Under common law, when a party breaches a contract it will normally be required to pay damages to the innocent party by virtue of the available “common law remedies”. The intention is to compensate the innocent party for the damage suffered that resulted from the defaulting party’s breach, putting it back into the position it would have been in if the breach had not occurred (rather than to punish the wrongdoer).
However, by a contract, the parties may agree to specific “contractual remedies” in advance to protect against particular risks. For instance, parties can agree that any advance payments or deposits paid by a party in default will be forfeited upon breach and will remain with the innocent party, or that a pre-agreed sum, known as liquidated damages, will be payable to the innocent party upon a certain breach.
The parties are free to agree to any such provisions within their contracts and in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] A.C. 689, 717H, it was observed by Lord Diplock that there is a presumption that neither party to a contract intends to abandon any additional common law remedies for its breach, and that clear words are required to exclude or limit such rights. This is sometimes referred to as the “Gilbert-Ash presumption”.
So in other words, in the absence of clear language to the contrary, the parties are presumed not to have excluded their rights to common law remedies. However, care should be taken when negotiating the terms of the contract so that you do not unintentionally do so when drafting a contractual remedy provision. It is vital to have considered the major risks posed by the contract and what remedies will be available in the event of such a breach, and which will not.
You want to be in a position where your contractual remedies provide you with sufficient security and do not fall short of what you would achieve if common law remedies were available to you.
So in what circumstances can this presumption be rebutted?
The recent case of Scottish Power UK Plc v BP Exploration Operating Co Ltd & Ors [2016] EWCA Civ 1043, 1 November 2016, provides a good example of when the Court will, in certain circumstances, find that parties to a contract have deprived themselves of their common law remedies.
Facts
In a rather complex set of circumstances, this case concerned a long-term gas supply contract that featured a comprehensive provision which related to the remedy available for the under-deliveries of gas by the seller. In the gas-supply industry, this is a relatively common provision to have as under-deliveries of gas can have significant and costly ramifications for the buyer who would commonly have many obligations to fulfil to its end users. In simple terms, the typical mechanism provides for a discounted price for the shortfall gas, referred to as “Default Gas” in this case by the parties.
The contractual mechanism awarded a 70% discount of the contract price on all Default Gas, and dealt with the consequences flowing from the provision of a shortfall. It stated that this mechanism “shall be in full satisfaction and discharge of all rights, remedies and claims howsoever arising…in respect of under-deliveries by the Seller”.
However, there was a period of three and a half years in which no deliveries occurred so Scottish Power sought damages under common law, as well as their entitlement to Default Gas. They claimed that their losses were greater than the discount it received.
The sellers rejected this, asserting that the Default Gas mechanism provided a complete remedy for all losses relating to shortfalls and under-deliveries and there could not be any further entitlement to other remedies.
Decision
The Court of Appeal confirmed that the provision was expressly intended to be a comprehensive and complete compensation mechanism in respect of all consequences from under-deliveries.<br /><br />Scottish Power’s case relied upon the Gilbert-Ash presumption (amongst other things), arguing that it should not be presumed that the parties intended to deprive themselves of their rights to damages in the absence of clear language to the contrary. The Court did find that the compensation mechanism was not a pure exclusion clause but it did replace the right to common law remedies with a different contractual remedy, which in some cases could be much more valuable to an innocent party.
The Court found that in this particular case, the parties were extremely sophisticated and experienced within the industry; they understood the intentions of their contract, and therefore the language of the agreement was interpreted as having rebutted the presumption. Scottish Power was not entitled to damages in addition.
Comment
The decision is uncontroversial from a contract law perspective, but it does provide a welcome clarification for sophisticated parties with similar bargaining power, who wish to incorporate detailed and comprehensive compensation mechanisms into their contracts; the courts will uphold an exclusion of the parties’ common law rights (so long as the exclusion is not unreasonable).
In such circumstances, suppliers or sellers will be safe in the knowledge that their liability is limited to that which has been agreed in the contract and they should not be faced with a substantial claim for damages. On the other hand, buyers should be careful not to allow an insufficient compensation mechanism that excludes their right to claim for common law damages.
Gibson & Co.
January 2017