All change for financier assignees — second time lucky with anti-anti-assignment provisions?

The good times seem likely to end finally on 31 December this year for anti-assignment clauses. The Government has published the draft Business Contract Terms (Assignment of Receivables) Regulations 2018, which for SMEs essentially invalidate anti-assignment clauses affecting receivables — i.e. sums payable for goods or services supplied. A few pointers:

1. The prohibition is not limited to assignment to financiers: assignment to debt-collectors, etc, also seems to be protected.

2.  There are anti-avoidance provisions. Any attempt to put conditions on the assignability of receivables is outlawed. The blurb states that a set-off clause is not such a condition: this may be important where, for example, a contract allows set-offs that would not otherwise be pleadable against an assignee. On the other hand, there is some doubt about this: the Regulations do not contain any such provision, and the blurb, of course, is not part of them.

3. There are exceptions. These include financial services, swaps, energy futures, petroleum licences, public-private partnership projects and contracts with national security implications. Importantly there are also two other carve-outs. One is contracts where one or more parties is not acting in the course of a business. This means consumers can, if there is a suitable term, continue to refuse to deal with an assignee. Another is contracts which neither party entered into in the course of a business here: so genuine international contracts remain subject to the old freedom of contract rules. Perhaps suprisingly, rental contracts are also excluded, except when connected with certain forms of financial services.

All in all, these seem an improvement on last year’s regulations (not difficult). As to their effect we’ll have to wait and see.

A Euro-spanner in the P&I works: direct actions allowed against insurers in EU courts, and no argument allowed.

UK-based P&I clubs will be hopping mad at the decision of the ECJ today in Assens Havn (Judicial cooperation in civil matters) [2017] EUECJ C-368/16, and will doubtless be joining a number of others in saying that Brexit can’t come soon enough. The problem can be summed up thus: as regards events in the EU the Assens Havn decision has blown out of the water their carefully-crafted provisions aimed at ensuring that all proceedings against them in respect of their members’ liabilities are sorted out in England.

The background (see here in this blog) arose out of events ten years ago in the Danish port of Assens. A Danish tug, entered by bareboat charterers with Navigators Management (UK) Ltd, negligently damaged shore installations. The charterers being insolvent, the port sued Navigators in Denmark under a Danish direct action statute. Navigators relied on the English law and jurisdiction clause in their agreement and insisted on being sued in England. The port relied on Arts 10 and 11 of Brussels I (now Recast 12 and 13, there being no relevant difference), saying that in matters of insurance the club could be sued in Denmark as the place where the damage occurred. Navigators said that Art.13.5 (recast Art.15.5) allowed the relevant jurisdiction to be ousted by agreement, including agreement between the insurer and the insured. It was only fair, they argued, that if the port wanted to use a direct action provision to sue them, the port had to take the insurance contract warts and all. The Danish courts sided with Navigators, but referred the matter to the ECJ.

The ECJ was having none of it. True, the plain words of Art.13.5 said that the provisions of Part 3 of the Regulation could be contracted out of in the case of (inter alia)  marine third-party insurance contracts. True also that the Brussels provisions dealing with direct actions against insurers — Arts.8-10 and 11.2 — indubitably formed part of Part 3. Nevertheless, the Court managed to interpret the Regulation as forbidding any contractual ouster of the direct action provisions. This it did on two grounds. One, flimsy enough, was that the direct action provisions contained no specific saving for Art.13.5. The other was that the victim of an accident always had to be protected in its claims on the basis that it was likely to be the weaker party (!). This can best be described as bizarre: not only is the right of contracting-out under Art.13.5 carefully limited to insurance against solidly commercial risks, but the victims are likely to be substantial businesses or authorities and / or their property insurers, none of which one would have thought deserving of any particular solicitude.

Discounting any entirely unworthy thoughts connected with ideas such as sour grapes and Brexit, one can only speculate that the Court regarded the regime that previously protected P&I clubs as a tiresome anomaly, to be removed almost at any cost. In any case, the position now appears clear. In EU jurisdictions that allow direct actions against insurers, P&I clubs will have to resign themselves to being sued wherever bad things happen. Only in the case of other EU jurisdictions, and outside the EU, where they have in addition the useful weapon of the anti-suit injunction available to them (see here) — can they continue as before and benefit from the savings in costs and trouble of one unique English forum.

Lending $150 million to an oil company? Don’t worry too much about UCTA.

The decision in African Export-Import Bank & Ors v Shebah Exploration & Production Co Ltd & Ors [2017] EWCA Civ 845 , dismissing an appeal from Phillips J (noted here in this blog), contains few surprises and much relief. A syndicate of three banks, one Egyptian and two Nigerian, lent $150 million or so to a speculative Nigerian oil exploration company which — surprise, surprise — failed to pay most of it back. The lenders did the obvious thing, accelerated the loan and filled in the form asking for summary judgment. Hoping to stave off the evil day, the company and its two guarantors raised what looked like a fairly speculative set-off of a cool $1 billion, essentially suggesting that one bank had wrongfully dragged its feet over making the loan, and that another had broken the terms of a different, earlier, facility. The lenders sought to shut out this effort to muddy the waters by invoking an explicit anti-set-off clause. The borrower for its part argued that it had dealt on the lenders’ written standard terms of business and that the clause was clearly unreasonable under s.3 of the Unfair Contract Terms Act 1977(!). Phillips J disagreed and gave judgment in short order, pointing out that the terms, standard ones drafted by the Loan Market Association, had been extensively negotiated, and that it would be rare indeed for a party to be able to argue that a standard set of conditions like this was used so inflexibly as to attract the operation of s.3.

The Court of Appeal agreed wholeheartedly. They pointed out that the borrowers, who had to prove the use of written standard terms of business, had not even called any evidence to that effect. This would not do: as Longmore LJ drily put it at [33],

“A party who wishes to contend that it is arguable that a deal is on standard business terms must, in my view, produce some evidence that it is likely to have been so done. … It cannot be right that any defaulting borrower can just assert that business is being done on standard terms and that the lender then has to disclose the terms of other (how many other?) transactions he has entered into before he is entitled to summary judgment.”

Although he accepted that inflexible use of a third party’s standard terms might theoretically trigger s.33, he also pointed out that any substantial degree of negotiation would negative this, and also that the negotiation need not necessarily relate to the terms potentially caught by the 1977 Act.

As I said, a result which will be welcomed in the Square Mile. It will rightly reassure lenders that they can make their loans subject to English law safe in the knowledge that the courts here will give short shrift to snivelling arguments based on an Act which was never intended, one suspects, to protect highly commercial borrowers like this.

Of course, to make assurance doubly certain, there might be something to be said for strengthening the blanket exception to the 1977 Act in s.26 so as to encompass not only international supply contracts but contracts for loans or financial services between corporations with places in different jurisdictions. With the Queen’s Speech reduced this Parliament to about the length of a fireside chat, an under-occupied Government might even find Parliamentary time for the necessary change.

Exemption clauses mean what they say — and so does the Misrepresentation Act 1967

Common sense in spades yesterday from the CA, in one of Moore-Bick LJ’s last judgments, contained in the financial misinformation case of Taberna Europe CDO II Plc v Selskabet AF [2016] EWCA Civ 1262. Taberna bought loan notes issued by Roskilde, a thoroughly bad Danish bank. They bought them not directly but on the secondary market from Deutsche Bank, allegedly on the basis of negligent misrepresentations by Roskilde. In due course, having lost their money, they claimed under the Misrepresentation Act 1967, s.2(1), against the successor body to Roskilde, which it was arguable under Danish law had to pick up the tab for misrepresentation claims. Three interesting issues arose:

(1) Roskilde’s pitch included two exemptions: “No liability whatsoever is accepted as to any errors, omissions or misstatements contained herein”, and “Neither the Bank nor any officers or employees accepts any liability whatsoever arising directly or indirectly from the use of this presentation for any purpose.” Eder J held them inapplicable to Taberna’s claim on the basis of contra proferentem and Canada SS Lines v R [1952] AC 192. The CA disagreed, downplaying the supposed presumption against exoneration for negligence, and saying (at [23]): “In the past judges have tended to invoke the contra proferentem rule as a useful means of controlling unreasonable exclusion clauses. The modern view, however, is to recognise that commercial parties (which these were) are entitled to make their own bargains and that the task of the court is to interpret fairly the words they have used.” This adds to a line of recent cases (and in our view a very sound one) to similar effect, most recently Transocean Drilling v Providence Resources [2016] EWCA Civ 372, noted here in this blog.

(2) Did s.2(1) of the Misrepresentation Act apply at all, since Taberna bought from Deutsche Bank and not Roskilde? Eder J had held that the Act applied, because by buying the notes Taberna came into contractual relations with Roskilde, presumably by assignment. This holding looked odd at the time, and the CA specifically discountenanced it: the 1967 Act applies only to contracts directly induced between representor and representee.

(3) Was contributory negligence pleadable against a claim under s.2(1) of the 1967 Act? The answer, again sensibly, was said to be Yes, though the question didn’t arise since (a) Roskilde wasn’t liable anyway and (b) Taberna hadn’t been negligent.

Altogether a good day for down-to-earth contract lawyers. We congratulate Sir Martin and wish him a happy retirement.

Of Default Gas and Freedom of Contract

It’s a good day for freedom of contract as Christopher Clarke LJ handed down his judgment for Scottish Power UK Plc v BP Exploration Operating Company Ltd & Ors [2016] EWCA Civ 1043 in favour of the respondents.

The appellants, Scottish Power – the buyers of natural gas under four, almost identical long term gas sales agreements – argued they should be allowed to recover damages for a contractual breach (the underdelivery of gas) under the general law. This was in spite of a compensation mechanism within their agreements which limited the remedy for such a breach to the delivery of the entitled quantity of gas at a discounted rate (“Default Gas”), and which expressly excluded the buyer’s right to seek compensation for such a breach through any other means.

During the initial case, in considering the commercial purpose of the compensation clause in the contracts, Leggatt J thought it improbable that the parties intended a situation where the buyer would automatically receive a quantity of Default Gas as compensation for the undelivered gas and yet still be permitted to seek another remedy for the failure to deliver the very same quantity of gas that already been compensated for. Christopher Clarke LJ was in agreement and further argued, quite sensibly, that the wording of the compensation regime was clear enough that the court was obliged to give effect to it, even though it deprived Scottish Power of a right it would have otherwise had under the law.

This case (along with the recent Transocean v Providence) is rather refreshing given how one of the very cornerstones of English contract law – freedom of contract (a rather sensible and practical doctrine which provides a good deal of certainty and thus is beloved by businesses everywhere) – has been placed under some scrutiny recently.

One hopes for more cases like Scottish Power v BP on the horizon but we’ll have to wait and see.

 

The LOGIC of freedom of contract

A ringing vindication of freedom of contract, and of grown-up contract interpretation, from the English Court of Appeal today in Transocean v Providence.

Transocean provided a drilling rig to Providence to explore for oil off the shores of the Emerald Isle. The contract was a bespoke version of the LOGIC offshore construction, etc contract.  Problems arose when operations had to stop for 4 weeks owing to problems with Transocean’s rig, which were found to be due to Transocean’s breach of contract. Providence sued for “spread costs” (accountant-speak for capital equipment left idle) during that time. Transocean countered with a reference to Clause 20, part of a complex and comprehensive knock-for-knock arrangement:

“20. CONSEQUENTIAL LOSS. For the purposes of this Clause 20 the expression “Consequential Loss” shall mean:

(i) any indirect or consequential loss or damages under English law, and/or

(ii) to the extent not covered by (i) above, loss or deferment of production, loss of product, loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption, loss of revenue (which for the avoidance of doubt shall not include payments due to CONTRACTOR by way of remuneration under this CONTRACT), loss of profit or anticipated profit, loss and/or deferral of drilling rights and/or loss, restriction or forfeiture of licence, concession or field interests whether or not such losses were foreseeable at the time of entering into the CONTRACT and, in respect of paragraph (ii) only, whether the same are direct or indirect. The expression “Consequential Loss” shall not include CONTRACTOR’S losses arising in connection with (1) failure by COMPANY to provide the letter of credit as required by Clause 3.13 of Section III or resulting termination of this CONTRACT or (2) any termination of this CONTRACT by reason of COMPANY’S repudiatory breach.

Subject to and without affecting the provisions of this CONTRACT regarding (a) the payment rights and obligations of the parties or (b) the risk of loss, or (c) release and indemnity rights and obligations of the parties but notwithstanding any other provision of the CONTRACT to the contrary the COMPANY shall save, indemnify, defend and hold harmless the CONTRACTOR GROUP from the COMPANY GROUP’S own consequential loss and the CONTRACTOR shall save, indemnify, defend and hold harmless the COMPANY GROUP from the CONTRACTOR GROUP’S own consequential loss.”

This seemed comprehensive enough, but Providence still thought it worth arguing the toss. They argued that the clause only covered claims for replacement costs; that it should be aggressively construed contra proferentem; that it was apt to reduce Transocean’s obligations to nil; and that as such the courts should simply disregard it (!).

The judge at first instance accepted some of these arguments and rejected Transocean’s defence. Moore-Bick LJ, who gave the only judgment in the CA, was having none of it. Read in any sensible way the clause covered the loss; contra proferentem was inappropriate in a case of this sort between sophisticated grown-up contractors; and the freedom of parties in situations like this to make unreasonable agreements needed to be preserved.

This is, if one may say so, the sort of entirely well-reasoned and sound decision which gives us continuing confidence in English law and jurisdiction as the best system to adopt if  businessmen want to know where they stand.

See Transocean Drilling v Providence Resources [2016] EWCA Civ 372, available on BAILII.