This month, the Court of Session reminded parties to commercial contracts to pay strict attention to the requirements of notice clauses in contracts.
The vast majority of drafted contracts will contain formal notice clauses, which set out how the parties should intimate formal communications under the contract such as an intention to vary the contract, notification of a breach or of an intention to terminate. A typical notice clause will set out precisely how that should be communicated: for example whether it has to be sent by Recorded Delivery, or by post or by email, to whom it should be addressed and any timescales that apply.
The prevailing view (until 2017) was that notices issued in accordance with a contract required to comply strictly with the procedure set out in the contract. In 2017 the Inner House considered this question in the case Hoe International v Martha Anderson and James Aykroyd [2017] CSIH 9. In that case, the contract between the parties set out that notices must be:
- Delivered personally; or
- sent by pre-paid first-class post or recorded delivery; or
- sent by airmail
The contract further provided that the notice must be addressed to a specific individual at Tods Murray solicitors. The Pursuer in this case subsequently issued a notice seeking payment for breach of contract, however failed to send it in accordance with the strict terms set out above by issuing it to the wrong individual at Tods Murray and by DX rather than personal or pre-paid first-class post or recorded delivery. The Defender argued (successfully at first instance) that the notice was therefore invalid and should be treated as not having been issued at all. The Inner House overturned this decision and held that the strict notice provisions in this particular case did not need to be complied with. Commercial common sense should be applied and the court should consider how a reasonable recipient would have construed the notice actually delivered. Despite the fact that the notice had not strictly complied with the contract, a reasonable recipient would have known that it was a notice issued in terms of the contract.
The court did however leave open the door for future decisions to find that strict compliance with a notice term was required:
"the more drastic the consequences of a notice, the greater the need for strict compliance with what is prescribed in the contract"
Lady Wolffe examined this issue further in Our Generation Limited v Aberdeen City Council [2018] CSOH 124 in her decision of 21 December 2018. Our Generation were seeking to terminate a contract on the basis that the Council had failed to make payment of overdue invoices. The contract provided that it could be terminated if:
"8.4.3 if the other Party fails to make punctual payment of any amount properly due to the former Party under this agreement and such amount remains unpaid at the expiry of 20 Banking Days after receiving written notice from the former Party requiring payment;"
Therefore Our Generation had to establish that it had issued a written notice which complied with this term before it was entitled to terminate the contract. Our Generation issued an email to the Council which simply stated "please see attached statement of balances now overdue, owing to Our Generation Solar" and attached a statement of account detailing several overdue invoices. Unhelpfully for Our Generation, there were errors with the email and statement including the fact that the email did not actually have its name recorded on it anywhere, and the statement of account included the wrong company number. More importantly, there was no explicit statement requiring payment.
The substantive issue before the court was not how the notice was served, but whether this email could amount to a written notice requiring payment. Our Generation sought to argue that a reasonable recipient would have known that the email had come from it and that, when considered alongside the previously issued invoices, this email amounted to a written notice requiring payment.
Lady Wolffe, highlighted that a failure of the Council to respond to a notice in terms of 8.4.3 would have "drastic consequences", which clearly, in accordance with Hoe, would support a need for stricter compliance with the notice provisions. Therefore a simple statement of fact that sums were overdue was held not sufficient for the purpose of 8.4.3 and what was required was a clearer written notice communicating that payment was required. It was not accepted, as Our Generation argued, that issuing invoices and a statement of account amounted to written notice requiring payment. As a result, Our Generation was not entitled to terminate the contract as it had not complied with the strict notice requirements.
The case is therefore a further reminder to consider very carefully the precise notice requirements in a contract and when they require strict compliance. The notice requirements are particularly important if one party to a contract intends to rely upon them subsequently to exercise a right such as withholding payment or terminating the contract.
