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Disputes Matter – Autumn/Winter 2016

Disputes Matter – Autumn/Winter 2016

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Contract formation: What constitutes acceptance?

Contract formation can be contentious When, if at all, have the parties formed a contract, […]

Contract formation can be contentious

When, if at all, have the parties formed a contract, and on what terms?

A contract is formed when all of the key elements are present: offer; acceptance; consideration (that is, money or money’s worth); intention to create legal relations; and certainty of terms. You might think that the point at which a contract has been formed is easy therefore to establish. However, this is a common source of dispute. One particular area of contention is often whether a response to an offer constitutes an acceptance or a counter-offer. This can be crucial because, for example, it can determine on whose terms a business deal proceeds, or on what terms a dispute is settled.

The latter scenario was the basis of a recent case, Gibbs v Lakeside Developments Ltd [1]. Party A made a settlement offer of a certain sum to Party B, specifying that payment was to be made by a certain date. Party B responded in an e-mail which stated “[Party B] accepts your offer.” Party B’s e-mail also attached a proposed draft order to formally document the settlement, but the draft order specified a later date for payment. A dispute arose as to whether Party A’s settlement offer had been accepted, or whether Party B’s response was a counter-offer.

Offer and acceptance and ‘the battle of the forms’

Going back to legal basics, an offer is a promise by one party to enter into a contract on certain terms. It must contain all off the basic terms of the agreement and evidence an intention that no further bargaining is to take place. Acceptance is final and unqualified assent to an offer which must correspond exactly with the offer, with no variation of the terms. If, as in this case, a purported acceptance does not match the terms of the offer, then no contract is formed and, instead, a counter-offer is made.

A common upshot in the commercial context is the so-called battle of the forms. This is where, during business-to-business negotiations, each party wants its own standard terms and conditions to govern the contract and so one party offers to contract on its terms and the other purports to accept but attempts to impose its own terms. This often means that the last set of terms despatched before performance (sometimes referred to as the ‘last shot fired’) will prevail. However in these scenarios it can be difficult to ascertain the exact point at which a contract comes into being, and therefore which terms apply.

Legal decision

In the Gibbs case the High Court held that the reference in Party B’s attached draft order to a later date for payment meant that Party A’s offer had not been accepted. The court did not agree with Party B’s argument that the e-mail statement constituted unequivocal, complete acceptance and that the attached draft order was merely a proposed form of document, which could be varied or rectified, to record the agreed settlement.

As an aside, the court considered the earlier case of Pagnan SPA v Feed Products Ltd [2], which stated that where there is a chain of correspondence or documentation from which you have to conclude the point at, and the terms upon, which a contract was formed, you have to consider the correspondence as a whole. Contrary to an earlier High Court decision [3], the judge in Gibbs held that that can involve an assessment of whether subsequent correspondence and conduct supports your conclusion.

Practical advice

The advice for commercial parties is clear:

Whether you are entering a new business arrangement or negotiating resolution of a dispute, take particular care if terms appear elsewhere, whether that be on the reverse of a form; on a website; in an attachment to an e-mail; in a separate draft contract or other form of document; or elsewhere within promotional material or pre-contractual correspondence.
Timing is everything. Governing terms will be those prevailing at the time the contract is created. Whilst a court can review all relevant correspondence and conduct, after-the-event attempts to rely on after-the-event statement, terms printed on invoices or other post-contract documents have been unsuccessful.
If you are making an offer, make sure that it clearly and comprehensively sets out all of the key terms that are important to you.
If you wish to accept an offer, make sure that you are entirely happy with all of the terms proposed and that you clearly communicate your unequivocal and unqualified agreement.
Beware inadvertent acceptance. Remember that, with some limited exceptions, a contract does not need to be written or indeed in any particular form. A contract can be made orally (face-to-face or via some communication medium such as the telephone); it can be implied from the conduct of the parties; and it can be made via email, or by clicking a button on a website, provided the key elements are present. It is therefore possible to accept another’s terms simply by failing to object to them or to assert your own [4].
Finally, note that even once a contract has been formed, post-contract conduct or correspondence can alter or vary governing contractual terms. Again, be careful to be consistent in the practice you adopt so that, whatever happens, you end up with the deal you expect.

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[1] [2016] EWHC 2203
[2] [1987] 2 Lloyd’s Rep 601
[3] Newbury v Sun Microsystems [2013] EWHC 2180 (QB0
[4] See our earlier briefing for more information and advice.

Warranties and/or representations, and why it matters

A common pitfall in commercial negotiations can be the incorrect or inadvertent use of terminology […]

A common pitfall in commercial negotiations can be the incorrect or inadvertent use of terminology which has specific legal meaning and consequence. A good example of this is where one party (for example, a seller) “warrants” or “warrants and represents” something to another (say, a buyer or target) in a contract. There is an important distinction between warranties and representations in English law and whether you want to give either or both of these to your counterparty will depend on your bargaining position and will differ from case to case.

The High Court has recently highlighted this distinction in its analysis of the terms of a sale and purchase agreement (SPA) entered into in the context of an oil and gas exploration project. The case of Idemnitsu Kosan Co Ltd v Sumitomo Co Corp [1] therefore provides welcome clarity for all commercial contracting parties.

Warranties and/or representations – what the terms mean and why it matters

A warranty is a contractual promise which, if it is not true or properly performed, gives rise to a claim for breach of contract. The innocent party’s remedy for breach of contract is damages which, so far as money can do, will put that party into the position it would have been if the promise had been performed [2]. A claim for breach of a warranty will be subject to certain limitations, for example the applicable contractual or statutory time-bar on the bringing of claims; any notification requirements or other pre-requisites to initiating a claim; and/or any contractual exclusion/limitation clauses.

By contrast, a representation is a pre-contractual statement of fact or opinion made by one party which induces the other to enter a contract. If the representation is untrue it gives rise to the right for the innocent party to set aside the contract [3] as if it had never been made, or for the innocent party to receive monetary compensation to achieve the same result. Whilst it may be possible for parties to place express limitations on the bringing of misrepresentation claims, it will often be in the innocent party’s best interests to pursue a misrepresentation claim as an alternative or an additional option.

Until the recent Idemnitsu Kosan v Sumitomo case, there was conflicting authority on whether and when warranties might also be actionable as representations.

High Court case

The buyer argued that warranties given in the SPA were also representations capable of founding a claim for misrepresentation. (The argument was important in this case because a contractual provision precluded the bringing of a breach of warranty claim unless the claim was notified to the seller within eighteen months of completion, and the buyer had not notified its claim within that time.) The buyer asserted that expressly referring to those statements within the SPA as warranties did not derogate from their inherent quality as representations [4].

Summarily dismissing the buyer’s claim, the court noted:

It is not enough that a warranty is capable of being a representation. What matters is the parties’ intention at the time the contract is completed.
Here, the relevant contractual provisions were expressly referred to only as warranties.
This was a commercial transaction conducted at arm’s length by sophisticated parties who were advised by experienced solicitors and accountants. The parties would have been aware of the important distinction between warranties and representations.
In the absence of clear drafting that specifically imports representations, it would be artificial and wrong for a court to interpret a warranty also as a representation.

‘Entire agreement’ clause – a final nail

In any event, in this particular contract, there was an ‘entire agreement’ clause under which the buyer had agreed that it had not relied on or been induced to enter the SPA by any representations or warranties other than the express and defined contractual warranties. Even if the buyer’s primary arguments had succeeded, the entire agreement clause would have defeated the claim.

WM Comment

There are some key practical points for contracting parties to take away from this case:

In the contractual context, terminology matters. Whether you give or accept warranties and/or representations can make a huge difference to your claim and compensation options in the event of any breach down the line.
Whether warranties and/or representations will be appropriate will differ according to your position in any commercial negotiations; what you ultimately hope to achieve from the contract; and any case-specific facts.
Make sure that you don’t negotiate and complete any contract without fully understanding the options available to you.
Once you do understand your options, make sure that the contract is drafted clearly and accurately to reflect the parties’ intentions.
Immediately you become aware of any breach, check the time limit and any express notification or other procedural requirements for issuing a claim – and make sure that you comply fully.
Is there is an entire agreement clause in the contract? If so, depending on the drafting, that may prove fatal to a claim.
In terms of tactics, it is worth noting that this case was resolved by summary judgment. The bar for summary judgment is high, but in those cases where it is possible to show that the opponent has no real prospect of successfully succeeding on or defending the claim and there is no other compelling reason why the matter should be disposed of at a full trial, there is the potential to achieve significant time and cost savings.

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[1] [2016] EWHC 1909 (Comm)
[2] In some circumstances, if a breach is ‘repudiatory’ and goes right to the root of a contract, the innocent party may also have a right to terminate the contract, so that no new future obligations arise. Even then, however, the contract will not be undone as if it had never been completed.
[3] that is, to rescind the contract
[4] ibid para. 15

Contractual doctrine – A ‘frustratingly’ high bar

A doctrine for the discharge of contracts The doctrine of frustration, which can be an […]

A doctrine for the discharge of contracts

The doctrine of frustration, which can be an effective defence to a claim for breach of contract, provides that, on the occurrence of a ‘frustrating event’, parties are no longer bound to perform their obligations and a contract is therefore effectively terminated. A frustrating event is one which:

occurs after the contract has been formed;
is so fundamental as to go to the root of the contract;
is neither party’s fault; and
renders further performance impossible, illegal or makes it radically different from that which was contemplated by the parties at the time the contract was made.

Frustration is an option which commercial clients often wish to consider when contracts do not turn out as they had hoped. However the doctrine operates within very narrow confines as the law of England and Wales will not lightly relieve parties of their contractual obligations.

In particular, frustration is not available where the contract has otherwise made express provision for the consequences of the occurrence of the event in question, where an alternative means of performing the contract is possible or if the contract merely becomes more expensive or less commercially viable to perform. In addition, because no one party is at fault in an incidence of frustration, neither party may claim damages and if a party incurred obligations before the time of frustration, it remains bound to perform them.

Court of Appeal case: Armchair Answercall v People in Mind

A recent Court of Appeal decision [1] is a clear commercial example which provides practical pointers for any client looking to pursue or defend a frustration claim.

The defendant had agreed to take over the management of a franchised telephone answering service business. It had entered into a contract with the business’ existing managing director (by his nominee company, the claimant) under which he would assist with the transition to the new arrangements. Under the new arrangements, the business would no longer be run by franchisees and new customers would be recruited. The franchisees were not happy with the new arrangements. They alleged in e-mail correspondence in October 2011 that, by as a result of the changes, the existing business was in repudiatory [2] breach of contract, such that the franchise agreements were null and void. The franchisees therefore set up a rival business. Some five months later, the defendant argued that the franchisees’ repudiation was a frustrating event which terminated its contract with the claimant. The defendant therefore stopped paying the claimant, who sued on the basis that the contract was continuing and payments were due and owing for the remainder of the term.

Highlighting the limitations of the doctrine of frustration, the Court of Appeal disagreed with the defendant’s argument that there had been a frustrating event. In doing so, the court noted:

According to the contract, the transition to the new arrangements with which the claimant was contracted to assist included arrangements with new customers, not just those introduced by the franchisees. Therefore, rejection of the arrangements by the franchisees, while a significant blow to commercial viability, was not so fundamental as to go to the root of the contract, nor to render the claimant’s future performance impossible.
It was in the contemplation of the parties at the time the contract was entered into that the franchisees might object.
Whether or not the franchisees accepted the new arrangements was dependent, in part, on the actions of the parties, including the actions of the defendant now seeking to allege frustration. That was at the defendant’s risk.
Although whether or not an event is a frustrating event is a question of law, the facts of a case, including the parties’ actions after the event, may be indicative. Here, the fact that the defendant continued to work with the claimant and did not allege termination by frustration for several months is consistent with there being no frustration.

Practical advice

There are various important considerations for any party looking to bring a contract to an end, or to defend a breach of contract claim, on the basis of frustration. Are there any express contractual remedies that would preclude frustration in any event? Would a finding of frustration actually bring about a commercially acceptable resolution, or might a damages claim or continued contractual performance prove more financially worthwhile? Can it truly be said that the event in question was wholly outside the parties’ contemplation at the time the contract was entered into and is it strictly correct that the event renders performance of the contract impossible (as opposed to merely more expensive or inconvenient)?

To ascertain whether a particular event amounts to a true example of frustration, specialist legal advice will be required. The best practical advice is that an expert professional view should be sought at the earliest possible time, so that any genuine case of frustration is not undermined or impaired by the parties’ subsequent actions or delay.

If you would like any further advice or assistance, please do not hesitate to contact Malcolm Simpson or any member of the Commercial Dispute Resolution team.

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[1] Armchair Answercall Limited v People in Mind Limited [2016] EWCA Civ 1039
[2] a ‘repudiatory’ breach is a breach that is so serious that it goes to the heart of the contract and allows the aggrieved party to terminate.

Shorter and Flexible Trials pilot schemes extended

The Shorter and Flexible Trials schemes recently piloted for commercial disputes were developed in response […]

The Shorter and Flexible Trials schemes recently piloted for commercial disputes were developed in response to feedback that clients want cheaper, faster, more flexible litigation and that businesses may, in many cases, prefer slightly more ‘rough and ready justice’ if it means that a clear resolution to their dispute is achieved quickly and cost-effectively.

In the Shorter Trials Scheme, key elements of civil procedure are shortened or completely dispensed with (including, for example, costs management) and the trial is limited to four days. The Shorter Trials Scheme can be chosen by one party and, if the other party does not agree to its use, the question is decided at the first CMC. In the Flexible Trials Scheme, which is consensual, the parties simply tailor the litigation process to suit their claim, subject to the court’s approval.

The pilot schemes have now been finally approved by the Civil Procedure Rules Committee and will operate permanently within the Business and Property Courts across England and Wales.

For further information and to find out whether the Shorter or Flexible Trials schemes might be appropriate for the swift resolution of your dispute, please see our more detailed briefing and please do not hesitate to contact any member of the Walker Morris Commercial Dispute Resolution Team.

Who we are and what we do – Disputes Matter Autumn/Winter 2016

Zero tolerance approach and an “eminently reasonable” result Gwendoline Davies, Louise Norbury-Robinson and Claire Simmons […]

Zero tolerance approach and an “eminently reasonable” result

Gwendoline Davies, Louise Norbury-Robinson and Claire Simmons are proud to have worked with a well-known low cost airline recently in conjunction with its zero tolerance approach to passengers’ disruptive behaviour on flights. As well as successfully recovering damages and costs for the client following one passenger’s anti-social and potentially dangerous behaviour, Gwendoline, Louise and Claire were particularly pleased to obtain an endorsement from the court of the airline’s “eminently reasonable” terms and conditions relating to passenger conduct. The principles and comments behind the court’s award are key and the judgment is welcomed by the client and aviation industry alike.

International Bar Association (IBA) conference

Four representatives from Walker Morris attended the annual conference of the International Bar Association (IBA) which took place in Washington DC. This central event in the international legal community’s calendar was attended by over 6,000 delegates from around the world. The agenda included notable speakers such as: Rt Hon Jack Straw, Christine Lagarde – Managing Director IMF, Jeh Johnson – United States Secretary of Homeland Security and Rt Hon Arlene Foster – First Minister of Northern Ireland. The Walker Morris team had meetings with over 40 law firms based around the world, to reinforce our global network offering to our clients.

Client training

Members of the Commercial Dispute Resolution team have been busy providing training to various clients over the last few weeks on topics ranging from how to conduct successful commercial contract negotiations; contract duration, termination and limitation; changes to insurance law; and fraudulent claims. If you would be interested in receiving training from the team on anything commercial contract or dispute resolution related, please do not hesitate to get in touch!

Top rated!

Walker Morris’ Commercial Dispute Resolution team is delighted to have retained its tier 1 ranking in the latest Chambers & Partners and Legal 500 expert legal directories. The team is especially pleased that it has been noted for being “proactive, efficient, friendly, knowledgeable and a pleasure to work with” and “responsive, …commercial and … very reasonably priced.”

Contacts

Gwendoline Davies - Partner, Commercial Dispute Resolution at Walker Morris LLP

Gwendoline Davies
Partner
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Malcolm Simpson, Partner, Litigation & Dispute Resolution

Malcolm Simpson
Partner
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