A recent Court of Appeal decision illustrates how keen courts are to give effect and meaning to contractual clauses if possible, even where there’s a lot of detail missing.

Background

F was a financial adviser. He became a franchisee of Openwork under which he would sell investment products to clients, and receive commission from Openwork.

The agreement between F and Openwork contained a clawback clause. This provided that, if the client investor withdrew the funds within three years, F had to repay a proportion of his commission to Openwork.

The clause provided that the amount of initial commission to be clawed back:

“relates to the amount invested, length of time invested and amount withdrawn”.

No further detail was given as to how the clawback would be calculated.

If an agreement is incomplete or otherwise uncertain, a court may not be able to enforce it.

The court in this case had to decide whether this provision was sufficiently certain in its effect to be enforceable.

F argued that it was not – and so he didn’t have to pay anything back.

The Court of Appeal held that it was.

Court’s decision

The court said that parties plainly intended the words of the clawback provision to have some effect. So, if the clause were treated as being so vague and unclear as to give Openwork no rights, it would defeat the intent of the clause.

The intent of the clause was that Openwork would be entitled to recover commission paid to F if his client’s funds were withdrawn within three years starting with the date of the investment.

The amount of the clawback was expressed as a percentage of the amount of the commission paid.

  • If funds were withdrawn after three years there would be no clawback.
  • Conversely, if the funds were withdrawn the day after the most recent investment, F would not be entitled to any commissions.
  • If the funds were withdrawn within that 3 year period, the amount of the clawback would be the proportion of the commission reflecting the time that had passed between the start and end of that period.

On that basis, the Court of Appeal determined that the parties’ intention was reflected in a straight-line calculation of entitlement to clawback.

The courts have previously said that a court’s role in a commercial dispute is

“to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy. To hold that a clause is too uncertain to be enforceable is a last resort.”

This case is interesting as a further illustration of the efforts that courts will make to give meaning and enforceability to contractual clauses despite gaps in drafting.

For another example, see our previous blog on a housing repair contract with defective drafting of the minimum performance levels.

Still, with a little bit of extra drafting, both parties would have avoided the dispute, and the consequent time and expense of court proceedings.

Case: Openwork Limited v Forte