As I Please: reasonableness and the construction of contracts

A common type of contractual clause with nebulous wording (and giving rise to nebulous thinking) is that conferring on one of the parties a discretion to do something. Is there a limit to Y’s discretion in such cases, or can he do as he pleases? Does he have to act reasonably?

A recent decision of Warren J. reminds us how the judges (are supposed to) construe such clauses and how the law approaches the implication of terms in documents.

Unique Pub Properties Ltd v. (1) Broad Green Tavern Ltd (2) Dempsey [2012] EWHC 2154 (Ch) concerned the lease of a pub, which incorporated a beer-tie. The landlord, Unique, wished to install a device known as the “i-draught”, to monitor the amount of beer dispensed and thus see whether the tenant was observing the tie. The tenant objected. Unique sought injunctions, ordering the tenant to allow it, and for access to install the system. Unique sought summary judgment.

The pub lease included the right (referred to by the judge as “the Reservation”):

“To enter the Property… to install… such beer and cider… dispensing equipment including (without limitation)… flow regulating or monitoring systems… as Unique may from time to time consider appropriate or desirable [my emphasis]…such entry… to be at reasonable times on reasonable notice.”

The tenant objected to the system, contending it was inaccurate, and “false or unjust” measuring equipment within section 17 of the Weights and Measures Act 1985 such that installing it would be a criminal offence.

The tenant argued that various terms should be implied. In considering (and rejecting) these arguments Warren J. reminded himself of Lord Hoffmann’s words in A-G of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 at [21]:

“(I)n every case where it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean……. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

And at para.18 in the same case, “…the implication of the term is not an addition to the instrument. It only spells out what the instrument means.” So whether or not to imply a term is merely part and parcel of construing the document.

The tenant argued the right of entry did not extend to entry for the purpose of installing any equipment which was unlawful and/or not accurate for the purpose of monitoring the flow of beers and ciders.

The judge “inclined strongly to the view” that Unique should not be entitled to install equipment the use of which would be unlawful. He did not need to decide the point, though, as he concluded that installing the i-draught system would not be unlawful.

The tenant also argued for implied terms which would prevent Unique from installing equipment which was not shown to be accurate or would interfere with the operation of the business. The judge saw little or no evidence of interference with the tenant’s business and in any event, since there was a covenant for quiet enjoyment, considered there was no need to imply such a term.

The judge concluded that the Reservation was to be read “as granting a right of entry to Unique to install such flow monitoring equipment as it should from time to time consider appropriate or desirable.” That led him to consider whether or not there was any legal constraint on Unique’s consideration of what was appropriate or desirable.

Warren J. considered a number of authorities dealing with the implication of terms where a contractual provision puts one party at the mercy of another’s discretion. These were: Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd’s Reports IR 221; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047; Abu Dhabi National Tanker Co v Product Star Shipping Ltd [1993] 1 Lloyd’s Reports 397; and Paragon Finance plc v Nash [2002] 1 WLR 685.

Summarising, the judge said (at para.53):

“(A) contractual discretion must be exercised honestly and in good faith and must not be exercised arbitrarily, capriciously or unreasonably, unreasonableness being assessed in the sense that no reasonable person would exercise the discretion in the manner proposed. Sometimes the courts appear to approach these restrictions by way of implication. In others, they appear to approach the matter of one of construction. It does not matter which approach is more accurate, especially as the implication is, in any case, a facet of construction as explained by Lord Hoffmann.”

Applying that principle he decided that the term as to the accuracy of the equipment for which the tenant contended should not be implied. There was nothing to suggest that Unique was acting other than honestly and in good faith. Nor was it acting arbitrarily, capriciously or unreasonably in the sense he had described. He gave summary judgment.

The lesson? On the whole the judges do not like implied terms.  

“Best Endeavours” Clauses

Covenants by which one party agrees to use their “best endeavours” to achieve some object are familiar to property lawyers and have left their mark in legal history. The 1838 case of Linder v Pryor concerned workers from ship-building yards, disorderly conduct, disapproving magistrates and the breach of a covenant to use best and utmost endeavours to keep premises open as a public licensed victualling-house.

Jet2.Com Limited v Blackpool Airport Limited [2012] EWCA Civ 417 brings matters into the 21st century, with the rise and struggles of a low-cost airline. Intriguingly, Lord Justice Lewison, author of The Interpretation of Contracts (where the nuances of various formulations of “endeavours” clauses are considered over 5 pages), gave a dissenting judgment.

There are at least two lessons from Jet2.com. Firstly, an “endeavours” clause is inherently uncertain; when drafting or negotiating a contract think about what can be done to provide an objective context for such an obligation. Secondly, on issues of construction, a court is often influenced by the background facts and its perception of the underlying merits.

Jet2.Com operates a low costs airline and entered into a 15 year agreement with Blackpool Airport Limited (BAL) to provide a new service from Blackpool to Belfast. The portion of the agreement in issue read:

“Jet2.com and BAL will co-operate together and use their best endeavours to promote Jet2.com’s low cost services from [Blackpool Airport].”  

A dispute arose as to whether this required BAL to allow Jet2.Com to operate flights outside of normal opening hours. The Court of Appeal divided on whether or not the obligation was sufficiently certain to be enforced.

A factor that both Moore-Bick and Lewison LJs emphasised was that when considering whether or not a “best endeavours” clause is sufficiently certain the court will have regard to the object of the required endeavours. A definite objective provides the court with criteria to measure the obligation’s minimum requirements.

The classic example of an obligation that is too uncertain to be enforced is an agreement to use best endeavours to agree something (see e.g. Phillips Petroleum Co. UK Ltd v Enron Europe Ltd [1997] CLC 329).

Even if the objective lacks certainty the parties can provide the requisite objectivity by specifying an objective test. Thus in EDI Central Ltd v National Car Parks Ltd [2010] CSOH 141 the reasonable endeavours required to procure the development of a project were those to be expected of a “normal prudent commercial developer experienced in development of that nature”.

However, as P & O Property Holdings Ltd v Norwich Union Life Insurance Society (1994) 68 P & CR 261 shows, even the invocation of a hypothetical person may not render an obligation certain if the circumstances and wishes of the hypothetical person are not sufficiently known. In that case, whether or not a hypothetical landlord would be willing to pay a reverse premium to achieve a letting would depend on the liquidity and objectives of such a landlord.

Another way of saving an uncertain provision can be to refer disputes under the clause to an expert or arbitrator.

In Jet2.com Lewison LJ looked beyond the circumstances of the dispute and considered the potential range of possible endeavours (such as offering complimentary refreshments) that the clause might require. He concluded the court could not determine the limit of the obligation and so there was not a justiciable obligation. He thought that if BAL had committed itself to keeping the airport open at certain hours the contract would have said something about this and that Jet2.com’s construction went beyond “interpreting” the contract and required the court to “make” a contract which the parties had not themselves made.

By contrast Moore-Bick LJ, with whom Longmore LJ agreed, accepted that there may be cases where it was difficult to decide whether there was a breach of the obligation but construed the obligation as obliging BAL to do all that it reasonably could to enable Jet2.com’s business to succeed and grow. The evidence had been that operating flights early in the morning and late at night was crucial to the business model for a low-cost airline. Other airlines had been operating from Blackpool outside of normal opening hours at the time of the agreement. On this basis they held that the obligation did extend to keeping the airport open outside normal hours, subject to any right BAL might have to protect its own financial interests.

The question of whether and to what extent a party may take account of its own commercial interests was in issue in Yewbelle Limited v London Green Developments Limited [2006] EWHC 3166. Lewison J. (as he then was) had held at first instance that a party using “all reasonable endeavours” did not have to sacrifice its own commercial interest. In Jet2.com Moore-Bick LJ said that the extent to which a person who has undertaken to use “best endeavours” can have regard to his own financial interest depends on the nature and terms of the contract in question. The Court of Appeal rejected BAL’s argument that it was not obliged to act in a way that caused it a loss but the court accepted that there might be circumstances where BAL could no longer be expected to incur further losses promoting Jet2.com’s services if that business was failing.