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Events of Default

Art. 11(1) of the Cape Town Convention which permits the parties to define the events of default in their agreement is a provision that fits well into English law.[1] English courts are in principle reluctant to interfere with the provisions agreed between commercial parties on the basis of freedom of contract, subject to issues of “illegality, incapacity, mistake, duress, misrepresentation, frustration and restraint of trade”.[2]

What is the reason behind the non-interventionism of English courts to bargains struck in commercial contracts? The following often-quoted opinion of Chadwick LJ in Watford Electronics v Sanderson CFL Ltd sheds light on their rationale:

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.[3]

Considering this extract, it is not surprising (or at least it is less surprising) that the parties are given considerable leeway in identifying the events that will permit the non-breaching party to terminate the contract[4]: “this right of termination may be exercisable upon a breach of contract by the other party (whether or not the breach would amount to a repudiation of the contract), or upon the occurrence or non-occurrence of a specified event other than breach, or simply at the will of the party upon whom the right is conferred.”[5]

Professor Peel recently provided an instructive analysis of the benefits and the pitfalls of using such clauses:

„.it can avoid the uncertainty inherent in termination for a repudiatory breach, though whether it does so depends on the extent to which the relevant event can be identified with certainty. If satisfied, the contract may be terminated notwithstanding that the breach is only a minor one and does not amount to a substantial failure to perform. If the other party has some bargaining power, the potential harshness of a termination clause may be mitigated by stipulating for an opportunity to cure the breach so that termination is available only if the time allowed for a cure has expired, or the attempted cure fails to remedy the initial breach. The courts have also insisted on strict compliance with the requirements that must be met before an express power to terminate may be invoked and with any procedure which must be followed to effect termination. [notes omitted][6]

Having said that, the use of an event of default clause raises the following issues under English law:

  • 1. does the use of such clause exclude the common law right to terminate the contract for a repudiatory breach? The answer is no, unless the clause, expressly or impliedly, excludes such right[7];
  • 2. can the parties take the flexibility of English law to the extreme and include a blanket default clause which provides that the “breach of any of its obligations under the contract” entitles the non-breaching party to terminate the contract for any breach no matter how minor it is? The answer is no. In a blanket default clause the right to terminate will only accrue in the case of a repudiatory breach
  • 106 E Peel, “The termination paradox” [2013] LMCLQ 519, 522.

of a contractual obligation,[8] unless clear wording to the contrary is used in the contract.[9] The main reason behind this decision is that such an interpretation “flouts business commonsense. A reasonable commercial person would understand [it],.. as meaning that if either party shall in any respect fail or neglect to observe or perform any provision of the Agreement in a way that amounts to a repudiatory breach, or if an insolvency event arises, then the innocent party may terminate by giving notice.”[10]; and

3. the notion of business common sense is regularly used by English courts as a tool of interpreting commercial contracts: “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must yield to business common sense”.[11] Yet, this statement must be approached with caution, because English courts are reluctant to use the notion of business common sense as giving them the green light to rewrite commercial contracts[12]: The decision in Co-operative Wholesale Society Ltd v National Westminster Bank plc [1995] 1 EGLR 97 where the Court of Appeal upheld a clause that produced an “improbable commercial result. [because] it flowed from the unambiguous language of the clause” is always a tale of caution for the unwary.[13] However, if the wording of the clause is ambiguous, English court will not hesitate to opt for the interpretation that makes commercial sense. Recently, Lord Clarke, with whom all the Lords agreed, explained what the search for commercial sense entails:

.. .the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. [T]he relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.[14]

In that respect, the extensive contractual freedom granted to the parties by Art. 11 of the Cape Town Convention will not suffer from its ratification from the British Government. Instead, I believe that the strong preference of English courts in providing a pragmatic, commercially-oriented interpretation of ambiguous clauses, including events of default clauses, will only strengthen the aims of Art. 11. At the same time, the dominant role that the notion of business common sense plays in the interpretation of commercial contracts is an assurance that English courts will easily embrace the concept of “commercial reasonableness” in Art. 8 of the Cape Town Convention.[15]

Having said that, the Consumer Rights Act 2015 and the Unfair Contract Terms Act 1977 (as amended) have in principle the potential to restrict the contractual freedom of parties to define events of default clauses. However, their influence over the issues regulated in the Cape Town Convention and are the subject of this report is limited; considering also the purposes of this report a very short analysis will be provided herein.

The Consumer Rights Act 2015 came into force on 1 October 2015 and replaces, among others, the Unfair Terms in Consumer Contracts Regulations 1999 which implemented into English law the EC Directive on Unfair Terms,[16] and for the first time introduced into English law a test of fairness. The Act applies to contracts between “a trader and a consumer for the trader to supply goods, digital content or services”.[17] [18] The term consumer is defined as “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”. 118 The Act gives the power to the court to set aside a term “if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer”.[19] The restrictive definition of consumer does not leave much room for the application of the Act to the definition of events of default in the commercial context of our discussion.

The Unfair Contract Terms Act 1977 (as amended by the Consumer Rights Act 2015) subjects exclusions and limitation of liability clauses in business-to-business contracts[20] (and consumer-to-consumer contracts) to a reasonableness test, namely that the term is “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”.[21] The Act covers clauses that exclude liability for negligence,[22] and/or liability arising in contract[23] and treats them in one of the following two ways: either they are outright unenforceable without checking their reasonableness (e.g. clauses excluding negligence for death or injury) or they are unenforceable subject to satisfying the reasonableness test (e.g. clauses excluding negligence for loss or damage other than death or injury).

Broad this scope as it is, the Act has three major restrictions with respect to our discussion:

  • 1. It is applicable to clauses excluding or limiting liability not to the entirety of the agreement. Strictly speaking events of default clauses in commercial contracts do not qualify as such and they remain outside the scope of the Act. Yet, English courts tend to look into the substance rather than the form of the clause in question taking a broad approach as to what constitutes an exclusion clause courtesy of s. 13(1) which essentially expand the meaning of exclusion clause, e.g. covering clauses excluding the right to set-off, or reversing the burden the proof etc.[24] As such, the drafting of the events of default clause is of paramount importance to avoid having its terms evaluated under the Act;
  • 2. In a business to business context English courts are still reluctant to fiddle with the parties’ arrangements: “I am less enthusiastic about [the] intrusion [of the Act] into contracts between commercial parties of equal bargaining strength, who should generally be considered capable of being able to make contracts of their choosing and expect to be bound by their terms”.[25] Still, when the question whether a clause in a commercial contract is reasonable arises, English courts are cautious to avoid disturbing the parties’ arrangements:

it should be much easier to establish that the clause is reasonable, especially if the clause is question is contained in a standard form which is generally accepted in the industry. This accords with the approach adopted in Photo Production v Securicor [1980] AC 827 [1980]

  • 1 All ER 556, of non-interventionism and leaving it to the parties to allocate the risks and responsibility for insurance cover[26];
  • 3. The Act does not apply to international supply contracts which are defined as “either.. .a contract of sale of goods or.. .one under or in pursuance of which the possession or ownership of goods passes; and it is made by parties whose places of business.. .are in the territories of different States”.[27] The Act further provides that for a contract to fit into this description one of the following three conditions must be satisfied: “(a)the goods in question are, at the time of the conclusion of the contract, in the course of carriage, or will be carried, from the territory of one State to the territory of another; or (b)the acts constituting the offer and acceptance have been done in the territories of different States; or (c)the contract provides for the goods to be delivered to the territory of a State other than that within whose territory those acts were done.”.[28]

This section was examined by the Court of Appeal in Trident Turboprop (Dublin) Limited v First Flight Couriers Limited.[29] The claimant, which was an Irish company, entered into two aircraft operating leases with the defendant who was an Indian company. The aircraft were intended to be used in India in the defendant’s courier business. The leases provided for delivery of the aircraft to the defendant in the UK, but one of them was actually delivered in Sweden and the other one in the UK. The leases contained an exclusion of the claimant’s liability for misrepresentation. The defendant stopped paying rent on the aircraft on the basis that they were unreliable and he argued that he had terminated the lease as a result of the claimant’s misrepresentation regarding the quality of the aircraft; with the clause excluding the liability of the lessor being unenforceable under the Unfair Contract Terms Act 1977. The claimant sought summary judgment requesting the court to decide, among other things, whether the Act is inapplicable to the exclusion clause in question as a result of s. 26. The Court rightly held that s. 26(3) was satisfied since the operating leases “provided for possession of the aircraft to pass under them and were made by parties whose places of business were in the territories of different states”.[30] With ss. 26(4)(b) and s. 26(4)(c) inapplicable, because the negotiations took place in England and the aircraft were to be delivered in England, the focus turned into s. 26(4)(a). The Court avoided a technical reading of the section and looked into the intentions of the parties: “if a person who carries on business abroad hires equipment from a supplier in this country in circumstances where both know that the intention is for it to be used abroad, the lease is one pursuant to which the goods will be carried from the territory of one state to the territory of another within the meaning of section 26(4)(a) and can sensibly be described as an international supply contract”.[31] Yet, the question remained whether the phrase “goods carried” in the section is broad enough to encompass aircraft which are flown in a foreign land under their own power. The Court gave a positive reply: “I am unable to accept that Parliament intended to draw a distinction for this purpose between vehicles capable of moving under their own power and other goods. In my view the aircraft in this case were to be ‘carried’ from the United Kingdom to India within the meaning of subsection 4(a), despite the fact that it was the intention of [the defendant] to fly them under their own power”.[32] Considering the popularity of such leasing arrangements, it becomes obvious that this finding limits the number of aircraft leases that would be subject to the Act.

  • [1] Reg. 18 of the International Interests in Aircraft Equipment (Cape Town Convention) Regulations2015.
  • [2] Halsbury’s Laws of England, Contract (5th edn, 2012), Vol 22, at [213] it is also stated that “thecourts have sometimes intervened by way of the classification of terms, and by their interpretationof the parties’ agreement, or the implication of terms...In addition, [they have employed equityrules, such as] promissory estoppel, specific performance, injunction, undue influence and thenotion of unconscionable bargains”.
  • [3] [2001] EWCA Civ 317, [2001] 1 All ER (Comm) 696, at [55].
  • [4] Lombard North Centralplc v Butterworth [1987] 1 All ER 267 with references in p 272 to casesthat go back to 1876.
  • [5] H Beale (ed), Chitty on Contracts (31st edn, 2013), at [22-048]. As to what constitutes a repu-diatory breach, Professor Peel recently provided a brief analysis that fits well into our discussion:“As a matter of general law, a contract may be terminated in the following circumstances: (i) wherethe defendant is guilty of renunciation; (ii) where the defendant is guilty of a substantial failure toperform; and (hi) where the defendant is guilty of a breach of condition. A little elaboration iscalled for in relation to each of these circumstances and it is helpful to start with the last of them.The designation of a term as a condition must be understood in the context of the tripartite classification of the terms of a contract into conditions, warranties and innominate (or intermediate)terms. A condition is a term of the contract which, if breached, entitles the innocent party to terminate the contract. A warranty is a term of the contract which, if breached, entitles the party only todamages and not to terminate the contract. An innominate (or intermediate) term, as the namesuggests, is neither a condition nor a warranty. Whether, if breached, it entitles the innocent partyto terminate the contract depends upon the seriousness of the breach. It is in relation to innominateterms, therefore, that the right to terminate accrues on the basis of a substantial failure to perform.By contrast, there is no requirement that a breach of condition should also amount to a substantialfailure to perform; all that is required for the right to terminate is that the term should amount to acondition and that it should have been breached. A term of a contract may be a condition as a result
  • [6] of legislation, or judicial precedent, or by express or implied agreement of the parties...As forsubstantial failure to perform, it is often captured by a number of differently formulated tests: didthe breach go to the root of the contract; did it substantially deprive the innocent party of what hebargained for; did it frustrate his purpose in making the contract? In simple terms, the question tobe asked is whether the breach was sufficiently serious to justify termination of the contract. It isthe breach and its effects which are relevant; not the nature of the term broken. Whether the breachreaches the necessary threshold is often a question of ‘very great difficulty’. The defendant isguilty of renunciation where he has demonstrated by his words or conduct his intention not toperform the contract, either at all, or in some respect which goes to the root of the contract. It isclear that renunciation and substantial failure to perform can overlap, since the conduct uponwhich a plea of renunciation may be based is a failure to perform obligations which have alreadyfallen for performance. But renunciation may also be relied upon to terminate on the basis of anentirely anticipatory breach, ie before the time for performance.. .[A]ll three bases of terminationunder the general law will be referred termination for a ‘repudiatory breach’” in E Peel,“The termination paradox” [2013] LMCLQ 519, 520-521. How English law on repudiatory breachis going to fit into Art. 11(2) of the Cape Town Convention which speaks of “substantial deprivation” will be a matter for consideration. The “substantial failure to perform” seems to be its equivalent from an English law perspective, with the two notions being conceptually close. Yet, thequestion remains whether renunciation and breach of condition will be good enough reasons totrigger default in the absence of express contractual provisions; with the breach of condition arguably qualifying as such.
  • [7] 107 H. Beale (ed), Chitty on Contracts (31st edn, 2013), at [22-048] with analysis on the implications of having both running in parallel.
  • [8] Rice (T/A the Garden Guardian) v Great Yarmouth Borough Council 2000 WL 823961 endorsedby Dominion Corporate Trustees Ltd v Debenham Properties Ltd [2010] EWHC 1193 (Ch) andH. Beale (ed), Chitty on Contracts (31st edn, 2013), at [22-048].
  • [9] Looney v Trafigura Beheer BV [2011] EWHC 125 (Ch), [2011] All E.R. (D) 17 (Feb) with comments in H Beale (ed), Chitty on Contracts (31st edn, 2013), at [22-048].
  • [10] Dominion Corporate Trustees Ltd v Debenham Properties Ltd [2010] EWHC 1193 (Ch) at [32]per Kitchin J.
  • [11] Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191, 201 per LordDiplock.
  • [12] In Co-operative Wholesale Society Ltd v National Westminster Bank plc [1995] 1 EGLR 97Hofmann LJ (as he then was) delivered a strong statement to that effect at p. 99: “[t]his robustdeclaration does not, however, mean that one can rewrite the language which the parties have usedin order to make the contract conform to business common sense. But language is a very flexibleinstrument and, if it is capable of more than one construction, one chooses that which seems mostlikely to give effect to the commercial purpose of the agreement”.
  • [13] Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2012] 1 All ER 1137, at [23] per Lord Clarke.
  • [14] Ibid, at [14].
  • [15] Reg 24 of the International Interests in Aircraft Equipment (Cape Town Convention) Regulations2015.
  • [16] Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ L 095,21/04/1993.p. 29.
  • [17] s 1(1).
  • [18] s. 2(3).
  • [19] s. 62(4).
  • [20] ss. 1(3) and 14.
  • [21] s. 11(1). The Act also provides in its Schedule 2 guidelines for the application of the reasonableness test.
  • [22] s. 2.
  • [23] ss. 3, 6, 7.
  • [24] s. 13(1) provides that the Act prevents “(a)making the liability or its enforcement subject torestrictive or onerous conditions; (b)excluding or restricting any right or remedy in respect of theliability, or subjecting a person to any prejudice in consequence of his pursuing any such right orremedy; (c)excluding or restricting rules of evidence or procedure”. For case law on application ofs. 13(1) see H Beale (ed), Chitty on Contracts (31st edn, 2013), at [14-062].
  • [25] Granville Oil & Chemicals Ltd v Davis Turner & Co Ltd [2003] EWCA Civ 570, [2003] 1 AllER (Comm) 819, [2003] 2 Lloyd’s Rep 356 at [31] per Tuckey LJ.
  • [26] J. Poole, Contract Law (11th edn, 2012), p.288.
  • [27] s. 26(1), (3).
  • [28] s. 26(4).
  • [29] [2009] EWCA Civ 290.
  • [30] Ibid., at [25] per Moore-Bick LJ.
  • [31] Ibid, at [28].
  • [32] Ibid, at [32]
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