2020 Annual Sourcing and Commercial Contracts Case Law Round Up

Welcome to our round up of key cases from 2020 for sourcing and commercial contracts.

2020, the most unusual of years, saw force majeure provisions come under the spotlight when the pandemic threatened supply chains. While COVID-19 related disputes may not reach the courts for some years, 2020 saw the courts analyse a force majeure provision in the context of 2011 riots¹ . With the possibility of further supply chain challenges post Brexit transition end, our insight into considerations on supply chain disruption may prove useful (read more).

Looking forward, the challenging economic environment may see provisions linked to hardship, such as “material adverse effect” clauses, increase in significance.

Brexit saw many businesses restructure, making a case which considered whether the assignment of a contract included accrued rights, as well as future rights, particularly topical². (You can find the dedicated Brexit area of our website here.)

Putting the pandemic and Brexit to one side, Schrems II brought 2020’s most significant legal decision for contract advisors when it declared the EU-US privacy shield invalid. (You can find our dedicated data privacy matters material here.)

More predictably, “good faith” arguments continued to generate debate and judicial commentary³, as will no doubt be the case during 2021. Claimants have variously argued breach of an express contract term; claimed that a duty should be read into their particular agreement; and said that the other party has exercised a contractual discretion arbitrarily or capriciously. Where the duty to act in good faith has been implied by the court in recent cases, the court has proved resistant to finding that the other’s actions pursuant to an express contractual term were actually in breach of that implied duty.

As we write, the Supreme Court’s judgment of the appeal of a controversial 2019 liquidated damages decision⁴ is awaited. In the meantime, in another dispute, the High Court found that liquidated damages did apply to the scenario in question and that, once the contract had been terminated, liquidated damages no longer operated as a sole remedy⁵.

Set out below is our selection of cases from 2020 which have a particular impact on sourcing and commercial contracts and some useful tips arising from them.

Selected cases

Good Faith: A twenty-five year PFI agreement was a “relational” contract, implying both additional behavioural requirements on the parties and duties of good faith in their actions towards one another (Essex County Council v UBB Waste (Essex) Ltd, read more). A joint operating agreement was also arguably “relational” but, again, this did not fetter one party’s contractual right to terminate an operator appointment (Taqa Bratani Ltd & Ors v Rockrose, read more). In other decisions: parties to a joint venture did not owe each other a general obligation to act in good faith (Russell v Cartwright, read more); and a three year loan facility was held not to be a relational contract of any kind (Oliver Morley v RBS, read more).

• Tip: A blanket contract term excluding good faith is unlikely to be palatable. However, expressing one particular contract mechanism as operating in good faith can support an argument that the parties did not intend the rest of the contract to be subject to this duty.

Force Majeure: A force majeure mechanism which anticipated riots and fire failed to protect a warehouse owner from a claim from a third party whose goods were lost in the warehouse following rioting, a break in and arson. These circumstances were not “beyond the reasonable control” of the warehouse owner (2 Entertain Video Ltd v Sony, read more).

• Tip: Interpretation of force majeure mechanisms turns on their particular drafting. Just as important as the agreed force majeure events are contractual controls - such as the commonly used proviso that the event must be beyond the affected party’s control and a requirement for the affected party to notify the other.

Liquidated Damages: Turning on the drafting of the clauses in question, liquidated damages accrued as soon as work was late; once the contract was terminated, liquidated damages no longer operated as the claimant’s sole remedy (PBS Energo AS v Bester Generacion UK, read more).

• Tip: Liquidated damages mechanisms should not be considered in isolation and the parties’ intentions should be carefully articulated, being clear, for example, whether the mechanism falls within or outside of the general liability cap and whether liquidated damages are the claimant’s exclusive remedy or in addition to other routes to compensation.

Remoteness of damages: A Privy Council decision allowed the recovery of losses under contract B connected with breach of contract A. In so doing it applied the traditional Hadley v Baxendale test (and not the “assumed responsibility” test applied by the House of Lords in Transfield Shipping / the Achilleas) (Attorney General of the Virgin Islands v Global Water Associates, read more). The Privy Council found that the two contracts were so closely related that breach of one contract allowed loss of profits under the other to be recoverable. No contract term prevented this.

Assignment: A dispute over the transfer of a sub-contract considered whether its assignment had included accrued rights as well as future rights (Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Ors, read more).

• Tip: Termination Consequences provisions should be carefully thought through. Here, the sub-contract’s assignment (from contractor to customer) on termination of the main contract had been agreed as a termination consequence. The implications for the contractor became apparent once it received a GBP133 million claim for delay from the customer.

Worked examples: In a dispute where the worked examples (for a hire adjustment formula) did not tally with the description in the main narrative, it was thought inherently more probable that the worked example expressed the agreement of the parties (Altera Voyageur Production Ltd v Premier Oil E&P UK Ltd, read more).

• Tip: Check any worked example is understood and expressed correctly (these can be complex). Where the example is in a schedule, consider the stated order of precedence between the contract’s clauses and its schedules.

Privacy Shield and Standard Contractual Clauses: The EU’s highest court handed down its judgment on the long-awaited case commonly referred to as Schrems II. The EU-US privacy shield has been declared invalid and the Standard Contractual Clauses (SCCs) remain valid subject to conditions, read more.

• Comment: until the Brexit Trade Agreement was published, there was considerable uncertainty about what would happen at Brexit transition end in a ‘no deal’ scenario, which would have prevented organisations from transferring data from the EU into the UK without adopting standard contractual clauses and conducting transfer impact assessments for each data transfer, in line with the requirement implemented in the recent Schrems II decision. The Brexit Trade Agreement resolves this by making it lawful to transfer personal data from the EU to the UK for a period of up to six months from 1 January 2021. This ‘bridging’ period is designed to allow the EU time needed to adopt a formal adequacy decision which will allow the continuing flow of personal data to the UK at least for an interim period (this is subject to the UK holding back from adopting any of its own adequacy decisions, or approving any new SCCs, that go beyond those already approved by the EU, without prior EU approval). The EU-UK Joint Declaration, published alongside the Brexit Trade Agreement, includes a clear commitment from the EU to secure a favourable adequacy decision for the UK within the near term. In addition, the Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019 effectively grant interim adequacy decisions in favour of all the EEA member states and allow UK organisations to continue to rely on the 13 existing adequacy decisions adopted by the EU. Therefore, UK organisations may continue to be able to send personal data to organisations in the EEA and to countries previously deemed as adequate (e.g. New Zealand, Israel) and the Channel Islands.

Data breaches: The Supreme Court held that Morrisons was not vicariously liable for the criminal acts of its employee, read more.

• Comment: This judgment focused exclusively on vicarious liability only because Morrisons was able to successfully prove that it had met the standard of care for security and processing of personal data under the Data Protection Act 2018.