Comparing Contract Drafting in the United States and United Kingdom

Material differences in legal terminology used in English and U.S. law can create problems beyond the obvious difficulty of two parties misunderstanding to what it is they are agreeing. Issues of terminology are potentially most likely to arise with template agreements, drafted for use in one jurisdiction but used internationally. The very common usage of U.S 'standard' entertainment terminology in agreements governed by English law may in particular cause uncertainty and inevitable expense in the event of a dispute. An example of such confusion occurred in the UK case of Tradigrain SA v. Intertek Testing Services (ITS) Canada Ltd. [2007] EWCA Civ 154, with respect to the definition of the term 'gross negligence.' While the term has a relatively uniform definition under U.S. law, the English court notes: 'The term 'gross negligence,' although often found in commercial documents, has never been accepted by English civil law as a concept distinct from simple negligence.'

The result of this was that the parties effectively surrendered control of the meaning of the term to the construction of the courts. The consequences of doing this can be significant. Take, for example, a U.S. lawyer drafting an agreement for holding a music concert in a sports stadium that provides for unlimited liability where there has been 'gross negligence.' Suppose the retractable 'all weather' roof failed to operate when it rained due to poor maintenance, causing the event to be cancelled at short notice. If the agreement is subject to English law, the courts may potentially hold that gross negligence means no more than (any) negligence, vastly widening the application of unlimited liability.

English courts will interpret any contract, notwithstanding the use of U.S. (or other overseas) terminology, in accordance with the five principles laid down by Lord Hoffman in what is regarded as the leading English case on interpretation of contracts, Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1997] UKHL 28. One such principle is that while words should be given their natural and ordinary meaning, the courts will not attribute to the parties an intention that they plainly did not have. An example of this with respect to U.S. terminology is found in the case of Camarata Property Inc. v. Credit Suisse Securities (Europe) Ltd [2010] EWHC 479, in which the English court noted that the parties had used both 'negligence' and 'gross negligence' in the applicable contract. This led the court to find that some distinction between them was intended. If such contract language had been used in our stadium example, the stadium operator might have evaded substantial liability if it could show it was not 'grossly' negligent.

The surest way of avoiding the problems outlined above is to use English terminology in an English law contract. A list of commonly used legal terms with different meanings in the United States and the United Kingdom is shown in Table 1, below.

[IMGCAP(1)]

Implied Terms

We turn now to some key areas in which English contract law contains particular rules that may catch unwary drafters of commercial contracts. Perhaps the biggest area of potential difficulty may be an unfamiliarity with the implied terms that UK law imposes on parties to commercial contracts.

With respect to the sale of goods, such as Blu-ray discs or branded merchandising, UK law implies warranties of good title and non-infringement of third party rights into agreements in the Sale of Goods Act 1979. With respect to the supply of services, which would include entertainment services, there is an equivalent implied term in the Supply of Goods and Services Act 1982 that a supplier will carry out the services with 'reasonable skill and care.'

This is unlikely to be of alarm to U.S. drafters, given that U.S. law implies similar rights in the federal Uniform Commercial Code (UCC). The key difference between the regimes is that in the United Kingdom, unlike in the United States, these rights may not be excluded by contract. It is also of note that, again, slightly different terminology is used in the two jurisdictions. The Sales of Goods Act uses the mechanism of a right to 'quiet possession' to provide a remedy against the supplier in the event of a third-party rights infringement claim.

Limitation of Liability

In the United States, contractual agreements to limit liability (and waive statutory rights) are typically enforceable, although this general rule has been limited by a number of states on public interest grounds (for example, a contractual exemption from liability is unenforceable for harm caused intentionally, recklessly or in some cases negligently. (See, Restatement of Contracts '195(1) and (2).))

In the United Kingdom, limitation-of-liability clauses are predominantly governed by the Unfair Contract Terms Act 1977 (UCTA). The UCTA automatically voids certain limitation-of-liability clauses. It subjects others to a reasonableness test, voiding them if they fail that test. This is one reason why English law contracts often break limitation-of-liability clauses down into subclauses, the intention being that even if the court considers one subclause unreasonable and therefore unenforceable, the rest should stand.

The rules of UCTA's application are quite complex. It does not apply at all to international contracts for the sale of goods, which may be of particular note to U.S. drafters and its application is strictest where one party is a consumer or when dealing on the parties' written standard terms and conditions.

Table 2, below, briefly summarizes UCTA's key provisions.

[IMGCAP(2)]

Duty of Good Faith

The U.S. duty of good faith, which is applicable to the negotiation and performance of contracts, is relatively rare amongst common law countries (being more akin to civil law jurisdictions, i.e., in continental Europe). Certainly, there is generally no implied duty of good faith in English law contracts (except in insurance contracts).

That said, the recent English case of Compass Group UK and Ireland Ltd. (t/a Medirest) v. Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB), recently provided a restatement of the fact that express good-faith obligations in an English law contract do mean more than 'a general wishy-washy duty to be nice in all communications' and should not be underestimated. The court found that a good faith clause had to be interpreted in light of the circumstances and, in this case, it could be applied to particular examples of cooperation being required. It also imposed a more general obligation to work together to resolve the type of problems that invariably occur from time to time in a long-term contract (which this was).

One lesson from this case, particularly of note to U.S. parties, is that good faith clauses are more likely to be enforceable when they are framed in terms that are as certain as possible, which allow the court to interpret them in light of the circumstances. For example, 'Licensee will seek in good faith to sign high-quality artists to appear in the Movie' is much less likely to be enforceable than 'Licensee will seek in good faith to sign [named artist A] and [named artist B] or other artists of equivalent stature and reputation to appear in the Movie.' To use 'good faith negotiation' terms to simply remedy a deficiency in the contract risks them being found unenforceable. So, for example, guard against saying that something should be negotiated in good faith at some stage in the future simply because the parties cannot agree on it now.

Endeavours Clauses

In both the United States and United Kingdom, parties often use endeavours (i.e., 'efforts' in the United States) clauses to qualify certain of their obligations, which would otherwise be absolute. There are a number of different endeavours clauses found in commercial contracts, although the two most common are 'best endeavours' and 'reasonable endeavours.' 'All reasonable endeavours' is also frequently encountered in English law contracts. However, in the recent case of Jet2.com Ltd. v. Blackpool Airport Ltd. [2012] EWCA Civ 417, the parties conceded and the court accepted that 'all reasonable' meant the same as 'best.'

The same case also provided useful commentary on when an endeavours clause may be found to be void for uncertainty. The court affirmed that the starting point for interpreting an endeavours clause is that the objective, to which the endeavours are to be directed, must be clear. Parties should ensure that the range of possible endeavours that may satisfy the obligation is sufficiently narrow so that the courts are able to determine what should be done to satisfy the obligation (if necessary, with the aid of expert evidence).

Assuming that the obligation is enforceable, what is the applicable party required to do? While the U.S. and UK terms are reasonably analogous, it is worth considering the actual tests applied by the U.S. and UK courts. In both jurisdictions, there is a question of construction to be assessed at the time the contract was made. In the United States, when determining what 'best efforts' should mean, the courts have articulated a test of imagining the promisor and the promisee in a unified single entity and asking what efforts such an entity would exert on its own behalf.

In the United Kingdom, a party subject to best endeavours must 'take all those steps in their power that are capable of producing the desired results ' being steps which a prudent, determined and reasonable [person], acting in his own interests and desiring to achieve that result, would take,' IBM United Kingdom Ltd. v. Rockware Glass Ltd. [1980] FSR 335). Consequently, in the United Kingdom a 'best endeavours' clause may require expenditure, even the incurring of losses by the party subject to it. However, a party may keep in mind their own commercial interests. Thus, to take the example above, if a British licensee commits to use best endeavours to sign certain named artists who reside in California, then it is likely that the obligee would fail this contractual obligation if it were unwilling to bear the expense of flying out to California and spending a substantial amount of time and effort on the ground, negotiating the deal with the artists.

Compliance does not require a party to take action that would destroy its business, such as incurring ruinous expenditures. Reasonable endeavours, on the other hand, involve an objective test: what would a reasonable person applying the relevant standard do? In this respect, reasonable endeavours may actually impose a stricter obligation than best endeavours, where at least the steps that must be taken are 'all those steps in [the party's] power.' Reasonable endeavours unlike best endeavours may require a party to achieve something that, due to their subjective attributes, is unachievable ' or risk breach.

Remedies

Under English law, similar to U.S. law, the main, basic remedy available to an injured party following a breach of contract is expectation damages, i.e., damages that put an injured party into the position, as far as is possible, that the party would have been in if the contract had been correctly carried out. Both jurisdictions also have 'reliance damages,' which are intended to put the innocent party into the position it would have been in if the contract had never been formed; and 'specific performance,' i.e., an equitable remedy that compels the party in breach to perform their part of the contract. Because it is an equitable remedy, specific performance is discretionary. In exercising its discretion, a court will consider whether damages would provide adequate remedy for the loss.

The key differences between the countries' regimes are, firstly, unlike in the United States, there is no provision in English law for special or punitive damages aimed at punishing the party in breach of a contract. Secondly, English courts have far wider discretion over awarding costs and expenses to a prevailing contact-dispute party, with the general rule being that 'costs follow the event.' This means that in English litigation an unsuccessful party usually pays the costs of a successful party. The courts will assess the level of costs to be paid (subject to the parties managing to agree the amount of costs themselves). The standard rule by which such a court assesses costs is to allow costs to be recovered that were reasonably incurred, or reasonable and proportionate vis-'-vis the matters in issue.

Regulatory Impact'On TV Content

One final point to note: While there are many common features in specific entertainment industry practices in the United Kingdom and the United States, there may also be important differences, underpinned by regulatory governance, which can also have a big impact on the contractual landscape.

One stark example of this concerns the television industry and the commissioning of audiovisual content from independent producers. The biggest commissioners of UK-produced content remain the UK public service broadcasters (PSBs), comprising the BBC and the licensed commercial PSBs (i.e., ITV, Channel Four and Channel 5). The PSBs are legally obliged to allocate 25% of total broadcast time to independently produced content. The 'terms of trade' (TOT) under which the PSBs commission and license content from independent producers are supervised by the UK media regulator, known as OFCOM. The TOT, which came into force in 2004, require producers to retain the majority of IP rights in commissioned content. Broadly speaking, the PSBs only retain a limited license of transmission rights, and a limited ability to share in the net revenue of future broadcasts in different jurisdictions. By retaining the majority of IP rights, the producer is free to exploit the program or film in secondary markets. It is important to note that non-PSB broadcasters, such as Sky, are not subject to TOT.

In the United States, the major television broadcasters are not subject to such stringent regulation. As such, the regime is similar to the pre 'terms of trade' UK model, with dominant broadcasters owning IP rights in the content (which they may or may not attempt to re-license to third parties).

The introduction into the UK market of independent video-on-demand (VOD) services (i.e., Lovefilm, Netflix, etc.) is perhaps making this distinction between the UK and U.S. models more important. While TOT have been renegotiated to allow the PSBs to benefit from 'catch-up' VOD rights, after the 'catch-up' window (which is generally between 7-28 days), independent producers are free to relicense their content, creating additional revenue streams for them. As this platform matures, it will be interesting to chart the development of regulation in response. There will no doubt be further finessing of the regulatory regimes in both jurisdictions to tackle the changing circumstances.

Ben Goodger is a partner in Edwards Wildman Palmer's London office (www.edwardswildman.com.) A founding member and Fellow of the International IP Strategists Association (INTIPSA) (www.intpsa.com), Goodger can be reached at [email protected]. Jonny McDonald is an associate in the Intellectual Property Department at Edwards Wildman Palmer in London. His practice focuses on media, IT, telecommunications and data protection/privacy. He can be reached at [email protected].

The authors' previous article, in the March 2013 issue of Entertainment Law & Finance, considered differences between copyright regimes in the United Kingdom and the United States. This article highlights some of the principal differences between UK and U.S. contract law.

The opportunities provided by the globalized economy mean that lawyers are increasingly called upon to consider international issues. This applies in the entertainment industry as much as any other, as evidenced by the recent increase in the number of foreign-made films that are permitted to be shown in cinemas in China. Agreements are more likely than ever to be cross-border in nature, contain a foreign element, or be governed by foreign law. Consequently, it is vital that entertainment and media lawyers are aware of the areas where different regimes diverge, so that counsel can ensure agreements are tailored to be appropriate for each jurisdiction and governing law.

The Language Barrier

Material differences in legal terminology used in English and U.S. law can create problems beyond the obvious difficulty of two parties misunderstanding to what it is they are agreeing. Issues of terminology are potentially most likely to arise with template agreements, drafted for use in one jurisdiction but used internationally. The very common usage of U.S 'standard' entertainment terminology in agreements governed by English law may in particular cause uncertainty and inevitable expense in the event of a dispute. An example of such confusion occurred in the UK case of Tradigrain SA v. Intertek Testing Services (ITS) Canada Ltd. [2007] EWCA Civ 154, with respect to the definition of the term 'gross negligence.' While the term has a relatively uniform definition under U.S. law, the English court notes: 'The term 'gross negligence,' although often found in commercial documents, has never been accepted by English civil law as a concept distinct from simple negligence.'

The result of this was that the parties effectively surrendered control of the meaning of the term to the construction of the courts. The consequences of doing this can be significant. Take, for example, a U.S. lawyer drafting an agreement for holding a music concert in a sports stadium that provides for unlimited liability where there has been 'gross negligence.' Suppose the retractable 'all weather' roof failed to operate when it rained due to poor maintenance, causing the event to be cancelled at short notice. If the agreement is subject to English law, the courts may potentially hold that gross negligence means no more than (any) negligence, vastly widening the application of unlimited liability.

English courts will interpret any contract, notwithstanding the use of U.S. (or other overseas) terminology, in accordance with the five principles laid down by Lord Hoffman in what is regarded as the leading English case on interpretation of contracts, Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1997] UKHL 28. One such principle is that while words should be given their natural and ordinary meaning, the courts will not attribute to the parties an intention that they plainly did not have. An example of this with respect to U.S. terminology is found in the case of Camarata Property Inc. v. Credit Suisse Securities (Europe) Ltd [2010] EWHC 479, in which the English court noted that the parties had used both 'negligence' and 'gross negligence' in the applicable contract. This led the court to find that some distinction between them was intended. If such contract language had been used in our stadium example, the stadium operator might have evaded substantial liability if it could show it was not 'grossly' negligent.

The surest way of avoiding the problems outlined above is to use English terminology in an English law contract. A list of commonly used legal terms with different meanings in the United States and the United Kingdom is shown in Table 1, below.

[IMGCAP(1)]

Implied Terms

We turn now to some key areas in which English contract law contains particular rules that may catch unwary drafters of commercial contracts. Perhaps the biggest area of potential difficulty may be an unfamiliarity with the implied terms that UK law imposes on parties to commercial contracts.

With respect to the sale of goods, such as Blu-ray discs or branded merchandising, UK law implies warranties of good title and non-infringement of third party rights into agreements in the Sale of Goods Act 1979. With respect to the supply of services, which would include entertainment services, there is an equivalent implied term in the Supply of Goods and Services Act 1982 that a supplier will carry out the services with 'reasonable skill and care.'

This is unlikely to be of alarm to U.S. drafters, given that U.S. law implies similar rights in the federal Uniform Commercial Code (UCC). The key difference between the regimes is that in the United Kingdom, unlike in the United States, these rights may not be excluded by contract. It is also of note that, again, slightly different terminology is used in the two jurisdictions. The Sales of Goods Act uses the mechanism of a right to 'quiet possession' to provide a remedy against the supplier in the event of a third-party rights infringement claim.

Limitation of Liability

In the United States, contractual agreements to limit liability (and waive statutory rights) are typically enforceable, although this general rule has been limited by a number of states on public interest grounds (for example, a contractual exemption from liability is unenforceable for harm caused intentionally, recklessly or in some cases negligently. (See, Restatement of Contracts '195(1) and (2).))

In the United Kingdom, limitation-of-liability clauses are predominantly governed by the Unfair Contract Terms Act 1977 (UCTA). The UCTA automatically voids certain limitation-of-liability clauses. It subjects others to a reasonableness test, voiding them if they fail that test. This is one reason why English law contracts often break limitation-of-liability clauses down into subclauses, the intention being that even if the court considers one subclause unreasonable and therefore unenforceable, the rest should stand.

The rules of UCTA's application are quite complex. It does not apply at all to international contracts for the sale of goods, which may be of particular note to U.S. drafters and its application is strictest where one party is a consumer or when dealing on the parties' written standard terms and conditions.

Table 2, below, briefly summarizes UCTA's key provisions.

[IMGCAP(2)]

Duty of Good Faith

The U.S. duty of good faith, which is applicable to the negotiation and performance of contracts, is relatively rare amongst common law countries (being more akin to civil law jurisdictions, i.e., in continental Europe). Certainly, there is generally no implied duty of good faith in English law contracts (except in insurance contracts).

That said, the recent English case of Compass Group UK and Ireland Ltd. (t/a Medirest) v. Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB), recently provided a restatement of the fact that express good-faith obligations in an English law contract do mean more than 'a general wishy-washy duty to be nice in all communications' and should not be underestimated. The court found that a good faith clause had to be interpreted in light of the circumstances and, in this case, it could be applied to particular examples of cooperation being required. It also imposed a more general obligation to work together to resolve the type of problems that invariably occur from time to time in a long-term contract (which this was).

One lesson from this case, particularly of note to U.S. parties, is that good faith clauses are more likely to be enforceable when they are framed in terms that are as certain as possible, which allow the court to interpret them in light of the circumstances. For example, 'Licensee will seek in good faith to sign high-quality artists to appear in the Movie' is much less likely to be enforceable than 'Licensee will seek in good faith to sign [named artist A] and [named artist B] or other artists of equivalent stature and reputation to appear in the Movie.' To use 'good faith negotiation' terms to simply remedy a deficiency in the contract risks them being found unenforceable. So, for example, guard against saying that something should be negotiated in good faith at some stage in the future simply because the parties cannot agree on it now.

Endeavours Clauses

In both the United States and United Kingdom, parties often use endeavours (i.e., 'efforts' in the United States) clauses to qualify certain of their obligations, which would otherwise be absolute. There are a number of different endeavours clauses found in commercial contracts, although the two most common are 'best endeavours' and 'reasonable endeavours.' 'All reasonable endeavours' is also frequently encountered in English law contracts. However, in the recent case of Jet2.com Ltd. v. Blackpool Airport Ltd. [2012] EWCA Civ 417, the parties conceded and the court accepted that 'all reasonable' meant the same as 'best.'

The same case also provided useful commentary on when an endeavours clause may be found to be void for uncertainty. The court affirmed that the starting point for interpreting an endeavours clause is that the objective, to which the endeavours are to be directed, must be clear. Parties should ensure that the range of possible endeavours that may satisfy the obligation is sufficiently narrow so that the courts are able to determine what should be done to satisfy the obligation (if necessary, with the aid of expert evidence).

Assuming that the obligation is enforceable, what is the applicable party required to do? While the U.S. and UK terms are reasonably analogous, it is worth considering the actual tests applied by the U.S. and UK courts. In both jurisdictions, there is a question of construction to be assessed at the time the contract was made. In the United States, when determining what 'best efforts' should mean, the courts have articulated a test of imagining the promisor and the promisee in a unified single entity and asking what efforts such an entity would exert on its own behalf.

In the United Kingdom, a party subject to best endeavours must 'take all those steps in their power that are capable of producing the desired results ' being steps which a prudent, determined and reasonable [person], acting in his own interests and desiring to achieve that result, would take,' IBM United Kingdom Ltd. v. Rockware Glass Ltd. [1980] FSR 335). Consequently, in the United Kingdom a 'best endeavours' clause may require expenditure, even the incurring of losses by the party subject to it. However, a party may keep in mind their own commercial interests. Thus, to take the example above, if a British licensee commits to use best endeavours to sign certain named artists who reside in California, then it is likely that the obligee would fail this contractual obligation if it were unwilling to bear the expense of flying out to California and spending a substantial amount of time and effort on the ground, negotiating the deal with the artists.

Compliance does not require a party to take action that would destroy its business, such as incurring ruinous expenditures. Reasonable endeavours, on the other hand, involve an objective test: what would a reasonable person applying the relevant standard do? In this respect, reasonable endeavours may actually impose a stricter obligation than best endeavours, where at least the steps that must be taken are 'all those steps in [the party's] power.' Reasonable endeavours unlike best endeavours may require a party to achieve something that, due to their subjective attributes, is unachievable ' or risk breach.

Remedies

Under English law, similar to U.S. law, the main, basic remedy available to an injured party following a breach of contract is expectation damages, i.e., damages that put an injured party into the position, as far as is possible, that the party would have been in if the contract had been correctly carried out. Both jurisdictions also have 'reliance damages,' which are intended to put the innocent party into the position it would have been in if the contract had never been formed; and 'specific performance,' i.e., an equitable remedy that compels the party in breach to perform their part of the contract. Because it is an equitable remedy, specific performance is discretionary. In exercising its discretion, a court will consider whether damages would provide adequate remedy for the loss.

The key differences between the countries' regimes are, firstly, unlike in the United States, there is no provision in English law for special or punitive damages aimed at punishing the party in breach of a contract. Secondly, English courts have far wider discretion over awarding costs and expenses to a prevailing contact-dispute party, with the general rule being that 'costs follow the event.' This means that in English litigation an unsuccessful party usually pays the costs of a successful party. The courts will assess the level of costs to be paid (subject to the parties managing to agree the amount of costs themselves). The standard rule by which such a court assesses costs is to allow costs to be recovered that were reasonably incurred, or reasonable and proportionate vis-'-vis the matters in issue.

Regulatory Impact'On TV Content

One final point to note: While there are many common features in specific entertainment industry practices in the United Kingdom and the United States, there may also be important differences, underpinned by regulatory governance, which can also have a big impact on the contractual landscape.

One stark example of this concerns the television industry and the commissioning of audiovisual content from independent producers. The biggest commissioners of UK-produced content remain the UK public service broadcasters (PSBs), comprising the BBC and the licensed commercial PSBs (i.e., ITV, Channel Four and Channel 5). The PSBs are legally obliged to allocate 25% of total broadcast time to independently produced content. The 'terms of trade' (TOT) under which the PSBs commission and license content from independent producers are supervised by the UK media regulator, known as OFCOM. The TOT, which came into force in 2004, require producers to retain the majority of IP rights in commissioned content. Broadly speaking, the PSBs only retain a limited license of transmission rights, and a limited ability to share in the net revenue of future broadcasts in different jurisdictions. By retaining the majority of IP rights, the producer is free to exploit the program or film in secondary markets. It is important to note that non-PSB broadcasters, such as Sky, are not subject to TOT.

In the United States, the major television broadcasters are not subject to such stringent regulation. As such, the regime is similar to the pre 'terms of trade' UK model, with dominant broadcasters owning IP rights in the content (which they may or may not attempt to re-license to third parties).

The introduction into the UK market of independent video-on-demand (VOD) services (i.e., Lovefilm, Netflix, etc.) is perhaps making this distinction between the UK and U.S. models more important. While TOT have been renegotiated to allow the PSBs to benefit from 'catch-up' VOD rights, after the 'catch-up' window (which is generally between 7-28 days), independent producers are free to relicense their content, creating additional revenue streams for them. As this platform matures, it will be interesting to chart the development of regulation in response. There will no doubt be further finessing of the regulatory regimes in both jurisdictions to tackle the changing circumstances.

Ben Goodger is a partner in Edwards Wildman Palmer's London office (www.edwardswildman.com.) A founding member and Fellow of the International IP Strategists Association (INTIPSA) (www.intpsa.com), Goodger can be reached at [email protected]. Jonny McDonald is an associate in the Intellectual Property Department at Edwards Wildman Palmer in London. His practice focuses on media, IT, telecommunications and data protection/privacy. He can be reached at [email protected].