Commercial Contracts: are oral discussions binding?

Commercial Contracts: are oral discussions binding?

The effect of a breach of contract can be such that the contract is automatically ended and the aggrieved party cannot insist on the contract continuing, a ruling has confirmed.  At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and breach of contract.

This is an important ruling in the UK’s Court of Appeal which has persuasive effect on the courts in The Bahamas.

What was the case about?

A seller hired shipping containers to transport cargo to a buyer. Under a liquidated damages clause, the shipping company could charge daily payments for each day the empty containers were not returned to it after delivery; and payment of a fixed sum was payable in the event of breach of a contract.

However, the buyer failed to collect the cargo, even though ownership had passed to it, so the seller could not unpack the containers and return them to the shipping company. When it informed the shipping company, the shipping company started charging the daily rate for the non-return of the containers. As the seller could not force the buyer to collect the cargo (thus allowing it to return the empty containers to the shipping company), the seller’s liability for the daily rate was potentially open-ended.

The UK Court of Appeal found that the contract had been repudiated by the delay which had frustrated the commercial purpose behind the contract.  Therefore, the repudiation automatically ended the contract. The contract no longer subsisted. The shipping company therefore did not have the option to affirm the contract - as there was no longer any contract to affirm.

Good faith

One of the appeal judges warned against implying a duty to act in good faith in the event of a repudiatory breach: “The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences.” His view was there was “a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement”.

What does this mean?

If you are faced with a repudiatory breach by the other party, you may have to treat the contract as ended if its commercial purpose has been frustrated as a result.  If you are the aggrieved party, or you are responsible for breach the contract terms and are unsure about the implications of the breach, it is important to take expert legal advice from experienced commercial lawyers as soon as you can.

How can we help?

For expert, incisive legal advice on your commercial contracts and disputes, call the experienced commercial lawyers at ParrisWhittaker.  If you are considering or negotiating new contract terms, we can help you with clear, effective drafting of commercial contract terms to fully protect your interests.  We will advise you on when your agreements are legally binding.

1MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789