Using US contract templates outside the US: it can be a bad mistake

US business practices dominate international contract negotiations.  This sometimes results in US contract templates being used for contracts that are not made under US laws.  While this may be okay for some of the more ‘commercial’ clauses in a contract, it can be a bad mistake to use US wording in liability clauses, when the contract is made under another country’s laws.

A case decided last week in the English Commercial Court illustrates the problems that can arise.

In Air Transworld Limited v Bombardier Inc [2012] EWHC 243 (Comm), an Angolan resident, Mr Antonio Mosquito, purchased a Challenger 605 private jet aircraft from a well-known Canadian manufacturer, Bombardier.  In his claim, he stated that the jet was for his personal use.  The contract was initially in the name of an Angolan company controlled by him, but was later assigned to a Gilbraltar company.  The contract was made under English law.

Plenty of room for Mosquitos

The detailed facts need not concern us, but there was a problem with the aircraft’s hydraulics which resulted in an emergency landing in Algeria.  The claimant purported to reject the aircraft on the grounds that it did not meet its description, was not of satisfactory quality and was unfit for purpose, in breach of implied terms under sections 13 and 14 of the English Sale of Goods Act 1979.  For the benefit of US readers who have similar implied terms in their legislation, the phrase “satisfactory quality” was substituted for “merchantable quality” by an amendment to the English legislation in the 1990s, but it is not thought that any substantive change was made by this modernisation of the wording.  The phrase “merchantable quality” was used in earlier versions of the same legislation, dating back to at least the nineteenth century.

Bombardier sought to rely on the following clause in the contract:

4.1 THE WARRANTY, OBLIGATIONS AND LIABILITIES OF SELLER AND THE RIGHTS AND REMEDIES OF BUYER SET FORTH IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF AND BUYER HEREBY WAIVES AND RELEASES ALL OTHER WARRANTIES, OBLIGATIONS, REPRESENTATIONS OR LIABILITIES, EXPRESS OR IMPLIED, ARISING BY LAW, IN CONTRACT, CIVIL LIABILITY OR IN TORT, OTHER OTHERWISE, INCLUDING BUT NOT LIMITED TO A) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE, AND B) ANY OTHER OBLIGATION OR LIABILITY ON THE PART OF SELLER TO ANYONE OF ANY NATURE WHATSOEVER BY REASON OF THE DESIGN, MANUFACTURE, SALE, REPAIR, LEASE OR USE OF THE AIRCRAFT OR RELATED PRODUCTS AND SERVICES DELIVERED OR RENDERED HEREUNDER OR OTHERWISE.

If effective, this wording would have excluded the implied terms under section 14 of the Sale of Goods Act.

Unfortunately for Bombardier, there is a long line of English case authority, discussed at length in Cooke J’s judgment, stating that in order to exclude section 14, it is necessary to state explicitly that one is excluding the “conditions” of merchantability (now satisfactory quality) and fitness for purpose.  It is not enough to state that one is excluding “warranties”.  This is because the Sale of Goods Act makes a clear distinction between promissory conditions (breach of which entitle the party suffering from a breach to terminate the contract) and warranties (breach of which only entitle that party to claim damages).

There is a strong commercial argument that this technical distinction between conditions and warranties has outlived its usefulness, does not reflect modern commercial practice, and should no longer form part of English law.  In one of the cited cases, Rix LJ (a very senior, current English judge specialising in commercial law) made comments to this effect, but felt bound by House of Lords (now Supreme Court) authority.

Be that as it may, a well-drafted English law disclaimer would include the word “conditions” in the long list of words that appears in lines 4-5.

Reading Cooke J’s judgment, one senses that he was trying to find a way of ensuring that Bombardier did not lose on this point as a result of a legal technicality.  In the event, he decided that some of the other wording of the clause, including the reference to other obligations and liabilities “of any nature whatsoever” meant that he could construe the disclaimer as applying to implied conditions, even though the word “condition” was not used.

IP Draughts has several thoughts about this case:

1. The judge was stretching a point in order to do justice in the case. It will be interesting to see if the decision is appealed and, if so, whether the Court of Appeal agrees that this wording is sufficiently different to that in the earlier cases cited in his judgment, that it can be given a different meaning.
2. The wording of clause 4.1 is quite clearly from a US, or North American, template.  There are plenty of clues that this is the case, including the fact that the above-quoted clause is in block capital letters – see our earlier blog posting which discusses this point.  It refers to merchantability when an English clause would refer to satisfactory quality.  Another clue is in the choice of law clause which stated “This Agreement shall be governed by and interpreted in accordance with the internal laws of England and Wales, excluding any conflicts of law provisions thereof.”  The reference to conflict of laws is a distinctly US feature of choice of law clauses, and is not really relevant under English law.  Wherever possible, parties should ensure that the warranty, liability and indemnity clauses (but not only these clauses) have been drafted by a lawyer who is qualified in the country or state whose law is to apply to the contract.
3. Sometimes, commercial parties treat the choice of law as a minor negotiating point, perhaps at a similar level to whether payment is to be made within 30 or 45 days of the date of the invoice.  In IP Draughts’ view, it is one of the more important terms of the contract, and should not be traded lightly.