Category Archives: Contract drafting

What are “standard terms of business”?

Readers who are English commercial lawyers, and perhaps some others, will be familiar with the provisions of the Unfair Contract Terms Act 1977 (UCTA). Specifically, they will be aware of section 3(1) which, in business-to-business contracts, requires exclusion clauses that form part of “written standard terms of business” to be “reasonable”. Separate requirements apply to consumer contracts, both under UCTA and under consumer legislation more generally. Section 3 of UCTA provides:

3(1) This section applies as between contracting parties where one of them deals on the other’s written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term—

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled—

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.

[emphasis added]

These provisions raise a number of questions, including when is a term reasonable. But today’s blog article is on the question of when a party contracts on its written standard terms of business.

For example, consider the following scenarios. In which of these am I required to justify my exclusion clause as reasonable, and in which am I free to impose unreasonable terms?

  1. I send you my standard contract and tell you it is not negotiable.
  2. I send you my standard contract and tell you that it is negotiable, but no change is made to the clauses dealing with liability.
  3. I send you my standard contract and tell you that it is negotiable, and offer to change the limit of liability from the price paid (in the standard contract) to twice the price paid.
  4. I send you my standard contract and tell you that it is negotiable, and agree to something close to your request for liability to be limited to the level of my insurance cover.
  5. I send you a draft contract and make no comment on whether it is a standard contract (but it does bear my company’s logo), and you think it might be based on a template from the PLC database. When negotiating liability issues in this draft contract, I take one of the positions outlined in 1-4 above.

This type of thought process may be relevant to a company that is seeking to limit its liability, eg through standard terms of sale and through standard contracting processes that seek to win the “battle of the forms”.

It may be unrealistic to reach definite conclusions on these points. To date, there has been little judicial guidance. But even if there were a body of case law, the court’s interest in doing “justice” in the individual case may be of more practical importance than general categorisation of this kind.

The recent case of African Export-Import Bank & Ors v Shebah Exploration & Production Company Ltd & Ors [2017] EWCA Civ 845 (28 June 2017) was one of the first times that the Court of Appeal had been asked to consider what are written, standard terms of business. Longmore LJ, giving the unanimous judgment of the court, went through the limited case law that touched on this subject. He approved a judgment in an earlier case which decided that a party relying on UCTA must establish:

  1. the term is written,
  2. it is a term of business,
  3. it is part of the other party’s standard terms of business, and
  4. the other party is dealing on those written standard terms of business.

Usually, he thought, there would be little controversy about points 1 and 2. On point 3, and where the contract was based on an industry-standard contract, he approved an earlier decision in which it had been said:

I shall not attempt to lay down any general principle as to when or whether the Unfair Contract Terms Act applies in the generality of cases where use is made of model forms drafted by an outside body. However, if the Act ever does apply to such model forms, it does seem to me that one essential for the application of the Act to such forms would be proof that the model form is invariably or at least usually used by the party in question. It must be shown that either by practice or by express statement a contracting party has adopted a model form as his standard terms of business. For example, an architect might say, “My standard terms of business are on the terms of the RIBA Form of Engagement”. Without such proof, it could not be said that the form is, in the words of the Act, “the other’s” standard terms of business.

On point 4, he quoted various earlier decisions, including the following quote from a judgment of HHJ Seymour:

…it is not enough to bring a case within Unfair Contract Terms Act 1977 s.3 that a party has established terms of business which it prefers to adopt, as, for example, a form of draft contract maintained on a computer, or established requirements as to what contracts into which it entered should contain, as, for example, provision for arbitration in the event of disputes. Something more is needed, and on principle that something more, in my judgment, is that the relevant terms should exist in written form prior to the possibility of the making of the relevant agreement arising, thus being “written”, and they should be intended to be adopted more or less automatically in all transactions of a particular type without any significant opportunity for negotiation, thus being “standard”.

He also quoted some comments from Nourse LJ in St Albans District Council v ICL, a leading case from 1996 in which the terms were held not to be reasonable:

The fourth requirement is that the deal must be done on the written standard terms of business. That raises the question whether the Act applies in cases where there has been negotiation between the parties the result of which is that some but not all the standard terms are applicable to the deal. In St Albans City and District Council v International Computers Ltd [1996] 4 All E R 481 (the only other case, so far as counsel were aware, which has come before this court on this issue since the Act was passed), the party relying on the Act submitted that, if there were any negotiation of any kind, the Act could not apply. That broad submission was rejected by this court in an obiter passage of the judgment of Nourse LJ with whom Hirst LJ and Sir Iain Glidewell agreed, but Nourse LJ went on to approve (at page 491g) the statement of Scott Baker J at first instance that the deal in that case had been done on the defendant’s standard terms of business because those terms remained “effectively untouched” by the negotiations that had taken place. That leaves open the question of the correct approach when some of the standard terms are not part of the deal.

Longmore LJ concluded:

I would also approve these first instance decisions and hold that it is relevant to inquire whether there have been more than insubstantial variations to the terms which may otherwise have been habitually used by the other party to the transaction. If there have been substantial variations, it is unlikely to be the case that the party relying on the Act will have discharged the burden on him to show that the contract has been made “on the other’s written standard terms of business”.

On the facts, he concluded that the parties did not contract on standard terms of business, and therefore UCTA didn’t apply. He commented:

A party who wishes to contend that it is arguable that a deal is on standard business terms must, in my view, produce some evidence that it is likely to have been so done. …It cannot be right that any defaulting borrower can just assert that business is being done on standard terms and that the lender then has to disclose the terms of other (how many other?) transactions he has entered into before he is entitled to summary judgment.

At one level, this case is very specific to its facts. But it does indicate that:

  1. It is for a party that seeks to rely on UCTA to show that the other party was contracting on its standard terms of business. This may seem harsh, but presumably on different facts, where a party puts forward its own template agreement, this may be slightly easier to establish than when a party drafts an agreement based on a third-party template.
  2. If standard terms of business are used, but are substantially changed in negotiations, UCTA doesn’t apply.

There is nothing very earth-shattering about these conclusions, but it is useful to get some guidance from the Court of Appeal on this subject.

 

 

 

Leave a comment

Filed under Contract drafting, General Commercial, Legal Updates

Why is M&A contract drafting so bad?

Before we get to that question, here are some others: why do people called Wood start insurance businesses, and what makes them so good at it that they become millionaires?

Back in the 1980s, Peter Wood set up Direct Line, an insurance company whose advertising was famous for featuring a red telephone handset on wheels. He later started another successful insurance business, eSure. Sir Peter Wood, as he is now called, is said to be worth about half a billion pounds.

When IP Draughts first read the Supreme Court’s judgment in the case of Wood v Capita Insurance Services Ltd [2017] UKSC 24 (29 March 2017), he assumed this was another Peter Wood venture. But in fact, the person selling an insurance business in this case was a Mr Andrew Wood. According to the case report, he received 94% of £7,681,661, or about £7.2M, from the sale of Sureterm Direct Limited to Capita Insurance Services Limited. Plus possibly some deferred consideration, the amount of which is not stated in the judgment. Impressive, but not on the same scale as his namesake.

General approach of the English courts to conctract interpretation

The Wood v Capita judgment is interesting mainly because the court was required to interpret a badly-constructed indemnity clause. It also includes some comments on contract interpretation generally, but as Lord Hodge, who gave the sole judgment (with which all the other justices – including Lords Neuberger and Sumption – agreed), stated:

It is not appropriate in this case to reformulate the guidance given in Rainy Sky and Arnold; the legal profession has sufficient judicial statements of this nature. But it may assist if I explain briefly why I do not accept the proposition that Arnold involved a recalibration of the approach summarised in Rainy Sky.

Regular readers of this blog will be aware that we have briefly commented on the Rainy Sky and Arnold cases in the past. For a more detailed and considered view of these and other recent cases on contractual interpretation, and how they should be applied to the facts of IP transactions, readers are directed here. This link is to the abstract of an article Contract Law for Intellectual Property Lawyers, which IP Draughts and his colleagues Lisa Allebone and Mario Subramaniam have recently written for the Journal of Intellectual Property Law and Practice, and which should appear in the print version of the Journal in the next few months. For what it is worth, the article agrees with Lord Hodge’s assessment of the impact of Arnold on Rainy Sky.

Analysis of the indemnity clause

Thus, the main interest of Wood v Capita is in how the court applied the existing law on contractual interpretation to the facts of a specific indemnity clause. In the 3 months or so since the judgment was published, many law firms have written articles summarising the case. IP Draughts will take a slightly different approach, by focussing more on the wording and what it says about the state of M&A drafting.

Here is the clause that was in dispute:

The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service. [emphasis added by IP Draughts]

The facts, very briefly stated, were:

  1. Allegations were raised about the conduct of the business prior to its sale to Capita. In essence the allegation was that, after a customer had obtained an online quote, and had been put in touch with a member of the Sureterm sales team, they were quoted a higher premium, which had in effect been made up by the sales person without reference to the underwriter, simply to increase the sales commission.
  2. Capita notifed the Financial Services Authority (FSA), who required Capita to implement a compensation scheme to customers.
  3. Capita claimed under the indemnity for the costs of the scheme and various other costs, totalling about £2.4M.
  4. Wood argued that he wasn’t liable under the indemnity, as there had been no “claims or complaints registered with the FSA” (see wording of indemnity above).

Readers will see that the above-quoted clause has numerous components, whose relationship to one another is unclear. The court broke these components down, and added numbering to aid discussion, as follows:

The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against

(1)       all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and

(2)       all fines, compensation or remedial action or payments imposed on or required to be made by the Company

(A)      following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other authority against the Company, the Sellers or any Relevant Person

(B)      (i) and which relate to the period prior to the Completion Date (ii) pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service.

In IP Draughts’ view, this breakdown is not entirely helpful, as it makes some assumptions about the relationship of each component with each other. He prefers to do so as follows:

  1. The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against
  2. all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and
  3. all fines, compensation or remedial action or payments imposed on or required to be made by the Company
  4. following and arising out of claims
  5. or complaints
  6. registered with the FSA, the Financial Services Ombudsman or any other Authority
  7. against the Company, the Sellers or any Relevant Person and
  8. which relate to the period prior to the Completion Date
  9. pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service.

Some remarkable arguments and comments were made about the relationship of these items to one another. Using IP Draughts’ numbering system, Lord Hodge notes that:

  • the parties agreed that item 3 is already covered by the wording of item 2, and so is “otiose” (or redundant to you and me), and was included “for the avoidance of doubt”.
  • Capita argued that items 4 to 7 qualified item 3 but not item 2 (which is difficult to reconcile, as the judge noted, with the previous bullet point), but that items 8 and 9 qualified both 2 and 3.
  • Wood argued that items 4 to 9 qualified both 2 and 3 (but see below).
  • Wood argued that a comma should be inserted after item 4, so that it was not qualified by item 6, but was qualified by item 7. In other words items 5 and 6 should be rolled into one.

Various other technical arguments were made on the drafting, including the potential tautology of using the word “claims” in both item 2 and item 4. Ultimately, the court had to decide whether a customer had to make a claim or complaint in order for the indemnity to be triggered. The 5 justices in the Supreme Court said yes, as did the 3 judges in the Court of Appeal, but the respected judge in the High Court said no.

IP Draughts’ first reaction to this case is to wonder what the drafter was thinking, when allowing such a poorly structured clause to be included in the agreement for which he or she was responsible. Then he has second thoughts, and wonders what pressures the drafter was under to produce wording of such low quality, and what training he or she had in contract drafting.

Clearly, a major issue in this case is that there were at least 9 separate components in the clause (IP Draughts has now spotted some more), and the drafter had not clearly established the relationship between them. This allows numerous interpretations, only some of which were explored in the present case. To some extent this can be fixed by including numbering, as the judge in this case did.

But the clause breaks so many other basic rules of contract drafting that it is difficult to know where to start. In no particular order, some significant issues are:

  • No contract needs a sentence of 119 words.
  • Rather than simply indemnify the buyer, the seller is required to “undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer”. This drafting approach appears to IP Draughts to be M&A industry practice, perhaps just UK M&A practice. He sees obligations to pay rather than indemnities (though here the two concepts seem to have been combined). IP Draughts understands that “covenants to pay” were originally used instead of tax indemnities in M&A transactions because tax indemnities had certain undesirable tax consequences under applicable legislation. They are, he understands, thought to be stronger than warranties in that they are a simple debt and not subject to the rules on causation, remoteness and mitigation. Thus, a practice has developed in M&A contracts of stating obligations to pay as a substitute for indemnities. He is not aware of any case law that supports this approach, and he has always put the practice down to the inward-looking “group think” of the M&A legal community. But he is happy to be corrected.
  • On pure drafting grounds “undertake to pay” is bad drafting. Why not just “shall pay”?
  • Item 2 in IP Draughts’ list mixes up various types of claim with various types of financial category (damages, costs, etc). He finds this confusing and his indemnities tend to separate out these two categories.
  • In what sense is a claim “suffered”? This is such an old-fashioned word, and is used in different ways – sometimes it means “allow” as in “suffer little children to come unto me” (Luke 18).

On the positive side, at least we have avoided “hold harmless and defend” in the above wording. IP Draughts hopes that somewhere in the agreement the seller is given conduct of any claims in respect of which the indemnity applies.

Seeing this clause feeds IP Draughts’ prejudices about the lack of interest in contract drafting among M&A practitioners. But he isn’t smug about the IP community either, as his recent article about the wording of a FRAND licence agreement demonstrates.

There’s a lot of it about…

 

Leave a comment

Filed under Contract drafting, Legal Updates

Where do you find good drafters?

IP Draughts wishes to offer thoughtful commentary but not to offend. Postings are works in progress, drafted in a few hours, rather than polished publications. On this occasion, the post prompted some discussion and reflection, as a result of which he has decided it would be best to delete it. He may return to the subject at a later date.

1 Comment

Filed under Contract drafting

Choice of contract law in light of Brexit

IP Draughts has just returned from a pleasant few days spent in Paris, where he chaired the third annual meeting of BioLawEurope FmbA, a not-for-profit association of specialist life science lawyers across Europe, who mostly work in small firms. In the last 3 years, we have referred dozens of projects between members of the association. IP Draughts’ firm is currently working on a regulatory matter that was referred to us by the German member of the network, and a commercial matter referred by the Danish member.

During our annual conference we have presentations on various topics. One that has stuck in IP Draughts’ mind this year was on choice of law and jurisdiction. When negotiating parties are based in different jurisdictions, they often need to find a compromise jurisdiction on which both of them can agree. Apparently, English law and jurisdiction has been a popular compromise choice, but is currently less popular for some of the BLE members, due to uncertainty over Brexit. Specifically, will there be mutual recognition of judgments between the UK and EU countries after Brexit?

IP Draughts thinks it is likely that the UK and EU will negotiate mutual recognition as part of the Brexit negotiations. Although the UK government is playing its cards very close to its chest, there is some ‘mood music’ to suggest that it recognises the importance of maintaining the reputation of England and Wales as a jurisdiction of choice. This seems to be a relatively uncontroversial topic where common sense would suggest that arrangements similar to those currently applicable (under Rome and Brussels regulations) will be agreed.

However, just because something makes sense and is uncontroversial is no guarantee that it will be negotiated, given the extraordinary times in which we live, so IP Draughts understands the short-term concerns that were expressed at our Paris meeting.

Part of our discussion was about the features of litigation in different jurisdictions. This discussion left IP Draughts feeling that, recognition issues apart, England and Wales had much to recommend it, including:

  1. A summary judgment procedure to get rid of spurious cases (unlike, it seems, France).
  2. Disclosure (also know as discovery) procedures to obtain access to the internal documents of the other party (unlike most civil law jurisdictions).
  3. Oral advocacy and cross-examination of witnesses, which tests the strength of the case in court, rather than relying mostly on written submissions (unlike in most civil law jurisdictions).
  4. A judiciary made up of experienced advocates, rather than career judges.
  5. A system of ‘without prejudice’ communications that are not disclosed to the court, and which facilitate freer communications in negotiations (unlike, it seems, Austria).
  6. The winning party usually gets a court order that most of its legal costs must be paid by the losing party. Apparently, in Austria, Germany and some other countries there is a tariff system which pays only a small proportion of the costs actually incurred. At the same time, for smaller cases in the Intellectual Property Enterprise Court, in London, there is a cap on legal costs of £50,000.

Other issues that we discussed included whether a non-English court would be willing to conduct the case in the English language, if the parties agree to do so. Apparently this is possible in Denmark but not in many civil law jurisdictions, where every document relied on must be  translated into the local language and certified to be an accurate translation, which can add considerably to a party’s costs.

Increasingly, IP Draughts is wondering whether Ireland might be an answer to some of these issues, bearing in mind that its legal system shares many features with that of England and Wales, particularly if the mutual recognition point is not dealt with in a timely manner.

But IP Draughts is crossing his fingers in the hope and expectation that all will turn out well in the next couple of years.

 

Leave a comment

Filed under Commercial negotiation, Contract drafting