SCL Event Report: Annual IT Contracts Update 2014

February 26, 2014

On Tuesday 11 February 2014, Hogan Lovells hosted the annual SCL IT Contracts Update, presented by Richard Stephens, FBCS, FCIArb, the Principal of LORS. The event has now been running for a number of years and has become a popular annual digest for IT lawyers wishing to find out how the year’s decisions on contract law will affect their drafting for the year to come. This year’s event was very well attended, with Richard covering a number of important decisions from 2013.

Richard began, appropriately, with the subject of contract formation. He explained that the recent cases in this area highlight that contracts may be formed by a simple exchange of correspondence, especially in relation to shorter and ‘snappier’ deals, and emphasised the importance of making your client’s intentions very clear throughout the negotiation process. Richard explained that, while it might be difficult to find a complex, long-term relationship in a few e-mails, the longer correspondence is allowed to continue, the more the courts will be willing to read into the relationship. He reiterated the importance of using the term ‘subject to contract’ in contract negotiations, as well as ensuring that the language used is plain and clear English – if your client does not intend to enter into a binding arrangement until all the terms are agreed, this should be clearly expressed.

Richard moved on to discuss the subject of avoiding a contract by misnomer or mistake, and used two recent cases to illustrate the approach the courts will take to differentiate between a simple misnomer, capable of correction, and a mistake requiring rectification. Richard also summarised Hamid v Francis Bradshaw Partnership to highlight the importance of using company names over trading names in contractual documentation, and clarifying the capacity in which an individual executes such agreements.

Richard then tackled the matter of contractual interpretation more broadly, in relation to three cases in which the courts displayed a willingness to interpret unclear provisions within their commercial/industrial context. These cases emphasised the importance of using clear language in agreements. Richard also suggested using more ‘narrative’ recitals to provide background on the parties’ intentions at the time of the agreement, such that the court might use these to interpret meaning should any issues arise.

RWE nPower Renewables v Bentley underlined the need for consistency and clarity throughout long commercial agreements, especially where a number of technical documents are included by annex. Richard’s take-away from this decision was that, if possible, the number of commercial annexures to an agreement should be kept to a minimum. The more documents one includes with an agreement that are created at different times in the negotiation and for different purposes, the greater the chance of an inconsistency.

In keeping with previous years, Richard introduced a number of cases which looked at the question of whether or not the concept of ‘good faith’ exists in English law. He summarised the learning points from these ‘good faith’ cases, and came back to the conclusion that the use of ‘good faith’ is simply not good drafting. However, he accepted that judges – at least at first instance – are starting to latch onto the concept, and that counsel are keen on it too, so it might well be given more meaning in the future. Further, if you do choose to use ‘good faith’ in your agreements, it should be made clear as to which obligations the concept applies. Richard lamented the trend in the industry to reduce the obligations contained in long-term contracts to something vague and imprecise with the liberal use of phrases such as ‘good faith’ and ‘reasonable endeavours’, and encouraged the attendees to be increasingly careful with their use.

Richard subsequently moved the discussion on to the subject of dispute resolution and jurisdiction clauses. The most recent case law in this area highlights that the inclusion of arbitration provisions in commercial agreements is a good option if parties cannot agree on an appropriate jurisdiction. It also emphasised the importance of considering third-party rights in relation to dispute resolution clauses, and encourages draftsmen to subject all parties (including third-parties that might have rights under the agreement) to the same court regime or arbitration process.

A number of cases on liability were discussed this year. The decision in Aioi Nissay Dowa Insurance v Heraldglen should encourage draftsmen to be more cautious when considering words in liability clauses such as ‘event or series of connected events’.  Kudos Catering v Manchester Central Convention Complex (which Richard dubbed the ‘white rabbit from the hat case’) emphasised, yet again, that the desire to exclude some form of liability from an agreement must be made very clear. It also raised the issue concerning deliberate or wilful breaches, and how specific one should be to ensure they are included in any exclusion or limitation of liability.

Richard briefly touched upon the topic of the inclusion of time-limits within contracts as a way of bringing certainty to liability exclusion.  The case law in this area serves to remind us that, however painful it might seem, notice provisions should be reviewed and their exact meaning determined. One should not fall into the temptation of blindly reusing old precedents!

There were some significant decisions discussed this year in the area of penalty clauses and deposits. Griffon Shipping v Firodi Shipping reaffirmed that contracts should be clear on whether an advance payment is a part payment or a deposit, and it should be made clear if the parties intend that the deposit should not be forfeited on the buyer’s default. Richard then covered the complex case of Talal El Makdessi v Team Y&R Holdings, in which the Court of Appeal struck out two clauses as penalty provisions because they were extravagant and unreasonable, and did not have sufficient commercial justification.

Richard expressed some disappointment that an opportunity was missed to tidy up the intrusion of the law of penalties into the general concept of freedom of contract, which the judge at first instance in Makdessi had tried to achieve. Indeed, in Richard’s view, the cases in this area have served only to confuse the matter further. As a result, it is still just as important to be careful of any payment or disposition of property that happens on a breach of contract, although draftsmen should take some comfort from the fact that the Court of Appeal raised the need to balance ‘extravagant and unreasonable’ charges with ‘commercial justification’. Importantly, Richard explained, these cases should encourage lawyers to consider how obligations can be worded so that any resultant charges from a failure to comply will not be considered to be penalties at all.

Richard’s final topic for discussion was termination, and he focussed on a case which addressed the question of a when a breach of contract should be considered repudiatory. Rather than rely on the traditional formulations, such as whether a breach went to the root of the contract or denied a party a ‘substantial’ part of the contract, it was held that the courts should compare the benefit due to the innocent party under normal performance of the contract with the consequences of the breach. As Richard remarked, if this approach is adopted more widely, it could be helpful for suppliers in the context of IT projects because, in most cases, an IT project will be delivering (some) benefit at termination, even if this falls short of the expected benefit. However, the factual enquiry required to compare the benefit due with the consequences of the breach will take time, which could lead to affirmation through continued performance under the contract. Once again, the takeaway point from this case is that draftsmen should attempt to provide more clarity, not less, in the drafting of termination provisions.

Matt Sharkey is an Associate at Hogan Lovells International LLP.

The podcast of the update from Richard Stephens is available to SCL members here.