Legal Update - Important English Law Developments

We report on some recent, important, English Court decisions and new UK laws which are of particular relevance to the International Trade, Shipping, Energy, Insurance and the Commercial sectors.

Contract law developments:  

‘Agreements to mediate or to discuss settlement before proceedings can be commenced’ 

These days it is common for international contracts and agreements – including various standard form agreements in regular use in certain sectors – to contain provisions that require the parties to mediate before being entitled to proceed to arbitration in accordance with a stated arbitration clause.  The English Courts have often held that such references are mere ‘unenforceable agreements to negotiate’ unless they include a specific, clear mediation process and timefame that provide certainty and that can be followed.  

Consistent with this trend of mediation clauses requiring adequate certainty to be enforceable, general provisions in agreements requiring parties to ‘negotiate’ or to ‘attempt to resolve a dispute by discussion’ as a pre-condition to a party commencing arbitration or court proceedings have been viewed as unenforceable, as well.  However, some commentators have long criticised this narrow approach as contrary to the usual effort of the English Courts to give effect to the genuine intention of the parties.  

A recent decision of the English Commercial Court now makes it more likely that these general negotiation clauses will be applied by the Courts in the future.  In Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] the Court held that a provision in a contract that required the parties to “first seek to resolve the dispute or claim by friendly discussion” was enforceable.

Whilst acknowledging that proving breach of the obligation and then actual damages suffered due to that breach could be hard, nevertheless the Judge commented that there were circumstances where such things would be apparent so that the parties’ intention should not be quickly overlooked by the Court.

Even more surprising, perhaps, is that the Judge expressed the view that discussions contemplated by such clauses were expected to take place in ‘good faith’.  Generally, English law is reluctant to imply good faith obligations into contracts as it is too vague a concept and contrary to the notion that a party is entitled to pursue his own interests, including to withdraw from negotiations for tactical reasons.

Whilst this is a first instance decision of the English High Court it is important as it moves the conversation about general negotiation/discussion obligations in contracts into the scope of enforceability.  This means that before a party commences arbitration or court proceedings it will be well advised to ensure that adequate settlement discussions have taken place beforehand if required by the contract, to avoid the risk of the arbitration/court proceedings being struck out as un-contractual and premature.

‘Implied terms in contracts’

Lawyers involved in international commerce are regularly faced with contracts where a party argues that there should be an implied term read into the particular contract in order to reflect what the parties actually meant.  

In a recent decision of the English Supreme Court, the circumstances in which terms will be implied into contracts was thoroughly reviewed.  Some terms are implied by operation of English Statute law (such as relate to the sale of goods) but here we are concerned with terms implied in light of the express terms and overall circumstances of the particular contract.

In Marks & Spencer PLC v BNP Paribas Security Trust Co [2015], the Supreme Court confirmed that the rules for (i) interpreting express contract terms and (ii) implying additional terms into a contract, were separate and distinct (over which point judicial doubt had arisen).  For a term to be implied into a contract, the following circumstances must exist:

•    The implied term must be ‘obvious’ and/or reasonably ‘necessary’ in order to give the contract commercial effect; ie commercial or practical cohesion – the so called ‘business efficacy’ test which has been at the foundation of implied terms since 1889.

•    Whether or not the actual parties to the contract intended the implied term is not determinative; what matters is whether reasonable people in the position of the parties when the contract was made would have intended the implied term?

•    The implied term must be capable of clear interpretation and must not contradict an express term in the contract.

•    The term must be reasonable and equitable.

A term will not be implied if the only reason for it is one of fairness or that the parties would have agreed to it at the time had it been expressly included in the contract.

The combined effect of these requirements is that the threshold for implying a term into a contract under English law is extremely high.  English law will not correct a ‘bad bargain’ by implying rebalancing terms into commercial contracts and neither will it add clarity to a contact which otherwise ‘works’ based solely upon its express terms.  After the decision of the Supreme Court it is more important than ever to draft contracts with accuracy and precision and not to leave it to arbitrators or Judges to ‘fill in the gaps’.  

Shipping & Marine:

‘Anti-suit injunction to protect a UK based P&I Club’

There are occasions when a charterer will seek to sue a P&I Club direct in respect of claims concerning an insured vessel, instead or in addition to the vessel’s owner; for instance, if the owner is bust or impecunious, or if the charterer considers that to target the Club direct will provide a tactical advantage.  Because P&I Clubs are, obviously, not parties to charterparties or bills of lading and are rarely exposed in tort for the acts or omission of the owner/the vessel, other direct routes have to be searched out.

In such a recent case (Ship Owners' Mutual P&I Ass v Containerships Denizclik [2016]), as well as commencing London Arbitration against the owner of a vessel that went aground resulting in a total loss and cargo claims, the charterers also commenced court proceedings in Turkey against the vessel’s P&I Club, relying upon provisions of Turkish law which afforded the charterers a direct claim against the UK based Club.  The English Commercial Court granted the Club an anti-suit injunction preventing the charterers from pursuing the Turkish court proceeding, which decision was upheld by the English Court of Appeal.

The Court of Appeal held that the charterers’ direct right against the Club (in Turkey) was really nothing more than a right to enforce the underlying English law contract between the owners and Club (ie the owner’s membership agreement with the Club), which provided for London Arbitration, and was not an independent right.  The Turkish proceedings were held to be vexatious.  Therefore, the charterers could not sue the Club in Turkey and had to follow the agreed arbitration route even though the charterers did not have a contract with the Club.  

This made a difference because in Turkey the Club was exposed, whilst in London under its agreement with the owner, the Club could rely upon the ‘pay to be paid’ rule - and as the owner had not paid the charterers anything, the Club was not obliged to reimburse any monies and had a complete defence to the charterers’ claim.

This case and the decision of the Court of Appeal illustrates the approach of the English court to protect a party’s agreed right to be pursued in England under English law.  It will be particularly welcomed by P&I Clubs and other insurers generally and further reduces the opportunities to try and pursue marine claims direct against London based P&I Clubs in overseas jurisdictions.

Shipbuilding Contracts:

‘Implied fitness for purpose obligations in shipbuilding contracts’

A recent decision of the Commercial Court has reviewed whether fitness for purpose obligations implied into contracts under English law by the Sale of Goods Act 1979, apply to shipbuilding contracts where the vessel is built for use in a standardised trade that is well known to the Purchaser and Builder?

Shipbuilding contracts are typically complex documents which are the result of detailed and extensive negotiations between Purchaser and Shipyard, containing general vessel descriptions and comprehensive build specifications.  It would not immediately occur to most owners or shipyards that such agreements might be affected by implied terms as to fitness for purpose.

The relevant section of the Sale of Goods Act 1979 (section 14(3)) provides that where goods are sold and the seller knows that there is a specific purpose for the goods, then the goods must be reasonably fit for such purpose even if that is not the purpose for which such goods are usually supplied.

In Neon Shipping v Foreign Economic 7/China Chang Jiang Shipyard [2016], the Commercial Court had to decide whether these section 14 fitness for purpose obligations were implied into a shipbuilding contract with a general vessel description for the build and sale of a standard ‘bulk carrier for normal worldwide service’ by Jiang Shipyard, such that the vessel’s cranes should be capable of continuous use.

Before this case, the generally accepted view amongst commentators was that put forward in the leading text ‘The law of Shipbuilding Contracts (4th Edition)’ [by Simon Curtis], which excludes the section 14(3) fitness for purpose obligations from shipbuilding contracts on the basis that: “the subsection is designed to cover the situation in which the goods are required for a specific purpose made known to the seller before the contract is signed; it is as such likely to be inapplicable in the overwhelming majority of shipbuilding projects in which the vessel is built for use in standardised trades which are well known to, and understood by, both the buyer and the builder”.

The Commercial Court disagreed with this (established) view.  The section 14(3) fitness for purpose obligations can be implied into shipbuilding contracts for the build of generally described standardised trade vessels if to imply such obligations will give effect to the detailed vessel specification.

This case highlights the need for parties to shipbuilding contracts to expressly exclude these implied obligations if that is what is intended – which is usually the position. 

‘Third Parties (Rights Against Insurers) Act 2010’

This long delayed English statute finally came into force under English law on 1st August 2016.  In summary the Act makes it more straight forward for a third party to stand in the place of an insolvent insured and pursue a claim against the insurer.  The new Act enables a third party to bring claims directly against an insurer with which it does not have a contract where the third party has acquired rights to the contract of insurance.  

Energy & Offshore:

‘MER UK Strategy’ & the ‘Energy Act 2016’

MER UK Strategy – the UK Government’s official strategy for Maximising Economic Recovery of UK Petroleum – and the Energy Act 2016 are now with us and are likely to impact most upstream, midstream and downstream energy and offshore businesses over time.

MER UK Strategy has developed from the Wood Review of 2013/14 (Sir Ian Wood, ex Wood Group a leading oil services company, was tasked with investigating how to best exploit the UK’s oil and gas).  The ‘Central Obligation’ upon energy stakeholders is that “relevant persons must, in the exercise of their relevant functions, take the steps necessary to secure that the maximum value of economic recoverable petroleum is recovered from the strata beneath relevant UK waters”.

Whilst something of a glorious mission statement, MER UK Strategy is now legally binding upon relevant persons, which are: the UK’s new Oil and Gas Authority (established by the Energy Act 2016); holders of UK offshore licenses and operators of such licenses; owners of upstream petroleum infrastructure and those planning or carrying out the commissioning of such infrastructure.  Although contractors are not directly identified as relevant persons, it is expected that as oil companies and operators develop strategies to meet the requirements of MER UK Strategy, contractors will also be affected.

This is a major development in the UK’s Energy strategy and regulation and is expected over time to have far reaching consequences. 

If you would like more information about the reported cases and legal developments, please contract Andrew Iyer at: [email protected] or on +44 (0)207 1007714.

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