CCF Pan European Contracts Comparative Contract Law ... · PDF fileCCF – Pan European...

CCF – Pan European Contracts Comparative Contract Law: English, French, German and Italian Law 28 February 2012

Paul Garland, Kemp Little

Paul O’Hare, Kemp Little

Andreas Peschel-Mehner, SKW Schwarz Emmanuel Schulte, Bersay & Associes Domenico Colella, Portolano, Colella Cavallo Studio Legale

Plus ça Change? Data Protection in 2012 – 14th March

Calum Murray, Chris Middleton and Chris Hill will consider the potential impact of the new Regulation on the UK’s existing data protection regime

Benchmarking in outsourcing deals: all pain no gain, or indispensable price protection tool? – 28th March

In this seminar, Paul O’Hare, head of Kemp Little’s outsourcing practice, and Paul Morrison, head of Alsbridge’s BPO and Shared Services Practice will look at whether benchmark terms can offer real value and protection in an outsourcing deal, and will look at some of the key issues to be addressed to help create an effective but balanced benchmark process

Visit the events page of our website to register.

Upcoming CCF’s

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• Scenario based

• Focusing on the English, Italian, German and French positions, regarding:

- Contract formation & formalities

- Breach: what’s recoverable as loss

- Handling pre-litigation contractual disputes

Topics for discussion….

• You are the GC of Software Magic (SM), a pan-European supplier of software to the retail and fashion sectors.

• Johnny English - SM’s sales manager has contacted you about a recent deal with one of SM’s customers, the design house Bartolli (HQ in Milan with branches in Frankfurt, London and Paris).

• Bartolli’s German affiliate, Strados GmbH has bought the Magic+ software suite to support the stock management needs of the Bartolli group. The deal was signed on 1 July 2011 and there are now problems with the project.

Background to Workshop Scenario

• JE sends you the documents that were signed on 1 July 2011:

– The Software Magic Service Contract (SMSC). The SMSC excludes all indirect & consequential loss + lost profit. It limits total liability to the amount paid by the customer in the preceding 12 month period.

– The Software Magic Order Form (SMOF): covering an outright (perpetual) licence; €2m licence fee plus a €450k annual support fee.

– It also states: “The parties will continue to discuss in good faith the scoping of a project to implement the software, details of which will be set out in a statement of work to be agreed by 31 August 2011, subject to contract and further due diligence”.

Scenario

• JE only received a pdf copy of the SMOF signed by Dr Deutsch, the CFO of Strados. The documents have not been signed by Software Magic.

• It turns out that in July 2011, SM agreed to start work on the project at Strados’ request to help them achieve their internal milestones. This was on the basis that all work performed would be on a time and materials basis unless otherwise agreed in the SOW. This was confirmed in an exchange of email between JE and Strados’ programme manager (PM). SM have already incurred €100k in professional services fees.

Scenario (cntd.)

• JE is worried because Strados’ PM is becoming increasingly difficult in project meetings. Our latest estimate is for 1000 man days’ effort (€1.5m). He has continued to find 'problems’ with the project plan for the statement of work and Strados is refusing to pay the invoices we have sent them for the licence fees and professional services fees.

• JE wants to know that we’re okay from a contractual perspective.

Scenario (cntd.)

1. Has an enforceable contract been created between SM and Strados regarding the implementation project? Under the order form?

2. Is receipt of the pdf copy signed by Dr Deutsch sufficient?

3. Is the signature of a CFO sufficient to rely on? What about emails from a programme manager?

4. Does it matter that JE has not also signed the Order Form?

5. Can a contract be created by (i) the exchange of emails; or (ii) the subsequent conduct of the parties?

Scenario Questions Part I - Formation & Formalities

English Law – legal background • Technically:

– 4 basic elements – offer, acceptance, consideration and intention to create binding legal relations. Acceptance not effective until communicated.

• In practice:

– UK courts not slow to infer contract has been made – objective test (Meritt v Meritt [1970]) - presumption of intention in B2B.

• B2B commercial contracts in the UK

– Generally ‘formality light’ – need not be in writing (with limited exceptions), so on-line/email formation possible – usual principles apply (although E-Commerce Reg requirements).

– If not in writing/all in one document: evidential issues as to formation and terms - ‘balance of probabilities’ UK civil law standard.

• Authority issues (if signing for a company) – actual and ostensible.

Contract Formation/Formalities

English Law – scenario questions part I

1. Enforceable contract? No intention to create binding legal relations – “subject to contract”.

2. Receipt of pdf sufficient? Yes, if offer from SM then communication of acceptance by Strados.

3. CFO signature ok? Likely to have actual or ostensible authority.

4. SM not signed. Contract formed if SM offer was accepted by Strados.

5. Contract from (i) exchange of emails; (ii) conduct? Both can be sufficient to form binding contracts. Here, terms were agreed (time & materials basis) and evidenced in emails. Authority issues?

Contract Formation/Formalities

German Law – legal background

• Formation:

– 1. offer; 2. acceptance (each including intention to create binding legal relation); 3. matching of the scope/term of the offer/acceptance;

– both offer/acceptance need to be received by the other party. Start of performance (delivery and receipt of goods or services) regarded as acceptance (including receipt). Exception: receipt typically not common (hotel reservation)

– Always: the intention – whether declared explicitly or conclusively - is the driving element for evaluation of the nature of the declaration

Contract Formation/Formalities - Comparison

German Law – legal background Formalities in B2B contracts:

• No formalities required for business contracts except if provided otherwise by law (e.g. notary’s deed necessary for real estate transactions, for transfer of shares of GmbH = limited liability company, or for donations)

• Formation of contract possible on a purely oral basis; orally concluded contracts are binding, but in case of a dispute, the party relying on and invoking the contract must prove its existence

• Conclusion of contracts based on factual, conclusive conduct of parties possible: i.e. start of work!


German Law – legal background

Authority:

• The contractual partner may rely (i) on all authorities and powers of representation as made known to the public, i.e. as registered with the commercial registry, (ii) on mandatory legal authority of executive bodies (managing director of GmbH or members of Board of Aktiengesellschaft), and (iii) on factual circumstances that could reasonably make believe that authority exists

• Delegation of authority for individual acts possible; if disclosed to third party, third party may rely on authority (contracts will be binding) until notification of withdrawal to third party.

• If company has knowledge and tolerates action of employee without statutory PoA -> valid contract.


German Law – scenario questions part I

1. Has an enforceable contract been created between SM and Strados regarding the implementation project? Under the order form? Not under the SMOF. If Strados’ PM has individual power of representation for Strados or if the circumstances imply such power: contract based on the e-mail communication.

2. Is receipt of the pdf copy signed by Dr Deutsch sufficient? As regards formality, a pdf-copy is generally sufficient for creating a binding offer made by Strados. As regards formation of valid contract, see answer to question 4.



3. Is the signature of a CFO sufficient to rely on? What about emails from a programme manager? CFO acting in official function as CFO: power of representation may be assumed -> valid contract

Program Manager: depends on the circumstances (size of company, knowledge of firm doing such business by the Program Manager, usual behavior). He may have obtained individual authority to validly sign contract for specific project .

Recommendation: Ask for written evidence of grant of individual authority !



Does it matter that SM has not also signed the Order Form?

- No explicit acceptance by SM, as no countersignature.

- Sending of draft: (invitation to make an offer = to send signed contracts back for countersignature).

- First binding offer by sending of signed pdfs. Such offer not accepted by countersignature. Countersignature usual business standard, therefore acceptance can not be assumed through tacit consent.

- Acceptance executed and communicated if delivery of software or start of work done after receipt of signed pdfs.



5. Can a contract be created by (i) the exchange of emails; or (ii) the subsequent conduct of the parties? In general: Yes. (i) creation of contract by e-mail possible if essential terms agreed, and clear intention to create binding obligations. In our case essential terms agreed. Problem of authority of PM, but difficult for Strados to get away if professional services have already been rendered by SM in such a volume at the premises of Strados.

(ii) creation of contract also possible by factual behavior expressing the intention to be legally bound under visible terms. Intention expressed by starting of work. ATTENTION: If SM delivers software or starts its works in due course after receipt of binding offer from Strados ( receipt of pdf), this will be considered as conclusive acceptance of offer made by Strados. SM will therefore be bound under the terms signed by Strados, even if it is not happy (for whatever reason) with conditions of binding offer!


Italian Law – legal background • Service Contracts/Software Licences (B2B)

– basic elements – proposal, acceptance. Acceptance not effective until communicated

– generally ‘formality light’ (PDF/e-mail admitted)

– Software licences written form necessary to prove terms and conditions.

– written confirmation of “oppressive clauses”

– agreements by course of dealings

• Authority issues (if signing for a company)

– position of signatory as director of the company

– lack of powers of the signatory: ineffectiveness

– confirmation by the company (even by course of dealings)

– protection of third parties being in good faith


Italian Law – scenario questions part I

1. Enforceable contract? Enforceability of service contract. Criticalities: “oppressive clauses” and software licence

2. Receipt of pdf? Satisfactory form

3. CFO signature ok? Yes if (i) director of Strados or (ii) empowered by authorised representative. Otherwise confirmation is needed. Good faith of SM?

4. SM not signed. Contract formed if SM proposal was accepted. Software licence?

5. Contract from (i) exchange of emails; (ii) conduct? Both can be sufficient to form binding contracts. Authority issues


French Law – legal background

• Four requisites are essential for the validity of an agreement:

– The consent of the party who binds itself

– Its capacity to contract

– A defined object forming the subject-matter of the undertaking

– A lawful cause in the obligation

• B2B agreements

– Except for limited exceptions, no specific formalities for B2B agreements

– No written document required but advisable in order to ensure evidence

– In practice, the existence of an agreement mainly depends on whether there is a mutual intent to contract

• Authority

– The person signing/agreeing to the contract shall have the authority to do so

– However, third parties can reasonably rely on the title/function of this person


French Law – scenario questions part I

1. Enforceable contract?

• No enforceable contract for the software implementation referred to in the OF →“subject to contract and further due diligence”

2. Receipt of pdf sufficient ?

• Yes : in commercial matters, evidence can be brought by any means

• Legality of electronic contracts expressly recognized by article 1369-1 of the French civil code



3. CFO signature ok?

• CFO likely to have the necessary authority to sign

• In principle, Strados could not claim that its CFO did not have the authority to sign the contract, unless it can prove that SM was aware of this

• Emails from Program Manager: same as for CFO. SM can reasonably believe that Program Manager has received authority for specific project

• To be on the safe side, ask for any document proving that CFO or PM is empowered to represent the company



4. SM not signed.

• Signature is not a formal requirement to establish a binding contract

• Contract in force as Strados has accepted SM’s offer (agreement on subject matter and price)

5. Contract from (i) exchange of emails; (ii) conduct?

• Contracts can be created by exchange of emails

• Tacit acceptance of an offer can result from a conduct, i.e. performance of the contract


Two months later…

• Johnny English rings you and says there’s a slight problem: Strados’ financial position took a turn for the worse following the credit crunch and it had to seek restructuring from its Italian and German banks, who are both demanding cost cutting throughout the business.

• Strados has served notice to terminate the Magic Software Order Form stating that the Magic+ Software is not fit for purpose as ‘out of the box’ software and is going to require more configuration and implementation work than is reasonable.

• Strados still hasn’t paid the licence fees, they have refused to pay the first year’s support fees and we have now incurred €500k in professional services fees. In spite of numerous escalation meetings with Strados’ PM and Dr Deutsch we were unable to agree the Statement of Work.

Scenario (cntd.)

6. What can SM recover for early termination by Strados?

7. Might SM be able to recover the €1.5m estimated implementation fees?

8. What might Strados be able to recover for misrepresentation and/or breach of warranty under the Magic Solutions Order Form?

Scenario Questions Part II - Contract Lifetime Issues

English law - Scenario Questions part II

6. What can SM recover?

▪ If wrongful termination, damages aim to put the injured party in the position he would have been in had the contract been performed

– Direct: ‘loss arising naturally and directly from the breach’

– Consequential: other loss within the contemplation of the parties at the time when the contract was made

– But what limitations in the contract?

– Liability for lost profit (direct and indirect) excluded - but exclusions may not apply in respect of deliberate, repudiatory breach. If so, SM can recover €2m licence fee and €450K support fee, less costs it would otherwise have incurred and subject to duty to mitigate


▪ No – but can recover fees already incurred (on T&M basis)

Contract Lifetime Issues


Right of recission and/or damages - depending on (i) whether claim founded in misrepresentation or warranty breach and (ii) nature of misrepresentation claim

Measure of damages differs for misrepresentation and warranty breach

Consider impact of any entire agreement clause

Impact of liability limitation clauses – indirect and consequentials + loss of profit excluded. Other losses recoverable up to liability cap.

Enforceability issues? SM’s standard terms, so UCTA ‘reasonableness test’ may apply

Contract Lifetime Issues

German law - Scenario Questions part II


• SMOF assumed to be a purchase (software) and a service agreement (support) and validly concluded for a fixed term (i.e. for one year): wrongful termination will not have any effect. Payment of 2m license fees and 450k support fees due. Only condition: ongoing offer of services.

Contract Breach/Recoverable Loss - Comparison



• Strados may terminate a development contract at any time, but must pay the agreed remuneration (i.e. even a higher amount than the €100k if such higher amount had been firmly agreed), however reduced by any amounts or efforts that SM will not occur due to termination of contract)

• In case no authorization of PM, possible liability of Strados (based on good faith duties and pre-contractual negotiations) to pay to SM all cost already incurred in expectation and preparation of contract performance (damages only on basis of cost actually incurred)




• If agreed remuneration not clear, to be calculated based on “time and materials” and/or on usual remuneration for comparable services

• Licence fee due unless quality defaults of software

• First year maintenance fees also due, unless not offered or bad performance by SM (either reduction or no payment at all)

Contract Breach/Recoverable Loss -

Comparison

German law - Scenario Questions part III


No. Not contractually agreed, only estimate and expectation. Termination of contract by Strados effective for the future, and the global amount would have been due only if project actually finalised.

Contract Breach/Recoverable Loss -

Comparison

German law - Scenario Questions part III


• SM obligated to provide software as promised under SMOF

• Default of software = violation of SM’s contractual obligation

• An express warranty may extend the claims at law, i.e. damage claims in place without negligence and relevant point of time for considering the well/malfunctioning of software might change

• Fraudulent misrepresentation may give entitle to rescission and damages claim


Italian law - Scenario Questions part II


• actual losses (=expenses)

• loss of profits (=consideration provided for by the contract)

• no punitive, indirect and unforeseeable damages

• limitation of liability


• €1m cap overcome by subsequent dealings (T&M)

• Discretionary calculation by the Judge (helped by a Court-appointed expert)

Contract Lifetime Issues - Comparison

Italian law - Scenario Questions part II


• Termination of MSOF or reduction of consideration if Magic+ software had malfunctions/defects that materially diminished its fitness for purpose, provided that Strados was not aware of such malfunctions/defects or the same were not easily detectable

• Compensation for damages unless SM proved to have innocently ignored the malfunctions/defects

• Strados’ claim groundless in the case at issue


French law - Scenario Questions part II


• Damages if wrongful termination (i.e. in the absence of material breach of SM or hidden defects)


• No: only an estimation and not contractually agreed


• Strados could claim and possibly obtain:

– Forced execution of SM’s contractual obligations;

– Replacement or repairs of the software;

– Diminution of price;

– Termination of the contract; and/or

– Damages for direct losses (i.e. costs for technical assistance, damages on equipment etc.)


9. How should SM handle the brewing dispute:

– internally; and

– with Strados?

Scenario Questions Part III - Handling the discussions

English Law - Scenario Questions part III • Follow any dispute resolution clauses in the contract.

• Serve notices in accordance with the contract, both form and method of

service…although don’t ignore notices incorrectly served on you.

• Notices should be “open”; negotiations “without prejudice”…but consider “without prejudice save as to costs” or “open” negotiations.

• Retain privilege:

– Legal advice privilege: confidential, between lawyer and client, for the purpose of legal advice. Consider “3 Rivers” – who is the client?

– Litigation privilege: communications created in contemplation of litigation

Handling Pre-litigation Contractual Disputes

German Law - Scenario Question part III

• Nothing specific to report – parties may negotiate and if no amicable solution is found, litigation proceedings before the courts

• No disclosure concept known, internal communication not problematic under legal aspects

• ATTENTION: BUT external communication of information, declarations or documents may be used by Strados as proof against SM. Therefore, to be prudent and avoid accidents, restrict also internal communication of critical information/documents

• Even if indication of “without prejudice”, “privileged” “confidential” on correspondence or documents, no guarantee that Strados or courts will not take into consideration or use the information to the benefit of Strados

• However, during pre-litigation discussions, do not document any intention to be bound by a result that is not really wanted

Handling Pre-litigation Contractual Disputes - Comparison

Italian Law - Scenario Question part III

• Preliminary review of what is binding.

• No legal privilege between parties (just confidentiality between lawyers).

• No disclosure, but very effective Court relief for urgent investigation (especially in IP cases).

• Making strategy (including economical aspects).


French Law - Scenario Question part III

• Formal notice to be sent

• Assess opportunity between amicable settlement v. litigation

• Communication risks

– Only correspondence between lawyers and between lawyers and their clients is privileged

– Recommended that any communication relating to possible settlement be made through lawyers

• Discovery procedure

– Under very specific circumstances: discovery may be carried out upon Court decision → risk of disclosure of internal communication if files or computers are seized


French Law - Scenario Question part III

• Settlements – formation and formalities

– The document should expressly state that the agreement will put an end to any current or subsequent lawsuit which may arise relating to the issue, written in a clear and unequivocal manner

– The settlement should provide reciprocal concessions


Key contacts SKW Schwarz Dr. Andreas Peschel-Mehner [email protected] +49 (0) 89 2 86 40 101

Kemp Little LLP Paul O’Hare paul.o’[email protected] +44 (0) 20 7710 1634

Kemp Little LLP Paul Garland [email protected] +44 (0) 20 7710 1617

Portolano Colella Cavallo Domenico Colella [email protected] +39 06 696661

Bersay & Associes Emmanuel Schulte [email protected] 00 33 1 56 88 30 00

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