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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)



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)



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)


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]


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


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


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


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

obligations 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)



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



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


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

or 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



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


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


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



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



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



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


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


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

of 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



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



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…



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]



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


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

of 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


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)


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


2. Key Terms – Right to reject

If a buyer can reject the goods he can decline to pay the price

or 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


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)


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


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)


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]


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



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

of 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])



Even where a clause is ineffective, a party could argue there

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

oral 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



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)"


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


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


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

on behalf of buyer, manufacturers' warranties, consider extent to

which can be assigned


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



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



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



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


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


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


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


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


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]



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



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



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


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


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



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."



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

5 July 2012 WIN Seminar 13568609 57