1. Formation of contracts

There were a number of key cases in the past 12 months which considered the issue of whether a contract had actually been formed, including the status of side letters and letters of intent. As these cases illustrate, it is vital to ensure that an agreement is sufficiently certain to be enforceable as a contract.

1.1  "Subject to contract"

Merit Process Engineering Ltd v Balfour Beatty Engineering Services (HY) Ltd [2012] EWCA 1376

  • Merit, the claimant sub-contractor, began work under a letter of intent with Balfour Beatty on the understanding that it would subsequently enter into a contract including an arbitration clause.
  • The letter of intent was expressed to be "subject to contract" and did not include an arbitration clause.
  • Although discussions continued between the parties as to the terms of contract, including price, a final form contract was never entered into.
  • Merit brought an action in relation to the work which it had carried out and Balfour Beatty sought to rely on the arbitration clause in the draft contract.
  • The Court of Appeal concluded that there was no final contract and no arbitration clause. The work was still being carried out under the terms of the letter of intent.

Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd & another [2012] EWCA Civ 265

  • By comparison, in this case the parties exchanged a series of e-mails in which they agreed various amendments to a standard form document for a ten year charterparty between Golden Ocean, the claimant, and Trustworth Shipping Pte Ltd, with Trustworth being "fully guaranteed" by SMI, the defendant.
  • Although one of the parties asked the other to provide a full and complete signed agreement incorporating all the key terms, such a document was never created.
  • When relations broke down Golden Ocean claimed under the guarantee. SMI stated that there was no guarantee as the requirements of Section 4 of the Statute of Frauds 1677 had not been met. Section 4 requires a guarantee, or a memorandum or note of it, to be in writing signed by the guarantor or a person authorised by the guarantor.
  • The Court of Appeal confirmed the High Court's ruling that an enforceable guarantee can be created by a series of emails authenticated by the online signature of the guarantor.
  • Section 4 did not require the agreement in writing to be in a single document or even in a small number of documents. The emails which constituted the alleged contract were signed by including the name of the persons who sent them.
  • If a person puts his name on an email, even if it is just his first name, initials or nickname, then it will be a signature for the purposes of Section 4 as it indicates that the email comes with his authority and he takes responsibility for its contents.
  • Note however that a deed does need to be signed formally – a name in an email would not be sufficient.

1.2  Requirements to negotiate in good faith not enforceable

Barbudev v Eurocom Cable Management Bulgaria Eood & Ors [2012] EWCA Civ 548

  • Mr Barbudev had agreed to sell his company to Warburg Pincus and wanted to reinvest part of the proceeds of sale into the company formed by Warburg to make the acquisition.
  • The terms of that reinvestment could not be agreed by the deadline for execution of the share purchase agreement so it was agreed that the parties would enter into a side letter which contained a requirement for Warburg to "negotiate the Investment Agreement in good faith".
  • Mr Barbudev claimed that the side letter, which had been drafted by external lawyers, constituted a binding contract, but at first instance the judge held that there was no clear intention to create legal relations and the letter itself was too uncertain and lacking in detail to be enforceable under English law.
  • Mr Barbudev appealed to the Court of Appeal. While the Court of Appeal agreed with Mr Barbudev that the side letter was intended to create legal relations, the Court of Appeal unanimously dismissed the appeal, holding that the side letter was only an agreement to agree and therefore could not constitute a binding commitment and was too uncertain to be legally enforceable as it omitted key details to make an Investment Agreement with Mr Barbudev sufficiently workable.

Charles Shaker v Vistajet Group Holding SA [2012] EWHC 1329

  • In an application for summary judgment Mr Shaker sought the return of a US$3.55m deposit paid pursuant to a letter of intent in respect of a potential transaction concerning the purchase and operation of an aircraft then owned by a company within the Vistajet group.
  • It was accepted that the letter of intent was intended to be binding in respect of certain matters including the payment and refund of the deposit.
  • Vistajet argued that Mr Shaker was not entitled to the return of his deposit as he did not proceed in good faith or use reasonable endeavours to agree the relevant transaction documents, which was a pre-condition for the return of the deposit.
  • The judge referred to Barbudev as authority for the proposition that agreements to use reasonable endeavours to agree or to negotiate in good faith are unenforceable. He said, "The reason for such unenforceability is that there are no objective criteria by which the court can decide whether a party has acted unreasonably and that a duty to negotiate in good faith is unworkable because it is inherently inconsistent with the position of a negotiating party".
  • The judge went on to decide that, even if the requirement to negotiate in good faith in this case was a condition precedent to the return of the deposit, it was nevertheless unenforceable for the same reasons that a requirement to use reasonable endeavours to agree was unenforceable. Mr Shaker was therefore entitled to the return of his deposit.  

2. Importance of distinguishing warranties and representations

Sycamore Bidco Ltd v (1) Sean Breslin (2) Andrew Dawson [2012] EWHC 3443

  • Sycamore was formed for the purpose of acquiring a company from the defendants for £16 million. The share purchase agreement (SPA) contained an express warranty that the company's accounts gave a true and fair view and had been prepared in accordance with generally accepted accounting principles.
  • Sycamore claimed damages for breach of the accounting warranty (amongst others), asserting that inappropriate amounts had been included in the company's accounts as turnover and that this rendered the accounts inaccurate.
  • Sycamore also argued that each express warranty in the SPA was capable of being a representation, which had induced it to purchase the company, and was therefore a misrepresentation under common law and/or the Misrepresentation Act 1967.
  • Part of the entire agreement clause provided that: "Each party acknowledges that it has not relied on or been induced to enter into this agreement by a representation other than those expressly set out in the Transaction Documents. A party is not liable to the other party (in equity, contract or tort, under the Misrepresentation Act 1967 or in any other way) for a representation that is not set out in the Transaction Documents."
  • The court held that there had been a breach of the express warranty but dismissed the claim for misrepresentation.
  • On a correct interpretation of the contract, the warranties did not constitute representations. The language of the SPA clearly distinguished between representations and warranties, the warranties being clearly described as such, and there was no reason to extend them beyond their natural meaning.
  • The court also considered the application of the limitation of liability clause which related only to warranties. In the court's view, it could not have been the intention of the parties to apply limitations to a claim for breach of warranty but to have unlimited liability if the wording of a warranty was also held to be a representation.
  • The distinction between the claim for breach of warranty and the claim for misrepresentation had real significance in this case because of the difference in the measure of damages for each of the claims. Damages for breach of contract are calculated to put the claimant in the position he would have been in if the breach had not occurred, so if the warranty had been true. By contrast, damages for misrepresentation are calculated on the basis of putting the parties into their pre-contract position.
  • In this case the judge awarded damages for breach of warranty based on the difference between the amount paid for the company and what it was actually worth, which amounted to around £4.75 million. However, as part of its claim for misrepresentation, which was rejected, Sycamore had claimed that if it had been aware of the correct position regarding the company's turnover, it would not have bought the company at all. It had therefore claimed repayment of the whole of the £16 million consideration paid.  

3. Exclusion and limitation clauses

Over the past 12 months the Court of Appeal considered the interpretation of exclusion clauses generally as detailed below.

3.1  Liability for intentional wrongdoing

Mir Steel UK Ltd v (1) Christopher Morris (2) Mark Fry (3) David Hudson (4) Alphasteel Ltd (in liquidation) [2012] EWCA Civ 1397

  • When Alphasteel went into administration, the ultimate purchaser, Libala, made an offer for assets on the understanding that there may be a dispute with Lictor as to ownership of a mill.
  • The assets were hived down from Alphasteel to Mir Steel, the appellant in this case, and Mir Steel was then sold to Libala. The Hive-down Agreement sought to exclude the liability of Alphasteel and the administrators in respect of any claims by Lictor by providing that "[Mir Steel] agrees that it shall be responsible for settling any claim made against it by Lictor in respect of the hot strip mill...".
  • Lictor sued Mir Steel and Libala for conversion, breach of contract and conspiracy. Mir Steel appealed to the Court of Appeal for permission to join Alphasteel and the administrators as Part 20 defendants.
  • Mir Steel accepted that under the above clause it took liability for Lictor's conversion claim but argued that the clause was not wide enough to impose liability for the torts of conspiracy and inducement of breach of contract, as these involved intentional wrongdoing, and that if the clause was intended to impose such liability it should have expressly spelt out this intention.
  • Mir Steel relied on the principles set out in the Privy Council decision in R v Canada Steamship Lines Ltd [1952] AC 192, namely the requirement for express words to exclude claims for negligence, which it said must also therefore be required in order to exclude claims for intentional wrongdoing.
  • The Court of Appeal held that the Canada Steamship principles relating to the interpretation of exclusion clauses should only be considered as guidelines and do not override the approach of searching for the parties' meaning in light of the overall commercial purpose of an agreement.
  • The distinguishing feature of this case was that all parties to the Hive-down Agreement knew about Lictor's potential ownership claim. In those circumstances there was no reason why "any claim" should be narrowly construed and it could cover all of the claims being made.

3.2  Liability for negligence

Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd [2012] EWHC 2198

  • Avrora bought a painting from Christie's at auction for £1.5 million. It was said to have been by a prominent Russian artist – Kustodiev – and Christie's seemingly warranted this fact by printing Kustodiev's name in capitals in the auction catalogue.
  • The catalogue for the sale incorporated Conditions of Sale and included an express warranty that any property described in headings printed in capitals, stated to be the work of a particular artist, was authentic. The remedy was cancellation of the sale and refund of the purchase price.
  • Avrora subsequently discovered that the painting was not genuine and claimed for breach of the express warranty. It also claimed that Christie's had been negligent in attributing the painting to Kustodiev and that it had misrepresented the fact that it had reasonable grounds for that view.
  • Christie's argued that the Conditions of Sale barred these additional claims, as they prevented liability except for breach of the express warranty.
  • The court decided that, on the balance of probabilities, the painting was not genuine so, as there had been a breach of the express warranty, Avrora was entitled to cancel the purchase and recover the purchase price.
  • In relation to the claims for misrepresentation and negligence, Christie's argued that the Conditions of Sale defined the duty which it owed to its clients rather than limited its liability to them, and so the Unfair Contract Terms Act 1977 (UCTA) did not apply.
  • The judge rejected this argument and so had to consider whether the relevant provisions in the Conditions satisfied the reasonableness test in UCTA. On the facts the court found that the Conditions did satisfy the test, partly because there was no question of Avrora being left without remedy if the painting turned out to be a forgery since breach of the express warranty gave the right to cancel the sale and reclaim the purchase price.

3.3  Exclusion of all liability where UCTA applies

Ampleforth Abbey Trust v Turner & Townsend Project Management Ltd [2012] EWHC 2137

  • Turner, a project manager, was ordered to pay damages to Ampleforth under its project management contract with Ampleforth, for losses arising from a dispute between Ampleforth and a building contractor, where the entire building works commissioned by Ampleforth had been carried out under letters of intent.
  • The court held that Turner owed a duty of care to exercise reasonable care and skill in procuring a contract from the contractor and was in breach of that duty for failing to attend to the matters holding up execution of a contract and for failing to exert enough pressure on the contractor. Ampleforth would otherwise have been able to take action to procure a contract and it was probable that this contract would have provided for liquidated damages, which would have benefited Ampleforth in its dispute with the contractor.
  • Although Turner had a £1 million cap on its liability in its project management contract with Ampleforth, the judge held that it was unreasonable for the purpose of the Unfair Contract Terms Act 1977 for Turner to limit its liability to Ampleforth to £1 million when it had passed on the cost of its £10 million insurance cover to Ampleforth.  

4. Criticism of the use of "and/or" in contracts

Situ Ventures Limited v Bonham-Carter [2013] EWCA Civ 47

  • The case related to the interpretation of a contractual provision about the sellers in a share purchase agreement remaining as directors during the earn-out period, with the dispute being about whether or not the provision allowed the purchaser to remove those directors during the earn-out period.
  • The wording of the provision as a whole was very inadequate. The phrase "and/or" was used in the provision but was meaningless, because in the circumstances it could only have meant "or".
  • Although the use of the phrase was not the deciding factor in the judgement, the judge was scathing about the use of "and/or" generally.
  • What the judge said was: "I would add that the use of the expression "and/or" in any other legal document is in any case open to numerous more fundamental objections to inaccuracy, obscurity, uncertainty or even as being just plain meaningless, as explained by Sir Robert Megarry in his erudite philological discussion of "and/or" in "Andoranororand" to "Law at the Centre" (1999) at pp 71 to 78".
  • The Megarry article also suggests that the concept can be dealt with instead by using 'or' together with 'or both', and where there is a longer list by using 'or any of them' or 'or all or any of them'.