Commercial Contracts Beware: Recent cases that may affect your contracts in 2023
In this briefing we will explore three commercial law cases highlighting issues in contracts. From clearly specifying the role of sub-contractors, force majeure and post-termination non-compete clauses. Paying closer attention to some of these small details could help significantly in the long run, giving companies greater control over outcomes and protection in their contracts.
Soteria Insurance Ltd (formerly CIS General Insurance Ltd) v IBM United Kingdom Ltd
The first case that we turn our attention to from 2022 is a case that was held in the Court of Appeal. There had been a contract for the supply of an IT system for a period of ten years. IBM was heavily reliant on sub-contractors for the performance of this contract. The supplier (IBM) was delayed in performance of a series of deliverables because of delays by the sub-contractors, meaning upon IBM serving an invoice for a milestone payment, the buyer (Soteria) refused to pay.
IBM then treated this as non-payment and opted to terminate the contract, resulting in non-deliverance of the IT system. Soteria, believed they had performed all their payment obligations and were not obliged to pay the milestone payment. They then initiated legal proceedings against IBM for IBM’s refusal to complete their obligation of delivering the IT system under the contract. Soteria sought £132 million in damages for wasted expenditure. Meanwhile, IBM put in a counter claim for the value of the invoice.
At first instance it was held that IBM had been wrong to terminate the contract, but that Soteria was not able to successfully claim for wasted expenditure because a clause in the contract excluded such loss.
The decision was appealed by Soteria with the Court of Appeal finding in Soteria’s favour. It was found that the definition of loss that was used in the contract was a rather broad one with non-specific language that encompassed many types of loss. When it then came to analysing the exclusion clause and which types of loss couldn’t be claimed, the contract made no reference to wasted expenditure as an excluded type of loss. Because of the broad wording that had been used and the failure to specifically exclude wasted expenditure, the Court took this as meaning that the Parties’ intention had been to cover such losses in the event of a breach. On a natural and ordinary reading of the words ‘loss of profit, revenue or savings’, wasted expenditure was not considered to be included under those definitions.
A further distinction which the Court of Appeal relied on when reaching its decision was the manner in which different types of losses could be quantified. Because of the difficult nature of quantifying loss of profits (in that they are merely forecasted), loss of profits could not be considered to have intended to include wasted expenditure which is relatively easy to quantify (in that it is merely an addition exercise of already spent money).
One of the key lessons from this case is that it is extremely important to ensure companies entering into contracts clearly define any losses which are to be excluded. This will help companies to ensure they won’t be responsible for a type of loss that they had intended to exclude. It would be good practice to think in a way which follows the method of reaching the judgement used by the Court of Appeal with regards to how certain types of loss may be calculated. This may require the use of more specific language to ensure companies have a very clear understanding of what losses are and aren’t excluded.
A side note is that this case also highlights the need to clearly set out the role of sub-contractors in the performance of a contract. Whilst the Judgement didn’t refer to sub-contracting because there was no legal issue surrounding the sub-contracting, its certainly something that should be carefully considered in drafting.
For contracts that are heavily reliant on sub-contractors the supplier may look to include provisions that can alleviate some of the effects of delayed performance of the contract. IBM’s heavy reliance on sub-contractors meant it had little it could do to counteract the delay. It would therefore be good for both parties to a contract to assess the role of any sub-contractors and what their performance is likely to do to the overall performance of the contract. The customer for example may want to push for a clause requiring equally as onerous obligations on sub-contractors, with greater freedom of choice of action for the customer in the event of delayed performance.
MUR Shipping BV v RTI Ltd
The next case is another Court of Appeal case and concerns force majeure clauses, something which since the war between Russia and Ukraine has become more widely considered when drafting a contract. Though this case incidentally involved Ukraine, it arose before the Russian invasion and does provide good lessons on force majeure clauses which are as relevant as ever. For contracts that had some involvement in Ukraine it was likely that performance of the contract became more difficult or in cases impossible.
The facts of the case were that there was a freight contract under which MUR Shipping would transfer goods to Ukraine, and RTI would pay for this service. The contract was to be paid for in US dollars, however, the parent company of RTI was subsequently placed on the US sanctions list. MUR Shipping argued that this was a force majeure event under a provision in the contract which defined force majeure as an ‘event or state of affairs which cannot be overcome by reasonable endeavours from the party affected’.
MUR Shipping argued that there would be an unacceptable delay to the receipt of payment and that it would be unable to discharge the goods. RTI argued that this did not constitute a force majeure event for two reasons. Firstly, that MUR shipping by definition were not a US person and therefore their ability to load and discharge the freight was not affected because such sanction rules did not apply to MUR. Secondly, that RTI had offered to pay for the contract in euros instead, with an inclusion of an indemnity against the cost of converting to US dollars. RTI therefore brought a claim for the costs of finding alternative shippers as a result of MUR Shipping refusing to load the freight.
After going through arbitration and the high court, the case was heard in the Court of Appeal and the decision focused on the specific wording in the contract itself. The Court questioned whether acceptance of payment in euros could overcome the force majeure event. When assessing this, the Court said that to overcome the force majeure event this did not necessarily mean that the contract’s exact terms had to be followed. It was also stated that the parties should apply common sense to the situation.
Resultingly, and because of the finding of fact at the tribunal that payment in euros would have achieved the parties’ original intentions and obligations, the Court of Appeal decided that it was possible for MUR Shipping to overcome the event using reasonable endeavours and so they could not invoke the force majeure clause. As MUR Shipping was the one seeking to rely on the force majeure clause, it was their reasonable endeavours that had to be considered. In considering the question the Court looked at what was required of MUR to satisfy ‘reasonable endeavours’. In the circumstances, there was to be no detriment to MUR because a quick conversion to US Dollars would be possible and the state of affairs would be ‘overcome’ if MUR simply accepted RTI’s offer to pay in Euros.
This case emphasises that it is very important for parties to carefully word their force majeure clauses especially in contracts such as supply of goods or services contracts which are more likely to require such a provision. This is a reminder that the Courts will usually take the specific wording of the contract in question above all else. When drafting, especially from a supplier’s point of view it should therefore be considered whether including ‘reasonable endeavours’ is going to be appropriate.
For contracts that are already in place and have the wording ‘reasonable endeavours’, the parties will have to be careful to not rely too readily on force majeure clauses and should think about what the other party may do which would reduce the level of commitment that would be required to meet ‘reasonable endeavours’.
Credico Marketing Ltd and Another v Lambert and Others
The third and final case we analyse during this briefing looks at the enforceability of non-compete clauses after termination of a contract.
Credico was organising marketing campaigns and entered into agency agreements with workers who would then provide the marketing services to clients. These agreements that Credico was entering into contained two non-compete clauses each as standard.
One of these was a relatively standard clause that the agency worker would not be able to work for anyone else during the course of the agreement. The second was a restriction on not working for anyone else for six months after termination of the agreement. In its argument Credico claimed that such clauses were justifiable due to their training of the workers and the effort put in by Credico to make the agreement profitable.
At first instance it had been held that both of these restrictions were enforceable, however, on appeal it was held by the Court of Appeal that only the restrictive covenant applying during the agreement could be enforceable, whereas the post-termination restriction could not. In coming to such a decision, each clause was taken individually and the Court considered whether the restriction was reasonable as per the restraint of trade doctrine in each situation, accounting for all the circumstances. When considering what is reasonable in the circumstances the Court noted a number of things that are worth consideration such as bargaining power, when the restraints operate, and the character of the business, among other things. Importantly, the Court noted that ‘for a restraint of trade to be reasonable between the parties it must be no more than what was reasonably required by the party in whose favour it was imposed to protect his legitimate interests.
There was held to be no legitimate interest for Credico to restrict trade in such a way following termination of an agreement, even for a period of six months. To not allow a worker or business to compete after the termination of a contract and use its knowledge it had gained in performance of the work after termination was found to be anti-competitive and unenforceable in these circumstances.
Non-compete clauses are quite often found in commercial contracts so this case will have an impact on the drafting and negotiation of such restrictions. Parties should be aware that they can’t always use the same clauses in their contracts with a blanket approach. Courts are not likely to enforce them in all situations for the simple fact that all situations are different. Instead, the specific facts of the case will be taken when looking at the enforceability and resultingly the drafting should give consideration to the specific nature of the contract if a non-compete clause is to be valid and enforceable.
Courts are likely to scrutinise non-compete clauses so companies should think about what may make their clause reasonable in the circumstances. An example would be seeking to protect a proprietary interest. It is also important to point out that the burden of making this judgement of reasonableness is likely to fall on the party to whom the benefit of the non-compete clause is conferred. Companies entering into contracts with post-termination restrictions will have to be careful when drafting because as in this case even a six-month period can be considered unreasonable. Having clear justifications for any such clauses will be key going forward.
It would seem parties with strong bargaining power will not be allowed to get away with quite as much in the future.
These cases help to highlight a few examples of areas that could require extra scrutiny in commercial contracts. That said, some of the lessons from these cases can apply across the entirety of the contracts that companies may be entering into rather than the specific clauses mentioned in this briefing. The key lesson that has cropped up throughout these cases is that drafting should be done with the utmost precision. Parties should ensure as little as possible is left open to interpretation so that both sides have full understanding of their obligations. This may also help speed up any dispute resolution.