Take care to avoid disaster during exit periods.

2 September 2012

A recent decision of the Court of Appeal has demonstrated the pitfalls of failing to adequately specify what terms should apply during an exit period. The decision does not make any alterations to the law as it currently stands as it was decided solely on the facts of the case, but serves as a warning from the Court as to the need to take care in ensuring that such provisions contain all the terms and obligations that you expect to apply during a transitional period after termination. In Interactive Investor Trading Limited v City Index Limited1 online services were provided to clients by Interactive through its website. Through a link on their website clients were directed to City Index for specific services not dealt with by Interactive, and City Index then entered into agreements with the clients, with commission payable to Interactive. The agreements in place between the parties provided for six months notice of termination, and following such termination for a winding down period during which City Index were to maintain the branded trading platform. There were provisions as to what was to happen at the end of the winding down period, but they were not clearly drafted and led to a dispute between the parties as to the rights and obligations applicable following the expiration of the winding down period. The main dispute involved whether City Index remained liable to continue to pay Interactive commission during the winding down period, and further the extent to which City Index continue to solicit clients originally introduced by Interactive during and after the winding down period. The Court of Appeal held that neither commission nor the obligation on City Index not to market to clients introduced by Interactive applied during the winding down period. The decision rested heavily on the poor manner in which the agreement was drafted and the interpretation of the Court as to whether the winding down period was to be included as a continuation of the main term of agreement. It was argued by Interactive that where in the agreement it stated "on termination of this agreement", this referred to the end of the winding down period. The phrase had been used in several places in the contract and in many of these it was evident that it clearly did not include the winding down period. The Court interpreted the agreement as a whole and presumed that the language used was consistent, and as such decided that this meant that the winding down period was not a continuation of the main term of agreement. The obligation on City Index to pay commission applied only "during this agreement". It therefore followed from the interpretation of the Court as to the length of term of the agreement, as outlined above, that City Index were no longer liable to pay commission on any trades conducted during the winding down period. Similarly, the obligation on City Index not to market to, or solicit, clients was held not to extend to the winding down period in accordance with the interpretation of the main term of agreement. The obligation was explicitly set out in the agreement to apply "during the agreement", and "after the expiration of the wind down period"; but there was no prohibition on the solicitation of clients during the wind down period. The argument put forward by Interactive was that a commercial construction should be taken of the phrase "during the agreement" such that it extended to include the wind down period; but again the Court read the language of the agreement consistently and held that it clearly did not. If Interactive had wished to prohibit such marketing at all times, then it could easily have inserted a single clause to achieve it. The outcome exhibits the importance of careful consideration and drafting of the rights and obligations set out for agreements involving the interplay between the termination notice period, the exit assistance period, and the overall term of a contract. The Court has demonstrated that it will interpret such agreements according to a consistent reading of the language of the contract. It is evidently necessary to ensure that the term and exit assistance periods are clearly set out and defined when drafting such agreements so that it is clear as to whether or not the exit period forms part of the term of the agreement. For additional information please contact Justin Emerson of Gepp & Sons on 01245 228113. The above is not legal advice; it is intended to provide information of general interest about current legal issues.