UK: Give Your Dough To The Baker Even If He Will Eat Half Of Your Bread!

Last Updated: 22 April 2016
Article by Liz Tout and Manal Tabbara

As dispute lawyers we often deal with contracts that result in unintended consequences because they have not been drafted by lawyers expert in the chosen governing law of the contract. While many legal systems share principles, there are still some important differences between civil and common law systems. It is very important to understand these differences to ensure your contract will be interpreted as you intend it to be.

Interpretation of contract

Many commercial disputes are won or lost depending on the interpretation of the contract terms.  

In common law, the aim of contractual interpretation is to find the parties' intention, objectively assessed. The language of the agreement is the starting point, and the court also considers the background facts reasonably available to the parties when they contracted. The background also includes anything which would have affected the way in which a reasonable man would have understood the language of the document. If the contractual wording is ambiguous, the court can consider which of the alternative interpretations make best business common sense. The assumption is that this will be the result most likely to reflect the parties' intentions. However, the scope of the commercial common-sense principle of interpretation only applies where the contract is ambiguous. Further, the court's power to use its powers of interpretation is limited to correct an allegedly "obvious" drafting error.

In French law, the starting point of contractual interpretation also aims to find the common intention of the parties, but is subjective. This means the intention of the parties prevails even if it is contrary to the literal meaning of the contract terms. This reflects the autonomy of will philosophy which contract law is based on in French law which is set up in article 1103 of the new Ordinance no. 2016-131 that recently amended the French Civil Code. Traditionally, the courts considered the intention of the parties at the moment of the conclusion of the contract. Now the courts are more prepared to assess factors which take place after the contract has taken effect.

Good faith

Traditionally, there has been no general duty to act in good faith towards a counterparty under English contract law, other than in limited circumstances. But, in 2013, the court considered the circumstances in which it should imply a duty of good faith (or fair dealing) into the parties' contract. The court identified joint ventures, franchise and long-term distributorship agreements as examples of "relational" contracts in which an implied duty of good faith may, depending on the context, arise. Several recent cases have also provided some guidance on the extent to which the courts may, in future, imply an obligation of good faith into these types of contract, or more generally. The court underlined the importance of context to imply good faith and made it clear that the minimum standard of behaviour that a party must satisfy so as not to breach any applicable duty of good faith is to act honestly. Other cases suggested that many commercial agreements which have been the subject of detailed negotiation will not have a good faith duty implied. And it also seems clear that if an agreement's written terms include express wording setting out the standards of conduct, the parties must adopt them in their mutual dealings. Even if the wording is not understood exactly in terms of a good faith obligation this will probably be enough to persuade the court not to imply a more general term. So a clearly drafted express obligation will usually restrict the court's latitude. The court will also not readily imply a duty to conduct commercial negotiations in good faith. Again, if such a duty is required, the parties should always expressly provide for it. Further, the court suggested that, where a duty of good faith might be implied into a contract, the parties can always agree to expressly exclude it altogether.

In French law, good faith or "bonne foi" is a fundamental principle of law.  This principle applies at both the contract formation stage and the execution stage. In the first stage, it creates an obligation on the parties to exchange information and negotiate prior to entering into a contract. In the second stage, the idea of good faith is essential for interpreting the behavior of the parties. During execution of the contract, the parties also have a duty of loyalty and cooperation. The principle is now consecrated in its two parts in article 1104 of the new Ordinance that recently amended the French Code Civil. Until the new Ordinance came into force the duty to negotiate in good faith was only a jurisprudential duty, from which the courts implied a duty of each party to communicate to the other any information on the subject matter of the contract which would be likely to influence its consent to the contract. Following the Ordinance, a general obligation of information between the parties has been spelt out in the Code Civil, to apply to all contracts and to all parties. This obligation of information during negotiations is limited to information actually known to one party. Also, the new article 1112-1 incorporates in the Code Civil the obligation to provide information during contractual negotiations, which until recently was in case law only.

Mitigation of damages

Under English law, the rule of mitigation requires a claimant to minimise its loss and to avoid taking unreasonable steps that increase its loss. If it fails to do so, that will affect its damages recovery. Although German, Italian and Belgian laws contain a duty to mitigate, under French law, the injured party is not required to take reasonable steps to mitigate its loss. There is no general term in the French Code requiring the victim of a breach of contract or tortious duty to mitigate loss.  However concepts of mitigation have surfaced intermittently, although French lawyers never think about "a duty" to mitigate. Instead, they use a variety of judicial guises to divert attention away from mitigation, such as fault, causation, remoteness, good faith etc. The mitigation principle has also appeared in discrete areas of French law such as leases, insurance and the sale of goods.  

Liquidated damages and penalties

Under English law, the parties to a contract can agree to a fixed or determined sum to be payable on breach by one of them rather than have to claim actual loss in court. If the sum cannot be justified or is out of all proportion to the legitimate interests of the innocent party, it may be considered to be oppressive and, therefore, an unenforceable penalty. 

French law does not adopt the same approach to liquidated damages. In French law, the parties are free to agree on penalty clauses that set an amount owed in case of non-performance of a contractual obligation. So the parties can agree on a penalty clause that sets an amount much higher than the damage suffered by the non-defaulting party. The purpose of those clauses is to encourage the contracting parties to comply with their contractual obligations. Nevertheless, judges may, even on their own motion, moderate or increase the penalty agreed on when it is manifestly excessive or ridiculously low. To avoid a judge intervening to decrease or increase the amount of the compensation the parties must ensure that the calculation method for liquidated damages does not lead to an amount that is "manifestly excessive or ridiculously low". 

The development of liquidated damages clauses seems to be moving toward a more uniform approach.

Force majeure 

Force majeure is an event beyond a party's control excusing the party from meeting a contractual obligation. It is a civil law concept that has no real meaning under the common law. Under French law, if there is an unexpected change of circumstances, a party may escape liability on grounds of force majeure despite no force majeure clause being included in the contract. Usually if the force majeure is temporary, then the specific obligation of the party victim of the force majeure event is suspended until the force majeure event ends. If the force majeure is permanent, then the contract is automatically void for the future and either party can walk away from the contract.

English law generally does not recognise that unexpected changes of circumstances affect the parties' obligations. The closest concept to force majeure in English law is the frustration of a contract.  For the doctrine of frustration to apply, the performance of a contract must be rendered effectively impossible or radically different from what was intended by the parties. The effect of frustration is that any obligation of either party is terminated as of the day on which the frustrating event occurs. So under an agreement subject to English law, unless the contractual provisions specifically describe events which are to constitute force majeure and what the consequences of such an event are, no relief will be available.

Conclusion

If you are entering into a contract that is important and valuable to your business it may well be "money well spent" to ensure you engage lawyers experienced in the chosen governing law.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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