NEGLIGENT MISREPRESENTATION: EFFECT OF CHANGE OF CONTRACTING PARTY
In Cramaso LLP v Viscount Reidhaven’s Trustees, the Supreme Court considered whether damages are available in respect of a pre-contractual negligent misstatement made to an individual, where the contract in question is subsequently entered into by a corporate entity rather than by that individual.
The case concerned the lease of a grouse moor. The moor was owned by VR’s trustees. The moor needed substantial investment in order to be used for commercial shooting. The trustees arranged for letting to be handled by their chief executive, SL, and by a chartered surveyor, JK. In the course of negotiations with a potential tenant, SL sent an email to JK about the grouse population on the moor. The email substantially overestimated the population.
When another potential tenant, E, expressed concerns about grouse numbers to JK, JK forwarded the email to him. E decided to proceed with the lease, but did so through a limited liability partnership, Cramaso.
E later discovered that SL’s email did not accurately reflect the grouse numbers. E brought an action against VR’s trustees. At first instance, the Court held that the email contained a negligent misrepresentation, but that because Cramasco had not been in existence at the time the representation was made, it could not recover damages. On appeal, the Court held that Cramaso was not entitled to damages on the grounds that it was owed no duty of care by the trustees.
The Supreme Court took a different approach. It said that the representation in question was of a continuing nature and SL (and so the trustees) was responsible for its accuracy. On the question of whether the trustees could be liable for a representation inducing conclusion of the contract by Cramaso, rather than E, the Court referred to an earlier case in which it had been held that a principal can be responsible for fraudulent misrepresentation made by an agent which induces the other party to enter into a contract made by the agent on behalf of his principal.
The Supreme Court held there was no reason why the principle outlined in the earlier case should not apply to negligent misrepresentation. The change in the identity of the contracting party (from E to Cramaso) did not affect the continuing nature of the representation or the responsibility of the trustees for its accuracy. Once it had become clear that Cramaso was to be used as the vehicle for E’s investment, negotiations had continued, and by their conduct the trustees had implicitly asserted the accuracy of their representations to Cramaso.
On this basis, the respondents were held to be liable for loss suffered by Cramaso, and damages were awarded accordingly.
The case is a useful reminder of the need to ensure the accuracy of all pre-contractual information and of the importance of sale documentation (including share or business sale agreements), including an effective exclusion of liability (in contract, tort and otherwise) for pre-contractual statements.
INTERPRETATION OF ENGAGEMENT LETTER: WHETHER ABORT FEE PAYABLE IN RELATION TO IPO
In Daniel Stewart & Company Plc v Environment Waste Control Plc, a waste management company, EW, engaged an investment bank, DS, to act as its nominated adviser on a proposed IPO.
Following a disagreement between DS and EW’s main shareholder as to the value of EW, EW decided not to proceed with the IPO. DS claimed payment of the abort fee contemplated for in its engagement letter with EW. The relevant clause provided:
“Fees will be payable in the event that [EW]
- aborts the transaction for reasons unconnected with [DS] or its performance prior to completion of the marketing and the book build process which DS confirms will be targeted to enable admission by no later than 28 April 2011. In these circumstances, in addition to the initial fee, the fees payable will be £150,000 [plus VAT]. Without prejudice to the generality of the foregoing, if upon completion of the marketing and book build process both parties agree that admission cannot or should not proceed, no abort fee will be payable.”
EW claimed that no abort fee was payable on the basis that a term should be implied into the engagement letter to the effect that DS must act reasonably in agreeing that the transaction should not proceed, and that DS had acted unreasonably in advising EW to proceed with the transaction at a lower valuation.
The Court disagreed and pointed out that for a term to be implied into a contract, the court needs to be satisfied that both parties, acting reasonably, would have agreed to the particular term had it been suggested to them. It said that the courts will be reluctant to imply a term where the parties have entered into a carefully drafted written contract containing detailed terms agreed upon between them. Where a term is not strictly necessary, it is unlikely to be implied. The clause was clearly drafted, and the fact that to imply the terms proposed would cause uncertainty meant that it would be inappropriate to imply it.
The Court found that the engagement letter required DS to act in good faith and not capriciously. This provided EW with the necessary protection under the clause and made good business sense without the need for an additional term to be implied. The judge pointed out that there was no obligation on DS to act reasonably in relation to the decision as to whether the IPO should proceed or not. Had the parties required this obligation to be subject to a requirement for reasonableness, this should have been stated expressly in the relevant clause.
This case is a reminder of the reluctance of courts to imply terms into contracts when they have been negotiated carefully.
Sometimes parties to a commercial agreement under English law assume that they are not bound by a contract until it is reduced to writing and signed. However, there is a consistent line of authority which upholds the existence of oral contracts. A recent example is Rowena Williams v Gregory Jones. In this case, the executor of a deceased minority shareholder (B) claimed damages from the defendant (J) for failing to perform an oral agreement. The claimant argued that B and J had entered into an oral agreement for the sale of B’s minority shareholding, in a company in which they both held shares, to J. After B’s death, J did not complete the transaction, claiming that the agreement had been dependent on them both entering into a formal written agreement. Such an agreement had been prepared and both parties had intended to enter into it.
Decision The Court held that despite the parties’ intention that their agreement should be recorded in a formal written document, the oral agreement they had reached was complete and binding, applying the principle established in RTS Flexible Systems Ltd v Molkerei Alois Muller that:
“whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”
Following these principles, the Court decided that two months before B’s death, an agreement was in existence which was sufficiently certain to be enforced by a court. The Court tested this by asking whether B could have obtained an order for specific performance if the defendant had repudiated the contract, and concluded that B could have obtained such an order on the basis that he was willing to perform his side of the agreement.
The defendants also argued that the agreement with B remained subject to contract. The Court did not agree. In particular, the drafts were not marked “subject to contract,” and the contract with B was a simple one not requiring due diligence or warranties. The Court also gave weight to the claimant’s evidence that B’s plans to move abroad could only have been achieved because he was in receipt of instalment payments under the agreement and that he had ended his employment in reliance of receiving those payments.
This case is a further reminder that a court may examine the conduct of and communications between parties to a negotiation and conclude that at some point there was a binding oral agreement, even though Fried Frank Client Memorandum 4 this was not recorded in writing. Marking documents “subject to contract” will help the court to assess the true position between the parties (and their intentions), but will not necessarily be determinative. Equally, if the parties perform part or all of the subject matter of a contract, that is likely to make it more difficult to argue that no legally binding agreement existed.
CONFLICT BETWEEN ARTICLES OF ASSOCIATION AND SHAREHOLDERS’ AGREEMENT
In Dear and Griffith v Jackson, the Court of Appeal considered the issue of how to resolve a conflict between a company's articles of association and a shareholders’ agreement. D and G, two shareholders/directors of a limited company, TFG, entered into a shareholders’ agreement under which they agreed to use their shareholder rights to procure the re-appointment of Jackson as a director, except on the occurrence of one of five specified events. TFG’s articles of association contained a power for all the directors acting unanimously to remove another director.
Dear and Griffith together with the other directors of TFG used the power in the articles to remove Jackson from office. Jackson sought specific performance of the shareholders’ agreement. At first instance, the judge implied a term into the shareholders’ agreement, the effect of which was to prevent Dear and Griffith from relying on the power to remove Jackson, a provision for which appeared in TFG’s articles of association.
The Court of Appeal reversed this decision, allowing D and G’s appeal. Looking at the relevant background, it was not clear that terms needed to be implied into the agreement in order for it to make commercial sense. Also, the shareholders’ agreement was made between parties able to vote their shares in their own interests, whereas a director must act in the company’s best interests. It is more difficult to argue that a term should be implied into an agreement made by parties acting in one capacity which fetters their power to act in another capacity.
The position of the independent directors also needs to be considered. When deciding whether or not to become directors, they are entitled to examine the power conferred on them by the articles, and will frequently have no knowledge of matters agreed to in a separate shareholders’ agreement. On this basis, they are entitled to act on the basis that a power in the articles to remove another director will be effective.
This is another example of the English Courts’ reluctance to imply terms into agreements.