RECENT DEVELOPMENTS IN CONTRACT
These notes aim to cover some of the key developments in
Contract in the last 12-18 months. They are not intended as an
exhaustive coverage of all developments. They highlight some of
those which may be thought particularly relevant to commercial
practice.
Some cases may fall a little outside the last 12-18 months but they
are noted in order to take account of them in the light of further
developments in more recent cases.
It may not be possible to speak to all of the developments referred
to in these notes in the presentation itself.
Ed Peel
Oxford
June 2013
Interpretation
Cherry Tree Investments Ltd v Landmain [2012] EWCA Civ 736
Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ 607
Fitzhugh v Fitzhugh [2012] EWCA Civ 694
Aston Hill Financial Inc v African Minerals Ltd [2012] EWHC 2173 (Comm), [2013] EWCA Civ 416
Implied Terms
Spencer v Sec. of State for Defence [2012] EWHC 120 (Ch), [2012] EWCA Civ 1368
Procter & Gamble v Svenska Cellulosa Aktiebolaget SCA [2012] EWCA Civ 1413
Wuhan Ocean Economic & Technical Cooperation Co Ltd v Schiffahrts-Gesellschaft MbH & Co KG [2012]
EWHC 3104 (Comm)
Dear v Jackson [2013] EWCA Civ 89
Gavin v One Housing Group Ltd [2013] EWCA Civ 580
Exemption Clauses
KG Bominflot v Petroplus [2010] EWCA Civ 1145
Air Transworld Ltd v Bombardier Inc [2012] EWHC 243 (Comm)
Dalmare SpA v Union Maritime Ltd [2012] EWHC 3537 (Comm)
Mir Steel UK Ltd v Morris [2012] EWCA Civ 1397
FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2012] EWHC 2477 (Comm)
Ampleforth Abbey Trust v Turner & Townsend [2012] EWHC 2137 (TCC)
Kudos Catering UK Ltd v Manchester CCC Ltd [2013] EWCA Civ 38
Deutsche Bank v Khan [2013] EWHC 482 (Comm)
Olympic Airlines v ACG Acquisition XX LLC [2013] EWCA Civ 369
Misrepresentation
Bikam Ood v Adria Cable S.a.r.l. [2012] EWHC 621 (Comm)
Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch)
A creeping ‘good faith’ requirement in English contract law
(i) Not in negotiation:
Dhanani v Crasnianski [2011] EWHC 926 (Comm)
Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 1560 (Comm)
Shaker v Vistajet Group Holdings SA [2012] EWHC 1329 (Comm)
MRI Trading AG v Erdenet Mining Corp [2013] EWCA Civ 156
(ii) But in performance?
Compass Group v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB)
SNCB Holding v UBS [2012] EWHC 2044 (Comm)
Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB)
TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)
Termination
Cavenagh v William Evans Ltd [2012] EWCA Civ 697
Leofelis SA v Lonsdale Sports Ltd [2012] EWHC 485 (Ch), [2012] EWCA Civ 985, [2012] EWCA Civ 1366
Crocs Europe BV v Anderson [2012] EWCA Civ 1400
Geys v Societe Generale [2012] UKSC 63
Cukurova Finance International Ltd v. Alfa Telecom Turkey Ltd [2013] UKPC 2
The MV Astra [2013] EWHC 865 (Comm)
Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577
TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)
White Rosebay Shipping SA v Hong Kong Chain Glory Shipping Ltd [2013] EWHC 1355 (Comm)
Damages and the date of assessment
Hooper v Oates [2013] EWCA Civ 91
Remoteness
Rubenstein v HSBC Bank Plc [2012] EWCA Civ 1184
Petro-Chemical Industries Company (KSC) v The Dow Chemical Company [2012] EWHC 2739 (Comm)
John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37
Contracting on-line & consideration
Spreadex Ltd v Cochrane [2012] EWHC 1290 (Comm)
Rule against penalties
E-Nik Ltd v Sec of State for Communities and Local Government [2012] EWHC 3027 (Comm)
Cavendish Square Holdings BV v Team Y&R Holdings Hong Kong Ltd [2012] EWHC 3582 (Comm)
Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2012] EWHC 3511 (QB)
Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, 6 September 2012
Cadogan Petroleum Holdings Ltd v Global Process Systems LLC [2013] EWHC 214 (Comm)
Berg v Blackburn Rovers Football Club [2013] EWHC 1070 (Ch)
Interpretation
Cherry Tree Investments Ltd v Landmain [2012] EWCA Civ 736
Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ
607
Fitzhugh v Fitzhugh [2012] EWCA Civ 694
Aston Hill Financial Inc v African Minerals Ltd [2012] EWHC 2173 (Comm), [2013] EWCA
Civ 416
1.
The decision of the Supreme Court in Rainy Sky v Kookmin Bank1 is seen as
something of a vindication of the ‘purposive’ approach to interpretation, ie “if the
language is capable of more than one construction, it is not necessary to conclude that
a particular construction would produce an absurd or irrational result before having
regard to the commercial purpose of the agreement”. This is further emphasized by
the fact that Lord Clarke also confirms that interpretation is a ‘unitary exercise’, ie it
is not a case of ‘interpreting’ the agreement first and then looking at the surrounding
circumstances if there is any ambiguity; one takes into account both the wording and
the ‘background’ at one and the same time.2 It may be thought there are not too many
contracts which, if considered against the ‘background’ do not admit of at least two or
more possible constructions, thus always leaving room for preferring the more
commercial over the less commercial.
2.
Of course, one person’s commercial may simply be another person’s uncommercial
and it did not take long for a judge to find that he had no basis for deciding which of
two interpretations was most in accordance with business common sense. Faced with
this problem in the Aston Hill case, Eder J. resolved the problem by preferring the
interpretation which was ‘more consistent with the language used in the facility’; thus,
it seems there is a residual role for ‘literalism’. In Aston Hill itself, a borrower
refinanced a loan facility and was obliged, under the original facility, to use the
proceeds of the new loan to repay the first loan. The lender contended that this also
constituted a ‘voluntary prepayment’ of the first loan which resulted in a pre-payment
fee (since the taking out of the new facility was itself a voluntary act). Eder J.
disagreed:3
in my judgment, the main fallacy in the claimants’ argument is the failure to
distinguish between, on the one hand, the refinancing, and, on the other hand,
the prepayment. I agree with Mr Beltrami QC that there are, or at least may
be, difficulties in characterising what conduct is or is not “voluntary” but I am
content to assume here that the refinancing carried out by the defendant is
properly to be characterised as “voluntary”. However, as Mr Boswood QC
conceded, the proceeds of such refinancing fell within the definition of
“Finance Proceeds” and accordingly the defendant thereby came under an
obligation to repay the loan by virtue of Clause 8.3. In other words, although
the refinancing was “voluntary”, the prepayment was not.
1
[2011] UKSC 50.
See also Bright Asset Ltd v Lewis<r> [2011] EWCA Civ 122 at [28]: “The interpretative exercise is the single
exercise taking into account the factual matrix”. <i>
3
At [33].
2
3.
On appeal, it should be noted, the Court of Appeal did not share Eder J’s doubts and
found that the language of the provisions and the commercial sense both pointed
clearly in favour of the borrower’s interpretation.
4.
In Rainy Sky Lord Clarke did acknowledge that “where the parties have used
unambiguous language, the court must apply it”4 even if it produces an improbable
result, but it is clear from subsequent cases that this does not amount to a rejection of
the principle that where the parties have used such language, it may nonetheless be
corrected (as a matter of interpretation (and not of rectification)) where there has been
an “obvious mistake”, ie where it is clear that a mistake has been made; and clear
what correction should be made.5
5.
One consequence of the willingness of the courts to correct obvious mistakes as a
matter of interpretation is that it does not seem to leave a lot of room for rectification.6
Where it may still be necessary to resort to rectification is in contracts recorded in
‘public’ documents, i.e. those which may be referred to and relied upon by third
parties. This is the point to emerge most clearly from the Cherry Tree case.
6.
C and D executed a charge and a facility agreement, the latter of which extended the
statutory power of sale so that it did not require that the mortgage monies had become
due. D purported to sell the property in question to D2 in circumstances where no
sum secured by the charge had become due. C challenged the sale on the basis that,
while the charge had been registered, the facility agreement had not, so the extended
power of sale could not be invoked.
7.
In a dissenting opinion, Arden LJ held that this was a case which was covered by the
principles of interpretation outlined above. The charge should be read against the
background which included the facility agreement, even to the extent of considering
this to be a case for correcting mistakes in that the charge as registered did not contain
the extended power of sale. The only limit was whether the admission of such
evidence and the consequent interpretation of the document in question would
prejudicially affect the rights of any third party. This was not such a case since C had
not created any further interest in the property.
8.
The majority disagreed that the question of third party prejudice could be dealt with
on a case by case basis. Lewison LJ was not particularly concerned whether the issue
was the admissibility of the facility agreement, or what was permissible by way of
interpretation, if it was admitted.7 What mattered was that the whole point of the
registration system is that it aims to protect the interests of third parties; it falls into
the category of ‘public documents’:
4
At [23].
See Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896; Chartbrook
Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101; and for confirmation of this principle post
Rainy Sky, but without success for the claimant, see McKillen v Misland (Cyprus) Investments Ltd [2012]
EWCA Civ 179 which was considered in June 2012.
6
To this effect, see Burrows, in Burrows & Peel (eds) <i>Contract Terms; Buxton 69 C.L.J. 253.
7
‘But accepting that the court need not shut its eyes to the existence and terms of the facility letter (i.e. it is
admissible evidence), there is still the question: what do you do with the evidence once it has been admitted?’, at
[104].
5
Our courts have already drawn distinctions between the use of background
material in the interpretation of what I might call “ordinary” commercial
contracts on the one hand, and the interpretation of negotiable and registrable
contracts or public documents on the other’8… ‘in all these cases9 the
justification for the restrictive approach is that third parties might (not will)
need to rely on the terms of the instrument under consideration without access
to extraneous material’.10
9.
Furthermore, and in line with the idea put forward by Rix LJ in the earlier ING case,11
this was not an ‘obvious mistake’ case; there was no mistake in the language used and
it made sense12 – it just omitted the extended power of sale: ‘Even the staunchest
advocates of the court’s ability to consider extrinsic evidence stop short of saying that
by the process of interpretation the court can insert whole clauses that the parties have
mistakenly failed to include’.13
10.
The extended power of sale could not therefore be read into the charge as a matter of
interpretation, but counsel for D2 was invited to consider amending the claim to one
in rectification. The key difference with rectification was that although, like
interpretation, it too would normally have a retrospective effect, i.e. the document is
read as if it had always been in its rectified form, this is subject to the priority
provisions of the Land Registration Act 2002 which would protect any third parties
who might be affected.
Implied Terms
Spencer v Sec. of State for Defence [2012] EWHC 120 (Ch), [2012] EWCA Civ 1368
Procter & Gamble v Svenska Cellulosa Aktiebolaget SCA [2012] EWCA Civ 1413
Wuhan Ocean Economic & Technical Cooperation Co Ltd v Schiffahrts-Gesellschaft MbH &
Co KG [2012] EWHC 3104 (Comm)
Dear v Jackson [2013] EWCA Civ 89
Gavin v One Housing Group Ltd [2013] EWCA Civ 580
8
At [124]. See, to similar effect, Longmore LJ at [148].
For examples referred to by Lewison LJ: Opua Ferries Ktd v Fullers Bay of Islands Ltd [2003] UKPC 19,
[2003] 3 NZLR 740 (registered licence); Slough Estates Ltd v Slough Borough Council [1971] AC 958; Sec of
State for Communities and Local Government v Bleaklow Industries Ltd [2009] EWCA Civ 206, [2009] 2
P&CR 21 (planning permission); Egyptian Salt and Soda Co Ltd v Port Said Salt Association [1931] AC 677
articles of association); and Masri v Consolidated Contractors (Oil and Gas) Co SAL [2009] EWCA Civ 36,
[2009] 1 CLC 82 (injunction or receivership order).
10
At [125].
11
ING Bank NV v Ros Roca SA [2011] EWCA Civ 353.
12
See also in this regard the rejection of ‘corrective construction’ in Scottish Widows Fund and Life Assurance
Society v BGC International [2012] EWCA Civ 607; and in Fitzhugh v Fitzhugh [2012] EWCA Civ 694 (where
an alternative case for an implied term was also rejected)
13
At [132]. Though one might think this is precisely what was done in the Spencer case below by Vos J
(though not the CA).
9
1.
There continues to be some debate as to whether the suggested approach of Lord
Hoffmann to terms implied ‘in fact’ in Att-Gen of Belize v Belize Telecom Ltd14 has
been accepted, or affected any change in the law15. A useful attempt to summarise the
principles in this area is set out by Aikens LJ in in Crema v Cenkos Securities plc:16
“38 The principles are: (1) a court cannot improve the instrument it has to
construe to make it fairer or more reasonable. It is concerned only to discover
what the instrument means. (2) The meaning is that which the instrument would
convey to the legal anthropomorphism called “the reasonable person”, or the
“reasonable addressee”. That “person” will have all the background knowledge
which would reasonably be available to the audience to whom the instrument is
addressed. The objective meaning of the instrument is what is conventionally
called the intention of “the parties” or the intention of whoever is the deemed
author of the instrument. (3) The question of implication of terms only arises
when the instrument does not expressly provide for what is to happen when
some particular (often unforeseen) event occurs.17 (4) The default position is
that nothing is to be implied in the instrument. In that case, if that particular
event has caused loss, then the loss lies where it falls. (5) However, if the
“reasonable addressee” would understand the instrument, against the other
terms and the relevant background, to mean something more, ie that something
is to happen in that particular event which is not expressly dealt with in the
instrument's terms, then it is said that the court implies a term as to what will
happen if the event in question occurs. (6) Nevertheless, that process does not
add another term to the instrument; it only spells out what the instrument
means. It is an exercise in the construction of the instrument as a whole. In the
case of all written instruments, this obviously means that term is there from the
outset, ie from the moment the contract was agreed, or the articles of
association were adopted or the statute was passed into law.
2.
That the process of implication is an objective one was fully endorsed by Vos J. in
Spencer:
The entire construction exercise is about determining what a reasonable person
would take the contract to mean, not about determining the subjective
intentions of the parties. It was, therefore, particularly helpful when Lord
Hoffmann explained in paragraph 16 of his speech in Belize that the objective
meaning is what is “conventionally called the intention of the parties”. I would
venture to suggest that the subjective element of the normal usage of the word
“intention” may in the past have caused much confusion. But it is now clear
that the process of interpretation is an objective one. One might ask
rhetorically: how could it be otherwise? It would be impossible for the court to
construe contracts by reference to the subjective intentions of the parties, when
by the time every case came to be decided, the competing parties would be
14
[2009] UKPC 10.
See a certain ambivalence in The Reborn<r> [2009] EWCA Civ 531; [2009] 2 Lloyd’s Rep. 639; Groveholt
Ltd v Hughes<r> [2010] EWCA Civ 538; <i>Leander Construction v Mullaley & Co Ltd [2011] EWHC 3449
(TCC).
16
[2011] 1 WLR 2066 at [38] and [39].
17
Consolidated Finance Ltd v McCluskey 1 August 2012, CA: No implied term setting out the purpose of a loan
agreement could be read into the agreement where the agreement already contained an express, albeit
meaningless, purpose clause.
15
swearing blind that they had subjectively “intended” the meaning for which
they were now contending.
What is instructive about Spencer is the acknowledgement that if the relevant question
is what would a reasonable person have understood the contract to mean, or would a
reasonable person have understood the contract to contain the implied term in
question, that person may be endowed with knowledge that the parties did not
themselves have.
3.
This issue came about because the parties added a small plot of land to an existing
tenancy and executed a memorandum to raise the rent slightly. They did so at the
time when the rent was the subject of review by way of arbitration. But what neither
side realized was that the effect of the memorandum was to set aside the old tenancy
and create a new one; but the arbitration was only binding in relation to the old
tenancy. The case which had to be advanced by the claimant was that when the
memorandum stated: “the within written clear yearly rent of £16,250 … shall in
consequence of the above mentioned addition be increased by £83.00 … thereby
causing the said rent to be £16,333.00 …”, it had to be read as if it stated: “the within
written clear yearly rent of £16,250 shall in consequence of the above mentioned
addition be increased by £83, thereby causing the said rent to be £16,333 or such other
rent from and after 29 September 1999 as should be determined by the arbitrator [in
the rent review under the 1987 Tenancy]”. Vos J. was of the view that this could be
reached by way of an implied term (or construction (it is not entirely clear which he
did in the end) and stated:
When considering the implication of a term, it is permissible to assume that the
reasonable observer had knowledge that the parties did not in fact have,
certainly if that knowledge is as to established and well-known legal principles.
I need go no further for the purposes of this case, but it seems to me that the
same will apply to the knowledge of the reasonable observer when one
considers the construction of a contract as much as when one considers the
implication of a term.
4.
The idea that objectivity can extend to giving the reasonable observer knowledge
which the parties did not have is potentially radical for the law of mistake, but Vos J.
was careful to confine himself to ‘clear law’. Furthermore, it was not an approach
which was taken by the CA, nor one which they found it necessary to comment upon.
For them, the solution lay more obviously in interpretation. They emphasized that the
memorandum recording the new rent expressly stated: ‘IN ALL OTHER RESPECTS
the terms conditions and covenants of the Principal Agreement as varied by the said
Memoranda shall remain in force as heretofore unchanged.’ Their view of this was
that ‘the legal regime of the Principal Agreement was unchanged’ and that extended
to the applicability and binding effect of the rent review; the intention of the parties
was, in effect, that it should be carried over into the new tenancy.
5.
Even if it is now established that (like interpretation) the existence of an implied term
is determined objectively, ie by reference to the reasonable person’s assessment of the
intention of the parties, this does not allow or the implication of a term simply
because it would be reasonable. That is a factor to be taken into account in making
an objective assessment of the parties’ intention. It is not enough on its own. Thus, in
Procter & Gamble a contract for the supply of goods stated the prices in euros but
payment was in sterling, and no fixed exchange rate was specified; the court refused
to imply a term providing for a fixed exchange rate since that would not be seeking to
give effect to the intention of the parties, but would rather simply be seeking to make
the contract fairer or more reasonable.18 Moore-Bick LJ expressed his conclusion in
this regard by taking up the link between interpretation and implied terms:19
I entirely agree that if a clause is reasonably capable of bearing two possible
meanings (and is therefore ambiguous), the court should prefer that which
better accords with the overall objective of the contract or with good
commercial sense, but the starting point must be the words the parties have
used to express their intention and in the case of a carefully drafted agreement
of the present kind the court must take care not to fall into the trap of rewriting the contract in order to produce what it considers to be a more
reasonable meaning.
6.
In Wuhan Ocean Economic the Court agreed with the finding of an arbitral tribunal
that a unilateral obligation to extend a refund guarantee which had no express time
limit was subject to an implied term that it had to be fulfilled within a reasonable time
and also with the finding that 14 days was a reasonable time (Belize applied). The
court also found that the implied term was an innominate term, and not merely a
warranty, but that its breach did not amount to a repudiatory breach. Since the
original guarantee was automatically if the buyer started arbitration proceedings at its
expiry, it could not be said that the seller’s failure to extend the guarantee within a
reasonable time had truly imperilled the buyer’s security.
Exemption Clauses
KG Bominflot v Petroplus [2010] EWCA Civ 1145
Air Transworld Ltd v Bombardier Inc [2012] EWHC 243 (Comm)
Dalmare SpA v Union Maritime Ltd [2012] EWHC 3537 (Comm)
Mir Steel UK Ltd v Morris [2012] EWCA Civ 1397
FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2012] EWHC 2477 (Comm)
Ampleforth Abbey Trust v Turner & Townsend [2012] EWHC 2137 (TCC)
Kudos Catering UK Ltd v Manchester CCC Ltd [2013] EWCA Civ 38
Deutsche Bank v Khan [2013] EWHC 482 (Comm)
Olympic Airlines v ACG Acquisition XX LLC [2013] EWCA Civ 369
1.
18
One of the issues for the CA in KG Bominflot v Petroplus was whether a clause in the
following terms was sufficiently clearly worded to exclude the implied term under
section 14(2) of the Sale of Goods Act 1979 that the goods should be of satisfactory
quality:
See also: SNCB Holding v UBS [2012] EWHC 2044 (Comm), esp. at [65].
And for a similar sentiment from a different CA: ‘In my judgment, the implication of the terms proposed
would involve an impermissible re-writing of the parties’ contract or, in other words, would subject them merely
to one notion of “what might have been the most sensible solution to the parties’ conundrum”. That is not a
proper basis for implying terms into the Agreement’, Dear v Jackson [2013] EWCA Civ 89, at [41] per
McCombe LJ. See also Gavin v One Housing Group Ltd [2013] EWCA Civ 580.
19
There are no guarantees, warranties or representations, express or implied, [of]
merchantability,20 fitness or suitability of the oil for any particular purpose or
otherwise, which extend beyond the description of the oil set forth in this
agreement.
The argument that says this wording does not succeed is based on the fact that where
the terms implied by the Sale of Goods Act are implied as conditions (i.e terms the
breach of which entitle the claimant not only to claim damages but to terminate the
contract and reject the goods), as is the case with s.14(2), nothing less than an explicit
reference to ‘conditions’ will suffice.
2.
If he was free from the constraints of previous authority, it is clear that Rix LJ would
have considered this too narrow an approach and that the wording employed was
sufficient to indicate the parties’ intention to exclude liability under s.14(2). But he
was constrained by a line of cases21 which had established as a general principle that
liability for breach of the implied conditions under the Sale of Goods Act could only
be excluded by a reference to ‘conditions’. The clause therefore failed, as a matter of
construction.
3.
This seems certain to be an issue which is destined for the Supreme Court, but for
now the decision of Cooke J. in the Air Transworld case22 is significant for
demonstrating that the beauty of the common law lies in the ability to find distinctions
that may not at first sight have been apparent. In the Bominflot case, Rix LJ had
expressed his conclusion that the word “condition” is needed to get rid of SGA
conditions in these terms: “such obligations can only be excluded by language which
expressly (or perhaps one may add which must necessarily be taken to) refer to
conditions”. The words in parentheses were all that Cooke J. needed to say that even
SGA conditions had necessarily been excluded by the following provision in an
aircraft sale agreement:
4.1 The warranty, obligations and liabilities of seller and the rights and
remedies of buyer set forth in the agreement are exclusive and are in lieu of and
buyer hereby waives and releases all other warranties, obligations,
representations or liabilities, express or implied, arising by law, in contract,
civil liability or in tort, or otherwise, including but not limited to a) any implied
warranty of merchantability or of fitness for a particular purpose, and b)
any other obligation or liability on the part of seller to anyone of any nature
whatsoever by reason of the design, manufacture, sale, repair, lease or use of
the aircraft or related products and services delivered or rendered hereunder or
otherwise.
4.
20
For Cooke J. the first part of the clause made clear that the agreement set out the
exclusive remedies of the parties: “There is plainly intended to be no room for the
operation of any primary or secondary rights or obligations outside the terms of the
Under a previous version of s.14(2) the goods had to be of ‘merchantable quality’; they must now be of
‘satisfactory quality’.
21
Most notably: Wallis, Son & Wells v. Pratt & Haynes [1911] AC 394; Henry Kendall & Sons v. William
Lillico & Sons [1969] 2 AC 31
22
The decision of Cooke J. also goes into a number of issues relating to UCTA (ss.26 (international supply
contracts), 27 (choice of law provision), and dealing as consumer). These notes are confined to the
interpretation issue).
contract itself”. Although clause 4.1 then went on to refer only to implied
“warranties”, this part of the clause was merely illustrative of the exclusivity achieved
by the first part (“including but not limited to”). Accordingly:
No person reading this Article could be in any doubt that every promise implied
by law is excluded, in favour of the contractual promises set out in the APA. It
is right that there is no term which purports to exclude the buyer’s right to reject
the goods and recover the price, nor to the specific sections of the Sale of
Goods Act, but the words “all other… obligations… or liabilities express or
implied arising by law”, which the purchaser expressly waives, necessarily
include the conditions implied by the Sale of Goods Act. In my judgment these
are apt and precise words which are sufficiently clear to exclude those implied
conditions and the Article, by necessary inference does negative the application
of those implied conditions.23
5.
In Dalmare Flaux J. upheld the finding of arbitrators that in the sale of a vessel, the
words ‘as she was’ at the time of inspection were not sufficient to exclude the implied
term of satisfactory quality under s.14(2) SGA, on the narrow basis that they were
really only concerned with the temporal issue of the period of delay between
inspection and delivery. But even if the contract had been for the sale of the vessel
‘as is’, Flaux J. inclined to the view that that would also not have been sufficient,
based in part on the line of cases referred to in Petroplus above.
6.
The FG Wilson decision is the latest consideration of a no set off clause and whether
it falls foul of the test of reasonableness under UCTA. The clause, in a contract for
the sale of generator sets was in the following form: ‘Buyer shall not apply any set-off
to the price of Seller's products without prior written agreement by the Seller’.24 No
set off clauses have fared pretty well in this respect in the contracts between two
commercial parties where they tend to be found.25 In Stewart Gill Ltd v Horatio Myer
& Co Ltd,26 a no set off clause failed where it expressly included within its ambit no
set off for ‘credits’,27 but Popplewell J. rejected an argument that since the no set off
clause in the present case was wide enough to cover admitted credits, it therefore did
so and, as a consequence, was unreasonable.28
7.
While it is the case that it is the whole clause which must be considered for the purpose of
the reasonableness test, Popplewell J. followed the earlier approach of Mance J.29 in
determining how widely to cast the net in determining the potential width of the clause:30
23
At [29].
The seller’s standard terms and conditions were found to be incorporated by reasonable notice and the court
rejected the argument that the no set off clause was onerous or unusual and therefore required special notice to
have been given (Denning’s red hand rule). The court also rejected a rather strained argument based on
construction: ‘there is no principle of construction that a no set-off clause cannot be effective unless it is
expressed in terms to qualify the payment obligation’, at [85].
25
See eg Schenkers v. Overland Shoes Ltd [1998] 1 Lloyds Rep 498.
26
[1992] QB 600.
27
That also seems to be the basis for the failure of a no set off clause in Axa Sun Life Services Plc v Campbell
Martin Ltd [2011] EWCA Civ 133.
28
See similarly Rohlig (UK) Ltd v Rock Unique Ltd [2011] EWCA Civ 18.
29
In Skipskredittforeningen v Emperor Navigation [1998] 1 Lloyd’s Rep 66, 75.
30
At [96].
24
The test is whether the term was a fair and reasonable one to have been
included at the time of contracting, and what was fair and reasonable at that
time should be judged by reference to factual circumstances which might
realistically be foreseen as arising in the future. The court should not be too
ready to focus on remote possibilities or to accept arguments that a clause fails
the test by reference to relatively uncommon or unlikely situations.
Popplewell J. took the same approach to an argument that the no set off clause could
potentially extend to fraud, but even if it did, that was not enough to render it
unreasonable:31
8.
I think that the parties at the time of contracting would have contemplated as
remote the possibility that either would act fraudulently towards the other, or
would deliberately and knowingly commit breaches of contract or other
wrongs. But however that may be, it is not in my view unfair or unreasonable
to require Holt Liverpool to pay the price for products in full without any
deduction for what is at that stage a mere claim, however arguable, even if for
fraud or intentional wrongdoing. In these respects I find myself in agreement
with the reasoning of Morritt LJ in WRM Group Ltd v Wood [1998] C.L.C
189 at 196 and Mance J in Skipskredittforeningen v Emperor Navigation
[1997] C.L.C 1151 at 1165
9.
Having rejected these arguments, Popplewell J. went on to find, for all the usual
reasons (commercial contract, equal bargaining power, common form of clause etc.),
that the no set off clause was reasonable. As a result, the claimant was entitled to
summary judgment on its action for the price.
10.
The Ampleforth case is notable as the first instance, as far as I am aware, of a
successful claim in negligence (common law and breach of the contractual duty of
care) against a project manager for failure to expedite the execution of the formal
contract (for construction) so that the employer was left only with the letter of intent
and had to reach a less favourable settlement for delay with the contractor. It is a
claim which has to get over quite a number of hurdles (duty, breach, causation, loss of
chance), but having got over them, the manager sought to rely on a limitation of
liability in the following terms:
Liability for any negligent failure by Us [TTPM] to carry out Our duties under
these Terms shall be limited to such liability as is covered by Our Professional
Indemnity Insurance Policy terms. Liability is also limited to such a sum as it
would be equitable for Us to pay having regard to the extent of Our
responsibility for any loss or damage suffered by You on the basis that all
other consultants, contractors and subcontractors who also have a liability
shall be deemed to have provided contractual undertakings to You on terms
no less onerous than these Terms and shall be deemed to have paid to You
such sums as it would be just and equitable for them to pay having regard to
the extent of their responsibility for any such loss or damage and in no event
shall Our liability exceed the fees paid to Us or £1million whichever is the
less
11.
31
Judge Keyser found such a limitation to be unreasonable on the following grounds: (i)
the contract required the defendant to have £10m of PII cover but that made no sense
And see the same approach of Hamblen J. in Deutsche Bank v Khan [2013] EWHC 482 (Comm)
if much of it was rendered illusory by the limitation (but quaere whether the £10m
was global cover for all claims against the defendant and not just project to project);
(ii) the limitation was not included in contracts for earlier works so it had a surprise
element.
12.
In Mir Steel C purchased the assets of a company from administrators including a hot
strip mill which was known to be the subject of an ownership claim by the supplier. It
provided the administrators with an indemnity against ‘any claim’ in respect of the
mill, but sought to argue that that could not extend to claims later brought by the
supplier for intentional wrongdoing such as inducing breach of contract and
conspiracy (there was no dispute that it covered conversion). The CA rejected that
argument since, in context, it was clear that the parties had intended to pass the risk of
any claim re the mill to C and this was reflected in the price paid by C.
13.
C had sought to rely, by analogy, on the Canada Steamship rules32 that, in the absence
of any express reference to negligence, wide general words of indemnity or exclusion
will not suffice. The CA confirmed the view that the rules are not in fact rules, but
merely guidance on the proper interpretation of a clause;33 as such, they are subject to
the overriding principle of interpretation of ascertaining the intention of the parties.
General words may not be enough for negligence (or intentional wrongdoing) because
of the inherent improbability that a party would include such wrongs in an exclusion
or an indemnity, but it was not improbable here, in the circumstances.34
14.
In Kudos Catering one sees the latest application of what is sometimes called the
‘main purpose rule’. The essential idea is that if a potentially very wide exclusion
clause is applied literally it may have the effect that a party could never be sued in any
circumstances. Not the least of the difficulties which that can lead to is the conclusion
that there was no contract between the parties, since on one side there is no
enforceable obligation. That makes no sense in circumstances in which the parties
clearly understood that they had entered into a contract with mutually enforceable
obligations. The courts therefore strive to find some more limited meaning to the
clause.
15.
In Kudos, D purported to terminate a catering contract with C in circumstances which
C said amounted to a repudiation by D which C accepted. In defence to C’s claim for
damages for loss of the profits it claimed it would have earned during the balance of
the term, D sought to rely on the following clause:
18.6 The Contractor hereby acknowledges and agrees that the company shall
have no liability whatsoever in contract, tort (including negligence) or
otherwise for any loss of goodwill, business, revenue or profits, anticipated
savings or wasted expenditure (whether reasonably foreseeable or not) or
indirect or consequential loss suffered by the Contractor or any third party in
relation to this Agreement...’
32
After Canada Steamship Lines Ld v. The King [1952] AC 192.
See earlier HIH Casualty and General Insurance Ltd and Others v. Chase Manhattan Bank and Others [2003]
2 Lloyd’s Rep 61.
34
The Canada Steamship rules are invoked and applied without comment in the Geys case which is considered
below on the issue of termination.
33
16.
At first instance, the judge had thought such wording was perfectly clear and
there could be no liability of D in contract for loss of profits. The CA held that
this ignored the problem identified above: ‘…the Agreement is, if the judge’s
construction of Clause 18.6 is adopted, effectively devoid of contractual content
since there is no sanction for non-performance by the Respondent.’35 It also
failed to give due weight to the doctrine of contra proferentem: ‘There also in
my view comes into play the presumption that neither party to a contract intends
to abandon any remedies for its breach arising by operation of law [in the
absence of clear words to that effect].’36
17.
It is however one thing to identify that the parties must have intended some limit
to an apparently wide exclusion clause and quite another to work out what that
limited meaning is. In Kudos, the CA drew on the fact that clause 18.6 appeared
in a section headed ‘Indemnities and Insurance’. It concluded that since the
relevant indemnities were given in the context of the performance of the
contract, liability ‘in relation to this Agreement’ in clause 18.6 meant liability in
relation to the performance of this Agreement, ie it did not extend to a failure to
perform:
‘This section of the agreement, as is apparent from its content if
not permissibly form its title, is not the place in which one would
expect to find a wide-ranging exclusion clause of general
application’.37
18.
This distinction (ie between defective performance and non-performance)
echoes that drawn in other cases in which the main purpose rule, or its
underlying idea has been invoked.38 Does it amount to a reintroduction of the
impermissible doctrine of fundamental breach, ie there are some serious
breaches for which liability cannot be excluded by rule of law? No, said the CA,
though the dividing line between the impermissible rule of law and the failure to
use sufficiently explicit words for serious breaches like non-performance may b
a fine one.
19.
The decision may also be noted for a further rejection of the idea that clauses
like 18.6 can be given a limited meaning by confining them to ‘deliberate
breaches’:39
I accept that, on the assumption which I have made for the purpose of
determining this preliminary issue, we are not concerned with a “deliberate” in
the sense of a “knowingly unlawful” repudiation, but I am yet to learn that the
35
At [19]. D sought to avoid this conclusion by arguing that C could get specific performance but the CA
dismissed the notion that this was the sort of contract in relation to which specific performance would be
granted.
36
At [21].
37
At [24].
38
See for example: A Turtle Offshore SA v Superior Trading Inc [2008] EWHC 3034 (Admlty); [2008] 2 CLC
953
39
See the difference of opinion in this regard in Internet Broadcasting Corporation Ltd v MAR LLC [2009]
EWHC 84 (Ch); [2009] 2 Lloyd’s Rep 295 and Astrazeneca UK Ltd v Albemarle International Corporation
[2011] EWHC 1574 (Comm) at [288]-[301]
consequences of a repudiatory breach of contract differ according to whether it
is informed or uninformed, deliberate or inadvertent, hopeful or hopeless’.
20.
Finally, one may briefly note the decision of the CA in the Olympic Airlines case that
a ‘conclusive proof’ provision in an aircraft lease was sufficiently clearly worded to
create a contractual estoppel out of a certificate of acceptance, thereby preventing the
lessee from claiming the lessee from claiming that the aircraft was not of satisfactory
quality.
Misrepresentation
Bikam Ood v Adria Cable S.a.r.l. [2012] EWHC 621 (Comm)
Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch)
1.
Recent decisions of the courts have emphasized the need for clear and express
language if the parties wish to exclude liability for pre-contractual misrepresentations,
whether in the form of the now ubiquitous ‘no representation’ or ‘non-reliance’
clauses, or otherwise.40 Ideally, this approach should be adopted in any future
drafting, but one finds a seemingly more generous approach taken in the Bikam OOD
case. The buyer of shares claimed in misrepresentation and argued that the precontractual misrepresentations upon which it had relied were those set out in the SPA
itself as representations and warranties. On the seller’s application for summary
judgment, the judge was prepared to accept the proposition that those representations
were also pre-contractual representations because of the exchange of drafts between
the parties.41 But the key issue was whether any such claim for misrepresentation had
been knocked out by the provisions of the SPA.
2.
The key provisions were as follows:
[Clause 9 set out a regime for indemnification for breach of Seller’s Warranties
and concluded] 9.10 The Buyer acknowledges and agrees that its sole remedy
against Sellers for any breach of the Sellers’ Warranties is set out in this Clause
9 and that, except to the extent that the Buyer has asserted a claim for
indemnification prior to the relevant Liability Termination Date, the Buyer shall
have no remedy against the Sellers for any breach of the Sellers’ Warranties
[“Seller’s Warranties” was defined as “the representations and warranties of the
Sellers contained in Schedule 2].
17. The rights, powers and remedies provided in this Agreement are cumulative
and not exclusive of any rights and remedies provided by law and no single or
partial exercise of any right or remedy under this Agreement or provided by law
shall hinder or prevent further exercise of such or other rights or remedies.
40
Most notably Axa Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133 in which an entire
agreement clause was found wanting because there was ‘no language to the effect that the parties were agreed
that no representations had been made or relied upon’ (Rix LJ, emphasis added). See, to similar effect, the
earlier view of Jacob J. in Thomas Witter Ltd v TBP Industries Ltd<r> [1996] 2 All ER 573.
41
Note the difference of opinion in this regard expressed in Eurovideo Bildprogramm GmbH v. Pulse
Entertainment Ltd [2002] EWCA Civ 1235 at [20] and Leofelis and another v. Lonsdale Sports Ltd and others
[2008] EWCA Civ 640 at [141].
21.1 This Agreement (together with all the documents to be entered into under
it) contains the complete agreement between the parties on the matters to which
it relates, and supersedes all prior agreements and understandings (whether
written or oral) between the parties in respect of such matters.
21.2 Each party waives its rights against the other in respect of warranties and
representations (whether written or oral) not expressly set out in this
Agreement.
21.3 Nothing in this Clause 21 limits or excludes the liability of any party for
fraud or wilful misconduct.
3.
Simon J. found for the seller. His conclusion may be summed up as follows:42
3.1
Clause 17 may have saved all rights and remedies provided by law, but that
simply begged the question of what rights survived the other provisions of the
SPA.
3.2
Clause 21.2 clearly excluded liability for representations not set out in the
SPA.
3.3
The representations which were set out in Schedule 2 were set out as
“representations and warranties” which were then defined as “Seller’s
Warranties”. In that context, while there may have been none of the express
language of “no representation” or “no reliance”, it was clear that the intention
of the parties was to confine the Buyer to claims for breach of warranty and
rule out any claims in misrepresentation at all:
“The SPA provided an agreement that there were no representations
beyond those contained in Schedule 2 and that the rights in relation to
thos representations were to be contractual rights, within the limitations
of the SPA.”43
4.
In Bikam Ood Simon J. decides, in effect, that the parties had agreed that any
representations set out in the contract, while capable of amounting to pre-contractual
representations, should only be treated as warranties. In the Sycamore case Mann J.
also reaches the conclusion that the only liability of the seller was for breach of
warranty, but on the more fundamental basis that all that was given in the contract
were warranties and they could not also qualify as pre-contractual representations. He
summarized his conclusion as follows:44
(i) There is a clear distinction in law between representations and warranties,
and that would be understood by the draftsman of the SPA. That is likely to be
the case in any transaction of this nature, but is also apparent from the SPA
itself. Representations are referred to in clause 16.3, and Warranties (with a
capital "W") are referred to elsewhere.
42
He reached it in part by endorsement of the approach to interpretation taken in the Rainy Sky case (see below)
but in part by downplaying the relevance of contra proferentem.
43
Simon J. at [47].
44
At [203].
(ii) The warranties in this case are clearly, and at all times, described as such,
and are nowhere described as representations. Those giving the warranties are
described as "Warrantors" (again with a capital "W"). The relevant wording is
always in terms of warranties.
(iii) The words of the warranting provision (clause 5) are words of warranty not
representation. There is a legal distinction between the two and…there is no
reason to extend the words beyond their natural meaning. In order to make the
relevant material a representation one has to find something in the SPA which
is capable of doing that. It is not enough that the subject matter of the warranty
is capable of being a representation. One has to find out why those words are
there. One finds that in clause 5; and what one finds is words of warranty, not
words of representation.
(iv) The Disclosure Letter (itself referred to in the SPA) also distinguishes
between representations and warranties - "The disclosure of any matter shall not
imply any representation, warranty or undertaking not expressly given in the
Agreement …".
(v) Clause 8 of the SPA contains significant limitations on the liability under
the "Warranties". It does not refer to representations. The clause is obviously a
significant part of the overall structure of liability. If the warranties were
capable of amounting to representations as well, then on the strict wording of
this clause it would not apply to any such misrepresentation. The sellers would
thus be deprived of a large part of their protection and limitation. That would be
a strange and uncommercial state of affairs, and can hardly have been intended.
This is strikingly so in relation to clause 8.2 containing the overall cap on
recoveries and on what could be recovered from each warrantor, (unless, in
relation to the overall cap a misrepresentation claim were construed as a claim
under the Agreement, which would be a forced construction). If this cap does
not apply then Mr Dawson could find himself liable for £17m, when he had
contracted for a cap of £317,000. It is also true of clause 8.1. This consequence
would be avoided if one construed claims under the "Warranties" as including
representations made in the warranty provisions, but again that would, in my
view, be a very forced construction.
(vi) There is a conceptual problem in characterising provisions in the contract
as being representations relied on in entering into the contract. The timing does
not work. The normal case in misrepresentation involves the making of a
representation, and as a result the entering into of the contract. That does not
work where the only representation is said to be in the contract itself. Miss
Newman expressly disclaimed the relevant representations being made at any
earlier time. In some cases that problem is solved by an express provision
making certain contractual statements representations. In such a case the parties
have agreed as to their nature and how they should be treated. However, that is
not the present case.
The difference in approach in the two cases appears to lie in the underlined words:
Mann J. was not able to find an agreement of the parties that they would treat any
representations only as warranties, but concluded as a result that they intended only to
give warranties; Simon J. was able to find such an agreement seemingly because of
the definition of ‘warranties’ as ‘representations and warranties’.
5.
Furthermore, Mann J. was not dissuaded from his view by the presence of fairly
typical clauses knocking out any representations not set out in the contract:45
Miss Newman said that the SPA contained a clear indication that the warranties
were capable of amounting to representations. Clause 16.3.2 provided that there
had been no reliance on any "representation other than those expressly set out in
the Transaction Documents"; and clause 16.3.3 excluded liability for "a
representation that is not set out in the Transaction Documents". There was
nothing in those documents which expressly described itself as a representation,
and in fact there was nothing which was a candidate for a representation other
than the warranties. The terms of the SPA just referred to assumed that there
was something capable of being a representation (otherwise they were writ in
water); so one should construe the only candidates (the warranties) as in fact
being representations as well.
I disagree. She is right that the provisions just referred to seem to presuppose
the possibility of some representation. However, that is not sufficient reason for
forcing that characterisation on something that would otherwise not bear it,
particularly in the light of the countervailing matters which I have held as
pointing firmly the other way. When one looks to the documentation to find
representations, there are none.
6.
In reaching his decision, Mann J. also disagreed with the earlier view of Arnold J.46
that representations made in the form of warranties in earlier drafts could retain the
character of representations:47
For the reasons given above, I think that there is no satisfactory answer to be
given by those claiming representations to have been made, to the question
which has to be asked: Why have the warranty provisions been inserted in the
contract? The answer is to be found in clause 5 in each case – they are there
because they are warranted. There is nothing more to make them into
representations. I do not think it affects the position that in the present case, as
in Arnold J's, the parties (and in particular the warrantors) knew what was
coming because drafts have been exchanged and the terms of the contract
negotiated. What the warrantors knew to be coming, or more precisely knew
they were going to be providing, were expressed to be warranties, not
representations.
45
At [204]-[205].
In Invertec Ltd v De Mol Holding BV and another [2009] EWHC 2471 (Ch)
47
At [209].
46
A creeping ‘good faith’ requirement in English contract law
(i) Not in negotiation:
Dhanani v Crasnianski [2011] EWHC 926 (Comm)
Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 1560
(Comm)
Shaker v Vistajet Group Holdings SA [2012] EWHC 1329 (Comm)
MRI Trading AG v Erdenet Mining Corp [2013] EWCA Civ 156
(ii) But in performance?
Compass Group v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB)
SNCB Holding v UBS [2012] EWHC 2044 (Comm)
Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB)
TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)
1.
The English law of contract is well known for (some would say prides itself in) not
having a general duty of good faith. Of course, much of the law of contract is
predicated on notions of good faith (e.g. misrepresentation, duress etc.) but the
approach of English law is a ‘piecemeal’ one48 and the principal reason given for this
approach is the uncertainty which may result from a very general duty of good faith.
2.
This continues to be the approach of the courts when it comes to questions of contract
formation. If the parties have failed to reach the stage of a contract in relation to the
particular deal they have in mind, it will not avail them to argue for a lesser agreement
in the form of an agreement to negotiate in good faith. This is amply confirmed by
several recent decisions,49 though it may also be noted that the courts continue to
strive not to find that the parties have created no more than an unenforceable
agreement to agree, or to negotiate.50
3.
Where good faith may be gaining a firmer footing is in the performance of valid and
enforceable contracts.
4.
If one starts with implied terms, the courts have fairly regularly now been prepared to
find that where an element of discretion is bestowed on one party, it is subject to a
‘good faith’ limitation in the form of an implied term that it will not be exercised
arbitrarily, capriciously, irrationally, or for an improper purpose.51 The extent of this
48
See Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd<r> [1989] QB 433, at 439 per Bingham
LJ.
49
See recent consideration of Dhanani v Crasnianski [2011] EWHC 926 (Comm); Barbudev v Eurocom Cable
Management Bulgaria EOOD [2012] EWCA Civ 1560 (Comm);Shaker v Vistajet Group Holdings SA [2012]
EWHC 1329 (Comm).
50
See recently MRI Trading AG v Erdenet Mining Corp [2013] EWCA Civ 156, in which the CA held that any
uncertainty about missing terms as to charges and shipping schedule could be resolved by an implied term that
such matters be resolved by arbitration.
51
See e.g. Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1
Lloyd’s LR 538 (valuation of securities by seller on termination of a forward sale); Horkulak v Cantor
Fitzgerald International [2004] EWCA Civ 1287, [2005] ICR 402 (discretion whether to grant bonus).
limitation should not be overstated since it still allows for the party in question to
prefer its own commercial interest; it is not a duty to act reasonably (save in the
Wednesbury sense), or to act with reasonable care.52 But it is just the potential
existence of such a limitation that can engender uncertainty and this raises the
question of when the necessary discretion is present.
5.
The broadest view appears to be expressed by Moore-Bick LJ in JML Direct Ltd v
Freestat UK Ltd53 in which he stated that the implied obligation not to act in an
arbitrary, irrational or capricious manner was ‘likely to be implicit in any commercial
contract under which one party is given the right to make a decision on a matter which
affects both parties whose interests are not the same …’.
6.
A literal, or broad interpretation, is checked by the decision of the CA in the Compass
case. In brief, in an NHS Trust catering contract performance by the contractor was
measured by the calculation of service failure points. The NHS Trust could then
award those points to the Contractor and levy deductions from payments due to the
Trust. The Contractor claimed that the Trust had exercised its discretion in this regard
in a way which was contrary either to the implied term referred to above, or in breach
of an express duty of good faith (the express duty is dealt with below); and which
entitled the Contractor to terminate the contract. Cranston J. agreed,54 on the basis
that the Trust was exercising a discretion which attracted the implied term.
7.
The CA disagreed, partly on the basis that such an implied term was unnecessary
because any wrong calculation or deduction was itself a breach and regulated by other
terms of the Contract, but also on the basis that it was the wrong sort of discretion.
Jackson LJ stated:
An important feature of the above line of authorities is that in each case the
discretion did not involve a simple decision whether or not to exercise an
absolute contractual right. The discretion involved making an assessment or
choosing from a range of options, taking into account the interests of both
parties. In any contract under which one party is permitted to exercise such a
discretion, there is an implied term (at [83])….The discretion conferred simply
permits the Trust to decide whether or not to exercise an absolute contractual
right (at [91]).
8.
This of course invites debate in future cases about whether the discretion involves no
more than whether to exercise an absolute contractual right. In this regard, note the
following observation from Longmore on the right to terminate a contract:55
The right to terminate is no more an exercise of discretion, which is not
to be exercised in an arbitrary or capricious (or perhaps unreasonable)
manner, than the right to accept repudiatory conduct as a repudiation of a
contract. We have already commented that the specific right to terminate
52
Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd’s LR
538.
53
[2010] EWCA Civ 34.
54
Though found that both parties had been entitled to terminate so that there was no financial relief available to
either.
55
Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419, at [46]. And see TSG Building Services Plc v South
Anglia Housing Ltd [2013] EWHC 1151 (TCC), dealt with below.
makes theoretical the question whether an Event of Default constitutes a
repudiation of the contract which can be accepted by the innocent party
as bringing the contract to an end. But no one would suggest that there
could be any impediment to accepting repudiatory conduct as a
termination of the contract based on the fact that the innocent party can
elect between termination and leaving the contract on foot. The same
applies to elective termination. Even if, moreover, it could be said that in
some sense a contracting party had a discretion to bring the contract to an
end and that such discretion should not be exercised capriciously or
arbitrarily, it by no means follows that the same considerations could
apply to allowing the contract to continue which does not require any
positive act on the part of the Non-defaulting Party.
9.
Still with the notion of an implied duty of good faith, the decision which goes furthest
in this regard and has raised a few eyebrows is that of Leggatt J. in Yam Seng in
which he advocates the recognition of a general duty of good faith, at least in the
sense of its application by way of an implied term where necessary to give effect to
the intention of the parties.
10.
The first point to be made about this decision is that it seems to have been
unnecessary to resort to any obligation of good faith. The case concerned a
distribution agreement (for the distribution of Manchester United Eau de Toilette and
other such products would you believe), entered into in informal terms without the
benefit of legal advice (or drafting). The distributor purported to terminate for breach
and claimed damages, and also had an alternative claim for misrepresentation.56 Both
claims succeeded and could be explained on entirely orthodox grounds, eg. that the
supplier was guilty of a repudiatory breach when he purported to appoint another
distributor in breach of exclusivity. But the judge decided to consider the existence of
an implied duty of good faith, and its breach by the supplier, in some detail.
11.
The salient points made by the judge may be summarized as follows, before
considering the potential impact of his decision, if any:
11.1
He reiterated the point made above that good faith is not alien to the English
law of contract. He cited numerous examples:
‘...such a concept is, I believe, already reflected in several lines of
authority that are well established. One example is the body of cases
already mentioned in which duties of cooperation in the performance of
the contract have been implied. Another consists of the authorities
which show that a power conferred by a contract on one party to make
decisions which affect them both must be exercised honestly and in
good faith for the purpose for which it was conferred, and must not be
exercised arbitrarily, capriciously or unreasonably (in the sense of
irrationally): see e.g. Abu Dhabi National Tanker Co v. Product Star
Shipping Ltd (The “Product Star”) [1993] 1 Lloyd's Rep 397, 404;
Socimer International Bank Ltd v Standard Bank London Ltd [2008] 1
Lloyd’s Rep 558, 575-7. A further example concerns the situation
where the consent of one party is needed to an action of the other and a
56
These notes are confined to the ‘good faith’ issue, but the case also contains useful and orthodox
consideration of a claim for ‘reliance damages’ for breach of contract and the measure of damages under s.2(1)
of the Misrepresentation Act 1967.
term is implied that such consent is not to be withheld unreasonably (in
a similar sense): see e.g. Gan v Tai Ping (Nos 2 & 3) [2001] Lloyd’s
Rep IR 667; Eastleigh BC v Town Quay Developments Ltd [2010] 2
P&CR 2. Yet another example, I would suggest, is the line of
authorities of which the Interfoto case is one which hold that an
onerous or unusual contract term on which a party seeks to rely must be
fairly brought to the notice of the other party if it is to be enforced’.57
11.2
Cases of negotiation (eg Walford v Miles) can be distinguished:
‘That case was concerned, however, with the position of negotiating
parties and not with the duties of parties who have entered into a
contract and thereby undertaken obligations to each other’.58
11.3
A duty of good faith is not to be implied into every contract as a default rule of
law, ie implied in law, but may be implied in fact so as to give effect to the
intentions of the parties:
‘I doubt that English law has reached the stage, however, where it is
ready to recognise a requirement of good faith as a duty implied by
law, even as a default rule, into all commercial contracts. Nevertheless,
there seems to me to be no difficulty, following the established
methodology of English law for the implication of terms in fact, in
implying such a duty in any ordinary commercial contract based on the
presumed intention of the parties’.59
11.4
In determining such an implied term one takes into account the ‘background’
and the background includes ‘shared values and norms of behaviour’.
11.5
Good faith goes beyond honesty and includes ‘fidelity to the parties’ bargain.60
11.6
It is not determined subjectively:
‘Although its requirements are sensitive to context, the test of good
faith is objective in the sense that it depends not on either party’s
perception of whether particular conduct is improper but on whether in
the particular context the conduct would be regarded as commercially
unacceptable by reasonable and honest people.’61
11.7
It may extend to a duty to disclose information:
‘While it seems unlikely that any duty to disclose information in
performance of the contract would be implied where the contract
involves a simple exchange, many contracts do not fit this model and
involve a longer term relationship between the parties which they make
a substantial commitment. Such “relational” contracts, as they are
sometimes called, may require a high degree of communication,
57
At [145].
At [122].
59
At [131]
60
This is a concept also recognised by Cranston J. in the Compass case above.
61
At [144].
58
cooperation and predictable performance based on mutual trust and
confidence and involve expectations of loyalty which are not legislated
for in the express terms of the contract but are implicit in the parties’
understanding and necessary to give business efficacy to the
arrangements. Examples of such relational contracts might include
some joint venture agreements, franchise agreements and long term
distributorship agreements.’62
12.
What to make of all of this? First, it is far too soon yet to say that English law now
has a general duty of good faith. If it does end up with one, there is much to be said
for the judge’s view that, in practice, not that much will have changed because of its
piecemeal acknowledgement in the form of a number of discrete instances already.63
13.
But it may be that it is just the recognition of a general duty, based on standards of
‘commercially acceptable’ behavior that is the cause for concern because of the
uncertainty it may create. Those who think that it is the certainty of an English law of
contract which does not include a general duty of good faith which makes it such a
saleable product will not be convinced of the following:
‘the fear that recognising a duty of good faith would generate excessive
uncertainty is unjustified. There is nothing unduly vague or unworkable about
the concept. Its application involves no more uncertainty than is inherent in the
process of contractual interpretation’.64
14.
There is, of course, nothing to stop parties agreeing to an express duty of good faith, but
the issue then is what is meant by good faith. The courts have stressed that this all
depends on the context in which good faith is called for.65 This is reiterated by the CA in
the Compass case,66 but they rejected a claim based on such an express obligation on the
basis that, as a matter of construction, good faith was confined to certain objectives and
did not cover the conduct of the Trust in the awarding of service failure points, or the
levying of deductions.
15.
An express obligation to act in the ‘utmost good faith’ may add something else.67 See
most recently the observations of Cooke J. in the SNCB case:68
There is, in my judgment a clear distinction between “good faith” on the one
hand and “utmost good faith” on the other. The latter concept is familiar in the
context of insurance, with its concomitant duties of full disclosure, but has been
held in other contexts, when used in commercial contracts, to impose “a
62
At [142].
It is noticeable that the judge then found it necessary to put the implied duty of good faith in the present case
on a concrete footing in the form of the supplier’s obligation not to give false information on which the
distributor would rely (namely the retail price of the products on domestic sale (the distributor deal with ‘duty
free sales’).
64
At [152].
65
See Berkeley Community Villages v Fred Daniel Pullen [2007] EWHC 1330 (Ch); CPC Group Ltd v Qatari
Diar Real Estate Investment Co [2010] EWHC 1535 (Ch).
66
In which it was found to amount to no more than a duty to act honestly, which would appear to render it rather
superfluous.
67
In Horn v Commercial Acceptances [2011] EWHC 1757 (Ch), the parties agreed to act ‘in absolute faith’
towards each other. Peter Smith J. (obiter) equated this with ‘good faith’ and held that a finding of dishonesty is
not a pre-requisite for a breach of good faith (this issue was not considered on appeal: [2012] EWCA Civ 958.
68
At [72].
63
contractual obligation to observe reasonable commercial standards of fair
dealing, faithfulness to the agreed common purpose and consistency with the
justified expectations” of the other party. (See e.g. Morgan J in Berkeley
Community Villages v Fred Daniel Pullen [2007] EWHC 1330 (Ch)). The
content of the “utmost good faith” obligation may well vary with the context or
contract in which it is found, but in my judgment, it is an expression which has
conveyed a meaning beyond “good faith” for a very long period of time. A duty
to exercise “good faith” in doing something is one which is usually to be
contrasted with a duty to exercise reasonable care. It connotes subjective
honesty, genuineness and integrity, not an objective standard of any kind,
whether reasonableness, care or objective fair dealing. It cannot be equated with
“utmost good faith” and although its exercise in practice may involve different
actions or restraint, the concept is not one which goes beyond the notion of
truthfulness, honesty and sincerity.
16.
The approach taken by the CA in the Compass case is confirmed by the very recent
decision of Akenhead J. in the TSG case. The parties entered into a four year contract
for gas servicing but agreed in a provision that either party could ‘terminate…at any
time during the term’. When D terminated, C challenged the termination on grounds
of good faith.
17.
So far as any express term was concerned, C could point to the following clause:
1.1 The Partnering Team members shall work together and individually in the
spirit of trust, fairness and mutual co-operation for the benefit of the Term
Programme, within the scope of their agreed roles, expertise and responsibilities as
stated in the Partnering Documents, and all their respective obligations under the
Partnering Contract shall be construed within the scope of such roles, expertise and
responsibilities, and in all matters governed by the Partnering Contract they shall
act reasonably and without delay.
Akenhead J. found that, as a matter of construction, clause 1.1. did not constrain the
‘unfettered’ right to terminate:69
‘The use of the words "in all matters governed by the Partnering Contract" is
readily comprehensible in relation to the assumption, deployment and performance
of roles, expertise and responsibilities; it is at least odd that the word "matters" is
used in this context if what is intended is that each and every obligation, power or
right must be exercised reasonably.’
18.
As for any implied limit of good faith on the right to terminate, based on the Yam
Seng decision, above, it is fair to say that Akenhead J. was not having it:70
‘Because cases and contracts are sensitive to context, I would not draw any
principle from this extremely illuminating and interesting judgment which is of
general application to all commercial contracts. I do not see that implied
obligations of honesty or fidelity to the contractual bargain impinge in this case at
all. There is certainly no suggestion or hint that there has or might have been any
dishonesty in the decision to terminate. So far as fidelity to the bargain is
69
At [37].
At [46]. But see a suggested ‘good faith’ limit of a sort in Timeload v. British Telecommunications Plc [1995]
EMLR 459.
70
concerned, that depends upon what the bargain actually was. In any event, fidelity
to the bargain is largely already covered by the expressed terms of Clause 1.1 and,
at least to that extent, does not have to be implied as well.’
Termination
Cavenagh v William Evans Ltd [2012] EWCA Civ 697
Leofelis SA v Lonsdale Sports Ltd [2012] EWHC 485 (Ch), [2012] EWCA Civ 985, [2012]
EWCA Civ 1366
Crocs Europe BV v Anderson [2012] EWCA Civ 1400
Geys v Societe Generale [2012] UKSC 63
Cukurova Finance International Ltd v. Alfa Telecom Turkey Ltd [2013] UKPC 2
The MV Astra [2013] EWHC 865 (Comm)
Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577
TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)71
White Rosebay Shipping SA v Hong Kong Chain Glory Shipping Ltd [2013] EWHC 1355
(Comm)
1.
The facts in the Leofelis case are complicated but may be reduced to the following: (i)
in a 2005 action C claimed breach of exclusivity by the licensor D under a TM licence
and sought damages projected to the end of the licence (potentially until 2014); (ii) in
2007, C purported to accept what it alleged to be a repudiatory breach by D and
terminated the licence. D disputed that and the question of who was guilty of
repudiation became the subject of a 2009 action, in which C accepted that the breach
it had relied upon did not succeed but relied on the principle that it could invoke
another repudiatory breach by D of which it had been unaware at the time of
termination (under the Boston Deep Sea Fishing principle72). The action before Roth
J., by way of an application by D for summary judgment, or strike out, was concerned
with the effect of the termination in 2007 on the claim for damages in both the 2005
and 2009 action.
2.
So far as the 2005 action was concerned, Roth J. applied the Golden Victory73 to
conclude that the damages claim could only be made up until the termination since it
was now known that the licence did not run its full term. The fact that it may not have
run its full term because of D’s repudiatory breach could be reflected in the damages
claim in the 2009 action. The damages there would be for loss of bargain and include
losses due to the unexpired term of the licence; such loss could include the inability to
project the damages claim in the 2005 action beyond the date of termination.
3.
But when it came to the 2009 action, Roth J. and counsel ran into a problem in that
they ran out of authority to guide them. It is clear that the Boston Deep Sea Fishing
principle allows C to invoke a repudiatory breach of which it was unaware to justify
its termination and avoid liability for a wrongful termination. It is equally clear that C
71
Dealt with under ‘good faith’ below.
Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339.
73
[2007] 2 AC 353. The effect of the Golden Victory principle, or the Bwlffa principle (after an earlier
decision), is that where the assessment of damages at the date of breach (or the date of acceptance of breach)
depends on a contingency (eg in Leofelis the remaining term of the licence) but that contingency is resolved by
later events prior to the hearing, the court may take into account what it now knows to have happened.
72
can also claim damages for breach of D’s obligations prior to termination. But can it
claim loss of bargain damages (ie those due to the fact the remainder of the contract
will not now be performed) in circumstances where it was not in fact terminated for
the reason C now relies upon. Here, authority ran out. Roth J. held that the answer
had to be derived from first principles and decided that C could not claim for loss of
bargain:74
In this situation, if [D] had not committed the repudiatory breach, the contract
would still have come to an end as [C] decided to terminate it without knowledge
of that breach by [D]. [C] therefore should not be able to rely on [D]’s
repudiatory breach as the grounds for recovering damages for the contract
coming to an end, i.e. for loss caused by [D]’s non-performance of its primary
obligations thereafter...
...The unknown breach of the Agreement by [D] was not accepted by [C] as a
repudiation for the obvious reason that it was unknown. Therefore, that alleged
breach, although its nature met the test for a repudiatory breach, cannot be the
cause of the termination and thus of the loss that flowed from the termination.
4.
With respect, this is a little doubtful. As counsel for C submitted it allows D to have
benefited from concealing the earlier breach on which C now relies. Nor was C able
to avoid this conclusion on the basis that its letter of termination stated “without
prejudice to any other breaches”: “This lawyer’s catch-all cannot alter the position in
fact, which is that [C] terminated the Agreement irrespective of the [earlier
repudiatory breach] or any circumstances surrounding it”75 (quaere whether a more
widely, or explicitly, drafted letter of termination would suffice).
5.
This result might be avoided by taking the fiction of the Boston Deep Sea Fishing
principle to its logical conclusion, ie C is deemed to have terminated for the reason
now relied upon. However, it is precisely this argument which seems to be rejected
by the Court of Appeal:76
The principle underlying the Boston Deep Sea Fishing case has never been put
forward as being that the unknown but justified ground for accepting a
repudiation is to be read into the letter or other communication by which the
unjustified reason is asserted. I do not see that the principle can or should be
understood as extending that far. It does not allow the innocent party to assert
that it did accept repudiation on the correct (though unknown) ground; rather it
allows that party to meet a claim that its conduct in terminating the contract,
though apparently unjustified because done on the wrong ground, is to be taken
as justified because it could have been done on the right ground, not because it
was done on the right ground. It operates as a shield against a claim for
damages on the basis of wrongful termination, not as a sword to claim damages
(for the future) on the basis of justified termination.
The appeal was made principally on the ground that, even if Roth J. was correct, C’s
claim did not fail as a matter of causation because the alleged repudiatory breach
which was relied on incorrectly at the time of termination was part of continuous
74
At [65]-[66].
At [67].
76
[2012] EWCA Civ 985 at [33] per Lloyd LJ.
75
conduct of D which included the later repudiatory breach which C now sought to rely
on. As a consequence it did not follow that even if there had been no repudiatory
breach by D, the contract would still have been terminated by C on the mistaken
basis. This ground for appeal required leave to amend which was rejected in a further
hearing because it could not be made out on the facts.77
6.
A further limit to the Boston Deep Sea Fishing principle is recognised in the
Cavenagh case. D was paid six month’s salary in lieu of notice on termination of his
contract of employment, but C later discovered that he was guilty of serious
misconduct that would have justified immediate dismissal without payment. C was
not entitled to return of the payment; the Boston Deep Sea Fishing principle is
confined to defending a claim that termination which was wrongful for the reasons
actually stated can be made lawful by reliance on the newly discovered valid basis for
termination. Those were not the circumstances of the Cavenagh case. Mummery LJ
suggested that C might have brought a claim for breach of the fiduciary duty on D to
disclose his wrongdoing78 or might have argued that the agreement to make payment
in lieu was void or voidable by reason of a vitiating unilateral mistake of C, which
was known to D, about its right to terminate the service agreement summarily and
without pay in lieu on grounds known to D, but unknown to the C.79
7.
An agent disparages the business of his principal; in particular its ordering process (by
posting a mock film on the internet). Does it amount to a breach entitling the
principal to terminate the contract? Not in the Crocs Europe case. The agent was in
breach of reg. 3 of the Commercial Agents Regulations (a commercial agent must
look after the interests of his principal and act dutifully and in good faith), but the
effect of any breach is left to national law (reg. 5(2)). As a matter of English law,
such obligation does not amount to a condition and nor was the breach sufficiently
serious (even if it could also be argued to amount to a breach of fiduciary duty: ‘no
authority cited supports the defendant’s radical proposition that any breach of the
fiduciary duty of loyalty necessarily and automatically results in the repudiation of the
agency contract. Breaches of fiduciary duty, like breaches of other kinds of duty, may
have different consequences and give rise to different remedies depending on an
objective assessment of the effect of all the circumstances surrounding the breach’, at
[24]).
8.
One might also briefly note the (obiter) decision of Flaux J. in The MV Astra that
punctual payment of hire under a charterparty is a condition so that any breach entitles
the other party to terminate and a claim ‘loss of bargain’ damages. The status of such
a clause has been the subject of a difference of opinion in the courts for some years so
this may not be the last word on this.
9.
In Geys v Soc. Gen the Supreme Court was required to consider, and affirmed, that
with employment contracts, like any other contract, a repudiatory breach does not
result in the automatic termination of the contract; C must have elected to terminate.
This issue mattered in Geys because of the following circumstances: (i) D dismissed C
‘with immediate effect’ on 29 November 2007; (ii) D was entitled to do so by making
payment of three months’ salary in lieu of notice, but made no such payment until 18
77
[2012] EWCA Civ 1366.
See Item Software (UK)Ltd v. Fassihi [2004] IRLR 928.
79
See Horcal Ltd v. Gatland (1984) 1 BCC 99,089 at 99,092
78
December 2007 and did not state that it was made pursuant to the relevant termination
provision; (iii) D finally did that by letter on 4 January 2008 which took effect on 6
January 2008. Was the contract therefore terminated on 29 Nov, 18 Dec, or 6 Jan?
This mattered because if it was after 31 Dec 2007 a different formula applied to
determine the termination payment due to C and the difference was very substantial.
10.
The purported dismissal on 29 Nov was clearly unlawful and amounted to a
repudiatory breach by D but at no point did C accept such repudiation; indeed, he
wrote on 2 January expressly to affirm the contract. The Supreme Court upheld the
finding that the contract was not lawfully terminated on 18 Dec because the payment
was not accompanied by the necessary notice. So, the argument left for D was that
the contract was automatically terminated by its own repudiatory breach on 29 Nov.
There had been some apparent support for such ‘automatic’ termination, but the
prevailing view had been that employment contracts were no exception to the general
rule that election is necessary.80
11.
The majority agreed that employment contracts were no exception, mainly on the
principled basis that it would too easily allow an employer potentially to benefit from
its own wrong, by committing a repudiatory breach at an advantageous date. In many
cases, the practical impact of this will be limited since the principal benefit to the
employee of affirming the contract is to do the work and get paid, but the employer
cannot be compelled to provide the necessary work which the employee will need
have to have fulfilled in order to be entitled to payment. As noted by Lord Wilson:81
...the law has been clear that, save when, unusually, a contract of employment
specifies otherwise, the mere readiness of an employee to resume work,
following a wrongful dismissal which he has declined to accept, does not entitle
him to sue for his salary or wages. “He cannot”, as Salmon LJ said in Denmark
Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699, 726, “sit in the
sun...”. The law takes the view that it is better for the employee (as well, of
course, as for the employer) that his claim for loss of wages or salary should be
confined to a claim for damages and therefore be subject to his duty to mitigate
them by taking all reasonable steps to find other work. This principle is not
without its critics. In Boyo v Lambeth London Borough Council [1994] ICR
727, 747 Staughton LJ observed that, unconstrained by authority, he would not
have accepted it; and, in his dissenting judgment in Cerberus Software Ltd v
Rowley [2001] ICR 376, Sedley LJ suggested, at p 386, that it was “one of the
great unresolved questions of employment law”. But, even if the question can
be said to be unresolved, this court is not invited to resolve it. The facts of this
appeal leave no room for an attack on the principle. It has added to the making
of a contract of employment into a special case – but, again, only in terms of
remedies.
Thus, in most cases, the employee will be compelled to accept the breach (if only by
the conduct of seeking alternative employment) and sue for damages. The slightly
unusual circumstance in Geys is that C’s claim was not for wages but for a
termination payment, the amount of which turned on the date of termination.
80
81
See discussion in Treitel: The Law of Contract 18-006.
At [79].
12.
Lord Sumption dissented and did so on the basis that there was no ‘exception’ where
employment contracts are concerned. Rather, where, in any contract, there is an
element of co-operation needed from D, there is, in effect, an automatic termination:82
These decisions are authority for a general rule that the innocent party to a
repudiated contract cannot treat it as subsisting if (i) performance on his part
requires the co-operation of the repudiating party, and (ii) the contract is
incapable of specific performance, with the result that that co-operation cannot
be compelled. The purpose of the right to treat a repudiated contract as
subsisting is to enable it to be performed at the option of the innocent party. It is
difficult to see why the law should recognise such a right in a case where the
contract cannot be either performed or specifically enforced.
The principal decision to which he is referring is White & Carter (Councils) Ltd v
McGregor83 and his dissenting view raises the fundamental point about whether that
decision is concerned with termination, ie the contract terminates because cooperation is needed (Lord Sumption’s view) or remedies, ie the contract subsists until
election, but some remedies may not be available, including the action in debt (for, eg.
wages) if it requires the co-operation of D to earn it (the majority’s view).
13.
In Cukurova the Privy Council has clarified the scope of the doctrine of relief against
forfeiture in the context of the termination of commercial contracts. D had loaned
$1.352bn to C, for which the security was C’s 51% shareholding in another company.
There was evidence that D hoped for C’s default as a means of acquiring the
shareholding, via appropriation,84 and that D had attempted to first bring this about
and then make it difficult for C to raise the finance needed to discharge the loan. In
these circumstances, C applied for relief against forfeiture.
14.
When it comes to such relief, there are two separate issues: first, does the court have
jurisdiction to grant relief; second, it if does should relief be granted?
15.
As to the first, the PC confirmed that the jurisdiction exists in only in relation to the
forfeiture of proprietary or possessory rights under the contract and not purely
contractual rights,85 and where the primary object of the contract was to secure a
stated result which could be effectively attained when the matter came before the
court (eg by the award of damages or other monetary relief), and where the forfeiture
provision was added as security to produce that result.86 The property in question is
not confined to real property and thus the power to grant relief extended to the
equitable mortgage of shares granted to secure the repayment to the loan in the
present case.
82
At [116]. See also at [130]: ‘The general principle is that the innocent party to a repudiated contract cannot
treat it as subsisting unless he can either perform it without the co-operation of the other party or compel that cooperation. In the case of a contract of employment, neither condition is satisfied’.
83
[1962] AC 413. Dealt with below in relation to the Isabella Shipping case.
84
The remedy of appropriation is available under the Financial Collateral Arrangements (No 2) Regulations
2003. The PC found that there was nothing in the Regulations precluding relief.
85
See The Scaptrade [1983] QB 529, [1983] 2 AC 699.
86
See On Demand Information Plc v. Michael Gerson (Finance) Plc [2002] 2 WLR 919.
16.
As to the second, whether relief should be granted, the PC highlighted previously
identified factors such as C’s conduct, ie the gravity of any default and whether it was
wilful, and any disparity between the value of the property being forfeited when
compared with the damage caused by the breach.
17.
The need for certainty in commercial contracts makes the granting of relief unlikely,87
but the PC granted relief in Cukurova on the basis that C repaid the loan plus interest
and costs (to be determined). The PC pointed to the unusual features of the case; in
particular the conduct of D in seeking at all times to obtain the shares themselves for
the control they gave over the group of companies in question, and not merely as
security for the loan.
18.
The Telford Homes case is a decision very largely on its facts but one which confirms
how fraught it can be to make the call that, in the absence of breach of condition, a
breach was sufficiently serious to justify termination for repudiatory breach. D was to
develop four blocks of flats, with a gap of 7 months between completion of the first
two and the last two, under an agreement for a lease and C would take 999 year
leases. Completion of the first two was delayed and work on the second two was
suspended because of financial difficulties. On 22 October 2010, C terminated the
contract, unaware that work on the second two blocks had restarted on 4 October.
The judge found that D’s repudiation occurred in July 2010 when it was clear that
completion could not take place in accordance with the target dates, and that C’s
termination was lawful.
19.
The CA disagreed, for two reasons:
a. While accepting that the usual tests are difficult to apply (was C deprived of
substantially the whole benefit of the contract; did the breach go to the root of
the contract), one should ask first what was the benefit of the contract to C.
Here, it was the 999 year leases and, in relation to them, the delay had/would
cause little or no loss: ‘I do not think that the judge gave adequate weight to
the ultimate objective of the contract, viz. the grant to Ampurius of 999 year
leases. He concentrated on the expected effects on the marketing period’. But
even in relation to the marketing period, the parties had envisaged a period
when two blocks would have been completed, but work continued on the other
two and there was no evidence that the delay had caused any loss to C.
b. The judge placed stress on the uncertainty of knowing when work on the
second two would have been completed, but this raised the question of when
to assess if the breach was repudiatory. The judge went for July 2010 (the
date of breach) but by the date of acceptance (22 October 2010) work had
resumed. The CA found that the relevant date was the date of acceptance and
not the date of breach; previous dicta that one looked to the former were not
confined to cases of anticipatory breach: ‘A breach of contract, although
serious, may be capable of remedy. If it is remedied before the injured party
purports to exercise a right of termination, then the fact that the breach has
been remedied is an important factor to be taken into account. Likewise if
87
See The Scaptrade above.
there is delay in performance of an on-going obligation it may well be possible
for the delay to be made up by faster performance.’88
20.
Finally, in the White Rosebay case charterers were found to have been guilty of
renunciation when, after a lengthy period of late and non-payment of hire, they failed
to meet a statutory demand on 7 November. The owners formed the decision to
withdraw (terminate) on 11 November, but then allowed the vessel to discharge the
cargo (on the reasonable commercial basis that such discharge would be at the
charterer’s expense).
21.
The arbitral tribunal found, and Teare J. agreed, that an innocent party has a
reasonable time in which to make up its mind whether to terminate and there had
therefore been no affirmation merely as a result of the four day delay, but the contract
had been affirmed when the owners allowed the discharge.89 The case is a good
illustration of the difference between mere delay which may amount to affirmation,
but where allowances will be made such as the reasonable time to come to a decision,
and doing something which is only referable to the continuation of the contract which
will be regarded as affirmation (quaere if there had not been any evidence that the
owners had decided to terminate before discharge was allowed?).
22.
All was not lost for the owners since Teare J. considered that this was a case where
the charterers may have been guilty of a continuing renunciation so that the charter
could be terminated even after affirmation, but since the tribunal had not made any of
the relevant findings in this regard, the case was remitted to them for further
consideration.
Damages and the date of assessment
Hooper v Oates [2013] EWCA Civ 91
1.
Over the years, much ink has been spilled on the date of assessment for damages for
breach of contract; in particular, on the ‘date of breach rule’ and exceptions thereto.
But it is clear that the reality is that there is no date of breach rule, nor any exceptions.
Damages are assessed on the date which is most appropriate to compensate C for his
loss. And what primarily dictates that loss is C’s requirement to mitigate: whether he
can, and when he should have done so. All of this is nicely summed up by Lloyd LJ
in the Hooper case in the following passages which also make clear what the issue
was in the Hooper case itself:
38. It seems to me that the breach date is the right date for assessment of
damages only where there is an immediately available market for the sale of
the relevant asset or, in the converse case, for the purchase of an equivalent
asset. This is most unlikely to be the case where the asset in question is land.
If the defaulting party is the buyer, much will depend on what the seller
does in response to the breach, as is suggested in Chitty at paragraph 26014, cited above. If he resells, the buyer may be able to show that, in so
doing, the seller failed to take reasonable steps to mitigate his loss, for
88
At [63].
And it did not assist the owners that they had expressly ‘reserved their rights’; if you have affirmed, you have
affirmed.
89
example by taking too long, or failing to follow proper professional advice,
or in some other way. Absent any feature of that kind, the eventual resale
price is likely to be the figure to be set against the contract price for
assessment of the damages, not because it represents the market value at the
date of the breach, but because it shows what loss the seller has suffered,
uncomplicated by issues of remoteness or failure to mitigate. If the property
market has declined during that time, it is of no avail for the defaulting
buyer to say that this should not be laid at his door. If he had completed the
contract, he would have suffered that decline in value, so this is part of the
loss for which the seller needs to be compensated.
39. If the vendor does not resell, and takes no steps to do so, then it may be
that the date of the breach is to be taken as relevant, or a date soon after that,
when he is shown, or taken, to have decided to retain the property. In the
present case, by contrast, the seller only decided not to resell after taking
reasonable steps to find a buyer. I can see no basis of policy or principle, in
such a case, for imposing on the vendor the value as at the breach date rather
than the later date when, after taking steps with a view to mitigating his loss,
he finally decided to retain the property upon the failure of his attempt to
mitigate.
40. In the present case, there has been no suggestion that Mr and Mrs
Hooper failed to take reasonable steps to mitigate their loss. Any such
contention would have to have been pleaded and explored in evidence.
Accordingly, it seems to me that the appropriate date, as I have said, is the
date when they brought to an end their reasonable attempts to resell and
took the property back for their own use.
Remoteness
Rubenstein v HSBC Bank Plc [2012] EWCA Civ 1184
Petro-Chemical Industries Company (KSC) v The Dow Chemical Company [2012] EWHC
2739 (Comm)
John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37
1.
Rubenstein is notable as a relatively rare instance where a bank has been found liable
for mis-selling a financial product (mainly because the investor was an individual and
(because he was a lawyer perhaps) he had clear documentary evidence as to the
priorities in his investment referred to below). It is noted here for the approach of the
CA to the question of remoteness.
2.
The bank was held liable for loss of capital in an investment notwithstanding the
unprecedented turmoil in and after autumn 2008 which led to it (the trial judge had
found that the bank was negligent and in breach of statutory duty but that the loss was
too remote). The investor had made clear his priority not to risk capital and had been
told the investment was equivalent to a cash deposit; avoiding loss of capital was
therefore within the ‘scope of duty’ of the bank and the occurrence of the very thing
they were required to avoid could not be too remote, however it came about.
3.
The CA therefore reached its result, in part, by a further endorsement of the approach to
remoteness taken in The Achilleas,90 ie that one asks whether the type of loss fell within
the scope of the duty of D or whether it was a type of loss for which D ‘assumed
responsibility’. In this regard, the CA drew a possible distinction between the claim for
breach of statutory duty on the one hand and the claims in contract (breach of
contractual duty of care) and tort (breach of common law duty of care), but not as
between contract and tort; thus appearing to endorse the view that where a claim in tortr
is, or may be, made concurrently on the basis of an underlying contractual relationship,
the same test of remoteness is applied.91
4.
The Dow case is one in which the current approach to remoteness was applied by an
arbitral tribunal. Aspects of their reasoning have entered the public domain because the
defendants applied for remission to the tribunal on the grounds that their approach
amounted to serious irregularity within the meaning of s.68 Arbitration Act 1996.
5.
D had failed to close a joint venture under which under which it agreed to purchase
50% of C’s business and assets for $7.5bn. C suffered losses of c.$2bn because of the
emergency measures it needed to take to finance its purchase of another business from
T because it did not have the proceeds of the JV. D was aware from the market, and
from advice from its own financial advisers, of the contract between C and T, but C
was said to have stated in the negotiations that completion of the C-T contract was not
dependent on completion of the D-C contract. D argued that such losses were too
remote because they could only fall within the second limb of the test of remoteness
laid down in Hadley v Baxendale and the requisite ‘special knowledge’ of such loss had
not come from C, and even if they were reasonably contemplated this was a case where
nonetheless D had not assumed responsibility because of C’s statements that the C-T
contract was not dependent on the C-D contract.
6.
The tribunal found that the losses were not too remote. The claim of serious
irregularity from the tribunal was based principally on the following two paragraphs of
the Award:
145. There seems to be no reason to place a burden on Dow to show that it or
its agents directly communicated to PIC the would-be “special circumstances”
of this case …in order to satisfy the Second Limb. To the contrary, it seems
to us, this was a sophisticated transaction involving sophisticated parties who
were all well aware of the commercial circumstances surrounding the
transaction, including Dow’s intention to apply the funds to be received from
PIC at closing to the Rohm & Haas deal.
146. Accordingly, PIC reasonably should have expected to be held liable for
costs associated with its failure to close, thus forcing Dow to secure elsewhere
substitute funding for the purchase of Rohm & Haas. PIC’s knowledge was
not gained, as Chitty warns, in a “purely casual way,” but rather through hired
professionals, its financial advisers…, through whom PIC was made well
aware that Dow would be put in a distressed position without the K-Dow
proceeds.
In reaching the conclusion in paragraph 145 the Tribunal endorsed the following test
for determining how special knowledge of a type of loss must be communicated:
90
[2008] UKHL 48; [2009] 1 AC 61.
See also the earlier decision in Brown v. KMR Services Ltd [1995] 4 All ER 598 where no distinction appears
to have been drawn.
91
[T]he test appears to be: have the facts in question come to the defendant’s
knowledge in such circumstances that a reasonable person in the shoes of the
defendant would, if he had considered the matter at the time of making the
contract, have contemplated that, in the event of a breach by him, such facts
were to be taken into account when considering his responsibility for loss
suffered by the plaintiff as a result of such breach. The answer to that
question may vary from case to case, taking into consideration such matters
as, for example, the nature of the facts in question and how far they are
unusual, and the extent to which such facts are likely to make fulfilment of the
contract by the due date more critical, or to render the plaintiff’s loss heavier
in the event of nonfulfilment.92
7.
The complaint of serious irregularity was (a) failure by the Tribunal to deal with all
the issues that were put to it (section 68(2)(d) of the 1996 Act), and (b) failure by the
Tribunal to comply with its general duty under section 33 of the 1996 Act (section
68(2)(a)). Both were rejected by Andrew Smith J.
8.
The ‘issue’ which the Tribunal was said to have failed to consider was the
‘assumption of responsibility’ question. But Andrew Smith J. held that they had
considered it and their conclusion was to be found in the underlined words above:93
I consider that the Tribunal dealt with the issue, admittedly succinctly, in the
first sentence of paragraph 146 of the award: “Accordingly, PIC should
reasonably have been expected to be held liable for costs associated with its
failure to close” (emphasis added). This echoes the language of the objective
test for assumption of responsibility identified in The “Achilleas” (especially
at paragraph 9 per Lord Hoffmann and paragraph 32 per Lord Hope), and it
can be traced to the language of Robert Goff J in The “Pegase”, which had
been set out in the award. It is the Tribunal’s answer on the assumption of
responsibility issue.
9.
If that amounts to a conflation of the test of foreseeability and assumption of
responsibility that does not mean the latter was not considered since they are both
ultimately concerned with determining remoteness, as D’s own pleadings had
conceded.
10.
Any suggestion that the Tribunal had failed to consider the assurances given by C to
D about the need for the funds from the C-D contract to finance the C-T contract,
because they were not referred to expressly, was dealt with by a finding that the
Tribunal must simply have given more weight to the information received by D from
its financial advisers.
11.
An engineer, D, in breach of contract fails to do the work required of him by the
agreed date with the result that the development is delayed and declines in market
value. Is the engineer liable for the market loss or is it too remote?
12.
It is not too remote said the judge in Grimes and the CA agreed. The CA confirmed
the prevailing view that the decision of the HL in The Achilleas did not effect a major
92
Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The “Pegase”), [1981] 1 Lloyd’s Rep 175,
183 per Robert Goff J.
93
The submission that the Tribunal failed to consider the test of assumption of responsibility was perhaps not
aided by the fact that Lord Hoffmann was one of the members of the Tribunal.
change in the approach to remoteness. One starts with the test of reasonable
contemplation (or foreseeability) of the type of loss in question. The answer this
provides then needs to be checked to see if there is any evidence to suggest that it
does not accord with the presumed intention of the parties, objectively ascertained
(which means ascertained by the court).
13.
Nothing terribly new or startling in this, but the case is of some additional interest
because it involved loss due to market fluctuation and, in The Achilleas, some of their
Lordships appeared to suggest that such loss by its very nature was too remote
(Tomlinson J. in the later Pindell case94 referred to the irrecoverability of loss due to a
volatile market as ‘axiomatic’).
14.
This could never have been right, if only because it is contradicted by the decision of
the HL in another leading remoteness case, The Heron II. And so the CA confirms.
Extraordinary or unprecedented market loss may be too remote, but this was not such
a case: it involved a fall over a prolonged period for which D was responsible. Such
loss was easily foreseen at the time of the contract and there was nothing to suggest
that this was not a type of loss for which D assumed responsibility.
15.
It may be noted that Tomlinson LJ was content to withdraw his earlier ‘axiomatic’
comment made as Tomlinson J:
Some markets are extremely volatile by nature. Furthermore, circumstances at
the time of contracting may be such as to render it foreseeable that extreme
volatility could be experienced in certain foreseeable circumstances within the
lifetime of the contract. Accordingly, I wonder in retrospect whether I was
correct in paragraph 88 of my judgment in Pindell to attribute to Lord Rodger,
Lord Walker and Baroness Hale in The Achilleas, above, the view that the
consequences of extremely volatile market conditions are, axiomatically,
irrecoverable. Happily this issue does not arise for decision here, as indeed it
did not arise for decision in Pindell. When it does, I doubt if it permits of so
trenchant or simplistic an answer as I was then, perhaps incautiously, inclined
to supply.
Contracting on-line & consideration
Spreadex Ltd v Cochrane [2012] EWHC 1290 (Comm)
1.
Spreadex concerned an application for summary judgment where the assumed facts
were that D had left his on-line account open and, during this time, trades were made
by his girlfriend’s son which led to a loss. D’s defence was that he had not made the
trades and his girlfriend’s son had no authority to make them on his behalf.
2.
C’s application for summary judgment was based on a term in the Customer Agreement
which regulated the trades and to which D had assented by clicking on-line. The term
in question stated: ‘You will be deemed to have authorised all trading under your account
number’.
3.
This did not avail C because it could only be relevant if it was binding on D and the
Customer Agreement was not itself a binding agreement. Its terms and conditions
94
Pindell Ltd v Air Asia Berhad [2011] 2 All ER (Comm) 396.
would form part of any individual trades if they were binding, but the very issue in the
present case was whether the trades in question were binding on D.
4.
The Customer Agreement was not binding because there was no consideration from C
(indeed C retained the ‘absolute discretion’ to refuse any bet. Counsel for C suggested
that the consideration could be found in granting access to the on-line platform or
maintaining the account, but C reserved the right to withdraw them at any time, so no
obligation there.
5.
As the judge held:95
The consideration necessary to support a contract can of course be found in
conduct alone, even if not required by a contractual obligation, if it is a benefit
provided or a detriment suffered. That test is, however, in my view not satisfied
by arrangements which merely facilitate the making by the two parties of ad
hoc contracts in the form of the individual trades. The provision of an on-line
interactive platform is in effect simply a more modern equivalent of the
expressed readiness of a potential contracting party (also covered in the
Consumer Agreement) to enter into contracts by receiving and responding
orally to telephone calls.
6.
For good measure, the judge found that, even if binding, the term in question was unfair
under the Unfair Terms in Consumer Contracts Regulations 1999 and was
unenforceable.
Rule against penalties
E-Nik Ltd v Sec of State for Communities and Local Government [2012] EWHC 3027
(Comm)
Cavendish Square Holdings BV v Team Y&R Holdings Hong Kong Ltd [2012] EWHC 3582
(Comm)
Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2012] EWHC 3511 (QB)
Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, 6 September
2012
Cadogan Petroleum Holdings Ltd v Global Process Systems LLC [2013] EWHC 214
(Comm)
1.
In Cavendish Square Holdings D sold a business to C by way of the sale of shares at
a price which included a premium for goodwill. The price was payable in instalments
and some of those instalments depended on future performance of the business based
on consolidated operating profit. If D became a ‘Defaulting Shareholder’ he was no
longer entitled to the instalments due (clause 5.1) and C could exercise a call option
for the purchase of his shareholding at a price calculated by net asset value at the date
D became a Defaulting Shareholder (clause 5.6).
2.
D breached certain restrictive covenants which made him a Defaulting Shareholder. D
challenged the operation of clauses 5.1 and 5.6 on the basis that they infringed the rule
against penalties. Burton J. held:
95
David Donaldson QC sitting in as a Deputy High Court Judge.
(i) The rule applied to clause 5.1 notwithstanding that it was in the form of
withholding a payment due.96
(ii) It also applied to clause 5.6 notwithstanding that it was in the form of the
transfer of shares.97
(iii) Neither clause was a penalty, based very much on the broader approach of
‘commercial justification’ referred to above:98
‘the reality is that, in the modern approach to the concept of penalty discussed
above, there is no longer the need for the dichotomy between liquidated
damages and genuine pre-estimate of loss (sic.),99 and so the relevant questions
seem to me to be simply:i) Was there a commercial justification?
ii) Was the provision extravagant or oppressive?
iii) Was the predominant purpose of the provision to deter breach?
iv) If relevant, was the provision negotiated on a level playing field?’
3.
He concluded, as follows:100
‘I am satisfied that there was a commercial purpose, such as is asserted by Ms
Smith [to adjust the consideration], and the existence of detailed negotiations by
experienced solicitors seems to me to negative oppression’.
4.
It seems, however, that the penalties rule only applies to the withholding of a payment
that was otherwise due. It does not apply to an entirely contingent payment where the
contingency is that the payee shall not have been in breach: see the Bluebay decision
in which an employer was no longer entitled to fund units by way of a settlement
agreement entered on his departure because of breach of the agreement. The penalties
rule was held not to apply: ‘There is a distinction between contingent rights and
accrued rights’.101
5.
In Andrews, the High Court of Australia has held that the penalty jurisdiction is not
confined to sanctions payable upon breach of an obligation owed by the ‘payor’ to the
‘payee.102 One might expect a similar submission to be made here, where the ‘breach
96
Based on Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd<r> [1974] A.C. 689 at 698, 703,
711, 723. The authoritative status of Gilbert-Ash has been questioned by Bingham LJ in <i>The Fanti and the
Padre Island (No. 2)<r> [1989] 1 Lloyd’s Rep 239 at 255, but in the same case the majority held that a clause
providing for retrospective cesser of cover where a member of a P & I club failed, in breach of contract, to pay a
call by the club was a penalty and this was said by Beatson J in The General Trading Co (Holdings) Ltd v
Richmond Corporation Ltd [2008] EWHC 1479 (Comm) to be binding ‘whatever may be the position in a
higher court’.
97
Based on Jobson v Johnson [1989] 1 WLR 1026.
98
At [53]. And see, to similar effect, Burton J. again in the E-Nik case.
99
It seems that what Burton J. really meant to say here is what he said earlier at [26]: ‘whether a provision was
or was not a penalty no longer depended upon the dichotomy between a liquidated damages clause and a penalty
and upon the need to concentrate upon whether there was a genuine pre-estimate of loss in order to resolve such
dichotomy’.
100
At [54].
101
At [220] per Popplewell J. The Bluebay decision pre-dates the decision in Cavendish. There is no mention of
the former decision in the latter.
102
Discussed at 129 LQR 152.
limitation’ is now routinely accepted, but not without controversy,103 but, for now, the
breach limitation is applied as a matter of routine.104
6.
103
In Cadogan Petroleum Holdings a dispute was settled on the basis that D would repurchase gas plants from C. D made some of the payments due, but not others, and C
terminated the agreement. On the proper construction of the agreement, C was
entitled to retain the instalments already paid and to demand those which had fallen
due at the time of termination. Such forfeiture was held not to be subject to the rule
against penalties105 because (i) the payments were made/due before breach and not
upon breach and (ii) because the penalties rule and relief against forfeiture are just
different; in particular relief against forfeiture which differs from the rule against
penalties in that it depends upon the exercise of the court’s equitable jurisdiction
‘having regard to the conditions existing when that relief is sought’; the rule against
penalties is ‘determined as a matter of construction viewed as at the date of the
contract.’106 As for relief, it was not necessary here: the contract should simply stand.
If, when the gas plants were eventually sold, they realized a sum in excess of that due
to C, the balance would be paid into court pending further order as to their proper
disposal.
See, eg. Bridge v Campbell Discount Co Ltd [1962] A.C. 600.
See most recently Berg v Blackburn Rovers Football Club [2013] EWHC 1070 (Ch).
105
Though if it had been, Eder J. was sympathetic to the view that the forfeiture was not penal, based on the
broader approach referred to above.
106
At [34]. See also Amble Assets LLP v Longbenton Foods Ltd [2011] EWHC 1943 (Ch).
104