We’ve picked out ten cases every commercial lawyer should know about from the last year
“ The recent history of the common law of contractual interpretation is one of continuity rather than change. One of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation.”
At least not when it comes to contract law. The High Court found that a London premises lease held by the European Medicines Agency was not frustrated by the UKâ€™s departure from the EU. Frustration canâ€™t be used to get out of a bad bargain â€“ it only occurs where a supervening event renders the performance of the partiesâ€™ bargain â€œradically differentâ€, when compared to what was contemplated at the formation of the contract.
The lease allowed the EMA to leave the premises before the end of the 25-year term by transferring the lease or sub-letting. The lack of break clause was a commercial decision. As the EMA wasnâ€™t legally required to move its office as a result of the UK referendum, the Court found that the need to move was self-induced and there was no frustration of the lease.
Whatâ€™s the lesson for you? The impact of Brexit may make you want to revisit various contracts, but itâ€™s not necessarily going to let you get out of them by claiming they are frustrated.
Where can you read more? See Canary Wharf (BP4) T1 Ltd v European Medicines Agency  EWHC 335 (Ch).
Brexit doesnâ€™t have to be frustrating...
2 Whatâ€™s the lesson for you? Non-competes and non-solicits will not be worth the paper they are written on if they are too broad, but you can protect against this by drafting clearly and in a way that the blue pencil test can be used to carve out any parts that go too far.
Where can you read more? See Tillman v Egon Zehnder Ltd  UKSC 32 and our briefing here.
The right approach to the so-called â€œblue pencilâ€ test has been confirmed by the Supreme Court in its first restrictive covenants case in over 100 years. Covenants such as non-competes may be unenforceable if they are too widely drafted but sometimes the court can strike out any offending parts so as to leave an enforceable undertaking. This is known as the â€œblue pencilâ€ test.
A recruitment consultant wanted to leave and work for a competitor. She had agreed to restrictive covenants and a dispute arose as to whether they were unenforceable, on the basis that they prevented her â€œbeing
interested inâ€ any competing business and were therefore too broad. The Court considered whether it could sever that part of the clause by applying the blue pencil test.
The Court confirmed that the correct approach to whether parts of a clause can be severed is the three-stage â€œBeckettâ€ test. This allows words to be deleted if: (i) no additional words need to be added; (ii) there is adequate consideration for the remaining terms; and (iii) the character of the restriction is not changed to make it a different sort of contract from the one the parties entered into.
How a blue pencil can make your non-competes enforceable.
Whatâ€™s the lesson for you? When drafting a contract, think about possible third-party rights. Unless you want to confer rights on specific third parties, you should include a clause to expressly exclude third- party rights (even if you donâ€™t think you need it). Even if your contract does purport to confer a benefit on a third party, an exclusion clause will show that the parties did not intend the term to be enforceable, meaning that the third party will not have enforcement rights under the 1999 Act.
Where can you read more? See Chudley v Clydesdale Bank Plc  EWCA Civ 344.
The Court of Appeal found that a â€œletter of instructionâ€ created rights for third party investors under the Contracts (Rights of Third Parties) Act 1999 despite the fact the investors: (i) were unaware of the letter at the time they invested; and (ii) were not named in the letter, which simply referred to a â€œSegregated Client Accountâ€.
Under the 1999 Act, a third party can enforce a contract term if it expressly says that the third party may enforce it or if it purports to confer a benefit on a third party. The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description. The Court found that the reference to a client account was
an express identification of the class (clients of the investment company who were investing in the scheme), and the investors were within that class. The same contractual term also purported to confer a benefit on the third parties. The purpose of the letter was to protect investors and the provision for the opening of a segregated client account was clearly intended to benefit those investors by ensuring that their monies were held separately by the bank.
Watch out for unexpected third party rights.
The Court of Appeal has confirmed that the correct test for rectifying a contract on the grounds of common mistake is the subjective intention of the parties. Two deeds were entered into to provide missing security for a prior acquisition. The parties sought rectification when it transpired that the unintended effect was to impose additional onerous obligations on one party. The Court granted rectification because, at the time the deeds were executed, the parties understood and expected them to do no more than provide the missing security.
The Court disagreed with Lord Hoffmanâ€™s obiter comments in Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38, that the test should be an objective one. The rationale for a subjective test is that rectification is an equitable remedy intended to correct a common mistake (an inadvertent failure to give effect to what the parties actually intended). The Court acknowledged that a subjective test is likely to lead to fewer contracts being rectified but was satisfied that it is right that rectification should be difficult to prove.
Whatâ€™s the lesson for you? Keep meeting notes and other records that may show the intention of the parties to a contract you are negotiating: they may come in useful if it turns out a mistake has been made.
Where can you read more? See FSHC Group Holdings Limited v Glas Trust Corporation Limited  EWCA Civ 1361 and our briefing here.
When will the court let you fix a mistake?
An automatically generated email footer constituted a valid signature according to a County Court decision. The terms of a settlement relating to a dispute about a right of way were set out in a series of emails exchanged between the partiesâ€™ solicitors. The solicitorâ€™s name, occupation, role and contact details were automatically added in a footer at the bottom of the relevant email. The Court held that the test of a valid signature is whether the name was applied with authenticating intent. Objectively â€œthe presence of the name indicates a clear intention
to associate oneself with the email â€“ to authenticate or sign itâ€. The Court was satisfied that the solicitor had validly signed the relevant email, which meant that there was a valid contract.
The Law Commissionâ€™s recent report on electronic execution of documents confirms that an electronic signature is capable in law of being used to execute a document (including a deed) provided that: (i) the person signing the document intends to authenticate the document; and (ii) any formalities relating to execution of that document are satisfied.
Whatâ€™s the lesson for you? Make sure anyone negotiating agreements by email knows to use the â€œsubject to contractâ€ rubric.
Where can you read more? See Neocleous & Anor v Rees  EWHC 2462 (Ch) and the Law Commissionâ€™s report here.
Is your automatic email footer a signature?
Two cases this year concerning contracts made on a phone call remind us of the potential uncertainty of agreeing contracts orally.
The first found that where a contract is entered into with minimal formalities, context is as important as the words.
An estate agent and a property developer spoke about the sale of some flats. The estate agent told the developer how commission was calculated but not the event that would trigger the payment. The Supreme Court found that a binding oral agreement was reached between the parties and the estate agent was entitled to commission. Lord Briggs takes an example straight from the Two Ronnies: â€œ[take] the simple case of the door to door seller of (say) brooms. He rings the doorbell, proffers one of his brooms to the householder, and says â€œone pound 50â€. The householder takes the broom, nods and reaches for his wallet. Plainly the parties have concluded a contract for the sale of the proffered broom, at a price of Â£1.50, immediately payable. But the subject matter of the sale, and the date of time at which payment is to be made, are not subject to terms expressed in words. All the essential terms other than price have been agreed by conduct, in the context of the encounter between the parties at the householderâ€™s front door.â€
The agreement was sufficiently certain and complete as a matter of construction of the partiesâ€™ words on the phone call and conduct. However, the Court noted that had the agreement not been interpreted as providing for payment on completion, it would not have hesitated in upholding the implication of such a term.
The second case highlights the desire of the courts to uphold commercial contracts, including by implying terms where necessary to make contracts workable.
The High Court considered the correct interpretation of a disputed debt trade concluded orally. At the time, the parties both thought the debt instruments were worth $7,700. They later realised, after the trade had been settled, that the true value was $7.7m. The buyer argued the agreement was for a sale of a fixed number of instruments at a fixed price of $7,700. However, the Court held that, viewed objectively, the agreement referred to the notional value of the instruments rather than a fixed quantity. Therefore the seller had over-delivered and the buyer had to compensate the seller for the amount of the undue benefit. This interpretation meant that the contract was not capable of being performed (as it required delivery of a fractional number of instruments). The Court reluctantly implied a term enabling a fractional sale in order to give effect to the contract.
Whatâ€™s the lesson for you? Oral contracts should generally be avoided if possible, or the terms confirmed in writing. Where contracts are made orally or by conduct, the Courts may be pragmatic if there are missing terms that need to be implied for the contract to make sense.
How will a court interpret a contract made on the phone?
Where can you read more? See Lehman Brothers International (Europe) (In Administration) v Exotix Partners LLP  EWHC 2380 (Ch) and our briefing here.
7 Where can you read more? See Wells v Devani  UKSC 4.
In resolving a dispute between the shareholders of the Premier League football club, Sheffield United, the High Court returned to the strict tests for the implication of terms so that an implied duty of good faith will only apply where needed to give the contract commercial or practical coherence.
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts.
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English law is still in flux when it comes to finding a contract is â€œrelationalâ€ and so subject to an implied duty of good faith. The High Court has confirmed that the concept of â€œrelational contractsâ€ is established in English law but recent cases suggest a more critical approach being taken to finding implied duties of good faith. Weâ€™ve highlighted three of the cases.
In delivering its finding that the Post Officeâ€™s contract with its sub-postmasters was â€œrelationalâ€, the High Court identified nine relevant characteristics. These include that the contract is a long-term one, that it involves a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and that there is no express exclusion of good faith.
Whatâ€™s the lesson for you? When drafting any long term contracts, consider whether they might be considered â€œrelationalâ€. If you donâ€™t wish to have an implied duty of good faith, think about if it should be expressly excluded, bearing in mind that any clause stating the parties do not need to act in good faith towards each other may not be well-received. Another approach would be to consider specific, uncontroversial areas where you might want to include a duty of good faith expressly and then make it clear that the duty is confined to those areas only.
Where can you read more? See Bates and others v Post Office Ltd  EWHC 606 (QB) and our briefing here.
Where can you read more? See Teesside Gas Transportation Limited v CATS North Sea Limited and Others  EWHC 1220 (Comm).
Where can you read more? See UTB LLC v Sheffield United Ltd  EWHC 2322 (Ch).
When will a court imply a duty of good faith?
In a dispute over a long-term agreement relating to a gas pipeline, the High Court declined to imply a general duty of good faith. Boilerplate provisions in the contract containing references to good faith were an indication that the parties had exhaustively defined the extent of any good faith obligations, so that no wider duty of good faith should be implied.