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CONTRACT LAW UPDATE

With emphasis for the Oil & Gas industry

Thursday, 13th October 2011

John Dickinson - St John's Chambers

Overview of topics: - Force Majeure - Entire Agreement clauses - Dispute Resolution - Joint venture agreements - Indemnity and liabilities / mutual hold harmless provisions - High Court decision in AstraZeneca v Albermarle - Unfair Contract Term Act 1977 1. Force Majeure Clauses

Introduction A force majeure clause is a contractual term by which one (or both) of the parties is entitled to cancel the contract or is excused performance of the contract, in whole or in part, or is entitled to suspend performance of the contract or seek an extension of time upon the happening of specified events or events beyond his control. Typically a number of events are specified followed by the words “or any other causes beyond our control”. The party relying on the clause must prove the facts bringing the case within the clause. The party must therefore prove the occurrence of one of the events referred to in the clause and that he has been prevented, hindered or delayed form performing the contract by reason of the that event1. He must also prove2

i. That his non-performance was due to circumstances beyond his control; and

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ii. That there were no reasonable steps that he could have taken to avoid or mitigate the event or its consequences.

Recent Developments in Case Law 1.1 Carboex SA v Louis Dreyfus Commodities Suisse SA [2011] EWHC 1165 (Comm). Field J; 12.5.11. The Claimants, a subsidiary of Endesa, imported coal for use in Endesa's power stations. The Claimants chartered four vessels and an issue arose as to whether a

1 Agrokor AG v Tradigrain SA [2000] 1 Lloyd's Rep 497, 500. 2 Hoecheong Products Co Ltd v. Cargill Hong Kong Ltd [1995] 1 WLR 404, 409. Mamidoil-Jetoil Greek Petroleum v Okta Crude Oil Refinery (No.2) [2003] EWCA Civ 1031, [2003] 2 Lloyds LR 635, paragraph 32 - events beyond their control.

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delay in discharge at the port, by reason of official an unofficial strikes, was excluded from the computation of time for the charter. The Claimants claimed to rely on a force majeure clause. The force majeure clause reads as follows:

“In case of strikes, lockouts, civil commotions or any other causes included but not limited to breakdown of shore equipment or accidents beyond the control of the Charterers consignee which prevent or delay the discharging, such time is not to count unless the vessel is already on demurrage.”

Some of the vessels arrived at the port after the strikes had finished. One of the issues for the court was whether this clause included delays caused by congestion at the port following strikes, which strikes were already over when the vessel arrived at port. The critical passage in the judgment of Field J is at paragraph 65:

“I propose therefore to approach the construction of clause 9 in the manner adopted in The Amstelmolen. In my judgement, on their ordinary meaning, the words “In case of strikes . . . beyond the control of the Charterers which prevent or delay the discharging” cover delay in discharging caused by congestion due to the after effects of a strike that has ended. They also cover delay in discharging caused by congestion due to a strike where the vessel arrived after the strike had ended. The strike exception in Cl 9 is in similar terms to the strike clause in Leonis Steamship Co v Rank (No 2) (see para 20 above). There, loading was delayed because the ship was delayed in berthing for more than a month by congestion resulting from a strike which had finished before the vessel arrived at the port. As we have seen, Bigham J and the Court of Appeal held that the delay was covered by the strike exception in the clause.”

Given an environment in which industrial action is more prevalent, the case clarifies the extent of force majeure clauses that refer to strikes, lockouts and civil commotion. It seems that force majeure clauses that explicitly include such events will also include the effects of such events i.e. the delays they cause. Therefore, the courts will be prepared to recognise the effects of that event extending beyond the time at which the event itself ends. It will be a question of fact as to how long after a strike has ended it will still be an operative cause of an event covered by a force majeure clause. A drafting point to provide clarity would be to refer not just to a strike but the congestion at a port caused by a strike. 1.2 Springwell Navigation Corporation (a body corporate) v JP Morgan Chase Bank (a body corporate) (formerly known as the Chase Manhattan Bank) and others [2010] EWCA Civ 1221 Court of Appeal; 1.11.10.

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The case arises from protracted litigation between Springwell and JP Morgan Chase Bank emanating from the late-nineties Russian debt crisis. Springwell was the treasury company of a shipping group and had invested in Russian short-term debt derivatives called GKO linked notes issued by JP Morgan Chase. JP Morgan Chase issued proceedings seeking declarations of non-liability. The case went to the Court of Appeal on a number of issues, one of which was whether JP Morgan Chase were entitled to give a force majeure notice in relation to the GKO linked notes. The material part of the force majeure clause under consideration by the Court of Appeal read as follows:

“circumstances affecting the [MICEX] (MICEX means Moscow Interbank Currency Exchange) . . . the Central Bank of Moscow currency markets generally . . which were beyond CMIL's (a JP Morgan Chase subsidiary company) control”.

The Court of Appeal held that JP Morgan were entitled to give the notice. Aikens LJ, who gave the leading judgment, stated that:

“[208] If my analysis on the "deliverable" nature of the forward currency contracts is correct, then CMIL was under an obligation to CMBI to ensure that its S-Account had in it the roubles needed to be exchanged to enable CMBI to fulfil its obligation to pay (at the agreed exchange rate) the US dollar sum payable on the relevant "Business Day" under the relevant Forward Exchange Transaction. CMIL could not supply the roubles via the maturity of the underlying GKO, because of the decision of the Russian authorities not to redeem them. The moratorium and the post-moratorium "S-Account Amendment" meant that Russian banks, including CMBI, were prohibited from purchasing foreign currency from non-residents such as CMIL. Therefore there was no means by which CMIL could purchase roubles to fund its S-Account which had no roubles in it.

[209] Therefore, it seems to me that there was a force majeure event within the terms of cl 22.1.2 of the FMA which prevented or delayed CMIL from performing its obligation to provide roubles in its S-Account. The events were "circumstances affecting the [MICEX] (MICEX means Moscow Interbank Currency Exchange: see FMA definitions.) . . . the Central Bank of Moscow currency markets generally . . ." which were beyond CMIL's control. At the least, as the judge found, ([2/230]) CMIL's decision to send a force majeure notice to CMBI on 24 November 1998 was a reasonable one. In my view it cannot possibly be characterised as negligent for the purposes of s 3(c) of the GKO LN terms. I agree with Gloster J's further conclusion that if CMIL had not sent a force majeure notice, it ran the risk (at the least) that its failure to have roubles in the S-Account at maturity of each of the forward currency contracts would be treated as a breach of contract by CMBI entitling it to terminate each of

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the contracts under the provisions of cl 20.1.1 of the FMA. Again, assuming that CMBI was acting on its own behalf, it would be obviously in its own interests to do just that. At least by giving a force majeure notice, CMIL kept the position open for a period of 15 days, under cl 22.3.

[210] Therefore, I agree with the judge's conclusion that there was no "gross negligence" let alone "wilful default" in CMIL giving the force majeure notice on 24 November 1998.”

It is apparent that the default of a country, in particular circumstances, would constitute a force majeure event. The Russian central bank had prevented spot currency transactions that would allow the funding of forward positions that underpinned the GKO linked notes making it impossible for JP Morgan Chase to honour its commitments. Aikens LJ held that the only ‘sensible’ route for JP Morgan to take was to issue a force majeure notice. A drafting point to take forward would be to consider including currency collapse or currency market suspension as a specific event to list in a force majeure clause. The case also held that a 'non-reliance statement' in the agreement terms were operative so as to create a contractual estoppel to prevent a duty of care to give advice arising. 1.3 Tandrin Aviation Holdings Ltd v Aero Toy Store LLC and another [2010] EWHC 40 (Comm) Hamblen J; 19.1.10 The case involved an analysis as to whether an economic downturn constituted a force majeure event. The case concerned the sale by Tandrin to ATS of an executive jet aircraft for $31.75m. ATS paid a $3m deposit but failed to take delivery of the aircraft or pay the residual purchase price. The force majeure clause reads as follows:

“Force Majeure. Neither party shall be liable to the other as a result of any failure of, or delay in the performance of, its obligations hereunder, for the period that such failure or delay is due to: Acts of God or the public enemy; war, insurrection or riots; fires; governmental actions; strikes or labor disputes; inability to obtain aircraft materials, accessories, equipment or parts from vendors; or any other cause beyond Seller's reasonable control. Upon the occurrence of any such event, the time required for performance by such party of its obligations arising under this Agreement, shall be extended by a period equal to the duration of such event.”

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The principal defence which ATS advanced to seek to justify its refusal to accept delivery of the Aircraft was that the alleged “unanticipated, unforeseeable and cataclysmic downward spiral of the world's financial markets” triggered the force majeure clause in the Agreement, thereby postponing the time for ATS to complete the purchase and potentially affecting the price at which ATS should be entitled to purchase the Aircraft. Hamblen J at paragraph 40 rejected that submission:

“It is well established under English law that a change in economic/market circumstances, affecting the profitability of a contract or the ease with which the parties' obligations can be performed, is not regarded as being a force majeure event. Thus a failure of performance due to the provision of insufficient financial resources has been held not to amount to force majeure – see The Concadoro [1916] 2 AC 19; and likewise a rise in cost or expense – see Brauer & Co (GB) Ltd v James Clark (Brush Materials) Ltd [1952] 2 All ER 497, [1952] 2 Lloyd's Rep 147, [1952] 2 TLR 349”.

It was also noted in paragraph 44 of the judgment that the phrase “any other cause beyond the Seller's reasonable control” should be read in the context of the entire clause. It was held that while there is no requirement to construe the phrase “any other cause beyond the Seller's reasonable control” ejusdem generis (of the same kind, class or nature) with the earlier specific events listed, it was held to be telling that there was nothing in any of the specific examples of force majeure which was even remotely connected with economic downturn, market circumstances or the financing of the deal. Pleading economic downturn as a force majeure event therefore has been given judicial shorthrift. Seeking to draft a standard form force majeure clause to include an economic downturn event would be liable to attack under section 3 of UCTA. 2. Entire Agreement Clauses 2.1 Standard Chartered Bank v Ceylon Petroleum Corp [2011] EWHC 1785 Hamblen J. 11.7.11. The claimant bank claimed the sum allegedly due under two derivative transactions entered into with the defendant Sri Lankan state-owned oil company, which was an importer, refiner and retailer of petroleum products. The defendant oil company had begun to enter into derivative transactions with banks in an attempt to protect itself from the rising price of oil. The derivative contracts entered into by the company with the bank required the banks to make payments to the company when oil prices were high and for the company to make payments to the bank if the price of oil fell below an agreed floor price.

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Issue arose as to the authority of the companies executives to sign the agreements and whether they were void under the Ceylon Petroleum Corporation Act 1961. The Springwell case was followed in relation to the effect of 'non-reliance statements' clause preventing a duty of care to give advice arising. The Master Agreement included the following entire agreement clause:

“(a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of any party for fraud"

The entire agreement clause was held to have given rise to a contractual estoppel preventing the company from asserting a counter claim in misrepresentation (paragraphs 567-568) . The entire agreement clause was held to have satisfied the requirement of reasonableness in section 3 of Misrepresentation Act 1967 (paragraph 569). 2.2 Axa Sun Life v Campbell Martin Ltd [2011] EWCA Civ 133; Court of Appeal ; 18.2.11. Axa had appointed Campbell to act as its authorised representatives in providing insurance products to customers. The terms of appointment were set out in a standard form agreement. Under the agreement Axa could claw back commission paid to Campbell if customers cancelled their products. The agreement included an Entire Agreement Clause:

"This Agreement... constitute the entire agreement and understanding between you and us in relation to the subject matter thereof... this Agreement shall supersede any prior... representations... relating to the subject matter of this agreement... ".

When the agreement was terminated Axa claimed against Campbell for monies due and in its defence Campbell asserted that it had been induced to enter into the contract by misrepresentations from Axa. The Entire Agreement Clauses was held to give both sides certainty as to the terms of their contract and it was therefore a reasonable provision to have been included in the agreement - applying Inntrepreneur Pub Co Ltd v East Crown Ltd

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(2000) 2 Lloyd's Rep 611 Ch D (paragraphs 63 to 66). However the clause was not held to cover . Rix LJ held that the entire agreement clause would not be construed to extend to 'misrepresentations' as this was not covered by the word 'representations'. 'Representations' was likely to refer to matters which might be argued, but for the clause, to have become terms of the agreement. (paragraph 81). 3. Dispute Resolution - Costs where ADR declined 3.1 The Claimant appearing on the Register of the Corby Group Litigation v Corby District Council [2009] EWHC 2109 (TCC) Akenhead J. 11.8.09. The concept of ‘unreasonable refusal to mediate’ and its application, first established in Halsey v Milton Keynes General Health NHS Trust [2004] EWCA Civ 576, was considered in detail. The Halsey factors to be taken into account when assessing the reasonableness of refusing mediation were re-iterated:

(a) the nature of the dispute; (b) the merits of the case; (c) the extent to which other settlement methods have been attempted; (d) whether the costs of the ADR would be disproportionately high; (e) whether any delay in setting up and attending the ADR would have been prejudicial; and (f) whether the ADR had a reasonable prospect of success.

It should be noted that this was not intended to be a definitive list and Akenhead J paid particular attention to the time at which the request for mediation was made. He held that at the time mediation was requested the defendant’s solicitor’s suggested, with some justification, that it would be better to defer any decision on this until the exchange of expert evidence. This having taken place, the defendant’s solicitors wrote that there was no common ground between the parties and they had “no reason at all for the defendant to consider that it should make any concessions”; they refused the offer of mediation because it would be “highly unlikely to be productive in reaching a conclusion”. Given the timing of the request for mediation and the circumstances of the case this was considered reasonable by Akenhead J and the defendants, despite ‘losing’ the substantive litigation, were not penalized for their refusal to participate in mediation. 3.2. Multiplex Construction (UK) Ltd v Cleveland Bridge (UK) [2008] EWHC 2280, TCC; Jackson J 29.9.08 Where a party has refused mediation, the court has a number of factors to consider, in relation to r.44.3(4)(a) and the parties’ conduct, rather than (as in Halsey) the single issue of whether refusal was unreasonable.

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Jackson J gave a comprehensive review of the cost authorities from which he derived the following principles:

i. In commercial litigation where each party has claims and asserts that a balance is owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action.

ii. In considering how to exercise its discretion the court should take as its starting point the general rule that the successful party is entitled to an order for costs.

iii. The judge must then consider what departures are required from that starting point, having regard to all the circumstances of the case.

iv. Where the circumstances of the case require an issue-based costs order, that is what the judge should make. However, the judge should hesitate before doing so, because of the practical difficulties which this causes and because of the steer given by r 44.3(7).

v. In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order.

vi. In considering the circumstances of the case the judge will have regard not only to any Pt 36 offers made but also to each party's approach to negotiations (in so far as admissible) and general conduct of the litigation.

vii. If (a) one party makes an order offer under Pt 36 or an admissible offer within r 44.3(4)(c) which is nearly but not quite sufficient, and (b) the other party rejects that offer outright without any attempt to negotiate, then it might be appropriate to penalise the second party in costs.

viii. In assessing a proportionate costs order the judge should consider what costs are referable to each issue and what costs are common to several. In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order;

ix. In considering the circumstances of the case the judge will have regard not only to any part 36 offers made but also to each party’s approach to negotiations (insofar as admissible) and general conduct of the litigation.

Apart from the clear statements of principle the judgment is also helpful in indicating the approach of the court to three particular matters that arose on the facts.

1. At one point Multiplex made a claimant's Pt 36 offer. As that offer turned out to be significantly higher than the sum awarded in the judgment the judge did not criticise Cleveland Bridge for failing to accept the offer. However, he did criticise them for failing to make a counter offer.

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2. Later Multiplex made another offer. This time it was not under Pt 36 and again it was too high. However as well as an offer it shared Multiplex's assessment of the case and offered to explore the possibility of an agreement. The judge described this as extremely constructive and criticised Cleveland Bridge for failing to respond by engaging in a dialogue as invited.

3. Despite his broad consideration of conduct the judge did also say that

there was a heavier burden on a debtor to make a defendant's Pt 36 offer than there was on a creditor to make a claimant's Pt 36 offer. What perhaps is notable is that the judge regarded both parties as under a burden to make offers.

Both the principles and these three points from the consideration of the facts show how the courts have moved on. It is not just that rules are provided to enable parties to protect themselves in costs. Parties are expected actively to seek to settle their differences and to behave reasonably and constructively in doing so; they risk penalty in costs if they do not. As Jackson J said 'It is the policy of the law that litigants are encouraged to settle their differences upon reasonable terms'. Parties must be aware that they are expected to follow that policy. 4. Joint Venture Agreements 4.1 Shell UK Ltd and others v Total UK Ltd and another [2010] EWCA Civ 180; Court of Appeal;

Background Facts. The case involved establishing liability for the largest peacetime explosion in the UK at the Buncefield oil depot in Hertfordshire. The Court Appeal examined the Joint Venture Agreement that existed between the parties who owned/controlled the tank where the explosion originated and whether Total had an indemnity against its own negligence. How the Court of Appeal construed the relevant contract/JVAs Waller LJ stated that the right approach was to consider the language used in the various agreements. He also stated that ‘we are not inclined unless driven to it to contemplate that where detailed agreements are drawn up, one will have been tacitly extended or by implication extended’. Explicitly on how the JVA was to be construed in relation to the other contractual documentation he stated:

“On any view there was in existence a management agreement; on any view there existed the operating regulations, and on any view there existed the JVA as amended all of which need to be construed standing as they did side by side. The question is whether Total can point to any term of any of the agreements which provides them with an indemnity.”

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Consequently, where parties have drawn up a series of detailed agreements and the draftsmen have expressly dealt with negligence, a significant rule of construction is that which would suggest that where it has not been expressly referred to, that would be likely to be a deliberate decision by the draftsman to exclude negligence. Furthermore, where parties have used language which means one thing in a contract to which they were parties, and they use the same language in another, it is likely that it will have the same meaning. Both parties relied on this and in one sense it holds the key (the Buncefield depot contractual arrangements, to some extent, replicated arrangements that existed at Avonmouth where the parties had a similar depot). Total said that the operating regulations in place at the time of the explosion were drafted to be attached to a contract (the execution agreement) under which the operator was to be entitled to an indemnity against their own negligence, and clause 1.2 in those regulations thus should be construed so as to provide that indemnity. They said that when the operating regulations came to be attached to another contract (the novation agreement) they should maintain their meaning. Chevron argued that Total were wrong about their construction of clause 1.2 as attached to the execution agreement although they accepted by a different provision it was contemplated that the operator was to be indemnified against their own negligence, but they also submitted that, since the language of clause 1.2 of the operating regulations was similar to that used over the years and which when used previously did not supply an indemnity to the operator for its own negligence, its meaning remained the same. The Joint Venture Agreement Total sought to assert a right to an indemnity as between participants to the joint venture under the original joint venture agreement (JVA). Chevron asserted that that clause was no longer applicable as at the time of the explosion in the light of other contracts made since the original JVA or that it did not entitle Total to an indemnity for its own negligence and/or when acting as operator or manager as opposed to participant. Clause 9.2 of the JVA provided that each of Texaco and Fina would:

“indemnify the other as to one half of any claim by or liability to (including any costs and expenses necessarily incurred in respect of such claim or liability) any party not being a party hereto, arising from the Joint Operations …”

Clause 1.3 of section C of the operating regulations relating to Hertfordshire Oil Storage Ltd (HOSL), a jointly held vehicle company set up 'to operate and maintain’ the facilities owned by Texaco and Fina at Buncefield, provided to participants an indemnity from HOSL in respect of 'all claims by third parties' for

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personal injury or damage to property made against participants arising 'out of or in the course of or by reason of the Terminal Operations'. The Court’s findings on the JVA in relation to Indemnity In relation to Clause 9.2 under the JVA, the Court of Appeal found that the judge at first instance was right in his conclusion that once the provisions dealing with how participants should be indemnified in the operating regulations came into force, clause 9.2 was redundant. It also held that in any event clause 9.2 was intended to deal with sharing as between participants. It would not cover a liability of Fina in negligence when acting as operator. There would also be a strong argument that it would not indeed apply to sharing a claim brought against a participant in relation to a participant's own negligence. In relation to clause 3, Waller LJ held that if HOSL was not insured it provided that the participants shall indemnify HOSL as to its percentage interest. It did not refer expressly to the negligence of the participants (the indemnified). He then went on to state:

“This we think is important because negligence of the indemnified is expressly referred to as being within the 'knock for knock' indemnities covered by 1.1 (participants' own negligence within indemnity from HOSL) and 1.2 (HOSL's own negligence within indemnity from participants). We are also of the view that 1.3 applies simply to indemnify participants as participants and that it would be a strained construction to apply it to Fina qua operator.

We do not think that any assistance is gained from the fact that under the accounting procedure the aim was to ensure that the operator neither gained nor lost by virtue of being operator. That was concerned purely with the economics and again could not be construed to cover what would occur if the operator were negligent without some express reference to that possibility when negligence was expressly dealt with by the draftsman elsewhere. Thus on two bases we think 1.3 would not provide Fina with an indemnity for its negligence—first because that negligence would have been committed as operator and not participant and secondly because we take the view that where the person to be indemnified was to be indemnified in relation to his own negligence the draftsman in 1.1 and 1.2 had made that clear and that thus 1.3 was deliberately drafted not to cover a participant in relation to its own negligence. We would also add that it would seem to us unlikely that the parties to the joint venture would produce a management agreement in relation to

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'back office' matters which did not indemnify Fina against its own negligence, but agree in relation to operating activities that as operator Fina's own negligence should be covered.”

Drafting Advice/Mitigation of Risk: Where parties have drafted a series of contractual agreements and the draftsmen have expressly dealt with negligence in certain parts the documentation, a cardinal rule of construction is that where negligence has not been expressly referred to, that would be likely to be a deliberate decision by the draftsman to exclude negligence. The issue of ‘secondment’ under a JVA that arose in the Buncefield litigation There was an issue at trial as to who employed the employees who were held to be responsible, in part, for the negligent act that caused the Buncefield explosion. Drafting Advice/Mitigation of Risk – avoid use of the word ‘secondment’ in drafting JVAs and any other contractual documentation. Case law remains equivocal on the meaning of the word despite the findings here. It remains unclear as to what the term means in law. 5. Indemnities and Liabilities

5.1 Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16; Supreme Court, 6.4.11 This is a Supreme Court case on the meaning of the term ‘affiliate’ and whether an affiliate was indemnified under a charterparty. An oil rig supply vessel was chartered by the claimant from the defendant. While a subsidiary of the claimant was cleaning the tanks a fire broke out. The charterparty was governed by English law and contained an indemnity by the defendant exempting the claimant and all it subsidiaries from all claims and losses resulting from loss and damage to the vessel. The Indemnity. The claimant, relying on the exclusive jurisdiction clause in the charterparty, issued proceedings in England seeking a declaration that it was entitled, as an affiliate of the parent company and the charterer, to claim the protection of the indemnity in the charterparty in answer to the defendant's claim in the Scottish proceedings because it was a 'subsidiary' of the parent company as defined by s 736(1)(c) of the Companies Act 1985 Act, which provided that a company was a 'subsidiary' of another company, ie its holding company, if the holding company was a member of it and controlled a majority of the voting rights in it. The defendant contended that the claimant was not an affiliate of the parent company or the charterer because its shares were charged to a Scottish bank under a deed of pledge which required the shares to be registered in the name

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of the bank or its nominee and the parent company to act as the bank's proxy when exercising voting and other rights and powers in respect of the shares and prohibited the parent company from exercising those powers in a manner which would adversely affect the value of the security or result in the shares being registered in the name of anyone but the bank. The Meaning of Affiliate: The relevant provisions are found in the Companies Act 1985 (as amended by the Companies Act 1989), but there are identical provisions re-enacted by the Companies Act 2006, and the issue on appeal was of general importance given the statutory definition of 'subsidiary' is incorporated by reference in other legislation (eg s 65 of the Transport Act 2000; s 223 of the Enterprise Act 2002; s 196 of the Energy Act 2004). Incorporation of the statutory definition in commercial contracts is very common. In this case it had an unexpected result, which arose through a combination of two factors.

1. The statutory definition of subsidiary in important respects uses the term 'member' which normally connotes the person on the share register.

2. The second factor flows from a difference between English and Scots law and practice relating to the holding of shares by way of security: under Scots law and practice the mortgagee is registered as the holder of the shares, by contrast with the position in England, where commonly an equitable charge by way of deposit of the share certificate will constitute the security. Under Scots law the only way in which a fixed security over shares can be taken is by fiduciary transfer of the shares to the creditor. The security is known as a share pledge, under which registration of the creditor as holder of the shares constitutes the security.

The Supreme Court’s Decision on the 'affiliate' issue The critical question was whether, when the fire occurred, Enviroco was a subsidiary of Asco in terms of s 736(1)(c) of the Companies Act 1985. For the indemnity to apply, Asco had to be 'a member' of Enviroco on that date. Unquestionably, Asco had at one time been a member of Enviroco, but Asco entered into a deed of pledge with the Bank of Scotland in order to secure certain obligations and liabilities of Asco to the bank and certain other lenders. Although the agreement was described as a 'Deed of Pledge', the security which it created did not depend on the transfer of possession of the security subjects. Rather, Asco pledged, charged and assigned all its shares in Enviroco to the bank and until the relevant liabilities had been discharged in full, Asco had to register the shares in the name of the bank or its nominees and it had to procure that the bank or its nominees remained the registered holder of the shares until the relevant liabilities had been discharged. In short, the security was to be created by transferring title in the shares to the bank's nominees. This would give the bank's nominees a real right in the shares in the event of Asco's insolvency.

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Asco took the steps required by the deed of pledge, with the result that the register of members of Enviroco was amended to remove the name of Asco and to add the name of the nominees of the bank as a member. When this was done, Bank of Scotland Branch Nominees Ltd (Nominees) appeared on the register as a member, holding the shares which had previously been held by Asco when it was a member. Therefore, Asco was no longer a member of Enviroco and had been replaced by Nominees. Of course, if Asco discharged its relevant liabilities the bank was required to transfer or cause its nominees to transfer all of the shares in Enviroco back to Asco. At the time of the fire though Asco did not appear on the register of members of Enviroco and Nominees did. Under the clear terms of the legislation, incorporated by reference in to the agreement, Enviroco was not a subsidiary of Asco, since Asco was not a member of Enviroco. There was no clear drafting error. The Court could not re-write the contract to get over the unforeseen consequence and Enviroco was not an affiliate entitled to rely upon the indemnity. Drafting Advice: The facts of the case are unusual in that the ‘ownership’ structure of the subsidiary was arguably not commonplace. The case is made more unusual by the apparent anomaly that exists in these particular circumstances between Scots and English law. However, it is clear that indemnity clauses need to take into account the decision where the clause aims to indemnify affiliates/subsidiaries of the principal contracting party and the ‘ownership’ of those affiliates/subsidiaries is complicated where the shares in the subsidiary are registered in the name of a bank in Scotland. Mutual Hold Harmless Provisions

The Farstad Supply A/S v Enviroco Limited case also looked in detail in relation to indemnities on whether Enviroco could rely on a mutual hold harmless provisions in the charterparty in which a regime was laid out allocating risk and responsibility in respect of the main types of liability situations that might arise between Farstad and the Charterer. In particular Farstad was to ‘defend and hold harmless the Charterers, its Affiliates and Customers, in respect of any loss or damage to the Vessel or to other property of Farstad’. Enviroco sought to rely on the mutual exception and indemnity clauses on the basis that it was an “Affiliate” of Asco UK Ltd because each of them was a subsidiary of ASCO. The Supreme Court’s Construction of the Hold Harmless Clause The Supreme Court held that the indemnity and hold harmless clause under discussion had a mixed quality, operating as an indemnity on some occasions and as an exclusion on others. The clause would act as an indemnity when being used to determine who was to bear responsibility for “third party exposure”. However, when (as here) the clause was being used to regulate “direct exposure to the other contracting party”, the “hold harmless” portion became engaged, and the clause would operate so as to exclude liability.

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Implications of the Farstad decision The following is largely taken from the Edinburgh Law Review 2011 - Contribution, indemnification and exclusion: Farstad in the Supreme Court. A pragmatic approach to dispute resolution has meant that litigation in relation to hold harmless provisions is rare. There has therefore been a lack of authoritative discussion of the indemnity and hold harmless clause. But there are good economic reasons to re-allocate risk as the industry does and even when the law is unclear, work must still be done and standardised wording settled upon. The fact remains that the holding that indemnity and hold harmless clauses sometimes operate as exclusions of liability has come as a surprise to many practitioners. Farstad 's full import will only become clear with time, but at present it seems unlikely that it provides serious cause for concern. The most obvious potential consequence would appear to be that the Unfair Contract Terms Act 1977 (UCTA) will now become engaged. UCTA had hitherto been largely overlooked by the oil and gas industry as the restrictions imposed upon the use of indemnity clauses apply only when the indemnifying party deals as a consumer. However, as indemnity and hold harmless clauses would now appear to function as exclusion clauses when they operate in the context of “direct exposure to the other contracting party”, the various restrictions imposed by UCTA now need to be considered. Thus, if a party wishes to rely upon an indemnity and hold harmless clause to regulate losses which, in Lord Mance's formulation, fall into the category of direct exposure to the other contracting party it will have to demonstrate that the provision satisfies UCTA's requirements. This may, in some circumstances, cause doubt as to whether a particular provision should be enforced, but is unlikely to cause serious problems. The provisions which would be of greatest concern to the industry would be the rule, contained in sections 16(1)(a) and 2(1) of the Act, that any attempt by a party to restrict its liability for death or personal injury resulting from negligence will be ineffectual. At first sight, this prohibition might seem to be triggered by an indemnity and hold harmless clause which pertains to losses associated with personal injury or death and which applies even in the case of negligence on the part of the party so indemnified and held harmless. Such clauses are a central plank of the industry's risk allocation model. It would be little short of a disaster for the industry if such clauses were ruled unenforceable. They have hitherto been seen not as exclusions of liability but background risk allocation clauses, which specify who is to bear ultimate responsibility for paying damages. As neither contracting party will have corporeal bodies to injure, claims relative to personal injury cannot be instances of direct exposure to the other contracting party, but will instead invariably be made by persons who are third parties. As a result, the clause would seem to operate as an indemnity, and sections 16(1)(a) and 2(1) UCTA would not be engaged. Assuming that this is so the impact of Farstad will not be great.

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6. High Court decision in Astrazeneca v Albermarle 6.1 Astrazeneca UK Ltd v Albemarle International Corporation and another [2011] EWHC 1574 (Comm); Flaux J. 21.6.11 Factual Background The case involved whether a contract to supply chemicals between AZ and Albermarle had been breached by one or both parties. AZ purchased ingredients for its anesthetic product from Albermarle and granted Albermarle a right of first refusal before it would purchase the ingredient from elsewhere. The case is of interest in that it involved a judicial examination of the issue of rights of first refusal; a subject about which both case law and the textbooks on the law of contract provide little guidance. Many of the cases in which a right of first refusal has been considered are contracts for the sale of land or leases of land and concern whether the right creates an interest in land, generally it is considered that it does not. It was held that AZ was in breach of a contract of first refusal both in accepting an alternative supplier’s offer before giving Albemarle disclosure of and the opportunity to match that offer and in failing subsequently to award Albemarle the business when Albemarle matched the competitor's offer. Rights of First Refusal Chitty on Contracts contains a fairly perfunctory passage at paragraph 2-127 dealing with the distinction between options and rights of pre-emption, which is essentially another name for a right of first refusal. Halsbury's Laws of England 4th edition volume 9(1), Reissue, at paragraph 641is more useful:

“Similar to the contract of option is the contract of 'first refusal' or 'pre-emption', whereby one person (A) enters into a contract with a second person (B) which provides that if A contemplates entering into a certain defined contract or type of contract with anyone, he will first offer to do so with B. That type of contract differs from the contract of option in that A has made no positive offer; his duty will usually be the purely negative one of not contracting with any third person (C) in the defined respect unless and until he has first offered to do so with B, though that offer may be conditional or assignable; but it is conceivable that his duty may merely be that, if he does so contract with C, he will make that contract subject to B's right of first refusal. Where A in breach of the first refusal contract sells to C, it may be that the first refusal becomes an option. There may be a contract of option and first refusal, whereby B is given an option and a right of first refusal; or where B is granted an option in return for his granting a right of first refusal. Similarly, there may be a

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contract of double option where each grants the other an option on the happening of a certain event.”

Flaux J. in his judgment makes the point that a difficulty with contracts of first refusal is whether the parties have completed their negotiations and have reached an agreement; if not, there may be no binding contract, merely an agreement to negotiate. On the other hand, there may be a binding provisional or conditional agreement; or a binding collateral agreement not to negotiate with a third party (a 'lock-out agreement'). Where the parties have not completed their negotiations, it seems that a binding 'lock-out' agreement cannot be created by implying a term that A will continue to negotiate with B in good faith; but it may be that an express agreement to use best endeavours to conclude a contract with B is binding, whereas there can be no contract on the basis of such an implied term. Ratio on Right of First Refusal A right of first refusal;

“confers a right to be given an opportunity to match any third party offer which the grantor of the right might be otherwise minded to accept, and, in the event that the grantee matches the offer, to be awarded the business to which the offer relates. That construction of the right of first refusal is supported by a number of authorities, which, albeit all at first instance, seem to me to support Miss Carr's submission about this irreducible minimum.” (paragraph 35 of judgment).

Furthermore, a right of first refusal constitutes:

“a right to receive a contractual offer on terms which the party who has granted the right of first refusal is prepared to accept, even though the detailed terms of any contract may require further negotiation and might ultimately not eventuate in a contract at all. As I have already noted, it is also authority for the proposition that the grantor of the right of first refusal is obliged to make a contractual offer, even though there is no express covenant to that effect in the term containing the right of first refusal.” (paragraph 44 of judgment).

Advice on drafting for solicitors Two pieces of advice emerge from the judgment in AstraZenenca v Albermarle: 1. Certainty of contract terms: Flaux J suggests ways in which the contract could have been made more certain in his judgment. If there is an intention to provide a supplier with an opportunity to negotiate a contract on mutually acceptable terms for the supply of x product, he states that a clause such as “[AZ] will notify [Albemarle] and will give [Albemarle] the opportunity to participate in any request for proposal and to negotiate a contract on mutually acceptable terms” would have been sufficient to achieve that effect.

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2. Full and fair disclosure where there is a right of first refusal: There was a secondary issue of construction in the case and that was whether the grantor is obliged to act in good faith and to provide the grantee with full disclosure of the terms of any third party “deal” which it is minded to accept. Albemarle pleaded its case as to good faith and full disclosure in the alternative as express terms of the right of first refusal or as implied terms necessary to give the clause business efficacy. It was held that if there is a third party deal with which the grantor is minded to proceed, in order to enable the grantee to exercise its right of first refusal and match that offer, full and fair disclosure of that deal by the grantor is required. Flaux J recognised the importance of providing full details of whatever contractual “deal” is contemplated, so as to enable the right of first refusal to be properly exercised. What was required was good faith in setting out the precise terms of the offer the grantee had to match and which the grantor was minded to accept. Astrazeneca case: the proper approach to the construction of a clause limiting the amount of damages Clause M provides:

“ Claims: No claims by BUYER of any kind, whether as to the products delivered or for non-delivery of the products, or otherwise, shall be greater in amount than the purchase price of the product in respect of which such damages are claimed; and failure to give written notice of claim within sixty (60) days from the date of delivery, or in the case of non-delivery, from the date fixed for delivery, shall constitute a waiver by BUYER of all claims with respect thereto. In no case shall BUYER or SELLER be liable for loss of profits or incidental or consequential damages…….."

AZ argued that this clause did not cover deliberate repudiatory breach relying on the decision of Gabriel Moss QC (sitting as a Deputy High Court Judge) in Internet Broadcasting Corporation v MAR LLC (Marhedge) [2009] EWHC 744 (Ch); [2010] 1 All ER (Comm) 112 and in particular the passage: “There is a presumption, which appears to be a strong presumption, against the exemption clause being construed so as to cover deliberate, repudiatory breach.....The words needed to cover a deliberate, repudiatory breach need to be very “clear” in the sense of using “strong” language such as “under no circumstances...” Flaux J rejected that passage as being wrong in law, as inconsistent with the rejection of any doctrine of fundamental breach, which the House of Lords in both Suisse Atlantique Societe d'Armement Maritime v NV Rotterdamschke Kolen Centrale [1967] 1 AC 361 and Photoshop Production v Securicor [1980] 1 AC 827 concluded was no longer good law. Deliberate breaches of contract can be treated in the same way as any other breach (Judgment paragraph 293) and it is an issue of construction of the clause whether a clause covers a deliberate breach (judgment paragraph 301

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Conclusions on non-reliance of the exemption clause where deliberate repudiatory breach Chitty at paragraphs 14-020 and 14-024 is unequivocal in rejecting the notion that there is such a thing as a fundamental breach or that an exception clause cannot be relied upon where there has been a deliberate repudiatory breach. Suisse Atlantique and Photo Production make clear there is no presumption that, in inserting a clause of limitation or exclusion into a contract, the parties are not contemplating its application to a fundamental breach or a breach of a fundamental term. The question in all cases whether the clause, on its construction, extends to cover the obligation or liability which it is sought to exclude or restrict. It is very unlikely that the judgments of Lord Wilberforce in Suisse Atlantique and Lord Diplock in Photo Production that fundamental breach is no longer good law would be overruled and such a principle revived even if AstraZeneca is appealed. 7. Unfair Contract Term Act 1977

The Act covers contract terms and non-contractual notices that seek to exclude or restrict liability. As an overview: 1. Negligence: UCTA prevents a contract term from excluding liability for negligence which causes death or personal injury. UCTA prevents a contract term from excluding liability for negligence which causes damage other than death or personal injury, unless such term is reasonable. 2. UCTA controls terms that seek to exclude or control terms implied by statute or the common law in contracts of sale of goods, hire purchase and other contracts for the supply of goods. 3. UCTA controls clauses that seek to exclude or restrict liability for breach of contract - they are subject to a test of reasonableness. Section 3 Liability arising in contract

(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term--

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled--

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

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except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness. Recent cases: 7.1 Springwell Navigation Corporation v JP Morgan Chase Bank and others [2010] EWCA Civ 1221; Court of Appeal; 1.11.10 As setout at paragraph 1.2 above Springwell is the investment arm of a shipping organization and sued JP Morgan Chase for misrepresentation and breach of duty in relation to the sale of Russian sovereign debt derivatives. UCTA in the context of the case Most of the relevant wording of the letters of contract was treated by the court as wording which set out how JP Morgan Chase was agreeing to contract with Springwell. This wording was not an exclusion clause as such and therefore could not fall foul of UCTA. However, part of the letters of contract stated: '… no representation or warranty, express or implied, is or will be made by either [Chase], their representative officers, servants or agents or those of their associated companies in or in relation to such documents or information ….' The first instance judge Gloster J cited Christopher Clarke J in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland PLC [2010] EWHC 1392 that 'to tell the man in the street that the car you are selling him is perfect and then agree that the basis of your contract is that no representations have been made or relied on, may be nothing more than an attempt retrospectively to alter the character and effect of what has gone before and in substance be an attempt to exclude or restrict liability' and as such stated that it would be inclined to regard that part of the contract as being subject to the UCTA regime. However, the court went on to find that this wording was reasonable and that JP Morgan Chase must therefore be entitled to rely on it to exempt Chase from liability for claims under s 2 of the Misrepresentation Act and for claims based on negligent misstatement. Furthermore, Gloster J found that (with the exception of a small number of genuine exclusion clauses, which were immaterial) most of the relevant provisions did not engage the Misrepresentation Act or UCTA. She found (paras 669 – 671) that the effect of the particular clauses was to preclude any representation, whether of fact or opinion, being made at all because Springwell and JP Morgan Chase had contracted on the express basis that Springwell was taking its own decision to enter into the transactions, independently and without reliance on the bank, and because the latter was not assuming any responsibility for statements of fact or opinion that were made. Having pointed out the distinction between clauses which exclude liability and clauses which define the terms upon which the parties are conducting their business, in other words clauses which prevent an obligation from arising in the

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first place, she referred to Tudor Grange Holdings v Citibank, in which Sir Nicholas Browne-Wilkinson V-C stated that:

“The Act of 1977 [UCTA] is normally regarded as being aimed at exemption clauses in the strict sense, that is to say, clauses in a contract which aim to cut down prospective liability arising in the course of the performance of the contract in which the exemption clause is contained.”

She accepted that:

“terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of UCTA. Otherwise, every contract which contains contractual terms defining the extent of each party's obligations would have to satisfy the requirement of reasonableness.”

The Court of Appeal accepted this analysis. Drafting Advice: Parties are entitled to agree to any terms including the basis upon which the contract is being entered into. This should be set out in the obligations clauses rather than seeking to limit the obligations in the clauses that seeks to exclude liability or to limit damages. Were the contractual terms to bare no relationship to the basis on which the parties actually intended to conduct their relationship from the outset, then the contract could potentially be characterised as a sham. 7.2 Schyde Investments Ltd v Cleaver and others [2011] EWCA Civ 929. Court of Appeal; 29.7.11 Factual Background. The case involved the sale of a property on the basis of an alleged misrepresentation as to whether there was a planning application related to the property. The Issue. In the Court of Appeal the issue turned on whether the Judge was right to conclude that Condition 7.1.3 of the Standard Conditions of Sale (4th ed) - which excluded error or omission except in the case of fraud or recklessness - and was incorporated into the contract, was of no effect on the facts of the case because it failed to satisfy the requirement of reasonableness in s.3 of the Misrepresentation Act 1967 (“the 1967 Act”), as provided for by s. 11(1) of the Unfair Contract Terms Act 1977 (“UCTA”). The Court of Appeal upheld the trial judge's finding that the Appellants had failed to satisfy him that Special Condition 7.1.3 was fair and reasonable. 7.3 Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc [2010] EWHC 1392 (Comm) Christopher Clarke J; 11.6.10 Factual Background. RBS lent an ENRON subsidiary company $138m. It then syndicated the loan and Raiffeisen lent $10m as part of that syndication.

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Raiffessen claimed to have been induced to lend the money by several misrepresentations by RBS. It sought to recover that part of the loan which it had lost (plus interest) as a result of Enron's collapse. UCTA in the context of the case Christopher Clarke J considered whether or not RBS had shown that the Relevant Provisions satisfied the requirement of reasonableness as stated in s 11(1) of the Unfair Contract Terms Act 1977 namely that:

“the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”

In his examination of the reasonable of the relevant provisions he noted that the courts have on several occasions expressed the undesirability, generally speaking, of striking down terms freely agreed between large commercial parties who are usually to be regarded as the best judges of their own interests: see Lord Wilberforce in Photo Productions Ltd v Securicor [1980] AC 827, 484D-E; Tuckey LJ, in Granville Oil & Chemicals v Davis Turner [2003] EWCA Civ 570; Chadwick LJ expressed this particularly strongly in two cases: Grimstead v McGarrigan [1999] EWCA Civ 3029 at para 29 (Clarke LJ, as he then was, agreed with these views in National Westminster Bank v Utrecht-America Finance Co [2001] EWCA Civ 658. Two reasons were cited as to why the courts should give effect to an acknowledgement of non-reliance in a commercial contract between experienced parties of equal bargaining power – a fortiori, where those parties have the benefit of professional advice.

1. It is reasonable to assume that the parties desire commercial certainty. They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed. They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings.

2. It is reasonable to assume that the price to be paid reflects the commercial risk which each party – or, more usually, the purchaser – is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give. The tighter the warranties, the less the risk and (in principle, at least) the greater the price which the vendor will require and which the purchaser will be prepared to pay. It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted.”

Christopher Clarke J also refereed to Watford Electronics v Sanderson CFL Ltd [2001] 1 All ER (Comm) 696 at para 55:

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“Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should, in my view, be taken to be the best judge of the commercial fairness of the agreement which they have made; including the fairness of each of the terms in that agreement. They should be taken to be the best judge on the question whether the terms of the agreement are reasonable. The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other – or that a term is so unreasonable that it cannot properly have been understood or considered – the court should not interfere.”

It was held that both parties in the case are large commercial concerns. The transaction into which RZB entered was an arm's length transaction entered into after mature deliberation. RZB was and is a very large Austrian bank; an experienced participant in the syndicated lending market with experience in structured finance transactions. It had previously participated in syndicated loan facilities for Enron. The Relevant Provisions were in no way unusual. In fact they were in a form habitually used in the market. The allocation of risk effected by the standard terms was well established and well understood by bankers operating in a sophisticated market. RZB did not have to lend to Enron (in effect) in this way (or at all). The clauses made for certainty; were designed to avoid arguments and, in effect, relieved from liability save in the event of bad faith. In the present context that was not unreasonable. UCTA: impact if one or both parties are outside England & Wales? 1. International Supply Contracts By s.26 of the Act, the limits imposed by the Act on the extent to which a person may exclude or restrict liability by reference to a contract term do not apply to liability arising under an international supply contract (as defined in subs (3) and (4) of that section), nor are the terms of such a contract subject to any requirement of reasonableness under s3 (liability arising in contract) or s.4 (unreasonable indemnity clauses). 2. Choice of English law clauses Where a contract is made subject to English law, even though having no substantial connection with England, s.27(1) of the Act provides that where the law applicable to a contract is the law of any part of the UK only by choice of the parties ss2-7 of the Act do not operate as part of the law applicable to the contract.