Contract Drafting Under English Law

Pericles Center for Int‘l Legal Education
Presentation by Marian Dent, Dean
Presentation given May 19, 2015, at Moscow State Law University, Moscow,
Russia, in a seminar sponsored and conducted by Lexis Nexis.
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Pericles Center for Int'l Legal Education
Disclaimer: I’m not an English lawyer, I’m a U.S. lawyer. So often I will be
pointing out differences and similarities in U.S. and English law. This slide show
is not intended to be legal advice on either English or U.S. law.
Also note that this slide show contains a very brief overview, and SOME OF THE
ILLUSTRATIONS ARE EXAMPLES OF WHAT NOT TO DO. So don’t blindly
follow any examples of clauses in this slide show Please contact your ownfollow any examples of clauses in this slide show. Please contact your own
lawyers for specific advice on particular contracts.
Note that case descriptions are just a brief summary. We discussed more in the
seminar, and you should read the cases in full rather than rely on these
summaries to assume a similar result in any current contract/case.
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Contract Formation in the UK is usually studied as having three basic
components: Intent to create a contract Offer and Acceptance andcomponents: Intent to create a contract, Offer and Acceptance, and
Consideration. To this I have added Legality and Capacity, which are not always
studied as formation issues, but without which, of course, you wouldn’t have a
contract or might have one in which certain terms are unenforceable.
After discussing formation we will discuss terms of a contract, and particularly try
to explain Reps and Warranties, which often come up, especially in M&Ap p , p, p y
practice, and which are concepts that Russian lawyers often have trouble
understanding, and Conditions, which are also largely misunderstood. These
terms are treated differently in the US versus England, which accounts for much
of the confusion.
The last few slides will repeat some of the drafting tips discussed during the
t tipresentation.
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The Serious Intent requirement brings up the “Objective Theory of Contracts.”
This means that when examining whether the parties entered into a contract, the
courts look at whether a reasonable person would believe the parties intend to be
bound. It doesn’t matter if the offeror thinks he was making a joke for example,
the key point is whether a reasonable person would think so.
The language used often indicates whether there was an actual intent to form aThe language used often indicates whether there was an actual intent to form a
contract. Present v. future agreement can be determined by the use of present
tense verbs, for example. We’ll look at some examples in a couple of minutes.
But first I want to talk about some of the most problematic areas where the
potential lack of serious intent might mean that a contract is not formed.
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In social and domestic agreements the law raises a rebuttable presumption that the parties do not intend
to create a contract This doesn’t mean that domestic arrangements are never enforceable just that you needto create a contract. This doesn t mean that domestic arrangements are never enforceable, just that you need
to be particularly careful in drafting them and ensuring that your client’s agreement, and conduct, are serious
enough to overcome a court’s presumption that no contract was intended. Example: Jones v
Padavatton [1969] 1 WLR 328. A mother promised to pay her daughter to quit work and go to law school.
Daughter ended up taking an age to complete her studies and the agreement went through multiple
permutations. Finally Mom has had enough and wants her daughter to stop mooching. The issue was whether
there was a legally binding agreement between the mother and daughter or whether the agreement was merely
a domestic/family arrangement not intended to be binding. Held: The agreement was purely a domestic
agreement, which raises a rebuttable presumption that the parties do not intend to form a legal contract. There
was not enough evidence to rebut this presumption.g p p
Comfort Letters are not the same as Guarantees. So be clear in your contract language that a binding
guarantee is intended. Example: Kleinwort Benson (KB) v Malaysia Mining Corporation BHD
(MMC) [1989] 1 WLR 379. A wholly owned subsidiary of the defendant, MMC, wanted MMC to guarantee a
loan from KB. MMC refused but wrote that “it was their company policy to ensure that their subsidiaries are
always in a position to meet their debts.” In reliance on this comfort letter KB loaned money to the subsidiary.
When the subsid defaulted, KB tried to sue MMC based on the comfort letter. Held: The comfort letter was not
intended to create a contract. The fact that MMC refused to act as guarantor demonstrated they did not intend
to be legally bound There was nothing to stop the company changing its policyto be legally bound. There was nothing to stop the company changing its policy.
Advertisements and Jokes generally are not intended to be contracts. However, they can form
contracts more easily than you might think based on the Objective Theory of Contracts. Example:
Carlill v Carbolic Smoke Ball (CSB) [1892] EWCA Civ. 1. CSB advertised that people who used their
smokeball as directed would not get the flu, and challenged anyone who bought the ball and used it for a
certain time as directed that if they caught the flu it would pay them £100. Mrs. Carlill used it as directed and
caught the flu, then sued when CSB refused to pay her. CSB argued that 1) CSB didn’t have serious intent, 2)
it was an advertisement open to the whole world, thus couldn’t be an offer, 3) there wasn’t enough detail to be
ff H ld A bl ld hi k hi i ff i ’ ff C b li S k B ll han offer. Held: A reasonable person would think this is an offer, so it’s an offer—Carbolic Smoke Ball has to
pay. This is a very famous case, taught in both the UK and the US to illustrate various legal issues.
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Pericles Center for Int'l Legal Education Presentation
by Marian Dent, Dean
MOUs and letters of intent, or whatever the parties call them, are generally not
binding English law does not have “preliminary contracts” the way that Russia doesbinding. English law does not have preliminary contracts the way that Russia does.
However, if the details are fully worked out, they can be binding, especially if the parties act
as though a contract were formed.
RTS v Müller [2010] UKSC 14. The makers of Müller yoghurt entered into negotiations with
an equipment manufacturer, RTS, to supply and install packing machines. Negotiations
lasted for years with multiple quotes and discussions. The manufacturer was then told that it
had won the contract. Müller then sent RTS a “letter of intent” stating that full contractual
terms would be based on a specified standard industry form and full terms and technicalterms would be based on a specified standard industry form and full terms and technical
specifications would be agreed within 4 weeks. The 4 week period was extended by
agreement several times but the parties could not agree on final terms. In the mean time
though RTS had started to perform. The points the parties could not agree upon were
related to limitations of liability. The judge in the High Court held a contract had come into
existence because the parties had agreed all of the main contractual points and proceeded
to perform it. However, the Court of Appeal relied on Clause 48 of the standard terms, which
stated “the Contract… shall not become effective until each party has executed a
counterpart and exchanged it with the other, to say that there was no contract.” The
S C b i ll i d h bj i h f i “Th lSupreme Court basically reiterated the objective theory of contracts, stating: “The general
principles are not in doubt. Whether there is a binding contract between the parties and, if
so, upon what terms depends upon what they have agreed. It depends not upon their
subjective state of mind, but upon a consideration of what was communicated between them
by words or conduct, and whether that leads objectively to a conclusion that they intended to
create legal relations and had agreed upon all the terms which they regarded or the law
requires as essential for the formation of legally binding relations.” It then imposed a
contract based on what the parties had agreed upon and the standard industry form. So in
short RTS won, but not much was done to clarify the situation for future parties involved inshort RTS won, but not much was done to clarify the situation for future parties involved in
MOU disputes. We only know that it is a question that is very fact specific.
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There are three ways to reach a agreement
1. One party presents a prepared agreement that the other signs.
1. Problems here tend to revolve around whether the contract terms are fair to the non-
drafter.
2. If parties have unequal bargaining power and terms are far in favor of the drafter, courts
might not enforce it.
3. So while it’s tempting to take advantage of this situation for your client, you want to think
f ll b t f t b f dcarefully about enforcement before you do so.
2. The parties negotiate to form an agreement.
1. Here all the terms are of course much more carefully considered.
2. The problem that often occurs, however, is when one party does not intend that a contract
be formed without further negotiation, while the other party believes that they have a
contract.
3. The drafter’s challenge here is to ensure that no contract is formed before your client is
ready. The trick is in using the language of the offer, or the non-offer, which we will
discuss in the next slide.
3. Each party presents its own prepared agreement.
1. Often these agree on “dickered terms” but not on other matters.
2. Lawyer must be aware of battle of the forms rules in the country in which he/she is
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dealing, and must plan accordingly.
With these things in mind, lets look briefly at some drafting problems in offer and acceptance.
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An offer must have serious intent, which we just discussed, definite terms, and
communication.
Definite terms: What terms must be included to create a contract? Merely quantity, all
else can be inferred as long as there is a way to determine the price (for example the
market). However, of course the more definite the terms in the communication, the more
likely it will be considered an offer. Language of present intent usually uses present
tense, and words such as “offer”, “accept”, and “will” rather than “would.” “Invitation to
treat” is a term of art that insures that your communication is NOT an offer.
Communication: You cannot accept an offer before it is communicated. Beware of the
Postal or Mailbox rule, which is absolutely the opposite of the law in Russia. An offer is
valid on receipt, but acceptance is valid on dispatch. (Although, a revocation of
acceptance is valid if it is received before an acceptance is received.) The rule is
complicated, but just keep in mind that your client should be aware that a contract could
be formed before the client has received a formal acceptance. To be on the safe side,
and eliminate reliance on the mail servicer, you can draft a clause in your contract
specifying that acceptance must be received. Exception: A case held that the Postal
Rule does not work in fax communication, and probably not in emailed communication.
An emailed acceptance must be received to be valid. (Case law has not established the
same exception in the U.S.)
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This slide gives an example of the premature acceptance risk.
Probably the seller didn’t really intend this to be an offer. The seller
expected further negotiations about the delivery details, but the customer
accepted it.
The merchant used the word “Offer,” which has legally operative meaning.
Thus, a court might decide that the Merchant, in fact, made an offer, which, g , , ,
the customer accepted. Delivery details are not required in a sale of
goods contract, so a court might consider the first part of this statement
superfluous. The acceptance “yes” is probably sufficient to form a
contract.
But even if the merchant did intend to make an offer, this is not wellBut even if the merchant did intend to make an offer, this is not well
written, because it leaves some doubt.
Drafting Point to Remember: Use a legally operative term of art (ie:
offer) only when you want to create a legally operative result.
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This slide gives three separate examples.
In the first example here, we use the word “propose” rather than “offer.” Comparing
this to the “offer” language on the previous slide, this is a bit better at creating a firm “non-
offer.” But it’s still risky. Drafting Point to Remember: Never draft an agreement that
hangs a legal consequence on a word that is not a legal term of art. What does
“propose” mean? Legally we don’t know, since it isn’t a legal term of art. Thus, a court
could decide that propose means “offer.”
In the second example, the language is clearest. Using the very precise legal terms of artIn the second example, the language is clearest. Using the very precise legal terms of art
“invitation to treat” or “invitation to offer” and making clear that the response will be an
“offer to buy” rather than an acceptance, is a much safer “non-offer” than any of the other
offers we have seen so far. Under English law it is fairly clear that an “invitation to
treat” can not be “accepted” to form a contract.
The last example is just to illustrate the sometimes poor ways in which clients will infer
contracts have been formed and start to perform/rely on the contract’s existence. The
language is from University of Plymouth (Uni) v European Language Center Ltd (ELC)
[2009] EWCA Ci 784 It t i d i th iddl f t th t di d li iti[2009] EWCA Civ 784 It was contained in the middle of a sentence that discussed limiting
the parties previous course of dealings. ELC provides summer holiday language courses
across Europe. The Uni hired out dormitory rooms during summer. For four years, parties
entered into written contracts for each year. Then the next year Uni’s representative wrote:
"I thought that I should make you aware of some developments at [Uni] which are likely to
affect your business for next year...there will certainly be less beds available than this year,
so we are advising you that there will only be 200 beds available for you to sell…” It
turns out there weren’t even 200 beds and ELC sued because it had advertised and sold
language classes based on inferring it could simply say “yes” and send 200 students
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language classes based on inferring it could simply say yes and send 200 students.
Again, the parties’ poor use of language meant the case went all the way to the House of
Lords, which found for the University, but had difficulty in determining that the statement
was NOT an offer.
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In this slide we have two examples taking us back to the MOU problem that we
discussed previously.
Words like “subject to contract” are often used in England as a shorthand
to say that the writer doesn’t agree to forming a contract right now, but
expect the details to be worked out. The second example spells the issue out
even more clearly, and is more common in the United States, where you don’t
often see the “subject to contract” shorthand But even with this language whatoften see the subject to contract shorthand. But even with this language, what
happens if your client and the opposite side start to perform without a written
contact? Many Anglo-Saxon and European legal systems are very lenient about
allowing oral contacts. If the parties begin to perform, a court could very well
decide that you have a contract anyway.
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Up to now we have been talking about the problem of moving from negotiations to
t d idi t l f d t t N I ld lik t t lk b tagreement, and avoiding a prematurely formed contract. Now I would like to talk about
the problem of one party having a prepared agreement and the other party having a
prepared agreement. In other words, we are talking about form contract problems.
The Mirror Image Rule means that acceptance must be on the same terms as the
offer. Let us assume that the negotiated terms are agreed upon, and what is left is the
“boiler plate” contained in each party’s form contract, which turns out to differ. In most
cases the purported acceptance is, therefore, actually a counter offer. But if the parties
start to perform as if there were a contract, then whose terms control? Battle of the forms
rules can get VERY complex.
England, for the most part, follows the “Last Shot Rule.” This means that the last
party to send a document without objection from the other side, wins. (Note that this is
different from the US, which has a complex system formulated by the UCC.)
However, there can be questions as to what is the actual “last shot.” In ButlerHowever, there can be questions as to what is the actual last shot. In Butler
Machine Tool v. Ex-Cell-O Corporation [1979] 1 WLR 401, a leading English case on
the battle of the forms, the seller’s offer include a price escalation clause. The buyer’s
acceptance did not include this clause. The Court of Appeal held that the seller's final
letter to the buyer stated to be "in accordance with" its earlier offer, but did not amount to
a counter-offer despite being the 'last shot‘ because the letter did not make it sufficiently
clear that the seller was continuing to insist on its own terms, with the escalation clause.
If the letter had been clearer, then the buyer would have understood it to be a rejection
and counteroffer and there would have been no contract unless the buyer expressly
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and counteroffer, and there would have been no contract unless the buyer expressly
conceded the point or proceeded to perform without challenging the seller's letter. Thus
the seller could not rely on the price escalation clause. Thus, your client must make it
clear to the counterparty when the client objects to a specific clause in the
counterparty’s form.
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This slide illustrates the problem of over-protecting your client in battles of the forms
When asked to draft a form contract for a client lawyers are often very temped to draft in provisions that forceWhen asked to draft a form contract for a client, lawyers are often very temped to draft in provisions that force
the other side to accept your client’s terms or nothing, like those in the slide above.
In reality, this might not be a good idea. Think of how your particular client operates, carefully examine the
operative law, and to determine what the practical result of such a clause will be.
Under English law, it’s fairly well understood that “prevail clauses” like the first clause above, don’t work.
The acceptance would be a counter offer and no contract would be formed.
The clause “Subject to the conditions . . .” is probably equally ineffective in England. The word
“condition” implies that there is no contract if the condition isn’t fulfilled but unfortunately this is a legal term thatcondition implies that there is no contract if the condition isn t fulfilled, but unfortunately this is a legal term that
is very commonly used wrongly. That makes it subject to misinterpretation.
Drafting Point to Remember: Never hinge a legal result on a frequently misused term of art.
The third clause reflects what actually will happen in English law, but in that case you don’t really need to spell it
out in the contract . (In the US you need it, because the UCC changes the mirror image rule. This clause is not
the best way to do it though.)
In the bottom clause this acceptance tries to limit acceptance to its own terms. It mirrors the U.S. UCC
language, and thus is very effective in the US. In England it is not necessarily more effective than other similarlanguage, and thus is very effective in the US. In England it is not necessarily more effective than other similar
language. Drafting Point to Remember: When trying to invoke the protection of a statute, use the same
language that is used in the statute.
But in the U.S., if your contract is between merchants, the last form wins anyway, and, as that is usually the
acceptance, you won’t need this. The only time you would need this is if the offer limits itself to its terms. You
certainly will not have a contract.
When these clauses are effective, if the parties start to perform anyway, they may be performing without a
contract, or with a contract formed by the default clauses in the jurisdiction’s laws. Do you want to take the risk
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that your client will start to perform when no actual contract is formed. Drafting Point to Remember: Always
think about what your client is realistically likely to do with the contract you draft.
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Now we get to “Consideration” which is a concept in English and U.S. law that
is almost universally misunderstood by lawyers in Civil Law jurisdictions,
such as Russia.
Hypothetical situation: Your client is not sure that he wants to be bound by an
agreement and wants you to draft a contract that has a clause that allows him to
get out of it. Assuming the clause is unnoticed by the other party, they start to
perform the contract but your client could at any time claim the benefit of theperform the contract, but your client could at any time claim the benefit of the
“escape clause” that you drafted.
Likewise, if you notice a clause in the counterparty’s draft that allows your client
to escape a contract, is it ethical for you not to mention it to the lawyer for the
other side? Is it smart?
In contracts governed by English or by U.S. law, “escape clauses” are
dangerous due to potential consideration problems. If one side is not bound
to perform, then it may be that the other side is not bound to perform either.
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Consideration is a bargained for exchange—something given for something else. It does not generally require a
detriment to one side and a benefit to the other although the rule is often stated this way because historicallydetriment to one side and a benefit to the other, although the rule is often stated this way because historically
consideration did require these elements.
Formality can eliminate the need for consideration. A “deed” does not require consideration. A deed is like a
regular contract but clearly indicates that it is a deed, is contained in a single written instrument, and must be
formally executed and delivered. Often, but not always, deeds are executed under seal, or signed by two company
directors. The formalities are governed by the company law of the company’s jurisdiction. (In the U.S., some states
do not require consideration if a contract is under seal.)
Reliance can be a defense against lack of consideration If one party relies to his or her detriment on theReliance can be a defense against lack of consideration. If one party relies to his or her detriment on the
promise of another, even if lack of consideration prevents a contract from being formed, the relying party is likely to
be able to enforce performance to the extent necessary to cure his or her detriment.
Consideration must move from the Promissee. This essentially means that, third party beneficiaries cannot
always enforce their rights. Tweddle v Atkinson [1861] EWHC QB J57 is the case all law students study for this
point. There, a couple were getting married, and the father of the bride entered an agreement with the father of the
groom that they would each pay the couple a sum of money. The father of the bride died without having paid. The
father of the son also died so was unable to sue on the agreement. The groom made a claim against the executor
of the will but the claim failed because the groom was not party to the agreement and the consideration did notof the will but the claim failed because the groom was not party to the agreement and the consideration did not
move from him. Therefore he was not entitled to enforce the contract.
Modern law is more flexible on this point. England passed a Third Party Rights in Contracts Act of 1999, which
allows third parties to enforce terms of contracts made for their benefit, or to enforce the terms when the contract
itself specifically gives them the right to do so.
What is adequate consideration? Any amount. My professor in law school used to say “The law won’t protect
you from forming stupid contracts.” Therefore, an uneven price does not prevent a contract from being formed.
Chappel v Nestles [1960] AC 87 shows that parties can, if they want to, “sell” valuable record albums forpp [ ] p y
chocolate bar wrappers. The wrappers were essentially worthless but the problem was that “sellers” of copyrighted
recordings owe a royalty to the copyright owners, so there was a question whether this was a give away or a “sale.”
It was held to be a sale. One of the judges stated that “a peppercorn does not cease to be a good consideration if it
is established that the promisor does not like pepper and will throw away the corn.” This famously became known
as the peppercorn theory of consideration.
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Although consideration need not be “adequate” it needs to be “sufficient.” This is one of those times when
ordinary words that can be used as synonyms for most of the English speaking world have become legalordinary words, that can be used as synonyms for most of the English speaking world, have become legal
terms of art with completely separate meanings. By “sufficient consideration” we mean it is of a type legally
regarded as sufficient. The term has nothing to do with the value of the thing exchanged.
Past Consideration is legally insufficient. If a party has already given away something, a later promise to
pay for that give away is not legally sufficient. Lampleigh v Braithwait (1615) 80 ER 255. Braithwait, a
convicted murderer, asked Lampleigh, a lawyer, to obtain a pardon from the King. Lampleigh did so.
Subsequently, Braithwait promised to pay him £100, but then didn’t pay. Lampleigh sued to enforce the
promise. The court held that a “mere voluntary courtesy will not do” as consideration, because Lampleigh had
already performed for nothing. But if Lampleigh were expecting to be paid something, and the statement of
£100 was just setting the amount, then this was different and it would be enforceable. Thus, it’s sufficient to fix£100 was just setting the amount, then this was different and it would be enforceable. Thus, it s sufficient to fix
a specific amount after the performance has occurred, but not sufficient to fix the entire obligation to pay after
the performance has occurred.
Pre-existing duty rule
1) Performing your professional duty is not consideration, because you are expected to perform your duty by
your employer or your obligations to your profession,
2) Refraining from violating the law is not consideration, because you are already obligated not to break the
law,
and, most seriously
3) Modifying a contract on one side can create a consideration problem.3) Modifying a contract on one side can create a consideration problem.
Roscorla v Thomas (1842) 3 QB 234 A nervous buyer had already agreed to buy a horse, but then obtained
an extra promise from the seller "in consideration of that sale” that the horse is “sound and free from vice.” The
court held that the pre-existing and executed consideration could not support the subsequent promise. In other
words, after the contract has been formed, you cannot go back and get some additional undertakings, unless
those additional undertakings are themselves supported by ADDITIONAL consideration.
In some cases the parties may try to escape this rule by saying that additional hardship in performing the
contract came to light after the contract was formed. Thus, for instance, an agreement to pay extra money was
not a one sided modification. But don’t rely on such exceptional cases. If you are asked to write a contract
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modification for a client, make sure that your modification makes it clear that BOTH sides have given up a right
or done something extra for that modification.
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In Anglo-American law, it’s common to start a contract with a statement of consideration.
These however actually mean nothing if in fact consideration doesn’t existThese, however, actually mean nothing if, in fact, consideration doesn t exist.
“For the sum of £1, . . .” is enforceable provided the £1 was actually paid. But this
language has gotten to be kind of joke- it looks very old. Courts won’t assume
consideration exists just because of this kind of language, since it has gotten to be a
common phrased to start many English and U.S. contracts.
The “mutual promises” language also works fine provided there are mutual promises. It
sounds a little more modern that stating a sum of £1 or $1 but it still won’t work if theresounds a little more modern that stating a sum of £1 or $1, but it still won t work if there
aren’t really any mutual promises.
Of course, it isn’t required that you start contracts with this type of language. It’s just
common. Some drafters suggest that you not use either of these phrases but just begin
with “The parties agree . . .” .
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So let’s look at some examples of language that could create
consideration problemsconsideration problems.
The first example contains one sided phrasing. Drafting Point to
Remember: When drafting contracts governed under English or U.S.
law, you should always phrase the contract with obligations on each
side. As long as there really is consideration, the courts won’t refuse to
enforce a contract for this reason. But (apart from creating the habit of
starting contracts with consideration statements, as we just discussed) the
consideration requirement has resulted in the best practice of phrasing the
parties obligations to clearly state that each side is giving up something.
Failing to do so will brand you as a legal amateur. Thus, although the
language of the first clause does not create any actual consideration
problem, an English lawyer would be more likely to write “Seller agrees to
sell . . . and Buyer agrees to purchase . . .”
The second example has a more serious problem—an escape clauseThe second example has a more serious problem an escape clause
that could make the contract unenforceable.
In the second example, the supplier could terminate without buying
anything at all. Thus, he has no obligation of consideration. This means
that the purchaser is also not bound by the contract. You can fix it by
placing any small obligation on the supplier that prevents him from
escaping with no obligation at all. Saying “supplier can terminate this
agreement at any time provided he give 10 days notice . . .” for example,
would correct this problem
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would correct this problem.
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What’s wrong with these two examples?
The first one has not only one sided phrasing, but also a one sided obligation.
What is A’s obligation? Is it expressed here that A actually has to provide B with
the products? And does B actually have to do anything either? Is there a specific
amount of product he has to distribute? Distributorship Agreements can be
particularly problematic for these reasons.
The second example one looks OK in terms of A’s obligation this time But theThe second example one looks OK in terms of As obligation this time. But the
problem is the word “may” describing B’s obligation “May” implies permission but
not obligation. The word “shall” should be used to convey an obligation.
Some other contracts besides distributorships raise common
consideration problems:
1. Exclusive Dealing Contracts
2 Req irements and O tp ts contracts2. Requirements and Outputs contracts
3. Accord and Satisfaction (settlement). There is no problem if each party is
giving up a disputed claim even though one is giving less money than the
disputed amount. The problem comes if one party agrees to accept less
money than owed, even if the claim is not disputed
4. A release is the same. As long as there is a real dispute being settled by the
agreement not to sue, then it’s alright.
5 Donations– consideration problems in donation contracts are usually solved
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5. Donations consideration problems in donation contracts are usually solved
by using a deed, or by suits for detrimental reliance.
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We would like to think that we would never violate the law in a contract, but
sometimes it’s going to happen.
Drafting Point to Remember: When drafting a contract for a particular
substantive area of law, with which you might not be familiar, it is important
to find checklists, previous contracts, etc., that might address the
substantive legal area.
It is also important to research the substantive law of course.
Finally, its important to be aware of the “default provisions” of the law.
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Drafting Point to Remember: Be sure to know the specific risks of writing a contract or
t t i i th t ld i l t l bli licontract provision that could violate law or public policy.
There could be several different effects:
Does it makes the act of entering into the contract illegal?: Anderson Ltd v
Daniel [1924] 1 KB 138, The Fertiliser Act of 1906 required every person who sold fertiliser
to provide the purchaser with an invoice stating the percentages of the chemicals. The court
held that the effect of entering into the contract that didn’t provide this invoice made the
vendor liable to pay a penalty. It also made the sale illegal and precluded the seller from
suing to collect payment.
Is entering into the contract legal, but the way it is performed makes it illegal and
therefore unenforceable? Sometimes courts have discussed making a contract that is
merely “tainted with illegality” unenforceable, but usually the narrowly rule on the side of
enforcing them. ParkingEye Ltd. v Somerfield Stores Ltd. [2012] EWCA 1338. Here
Parkingeye contracted with Somerfield stores to administer its paid parking lot. Parkingeye
then sent potentially tortious letters to parkers trying to impose large fines. Somerfield tried tothen sent potentially tortious letters to parkers trying to impose large fines. Somerfield tried to
use this as an excuse to void the contract with Parkingeye. Court held this was not voidable
because the violation was minor and it seemed Parkingeye didn’t realize it was doing
something wrong; but the language of the case implied that it could have been voided if
ParkingEye’s conduct had been more egregious.
Is a particular CLAUSE in a contract unenforceable because of illegality or public
policy? This is the more common scenario, and the more dangerous one, if you are relying,
for example on an exclusion of warranties being enforceable only to find that the English
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for example, on an exclusion of warranties being enforceable, only to find that the English
court will enforce the buyer’s rights under the contract but not enforce your client’s disclaimer
of liability. Often this will be done for reasons of public policy. But, as stated by Judge
Burrough in a famous quote in Richardson v. Mellish (1824), 2 Bing. 252 “Public policy is a
very unruly horse, and when once you get astride it you never know where it will carry you.”
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This list contains areas where you are likely to run into illegality or public policy problems in
UKUK contracts.
Trading with the Enemy prohibitions technically apply in times of war, when common law makes
all trading with enemy countries illegal. So this doesn’t apply generally, but I’m using this phrase in
the slide as a shorthand for statutory illegalities that you might have to look out for right now, which
include UK parties doing business with sanctioned Russian individuals, entering into prohibited
financing transactions that extend loans through sanctioned banks, or exporting restricted
technology to Russia.gy
Tax Evasion and Corruption brings us to the well known UK Anti-bribery Act, with includes
commercial bribery. This act might, for example, prohibit a company from paying a fee to your
client who is affiliated with another company. The act may be a defense to your client suing to
compel payment of that fee.
Restraint of Trade is a particular problem, because England, of course, is part of the EU, which
means that the strict EU Antimonopoly Laws applymeans that the strict EU Antimonopoly Laws apply
Immorality Problems These tend to be related to contracts surrounding family relations or sex or
children. For example, some surrogate mothering contracts aren’t enforced by UK law,
even after the intended parents have paid the mother’s expenses. Worldwide, though,
the law is changing with technological developments in the family and reproduction area, so you
always need to check on current law.
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Interference with the Administration of Justice Contracts that, for example, pay a witness not to
testify, or purport to settle a private case but really have broader implications on keeping a public
wrong quiet.
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UK Unfair Contracts Terms Act 1977 and the Unfair Terms in Consumer Contracts
Regulations 1999 These prevent unfair terms and limit exclusions of liability particularly inRegulations 1999. These prevent unfair terms and limit exclusions of liability, particularly in
consumer contracts, which make provisions unenforceable that you might think are
acceptable in Russia or in the United States. The contract isn’t unenforceable, just the
exclusion of a remedy.
Drafting Point To Remember: The more a term has a possibility of being considered
unreasonable, the more you have to bring it to the other party’s attention.
Interfoto Picture Library v Stilletto [1989] QB 433 The claimants ran a photo library and
advanced some several transparencies to Stilletto an advertiser He was supposed to getadvanced some several transparencies to Stilletto, an advertiser. He was supposed to get
back to them telling them the photos he wanted to use and returning the transparencies he
didn’t want. The contract stating that if any transparencies were kept longer than 14 days a
£5 fee would be charged per photo per day. The defendant then forgot about the
transparencies and failed to return them for 6 weeks, and incurred over £23,000 pounds in
charges. Held: The term was not incorporated into the contract. Where a term is particularly
onerous the person seeking to rely on the term must take greater care to bring it to the
attention of the counterparty.
The general rule is that an otherwise unfair term is only likely to be enforceable if it isg y y
brought to the attention of the counterparty at the time the contract is signed.
How to avoid problems
1. Use a form that makes it clear that the other party knew about it and agreed
to the term: Different color ink, Capital Letters, insert the clause near the
signature line, have it Separately initialed. And most importantly, in clearly
understandable language.
2. Explain the reason for the unfair provision in the contract.
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Although Liquidated Damages are acceptable, Penalty Clauses are not enforceable
under English law.
How to Avoid Problems: Explain the reason for the liquidated amount in the contract.
Calculate the liquidated amount carefully and realistically.
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Lots of litigation occurs around exclusion clauses.
In the first example the English court held that because the Sales of Goods Act 1979 says that the
implied term at issue was, for purposes of English law, a condition, rather than a warranty or
representation, and because the contract waiver didn’t include the word “conditions,” the waiver
didn’t preclude the buyers’ claim. This clause would have been effective under US law. US law
calls “exclusion clauses” “warranty disclaimers” and what are called “implied warranties” in
American law are called “implied conditions” in English law. So watch out for this difference
between legal regimes.
The second example might or might not work in English law. Under the Sale of Goods Act and the
Unfair Terms laws mentioned in the previous slide, a party cannot exclude liability relating to
description of the goods, quality, fitness for purpose or conformance to a sample. Here, the
attorneys have attempted to avoid that law, by adding that the “samples” were not in fact samples
but merely general illustrations. I’m unaware of whether such clauses have been found invalid or
not in English law.
In non-consumer sales a party can only exclude these things when it’s reasonable to do so.
Reasonability is going to be determined on a case by case basis, and taking into account the
relative bargaining power of the parties, the extent to which the clause was brought to the other
side’s attention, and several related factors.
Drafting Point to Remember: It might not be in the interests of your counterparty to inform
you that a particular exclusion is not enforceable in England. Always look up the law related
to your particular circumstances.
In short, your client could think a particular type of liability is excluded from the contract, but the
counterparty might still be able to enforce it in the English courts
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counterparty might still be able to enforce it in the English courts.
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Waiver is another commonly misunderstood area in both English and U.S. law. A waiver
i th l t li i h t f k i ht W i b bis the voluntary relinquishment of a known right. Waiver can be express, or can be
implied by conduct. For example, if you are a landlord who constantly fails to collect the
rent on time, a court could find that you have waived the right to get the rent on that
certain day of the month and the tenant has a right to always pay late.
Waiver of rights and exculpatory/exclusion clause problems are examples of making a
particular provision unenforceable, while the contract as a whole remains valid.
Waiver of rights and public policy.
Generally, a party can waive a right intended for his personal benefit, but not one that is
intended for public purposes.
Example: You cannot agree to waive a tenant protection statute or a consumer protection
statute. Thus, in the first example, the waiver would not be effective. The problem is that
laws don’t come with neat little flags saying “the is a private right” and “this is a public
protection.” If you write a contract that violates the law by waiving too many of the
opposing party’s rights, you will need to know particularly what responsibilities the clientopposing party s rights, you will need to know particularly what responsibilities the client
will have if waiver doesn’t work.
In the example above, the attorney has tried to avoid the limitations on warranty
exclusions by calling it a “waiver.” However it’s not likely that this clause will be effective.
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Types of capacity needed to undertake a contract are age limitations, and
limitations related to insanity or drunkenness. Frankly though, these are
not as likely to be a problem in international contracts as corporate
capacity, so we will concentrate mainly on that.
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A self explanatory problem.
(I got this little joke from Scott Burnham’s excellent textbook, Drafting & Analyzing
Contracts)
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If a contract is Ultra Vires, it means that a company may not have authority under its charter
to undertake certain business even though it signs a contract to do so This potential problemto undertake certain business, even though it signs a contract to do so. This potential problem
has been eliminated as a defense to contracting in English law. If a company signs an ultra vires
contract, it can still be held to that contract.
Capacity of an individual to act for a company is a more important issue in Russia than in
England. Think how Russian contracts usually start: “_________ acting in the capacity of
___________”, whereas English contracts usually start with a consideration statement. This gives
you an idea of what lawyers in each of these countries think is important.
The reason that English lawyers are less concerned with corporate capacity is because of theThe reason that English lawyers are less concerned with corporate capacity is because of the
Ostensible Authority Rule under corporate law. (In the US this is called the “Color of Authority”
rule. Sometimes in both countries it is called the “Apparent Authority Rule.”) Freeman & Lockyer v
Buckhurst Park Properties [1964] 2 QB 480 held that when a company represents that an agent
is authorized to enter into a contract, or has placed an agent in a position that generally carries that
authority, then the company is held to the contract.
The situation has recently changed for international contracts. The Overseas Companies
(Execution of Documents and Registration of Charges) Regulations 2009, Part 2, modified the UK
Companies Act to say that a document is executed by an overseas company either by affixing itsCo pa es ct to say t at a docu e t s e ecuted by a o e seas co pa y e t e by a g ts
seal, or by any manner permitted by the company’s domestic laws. But if a document is signed by
someone who has authority under domestic law and it expressed in words that the company has
executed it, then it is a valid contract regardless of whether it would have been a valid contract in
domestic law. Thus, English lawyers remained fairly complacent that signing authority was not
likely to be a huge problem.
BUT in January 2015, Integral Petroleum v Integral Finance [2015] EWCA Civ 144 has turned
English corporate capacity expectations on its head. The English Court of Appeals has ruled
that the question of who has authority to sign for a company has to be decided by the local law of the
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q y g p y y
company's country of incorporation , regardless of the law governing the main contract. It is not
enough for the contract to appear to be signed by someone authorised. I don’t know if the case has
been appealed to the Supreme Court, but as on now, May 2015, it has caused quite a stir.
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Contract Terms can be created by express words or by implication of law.
For example, the Sale of Goods Act 1979 creates implied terms of good
title, satisfactory condition of the goods, and conformance to description.
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Under English law various provisions of your contract can result in various remedies, depending on
how they are classified.how they are classified.
In English Law, a “Representation” isn’t considered a “Term” at all. A representation is a statement that
reasonably leads others to believe that something is true, but does not result in a contract claim. A
representation is not a “term” because it’s a statement about the present, it’s not a promise you are making
about the future, which is what contract terms are all about. Thus, representations don’t result in an action for
breach, but in an action in tort for misrepresentation. Under the Misrepresentation Act of 1967, a material
misrepresentation can also result in the innocent party being able to rescind the agreement ab initio.
You need to be careful of your language though, because in American Law, the term “representation” is usedYou need to be careful of your language though, because in American Law, the term representation is used
almost synonymously with the term “warranty.” Indeed, you will usually find a section of the contract called
“representations and warranties.”
Warranties and Conditions are terms that, under English law, result in very specific types of remedies. The
remedy for breach of warranty is damages, but the remedy for breach of a condition can be rescission of the
contract. In English law, a warranty is a term that does not go to the essence of the contract, whereas a
condition does go to the essence of the contract—it’s so important that it allows rescission if that condition
isn’t fulfilled.
Innominate Terms just means, everything else. It doesn’t have a specific name, it’s just part of the promises
made. In American law we call these Promises. Usually breach of the innominate terms means damages,
but it also really depends on whether the innominate term is “material” or not. Hong Kong Fir Shipping Co
Ltd v Kawasaki Kisen Kaisha Ltd [1962] EWCA Civ 7, created the concept of an innominate
term, breach of which may or not go to the root of the contract depending upon the nature of the breach.
In other words, no one expects 100% perfect performance of a contract, and some things just aren’t worth
complaining about. So the courts will only insists on substantial performance of many terms. These are
innominate terms—they are the everything else.
Drafting Tip: If you really think a term is really essential, you should make it into a condition of the
contract.
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Representations and Warranties. The difference is in the remedies
1) Representations are statements by one party that he/she shares the other party’s
understanding of the facts.
1) If the misrepresentation is very serious, the contract might be void considered
void ab initio, and, more importantly, the parties might be sued in tort.
2) Because of potential tort liability, English lawyers like to avoid the term
“represents” in a contract. In U.S. law the terms reps and warranties are
not as carefully used because tort liability could be imposed despite the term
that the parties use. So in general, American lawyers don’t care whetherthat the parties use. So in general, American lawyers don t care whether
something is called a representation or a warranty.
2) Instead, English lawyers might change a U.S. lawyer’s “representation” to a condition
of the contract. By using language such as “must” or by using the phrase “It is a
condition of this contract that . . .” you are making clear that the term is essential.
3) Warranties are undertakings that the party making the warranty agrees to bear the
loss in the event that the facts are not as represented, but no tort liability is implied,
d lth h th d il bl th t t i t i d bl f b hand although there are damages available, the contract is not rescindable for breach
of warranty.
Drafting Point to Remember: Because the definitions of these two terms are not
always understood, the important thing about a representation or warranty is
providing for a specific consequence for its breach
The last two clauses on this slide specify the remedy for breach.
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Apart from writing in a remedy, conditions can be written as “Conditions
Precedent,” meaning something that must occur before the obligation of the other
party occurs. They can also be written as “Conditions Antecedent,” meaning that
if something occurs the contract will end. The difference between conditions
precedent and conditions antecedent used to be important in teaching contract
law theory, but these days the different between the two is seldom important in
practice. The slide above just illustrates various ways in which they can be used.
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Contract Drafting Under English Law

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