Court of Appeal construes Farm-Out Agreement and Joint Operating Agreement together as a cohesive whole

The Court of Appeal has dismissed an appeal against a decision interpreting the provisions of a Farm-Out Agreement for the sale of an interest in two oil production licences: Apache North Sea Limited v (1) Euroil Exploration Limited & (2) Edison S.p.A [2020] EWCA Civ 1397. Herbert Smith Freehills LLP represented the successful defendants/respondents, Euroil Exploration Limited and Edison S.p.A.

This decision serves as a reminder for parties to think carefully about the intended interplay between associated contracts and to ensure the drafting is clear as to the impact the provisions of one agreement may have in interpreting another, including the effect of any inconsistency clauses.

For more information please see this post on our Energy Notes blog.

Court of Appeal upholds High Court’s decision on the preferred contractual construction of a term in an exclusion clause

The Court of Appeal has upheld the High Court’s decision on a claim involving the legal meaning of ‘goodwill’ and the contractual construction of an exclusion clause excluding liability for lost goodwill: Primus International Holding Co & Ors v Triumph Controls – UK Ltd & Anor [2020] EWCA Civ 1228.

In doing so, the Court of Appeal has confirmed that (unless there are clear words to the contrary in a contract) the ordinary legal meaning of a particular term will be preferred to an unusual, technical or non-legal meaning. The Court of Appeal agreed, in this case, that the ordinary legal meaning of “goodwill” applied to the exclusion clause under consideration as opposed to the technical accounting definition advanced by the defendants; there were no indications otherwise to suggest that the technical definition should be preferred.

For more information see this post on our Banking Litigation Notes blog.

 

High Court gives guidance on availability of summary judgment and frustration in contractual disputes

A recent High Court decision is a good example of the court’s willingness to deal with questions of contractual interpretation on a summary basis in an appropriate case, without the need for a full trial. However, it also highlights the difficulties that will be faced in successfully striking out a defence based on the common law doctrine of frustration, which is likely to be of particular interest in the context of the COVID-19 pandemic: Natixis & Anor v Famfa Oil Ltd [2020] 2 WLUK 330.

The following factors (in particular) were highlighted as making the present case suitable for determination by summary judgment: the claim involved a short point of contractual construction; the factual matrix was not in dispute; the agreements were sophisticated, complex and drafted by skilled professionals; and it was appropriate to interpret the contracts principally by a textual analysis.

However, the court was not prepared to summarily strike out a defence based on the doctrine of frustration. Having regard to the need to take a multi-factorial approach to this question, the court held that the relevant factors (including the parties’ knowledge and expectations at the time of entering into the contract, in particular as to risk) could only properly be investigated at trial following disclosure and the exploration of oral evidence in cross-examination.

For more information see this post on our Banking Litigation Notes blog.

Commercial Court interprets indemnity clause in SPA to exclude damage which occurred pre-execution

The Commercial Court recently dismissed a claim to recover the cost of repairs to two offshore transmission cables linking the Gwynt Y Môr offshore wind farm in North Wales with the National Grid, which the claimant had sought to recover under an indemnity for “Pre-Completion Damage” in a business sale agreement: Gwynt Y Môr OFTO PLC v Gwynt Y Môr Offshore Wind Farm Ltd [2020] EWHC 850 (Comm).

Although the indemnity did not expressly state that “Pre-Completion Damage” was limited to damage occurring after the agreement was signed, the court found that this was the clear interpretation of the clause based on a textual analysis including the tense used. On the facts, the cables had failed as a result of ongoing corrosion, and no relevant “damage” for the purposes of the indemnity had occurred between signing and completion.

As well as giving a useful illustration of how the courts will approach the interpretation of an indemnity in a business sale agreement, the decision reinforces that careful consideration is required when drafting indemnities to ensure that there is absolute certainty in what the indemnity is intended to cover. In particular, there should be no room for doubt as to whether an indemnity is intended to cover the pre-signing period, the period between signing and completion, or both. Continue reading

Joint Operating Agreement arguably a “relational contract” but Commercial Court declines to imply duty of good faith or Braganza duty

In a recent decision, the Commercial Court found that an express and (on its face) unqualified right to discharge the operator in a Joint Operating Agreement (JOA) was not subject to any implied term of good faith, or that the right would not be exercised capriciously, arbitrarily or unreasonably: TAQA Bratani Limited and Others v RockRose UKCS8 LLC [2020] EWHC 58 (Comm).

The decision confirms that unqualified termination or discharge rights in JOAs are unlikely to be subject to implied terms of good faith, and therefore provides comfort for those who might exercise such rights.

The decision is also of interest in that, despite the court being prepared to treat the JOAs as arguably falling into the category of “relational” contracts (as considered here, for example), it nonetheless declined to imply an obligation of good faith in relation to the discharge right.  It is therefore a helpful reminder that the question of whether a contract is “relational” is just part of the analysis. The onus will still be on the party seeking to establish a duty of good faith to show that such a duty should be implied. As this decision makes clear, where that duty would qualify an otherwise unqualified contractual right, this may prove to be difficult.

James Robson, a senior associate in our disputes team, considers the decision further below. Continue reading

Court of Appeal finds entire agreement clause did not preclude terms of superseded contract being admissible to explain meaning of unconventional term

The Court of Appeal has held that the parties agreed a binding variation to incorporate additional services (Intermediate Minor Oral Surgery, or IMOS, services) into a standard form contract for the provision of dental services, so that an earlier contract for the provision of the IMOS services was superseded. That meant that the agreement for the IMOS services could not be terminated without fault by the dentists; the ability to terminate on one month’s notice under the IMOS contract no longer applied: NHS Commissioning Board v Vasant and others [2019] EWCA Civ 1245.

The variation was in writing and signed by both parties, as required by a so-called “no oral modification” clause in the standard form contract. Although the variation was in very brief terms, which did not (in themselves) explain the nature of the services to be provided under the varied contract, the court rejected an argument that it failed for uncertainty.

While the terms of the IMOS contract could not be said to be incorporated into the standard form contract, as they were not expressly incorporated by reference and the standard form contract contained an entire agreement clause, they were admissible as extrinsic evidence for the purpose of explaining the meaning of the relevant expression in the standard form contract.

The decision shows that, even where an earlier contract is superseded and no longer applies, it may be admissible to explain the meaning of an unconventional, or technical, expression in the subsequent agreement. The obvious message for those drafting contracts, however, is that it will almost certainly be preferable to ensure that the meaning of all terms is clear on the face of a contract rather than having to look to extrinsic evidence for that purpose. Continue reading

What does your contract mean? How the courts interpret contracts

All too often, a term might seem perfectly clear to the parties when the contract is agreed, but a dispute later arises as to how it is meant to apply in the circumstances that have come about.

If the parties cannot resolve the issue, the court may be called on to interpret the contract. Where the parties have not made themselves clear, the result may then be difficult to predict.

In this second of our updated and relaunched series of contract disputes practical guides, Gary Milner-Moore, Sarah McNally and Steven Dalton consider the court’s approach to interpreting contracts and some practical steps that can be taken to minimise the risks.

You can click here to download the PDF guide or contact webinars to access the archived version of our webinar exploring these issues.

We will be publishing further editions of the updated series of contract disputes practical guides in the coming months. In the meantime, the first edition in our relaunched series (When do you have a binding contract? It may be more (or less) often than you think), and the remaining editions from the original series, can be accessed from the home page for our contract disputes series (which is also linked under “our guides” in the top menu).

Court of Appeal reiterates limited scope for reference to pre-contractual material when interpreting contracts

A recent Court of Appeal decision has illustrated the strict operation of the common law rule against relying on evidence of pre-contractual negotiations to interpret contracts. The decision confirms that, while it is permissible for a court to take into account pre-contractual material for the limited purpose of understanding the genesis and commercial aim of the transaction as a whole, this does not extend to admitting material in order to shed light on the genesis and aim of a particular contractual provision: Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council [2019] EWCA Civ 526.

Importantly, the decision illustrates that it is not only statements reflecting one party’s subjective intentions or aspirations which are excluded for the purpose of interpreting a contract, but also communications that are capable of showing that the parties reached a consensus on a particular point or used words in an agreed sense.

As a practical matter, the decision shows the importance of ensuring that all contractual provisions are drafted clearly. To the extent that any underlying assumptions or background information might be necessary to understand the purpose and intended operation of a particular provision, these should be included in the contract itself, if necessary as recitals. While evidence of negotiations may be admissible if there is a claim for rectification or estoppel, it is clearly preferable to avoid the need for recourse to such arguments.

Continue reading

Court of Appeal finds clause imposing liquidated damages for delay did not apply where work was never completed

In a recent decision, the Court of Appeal held that a clause providing for liquidated damages for delay did not apply where the contractor failed to complete the contracted work (the installation of a new software system). The employer under the contract was therefore entitled to recover damages for breach assessed on ordinary principles, rather than liquidated damages: Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230.

The Court of Appeal said that the question of whether such a clause applied in these circumstances would depend on the wording of the clause itself. In relation to the specific clause before the court, the clause was focused specifically on delay between the contractual completion date and when the work was actually completed by the contractor and accepted by the employer. If that never occurred, the liquidated damages clause did not apply. The case is a useful reminder that, when drafting a liquidated damages clause, it is important to ensure there is no room for doubt as to when the clause will apply.

The Court of Appeal also rejected the appellant’s argument that the liquidated damages clause should be struck out as a penalty clause, under the test established by the Supreme Court in the leading case of Cavendish v Makdessi (considered here). The court noted that the total sums as calculated under the clause were modest when compared to the financial consequences of delay in installing the software, and concluded that it was a genuine pre-estimate of loss.

Anthea Brookes, an associate in our disputes team, outlines the decision below. Continue reading

Supreme Court overturns decision finding contract incomplete and declining to imply term

The Supreme Court has unanimously held that a binding agreement was reached between a property seller and an estate agent, despite the parties not having specified the circumstances in which the agreed rate of commission would fall due: Wells v Devani [2019] UKSC 4.

In doing so it overturned the majority decision of the Court of Appeal (considered here) finding that the agreement was incomplete because of the failure to agree this essential term, and that the court could not imply a term in order to transform an incomplete bargain into a legally binding contract.

The Supreme Court found that the only sensible interpretation of the parties’ words and conduct was that the commission would be payable on completion of a purchase by a buyer introduced by the agent, so it was not necessary to imply a term. If it had been necessary, however, the court would have had no hesitation in doing so. It did not agree with the Court of Appeal that there is any general rule preventing the court implying a term where that will render the agreement sufficiently certain or complete to constitute a binding contract, and the conditions for implying a term are satisfied.

The decision emphasises the court’s reluctance to find that an agreement is too vague or uncertain to be enforced where the parties intended to be bound and have acted on their agreement. Of course, as a practical matter, to avoid the risk that the courts will find their bargain unenforceable – or, conversely, imply a term that is not in fact what they intended – parties should ensure that all essential terms are expressly agreed.

Chris Bushell and Maura McIntosh consider the decision further below. Continue reading