1. The system of contract law in England and Wales
English Contract Law is derived overwhelmingly from decided cases (i.e. common law) and, to a very large extent commercial parties enjoy complete freedom of contract. The law applies uniformly throughout England & Wales. As a member of the European Community a significant proportion of new legislation is derived from EC Directives which are then implemented into English Law.
2. The impact of statute and applicable codes on the principle of “freedom of contract” in a business to business context
Statute law plays a limited but extremely important role in three principal areas:
• Implied terms
• Limitations of liability
• Competition law
Each of these is dealt with in detail in other sections.
3. Application of contractual formalities under English law
Contractual formalities are virtually non-existent. Contracts can in virtually all cases be formed perfectly well orally or via email. For almost all commercial contracts there are no requirements for contracts to be in writing or signed (unless it is a specific contract, for example, one relating to land). Contracts do not have to be in English nor are there any registration requirements. Naturally, contracts which are not set out in a single, formal signed agreement create some evidential problems.
4. Contracting with overseas companies and liability of parent companies
There are no requirements to contract through English subsidiaries – a contract with an overseas company is perfectly valid and may be welcomed if the overseas company is a parent of substance.
English law reflects the principle of privity of contract. Parent or other group companies will not be liable under a contract unless expressly made a party to the contract or a parent company guarantee has been executed (in the absence of some non-contractual basis of liability such as negligence or misrepresentation).
5. Implied terms in business to business contracts
In business to business contracts there is no implied duty of good faith or duty to act reasonably although it has long been established that there is a duty to co-operate (at least in the sense of co-operating to facilitate the performance by the other contracting party). “Where in a written contract it appears that both parties have agreed that something should be done which cannot effectively be done unless both parties concur to doing it, the construction of the contract is that each agrees to all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.”
By virtue of the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 (as amended), terms of satisfactory quality and fitness for purpose are implied into contracts for the sale and supply of goods and reasonable skill and care are implied into contracts for services. Such terms can, in a commercial as opposed to a consumer contract, only be excluded to the extent it is reasonable to do so. This might be the case where a detailed, comprehensive specification has been agreed and incorporated into the contract. However, the courts have in a number of high profile cases shown a general willingness to allow parties to rely upon the implied terms where this seems equitable.
Under the Sale of Goods Act 1979, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all other circumstances. The quality of the goods include their state and condition and in appropriate cases other factors such as appearance, finish, fitness for all the purposes for which goods of the kind in question are commonly supplied and freedom from minor defects.
6. Interpretation of terms under English law
Best endeavours
“Best endeavours” is a more onerous obligation than “reasonable endeavours”. The test for the obligation is, perhaps rather confusingly, one of reasonableness, and case law supports the contention that ‘the standard of reasonableness is that of a reasonable and prudent board of directors, acting properly in the interests of their company and in applying their minds to their contractual obligations’. A party is likely to be expected to exhaust all of a number of reasonable courses that could be taken in the circumstances, in order to achieve the desired outcome. Certain steps must be taken even if they involve sacrificing the party’s own commercial interests, although a “best endeavours” obligation will not require steps to be taken that will lead to the party’s bankruptcy.
All Reasonable endeavours
“All reasonable endeavours” is the least well developed “endeavours” clause but is traditionally considered to sit somewhere between best and reasonable endeavours. As with best endeavours, a party is expected to take all reasonable courses that could be taken in order to achieve a particular aim. However, the level of commercial sacrifice that a party is expected to bear will be less for an all reasonable endeavours obligation than for a best endeavours obligation.
Reasonable endeavours
A “reasonable endeavours“ obligation does not require actions to be taken that will disadvantage the party, although there is an exception to this where a contract specifies that certain steps must be taken. The standard expected is that of an ordinary competent person in similar circumstances, taking into account commercial considerations. In contrast to “best endeavours”, the party is probably only required to take one reasonable course to achieve the aim, rather than exhausting all of them.
Consent not to be unreasonably withheld
A 1997 case seemed to suggest that “consent” is regarded as a matter of permission which seems to imply that it is discretionary. The addition of “not to be unreasonably withheld” is an attempt to ensure that the company whose consent is required must only withhold consent where it is objectively justifiable, for example, because of certain “personal” characteristics of the original contracting party in the case of a consent to an assignment.
Material breach
One that goes to the root or essence of the contract. A breach as would deprive the other party of substantially the whole benefit of the contract.
Time of the essence
If time is of the essence of a contractual provision, that provision constitutes a condition of the contract breach of which entitles the party not in default to terminate.
Where time is expressly stated to be “of the essence” in a contract, there may also be the usual requirements for giving notice of breach and a time period for remedying the breach. In such a case the notice provisions are likely to take precedence, with the result that the party would still have an opportunity to “remedy” any delay.
Conversely, where a party insists on the inclusion of an express statement that “time is not of the essence” (in the context of a contract which has a clear and detailed timetable), this would be unlikely to absolve the party from any responsibility as to time. Where there was an unreasonable delay, the party not in default would still be able to serve notice of material breach requiring it to be remedied. “Remedying” in this context means remedying in respect of future performance rather than putting right what has gone before.
Force majeure
The concept of “force majeure” (acts or events beyond a party’s reasonable control excusing what would otherwise amount to a breach of contract) is not one which applies automatically under English law. A party affected by such a circumstance will only be excused if there is an appropriate provision in the contract to that effect.
Consequential loss
A relatively narrow category of losses – certainly the term does not have its ordinary English meaning. The case of British Sugar is authority for the proposition that “consequential loss” means those losses which arise out of special circumstances and which would only be recoverable because of the defendant’s knowledge of the special circumstances at the time the contract was concluded. “Consequential” and “indirect” have also been held to mean much the same thing.
Direct loss
“Consequential” loss is to be contrasted with direct, i.e., that loss which follows directly and naturally from a breach of contract in the ordinary course of things and which were or ought reasonably to have been, in the contemplation of the parties at the time the contract was concluded.
In the 2010 case of GB Gas Holdings v Accenture it was made clear that whether a loss is direct or consequential is context specific and a loss that may be considered direct in one scenario, may be considered consequential in another. For example, it was held in that case that ex gratia compensation can, in principle, constitute a direct loss.
7. Limitation of liability
In the context of English Law, The Unfair Contract Terms Act 1977 (UCTA) restricts the ability of parties to limit or exclude liability in certain circumstances. Any limitation in a supplier’s standard terms of business or any limitation which attempts to limit liability for negligence (under English law there is no concept of gross negligence, one is simply either negligent or not) or misrepresentation will be subject to a test of reasonableness.
The reasonableness test is whether the term is a fair and reasonable one to have included in the contract, having regard to the circumstances which were or ought to have been, known to or in the contemplation of the parties when the contract was made.
Matters taken into consideration include the strength of the parties’ bargaining positions relative to each other, whether the customer knew or ought to have known of the existence and extent of the term and whether the goods were adapted to the special order of the customer.
In determining whether a contract is on “standard” terms, the Courts will look to assess the extent to which the limitation clause itself has been amended. If it remains substantially the same the Courts will usually be prepared to apply the reasonableness test regardless of the extent to which the remainder of the contract has been negotiated.
Any limitation clause should expressly provide that it does not apply to death or personal injury caused by negligence, fraud or to any breach of the statutory implied terms as to title and quiet possession in the context of a sale of goods.
The reasonableness test and the limits to which a person may exclude or restrict liability in a contract under UCTA do not apply to terms of “International supply contracts”.
8. Limiting liability for damages to a specified financial sum
In most cases any limitation would have to be set at least equivalent to the value of the contract over a 12 month period. Departures from this sort of level would have to be justified very strongly.
Under UCTA, regard is had to the resources available to the person relying on the limitation to meet liability and how far it was open to that party to obtain insurance cover.
9. Enforceability of liquidated damages clauses
Liquidated damages clauses are enforceable provided they represent a genuine pre-estimate of the loss likely to be suffered by the party not in default, as opposed to a penalty. However, in the 2010 case of Benetti Division v Healey it was held that a party seeking to overturn a damages claim will need to do more than “merely” assert that such a clause is a penalty, i.e. evidence is needed. The resulting position is that a liquidated damages clause may not be a penalty (and is therefore enforceable), even where it is not based on a genuine pre-estimate of loss, provided there is a “genuine commercial justification” for the clause.
10. Privity of contract and third party rights
Under English law we have, until recently, rigorously observed the principle of ‘privity of contract’ under which only those entities who were a party to a contract could sue or be sued on that contract. That position has now changed with the introduction of the Contracts (Rights of Third Parties Act) 1999. The Act creates a two limb test and the satisfaction of either limb will permit a third party who is not a party to the contract to enforce it. The first limb will allow a third party to enforce a contract where a provision in the contract expressly provides that he may do so. The second limb will allow this where there is a provision which purports to confer a benefit on the third party.
11. Assignment, sub-contracting and sub-licensing
The benefit of a contract is generally freely assignable. The burden of a contract is regarded as being personal and therefore is not assignable without consent even if the contract is silent on the point. If a commercial contract is silent on the ability of a party to sub-contract or sub-licence then, except where the contract is more personal in nature (which would be fairly exception), sub-licensing/contracting would be permitted without consent. The original contracting party would remain primarily liable for any breaches by the sub-licensee/contract.
12. Assignment of Intellectual Property rights (“IPRs”)
Under English law there are no restrictions/limitations on a contracting party contractually insisting upon the assignment of intellectual property rights (IPR) created by the other party during the course of the performance of the contract. An agreement to assign IPR’s is perfectly enforceable and is commonly necessary since IPR’s ordinarily vest in the creator/inventor irrespective of the fact that they have been paid.
13. Remedies
Remedies available under English contract law include damages, injunctions and, in exceptional cases, orders for specific performance. Damages are usually awarded to reflect losses suffered, to put the party in the same position it would have been in had the breach not been committed.
Exceptionally, if a contract is declared void from the outset, the Courts may order all sums previously paid to be re-paid.
The successful party in Court proceedings will generally be awarded legal costs to be paid by the losing party but these will almost always amount to no more than 60-70% of the actual costs incurred by the winner. This entitlement is not dependent on any provision in the contract to this effect.
Injunctions may be available where it can be shown that damages alone are unlikely to be an adequate remedy. Crucially, in cases of extreme urgency, interim injunctions can be obtained at very short notice (and, exceptionally, even in the absence of the other party). To obtain an interim injunction, a party must satisfy a high burden of proof. This includes demonstrating that the “balance of convenience” favours the granting of an injunction. Further, a party that is granted such an injunction must usually give an undertaking in damages to the other party for losses suffered as a result of the granting of the injunction if that party ultimately loses the case.