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Home > News > Commonly litigated clauses in contracts

Commonly litigated clauses in contracts

23 May 2016 | Ken McEwan

Snap shot of commonly litigated clauses in contracts 

Recently the courts have been moving away from interpreting commercial contracts on a common sense basis. Instead, the recent Supreme Court decision of Arnold v Britton & Ors [2015] reinstated the principle that parties will be bound by what they have agreed in writing. Even if this defies common sense and results in potentially ‘grotesque or catastrophic’ commercial consequences for the parties. 

The courts are becoming increasingly reluctant to veer away from the natural language of the contract and will focus on what the parties did actually agree instead or what the parties thought they were agreeing or should have agreed.

It is therefore more important that ever to review any contracts you are entering in to and ensure that you understand what you are signing up to.

To assist, we have set out a snap shot of common areas that cause contractual disputes:

Entire Agreement Clauses

These are also known as ‘whole agreement clauses’. An entire agreement clause is a contractual provision which aims to prevent a party from relying on any statements or representations made during the negotiations but not included in the contract itself. It is therefore important that the contract accurately reflects the negotiations.

The purpose of the clause is to stop the courts having to look at the detailed negotiations and pre-contractual discussions. Therefore, if something is required within the contract it should be specifically set out. However, recent case law has showed that entire agreement clauses cannot be used as a defence for a claim against misrepresentation. So, if you feel that a party made misrepresentations to you that were not subsequently included in the contract then the entire agreement clause does not necessarily mean that you cannot bring a claim.

Frustration

The general rule with contracts is that any party who fails to perform its obligations is in breach and is liable for damages to the other party. However, sometimes both parties cannot perform their contractual obligations for reasons that are completely out of their control. In these circumstances the contract may be frustrated.

A contract is frustrated when it becomes impossible to perform or when performance becomes very different to what was envisaged by the parties at the outset. A good example of this is the case where the parties entered into an agreement to hire a music hall for the purpose of holding a series of concerts. The musical hall was destroyed by an accidental fire and the concerts could not take place. The court held that the destruction of the music hall meant that the contract had been frustrated and the party arranging the concerts could not claim damages.  

When a contract is frustrated both parties are lawfully excused from performance and all sums paid under the contract must be repaid or any outstanding amounts cease to be payable. The legal consequences of frustration are often severe and uncertain and for this reason it is very narrowly applied.

It is also important to note that this is not a ‘get out’ clause and cannot be used if it just becomes too expensive or difficult to perform the contract. For this reason you should always seek legal advice when drafting a contract or if you suspect that a contract should be frustrated.

Frustration can cause significant problems to contracting parties which is why most commercial contracts include a provision to intentionally exclude the doctrine of frustration. These are known as ‘force majeure’ clauses.

Force Majeure Clauses

 A force majeure clause excuses one or both parties from performing a contract in some way following the occurrence of certain defined events. The underlying principle is that on the occurrence of the events set out in the clause one or both parties are excused from their obligations under the contract or can suspend performance. A party will not be liable for its failure to perform its obligations in accordance with the force majeure clause.  

These are considered essential in commercial contracts as a well drafted force majeure clause will allow the parties to avoid the vagaries if the doctrine of frustration, extend the range of events which excuse performance and impose the parties own choice of outcomes.

Usually a force majeure clause lists events or circumstances such as war, strike, riot, act of God etc. which are reasonable to exclude. However, it is important that you consider these clauses carefully when entering into a contract as they can also be drafted to include more common events such as: failure of sub-contractors to supply goods, increase in costs of raw materials, failure of telecommunications or power supply or data platforms. If included in a contract’s force majeure clause these fairly common place events could excuse a party’s non-performance without giving rise to any liability. 

It is therefore crucial to conduct a full pre-contract review.  

Termination of Contracts

There are many reasons why parties may want to terminate a contract, for example, if the one party’s performance is unsatisfactory or they are in breach, or where the contract is no longer commercially sensibly or a party no longer requires the goods they have contracted to purchase.

However, terminating a contract can be harder than it sounds and you should always consider the legal and financial consequences before taking any steps to bring the contract to an end.

A contract can usually be terminated in one of the following ways:

  • Under its express terms
  • At common law on the grounds of repudiatory breach
  • By giving reasonable notice
  • In insolvency situations

Termination of a contract excludes all parties from further performance of their obligations but some duties will survive, including the duty to pay damages for any breaches that have already been committed.

Alternatives to Termination

In some commercial situations termination may not be a viable option and the parties may want to maintain some form of working relationship.

In these circumstances it may be preferable to vary the agreement or look to the dispute resolution clause to see whether there is a procedure to help stop disputes from escalating. We can assist with this and are experienced in resolving commercial disputes through alternative means to ensure that the parties can continue to work together.

How we can help

At Gregg Latchams we offer a fixed fee contract review service where we provide a brief and easy to understand summary of your contracts. We offer a pre-contract review for contracts you have not yet entered into or a general review for existing contracts. If you would like to discuss this further please contact Richard Gore or Emma Ironside on 0117 906 9400 or enquiries@gregglatchams.com.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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