UK: Managing The Unforeseen – Is There A Duty To Cooperate?

The current pandemic emphasises just how unforeseen events can interfere with contractual arrangements, particularly longterm ones. It is therefore no surprise that there has been a considerable focus on the application of force majeure clauses and the doctrine of frustration.

Many contracts also contain provisions, which permit termination for convenience or on the happening of defined events (such as insolvency) or which may permit one party to suspend performance or structure performance in a way which reduces or postpones that party's financial liabilities. Clearly, while not originally intended as a means of dealing with the current situation, such clauses may provide another route to manage financial exposure or escape from a contract.

But is it possible to prevent a party using express contractual rights to its advantage and to the disadvantage of the other party in situations, which were not foreseen or which are not what the clauses were intended for?

The law will recognise an implied term that neither party will actively prevent performance of a contract by another party; Stirling v Maitland (1864) 5 B & S 841. In certain situations, the law will also recognise an implied term that the parties will cooperate if that cooperation is necessary to enable the contract to be performed; see Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd. [2013] EWHC 1191 (TCC) at [34]. However, such implied terms have limitations including the need to establish that implication of the term is necessary and that it does not conflict with any of the express terms of the contract.

There are also cases, which suggest that in certain circumstances a party is under a duty not to act capriciously, arbitrarily, perversely or irrationally, when exercising a contractual discretion which will affect the rights and obligations of both parties; Braganza v BP Shipping Ltd [2015] 1 WLR 1661.Implied terms to similar effect may arise in long-term joint venture and similar agreements due to the need for mutual trust, confidence and loyalty in order to enable performance of the contract; Al Nehayan v Kent [2018] EWHC 333 (Comm).

Such implied terms may provide a route to prevent one party deliberately engineering circumstances, which would allow it to exercise rights of termination; for example deliberately creating a situation which puts the other party in default under a clause allowing termination when certain material events occur.

However, recent authority suggests that the circumstances in which a party can rely on such implied terms will be unusual. In Taqa Bratani Ltd v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm)¸ the Commercial Court considered whether a party to a joint venture for the extraction of oil and gas from fields in the North Sea could be prevented from exercising a right to discharge another party as the operator under a number of joint operating agreements. The claimants discharged the defendant as operator following a majority vote of the joint venture partners and having given the required contractual notice. The defendant challenged the legitimacy of the termination of its role on grounds that the claimants' rights were circumscribed by implied terms of the type discussed above. The judgment is a comprehensive review of the authorities concerning the use of the process of construction to seek to qualify a party's express rights and the limitations on the use of implied terms particularly in the context of professionally drawn or standard form contracts. The judge held that where a party has an unqualified express right of termination, which is exercised in accordance with the required contractual mechanism, that right is not to be qualified by implied terms of the type discussed above. The judge rejected an argument that there was any industry or general practice which supported the implied terms alleged. The judge also held that even if he had been prepared to accept the right of termination was qualified, the claimant was still entitled to exercise the rights of termination as it had.

It is inevitable that with the current volatility of the global economy, parties are going to be looking to their contracts for innovative solutions to their commercial situation. The cases discussed above illustrate both potential routes and the likely hurdles that may be encountered. In exceptional circumstances, implied duties not to act arbitrarily or capriciously may be a useful foil to counter express contractual rights. But it will be a heavy burden to establish both that the duty arises and that it has been breached.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.