Wednesday, 17 February 2016

Make sure your commercial contracts cover all the issues

February 18, 2016.

Marks and Spencer plc (Appellant) v. BNP Paribas Securities Services Trust Company (Jersey) Limited and another (Respondents) [2015] UKSC 72

The UK Supreme Court has clarified the English law approach to implying terms into contracts, adopting a restrictive approach. Although not a case relating directly to the shipping industry, the decision has important implications for all commercial contracts.

The key point is to try and deal with all contingencies explicitly in the contract. Failing to do so may cost you money.

The law

In certain circumstances, the Court will imply terms into contracts that were not dealt with explicitly in the wording of the contracts. There are two types of implied term:

(i)  A term that is implied into a particular contract, in light of the express terms, commercial common sense, and the facts known to the parties at the time the contract was made; and

(ii)  Terms implied because the law effectively imposes certain terms into certain classes of relationship.

This case dealt with the first type of implied term. Traditionally, the Court has been reluctant to imply these kinds of terms into contracts, viewing this as an intrusion into the parties’ commercial autonomy. To be implied, a term had to:

(i)  Be reasonable and equitable;

(ii)  Be necessary to give business efficacy to the contract (i.e. without the implication of the term, the contract would lack practical or commercial coherence);

(iii)  Be so obvious that “it goes without saying”;

(iv)  Be capable of clear expression; and

(v)  Not contradict any express term of the contract.

This stringent test reflected the Court’s traditional reluctance to impose terms on parties that they had not explicitly agreed.

Recently, some observers have said English law had changed, and that the English courts were now more willing to look beyond the explicit terms of commercial contracts and imply terms more liberally. This case has re-affirmed the traditional view.

The background facts

The dispute arose out of the terms of a lease under which M&S leased premises from BNP. M&S were entitled to break the lease by giving six months’ notice before a specified date. The lease would then terminate on that date so long as all payments due had been paid. Rent was to be paid in quarterly instalments in advance.  

M&S exercised its right to terminate the lease on 24 January 2012. In accordance with its obligations, M&S paid a three-month instalment of rent before 25 December 2011 (which covered a period up to 24 March 2012). The lease then terminated on 24 January 2012. 

M&S asked to be refunded pro rata for the rent they had paid from 24 January 2012 to 24 March 2012. BNP refused.  

There was no provision in the lease that expressly obliged BNP to pay back these sums to M&S, who argued that such a term should be implied into the lease.

The Supreme Court decision

The Supreme Court refused to imply this term into the lease. Although it was clearly reasonable and equitable that M&S be refunded this money (as this sum represented a pure windfall for BNP), this was not sufficient to imply a term into the lease.  

This was a detailed commercial lease that had been entered into between two experienced parties. It had been negotiated and drafted by lawyers and dealt with a large number of contingencies.

The lease was still workable without the implied term. As it was not necessary to imply the term, the Court refused to do so.

Comment

The term M&S wanted implied was reasonable and fair. Without the implied term, the Court accepted that the lease operated in a capricious way. Nonetheless, the Court refused to imply the term. An implied term must be necessary to give commercial or practical coherence to a contract. Reasonableness was not enough.

In terms of the shipping market, there are many terms that the Court implies into charterparties (e.g. the implied indemnity given by charterers to owners for following charterers’ orders). These implied terms will not be affected by this judgment. 

However, when negotiating rider clauses, it is imperative that you consider in detail at that stage what you are agreeing. Only that kind of review will allow you to assess adequately the risks of any deal (and then make the commercial decision as to whether you will accept these risks). In particular:

>  The courts have already determined the meaning of most of the older industry standard charterparty clauses. This gives a degree of certainty. If you are replacing these standard clauses with rider clauses, do the rider clauses have the same effect?

>  When negotiating additional rider clauses, do they cover everything? Think through all contingencies that could occur and try to deal with these explicitly. This is particularly important on longer term or higher value contracts where your potential liabilities will be greater.

>  Keep your contract terms under review – if a situation occurs that is not dealt with, can you insert a clause in your future contracts that deals with this issue?  

>  Try to use clear and unambiguous language when drafting.

>  Seek professional advice where necessary.  

Taking such precautionary steps at the contracting stage could save you a lot of money later. If you make a bad bargain, the Court will not correct your mistake, so get your contracts right!

Source: http://www.incelaw.com

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