In this briefing we look at the lessons to be learnt from some of the English contract law cases of 2019. Whilst the cases we cover do not involve any seismic shift in the law, they do serve as a useful reminder to those entering into contracts of some legal pitfalls to be wary of. We also flag the discontinuance of LIBOR and the impact of Brexit on contracts.
Table of contents
1. Formation and certainty of terms 2. Interpretation and implied terms 3. Good faith 4. Severance 5. Loss and remedies 6. Penalties
1 2 4 6 6 7
1. Formation and certainty of terms
7. Force majeure
9
Do you have a contract? Every year a multitude of cases are brought to court which centre around the basic
8. Notice provisions 9. Third party rights
10 11
question of whether a contract was ever actually formed.
10. Execution
12
Even if it is possible to identify an offer and acceptance, if
its terms are unclear it may not be binding on the parties.
The cases we have selected below highlight the importance of being clear as to when a contract has been
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formed and what its terms are, particularly when one party has started performing its obligations.
Herbert Smith Freehills
Farrar v Rylatt [2019] EWCA Civ 1864
British and Irish Legal Information Institute the transcripts of all the cases we refer to
Mr Farrar, a builder and owner of a construction
are available free of charge from this
company, had entered into two profit share agreements
website with the exception of Wood
with the Rylatts, property developers, relating to two
developments owned by the Rylatts, in West Yorkshire.
Mr Farrar claimed that the profit share agreement in
relation to one of the developments (Hazel Grove) arose from an oral agreement to create a trust under
which the Rylatts and Mr Farrar would hold the beneficial interest of the development in equal shares. The
profit share agreement in relation to the second development (The Barns) arose out of unsigned heads of
terms which provided that the Rylatts would enter into a joint venture with Mr Farrar dividing any sale
proceeds from The Barns on an equal basis. The heads of terms were labelled as "Subject to Contract and
Without Prejudice".
In 2017 Mr Farrar sought a declaration from the court that the profit share agreements were binding. The judge at first instance and the Court of Appeal rejected Mr Farrar's claim and any right to profits.
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In relation to Hazel Grove the evidence showed a "confusing picture" as to between who and when any oral agreement was made. Further it was considered extremely unlikely that the Rylatts understood the meaning of putting a trust over Hazel Grove. In relation to The Barns' heads of terms, Mr Farrar argued that at the time there was nothing left to agree in respect of the profit share arrangement and the "Subject to Contract" tag should have been ignored because the parties had intended to create legal relations. This argument failed on the basis that the heads of terms contained a clause that envisaged a joint venture partnership, which never materialised. Importantly, the "Subject to Contract" wording also featured on the face of the document and was therefore considered to cover all terms as it had not been expressly dissapplied from any specific clauses.
Anchor 2020 Limited v Midas Construction Limited [2019] EWHC 435 (TCC)
Anchor engaged Midas to design and build a retirement community in Hampshire. The parties were not able to agree all the terms before the construction start date so Anchor issued several letters of intent pending finalisation of the formal contract. The contract sum was agreed between the parties and documented in one of the letters of intent. Midas returned a signed version of the formal contract to Anchor, but Anchor did not counter-sign it. Following completion of the construction Midas claimed that there was no binding contract between the parties and that it should be paid a reasonable sum on a quantum meruit basis. Anchor argued that the partially signed contract was binding and Midas should be paid in accordance with the terms of that agreement.
The judge held that the partially signed contract was a binding contract, notwithstanding the fact that it was not signed by Anchor. Firstly, the judge concluded that there was an intention to create legal relations; he gave considerable weight to the fact Midas continued to perform the works, in accordance with the terms set out in the contract, up until practical completion suggesting that it considered there was a binding contract in place. In addition, the judge held that the essential terms had been agreed by the parties by the time the partially signed contract was sent to Anchor.
Practice points formation
Remember the basic requirements for a binding contract: an agreement, which is intended to be legally binding, supported by consideration, and sufficiently certain and complete to be enforceable.
If you have to use a form of interim arrangement before the final terms are agreed, build in as much protection as possible. Clearly state the scope of the works and the terms on which it will be carried out. Specify which parts of the document (if any) are intended to be legally binding. Consider what is to happen if the full contract is in fact never signed.
Remember that a contract may become binding, even though there are still terms to be agreed, if the parties have agreed all the terms that they objectively regard as essential for the formation of legally binding relations between them. Equally, as the Midas case shows, the lack of a signature on a formal written contract does not necessarily prevent the existence of a binding contract.
Although the "subject to contract" flag worked in the Farrar case, it is not a cast-iron guarantee that a binding contract has not come into force; the parties' subsequent conduct may indicate that they have in fact reached a binding agreement.
2. Interpretation and implied terms
The first two Court of Appeal rulings in this section illustrate the differing rules on using evidence of precontractual negotiations in cases of interpretation and rectification. The first decision on interpretation confirms the strict operation of the common law rule against relying on evidence of pre-contractual negotiations; while it is permissible for a court to take into account pre-contractual material for the limited purpose of understanding the genesis and commercial aim of the transaction as a whole, this does not extend to admitting material in order to shed light on the genesis and aim of a particular contractual provision. By contrast in the second case, which establishes the test for rectifying a contractual document on grounds of common mistake, the court considered evidence of prior negotiations to discover the subjective
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intention of the parties in order to rectify a contractual document. The final case is a Supreme Court decision on the implication of terms.
Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council [2019] EWCA Civ 526
In 2015 an escrow account agreement was executed between Merthyr Ltd, a coal mining company, Merthyr Tydfil Council and HSBC bank, and an escrow fund was established to secure 15 million for restoration costs once mining works ceased. The agreement required Merthyr Ltd to make quarterly payments, with provision for making up any shortfall in subsequent quarterly payments and a longstop date of June 2022. By mid-2018, Merthyr Ltd had made no deposits into the escrow account, arguing that it was under no enforceable obligation to make quarterly payments, pursuant to the wording of the agreement, as long as 15 million was paid by the longstop date. The trial judge rejected that construction and granted summary judgment, ordering Merthyr Ltd to pay into the escrow account the deposits outstanding at that time.
The Court of Appeal dismissed Merthyr Ltd's appeal, finding that the language used in the relevant clause ("shall", "fails to pay", "payable" and "outstanding") clearly indicated that payment of the amounts on the specified dates was a legal obligation.
Merthyr Ltd also sought to rely on a passage in its proposal for the escrow arrangement, and Merthyr Tydfil Council's report recommending acceptance of the proposal. This stated that if the company was unable to make a quarterly payment it could roll it forward, subject to full payment being made by the longstop date. The court reaffirmed the legal principles regarding pre-contractual material. A court may look at previous documents for the purpose of ascertaining the surrounding circumstances and thereby understanding the commercial aim of a transaction. What is not permissible is to seek to rely on evidence of what was said during the course of pre-contractual negotiations for the purpose of drawing inferences about what the contract should be understood to mean. This excludes not only statements reflecting one party's subjective intentions or aspirations but also communications that are capable of showing that the parties reached a consensus on a particular point or used words in an agreed sense.
The court noted that there may in some cases be a fine line between referring to previous communications to identify the "genesis and aim of the transaction" and relying on such evidence to show what the parties intended a particular provision to mean, but said this was not such a case.
FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd [2019] EWCA Civ 1361
FSHC Group executed two deeds to accede to two pre-existing security agreements; it had previously agreed to give the security in connection with a complex corporate acquisition which took place in 2012, but had been omitted as a party from the security documentation. However, the effect of acceding to these agreements was not only to provide the missing security but for FSHC Group to undertake additional, onerous obligations.
The trial judge found as a fact that when the deeds were executed both parties understood and intended them to do no more than provide the missing security; no one involved in the transaction realised that the effect was to impose the additional obligations. He also found that an objective observer would have concluded, from the background facts and the communications between the parties, that such was their common intention. He therefore granted rectification of the deeds so as to exclude the additional obligations from their scope.
The Court of Appeal agreed and its judgment clarifies the correct test for rectifying a contractual document on grounds of common mistake. The judgment determines that to establish a claim for rectification, a party must prove that the document failed to give effect to either: (i) a prior concluded contract, in which case the terms of the prior contract must be objectively determined; or (ii) a common intention shared by the parties, in which case the existence of the intention must be established as a subjective state of mind though it must also be shown that, by way of evidence of communication between the parties, that they understood each other to share a common intention.
Wells v Devani [2019] UKSC 4
In a telephone call between Mr Wells (a property developer) and Mr Devani (an estate agent) the judge found that, when asked about his fees, Mr Devani had stated that his standard terms as regards commission
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were 2% plus VAT. There was no discussion of the circumstances in which that commission would fall due. When Mr Devani attempted to claim commission due to his introduction of a buyer who completed the purchase of Mr Wells' properties, he relied solely on an oral contract established during the telephone call.
The High Court held that there was a binding contract, implying a term that the commission would be due to Mr Devani on the introduction of a buyer who actually completed the purchase. However, the Court of Appeal overturned the High Court's decision by a 2:1 majority, finding in favour of Mr Wells that there was no legally binding contract (see our 2016 contract briefing). This was on the basis that the question of when the entitlement to commission was triggered was an essential term of the contract and, as the parties had failed to specify that event, their bargain was incomplete.
Nonetheless, the Supreme Court unanimously allowed Mr Devani's appeal finding that the question of whether there was a binding contract required a consideration of what was communicated between the parties by their words and their conduct and whether, objectively assessed, that led to the conclusion that they intended to create a legally binding relationship and that they had agreed all the terms that the law requires as essential for that purpose. The Supreme Court considered the conditions for implying terms into contracts as set out in Marks & Spencer Plc v BNP Paribas [2015] UKSC 72 (see our 2015 contract briefing). Accordingly, the judge found that the obligation to make payment of the commission on completion was required to give the agreement business efficacy, and would not go beyond what was necessary for that purpose.
Practice points interpretation and implied terms
Don't rely on the courts implying a provision into your contract if a term is essential ensure that it is expressly included.
Remember that the more ambiguous the wording of a provision, the greater the scope for differing judicial views on the correct interpretation. So seek to avoid any argument about how a contract should be interpreted by drafting each clause carefully to reflect the agreement reached between the parties and, where practical, demonstrate the commercial rationale for key provisions.
Consider how the wording of your contract might be viewed by an outsider some years later. Is its meaning clear enough on its face from the words you have used?
3. Good faith
The case below considers the implication of a duty of good faith in the context of so-called "relational" contracts - contracts which involve a longer-term relationship between the parties and which may require a high degree of communication and predictable performance based on mutual trust and confidence.
Bates v Post Office Ltd (No. 3) [2019] EWHC 606 (QB)
This case revolved around contracts between the Post Office and a number of sub-postmasters for the provision of local Post Office branches. The contracts provided that the sub-postmaster was responsible for losses caused by his or her negligence. The Post Office's computerised accounting system identified discrepancies in the accounting of various branches, which the Post Office pursued with various subpostmasters, demanding payment. The sub-postmasters began group litigation proceedings alleging that the accounting system contained bugs which caused the discrepancies and that no liability had occurred under the contracts.
The High Court recognised, in its "common issues" judgment that whilst an obligation of good faith is not implied in all commercial contracts, the contracts between the Post Office and the sub-postmasters did contain an implied duty. The High Court considered these contracts to be relational contracts. Whether a contract is a relational one depends on the "circumstances of the relationship, defined by the terms of the agreement, set in its commercial context". The court identified a number of characteristics relevant to an assessment of whether a contract is relational, including, for example, whether the parties' relationship is long-term, and whether the parties have trust and confidence in each other in performing the contract. No
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single one of these characteristics would be determinative, save that there must be no express terms in the contract which would prevent a duty of good faith being implied.
The court considered that each of the above characteristics was present in the relationship between the Post Office and the sub-postmasters, and there were additional features of the relationship that influenced their categorisation as relational contracts. It therefore implied a number of provisions including obligations not to take steps which would undermine the relationship of trust and confidence between the parties; to exercise any contractual or other power honestly and in good faith for the purpose for which it was conferred; not to exercise any discretion arbitrarily, capriciously or unreasonably; and to exercise any such discretion in accordance with the obligations of good faith, fair dealing, transparency, trust and confidence.
Practice points good faith
Courts may be prepared to imply a duty of good faith into some commercial contracts, where appropriate, provided that the implication of such a term is not inconsistent with the express terms of the contract.
Consider addressing the issue of good faith expressly, particularly in any long term "relational" contracts. But remember that this is an unclear area in English law and does not create certainty as to what the parties must do to honour it.
If an express good faith clause is included, ensure that the intended meaning of the clause is reflected in the actual drafting. Consider specifying the actions which a party is required to take to satisfy a good faith obligation and those actions which it is not required to take.
Do not ignore an express contractual obligation to use good faith and remember that fulfilling such an obligation will involve more than not acting in bad faith.
English law contracts post-Brexit
The case considered below illustrates the difficulties that are likely to face a party seeking to establish that its contracts are frustrated as a result of Brexit. This is unlikely to be the only case concerning the effect of Brexit on contracts. Contracting parties should therefore continue to review existing and negotiated contracts to understand any terms that may be affected by the UK's withdrawal from the European Union.
Canary Wharf (B4) T1 Ltd and others v European Medicines Agency [2019] EWHC 335 (Ch)
The EMA has a 25 year lease in relation to its London premises with landlord Canary Wharf. In August 2017, the EMA wrote to Canary Wharf stating that it would treat Brexit (if and when it occurred) as frustrating the lease.
Canary Wharf sought a declaration from the court that the UK's withdrawal from the EU or the relocation of the EMA would not cause the lease to be frustrated, and that the EMA would continue to be bound by all of its covenants and obligations including the payment of rent. Canary Wharf disputed the factual basis for the EMA's case, as regards the effect of Brexit on the EMA's powers, but in any event argued that none of the grounds put forward, even if established, would be capable of frustrating the lease. The EMA argued that, as a result of Brexit, and as a matter of EU law, it would lack capacity to make use of the premises or perform its obligations under the lease, and therefore the lease was frustrated under English law.
The High Court rejected the EMA's case that it would lack such capacity under EU law, and in any event found that an intervening lack of capacity under foreign law, after the contract had lawfully been entered into by the relevant foreign party, would not be relevant to questions of frustration under English law.
The EMA is in a fairly unique position, as a European agency with good reasons to be located in an EU member state, and it is therefore interesting that it could not succeed in establishing its case on frustration. However, the decision does leave open the possibility of establishing frustration where a party is able to show that, as a result of Brexit, it will be deprived of all or substantially all of the benefit of a contract, or that it will simply not get what it bargained for, rather than performance simply becoming more onerous or inconvenient.
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The EMA has subsequently dropped its appeal, having sub-let the office space concerned.
Practice points English law contracts post-Brexit
Consider the impact of Brexit on any new or existing contract and whether any of the provisions will continue in force after the end of the transition period.
Pay particular attention to references to the EU, EU legislation or EU regulators.
Do not assume that there will be an automatic right to terminate or vary a contract when the UK leaves the EU or at the end of the transition period so consider including an express right if necessary.
Refer to our online Brexit Legal Guide, including the section on Contract and Other Obligations and Disputes (in relation to the enforcement of judgments), which we continue to update to take into account the latest developments and to explain the anticipated impact of Brexit in various practice and sector areas.
4. Severance
In 2019 the Supreme Court examined the rules on severance in the context of restrictive covenants. A restrictive covenant will be void as being in restraint of trade if it is wider than reasonable to protect the interest of the enforcing party. In such circumstances the courts may use the so-called "blue-pencil test" to sever offending words in order to make an enforceable covenant. In this case the Supreme Court reestablished the most liberal approach to severance, ruling that the "blue-pencil test" can be applied to parts of a single covenant, even where it is not in effect a combination of several distinctive covenants.
Tillman v Egon Zehnder Ltd [2019] UKSC 32
The employment contract between Egon Zehnder Ltd and Ms Tillman, a senior executive, included a covenant prohibiting Ms Tillman from being directly or indirectly engaged, concerned or "interested in" competing businesses. The Supreme Court agreed with the Court of Appeal that "interest" must include minor shareholdings, and therefore such a covenant would be an unreasonable restraint of trade had it not been capable of severance. However, the Supreme Court disagreed with the Court of Appeal as to the correct approach to severance, concluding that a severance of words in a single covenant is not limited only to situations where the covenant is in effect a combination of different covenants.
The test, as set out by the Supreme Court, provides that severance will be possible if: (i) the words can be removed without needing to add to or modify the remaining text (the "blue pencil test"); (ii) the remaining terms continue to be supported by adequate consideration; and (iii) the removal of the words does not generate any major change in the overall effect of all the restraints in the contract, focussing on the legal effect of the restraints rather than their significance for the parties.
Practice points severance
Although the ruling above confirmed a liberal approach to severability, consider the appropriate scope for any restrictive covenants and draft carefully to ensure that parts of the covenant could be removed without the need to add to or modify the wording that remains.
Consider each restrictive covenant separately and use separate definitions for each covenant to facilitate severability.
Remember that a court will not rewrite a contract it will only sever a provision if it can literally run its pencil through the offending words while leaving the rest of the contract intact.
5. Loss and remedies
Both the cases featured below involved a tri-partite arrangement of some kind and in each case the structure was a key issue in disputes between the parties.
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BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, inc [2019] EWCA Civ 596
Rembrandt was a supplier of egg products in the US. It suffered a serious shortage of supplies following the US avian flu outbreak and entered into a contract with NIVE, a Netherlands-based egg supplier, to buy egg products over a two year period, provided that NIVE's production process satisfied US regulatory authorities.
Shortly after shipments began NIVE informed Rembrandt that roughly half of the egg products would be supplied by its sister company, Henningsen. Rembrandt agreed to accept some products from Henningsen and to be invoiced by it directly but it was accepted that Henningsen had no contractual rights against Rembrandt, or vice versa. Rembrandt subsequently suspended its performance of the contract and alleged that NIVE had failed to comply with US inspection requirements.
NIVE brought proceedings against Rembrandt for loss of profit on the total amount to be supplied, including in respect of the Henningsen product. The Court of Appeal agreed with the High Court that under the original contract NIVE could only claim for its own loss and not for the loss of profit suffered by Henningsen.
The decision confirms that a contracting party can only claim for a third party's losses if at the time the underlying contract was made there was a common intention to benefit the third party (or a class to which the third party belonged).
New York Laser Clinic Ltd v Naturastudios Ltd [2019] EWHC 2892 (QB)
New York Laser Clinic (NYLC) operated a number of laser hair removal clinics and Naturastudios supplied laser hair removal devices. NYLC alleged that it had been induced to take delivery of six of Naturastudios' devices as a result of false statements made on behalf of Naturastudios and that in fact the devices were not fit for purpose. There was, however, no contract between NYLC and Naturastudios as the goods had been purchased through hire purchase companies on NYLC's behalf. Therefore, NYLC was unable to bring a standard claim for breach of contract for defective goods, but brought a claim for breach of collateral warranty seeking damages calculated by reference to the profits it said it would have earned had the devices performed in accordance with the warranties.
The High Court agreed that there had been a breach of collateral warranty and awarded damages in the amount claimed. The judge held that each of the ingredients of a claim for breach of collateral warranty was established including: (i) a warranty (in this case a statement) was given to a third party by one of the parties to the main contract, in advance of the main contract being entered into; (ii) the warranty was not a mere representation but was intended to have contractual force; (iii) the third party provided consideration to the party which gave the warranty (in this case by causing the hire purchase company to enter into a contract with the supplier and also by directly paying deposits to the supplier); (iv) in reliance upon the warranty, the third party caused another party to enter into the main contract with the party who gave the warranty; (v) the warranty was inaccurate; (vi) the third party suffered financial loss as a result; and (vii) there are no relevant exclusion clauses.
Practice points loss and remedies
Take care when allowing a group company or other third party to take on all or part of the benefit of a contract in order to avoid a situation where there is no, or at least a reduced, recoverable loss in the event of breach. Ideally document the arrangement either by way of an assignment or direct contract.
Consider putting collateral warranty deeds in place with providers of goods or services if you do not already have a direct contract with them rather than relying on the court finding that a collateral warranty exists.
6. Penalties
The first case set out below considered whether a default interest rate of LIBOR plus 12% was an unenforceable penalty. The court applied the test established by the Supreme Court in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 (see our 2015 contract briefing), namely that a clause which takes effect on breach will be unenforceable as a penalty if it is out of proportion to the innocent party's legitimate
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interest in enforcing the counterparty's obligations under the contract. The second case looks at the operation of a liquidated damages clause in circumstances where the relevant work is never completed.
Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd [2019] EWHC 476 (Comm)
Cargill and Uttam entered into contracts for the sale and purchase of steel whereby Cargill could be called upon, but not obliged, to make advance payments for contemplated future sales and Uttam was then obliged, within a specific period, to sell the steel or refund the advanced payment. Cargill made advance payments to Uttam under the contracts to a total of US$61.8 million but Uttam failed to repay this advance either in steel or in refunds by the required dates. Cargill made a claim for repayment of the total amount advanced and to interest at the contractual rate of LIBOR plus 12%. Uttam alleged that the contractual interest provision was unenforceable as a penalty.
Cargill obtained summary judgment for the full sum and interest. The judge held that the interest rate was not a penalty, and therefore was valid and enforceable. It was common ground that the obligation to pay interest under the relevant clause was a secondary obligation, which arose out of the situation where Uttam was in breach of its primary obligation to repay an advance. The judge held that in these circumstances the level of interest was not "out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation"; in fact it was "self-evident" that there was a good commercial justification for charging a higher rate of interest on an advance of money after a default in repayment.
Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230
Triple Point entered into a software supply agreement with PTT, under which Triple Point was to provide software in two phases. Phase 1 was to be delivered by a certain time with the contract providing that any failure to do so by Triple Point would leave it liable to pay damages "at the rate of 0.1% ... of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work".
Completion of Phase 1 was delayed and key milestones for payment were not met. Triple Point suspended work until further payment and PTT terminated the contract. Triple Point commenced proceedings against PTT to recover sums it said were outstanding. PTT counter-claimed damages for delay.
The judge at first instance held that Triple Point was in repudiatory breach by suspending work under the contract, meaning PTT had the right to terminate and claim damages. PTT was entitled to recover the cost of procuring alternative software and wasted costs and was also entitled to liquidated damages for delay, which were excluded from the contractual cap on liability.
The Court of Appeal agreed with the judge at first instance on all points, except as regards the award of liquidated damages where Triple Point's appeal was allowed. The court held that a clause providing for liquidated damages for delay did not apply where the contractor failed to complete the contracted work. PTT was therefore entitled to recover damages for breach assessed on ordinary principles and subject to the agreed cap, rather than liquidated damages.
Practice Points penalties
Remember that the Supreme Court ruling in Makdessi did not abolish the penalty rule it must still be considered when drafting and negotiating contracts. The key test is whether there is a legitimate interest which is being protected in a way that is not completely out of proportion to that interest.
Where possible, structure provisions requiring a potential future payment so that the trigger for payment is an event other than breach of contract. Similarly structure provisions involving the loss of a right to a future payment so that performance or compliance is a pre-condition to the payment, rather than payment being forfeited if there is a breach. However, remember that, the courts will look at substance rather than mere form.
Where the parties are of comparable bargaining power and both legally advised it will be much harder to argue that a consequence of breach is an unenforceable penalty.
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7. Force majeure
Force majeure clauses are commonly used in a wide variety of contracts but cases about force majeure are not particularly frequent. In the case considered below the relevant provision was labelled an exceptions clause rather than a force majeure clause but the Court of Appeal emphasised that the key issue was not what the clause was called but rather how the provision should be interpreted, based on its language and having regard to its context and purpose.
Classic Maritime Inc v (1) Limbungan Makmur SDN BHD and (2) Lion Diversified Holdings BHD [2019] EWCA Civ 1102
Limbungan as charterer and Classic Maritime as ship-owner entered into a long-term contract for the shipment of iron ore from Brazil to Malaysia. Limbungan claimed that it was unable to meet its contractual obligation to provide five shipments of iron ore because of a dam burst which halted production at the relevant mine. Classic Maritime claimed for damages in respect of the lost shipments, and in defence Limbungan relied on an "exceptions clause" which provided that it would not be liable for failure to supply the cargo resulting from various events. The list of events was similar to the list of events commonly included in a force majeure clause including Act of God and accident at the mine "provided that any such events directly affect" Limbungan's performance of the contract.
Classic Maritime accepted that the dam burst was an "accident at the mine" but argued that the clause did not relieve Limbungan's liability as it would not have performed its obligations even without the dam burst; it had in fact already missed two shipments because of falling demand from its customers. The judge at first instance agreed with Classic Maritime; although it was impossible for Limbungan to perform the contract as a result of the dam burst, it would have defaulted anyway. In spite of this, the judge did not award substantial damages as claimed by Classic Maritime, because the dam burst would in fact have prevented Limbungan from shipping iron in any event.
The Court of Appeal agreed with the judge at first instance that Limbungan could not rely on the "exceptions clause" to avoid liability.
In relation to the amount of damages to be awarded to Classic Maritime, the Court of Appeal held that the High Court had misapplied the compensatory principle under which the innocent party must be put in the position it would have been in if the contract had been performed. Limbungan's obligation to make shipments was absolute, subject only to the exceptions clause which the court had found it could not rely on. Accordingly, Classic Maritime was entitled to be put in the position it would have been in if Limbungan had in fact made the shipments as contracted not simply the position it would have been in if Limbungan had been willing and able to do so absent the dam burst.
Practice Points force majeure
Remember that force majeure is not a term of art if you include a force majeure provision in your contracts make sure that you include a definition. A court will look at the substance not the form or labelling of such a clause.
Consider which events should be expressly included as force majeure and whether any events should be expressly excluded. Think about how the contract should operate in a force majeure situation and reflect that in the drafting.
Remember that a force majeure clause does not excuse liability for events which were within a party's control. Equally a force majeure clause will only provide relief from liability if the affected party is able to perform its obligations "but for" the relevant force majeure event.
If there is a particular event which may impact on the ability to perform contractual obligations consider dealing with it expressly rather than seeking to rely on a generic force majeure clause.
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Discontinuance of LIBOR
In the wake of the 2012 LIBOR scandal and the recommendations in the Wheatley review of the LIBOR process, a number of changes were made to the way in which LIBOR is administered and calculated. More recently in 2017 the FCA announced that it will not encourage or compel banks to continue to provide quotes for LIBOR after the end of 2021. While LIBOR will not necessarily cease to exist at that point there is considerable regulatory pressure to find an alternative, nearly risk-free rate to use in its place for each LIBOR currency. The near risk-free rates for sterling (SONIA) and dollars (SOFR), which are overnight, backwards-looking rates based on actual transactions, are starting to be adopted in financial products and we expect to see this increase substantially in the course of 2020. In the absence of an easily available screen rate for these risk-free rates, and a term, forward-looking rate based on them, contracting parties should consider using the base rate of a selected lending bank as the starting point for any contractual terms which previously would have referred to LIBOR in non-financial contracts.
8. Notice provisions
There is a growing body of case law dealing with the construction of notice provisions in agreements. In our 2018 contract briefing we looked at a case in which the Court of Appeal took a strict view on the level of detail of a claim required for a notice to be compliant. The two cases below from 2019 were also taken to the Court of Appeal, further illustrating the need for careful consideration of notice provisions, both when drafting the original agreement and when serving notices.
Hopkinson v Towergate Financial (Group) Ltd [2018] EWCA Civ 2744
Mr and Mrs Hopkinson and Mr and Mrs Howard (the sellers) sold a financial advisory company to Towergate. Following an investigation by the Financial Conduct Authority the company was required to pay significant compensation to its customers in relation to the sellers' period of ownership. Towergate claimed under an indemnity in the share purchase agreement but the sellers argued that the notice served by Towergate did not comply with the requirements in the agreement and its claim should therefore fail.
The share purchase agreement set out time limits for various types of claim and required written notice of the relevant matter "specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims". The term "Claim" was defined as a claim under the warranties in the share purchase agreement. The sellers argued that the term, as used in the notice clause, should in fact be read as including a claim under the indemnities and that as Towergate's notice of its indemnity claim did not include the relevant detail it was invalid.
The judge at first instance and the Court of Appeal rejected the sellers' construction. The Court of Appeal agreed that as a starting point "the court should assume, unless driven to a contrary conclusion, that the parties who have entered into a professionally drafted agreement in which terms have been elaborately defined intend to use such terms in accordance with the definitions". The Court of Appeal also agreed that it made commercial sense to distinguish between warranty claims and indemnity claims in terms of the level of detail that can sensibly be given; when a purchaser gives notice of a potential indemnity claim it may not be able to specify details and provide a good faith estimate.
Stobart Group Ltd v Stobart [2019] EWCA Civ 1376
In 2008 Mr Stobart and Mr Tinkler (the sellers) sold the entire issued share capital of Stobart Rail to Stobart Group. Stobart Rail subsequently incurred a tax liability, for which Stobart Rail and Stobart Group brought a claim under the tax covenant against the sellers. As in the case above, the question for the court was whether a letter from the purchaser complied with the notice of claim requirements as set out in the share purchase agreement. The relevant clause in this case provided that the sellers "shall not be liable in respect of a Tax Claim unless the Purchaser has given written notice of such Tax Claim (stating in reasonable detail the nature of such Tax Claim and, if practicable, the amount claimed)" before a given deadline.
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The Court of Appeal agreed with the judge at first instance that the notice was ineffective as a formal notice of claim. The court noted that the letter was plainly drafted by a lawyer and expressly adopted the definitions set out in the share purchase agreement but it made no reference to a Tax Claim or to a claim being made by Stobart Group under the relevant paragraph of the agreement. The court found that the letter was in fact notice given under a different provision of the share purchase agreement, which was designed to give the sellers as much notice as possible of a potential tax claim.
The Court of Appeal judgment helpfully sets out its approach to the construction of notices: (i) the construction of notices must be approached objectively (ie how would a reasonable recipient understand the notices); (ii) the main concern is not the subjective intent of the parties; (iii) the order in which the analysis of an agreement's provisions and the factual background to the case are dealt with is immaterial; and (iv) the purpose of notification of claims is to make clear in sufficient and formal terms that a claim is being made against the sellers.
Practice Points notice provisions
Do not neglect the boilerplate provisions in any contract; disputes about how the contract is to work are just as likely as disputes about the substantive provisions.
If you wish to specify particular methods of contractual service use clear language in the contract to put this beyond question. In particular use "shall" or "must" instead of the permissive "may".
Make sure that any correspondence intended to serve as a notice of breach or termination is completely clear as to its purpose, and if there are provisions in the contract about how notices must be given, follow them to the letter.
In particular, purchasers looking to claim under share purchase agreements should make clear which provisions of the agreement are being relied upon to make a claim against the sellers in unequivocal terms and to check that their claim has been formulated in accordance with the appropriate defined terms and notified and served in accordance with the contractual requirements.
9. Third party rights
The Court of Appeal held that a letter of instruction between a bank and its customer conferred a benefit on third party investors, giving a broad interpretation of the Contracts (Right of Third Parties) Act 1999 (CRTPA).
Chudley & Ors v Clydesdale Bank plc [2019] EWCA Civ 344
The claimant investors had invested in a property development scheme, which was promoted by a corporate customer of Clydesdale Bank. The invested monies were paid into a Clydesdale Bank account. The development scheme turned out to be a fraud; at the direction of the scheme promoter, Clydesdale Bank had moved the money from the bank account and no monies was returned to the investors. The individuals behind the promoter were subsequently imprisoned and the company went into liquidation.
The investors brought group litigation against the bank claiming that their money should have been held by Clydesdale Bank in a segregated account referred to in a letter of instruction signed by Clydesdale Bank, which restricted the ability for sums to be withdrawn from the account. The investors alleged that there was a contract between the promoter and Clydesdale Bank contained in the letter of instruction, which Clydesdale Bank had breached and under which the investors were entitled to claim the benefit pursuant to the CRTPA.
The key issue considered by the Court of Appeal was the level of identification required in order for third parties to establish that a contract conferred a benefit upon them which they could then enforce under the CRTPA. Section 1(3) requires third parties to be "expressly identified in the contract by name, as a member of a class or as answering a particular description". The Court of Appeal held that it was not necessary for the letter of instruction to mention a third party investor by name, finding that reference to "a client account" together with the name of the investment scheme was express identification of the class, namely clients of the bank's customer who were investing in the scheme in question.
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Practice Points third party rights
Remember that under the CRTPA there is a risk that a third party will have an enforceable right where none was intended and that the contracting parties' right to vary or rescind the agreement will be limited.
Consider excluding the operation of the CRTPA where possible.
Where the parties intend to give third parties rights (and so do not want to exclude the operation of the CRTPA) pay careful attention to the definition of the relevant third parties, particularly in cases where the contract refers to a class of potential beneficiaries. Also consider modifying or limiting the rights of third parties for example, by removing the right to assign and preserving the contracting parties' rights to vary or rescind the contract without third party consent.
10. Execution
The cases below both concern the formalities required by the Law of Property (Miscellaneous Provisions) Act 1989 (LPMPA). The first case considered whether an email with an automatically generated signature was considered to be "signed" and the second case considered the witnessing requirements for an individual's signature on a deed.
Neocleous v Rees [2019] EWHC 2462 (Ch)
Following a dispute over a right of way settlement discussions took place between the parties and their solicitors. Mr and Mrs Neocleous' solicitor sent an email to Ms Rees' solicitor setting out the terms of settlement, which would consist of Mr and Mrs Neocleous buying a plot of land from Ms Rees. Her solicitor replied, by email, that he was in agreement with the settlement terms. Mr and Mrs Neocleous subsequently sought specific performance of the settlement.
In September 2019, the Law Commission published its Report on the electronic execution of documents confirming its view 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.
As the settlement involved the disposition of interests in land, the formality requirements of section 2 of the LPMPA needed to be satisfied. This requires that all the terms of a contract "for the sale or other disposition of an interest in land" must be in writing in one document signed by or on behalf of each party to the contract.
Mr and Mrs Neocleous claimed that the two emails between the respective solicitors amounted to a single document signed by or on behalf of each party and that therefore the formalities of the LPMPA were met. They argued that that the typed name at the foot of an email, whether entered manually or generated as an automatic signature, satisfies the requirement for a signature under section 2 so long as the inclusion of the name was for the purpose of giving authenticity to the document.
Ms Rees argued that that the meaning of "signed" required an exercise of decision and action of the person inserting it. In this case, as the purported signature on behalf of the Ms Rees was the automatic addition of the solicitor's name, occupation, role and contact details at the foot of an email, she argued that it fell short of the statutory requirement.
Her argument was rejected by the High Court, which considered that the emphasis placed on the "automatic" nature of the signature was misleading as the solicitor knew that his name was at the bottom of the email and that the signature had been relied upon to identify him as the sender. Further an email signature could only be present because of a prior conscious decision to insert it so as to identify the sender with the contents of emails, even though the decision was made as part of a general rule that automatically applied the email signature in all cases. The inclusion of the words "Many thanks" at the end of the email showed an intention to connect the name with the contents of the email.
Wood v Commercial First Business Ltd [2019] EWHC 2205 (Ch)
Mrs Wood tried to set aside a commercial mortgage which she had with Commercial First, arguing that the correct formalities as regards the execution of the mortgage deed had not been followed. Section 1(3) of the
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LPMPA provides that in order to execute a document as a deed, an individual must sign the document "in the presence of a witness who attests the signature" and deliver the document as a deed. Mrs Woods' signature to the deed was witnessed by a representative of her mortgage broker, but Mrs Woods claimed that, as the representative did not sign as witness in Mrs Wood's presence, the deed was invalid.
The High Court rejected Mrs Wood's claim, holding that "while there is a requirement for the person executing the deed to sign in the presence of a witness, it is not a requirement of the witness to sign in the presence of the person executing the deed (or indeed of anyone else)".
Although this particular case was decided under the LPMPA as it concerned an individual, section 44(2)(b) of the Companies Act 2006 in relation to companies contains the same language as to attestation and so would be subject to the same analysis.
Practice points execution
Ensure that you pay sufficient attention to the execution formalities; parties remain willing to take execution points to court in an attempt to invalidate agreements.
Consider any applicable statutory or regulatory requirements that may apply to the execution of any document. If there is an extra layer of formality required, make sure that you follow this.
Parties negotiating terms over email should make it clear that such terms are not final and settled until an official document containing them is agreed and signed by the parties.
Remember that deeds do have additional requirements of formality, namely:
- the document must make clear on its face that it is intended to be a deed;
- the document must be correctly executed as a deed, meaning that an individual's signature must be witnessed and a company must execute by its common seal, by the signatures of two directors or one director and a secretary or by one director with a witness; and
- the deed must be delivered although there is a rebuttable presumption that a deed executed by a company is delivered on execution there is no such presumption where a deed is executed by an individual. Include wording in deeds expressing when delivery is intended to take place.
Contacts
Julie Farley T +44 20 7466 2109 [email protected]
Sarah Hawes
T +44 20 7466 2953 [email protected]
Robert Moore
T +44 20 7466 2918 [email protected]
Sarah Pollock
T +44 20 7466 2786 [email protected]
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Herbert Smith Freehills LLP 2020 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein.
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