TechBlog

The Problem

Imagine you are a bank with a complex group structure, i.e. multiple companies in your group. A core computer system has gone wrong and most of the group companies have suffered loss as a result. So you sue the supplier.

The supplier’s defence is that it only has a contract with one member of the group, and while that group member can recover its loss, the supplier isn’t liable for loss suffered by the other group companies.

This is a fairly valid legal argument.

Third Party Rights as a Solution

There are various ways to reduce this “group loss v. single group contracting entity” problem. One way is to give all the group companies the right to enforce the contract against the supplier, so each of them can “kick” the supplier. These are called third party rights, because they give legal rights to a person who didn’t “sign” the contract (in legal terms a third party).

Since 1999 this has been fairly easy to do in English Law Agreements as a result of the Contacts (Rights of Third Parties) Act 1998 . (I say “easy”, but with my CYA head on I should note that there are some drafting traps for the unwary).

It has been possible to create such third party rights under Scots Law for quite a bit longer than that using the legal right “ius quaesitum tertio”, or “IQT”.  You can tell its really old because it has a Latin name! 

Moving Contracts between Scotland and England

As a lawyer working in England in the mid nineties I sometimes “moved” contracts to Scots Law in order to create third party rights using IQT.

However, since the English Act came into force I find myself doing the opposite, i.e. moving contracts to English Law in order to use the English third party rights legislation. 

Why?

Well because the IQT is massively inflexible when compared to the position under the English Act. For example, once you create a third party right under an IQT it can be very difficult to amend it or kill it. In contrast that is possible under the English Act (if you draft the clause correctly).

Recently I had a contract that had to be Scots law, but also needed to create flexible third party rights. The solution was to expressly apply the English Act to the third party rights clause, but have the rest of the Agreement subject to Scots law.  Very ugly – So ugly in fact that it prompted me to blog about it.

Let’s Update Scots Law

So I think the Scottish Law Commission  should look into updating the law in Scotland in order to mirror (or better) the English Act.

The recent no fly zone across (most of) Europe because of the Icelandic volcano has made me think about force majeure clauses (sometimes known as “Act of God” clauses). 

A force majeure clause is a clause in a contract that excuses a contract breach where the “breaching party” cannot perform because of an event outside its reasonable control.  So for example, if I had an obligation to you to supply 10,000 widgets by 1 May 2010, but my factory was struck by lightning and burned to the ground in the middle of April, then the force majeure clause might protect me from your claim for contract breach.     

Is the no fly zone a force majeure event?  It might prevent an individual or an air-freight item getting somewhere in time, which might otherwise be a contract breach.  So possibly, yes. 

However, you have to check the drafting of the relevant clause carefully.  Also if the contract has no force majeure clause then there is no relief (the Courts do not imply them).

All that said in my 15 years of being an IT lawyer I have never seen a force majeure clause used in defence of a “you didn’t perform” claim.  My colleagues in litigation echo this, i.e. it’s not something they see used very often. 

One final thought on this.  Force majeure clauses are often considered to be contract “boiler plate”.  That is, relatively standard clauses towards the rear of the contract.  Sometimes contract reviewers have “switched off” by the time they get to the force majeure clause.  That can be dangerous because sneaky lawyers can hide nasty stuff in the force majeure clause.  In fact when acting for suppliers I have been known to slip some stuff in there myself. 

This is particularly relevant in the area of telecoms / internet services / hosted services / SaaS where I have seen some events included in the definitions of force majeure that I think the supplier should be on the hook for.  Something to watch out for.

And so to a recent case where a new car appeared be showing more “kaputt durch technik”, rather than the advertised Vorchsprung durch Technik.

The case considers the period of time within which a buyer will be deemed to have accepted goods for the purposes of the the Sale of Goods Act 1979 (SGA). Whilst the case considered the point for the purposes of a buyer’s right to reject goods under section 15B (which applies only in Scotland), the case is of general relevance to the effect of acceptance under the SGA – in particular, the rights and remedies of a buyer in respect of the supply of defective goods.

The pursuer had purchased, as a “third car”, a £41,000 Audi A4 from Edinburgh Audi. Following a year of occasional use, a number of minor and then major problems occurred, the latter of which caused the car to suddenly run in “safety” mode (restricted to no more than 30 mph). When this happened for a second time, the pursuer took the car back to the dealer (now 15 months after delivery), where it remained for several months whilst the dealer tried to repair it. After a number of failed attempts to repair it, the pursuer sought to reject the car and seek repayment of the purchase price, failing which payment of damages.

The court held that the car was not of satisfactory quality (and therefore in breach of the SGA) as it had been fitted with a defective electronics component. However, the court also held that the pursuer had lost his right to reject the car. Under the SGA, if the buyer retains the goods for “a reasonable period of time” without intimating to the seller that he has rejected them then they wil be deemed to have been accepted.

There are a number of points to take from this case, which are relevant when considering whether a buyer still has a right to reject defective goods:

• the right to reject is a short term remedy only, and the “reasonable period” for the purposes of deemed acceptance will be construed accordingly
• this applies even where there is a defect that does not emerge until some time after delivery, as the the buyer still has a remedy in damages
• however, any period during which the seller attempts to repair the goods is discounted for the purposes of calculating the “reasonable period”
• in this case, after 15 months it was too late for the pursuer to reject the car
• buyers wishing to preserve their right to reject goods should therefore not notify the seller as soon as they become aware of any defects or problems
• notwithstanding this case, consumers may still have remedies (to rescind contracts or require replacement of goods) under the European law derived rights contained in later sections of the SGA