Managing disputes: recent cases point to common contract traps (Communications newsletter, January 2011)

Four recent cases have highlighted common "bear traps" in commercial contracts. However, the cases also demonstrate that these pitfalls can be overcome with careful drafting and advice. In particular, the recent case of Ericsson -v- Hutchison 3G UK Ltd (1) (H3G) shows the need for careful consideration of outsourcing terms, including not overlooking definitional consistency, perhaps easily done in lengthy and often-amended agreements such as these. Care when amending a complex agreement When changes are agreed to a complex commercial contract, amendments to one part may have consequential effects elsewhere. The case of Ericsson Ltd -v- Hutchison 3G UK Ltd relating to a network outsourcing arrangement is a reminder that courts will still interpret the words of an agreement objectively and emphasises the importance of ensuring that contract amendments are followed through in the rest of the contract. Background and issues H3G decided to outsource certain fixed and mobile network and other communications services to Ericsson under a master services agreement (MSA) that was intended originally to last seven years. H3G gave Ericsson notice to terminate the agreement two and a half years before the earliest termination date and proposed that the handover exit period kicked in from the date of that notice. Ericsson tried to avoid the extra expense of an extended exit period by arguing that the intended construction of the agreement was that this exit period could not begin until at least 12 months before the seven-year term was due to expire. H3G contended that it would need over two years before the contract would terminate to prepare for an orderly handover. The issue was that several of the key defined terms, including expiry date, had been amended more than once during the negotiations, and this had a knock-on effect on the other definitions which had remained unchanged, particularly on how the exit period and handover provisions were interpreted. Outcome - need for consistency After a careful analysis of the MSA's terms, a brief consideration of the negotiations surrounding it and the amendments to it, the judge found in favour of Ericsson. The judge followed well-established law on the interpretation of contractual documents such as the principles of approaching intention objectively and interpreting the words on their ordinary meaning (incorporating relevant background of the transaction). The existence of both the terms "expiry" and "termination" within the MSA (even though the original fixed expiry date had been removed) was an important issue in the case, as it suggested that the parties intended them to have different meanings. Interestingly, the judge partly based his view on the fact that the MSA had been agreed between "sophisticated parties with sophisticated solicitors". Obligation to use "all reasonable endeavours" Endeavours obligations are commonly used in commercial agreements although their meaning can be unclear with the risk that non-performance may be difficult to prove. As recently highlighted in the case of CPC Group Limited -v- Qatari Diar Real Estate Investment Company (2), a high-profile dispute on the redevelopment of the Chelsea Barracks site, the obligation to use "all reasonable endeavours" does not always require the obligor to sacrifice his commercial interests. The Court considered the meaning of a contractual obligation to use "all reasonable but commercially prudent endeavours". In this case, the position was clearer because the contract itself contained other indications that the party owing the obligation was not to be required to sacrifice its commercial interests: it referred to "but commercially prudent" endeavours. On the facts, the judge found that the obligor's conduct was not a breach of the obligation. The case therefore provides a useful review of the spectrum of endeavours obligations that are often used in commercial contracts.

Importance of clear termination rights In the event of a party's breach of contract, the other party may rely on two sources of rights to terminate the business relationship, namely the contract itself (including terms implied by statute) and common law. Contractual and common law rights co-exist, unless the common law rights have been modified by the contract terms. We highlight two particular circumstances below where consideration should be given to excluding common law rights and electing termination rights clearly in the contract to avoid uncertainty. Traps for the unwary supplier or manufacturer: ensuring that common law termination rights are excluded In Stocznia Gydnia SA -v- Gearbulk Holdings Ltd,(3) the Court of Appeal held that a party that exercised its contractual rights to terminate a shipbuilding contract and recover prepaid instalments under that contract did not lose its common law rights to treat the contract as repudiated and claim damages for loss of bargain. In this case the termination provision which the buyer had relied on did not clearly exclude common law rights. The decision makes it clear that if a party exercises a contractual right to terminate for breach, this will not necessarily mean that they cannot also rely on their common law rights to repudiate the contract and seek damages for loss of bargain. This would depend on the intention of the parties, and thand :rsidnnsi="Verdana" w:cs="Times New Roman"/