Talent Management – Harnessing the power of your team
Litigation 3
1. Litigation: Ways to avoid issues
Common contractual issues which arise in
supply chain disputes
Eszter Horvath-Papp, Associate
4 October 2012
2. Overview
1 - ambiguous obligations
• best endeavours
• reasonable endeavours
• good faith
2 – limitation of liability
3 – payments on termination of a contract
3. Best endeavours - 1
Jet2.com v Blackpool Airport Ltd [2012] 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.com's
low cost services from [Blackpool Airport]"
4. 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 C's
business and was fundamental to the contract
• dissenting judgment: clause was too vague
5. 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 isn't
required to do to meet the performance standard, eg
does it have to incur costs; can it take its own
commercial interests into account?
6. Reasonable endeavours - 1
Ampurius NU Homes Holdings Ltd v Telford Homes
(Creekside) Ltd [2012] 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
7. 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
8. 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
9. Good faith - 1
Compass Group UK & Ireland Ltd (t/a Medirest) v
Mid Essex Hospital Services NHS Trust
[2012] 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
10. 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
11. 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”.
12. Limitation of liability - 1
Kudos Catering (UK) Ltd v Manchester Central
Convention [2012] 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
13. 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...”
14. 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.”
15. Limitation of liability - 4
Share Network Services Ltd v Nextiraone UK Ltd
[2011] 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
16. 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
17. Payments on termination - 1
Cavenagh v William Evans Ltd [2012] 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
18. 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