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Retention of title clauses are found in most contracts for the sale of goods.  The concept of retention of title is a simple one whereby the supplier of goods seeks to protect itself against non-payment by retaining ownership of goods until payment is received from the customer.

What is retention of title?

The concept arises from the Sale of Goods Act 1979.  The Act provides that property in goods will only pass when the parties to the transaction intend it to pass, thus allowing a supplier to retain title to goods after delivery of those goods to the customer.  A supplier wishing to retain title to goods until payment is made must ensure that this intention is expressly stated in their terms and conditions with the customer; otherwise it is implied by the Act that title will pass on delivery.

Retention of title clauses can be a powerful weapon for suppliers.  This is particularly so where a customer enters into an insolvency process since generally they can be enforced against insolvency office-holders (such as liquidators) and hence can, in roundabout terms, improve a supplier’s position compared to other creditors of their customer (including secured ones).  This is because the goods will not form part of the customer’s insolvency estate.  In corporate insolvencies there is rarely enough money to pay all creditors and hence the opportunity to obtain goods back can be an effective remedy for a supplier.

Where should a retention of title clause be incorporated?

Although a relatively simple concept, in practice, many suppliers get retention of title wrong.  A common reason for this is a failure to properly incorporate the terms and conditions which contain retention of title clauses into a contractual relationship with a customer.  I have lost count of the number of suppliers I have seen who have simply referred to their terms and conditions in their invoices to customers and expect this to be sufficient.

Incorporation is a matter of contract law.  The most effective way of a supplier evidencing incorporation is by producing terms and conditions signed by the customer confirming its assent to the terms.  Other modes of incorporation include taking steps to give reasonable notice of the terms prior to the goods being supplied.  Retention of title clauses commonly fail where a supplier seeks to rely on terms and conditions referred to or printed on an invoice or delivery note, where no written contract was in place before the goods were supplied.  Invoices and delivery notes are generally viewed as post-contract documents, meaning before the supplier has offered to supply goods and the customer has accepted that offer. 

What to do next

Businesses supplying goods on credit would be well advised to take a close look at their standard terms and conditions to check that they include a valid retention of title clause.  They should then ensure that their contracting techniques validly incorporate these into contracts with customers.  This may well require sales staff to be advised on how to effectively achieve this.

If you require legal assistance regarding terms and conditions or insolvency, please do not hesitate to contact Christopher Buck, Associate Partner in our Business Services team, on 01908 660966 / 01604 828282 or by email at christopher.buck@franklins-sols.co.uk who will be happy to assist.

How might your commercial contracts be affected by the end of the Brexit transition period, and what can you do to protect your position?

On 30 December 2020, the UK government and the European Commission signed the EU–UK Trade and Cooperation Agreement (TCA) which now governs the trade relationship between the UK and the EU following the end of the transition period on 1 January 2021. The following checklist sets out some of the key provisions of a commercial contract that will need to be considered.

Click here for a downloadable PDF version.

For legal advice and assistance, contact Christopher Buck, Associate Partner & Corporate Solicitor, at Franklins on 01908 660966 or email christopher.buck@franklins-sols.co.uk.

From time to time a business may become involved in a contractual dispute whereby a large monetary penalty is sought. These disputes sometimes relate to penalty clauses that have been incorporated within a contract and understanding whether such penalties may or may not be enforceable is crucial to determining the extent of a defaulting party’s liability.

What is a penalty clause?

In simple terms, a penalty clause is a contractual provision that requires the defaulting party to provide monetary compensation to the innocent party in respect of a breach of a secondary obligation contained within a contract.

When is a penalty clause enforceable and which case law has changed the way we interpret penalty clauses?

In the landmark combined judgment of Cavendish Square Holdings BV v Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67, the Supreme Court sought to clarify the way in which penalty clauses should be interpreted in commercial contracts. The last case to substantially consider their enforceability was over 100 years ago in the case of Dunlop Pneumatic Tyre Company Ltd v New Garage Motor Co Ltd [1915] in which Lord Dunedin set out four key tests to be applied when determining whether the clause in question is a genuine pre-estimate of liquidated damages or a penalty.

The key tests applied under Dunlop involved assessing whether the extent of the monetary compensation sought was ‘unconscionable’ and ‘extravagant’ in comparison to the loss incurred by the innocent party. Consideration was also given to whether the loss was so disproportionate it could only be intended to deter a breach of contract. If the loss was found to be wholly disproportionate, it would be construed as a penalty and unenforceable.

The decisions of both Cavendish and ParkingEye reconsidered the tests to be applied when considering the enforceability of penalty clauses. They established that a clause can only be considered to be penal where it is a matter of substance, not form. In particular, in order to consider whether a clause in question is a penalty clause depends entirely upon whether the clause relates to a primary or secondary contractual obligation. If a breach of the obligation gives rise to a new one, this would be construed as a conditional primary obligation. However, in the instance that the breach gave rise to an obligation that would not otherwise exist, it would be a secondary obligation that is an alternative to damages and could be found to be a penalty clause.

The Supreme Court were keen to uphold the doctrine of penalties and, while acknowledging that Lord Dunedin’s key tests were still relevant, the majority held that the commercial approach to adopt was to have regard to the innocent party’s interests, whether these were being legitimately protected and whether the remedy the clause seeks to impose is proportionate to the innocent party’s interest. If these two tests can be established, the penalty clause will be enforceable.

Can a penalty clause be disputed?

A penalty clause may be disputed if the party to which the penalty is imposed against is of the opinion that the penalty sought far exceeds the innocent party’s attempt at quantifying a genuine pre-estimate of a loss incurred and which also seeks to act as a deterrent to the innocent party ever committing a breach of the relevant clause. Ordinarily, penalty clauses imposed in respect of primary obligations are enforceable. However, secondary obligations are not. It will be a matter of interpretation as to whether a penalty clause is enforceable applying the tests established following the Supreme Court’s judgement in Cavendish and ParkingEye.

For advice and assistance in relation to the drafting of a penalty clause within a contract or understanding the enforceability of any penalty provisions, contact Christopher Buck, Associate Partner & Commercial Solicitor within our Business Services team on 01908 660966 / 01604 828282 or email christopher.buck@franklins-sols.co.uk.

The Coronavirus pandemic has caused the Government to order the mandatory closure of all schools and nurseries across the United Kingdom, but where does that leave those parents whose children attend independent schools and nurseries? This is a concern that has been raised by many parents who are unsure as to whether they are entitled to a refund in respect of those fees that they have already paid for the remainder of the school year.

Undertaking a review of the terms of any parent contract that you may have entered into with the school and/or nursery in question when your child first joined, is key to understanding the contractual obligations and liabilities imposed upon you and whether you will be entitled to claim a refund for all, or some, of the school fees that have been paid for the following term. Some independent schools and nurseries may not have envisaged a closure of this nature and whilst some are offering a reduction in fees in light of the un-planned closures, this is not the case across the board.

If you have taken out a school fees insurance policy that may provide you with some protection, however careful consideration of the policy wording and terms is required in order to assess whether you will be entitled to claim. In any event, you should firstly make contact with the school and/or nursery to establish how they are proposing to deal with the current crisis.

Understanding your legal position in light of the Coronavirus pandemic is crucial to determining your right to a refund.

If you require any legal assistance with regards to understanding the terms of a parent contract or insurance policy, or if you are in dispute with a school and/or nursery at present and require our assistance to draft a suitable letter on your behalf, then please do not hesitate to contact Christopher Buck, Associate Partner in the Commercial Services Department on 01908 660966 / 01604 828282 or email christopher.buck@franklins-sols.co.uk.

The United Kingdom along with the rest of the world is currently in unchartered territory. Extensive travel bans have been implemented, schools have been closed and the stock markets are in freefall with the FTSE 100 falling to levels not seen since the financial crisis.

It has become apparent that no government was adequately prepared for a pandemic of this nature and it is undeniable that the uncertainty is worrying for all sectors of the economy.

With that being said, it is inevitable that commercial contracts are being delayed so it is worthwhile taking the time to assess what your legal options are if you are unable to fulfil your contractual obligations.

A contract is a legally enforceable agreement that creates rights and obligations between those who agree to be bound by its terms, provided that certain key elements are present (namely, offer, acceptance, consideration, intention to create legal relations and certainty of terms).

Each party is entitled to expect the performance of a contract which has been agreed. If you terminate a contract without a common law or contractual right to do so, this would normally amount to repudiation, which in itself attracts significant consequences for the benefit of the ‘innocent party’. It is therefore pertinent to be aware of the two key exceptions to a breach of contract, these are force majeure and the common law doctrine of frustration, both of which are considered in turn below.

Force Majeure

Force Majeure is a phrase derived from French civil law which means ‘superior force’. You will find that most commercial contracts include an express force majeure clause tucked away at the back as it is not an automatic right. It is intended to suspend or terminate contractual obligations following the occurrence of certain events which are outside the parties’ reasonable control and that prevent them from performing their obligations. You will need to carefully asses the specific wording of the relevant clause, normally it will contain a non-exhaustive list of circumstances which would be deemed as a ‘force majeure event’ as there is no statutory or common law definition.

It is important to check whether a pandemic or epidemic is specifically covered as the World Health Organisation has recently declared that the outbreak of Covid-19 has reached pandemic levels. In the event that neither pandemic nor epidemic is listed it may be worth considering whether “any law or any action taken by a government or public authority” is included and indeed applicable instead, especially if the government move to enforce a mandatory lockdown.  In any event, it is likely that any counterparty will resist reliance on such a clause leading to the possibility of litigation.

In comparison, a short form force majeure clause would normally contain wording to the effect of “neither party shall be in breach of this agreement nor liable for delay in performing, or failure to perform, any of its obligations under this agreement if such delay or failure result from events, circumstances or causes beyond its reasonable control…..”. Obviously, this is a much wider definition and in the absence of a list of specified events, it means it is open to interpretation on whether this clause would extend to cover Covid-19.

Once it has been established that a force majeure event has occurred, causation also has to be established, i.e. that the outbreak of Covid-19 has prevented, hindered or delayed a party from performing any of its contractual obligations. If performance has only been made more difficult or expensive then the protection is unlikely to apply. A party seeking to rely on the force majeure clause should also be able to demonstrate the use of reasonable endeavours to mitigate any loss.

There may also be a process to follow in that the affected party has to serve notice on the other party within a certain number of days to notify them that a force majure event has occurred. Time is therefore potentially of the essence. 

If you can successfully establish that a force majure event has occurred the clause will typically provide that the parties’ obligations under the contract are suspended until the force majeure event ceases. At this point, the contract will be ‘resurrected’. Alternatively, you may find that a more commercially attractive option has been drafted which states that so long as the performance of your obligations are continuously prevented, hindered or delayed for a certain number of weeks or days the agreement may be terminated by both parties. In terms of costs, unless the clause specifically details recovery provisions the general position is that any costs incurred or payments made will not be recoverable.

Frustration

In the absence of an express force majeure clause in a commercial contract, the common law doctrine of frustration may assist a party who is unable to fulfil its contractual obligations. You would need to demonstrate that a frustrating event has occurred after the contract was formed which, due to no consequence of your own, has made it impossible for you to carry out your contractual obligations or that they have become radically different.

Whilst this may seem like an attractive alternative, each case will be assessed on its own merits and case law has shown that a very high threshold must be met before the court will deem that a contract is truly frustrated. This is so parties are not released from their contractual obligations too easily. Please note in the past it has been deemed that a contract is not frustrated where:-

• a force majeure clause in the agreement covers the situation instead (unless such clause is incomplete);
• the contract is more difficult or expensive to perform;
• there are changes in economic conditions; and
• the frustrating event should have been pre-empted or is due to the conduct of one of the parties.

These are only a few examples, but seem particularly relevant in the context of this article.

If a contract has been frustrated, all parties will be released from their future (not past) obligations immediately and the contract will be automatically brought to an end. Neither party may sue for breach. The allocation of loss is then decided by the Law Reform (Frustrated Contracts) Act 1943. Under the Act payments can be recovered in full or in part, in a manner deemed equitable by the courts.

Insurance

Finally, you should also check your business insurance or speak to your broker to see what risks are covered. Standard commercial insurance policies typically only provide cover against a wide range of day-to-day risks, therefore unless you have put specific cover in place which protects your business against interruption arising from a infectious disease or forced closure by the authorities it is unlikely that you will be able to make a claim. Even if your policy covers such perils you may find that a claim can only be made in relation to specific diseases named in the cover.

If you require legal assistance regarding contracts, please do not hesitate to contact Christopher Buck, Associate Partner in our Business Services team on 01908 660966 / 01604 828282 or at christopher.buck@franklins-sols.co.uk who will be happy to assist.

When does a breach of contract occur? It is usually as a result of one of the following:-

• There has been a failure to deliver goods or services
• There has been a failure to make a payment within a specified time frame
• Work carried out, goods delivered or services provided have been defective
• A party has refused to perform part of a contract
• Services or products are provided late

Breaches of contract are categorised depending upon how serious they are to the relationship between the parties. They can be categorised as a:

• Minor breach of contract
• Material breach of contract
• Fundamental breach of contract., and
• An anticipatory breach of contract

A minor breach of contract can arise when a service or individual part is substituted for what was originally agreed between the parties in accordance with their contract and yet the contract itself can still be delivered despite the alteration. In other words, the breach only has a minor impact upon the contract.

A material breach of contract arises when there has been a more serious breach that goes to the heart of the contract itself. This generally means that one of the parties would not have entered into the contract without this element being agreed and part of the contract.

A fundamental or sometimes called a repudiatory breach of contract is so severe that the contract itself can be terminated. Termination of the contract is instead of the innocent party seeking compensation or what is known as damages against the offending party as would be the case if the breach were classified as a minor or material breach.

An anticipatory breach is when one party tells the other party to the contract that they will not be carrying out part of the contract or a specific term of the agreement which is still due to take place at a future point in time.

What can you do?

Make sure you have your contract and all associated documents and communication together and begin to consider the implications of what has happened. This will help begin to identify which category of breach the action (or lack of it) falls into.

As it may be possible to terminate the contract, acting promptly is important otherwise you may be deemed to have accepted the breach.

We can help advise you on the nature of a breach and the consequences. This will enable you to decide what steps to take next. Contact our Dispute Resolution team today on 01604 828282 / 01908 660966 or at litigation@franklins-sols.co.uk.