Category Archives: Contract drafting

Zero quantity contracts

You may have heard of zero-hours contracts, where an employer is not required to provide any fixed hours of work to an employee. It seems that about 1.8 million employees had the fortune or misfortune, depending on how you look at it, to be employed on this basis in the UK in 2017.

Now we have confirmation from the Court of Appeal of its commercial cousin, the zero-quantity contract. In the recently-reported case of PM Law Ltd v Motorplus Ltd [2018] EWCA Civ 1730, the Court of Appeal was asked to interpret a contract between a claims company and a firm of personal-injury solicitors. The contract provided that the claims company would refer to the solicitors “a quantity” of  accident claims. In context, the Court of Appeal agreed with the judge at first instance that this was merely an expression of intention and did not impose an enforceable obligation to refer any claims. Or, put another way, zero is a quantity.

The clause in question included the following provisions (emphasis added):

1. In consideration of the payment of referral fees by PM Law Ltd Solicitors as set out in clause 4 of this Agreement Motorplus Ltd shall refer a quantity of road traffic accident, accident at work, public or private liability and product liability PI & Non PI claims (the “Referred Claims”) to PM Law Ltd Solicitors which PM Law Ltd Solicitors will handle on behalf of Motorplus injured customers (“the Referred Customers”)…

Counsel for PM Law argued that this wording imposed an obligation on Motorplus to refer at least a reasonable number of claims. The Court of Appeal disagreed. In context, there was no obligation to refer, only a mechanism for what would happen if claims were referred.

Or, as the judge at first instance put it more technically (some would say, pompously), and Asplin LJ in the Court of Appeal repeated, it was not a “synallagmatic contract” that imposed mutual obligations.

Ah, our old friend the synallagmatic contract! It seems that this is primarily a civil-law concept. Lord Diplock may be guilty of introducing the term into English law. As a Court of Appeal judge in United Dominions Trust (Commercial) Limited v Eagle Aircraft Services Limited [1968] 1 WLR 74, he defined a contract as a bi-synallagmatic agreement. IP Draughts agrees with the criticism that this was “gratuitous philological exhibitionism”, though he would never have dared say so publicly, while Lord Diplock was alive.

Lord Denning’s reaction to his great rival’s use of the term, in the final volume of his autobiography, The Closing Chapter, was expressed in more polite language, but was equally damning in its effect:

A little while ago, I heard of a contract being a synallagmatic contract. I had never heard of such a contract before. Nor had any other lawyer of my acquaintance. Nor had any textbook writers. At any rate, their textbooks did not contain the word.

It seems from the present case that the term is alive and kicking, 50 years after Lord Diplock used it in an English judgment. Shame.

It also seems, from the case report in the PM Law case, that the senior partner of PM Law, who drafted the contract, used a precedent that was “circulating in the solicitors’ personal injury market”. Readers of this blog know better than to slavishly copy wording from published precedents.

 

 

 

 

2 Comments

Filed under Contract drafting

Why do people have a problem with deeds?

Two incidents this week prompt IP Draughts to reflect on why deeds are sometimes not correctly executed – a niche subject, perhaps, but one that affects the validity of contracts that parties may wish to enforce.

First, a quick reminder: what is a deed? Under English law it is a more formal way of executing a contract than simply signing it. An older name for this is “contracts under seal”, as until 1989 it was necessary to apply a seal to a contract made as a deed. English legislation in 1989 abolished the requirement for most corporations (those incorporated under the Companies Acts) and individuals to apply their seal to a deed. There is still a degree of formality about who must sign and witness deeds, even though the requirement for applying a seal has been abolished. If you need to know more about this subject, read our book, Execution of Documents.

Peculiar types of corporation such as bodies incorporated by Royal Charter (most UK universities) or by special statute (eg NHS Trusts, ie most UK hospitals) or government bodies, still have to apply their seal. Typically the constitution of the corporation will specify what authority is required for the use of the seal, eg it must be done in the presence of two board members who must sign the document next to the applied seal.

Why would one execute a contract as a deed? Two possibilities:

  1. No alternative. Because that is the only way to make the contract (or other instrument) legally effective. This only applies to a few types of contract, including conveyances of land, powers of attorney and financial guarantees.
  2. Nice to have. Because, though executing the contract as a deed is not compulsory (which is true of most contracts), there may be legal advantages of doing so. The two main, potential advantages are (a) there is no need for “consideration” in a contract made as a deed, and (b) the limitation period – the time limit for bringing an action for breach of contract – is 12 years for deeds and only 6 years for ordinary contracts.

So, why do these rules cause people problems in practice?

Two examples that IP Draughts encountered this week illustrate the point.

In the first, a client was seeking to enter into a contract executed as a deed, where one of the other parties was an NHS Trust. The signature blocks showed clearly that the Trust’s seal should be applied. The document comes back, apparently signed as a deed by all parties. But there is no impression of a seal on the document. (Corporate seals are typically small steel devices which clamp together to squash the paper and impress it with an image of the corporate seal.)

The client reports that he has spoken to the Trust’s representative who assures him that they don’t have a seal. IP Draughts is puzzled. He searches for and finds on the internet:

  1. Model constitutions for this type of Trust, which include reference to them having a seal.
  2. A copy of what appears to be the actual constitution of this particular Trust, which also refers to it having a seal.

He suggests to his client that he go back to his counterparty and get them to check the point, preferably involving their legal department. Some time later, the document comes back, now bearing a seal.

The second example that IP Draughts encountered this week was on Twitter. He saw this report, by a US law firm, of a recent case in the Virginia Supreme Court, where the court invalidated a lease that wasn’t executed as a deed (with the application of a seal), as state law required. Thanks to @profrobanderson (no relation) for drawing this to IP Draughts’ attention.

IP Draughts is not an expert in US state laws, but his impression/guess has been:

  1. Centuries ago, US laws had rules on deeds (contracts under seal) that were similar to English law.
  2. But perhaps the rules were originally or later limited to conveyances and long leases of land.
  3. And perhaps in the 21st century the practice of using seals has largely been abandoned, but without legislation directly equivalent to the English laws that were passed in 1989.
  4. So that the subject is seen as something of a formality whose importance has gradually been eroded, and it takes people by surprise when, as in the Virginia Supreme Court case mentioned above, the rules are actually applied and seen to have a significant legal effect.

As IP Draughts has mentioned before on this blog, he was once involved in a licensing transaction with a Massachusetts corporation, where the other party had prepared the drafts, and they included a signature block that referred to the parties applying their seals. When IP Draughts indicated that his client, a UK company, didn’t intend to apply its seal, this point seemed to take the US party by surprise. The surprise didn’t seem to be that we weren’t intending to apply our seal, but rather that we were taking literally the wording of the signature block. The other party revised the signature block so that it no longer referred to sealing.

The lessons that IP Draughts draws from these examples are that those of us who are responsible for contracts need to be ever-vigilant for wrongly-executed contracts, even if in doing so we make ourselves unpopular with clients who “just want to get the deal done”.

Leave a comment

Filed under Contract drafting, General Commercial

Interpreting trade mark agreements

The authority of Court of Appeal decisions is sometimes said to be greater if a “strong court” decides the case. For a decision on the interpretation of an IP licence agreement, it would be difficult to think of a stronger court than:

  1. Lady Justice Arden – the first female judge to be appointed to the Chancery Division, who has decided many contract and company law cases. She is shortly to become a Supreme Court judge.
  2. Lord Justice Kitchin – a senior IP judge in the Court of Appeal. He is also shortly to become a Supreme Court judge.
  3. Mr Justice Birss – an IP judge in the Chancery Division who revitalised what is now the Intellectual Property Enterprise Court, and is surely due for promotion to the Court of Appeal before too long.

This was the panel in the recently-reported case of Holland And Barrett International Ltd & Anor v General Nutrition Investment Company [2018] EWCA Civ 1586 (04 July 2018). IP Draughts reported on the decision at first instance, here.

On appeal, the points at issue have crystallised into a point that was not discussed in IP Draughts’ summary of the first instance decision. He would summarise the point this way.

  1. GNIC sells a business in nutritional supplements to Holland & Barrett (HB), whose shops are familiar in UK high streets. As part of the deal, GNIC grants HB an exclusive licence under certain GNIC trade marks, including the “GNC” word mark and several ancillary marks that include the word GNC, eg one consisting of a device and the words “GNC Herbal Plus”.
  2. Clause 5.6 allows GNIC to terminate the licence in respect of one or more of the licensed marks if HB fails to use the relevant marks for a period of 5 years.
  3. GNIC purports to terminate the licence for 5 unused, ancillary marks. The licence remains in force for the main GNC word mark.
  4. GNIC contends that the implication of terminating the licence to these marks is that it may use them in the HB territory, even though such use may infringe the main GNC word mark.
  5. HB contends that such use would be a breach of the grant of exclusive rights to the GNC word mark.
  6. The judge at first instance agrees with GNIC.
  7. The Court of Appeal agrees with HB, and overturns the first instance decision on this point.

The Court of Appeal focused on the exclusivity granted to HB with respect to the main GNC mark, and found it would be breached if, for example, GNIC sold products under a mark that included the GNC word and other elements, as in the GNC Herbal Plus mark mentioned above. This analysis was not affected by:

(a) the fact that a separate licence had been granted to, for example, the GNC Herbal Plus mark; nor

(b) the fact that the latter licence had been terminated. It was not necessary to imply a term that on termination of the latter licence, the exclusive licence to the GNC word mark was qualified or reduced in scope.

And as the Court of Appeal stated, paragraph 53 of their judgment:

Putting the matter in a different way, if when the licence was being drafted, someone had suggested to the parties that clause 5.6 might have the consequence which GNIC contend for today, then taking into account the parties’ intention construed objectively from the document as a whole, the parties would have agreed that that is not what they intended to achieve.

In IP Draughts’ view, the Court of Appeal’s forensic analysis of law and facts is persuasive, and overcomes a first thought that such an interpretation fails to give GNIC an effective remedy for failure to use the marks.

It is also interesting to note that the judgment is described as “the judgment of the court” rather than being ascribed to one of the court members and then agreed to by the others. This technique should be used more often, in IP Draughts’ view, and is a further sign of the quality of the judgment.

 

Leave a comment

Filed under Contract drafting, Intellectual Property

When is a total exclusion of liability enforceable?

The recently-reported, Court of Appeal case of Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371 provides a tutorial in how to make an exclusion clause, in standard contract terms, legally enforceable. Drafters of standard terms will find the lead judgment, by Coulson LJ, a good refresher.

This area of law is, in IP Draughts’ view, far too complex. It is easy to gloss over subtleties and jump to conclusions that seem intuitively right, but may be legally wrong. You need to know this stuff if you are drafting standard terms of business and want them to be legally enforceable in the English courts. This is an area where law graduates can be at an advantage compared with science graduates who qualify as lawyers via the one-year graduate diploma in law. The more intense examination of cases that you get in a three-year law degree helps you not to make mistakes.

This article attempts a brief, and incomplete, summary.

The facts of the case

  1. Goodlife produces frozen foods from a factory in Warrington, a town in the north-west of England. Before freezing, the foods are cooked, using a fryer.
  2. In 2002, they contract with Hall Fire, who install a fire suppression system over the fryer. The contract price is £7,490. The contract is made on Hall Fire’s standard terms of business, discussed below.
  3. In 2012, there is a fire at Goodlife’s factory, said to have originated in the fryer. The fire suppression system fails to suppress the fire. The fire is said to have caused loss and damage in the region of £6.6 million.
  4. Both parties are insured. Goodlife’s insurers exercise rights of subrogation under the contract and sue Hall Fire for the loss and damage incurred.

Procedural issues

  1. A claim for breach of contract is time-barred as the contract was performed more than 6 years before the fire. But there may still be a claim for negligence under the law of tort.
  2. The judgment being appealed was a preliminary decision on whether the exclusion clause was (a) incorporated into the contract between the parties, and (b) enforceable in light of the Unfair Contract Terms Act 1977 (UCTA).

The relevant contract clauses (emphasis added)

We draw your particular attention to the following specific conditions and assumptions on which the tender is based, unless qualified in our covering letter. Any contract would be based on our tender and these supplementary conditions sections 4 – 12 which do not provide for the imposition of any form of damages whatsoever and are based on English Law…
11) We exclude all liability, loss, damages or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided by HFS for whatever reason.
In the case of faulty components, we include only for the replacement, free of charge, of those defected parts.
As an alternative to our basic tender, we can provide insurance to cover the above risks. Please ask for the extra cost of the provision of this cover if required.

Legal issues and the court’s conclusions

The following paragraphs attempt a very brief summary of the outcome of the Court of Appeal’s analysis; unlike Coulson LJ’s judgment they do not discuss the earlier cases. Essentially the Court of Appeal agreed with the judge at first instance.

  1. Was the clause particularly onerous or unusual (“POU”)? This is a separate issue to whether the clause is reasonable under UCTA. There is a strand of case law that says that POU standard terms have to be brought to the other party’s attention, rather than being buried in small print, if they are to be effective. So the first question is whether the total exclusion of liability highlighted in red above is POU. The court said no. It was more extreme than clauses that limited liability to price paid, and excluded indirect losses. The latter clauses were commonly seen in contracts, and in several cited cases were held to be not POU. But for practical purposes, in the context of a fire causing millions of pounds of damage, it made little difference whether the clause excluded all liability or limited liability to £7,490.
  2. Was the clause fairly and reasonably brought to Goodlife’s attention? In light of the long-established case law in this field, IP Draughts typically puts some warning wording at the top of standard terms, when he is asked to draft them, drawing attention to the strict limits and exclusions of liability that appear later in the terms. The drafter in this case included the text coloured blue above. Coulson LJ agreed with the judge that, if the exclusion clause was POU, this wording was sufficient to bring the clause to the customer’s attention.
  3. Was the exclusion unreasonable: (a) bargaining power. Even if the clause is enforceable at common law, in light of the points discussed at items 1 and 2 above, it will not be enforceable under UCTA if it forms part of written standard terms of business and if the exclusion is not “reasonable”. The tests for reasonableness are set out in detail in section 11 and Schedule 2 of UCTA. Coulson LJ emphasised the importance of giving effect to contracts entered into between parties of broadly equal size and status (a point that Gross LJ felt so strongly about that, even though he agreed with Coulson LJ’s judgment, he added some remarks of his own on the point, after Coulson LJ’s judgement).
  4. Was the exclusion unreasonable: (b) insurance. Coulson LJ also considered the question of insurance. In light of earlier case law, it is a common technique used by drafters of standard terms to strictly limit liability but make clear to the customer that, for an additional price, insurance to cover potential losses can be arranged. The wording coloured orange, above, does this. There was also some wording, not quoted above, about Hall Fire providing details of current insurance on request. In reality, these seemed to be clauses that no-one followed up on. And the judge felt that it was probably easier for Goodlife to arrange insurance for its factory. Overall, the insurance issues did not result in the clause being unreasonable.
  5. Was the exclusion unreasonable: (c) total exclusion of remedies. Several submissions by Goodlife’s counsel (as summarised by Coulson LJ) seemed to skirt around the theme that the wording coloured in red above was a blanket exclusion clause and avoided a core obligation. IP Draughts is reminded of advice he received from senior lawyers when he was a junior, that standard terms should offer something positive (eg a repair or replace warranty), rather than totally excluding liability and removing any remedies. In the present case, however counsel formulated the argument, Coulson LJ came to the same conclusion: the clause was not unreasonable.

Lessons for the future

The more that IP Draughts reads Coulson LJ’s judgment, the more he feels that Coulson LJ was determined to find the exclusion clause enforceable. Perhaps he was influenced by the fact that this was really a dispute between insurers on who should pick up the bill.

IP Draughts has detected a different approach by the English courts to exclusion clauses in recent years. When he first started in practice, the view of expert contract lawyers seemed to be that limiting liability to the contract price was a high-risk strategy, and that a limit linked to the contractor’s reasonable level of insurance cover was more likely to be effective.

With all the usual caveats that cases are decided on their facts, different judges have different views, etc, the current view of the courts seems to include the following themes:

  1. Parties of roughly equal size or bargaining power should be allowed to agree whatever contract terms they wish, without interference from the courts.
  2. Courts should not interpret wording in an unintended way, eg by saying that a clause could cover fraud, and in that situation the clause would be unenforceable, so the clause is unenforceable in all situations.
  3. Limiting liability to the contract price and excluding indirect losses are conventional terms in contracts, and should not be regarded as particularly unusual or onerous.
  4. It may still be necessary to draw attention to onerous terms in standard contracts. Lord Denning favoured a big red hand in the margin, but this technique seems to have fallen out of fashion.

Leave a comment

Filed under Contract drafting