The Court of Appeal has held that a provision in a franchise contract that allowed for the clawback of commission in certain circumstances was sufficiently certain to be enforceable even though it did not specify exactly how the amount of the clawback was to be calculated. The judge had been correct to find that the parties’ intention was for the clawback to be calculated on a straight-line basis over the relevant period: Openwork Limited v Forte [2018] EWCA Civ 783

The decision emphasises that the court will strive to give meaning to a contract term if at all possible. Parties should not accept the inclusion of vague or uncertain terms on the assumption that they will not be capable of enforcement in practice. If the terms are not clear, the court may try to determine their meaning, as it would be understood by a reasonable third party. This may have unintended consequences.

Further guidance on how the courts approach contract issues including contract formation and interpretation can be found in our contract disputes practical guides, available here.

Background

The claimant, Openwork Limited, was a company associated with Zurich Assurance Limited which used a network of franchised advisors to sell Zurich’s investment products. The defendant, Mr Forte, was a financial advisor who entered into a written franchise contract with Openwork to sell Zurich investments in return for the payment of commission.

The franchise contract included a provision which stated that if an investment was withdrawn within three years then Openwork could claw back a percentage of the initial commission that it had paid to Mr Forte. The clause stated that “the amount of initial commission clawed back relates to the amount invested, length of time invested and amount withdrawn” but did not provide a formula for calculating the amount.

Two of Mr Forte’s clients purchased Zurich investments which they then withdrew within three years. Openwork therefore sought to claw back a portion of the commission that it had paid to Mr Forte. However, Mr Forte argued that the clawback provision was too uncertain to be enforceable.

At first instance, Mr Recorder Blohm QC found that although the clawback provision did not include a formula for calculating the clawback, the contractual intention was sufficiently clear and the amount of the clawback should reduce on a straight-line basis from the full commission at the date of the investment to zero at three years.

Mr Forte appealed to the Court of Appeal.

Decision

The primary issue for the Court of Appeal was whether the court could give effect to a contractual term whose overall effect was explicit but whose detailed terms were incomplete. Mr Forte argued that, having identified the indeterminacy of the clawback provision, the judge was not entitled to invent his own calculus or means of ascertainment.

The Court of Appeal took as its starting point the principle that the court should strive to give some meaning to contractual clauses agreed by the parties if it is at all possible to do so. The parties had clearly intended the clawback provision to have some effect. If it was treated as being so vague and unclear as to give Openwork no rights, that would defeat the intent of the clause.

The clear intent was that, if Mr Forte’s clients withdrew their investments within three years, then Openwork would be entitled to recover part of the commission paid to Mr Forte. The exact meaning of the clawback provision could be extracted from the criteria in the clause – the amount to be clawed back was a percentage of the commission paid which reduced over time. Accordingly the judge at first instance was right to find that the parties’ intention was reflected in a straight-line calculation.