Litigation: Ways to avoid issuesCommon contractual issues which arise insupply chain disputesEszter Horvath-Papp, Associate4 October 2012
Overview1 - ambiguous obligations • best endeavours • reasonable endeavours • good faith2 – limitation of liability3 – payments on termination of a contract
Best endeavours - 1Jet2.com v Blackpool Airport Ltd  EWCA Civ 417• C and D entered into a 15 year contract for C to provide low cost flights from D’s airport• initially D allowed flights outside normal opening hours – at a cost to D• D gave a week’s notice no longer accepting arrivals or departures outside normal hours• C claimed breach of contract• "Jet2.com and BAL will co-operate together and use their best endeavours to promote Jet2.coms low cost services from [Blackpool Airport]"
Best endeavours - 2• leading judgment: – obligation not too uncertain to be enforceable – it obliged D to do all that it reasonably could to enable C’s business to succeed and grow – to what extent a person can have regard to its own financial interests will depend on the nature and terms of the contract in question – the ability to schedule aircraft movements outside those hours was essential to Cs business and was fundamental to the contract• dissenting judgment: clause was too vague
Best endeavours - 3• Key points: – is an obligation to use best/reasonable/all reasonable endeavours to achieve an outcome really necessary/appropriate? Can it be avoided altogether? – ensure that it is clear what the object of the endeavours is. Is it clear what the party is endeavouring to do? – rather than just using the term best/reasonable/all reasonable endeavours, clarify what a party is and isnt required to do to meet the performance standard, eg does it have to incur costs; can it take its own commercial interests into account?
Reasonable endeavours - 1Ampurius NU Homes Holdings Ltd v Telford Homes(Creekside) Ltd  EWHC 1820 (Ch)• contract for construction of a development• “the [Defendant] will use its reasonable endeavours to procure completion of the works by the target date”• works put on hold as D ran out of money• D tried to secure further funding• C terminated contract and claimed repudiatory breach by D
Reasonable endeavours - 2• Court found in favour of C on another point• Obiter comments: – reasonable endeavours cover efforts that “directly relate to the physical conduct of the works” – “matters antecedent or extraneous to the carrying out of the work, such as having the financial resources to do the work at all” are too far outside a reasonable endeavours clause
Reasonable endeavours - 3• key points: – the reasonable endeavours need to directly relate to the subject matter of the contract – draft clearly the steps required to be taken
Good faith - 1Compass Group UK & Ireland Ltd (t/a Medirest) vMid Essex Hospital Services NHS Trust EWHC 781 QB under appeal• C contracted to provide catering services to patients at D’s hospital• contract set out Service Level Specifications and deductions for performance failures• C initially committed numerous performance failures, but rectified wherever possible and the service improved over time• dispute over the amount of deductions led to a poisoning of the relationship
Good faith - 2• “the Trust and the contractor will co-operate with each other in good faith and will take all reasonable action as is necessary to enable the Trust to derive the full benefit of the contract”• the Trust’s behaviour: – calculated absurd deductions • eg, £96K for 3 day old bagel belonging to staff – refused to explain calculations – refused to engage in mediation – threatened to terminate the contract – expected that Medirest would want to avoid the bad publicity or that its parent company would pay up
Good faith - 3• Court found the Trust in repudiatory breach• “the duty to co-operate necessarily encompassed the duty to work together to resolve the problems which would almost certainly occur from time to time in a long term contract of this nature.”• the objective standard of conduct demanded of the parties encompassed faithfulness to the common purpose of benefit to the public• “fair dealing and acting consistently with justified expectations were corollaries of that”.
Limitation of liability - 1Kudos Catering (UK) Ltd v Manchester CentralConvention  EWHC 1192 (QB) under appeal• the parties entered into a 5 year contract for C to provide catering and hospitality services at D’s venues• after 3 years, D sought to terminate the contract• C argued this was a repudiation by D of the contract, which C had chosen to accept• C claimed £1.2m damages for loss of profit
Limitation of liability - 2 “[Kudos] hereby acknowledges and agrees that [MCC] shall have no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits, anticipated savings or wasted expenditure (whether reasonably foreseeable or not) or indirect or consequential loss suffered by [Kudos] or any third party in relation to this Agreement...”
Limitation of liability - 3• for there to be a question of construction, there must be at least 2 possible interpretations• Court will apply the most commercially sensible meaning• if only one interpretation, then court will apply that, regardless of the parties’ intentions• the words in this case were perfectly clear: “in any case in which there might otherwise be a liability in contract to pay damages in respect of loss of profits, there is not one. It is as simple as that.”
Limitation of liability - 4Share Network Services Ltd v Nextiraone UK Ltd EWHC 3845 (Comm) under appeal• contract for network operation services• D closed VPN network as unused• C claimed €1.7m damages for wasted costs• “[D]’s total liability for damages under this Agreement shall not exceed 50% of the service charges paid by [C] to [D] during the 12 months preceding any claim. This limitation will apply regardless of the form of action (ie, whether in contract or in tort).”• VPN not used, no service charges, so no liability
Limitation of liability - 5• Court disagreed with C’s argument that damages for repudiatory breach fell outside the limitation clause• there is no rule of law that a party may not exclude liability for a fundamental breach• UCTA reasonable: “The court assesses the issue of reasonableness at the time when the contract is made … not with the benefit of hindsight”.• C had expected to make a lot of money, so didn’t think the clause was unreasonable at the time
Payments on termination - 1Cavenagh v William Evans Ltd  EWCA Civ 697• D (the employer) made C redundant and operated PILON clause• subsequently discovered that C wrongly paid £10K of company money into his pension• had D known, it would have been entitled to summarily dismiss C, for gross misconduct• C claimed for his payment in lieu of notice
Payments on termination - 2• the Court found that when D gave notice, a contractual debt arose• the contract contained no provision to release D from this contractual obligation• “The prior unknown misconduct was not a defence to the claim for payment of the debt”• supply contracts: any provision for termination payments should be made conditional on the supplier not being in breach of contract at the time the contract is terminated, or during any given notice period