On this page we comment on some common contracts topics:

Exclusion Clauses

Repudiatory Breach and Material Breach of Contract

Best Endeavours, Reasonable Endeavours

Interest on Late Payments

Preferred Supplier / Exclusive Supplier

Force Majeure

Exclusion clauses can take a variety of forms, such as for example excluding categories of loss (eg loss of profits, loss of business, damage to goodwill) to imposing conditions for making claims (eg procedures or time limits) and financial limits to overall liability.

To exclude liability for indirect or consequential loss leaves the defaulter exposed to the full legal responsibility for direct loss ie loss which flows naturally from the breach without other intervening cause and independently of special circumstances.

The Unfair Contract Terms Act 1977 (UCTA) will apply to a contract if either one party is a consumer or it is on written standard terms. If either case a term which excludes or limits liability for a breach is only valid to the extent that the exclusion or limitation is reasonable. The invalid the term must be fair and reasonable having regard to the circumstances known to the parties when the contract was made and (2) to those that the parties ought to have known at that time.

UCTA sets out in a schedule some guidelines for assessing reasonableness, which refer to:

The schedule applies specifically to contracts for goods and hire purchase agreements, although the courts have used it as a guide for assessing reasonableness in other contracts as well.

“Standard terms of business” will include a contract which is based on one party’s standard terms but the final form of which is the result of a negotiation. It may be reasonable to exclude or limit liability for one claim which the innocent party may have upon a breach by the other party, but a parallel claim against the defaulter is not excluded. The wording in these clauses is interpreted strictly and they therefore require careful drafting if they are to provide the protection that the contracting party seeks. Protection is a matter of balance between looking after the potential defaulter and overdoing the limitation such as to render the whole clause unreasonable. If an innocent party is left with no compensation rights at all in the face of a significant default by the other party, then the clause is likely to be invalid.

Clauses that exclude a liability, as opposed to limiting it, are looked at with greater scrutiny by the courts. If the clause effectively shuts out any claim for a fundamental breach, it is likely to be held to be unenforceable.

If a clause might be considered by the courts to be unreasonable it is wise to take steps to draw the attention of the other contracting party to it before the contract is entered into.

Further, it is sensible to have separate exclusions clauses addressing particular risks so as to minimise the possibility of unlimited exposure in the event of a single exclusion clause being declared invalid.

The fact that a party is required to have insurance cover up to a certain figure does not mean that any limitation of liability below that figure is unreasonable.

All attempts to exclude or limit liability for death or personal injury (which includes food poisoning) are invalid and unenforceable.

This question arises frequently when an innocent party is considering what options it has. There has been little guidance from the courts over the years.

Under general law a party to a contract is entitled to terminate the contract if the other party has committed a repudiatory breach ie, that other party has done something that is incompatible with continued existence of the contract. Thus the breach must be of a main condition of the contract (as opposed to a breach of a warranty) or otherwise so serious as to deprive the innocent party of the whole benefit of the contract.

This requires careful assessment by the innocent party before it attempts to terminate the contract. Getting it wrong may mean the innocent party itself is in repudiatory breach and liable for damages. Written contracts often provide a specific right to terminate if the other party has committed a material breach. A material breach may not be as serious as a repudiatory breach; materiality has to be assessed in the context of the contract and on the impact on the innocent party. In the case of non-payment of money, the amount must not be trivial and the reason for non-payment must not be as a result of mistake or understanding.

Importantly, the fact that the contract has become economic for the defaulter or that continuation of it would force it into insolvency is not a defence.

Obligations to use best endeavours or reasonable endeavours appear in a variety of commercial contracts. What do these phrases mean?

“Best endeavours” require a party to take steps which a prudent and determined man acting in his own interests and anxious to achieve the particular results would take even if that required him to incur expense. The board must ask how far would a reasonable and prudent board of directors go to achieve that aim ? They are not required to incur financial ruin or undermine their commercial goodwill; they can have regard to cost and the degree of difficulty when deciding what practical steps to take.

“Reasonable endeavours” is at the lowest end of the spectrum. Only one reasonable course need be taken, without resorting to take any other optional ones. The party is entitled to take account of all commercial considerations, as well as the cost, the practicalities and the chances of achieving success. It does not have to sacrifice it commercial interests or act to its disadvantage. If however the contract specifies certain minimum action then this has to be taken by the party, irrespective of the impact on its commercial interests.

“All reasonable endeavours” means that the party must continue its efforts until doing so would amount to repetition. It is not as stringent as best endeavours.

A recipient of a “reasonable endeavours” might well wish to push for something more, including specific steps to be taken. Whichever expression finds its way into the contract, an endeavour does not amount to a guarantee of a particular outcome.

If parties to a commercial contract have included a “substantial remedy” for late payment, then that will regulate what happens upon payments being delayed.

For the rest, the Late Payment of Commercial Debts (Interest) Act 1998 will come to the rescue of creditors, ahead of commencing court action for payment, and prove to be expensive for debtors. The Act entitles the creditor (1) to levy an administration charge for chasing a late payment and (2) to charge interest at the rate prescribed.

(1) Administration charge
This is available according to the size of the debt, as follows:

(2) Interest
The late payment interest rate, which is fixed for a six-month period. is the reference rate + 8%. The fixed-reference periods are:

A service provider will frequently wish to be appointed as an exclusive supplier to its customer, while the customer may wish to retain the liberty of engaging other suppliers for the same or similar services. Sometimes the parties compromise by agreeing that the supplier has “preferred” status. What does that expression mean?

It might for example mean that the supplier has to be offered the first opportunity to supply the service and that the customer will not obtain the services from other suppliers until the contracted supplier had been offered a reasonable opportunity of meeting the requirements and had failed to do so. But this is to impute a good deal of interpretation into the expression. It could be argued that a preferred supplier is merely one with whom the customer has decided that it is prepared to deal, i.e. that “preferred” simply means “approved”, with no attendant preference or indeed exclusivity.

It would be as well for the parties to spell out precisely what is meant, in completely unambiguous terms.

The function of a force majeure clause is to relieve a contracting party, if he fails to perform his contractual obligations, from being liable for breach of contract when the cause of the failure is some event or circumstance out of his reasonable control. A service provider, for example, would be at risk of damages claims and indeed a termination of his contract even though he was ready and willing to perform his services but was prevented from doing so by some external event.

Some force majeure clauses set out non-exhaustive lists of events or circumstances outside of a party’s reasonable control, such as weather conditions, fire or other damage to premises, shortages of raw materials, labour disputes in their own supply chain etc. Sometimes a receiver of the services will seek to exclude certain events which would otherwise be generally understood as being outside of the defaulter’s reasonable control. This is either an aspect of risk sharing or in order to impose upon the service provider the responsibility of either reducing the risk in that area or otherwise taking on the responsibility of making plans to circumvent such events.

A force majeure clause is not a protection against rising costs of providing the service. If the contract has become uneconomic, it is still capable of being performed by the service provider. The service provider must incorporate specific language into the contract to deal with the risk of it becoming uneconomic.

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