Terms and Exit WIN Seminar Claire Edwards Legal Director David - - PowerPoint PPT Presentation

Contract Drafting, Key Terms and Exit

WIN Seminar

Claire Edwards – Legal Director David Booth - Solicitor DLA Piper Manchester Office 5 July 2012

Introduction

1. Contract Drafting – avoiding early mistakes

• Letters of intent
• "Subject to contract"
• Course of dealing
• Entire agreement
• Misrepresentation

2. Key Terms – get it right so life is easy

• Dangers of ambiguity
• Absolute and qualified obligations
• Time for performance
• Acceptance / right to reject
• Pricing – what is included and what is not
• Changes
• Indemnities and warranties

5 July 2012 WIN Seminar 2

Introduction

• 3. Exit – how to walk away gracefully
• Termination rights
• "Material" breach
• IP rights on exit
• Exit planning and transition

5 July 2012 WIN Seminar 3

• 1. Contract Drafting – Letters of intent
• Letter of intent
• a temporary binding or non-binding arrangement entered into while the

parties conclude formal contract negotiations, to enable work to commence

• Advantages
• enables work to commence before full contract formed
• Disadvantages
• uncertainty whether a letter of intent binds the parties and if so, on what

terms

• uncertainty as to the nature of the contractual relationship between the

parties where a letter of intent expires and a contract is not signed

• court may decide that parties have moved beyond negotiation and into

contract (each case is decided on its facts)

5 July 2012 WIN Seminar 4

• 1. Contract Drafting – Letters of intent
• Content (should be as clear as possible)
• whether binding or non-binding (in whole or part (and which parts))
• parties' aims
• terms and conditions applying to the work in the letter of intent
• requirements for quality, timing and completion of work
• any insurances required to be maintained
• any licences required
• payment clause and any cap on payment
• dispute resolution clause
• how to end letter of intent, including what happens if parties enter

formal contract

• any boilerplate clauses (governing law, rights of third parties…etc)

5 July 2012 WIN Seminar 5

• 1. Contract Drafting – Letters of intent
• RTS Flexible Systems Ltd v Muller [2010]
• "perils of beginning work without agreeing the precise basis upon

which it is to be done. The moral of the story is to agree first and to start work later" (Lord Clarke)

5 July 2012 WIN Seminar 6

• 1. Contract Drafting – "subject to contract"
• A "subject to contract" clause will not necessarily prevent a

contract from coming into existence though it gives a strong presumption that the parties do not intend to be bound until a written agreement is executed or a condition is satisfied

• The words "subject to contract" are not always given their

literal meaning, but are interpreted by taking into account other factors, including conduct, which could waive such a clause Jirehouse Capital & others v Beller [2009]

• Other clauses may be construed as a "subject to contract"

clause e.g. a counterparts clause RTS Flexible Systems v Molkerei Alois Muller [2010]

5 July 2012 WIN Seminar 7

• 1. Contract Drafting – "subject to contract"
• Investec Bank (UK) Ltd v Zulman and another [2010]
• guarantee was not signed by the guarantors, and was not "subject to

contract"

• clause recommended that guarantors seek legal advice before signing
• Court of Appeal ruled the guarantee was unenforceable - pointless if

parties intended they should be bound by oral agreement made before the draft guarantee drawn up

• RTS Flexible Systems v Molkerei Alois Muller [2010]
• letter of intent expired and work continued
• a contract had come into existence on the terms of the full contract
• the full contract contained a "counterparts" clause, but had not been

executed

• Supreme Court found agreement had been reached on all essential

terms and work carried out and paid for on that basis – counterparts clause deemed to be a subject to contract clause, and waived by conduct

5 July 2012 WIN Seminar 8

• 1. Contract Drafting – Course of dealing
• Courts have held that certain terms are incorporated where, as

a result of their consistent use in previous transactions, the reasonable expectation of the parties is that those terms will apply

• even where these terms are omitted from the contract
• "Course of dealing"
• regular trading
• over a period of time
• on consistent terms
• "Course of dealing" argument should only be used as an

argument of last resort (courts will not uphold it automatically)

• not to be seen as a substitute for clear contract drafting
• Each case decided on its facts

5 July 2012 WIN Seminar 9

• 1. Contract Drafting – Course of dealing
• University of Plymouth v European Language Centre [2009]
• Course of dealing did not create a binding contract
• parties had worked together for number of years, agreeing a new

contract annually

• an email offering ELC places for 200 students was not a binding offer

(no intention to create legal relations) and no acceptance

• offer and acceptance should have been confirmed in writing, and terms

recorded in signed document (as it had been during the previous four years of dealing)

• ELC could not rely on exchange of emails and telephone calls as

creating a binding contract

• dealing had not been consistent

5 July 2012 WIN Seminar 10

• 1. Contract Drafting – Entire Agreement
• Intended to prevent parties of a written contract from relying on

statements made during negotiations but which are not included in the final written terms and thereby ring-fencing

• bligations and liabilities within the "four corners" of the

contract

• Consist of a number of specific elements:
• a statement that the written contract constitutes the entire

agreement between the parties

• a statement that neither party is relying on a statement which is not

set out in the contract (expressly exclude implied conditions)

• exclusion of liability for misrepresentation
• an agreement that the remedies available will be those set out in

the contract or will be a claim in damages (for breach of contract)

5 July 2012 WIN Seminar 11

• 1. Contract Drafting – Entire Agreement

Problems

• can be uncertain and unclear
• may not exclude representations and remedies for

misrepresentation

• clear wording needed to exclude implied "conditions" as to

contract

• may be interpreted as an exclusion clause for the purposes of

UCTA and be subject to the reasonableness test

5 July 2012 WIN Seminar 12

• 1. Contract Drafting – Entire Agreement
• Contents – drafting needs to ensure that:
• no other documents are incorporated into the contract
• no oral statements are incorporated into the contract
• no written or oral terms take effect as separate collateral contract/warranty
• neither party was induced to enter the contract by reliance on a statement
• incorporates both entire agreement and non reliance provisions
• entire agreement provision alone may be insufficient to exclude liability for

misrepresentation (even where worded in broad terms) therefore best practice to include non reliance provision

• courts more likely to give effect to clause drafted in these terms,

recognising the commercial reality that both parties want the certainty of knowing the written agreement constitutes the 'complete bargain' between them

5 July 2012 WIN Seminar 13

• 1. Contract Drafting – Entire Agreement –

draft clause

• ENTIRE AGREEMENT (LONG FORM)
• 1.1 This agreement and [[IDENTIFY DOCUMENT] OR the documents referred to in it OR the

documents annexed to it and initialled by the parties] (together, Transaction Documents)] constitutes the entire agreement between the parties and supersedes and extinguishes all previous drafts, agreements, arrangements and understandings between them, whether written

• r oral, relating to its subject matter.
• Include this clause in all entire agreement clauses
• 1.2 Each party acknowledges that in entering into this agreement it does not rely on, and shall

have no remedies in respect of, any representation or warranty (whether made innocently or negligently) that is not set out in this agreement.

• this combines a non reliance statement with an exclusion of liability for misrepresentation, for

representations that have not been incorporated into the final agreement

• wording relating to remedies is subject to s.3 Misrepresentation Act 1967 and the reasonableness test in

s.11(1) of UCTA 1977

• the non reliance statement may amount to an exclusion, though not automatically
• ensures liability for negligent misrepresentation is caught
• do not add "fraudulently" to the clause – would not be valid
• 1.3 No party shall have any claim for innocent or negligent misrepresentation based upon any

statement in this agreement.

• excludes remedies for innocent and negligent misrepresentation based on statements in the contract (e.g.

cannot rescind the contract)

• restriction of liability for misrepresentation must satisfy UCTA reasonableness test
• do not add "fraudulently" to the clause – would not be valid

5 July 2012 WIN Seminar 14

• 1. Contract Drafting – Entire Agreement
• 2. ENTIRE AGREEMENT (SHORT FORM)
• 2.1 This agreement constitutes the entire agreement between the parties and supersedes and

extinguishes all previous drafts, agreements, arrangements and understandings between them, whether written or oral, relating to its subject matter.

• Include this clause in all entire agreement clauses
• 2.2 Each party agrees that it shall have no remedies in respect of any representation or

warranty (whether made innocently or negligently) that is not set out in this agreement. No party shall have any claim for innocent or negligent misrepresentation based upon any statement in this agreement.

• excludes
• all liability for misrepresentation in relation to pre-contractual statements
• remedies for innocent and negligent misrepresentation for untrue statements in the agreement (cannot rescind contract or

claim tortious damages)

• exclusion of liability for misrepresentation only valid if it satisfies UCTA reasonableness test
• omits non-reliance statement
• do not add "fraudulent misrepresentation" to the clause – would not be valid

5 July 2012 WIN Seminar 15

• 1. Contract Drafting - Misrepresentation
• A party may limit or exclude its liability for misrepresentation by
• inserting an exclusion clause to limit liability generally
• including wording in an entire agreement clause
• including a non reliance statement in an entire agreement clause
• creates an estoppel that prevents an action for misrepresentation
• a non reliance statement is always potentially an exclusion clause for

misrepresentation and so subject to the UCTA reasonableness test Springwell Navigation Corp v JP Morgan Chase Bank [2010]

• The effectiveness of such provisions is subject to common law

and UCTA controls

• cannot exclude or restrict liability for fraudulent misrepresentation
• an ambiguous clause will be construed against the party seeking

to rely on it

5 July 2012 WIN Seminar 16

• 2. Key Terms – Dangers of ambiguity
• Rules of construction
• Common law
• clauses should be clear and unambiguous
• drafting is construed strictly
• "Contra Proferentum Rule"
• any ambiguity is resolved against the party seeking to rely on that

clause or the person who drafted the clause

• used where all other rules of construction have failed
• Statutory
• reasonableness test in UCTA
• Consider standard forms are not drafted by the people who

use them and disputes usually over amendments

5 July 2012 WIN Seminar 17

• 2. Key Terms – Dangers of ambiguity
• In relation to Limitation clauses
• Regus v Epcot [2008] highlights the importance of appropriately

structuring limitation of liability to ensure that its various elements are severable if required

• In Regus, the court confirmed that where a clause is found to be

unenforceable it will be unenforceable in its entirety

• Consider "Blue Pencil" Test

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] Francotyp-Postalia Ltd v Whitehead [2011]

• Recent trend to deal with identified prospective liabilities 'up-front' -

set these out in the agreement. This shows the parties' intentions which evidences the apparent reasonableness of terms

5 July 2012 WIN Seminar 18

• 2. Key Terms – Dangers of ambiguity
• In relation to Exclusion clauses
• Pegler v Wang [2000]
• Relevant to those purchasing or tendering for major IT systems
• Tendering can often take place in the midst of great uncertainty, optimism and

sometimes self delusion and greed

• "Wang shall not in any event be liable for any indirect, special or consequential loss,

howsoever arising (including but not limited to loss of anticipated profits or of data) in

connection with or arising out of the supply, functioning or use of the Hardware, the

Software or the Services"

• exclusion clause held to be unreasonable due to knowledge and ignorance of

tenderer and purchaser

• no perfect installation
• a misrepresentation by a supplier who was in a position to know the truth when

buyer has no such knowledge, will face a steep hill to avoid liability

• no limitation and Wang entered voluntary liquidation

5 July 2012 WIN Seminar 19

• 2. Key Terms – Dangers of ambiguity
• Points to consider
• Cap on liability proportionate and reasonable?
• One cap for all types of recoverable loss, or multiple caps for different types of

loss

• Each cap, is it on an aggregate, annual, per claim or some other basis?
• What losses (if any) are excluded from the cap (e.g., losses arising from fraud

/ wilful default / etc, indemnified losses)?

• Consider limiting or excluding ability to claim damages for physical losses

(e.g. making re-performance the sole and exclusive remedy)

• Should a “no fault no liability” clause be included (e.g. relief event)?
• Will damages paid to “Affiliates” erode the cap?
• What is the relationship between the cap and liquidated damages / service

credits?

• Be clear on direct and indirect losses (e.g., loss of profits, loss of revenues,

etc)

• Consider impact of severability concepts and use discrete paragraphs for

discrete liability concepts and severable drafting for defined terms

5 July 2012 WIN Seminar 20

• 2. Absolute and qualified obligations
• Absolute Obligations
• contractual obligations are normally absolute
• failure to satisfy will be a breach of contract
• typically drafted as "shall"
• Qualified Obligations (Endeavours clauses)
• best endeavours
• reasonable endeavours
• all reasonable endeavours
• Better for a party under the obligation to qualify it, and to agree

to only "try" to achieve it

5 July 2012 WIN Seminar 21

• 2. Qualified obligations – endeavours clauses
• General rules of construction
• The meaning of an endeavours clause is assessed at the time the

contract is formed by reference to:

• its terms
• the other provisions of the agreement
• the surrounding commercial context
• This can create uncertainty over the meaning of a particular

endeavours clause

• "The meaning of the expression remains a question of construction not
• f extrapolation from other cases… the expression will not always

mean the same thing" Jet2.com Ltd [2011]

• Clause must be sufficiently certain to be enforceable
• ensure that the underlying objective is defined clearly and

precisely

5 July 2012 WIN Seminar 22

• 2. Qualified obligations – endeavours clauses
• Best Endeavours
• onerous, though not an absolute obligation
• "must at least be the doing of all that reasonable persons

reasonably could do in the circumstances" Pips (Leisure Productions) Limited v Walton [1982]

• obligor may be required to sacrifice its own commercial interests,

and make significant expenditure, though it would not be required to take steps to ruin the company

• Reasonable Endeavours
• less tangible than best endeavours
• balance between contractual obligation and own relevant

commercial considerations (subjective standard)

• requires limited expenditure but does not, as a general rule,

require the obligor to sacrifice its commercial interests

5 July 2012 WIN Seminar 23

• 2. Qualified obligations – endeavours clauses
• All Reasonable Endeavours
• compromise position
• is this the same as best endeavours?
• no, it is a middle ground between "best" and "reasonable"
• is the obligor obliged to sacrifice its commercial interests?
• "not always" CPC Group Ltd v Qatari Diar Real Estate Investment

Company [2010]

• however, these words indicate that some element of sacrifice may be

required in some cases

• some expenditure may be required, but no obligation to pay substantial

sums

• does it impose an objective or subjective standard?
• all depends on the context…

5 July 2012 WIN Seminar 24

• 2. Qualified obligations – endeavours clauses
• Subjective standard
• the words "all reasonable endeavours" did "not require [Qatari] to

ignore or forego its commercial interests. Instead, they allow[ed] [Qatari] to consider its own commercial interests" CPC Group Ltd v Qatari Diar Real Estate [2010]

• Objective standard
• “do everything that a reasonably competent and energetic distributor

would do to promote the…products…knowing that [Steni] was entirely dependent on [CEP’s] efforts to achieve sales…over a period of many years” CEP Holdings Limited v Steni AS [2009]

• Whether "all reasonable endeavours" is subjective or objective will

depend on the wording of the obligation

• "all reasonable endeavours as would be expected of a normal prudent

commercial developer experienced in developments of that nature" was clearly intended to impose an objective standard EDI Central Ltd v National Car Parks Ltd [2010]

5 July 2012 WIN Seminar 25

• 2. Qualified obligations – endeavours clauses
• Commercially reasonable / reasonable commercial / utmost

endeavours

• these represent other variations to endeavours clauses
• aim to soften a reasonable endeavours obligation
• however, there is little precedent to support these variations. It is not

clear that the courts would differentiate between the terms (for example, a reasonable endeavours obligation already involves considering all relevant commercial factors)

• utmost endeavours is often seen as an advancement on a best

endeavours clause, though there is little precedent on its use in commercial contracts

• If a modification to one of the more common endeavours clauses is

required it may be advisable to consider what the parties should actually do in practice, rather than relying on wordplay

5 July 2012 WIN Seminar 26

• 2. Key Terms – Express time for performance
• If not specified, courts will imply a term that performance must be

within a reasonable time

• Important to:
• make time of the essence / specify delay as grounds for termination
• include clear, fixed and ascertainable time limits for compliance with

specific contract terms – fixed date, formula or notice clause

• make such terms express conditions of the contract (remedies for breach
• f condition and other terms are different)
• Where time is of the essence, delay in performing a duty gives the

innocent party the right to claim damages and terminate the contract

5 July 2012 WIN Seminar 27

• 2. Key Terms – Implied time for performance
• Whether time is of the essence may be implied by
• the terms of the contract
• the conduct of the parties
• Equity may make time of the essence where
• the circumstances of the contract indicate that a date or time must

be complied with (e.g. where failure to perform on time deprives the claimant of the benefit of the contract)

• reasonable notice is given that an obligation must be complied

with by a particular date or time (what is reasonable depends on the facts of the case)

• Better to include express provision
• otherwise, may be left with inadequate remedy (e.g. damages

alone, rather than termination and damages)

5 July 2012 WIN Seminar 28

• 2. Key Terms – Time for performance

(Clauses)

• Sample clause one
• Time of [delivery OR payment OR performance] is of the essence
• Sample clause two
• 1.1 Time is of the essence for the times, dates and periods:
• (a) specified in clause[s] [NUMBER(S)]; or
• (b) substituted for them
• 1.2 [Time is not of the essence for any other obligation in this

agreement]

• Sample clause three
• Time is of the essence for all times, dates and periods:
• (a) specified in this agreement; or
• (b) substituted for them

5 July 2012 WIN Seminar 29

• 2. Key Terms – Right to reject
• If a buyer can reject the goods he can decline to pay the price
• r recover the price already paid
• Buyer may also have a claim for
• damages for non-delivery / performance
• damages for delayed delivery / performance
• damages for defective quality / breach of warranty / defective

performance

• Buyer has a right to reject goods where
• there is an express or implied term of the contract
• the seller is in breach of an express or implied condition or

sufficiently in breach of an innominate term

• the seller gives an intention not to be bound or has disabled

himself from performing the contract

5 July 2012 WIN Seminar 30

• 2. Key Terms - Acceptance
• Acceptance marks the loss of the right to reject
• Acceptance can be by
• express intimation
• delay
• Silence does not constitute acceptance, unless:
• based on previous dealings between the parties
• the parties have expressly stated so
• "Acceptance in part" in principle constitutes acceptance of

whole unless

• contract is severable
• statutory right of partial rejection applies (s.35A(1) SGA 1979)

5 July 2012 WIN Seminar 31

• 2. Key Terms – Acceptance
• Incorporate provisions to exclude or restrict the buyer's right to

reject

• supplier entitled to repair / replace defective goods
• time limit for deemed acceptance, after which the right to reject is

lost

• no right to reject if goods are altered or damaged by buyer
• specify a point at which the buyer is deemed to have inspected

and accepted the goods

5 July 2012 WIN Seminar 32

• 2. Key Terms - Pricing
• Important to spell out what is included and what is not
• whether or not VAT is included
• Pricing clauses are not subject to UCTA (providing they are in

plain and intelligible language)

• If price is determined by reference to the supplier's price list,

specify an appropriate reference date for the prevailing price list (e.g. the date of acceptance of the order)

• Provide that prices quoted in sales literature are subject to

change

• Consider a general right to increase price (see next slide)

5 July 2012 WIN Seminar 33

• 2. Key Terms - Pricing
• Be wary of price review terms that give a unilateral right to

increase prices

• may not automatically give the party the right to increase prices in

every situation (even where such a term has worked in the past)

• such a term must be clearly drafted and not simply state "the price

is subject to review as costs increase" Amberley (UK) Ltd v West Sussex County Council [2011]

5 July 2012 WIN Seminar 34

• 2. Key Terms – Changes (variation)
• Variation is not the same as a waiver of that term
• a waiver suspends rather than alters that term and it may be

possible to enforce it later

• Contract may include express clause(s) setting out
• whether one or more party can amend its terms; and
• the prescribed procedure to be followed in that event (change

control mechanism)

• Common to attempt to restrict variations to those agreed in

writing by the parties

• the aim is to exclude informal, inadvertent or oral variations being

made to an agreement

5 July 2012 WIN Seminar 35

• 2. Key Terms – Changes (variation)
• Are such clauses effective?
• World Online Telecom Ltd v I-Way [2002]
• contract contained the following clause: "no addition, amendment or

modification of this agreement shall be effective unless it is in writing and signed by and behalf of both parties"

• however, the case did not resolve the issue whether such clauses are effective,

and there is no direct authority on whether parties could prevent oral variations

• f a contract through use of such a clause
• It is doubtful whether such a clause would protect a party against

being bound by a variation if:

• that party has engaged in conduct that amounts to a clear and

unambiguous representation that it agrees to the variation;

• it has conducted itself so that a reasonable man would have believed it

was meant that he should act on it; and

• the other party to the contract did, in fact, act on the representation
• A party will be estopped from relying on the original terms of the contract if these three

conditions have been fulfilled (Lowe v Lombank Ltd [1960])

5 July 2012 WIN Seminar 36

• 2. Key Terms – Changes (variation)
• Even where a clause is ineffective, a party could argue there

was an oral agreement to amend the clause, followed by an

• ral agreement to vary the contract
• in practice it will generally be difficult to prove or evidence oral

variations

• Any benefit?
• evidentiary and practical benefit
• encourages the parties to ensure that any variation is set out,

documented, and signed off by all parties

• helps to avoid future dispute between parties about what was and

was not agreed to be varied

• A clause permitting unilateral variation will be subject to the

reasonableness test under UCTA

5 July 2012 WIN Seminar 37

• 2. Key Terms – Changes (variation)
• Sample variation clause
• "No variation of this agreement shall be effective unless it is in

writing and signed by the parties (or their authorised representatives)"

5 July 2012 WIN Seminar 38

• 2. Key Terms – Indemnity
• Indemnity
• promise to compensate for some defined loss or damage should it arise
• independent to, not contingent on, underlying obligations
• Benefits
• more robust than guarantee (guarantee is secondary obligation)
• if the underlying contract is set aside or altered, the indemnity will remain

valid (unlike a guarantee)

• provides a guaranteed remedy (unlike a warranty)
• recovery of loss as debt, not claim for damages (no remoteness or

mitigation)

• losses recoverable on "pound for pound" basis

5 July 2012 WIN Seminar 39

• 2. Key Terms – Indemnity
• Courts may impose limitations on losses recoverable under an

indemnity Total Transport Corporation v Arcadia Petroleum Ltd (The Eurus) [1996]

• requires an unbroken chain of causation
• reasonable contemplation of the parties
• only consequences that are proximately caused are covered by

indemnity (not all consequences)

• without express language, an indemnity will not cover

consequences caused or contributed to by the negligence of the benefitting party

• where an indemnity is triggered by a breach of contract, the

indemnity, subject to any contrary provision, only covers foreseeable consequences caused by that trigger

5 July 2012 WIN Seminar 40

• 2. Key Terms – Warranties
• Warranty
• contractual promise that a particular state of affairs exists
• only as good as the business giving it
• breach of warranty may give rise to a claim for damages (subject

to 'remoteness' and mitigation)

• less important than a condition (i.e. goes to the root of the

contract) insofar that contract cannot be discharged for breach of warranty

• Consider assignment of warranties
• assignment to third party who takes the benefit of the agreement
• where supplier obtains warranties on your behalf or agrees to pass
• n behalf of buyer, manufacturers' warranties, consider extent to

which can be assigned

5 July 2012 WIN Seminar 41

• 2. Key Terms – Warranties in service

agreements

• Warranties in service agreements
• Performance warranties
• may be linked to specification
• supplier may include limitation that goods will "comply in all material

respects" or "perform substantially in accordance" with its specification

• should spell out the remedies (or lack of remedies)
• warranty may be limited (for example, software warranties typically

limited as software prone to 'go wrong')

• limitation on duration
• Service and staff performance
• services will be performed to a reasonable defined yet objective

standard (e.g. "good industry practice")

• services will be performed in a diligent and timely manner
• supplier may include limitation to re-perform or refund
• the supplier will use a sufficient number of suitably qualified staff

5 July 2012 WIN Seminar 42

• 2. Key Terms – Warranties in service

agreements

• Common warranties
• Title
• typically limited to IPR or goods
• Capacity
• to enter into the agreement
• take care to ensure an implied warranty as to title is avoided

5 July 2012 WIN Seminar 43

• 2. Key Terms – Warranties in service

agreements

• Regulatory compliance
• parties will ensure their entry into and performance under the agreement is in

compliance with relevant regulations

• Licences and consents
• usually linked to the above, i.e. the parties have the required licences or

consents and/or provide goods and services under it

• Accuracy of statements made
• wide ranging and risky for suppliers (who prefer to exclude pre-contractual

representations)

• especially risky if warranty expressed to be a representation and an

undertaking

• Implied warranties
• Title and quiet possession
• cannot exclude/restrict
• Conformity of goods
• to description, sample, fitness for purpose…etc
• can exclude/restrict if reasonable

5 July 2012 WIN Seminar 44

• 2. Key Terms – Warranties in service

agreements

• Intellectual property ("IP")
• it is important to cover existing and newly created IP

i. that the service provider owns or has the necessary rights to the IP rights to be used in the provision of the services ii. that such IP rights and any newly created IP rights (e.g. material, data, information and specifications) do not infringe the rights of third parties

• point ii. may be coupled with an indemnity in favour of the customer in the event

that IP rights of a third party are infringed

• suppliers increasingly reluctant to give IP indemnities and warranties, or are

aiming to qualify or reduce their scope

5 July 2012 WIN Seminar 45

• 2. Key Terms – Indemnities and Warranties
• Limiting seller's liability
• Warranties
• standard practice for supplier to attempt to
• cut back the wording (e.g. limit by awareness, "so far as the supplier is

aware" or "so far as the supplier is aware (having made no enquiry)")

• supplier is deemed to have the knowledge and awareness it would have

after making due and careful enquiry (if no such express statement, the courts will imply that the supplier made only such investigation as could reasonably be expected) William Sindall v Cambridgeshire CC [1994]

• impose financial and time constraints
• period for breach of warranty claim is six years (if signed under hand) /

twelve years (if executed as a deed), unless there is express agreement between parties to the contrary

• de minimis limit for individual and aggregate claims and overall limit, and

to prevent double recovery

• limit liability of warranties
• be careful not to exclude all implied warranties

5 July 2012 WIN Seminar 46

• 2. Key Terms – Indemnities and Warranties
• Limiting seller's liability
• Indemnities
• seller may try to include indemnities in the overall limits, as they will in

respect of warranties

• buyer should resist this, as an indemnity may provide redress on a

pound for pound basis

• Security for breach of warranty
• if the seller has not taken out warranty insurance, the buyer may

wish to include a provision to

• obtain a bank / parent company guarantee
• insert set off provisions in the agreement

5 July 2012 WIN Seminar 47

• 3. Exit – how to walk away gracefully
• Termination and exit provisions are often not given the attention they

deserve during contract negotiations

• However, exit provisions are a potential "win-win" area
• provide assurance for the customer that exit will not cause undue

business interruption

• give clarity to the supplier about its obligations and revenue on exit
• provide a managed, clear path to exit for both parties
• avoid unnecessary negotiation on exit when the relationship may have

deteriorated

• Begin considering exit provisions from the start of negotiations
• not to be considered once things go wrong
• to be regarded as just as important as those provisions of an agreement

which have immediate effect

• payment for obligations under exit provisions likely to incentivise

5 July 2012 WIN Seminar 48

• 3. Exit – Termination rights
• Consider what termination rights each party shall have and

clearly define the relevant circumstances enabling each right

• Termination for convenience
• may invoke an early termination charge
• Termination for cause (breach)
• material breach (may include a time limit for remedy)
• repeated breaches
• Termination for insolvency
• Other termination rights
• change of control
• Expiry
• Even where no termination clauses are included, there is a

common law right to terminate for repudiatory breach

5 July 2012 WIN Seminar 49

• 3. Exit – "Material" breach
• "Material" breach
• when deciding whether a breach is material, the courts will take

into account the commercial circumstances of the case

• if the term “material breach” is used in a termination clause, it is

advisable to include a definition in the agreement

• it is not necessarily the same as a repudiatory breach
• if it is intended that "material" should have a meaning beyond this, the

contract should define the term accordingly

• "one which in all the circumstances is wholly or partly remediable

and is or, if not remedied, is likely to become, serious in the wide sense of having a serious effect on the benefit which the innocent party would otherwise derive from performance of the contract in accordance with its terms” National Power plc v United Gas Company Limited [1998]

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• 3. Exit – "Material" breach
• Dalkia Utilities Services PLC v Celtech International

Limited [2006]

• when assessing whether a breach is 'material', courts should

consider what the breach consists of and the circumstances in which the breach arises

• non-payment of three consecutive monthly instalments in a 15

year agreement was a material breach

• consecutive non-payment, without mishap, mistake or

misunderstanding

• sums involved were not trivial or minimal
• a material breach should be defined by the nature of the breach,

not by the consequences for the party in breach if the contract is terminated

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• 3. Exit – "Material" breach
• Fortman Holdings Ltd v Modem Holdings [2001]
• repayment of loan notes in four instalments
• contract provided that the principal sum became immediately

repayable in full if Modem was in material or persistent breach of any obligation under the loan notes and failing to remedy such breach within 14 days of becoming aware of it

• first instalment, representing 10% of the total due, was not paid (as

Modem believed it had a claim by means of set-off)

• Modem held by Court of Appeal to be in material breach
• payment of each instalment represented a separate obligation
• non-payment of one instalment constituted total non-compliance with

that obligation

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• 3. Exit – "Material" breach
• Antaios Compania Naviera S.A. v Salen Rederierna A.B.

[1985]

• House of Lords case stated that detailed semantic and syntactical

analysis of words in a commercial contract must yield to business common sense

• For clarity preferable to define the meaning of 'material', and

deal with the possible differences between "material remediable" and "material non-remediable" breaches

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• 3. Exit – IP rights on exit
• Documentation, software and other deliverables may be

created during the course of the agreement

• the agreement should address ownership of these deliverables
• Consider what impact termination may have on any IP rights
• do IP rights terminate or continue (and for how long) upon exit?
• will IP rights need to be assigned?
• do any licences permit modification of the IP (to allow continued

use as business and operations change)

• Default position – the supplier (as author) retains ownership
• Ensure that IP rights indemnities survive termination - this is

particularly critical for the party being indemnified

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• 3. Exit – Exit planning and transition
• Best practice approach to Exit
• Provide an initial Exit Plan, pricing mechanism, compensation…etc at

contract signature

• Update the Exit Plan during the performance of the contract (to account

for change)

• Deal with the continuation of the services before/after termination date
• Deal with the scope of exit services and what is/is not included (and

whether services must be aggregated or not)

• Identify the time limits for performance of the services and exit services in

the event of an exit

• Consider if exit obligations are different depending on the reason for exit
• Avoid the scenario where no pricing is included but the exit provisions are

sufficient to trigger obligations…which may then be interpreted widely by the court

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• 3. Exit – Exit planning and transition
• AstraZeneca UK Ltd v IBM Corp [2011]
• contract contained ambiguous exit provisions, in particular with

reference to defined terms which had been used inconsistently

• AstraZeneca terminated for cause, which triggered the contractual

exit provisions

• the parties disagreed over the meaning and scope of the exit

provisions

• the court ruling increased the scope of the exit provisions, to IBM's

detriment

• the court interpreted the exit provisions according to what they

would convey to:

• "a reasonable person having all the background knowledge which

would reasonably have been available to the parties in the situation which they were in at the time of the contract, but excluding their previous negotiations and declarations of subjective intent."

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• 3. Exit – Exit planning and transition
• A robust and comprehensive Exit Plan must clearly map out

the termination process, in order to

• provide business continuity
• prevent disputes
• provide clarity on parties' obligations
• minimise disruption and delay during transition
• ensure the outgoing supplier co-operates with the new incumbent
• Termination clauses should address
• planning for exit
• when exit occurs
• post-exit

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