Alert 9 June 2020

English Contracts under Stress in Times of Economic Disruption

The current economic, environmental and political outlook globally is perhaps the most uncertain it has been in decades. Against this backdrop, contracts are likely to be analysed and tested in ways unlike before.

With this in mind, understanding the approach that the English courts will take in interpreting contracts and the legal principles that may be available to parties looking for options are going to be more important than ever.

How will the English courts approach interpretation?

Since the financial crisis of 2008/9 there has seen significant activity in the English courts on the question of contractual interpretation. In the immediate aftermath of that crisis there were some suggestions that courts might be more flexible than had previously been the case in interpreting contracts and the instances in which courts were willing to intervene appeared to be increasing.

Things developed, however, to a position today where the courts will not look to interfere with the bargain struck by the parties unless it is absolutely necessary. The cases of Arnold v Britton and Wood v Capita Insurance Services Limited offer the most recent comprehensive expression by the courts of the approach that will be taken.

Unfortunately, there is no easy checklist or clear flowchart that can be followed. The question is objective and the most that can be discerned are over-arching principles that need to be considered:

  • Start with the text – the Arnold case emphasises this clearly. Although the natural and ordinary meaning of the words may give rise to a result that feels commercially unlikely or difficult (as it undoubtedly did in Arnold), if those words are clear then there is no reason for a court to get involved and it will not do so.

  • Through the prism of the whole contract – in considering the text, the court will do so in the context of the whole contract. A good example of this in practice is if there is some sort of regulatory requirement that needs to be factored in.

  • Business common sense has a role to play – this should not be over-emphasised. The question of whether a provision makes business sense only falls to be considered when the wording is not clear or where there are competing provisions.

In considering these issues the court will obviously need to consider the contract itself. The availability of other evidence for consideration is somewhat limited though. The factual background of what was known to or assumed by the parties may be considered if it were to point to a different interpretation. Beyond this, the options are limited:

  • Market practice may be considered if supported by expert evidence.

  • Anything said or done after the contract is concluded will not be relevant.

  • Travelling drafts of the contract during negotiations tend not to be relevant.

  • What the parties say they meant is irrelevant.

These last two points raise an interesting tactical issue. If a court will not interpret a contract in the way that a party wishes it to be, it is open to the court to rectify the contract to achieve a similar end. Rectification is more difficult to achieve and requires a party to succeed in demonstrating that there was a common intent on behalf of the parties at the time the contract was concluded to contract on a different basis to that recorded. Put simply, the parties must show that what they wrote down in the contract was different to what they agreed and settled on.

In a rectification claim, evidence of travelling drafts and what the parties say they believed at the time is of real importance. Often, a party seeking an interpretation of a contract in a particular way will bring a rectification claim alongside that claim. The effect of this is to put in front of the court evidence that the court may not otherwise consider on a pure interpretation claim. In those fine margin cases of contractual interpretation, the existence of evidence showing the parties’ intentions may have a part to play.

What legal tools may be available to help in a contractual dispute?

The starting point must always be the governing law and jurisdiction. What law applies and where are any disputes going to be determined?  If the contract is silent on these issues, then there is a complex set of EU and common law provisions that must be considered in order to ascertain this. Speed in doing so is often of vital importance. There may be competing claims to jurisdiction and the issue of proceedings in one jurisdiction can lead to protracted proceedings in a hostile foreign system for a long time, without resolution of the issue.

Assuming that English law applies, then the forum should also be considered, whether it is the courts or arbitration. Whichever of these is chosen, there are a number of tools available under English law to parties faced with difficult circumstances.

  • Injunctive relief – in certain circumstances, the English courts will support a party facing a breach of contract by another party by issuing an injunction. This could, in certain circumstances, be to restrain a party from terminating wrongfully or it could be to preserve assets. An injunction will provide immediate, but temporary relief while a party’s claim is progressed through litigation.

  • Variations – uncertain times lend themselves to commercial negotiations that lead to a change to contractual terms, rather than a formal dispute. Quick and efficient, this route should be considered where viable. If it is agreed, then care must be taken to ensure that it is documented in accordance with the contractual provisions.

  • Can you terminate? – there are many different ways in which contracts can provide for termination. Does the contract have defined termination provisions, for example through specified events of default? Or is there a provision that allows for termination in the event of a material adverse change or force majeure? Whether the factual matrix constitutes a material adverse change or force majeure will be specific to each circumstance and advice should be sought before triggering this type of relief.

  • Giving notice to terminate – sometimes a contract may not contain an express right to give notice to terminate. In those circumstances, English law may provide a solution and allow the contract to be terminable by either party on reasonable notice. Exactly what constitutes reasonable notice is dependent on the context and this is not going to be available in all circumstances (for example in fixed term contracts).

  • Has there been a repudiatory breach of contract? – if the act complained of is a breach of a key term of the contract or if it is a breach that deprives the other party of substantially all of the benefit it was meant to receive, then it can entitle a party to accept the repudiation and treat the contract as at an end.

  • Frustration – in the current climate there is often talk of contracts being frustrated. In reality, the occasions on which frustration truly occurs are rare. The doctrine provides that the contract can be discharged when something happens that makes it physically or commercially impossible to perform the contract. The bar is high, however, and the simple fact that it is significantly more expensive for one party to perform, such that it will cost that party money to do so is not enough.

Contractual parties, especially in complex commercial arrangements, will go to great lengths to provide for every eventuality in their contracts. History has shown that it is not possible to cover everything though and the events of the financial crash highlighted this starkly. English law does, however, provide ways through these issues and, with proper guidance, parties can ensure that their position is protected. The current global events are likely to bring these issues into sharper focus and here at Goodwin, the London litigation team is highly experienced in providing strategic advice on these matters and litigating them where it is necessary.

If you would like to discuss any issues arising out of this Client Alert, please contact Oliver Glynn-Jones, UK head of litigation at Goodwin.

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