradle to grave. Here are the practical highlights.

The risk of informal correspondence and conduct

Professor McKendrick explained the significant risks that stem from informal correspondence, such as email, and from conduct before a contract has been fully negotiated and signed. He emphasised that if an objective assessment of the facts allows the court to find the "essential terms" of a contract, then there will be a binding agreement even if the parties are not aware of that legal effect.

The parties may specifically identify their own "essential terms". It is possible for businesses to avoid becoming accidentally bound by a contract by specifying and sticking to a clear set of pre-conditions. For example, the parties may state that there will be no contract unless and until there is a fully agreed and signed document. Failing that, the court will look only for the "essential terms" required by law. Those terms are minimal – perhaps limited to identification of the goods to be sold or the services to be provided, the price and (possibly) the time or place for delivery. Professor McKendrick focused on Arcadis v Amec [2018] EWCA Civ 2222 to emphasise that exclusions or liability caps will generally be regarded as "nice to have" rather than being essential terms of a commercial contract.

Practice points: The Court of Appeal strongly suggests that if you do not agree to a particular contractual provision, then you should specifically say so. The court is likely to find contractual acceptance in fairly loose language – for example, email responses that merely thank the sender for setting out proposed terms, or that say the proposed terms are "noted". Given the risk that such responses might be interpreted as an acceptance, it is essential that any disagreement is specifically stated. Further, rejecting a term that would not be regarded as "essential" could result in the formation of a contract with no provision to cover the subject matter of the rejected term. To avoid that risk when rejecting individual terms, remember to state that there is to be no contract until the final terms are agreed and signed.

Variation

Professor McKendrick also discussed the Supreme Court ruling in MWB v Rock Advertising [2018] UKSC 24, confirming the general enforceability of a clause stating that contract variations will not be valid unless in writing and signed by the parties.

Practice points: MWB v Rock provides a significant measure of contractual risk management, reducing the risk of informal variation through words or conduct. However, Professor McKendrick urged caution in relation to emails or other correspondence which will clearly be "in writing" and may easily be "signed" – for example by typing the sender's name or even initials. If there is no intention to create a legally binding variation, say so.

Bad bargains

The courts have repeatedly stated that judges will not rewrite clear contractual wording in order to rescue a party from a bad bargain. That approach, reinforced by the Supreme Court ruling in Arnold v Britton [2015] UKSC 36, involved a move away from a previous tendency for courts to consider that contractual meaning should be determined according to "commercial common sense".

Commercial common sense still has a part to play, but only when the court has to choose between competing potential meanings. If a clause is clear, it will be enforced.

Practice points: Where commercial parties enter into a contract, be aware that the court will not go looking for ambiguities. If the wording is clear, it will be enforced. The courts have also moved away from old "rules" of interpretation such as contra proferentem, and they have resisted the development of any implied doctrine of "good faith" to impose obligations or moderate the exercise of contractual rights. Where a contract has been professionally drafted for commercial parties, the parties will be taken to have said what they meant, and meant what they said.

Good faith

While the courts have leaned against any general doctrine of good faith in contracts, it is increasingly common for commercial parties to include "good faith" wording in dispute resolution and hardship clauses. Where such wording is used, it is highly likely to be enforceable.

Practice points: If your contract includes "good faith" obligations to meet in order to resolve a dispute or to consider relaxing obligations to reflect hardship, assume that the obligations are enforceable. Professor McKendrick suggested that failure or refusal to attend such a meeting might well be a breach – and perhaps even a repudiatory breach leading to significant liability for damages.

Termination

Professor McKendrick closed with a warning stemming from Phones4U v EE [2018] EWHC 49 (Comm). Faced with a party going into administration, EE moved quickly to terminate the contract. To ensure swift and secure termination, EE relied on an express provision that allowed them to end the contract if Phones4U went into insolvency proceedings. Having served its notice, EE then sought to claim damages for breach. The court held that by deciding to terminate for insolvency (which is not a breach), EE had elected not to terminate for breach. The right to recover damages had been lost.

Practice points: If you decide to terminate a contract, you must act quickly and on clear grounds. Terminating without valid cause risks a claim for wrongful termination, and significant liability for damages. However, it is essential to balance speed with careful consideration. The route you select for termination will determine the remedies that are available to you. Terminating for an event that is not a breach may be taken as a decision not to seek damages that might otherwise be available.