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.
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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