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Home , Contract, English law

MARCH 2018 COMMERCIAL LITIGATION

AND THE OSCAR Morality clauses are back in the spotlight after a spate of high-profile scandals in GOES TO... Hollywood. Many studios are questioning FREEDOM OF how best to protect themselves from the financial and reputational damage done ! when claims are levied against their leading lights. After Kevin Spacey’s fall from grace, Netflix may still have to pay him a significant sum after terminating his contract for House of Cards. A Hollywood studio can protect The , however, is should trump any NDA.4 In itself by inserting a broad morality divided on this issue. Many argue between and consumers, clause into contracts in order to easily that ‘’ is, in some a cannot exclude or limit its dismiss employees who make the instances, a poisoned chalice. liability for death or transition from famous to infamous. caused by or supplying However, their employees are wary of For example, it makes sense for defective goods. being kicked to the curb for a to require their employees infraction of an over-zealous morality to sign Confidentiality & Non- Under the Unfair Contract Terms Act clause. For example, studios like Fox Disclosure Agreements (NDA) to 1977 (UCTA) companies cannot avoid News are inserting broad clauses protect business secrets. But what liability by inserting exclusion clauses against “moral turpitude” or engaging about the risk that these agreements that fail a test of reasonableness by in acts that bring the artist into could be used to gag employees restricting wronged party’s to “public disrepute, contempt, scandal who may otherwise speak out about make a claim. There are also controls or ridicule”. Their employees must abuses in the workplace? Parliament written into that mean an be wary that a catch-all clause may is set to examine the use of NDAs employer cannot contract out of its 5 encompass minor faux pas as well as in the wake of the Presidents’ Club duty to not discriminate against staff. immoral behaviour. Scandal, after female waitresses were allegedly harassed at a men-only When do the steer clear? Of course, scandals are not limited to dinner attended by politicians and Since 2015 we have seen several cases Hollywood; as seen with the recent businessmen.3 where the courts affirm that it is not and distressing Oxfam episode, their role to interfere in the drafting which demonstrates how difficult has faith that both parties of a contract agreed between two it can be to remove entrenched will come to an agreement that commercial parties, even when one senior staff members in the wake of reflects their respective interests. The party has superior bargaining power. abuse claims.1 A “moral turpitude” danger is that the NDA becomes an now emphasise “the primacy provision could certainly smooth the alternative to a proper investigation of language” because “language, path of organisations attempting and results in a up of improper properly used, should speak for itself to rid themselves of misbehaving behaviour. So, in effect, the ‘freedom and it usually does”. This means that staff members but what is to stop of contract’ can become a the words on the page, rather than these clauses being used against smokescreen that allows wrongful the presumed behind those employees who only commit minor behaviour to continue out of the words, is the alpha and omega of a infractions? public’s view. commercial contract.6 When does the intervene? The freedom to be shackled The Court of Appeal has reinforced The debate around morality clauses There are some ways in which the this trend by confirming that an reaches to the heart of the doctrine builds barriers to which excluded of ‘freedom of contract’. This is a unfettered freedom of contract in liability for “any claim” was sufficient fundamental building block of the order to protect parties from bad to exclude liability for all forms of 7 English common law, whereby parties bargains, especially where there is negligence. This also means that the to a contract are generally free to an asymmetric relationship between court is perfectly happy to let parties agree to whatever terms they like: the parties, such as an employer- enter into ill-advised contracts and employee or business-consumer suffer their consequences. It is not “A basic principle of the common relationship. within the court’s remit to rescue a law of contract … is that parties to party from the consequences of its a contract are free to determine for forbids own poor .8 themselves what primary obligations employers from treating employees they will accept”2. unfairly for reporting wrongdoing. Recent has rolled back the With regard to NDAs, an employee rule in exclusion The parties are given broad scope cannot contract out his or her right to clauses. The contra proferentem to set out the terms of their contract ‘blow the whistle’ on claims of abuse. rule states that, where there is doubt without the courts adopting an If the employee’s disclosure amounts about the meaning of the contract, activist approach to renegotiate to a ‘protected disclosure’ and it is in the words will be construed against commercial bargains. the public interest, reporting abuse the party who put them forward. So

1. https://nypost.com/2018/02/16/oxfam-director-says-sex-abuse-claims-will-stain-charity-for-years/ 2. Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827 3. https://www.theguardian.com/uk-news/2018/jan/25/mps-call-for-police-investigation-into-presidents-club-scandal 4. https://www.gov.uk/whistleblowing 5. https://www.gov.uk/guidance/equality-act-2010-guidance 6. Lord Sumption, ‘A Question of taste: The and the Interpretation of Contracts’ – Harris Society Annual Lecture. Available at: https://www.supremecourt.uk/docs/ speech-170508.pdf 7. Persimmon Homes Ltd and others v Ove Arup & Partners Ltd and another [2017] EWCA Civ 373 8. Arnold v Britton [2015] UKSC 36 in a contract that excludes liabilities Previous tests that focussed on that are beyond the contemplation for certain eventualities, the court whether a contractual provision of both parties when they enter will not use unclear drafting as a was a penalty or a genuine pre- into a contract. Recent case law stick to beat the party who inserted estimate of loss were considered demonstrates that each party must the exclusion clause. This is because to be unhelpful. The true test was be its own white knight and a master the court views exclusion clauses as whether the provision imposing a of its own contracts. Legal advice “part of the contractual apparatus for detriment on the party in breach from HFW can help protect you in distributing risk” so will not approach was out of all proportion to any an uncertain climate and provide for such clauses “with a mindset legitimate interest of the innocent many eventualities. determined to cut them down”.9 party in the enforcement of the primary obligation (and there can be Parties can also agree that a certain no proper interest in simply punishing For further information, please state of affairs exists at the time the defaulter). of the contract even if that is not contact the authors of this briefing: the case. A non-reliance clause will The Court recognised that a therefore generally be upheld even in legitimate remedy for a breach circumstances where it is clear that a of contract may not be financial party may rely on statements made compensation and this can be by another party.10 reflected in the parties’ agreement. It may also uphold a clause which The courts will even protect contracts protects legitimate commercial that are born out of . In English interests, notwithstanding that the BRIAN PERROTT common law, a contract by which may not cause the Partner, one party agrees to pay a bribe to innocent party equivalent financial T +44 (0)20 7264 8184 11 the other is certainly illegal but loss. For example, a large parking E [email protected] a contract born out of a bribe is for overstaying a time limit was perfectly legal and enforceable. justifiable because it deterred long- In a recent case, HFW successfully stay parking, preserved a good flow of defended an application to set aside traffic, and generated income for the enforcement of a Chinese parking lot.14 award that had allegedly been “tainted” by fraudulent . The court’s revised focus on This allegation of fraud was not proportionality is in line with the LEE FORSYTH enough for the court to unravel the importance placed on freedom of Associate, London basic right of parties to contract with contract in English law. T +44 (0)20 7264 8799 12 one another. E [email protected] Lights, camera, action! Penalty clauses Research undertaken by Unfortunately, not all contracts are Ed Bentsi-Enchill, Trainee The Supreme Court has recently a love story where both parties walk restated the rule on penalty clauses away happily into the sunset. They in the appeals of Cavendish Square can often result in one party suffering Holding BV v Talal El Makdessi and a significant detriment. The court ParkingEye Limited v Beavis13. While understands that contention and acknowledging that the “penalty calamity are a natural part of the cut rule is an interference with freedom and thrust of business. of contract” which “undermines the certainty which parties are Before the camera starts rolling, you entitled to expect of the law” the must ensure that you have protected court emphasised that the penalty your rights against your counterparty rule regulates only the remedies and that you can maximise your available for a breach of a party’s benefits under the contract. primary obligations, not the primary In the commercial world, there are obligations themselves. many ‘unknown unknowns’; things

9. Persimmon v Ove Arup [2017] EWCA Civ 373 10. JP Morgan Chase v Springwell [2010] EWCA Civ 1221 11. In National Iranian Oil v Crescent Petroleum [2016] 2 Lloyd’s Rep 146 the English court confirmed that it will not enforce an award that gives effect a corrupt practice, such as to enforce payment or recovery of a bribe. 12. http://www.hfw.com/English-court-reviews-the-fraud-unravels-all-principle-April-2017 13. [2015] UKSC 67 14. ParkingEye Ltd v Beavis [2015] UKSC 67 (ParkingEye) HFW has over 500 working in offices across , Asia, the Middle East, Europe and the Americas. For further information about our Commercial Litigation capabilities, please visit hfw.com/Commercial-Litigation

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