UK: Commercial Disputes Update - Winter 2011

Last Updated: 15 February 2011
Article by Stephen Burns and Lynne Gregory

CASE LAW UPDATES

A software company could not rely on its limitation of liability clause because of the manner in which it had sold its products

Kingsway Hall Hotel Limited v Red Sky IT (Hounslow) Limited (TCC) [2010] AII ER (D) 51

Red Sky provided a hotel reservation system to Kingsway to replace Kingsway's existing reservation system which had also been supplied by Red Sky. There were two demonstrations of the new system before contracts were signed and the system installed. There were two key exclusion clauses in Red Sky's standard terms. The first excluded most terms as to performance, quality, fitness for purpose etc. Clause 10.2 contained an express warranty that "the programmes will in all material respects provide the facilities and functions set out in the operating documents". The operating documents were defined as any operating documents supplied by Red Sky to Kingsway. There were exclusions for indirect and consequential loss and an overall cap of four times the total price.

It was held that clause 10.2 only applied if Red Sky provided operating documents before the contract was signed which it did not. Therefore clause 10.2 "and the exclusions derived therefrom" did not apply.

A letter giving contractual notice to terminate should not necessarily be construed as an acceptance of the other party's repudiatory breach

Shell Egypt West Manzala v Dana Gas Egypt Limited (Commercial Court) [2010] AII ER (D) 156

An agreement provided that if a closing date had not occurred within nine months following the agreement date then Shell could elect to terminate the agreement by giving 30 days' notice in writing. In that case Dana would not be obliged to repay an initial payment of $15 million. Closing was conditional on the completion by Dana of the acquisition of a 25% interest in the oil and gas concessions it did not then own. If closing did not occur within nine months because that condition precedent was not satisfied and Shell elected to terminate, Dana would have to refund the initial payment to Shell.

Shell purported to give 30 days' notice of termination stating mistakenly that the acquisition had not been completed requiring Dana to refund the payments made by Shell. In fact the acquisition had been completed but Dana was (for other reasons) in repudiatory breach (i.e. a breach of contract by one party that is sufficiently serious to entitle the other to treat the contract as terminated with immediate effect and enable that party to sue for damages for breach of contract) of the agreement giving Shell the right to rescind. Dana acknowledged the notice to terminate and stated that as the acquisition had taken place, it had no obligation to refund any payments made by Shell. Shell claimed damages for repudiatory breach. The arbitrators found although Dana was in repudiatory breach, Shell had not accepted the repudiatory breach. Rather it had elected to exercise a contractual right to terminate on 30 days' notice thereby affirming the contract. Shell submitted that its notice to terminate could be regarded as an acceptance of Dana's repudiatory breach.

The court held it was clear the termination letter was an election to terminate using the contractual mechanism. It was a perfectly feasible commercial stance for Shell to adopt that it wished simply to withdraw from the agreement without incurring any further obligation whether that enabled it to recover the initial payment or not. The imperative was clarity that Shell had no further obligation under the agreement. Shell ought to have considered terminating by simply accepting Dana's repudiatory breach and not giving contractual notice. In other instances it may be prudent to not only give contractual notice but also, in the alternative, to accept a repudiatory breach (but this is an area where you may wish to take advice).

How quickly must a party give its decision to end a contract on grounds of repudiatory breach before its inaction is taken to affirm the contract?

Force India Formula One Team Limited v. Etihad Airways (CA) [2010] AII ER (D) 41

An innocent party faced with a repudiatory breach can choose either to accept the repudiation and terminate the contract or to affirm the contract so that both the parties continue to perform their obligations under it. An innocent party cannot affirm until it knows of the breach and its right to end the contract.

The case involved a Formula One racing team which, after a management change, fell out with its sponsor. It changed its name to exclude the sponsor, and gradually began promoting a rival. The team did not tell the sponsor about this – the sponsor found out in piecemeal fashion. By early November 2007 it knew all the matters it later relied on as constituting repudiatory breach. It called a meeting with the team which took place in December.

The team said they would provide more information which was sent in mid- January. The sponsors terminated for repudiatory breach at the end of January 2008. The team argued the sponsors had affirmed the contract by their delay. This was upheld by the judge at first instance. On appeal, the Court of Appeal reversed this decision holding that the sponsor's conduct did not amount to affirmation. The Court of Appeal accepted that in some cases delay could affirm the contract such as where time was of the essence (e.g. share sales in a volatile market) or where silence could be misleading. This scenario was different – it had not been immediately clear that there had been a repudiatory breach – information had been gleaned rather than communicated and it would have taken the sponsor a while to realise the breaches were clearly repudiatory. The delay also took place during the winter break between racing seasons so there was no urgency.

Parties should however be aware that each case will turn on its facts and they should expressly reserve their position and perhaps state how much time they need to consider the matter.

The meaning of a contractual obligation to use "all reasonable but commercially prudent endeavours"

CPC Group Ltd v Qatari Diar Real Estate Investment Company [2010] EWHC 1535

The High Court has considered the meaning of a contractual obligation to use "all reasonable but commercially prudent endeavours". After considering the relevant case law, the judge said that the obligation to use "all reasonable endeavours" does not always require the obligor to sacrifice his commercial interests. In this case, the position was clearer because the contract itself contained other indications that the party owing the obligation was not to be required to sacrifice its commercial interests: it referred to "commercially prudent" endeavours. On the facts, the judge found that the obligor's conduct was not a breach of the obligation.

The perils of starting work before a contract is signed

RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] UKSC 14

Molkerei and RTS had entered into negotiations about RTS supplying and installing automated packaging machinery for Molkerei. Although the parties had intended that a written contract would set out the terms on which the work was to be carried out, work had in fact begun before the terms were finalised.

The Supreme Court found that, although the parties did not sign the draft written agreement, that agreement had come into effect notwithstanding that it was expressed to be subject to contract. In doing so, the court reached a different conclusion from both the Court of Appeal and the High Court. The court commented that the different decisions in the courts below and the arguments before it demonstrated the perils of beginning work without agreeing the precise basis on which it was to be done: the Court said that the moral of the story was to agree first and start work later.

GHSP Inc v AB Electronic Ltd [2010] EWHC 1828 (Comm)

The High Court has held that neither party's standard conditions governed the parties' relationship in a battle of the forms dispute. Instead, the judge found that the parties had concluded a contract that was governed by, and incorporated, the implied terms in the Sale of Goods Act 1979. The judge's decision means that the supplier's liability under the contract, which is to be determined, is unlimited (subject to the common law rules on recovery of damages).

This case demonstrates that, for suppliers, starting to perform the contract before it is signed when there is an outstanding disagreement over the liability clause is a high-risk strategy and should be avoided.

In-house lawyers are unable to claim legal professional privilege in competition investigations

AKZO Nobel Chemicals Ltd v Commission of the European Communities

The ECJ has published its much awaited judgment on whether in-house lawyers who advise on competition investigations can claim privilege. The judgment has confirmed the existing limitation on the ability of in-house counsel to claim privilege in competition investigations by the Commission. The decision has caused consternation amongst inhouse lawyers as it was hoped the ECJ might take the opportunity to change the law in this area. To read our recent briefing note on this case, please click here.

THE BRIBERY ACT 2010

The Bribery Act received Royal Assent on 8 April 2010. When the Act comes into force in April 2011, it will increase the risk of businesses being prosecuted in relation to bribery and corruption offences committed in the UK or abroad.

Businesses should pay close attention to the offences created by the Act, in particular the new corporate offence of failing to prevent bribery, and should ensure their compliance policies are reviewed and updated prior to the Act coming into force.

To read our more detailed Bribery Act briefing note, please click here.

PREPARING A WITNESS FOR A CIVIL TRIAL – THE NECESSARY STEPS TO TAKE TO ENSURE CREDIBILITY

Further to our recent mock trial seminar, this article looks at the role of a factual witness in civil court proceedings and seeks to provide some practical advice to potential witnesses on how to prepare in advance for trial and what a witness can expect to face in the witness box.

A factual witness may be called by a party to a trial to provide evidence of fact on behalf of that party. The weight assigned to their evidence in many cases will be judged on the credibility of the witness. A witness who is underprepared or who does not respect the court and its process is unlikely to appear credible. This is something which is likely to impact upon the outcome of the case. It is therefore extremely important that a witness bears this in mind prior to going to court. Set out below is some guidance which anybody who has, or may potentially be called as a witness, should consider.

Firstly, there are three key points any witness should remember when giving evidence:

  • It is the witness' role to provide factual evidence of relevant events to enable the Judge to come to a decision, it is not to provide an opinion;
  • It is not the job of a witness to take sides. The witness is there to help the court by giving an account of the facts in a dispassionate way;
  • Giving evidence is not a memory test. A bundle of the relevant documents and the witness statement will be available in the witness box. A witness can refer to the documents at any time to assist in answering a question.

Secondly, for witnesses residing in England and Wales a witness summons may be issued to each witness stating when and where a witness should attend. These can be issued in order that an employer cannot intervene and prevent a witness from attending.

Preparation is essential to a witness's delivery and therefore credibility in the witness box. There is no doubt, as mentioned above, that being under prepared will adversely affect the way that a witness will present him or herself. Some key steps to take prior to attending court include:

  • Review the witness statement and any associated documentation;
  • Identify strengths and weaknesses from evidence and be prepared for strong questioning in cross examination;
  • Find out who the Judge is and also who the other advocates are and how to address them. In the High Court a Judge should be addressed as 'My Lord' or 'My Lady' and in the County Court as 'Sir' or 'Madam'. Barristers should be referred to as 'Counsel';
  • Consider attending a witness familiarisation course.

Prior to arriving at the court to give evidence a witness should be prepared but not coached by their solicitor or barrister for what he or she is likely to face. There is a discrete but often misunderstood difference between what may be classed as witness coaching and that which can be defined as witness familiarisation. Witness coaching is commonly used in America by attorneys who want to ensure they know exactly what their witness is going to say before they enter the court room. In this country however, the practice is unlawful and strict guidelines have been issued regarding what a solicitor or barrister can say to assist their witness before trial. The key principle to remember is that a witness must give his own evidence, in his own words, as opposed to being advised what to say by his legal team.

Witness familiarisation training aims to explain how the trial process works, what practices and procedures the witness can expect to encounter, how the witness should direct their answers and also techniques for dealing with cross-examination. The trainer must not discuss the particular case in point and care must be taken to avoid saying anything which could be viewed as suggesting what the witness should say or how they should express themselves. Such training, if properly run, can prove extremely helpful to an inexperienced witness to prevent them being overwhelmed by an often, extremely unfamiliar and pressurised environment.

In civil proceedings a witness is allowed (and often encouraged) to sit in on the hearing before giving their own evidence whereas in contrast, during a criminal trial the witness remains outside the court and must not have any knowledge of what has gone on before. Once called, a witness should move to the witness box where they will then be asked whether they wish to take the oath or affirmation to confirm they will tell the truth. From this moment on the witness is under a legal obligation to tell the truth at all times. A witness should sit to face the judge, ensuring that all responses are given directly to the judge, no matter who is asking the question and should remain in the box until released or there is a break in proceedings. Witnesses who have not been released remain under oath during a break and will not be allowed to discuss the case with anyone during this time, even if the break is of substantial duration.

The most important aspect for a witness is to remain calm throughout his time in the witness box (which can be a challenge) and not to argue with an advocate, regardless of their tone or possible rudeness. A witness who becomes agitated tends to make mistakes and could be easily led by a barrister who aims to push them in a certain direction.

Crucial mistakes for a witness to avoid include:

  • Do not argue with the person asking you questions.
  • Do not argue with the Judge. The Judge is always right.
  • Do not be long-winded as you will almost certainly lose sight of the question.
  • Do not exaggerate or colour your evidence.
  • Be charming, but do not try to be funny or ironic. Irony is hard to detect in a written transcript of the hearing.
  • Tell the truth. You will otherwise be committing a criminal offence and honest answers will help give you confidence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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