Scotland and England
The Differences Explained
Termination for material breach: too quick off the mark 1
Database ransom 2
Service provisions: does your contract serve you well? 4
You say irrational, I say reasonable – the Court of Appeal looks
at what is a “commercially reasonable manner” 6
Fujitsu hits a red light: exclusion of liability clauses,
fiduciary duties and good faith 7
Liability for pre-contractual negotiations:
something worth grousing about? 9
To agree or not to agree, that is the question… 11
Wine not? Principal fails to end agent’s
authority to collect payments 13
Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd  EWHC 4030 (TCC)
The recent case of Vivergo Fuels Ltd highlights that any party seeking to terminate a contract for material breach should do so cautiously. Parties must consider firstly, whether the breach is sufficiently material to justify termination and secondly, whether any notice of termination to the other party is drafted properly.
Termination for material breach: too quick off the mark
Vivergo employed Redhall to conduct manufacturing and piping work at Vivergo’s biofuel plant. Redhall’s work on the project became delayed. Vivergo sought to terminate the contract on the basis that Redhall had failed to proceed regularly and diligently with the work and had also failed to provide a revised programme for the project when requested to do so.
The contract contained a two-stage termination process, common to many commercial contracts. Vivergo required firstly to notify Redhall of the purported material breach and, subsequently, if Redhall failed to rectify that default within 14 days, Vivergo could terminate the contract by a further notice to Redhall.
Vivergo sent Redhall the first notice of the default. A few days following receipt, Redhall sent Vivergo a revised programme of the works seeking an extension of time to complete the project. Vivergo ignored this and sent a second letter notifying Redhall that the contract had been terminated.
Vivergo banned Redhall from entering the plant. Redhall then served a notice on Vivergo that such a ban amounted to a repudiatory breach of contract itself by Vivergo, and subsequently that Redhall was terminating the contract.
The court held that Redhall was in material breach of contract for having initially failed to submit a revised programme of the project when the works became delayed. However, the court found that Redhall had then rectified the breach by sending an updated programme to Vivergo. Subsequently, Vivergo had no right to serve the second termination notice on Redhall. Moreover, Vivergo was in repudiatory breach for refusing Redhall entry to the plant and Redhall had thereafter successfully terminated the contract.
In reaching his decision, the judge focused on two issues, which are of relevance to all commercial contracts: firstly, how to assess whether a purported breach is sufficiently material to justify termination of a contract; and secondly, how to construe contractual notices.
Was the breach sufficiently material to justify termination?
In determining whether Redhall’s initial breach of contract (i.e. failing to deliver a current programme of work) was material or not, the court highlighted that the following factors should be considered in order to assess “materiality”:
the circumstances in which the breach arose, as well as what the breach entailed;
the commercial consequences of the breach, and in this case, the fact that Vivergo required the revised programme to effectively manage the project;
the level of importance attached to the clause which had been breached; and
whether termination for such a breach would be a proportionate remedy.
Was the notice of termination properly drafted?
The court also held that in order to be valid, contractual notices must:
be construed as a contractual document against “the relevant, objective contextual scene” known to both parties and in this regard that the recipient of the notice could reasonably be expected to have in mind the related terms of the contract;
be “sufficiently clear and unambiguous” so that the recipient is in no reasonable doubt about how and when the notice is intended to operate;
be “connected in content and in time”, where a contract requires a two-stage termination process; and
identify the default and the seriousness of it, or make a reasonable connection to the termination clause of the contract (although, notably, there is no requirement to use the word “notice” nor to expressly specify that the notice could or will result in termination).
Getting termination of a contract right is essential to ensure that any compensation or damages payable on termination apply as the parties originally intended. Any party seeking to terminate a contract must be certain that it has a clear right to do so and that, at the point of termination, the other party has not rectified the breach following an earlier notice of default. Parties seeking to terminate a contract should be alive to the danger that if such breach no longer exists and termination is attempted anyway, the terminating party may well find itself in repudiatory breach of contract and exposed to a claim for damages from the other party to the contract.
Finally, any notice of termination must be drafted carefully. Nevertheless, given that such a notice need not expressly specify that it is a termination notice, correspondence received from the other party to a contract should be analysed cautiously to ascertain its purpose in this regard.
A common law lien is a right which entitles a party with physical possession of goods to hold on to those goods pending payment of a debt. It exists in Scotland and England, though in Scotland it is sometimes referred to as a right of retention. Historically, there is a distinction between liens over tangible and intangible property.
Tangible property can be the subject of physical possession and therefore physical control; intangible property cannot. The emphasis on physical possession has led to the established view that a common law lien cannot be exercised over intangible property, such as
an electronic database, and Your Response follows this reasoning.
Your Response Limited v Datateam Business Media Limited  EWCA Civ 281
The recent Court of Appeal decision in Your Response has demonstrated that suppliers cannot exercise a common law lien over an electronic database pending payment of outstanding fees for services rendered.
2 | Commercial Contracts Bulletin May 2014
Datateam is a magazine publisher and keeps a record of information relating to its subscribers in an electronic database. The database requires constant amendment to ensure that the information is current. Datateam entered into a contract (partly oral, partly in writing) with Your Response for the provision of database management services for this purpose. Crucially, the contract was silent as to what was to happen to the database when the contract came to an end.
Datateam was unhappy with the service provided by Your Response and gave notice to terminate the contract. Your Response refused to release the database or provide access to it until all outstanding fees were paid. Datateam refused to pay until the database was made available. A standoff ensued and the database was of such strategic importance to Datateam that it engaged another company to reconstitute it.
Your Response initiated proceedings claiming fees for services rendered and damages for breach of contract. Datateam counterclaimed for damages for breach of contract represented by the cost of reconstituting the database.
At first instance, Your Response was successful in establishing that it was entitled to withhold the database until Datateam paid its fees for the services it had provided. The judge held:
“It would not be appropriate for the law to ignore the development in the real world of record keeping moving from hard copy records into electronic media”.
Datateam then appealed to the Court of Appeal (the “Court”).
The Court expressed some sympathy with the view of the lower court, but unanimously overruled its decision. The majority of the Court’s discussion focused on whether it is possible to exercise a possessory lien over intangible property. The Court considered that the essential nature of a common law lien is a right to retain possession of goods delivered for the purpose of carrying out work on them. On the grounds that it is not possible to transfer physical possession of intangible property by simple delivery, the Court held there could not be a lien over intangible property.
Additionally, the Court commented that the provisions of the Copyright, Designs and Patents Act 1988 and the Copyright and Rights in Databases Regulations 1997 show clearly that the information which makes up a database is not intended to constitute property of a type that is “susceptible of possession”.
The Court recognised the benefit of extending the protection of property rights to take account of recent technological developments. However, the Court held that allowing a possessory lien to be exercised over intangible property would represent a significant departure from the current law, and the Court was unwilling to go further without the input of Parliament.
The retention of a customer’s goods pending payment is no doubt a highly effective weapon in a supplier’s arsenal. However, the result in Your Response shows that, in the absence of an express contractual right to do so, the courts would likely order the data to be returned to the customer. Data managers should therefore consider negotiating an express right to exercise a lien over a customer’s data in a contract if this is a remedy upon which a data manager may seek to rely.
Service provisions: does your contract serve you well?
The court was asked to determine the preliminary matter of whether T&L Sugars Limited’s notice of and claim for breach of warranty by Tate & Lyle Industries Limited had been correctly served in accordance with the terms of contract.
The court was first required to determine whether or not the CPR – which govern civil court practice in England and Wales - applied in interpreting the contractual stipulations for serving a claim for breach of warranty. Further, if the CPR did apply, at what point did service legally take place? Uncertainty arose out of a perceived conflict between CPR rules 6.14 and 7.5. The former states that service is deemed to occur two working days after dispatch of the required claim forms; the latter that service occurs upon actual receipt of the claim forms by the party being served upon.
The contract in question related to the sale of the European sugar business of Tate & Lyle Plc to the defendant, Tate & Lyle Industries Limited, by the claimant, T&L Sugars Limited. The claimant alleged that the defendant was in breach of certain express and implied terms of a share and business sale agreement (SBSA) between them. Under the SBSA, the claimant was required to give notice of any warranty claim to the defendant within 18 months of completion. Any such claim then had to be issued and served on the defendant within 12 months after the notice. Failure to do
so would result in the claim being deemed to have been irrevocably withdrawn. However, the contract did not provide a specific mechanism for the service of legal proceedings.
Following completion, the last date of the 18 month claim window was 30 March 2012, and it was on this date that the claimant notified the defendant of the breach of warranty claims in writing. The final date for the claim to be issued and served on the defendant was 30 March 2013. The claimant’s solicitors delivered the required documentation to the defendant’s solicitors by hand on 27 March 2013. However the defendant argued that the claimant’s claims were deemed to be irrevocably withdrawn because they were not issued and served within the meaning of the SBSA, on the basis that CPR 6.14 deems service to take place two business days after delivery. In this case, the Easter public holidays would have the effect of pushing the date of deemed service back to 2 April 2013 and past the 30 March deadline.
The court was quick to determine that the CPR did apply to this contract. The judge was not convinced by the reasoning in an earlier case (Ageas (UK) Ltd v Kwik-Fit  EWHC 3261 (QB)) which concluded that contracting parties could not reasonably be taken to ascribe strictly legalistic meaning to an ordinary word such as “service” and as such the CPR did not apply to the interpretation of the contract. Instead, the judge in the present case argued a line of reasoning to the effect that:
1 in the phrase “issued and served” the word “issued” has specific legal meaning relating to the CPR, it therefore follows that “served” should similarly have specific legal meaning;
2 in the context of the document, the natural meaning of the word “served” is “served in accordance with the procedural rules in force in England at the relevant time”;
T&L Sugars Limited v Tate & Lyle Industries Limited  EWHC 1066
In the English case of T&L Sugars Limited the court held that the word “service” in respect of the service of a claim under a contract, in the circumstances of the case and in the absence of express wording to the contrary, meant service in accordance with the Civil Procedure Rules (CPR). Further, the court determined that the proper interpretation of the CPR is that service occurs on the actual date of delivery of the claim forms to the other party unless there is clear, express wording to the contrary.
4 | Commercial Contracts Bulletin May 2014
3 the contract envisages two regimes: one for notices and one for service of a legal claim form showing “that the parties were alive to the service of legal process being something distinct from the giving or receipt of a contractual notice”;
4 ascribing the legal meaning to the term “service” provides the parties with greater legal certainty; and
5 with specific reference to the exclusive English jurisdiction clause, reading the contract as a whole suggests the CPR rules should apply in this context.
With this determined, the question centred around whether service occurred on actual delivery (applying CPR 7.5) or whether service occurred on the date by which service was legally deemed to have taken place, i.e. two business days after delivery (applying CPR 6.14).
The court rejected the submissions of the defendant concluding that by reading the two CPR provisions together, there is a distinction created between actual service and the date when service is deemed to have occurred. The court commented that such a distinction exists because “whereas CPR 7.5 is looking at when actual service takes place… CPR 6.14 is looking at when service will be deemed to have taken place for the purpose of other steps in the proceedings thereafter”. Deemed service therefore is only a device for calculating time periods under the CPR. For example, a defendant has fourteen days to acknowledge service under CPR 58.6, the period running from the date of deemed service, even though actual service occurred two days earlier.
In this instance, the step required to effect actual service was the delivery of the claim form to the defendant’s solicitors’ office. This took place on 27 March 2013 as opposed to 2 April 2013, thereby rendering the claimant’s service valid.
T&L Sugars Limited leaves us with two first instance decisions arriving at entirely opposite conclusions in similar circumstances. Despite the earlier Ageas case concluding that the CPR did not apply in interpreting the proper meaning of a contract, for the reasons detailed above T&L Sugars Limited held that the CPR did apply. This uncertainty will no doubt be subject to further judicial scrutiny in other cases in the near future.
In the meantime, this case serves as a reminder that parties should specify clearly in their contract if they wish CPR provisions to apply or not. This express clarity will reduce the risk of prolonged and costly disputes regarding delivery and timing of service.
You say irrational, I say reasonable – the Court of Appeal looks at what is a “commercially reasonable manner”
The case concerned credit default guarantees provided by Barclays to Unicredit pursuant to which Unicredit transferred some of the credit risk on certain loan portfolios to Barclays in return for Barclays receiving quarterly premium payments and a fixed quarterly fee. The guarantees contained an early termination clause which gave Unicredit, in the event of a “Regulatory Change”, the option to seek to terminate the guarantees early. However such termination required Barclays’ consent, which had to be determined “in a commercially reasonable manner”.
Despite the optional early termination clause, given the term of the guarantees, at the outset of the transaction Barclays understood that it could expect to earn at least five years of premium and fees and booked five years’ worth of profit. In 2010, only two years into the arrangement, Unicredit sought Barclays’ consent to terminate the guarantees. Barclays accepted that a “Regulatory Change” had occurred but, on the basis of their expected minimum return, sought payment of five years’ fees under the guarantee for giving its consent. Unicredit claimed that Barclays was not acting in a “commercially reasonable manner” in seeking payment of these fees in return for granting consent.
In March 2014, the Court upheld the decision of the High Court in finding that Barclays were acting in a commercially reasonable manner when demanding five years’ fees upon termination. In making its decision, the Court focused on the meaning of the clause in its particular context as relevant to the agreement between the parties. The Court used an objective standard of reasonableness, considering whether the decision was so unreasonable that no commercially reasonable person could have come to that particular decision. The Court considered that in making its decision, it was impractical to ask Barclays to weigh the parties’ competing interests against one another and determine the overall commercially reasonable outcome. Instead, Barclays was entitled to give its own interests primacy in preference to the interests of Unicredit.
The Court found that, although some exercise of control is necessary in this test, the Court would only interfere if a party demanded a sum far in excess of the reasonably anticipated return from the contract or if it refused to consent at any price. It was the “manner” of the determination as to whether or not to give consent which must be commercially reasonable, not the outcome. However, commercially unreasonable outcomes may cause the manner of the determination to be subjected to greater scrutiny. Whilst a party is entitled to prefer its own commercial interests to the other party’s in circumstances where it is required to act in a “commercially reasonable manner”, the situation should not be treated as an opportunity to ransom consent for unrealistic commercial demands.
Barclays Bank plc v Unicredit Bank AG  EWCA Civ 302
It is commonplace in many commercial contracts to require that parties exercise any powers or discretions in a “commercially reasonable manner”. The recent Court of Appeal decision in Barclays Bank plc v Unicredit Bank AG  EWCA Civ 302 considered the meaning of the phrase and the limits of commercially reasonable conduct. In upholding the decision of the High Court, the Court of Appeal (the “Court”) found that requiring a party to give their consent in a “commercially reasonable manner” meant only that they could not withhold their consent irrationally.
6 | Commercial Contracts Bulletin May 2014
Although the case concerned a financial transaction, it has a broader application to the interpretation of commercial contracts in general. It is unfortunate that the Court did not set out a clear test or guidance for interpreting the term “commercially reasonable manner”. Instead, it noted that it was difficult to express a test for commercial reasonableness.
One possible consequence of this decision is that contracts may become longer, with parties inserting interpretation clauses explaining what is meant by “commercially reasonable” and other controversial phrases such as, “using their best endeavours”. This could lead to contracts where words may not have their natural meaning, something likely to be undesirable to
the courts, particularly as this case makes it clear that, unless exceptional circumstances apply, the courts will give effect to the ordinary meaning of the words of contractual provisions. Alternatively, clauses could be drafted to reduce ambiguity by (in the case of “commercially reasonable” consent) not requiring the party whose consent is being sought to exercise any discretion. Neither of these alternatives seems satisfactory and further guidance from the courts as to the interpretation of “commercially reasonable manner” would be preferable and helpful. In the meantime, the prudent approach continues to be clear drafting and limited use of such potentially ambiguous phrases.
Fujitsu hits a red light: exclusion of liability clauses, fiduciary duties and good faith
On 12 September 2002, PricewaterhouseCoopers (“PwC”) entered into a contract with the Driver and Vehicle Licencing Authority (“DVLA”) under which PwC would provide IT services to DVLA (the “Contract”). On the same date, PwC entered into a sub-contract (the “Sub-Contract”) with Fujitsu Services Limited (“Fujitsu”) under which PwC agreed to sub-contract to Fujitsu a certain proportion of the IT services that PwC was to provide to the DVLA under the Contract. Around one month later, IBM United Kingdom Ltd (“IBM”) purchased the relevant PwC consulting arm and took over the Contract and Sub-Contract in PwC’s place.
Fujitsu alleged that IBM was in breach of the Sub-Contract on the grounds that IBM had failed to pass the work for the relevant services to Fujitsu. As a consequence, Fujitsu claimed that it had suffered a significant loss of profits. IBM denied liability on the following grounds:
IBM referred to the following exclusion of liability clause in the Sub-Contract:
“Neither Party shall be liable to the other under this Sub-Contract for loss of profits, revenue, business, goodwill, indirect or consequential loss or damage.”; and
IBM denied the existence of any duty of good faith or any fiduciary duties between IBM and Fujitsu.
Fujitsu Services Limited v IBM United Kingdom Limited  EWHC 752
Fujitsu Services Limited v IBM United Kingdom Limited  EWHC 752 demonstrated: (i) the court’s willingness, in a contract between two sophisticated parties, to interpret strictly a clear and unambiguously drafted exclusion of liability clause; (ii) the court’s reluctance to import fiduciary duties into commercial contracts; and (iii) the necessity of including an express obligation of good faith into an English law contract if the parties seek to rely upon such an obligation.
The decision relates to a trial of preliminary issues. A full trial is fixed for February 2015 and we will keep you informed of any updates.
Exclusion of Liability
In examining the force and extent of the exclusion of liability clause, the court applied the general principles of contract construction/interpretation. The court quoted the case of Rainy Sky SA v Kookmin Bank  1WLR 2900:
“The ultimate aim in interpreting a commercial contract is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. The “reasonable person” is one who “has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”
The court held that the wording of the exclusion of liability clause was clear and unambiguous. Additionally if read within the context of the Sub-Contract as a whole, and in light of the material background and circumstances as at the time the Sub-Contract was entered into, there was no suggestion that anything other than a simple application of the words was required in interpreting the clause. The following points were influential:
the agreement was a sophisticated commercial agreement and had been entered into at arms-length;
the clause used express and clear words (rebutting any presumption that the parties did not intend to abandon their remedies for loss of profit); and
the clause was reciprocal.
The court rejected Fujitsu’s claim that the exclusion of liability clause effectively removed all its remedies. The court held that the clause did not exclude a claim on the basis of non-payment of a debt or for an account of profits.
Breach of Fiduciary Duties
The court held that IBM owed Fujitsu no fiduciary duties under the Sub-Contract, on the grounds that:
1 the relationship between the parties did not fall within any settled category of fiduciary relationship, such as exists between a trustee and beneficiary, an agent and principal or a solicitor and client;
2 the Sub-Contract expressly stated that the parties had not entered into any partnership, joint venture, association or employer/employee relationship; and
3 this was an arm’s length commercial contractual relationship and to import fiduciary obligations into it would be to distort the true bargain between the parties.
Duty of Good Faith
The Sub-Contract contained relatively standard warranties that IBM would (in performing its obligations under the Sub-Contract) employ appropriately qualified and experienced personnel and that such personnel would discharge their obligations “with all due skill, care, and diligence in accordance with Good Industry Practice”. The definition of “Good Industry Practice” included an obligation that all IBM personnel would “seek in good faith to comply with [IBM’s] contractual obligations”.
The court did not accept that this gave rise to an express obligation of good faith on the part of IBM in the performance of its duties under the Sub-Contract. The court held that the natural interpretation of the clause was that the good faith obligation applied to IBM personnel and not the organisation. The court stated that, in a detailed contract like the Sub-Contract, one would expect clear words imposing a duty of good faith if there was to be a duty of good faith on the parties.
The case confirms that courts are likely to interpret exclusion of liability clauses strictly if: (i) the clause is clearly and unambiguously drafted; (ii) the agreement is between two sophisticated parties and has been negotiated at arm’s length; and (iii) the clause is reciprocal – in that both parties’ remedies are limited. Parties should seek to have a clear understanding of the exact limit or exclusion of remedies at the negotiation stage and ensure that this understanding is reflected in the contractual drafting.
To an extent this case alleviates the concern which arose in light of last year’s High Court decision in Yam Seng Pte Ltd v International Trade Corporation Ltd  1 C.L.C. 662. Yam demonstrated that the courts may imply a general duty of good faith into commercial contracts, particularly where the parties have had an on-going relationship. However, the differences in approach/interpretation cast doubt as to how a court will interpret good faith obligations in the future. If the parties require an obligation to act in good faith to bind a party, then this should be set out clearly in the contract.
Parties should also be mindful that, as demonstrated in this case, courts are reluctant to import fiduciary duties into contracts where a fiduciary relationship does not exist.
8 | Commercial Contracts Bulletin May 2014
Liability for pre-contractual negotiations: something worth grousing about?
The respondents (“OG”) were the owners of a grouse moor on which commercial shooting took place. OG entered into negotiations with Mr. Erskine (“E”) with a view to leasing him the land for this purpose. During negotiations, E expressed concern that the grouse stocks had been over-shot. OG sent E an email containing information about the grouse counts carried out earlier in the year which exaggerated the grouse population size. On that basis, E decided to proceed with the transaction and informed OG that he intended to incorporate a limited liability partnership to take the tenancy. Discussions continued between the two parties and Cramaso LLP was incorporated shortly before it entered into the lease. Cramaso LLP then discovered that the grouse population figures were inaccurate and sought reduction of the contract and damages.
A contract entered into on the basis of a misrepresentation may be set aside by the representee. It does not matter whether the misrepresentation was made fraudulently or negligently. However, in order for a party to be found liable in damages for misrepresentation, it must be shown that a duty of care was owed to the representee.
A misrepresentation can have a “continuing” effect. In other words, a misrepresentation does not end after it is made, but remains in the mind of the representee until a contract is concluded. Therefore, it makes no difference if there is a lapse of time between the misrepresentation and the conclusion of the contract. On the other hand, a misrepresentation will not have a continuing effect where, for example, it is given with an appropriate disclaimer or if the representee discovers it is false before concluding the contract.
The representor is responsible for the accuracy of a continuing representation. This means there is a positive obligation on the representor to inform the representee if he later discovers his representation is untrue or if it becomes untrue as a result of a change in circumstances.
In Cramaso, the Supreme Court (the “Court”) rejected the approach taken by the lower courts: the Outer House focused on the non-existence of the contracting party, Cramaso LLP, at the time the misrepresentation was made; and the Inner House held that it was not foreseeable that anyone other than E would have relied on the misrepresentation.
Instead the Court considered that the pertinent question was whether there was a continuing representation which remained in effect until the contract was concluded. If so, did OG’s responsibility for the accuracy of that representation continue even after the identity of the prospective party had changed?
The Court reiterated the established point that the law is “capable of imposing a continuing responsibility upon the maker of a pre-contractual representation” for the accuracy of that representation. The Court concluded that the representation in the present case was “undoubtedly of a continuing nature so long as E remained the prospective contracting party.”
Cramaso LLP v Ogilvie-Grant  UKSC 9
In the Scottish case of Cramaso, the Supreme Court considered the liability of a contracting party for a negligent misrepresentation made in pre-contractual negotiations. Ultimately, the misrepresentation induced the conclusion of a contract with someone other than the original representee. The court held that a misrepresentation may still result in liability for the party that made it, even if the recipient of the information is not the eventual party to the contract in question. Cramaso is the first reported case on this issue and has implications for all parties engaged in pre-contractual negotiations.
To address the issue of E’s change of identity the Court referred to an English authority, Briess v Woolley  AC 333, which also involved an agency relationship and whose facts were similar to those in Cramaso. In Briess, a fraudulent misrepresentation was made in the course of pre-contractual discussions by a company shareholder. The shareholder was subsequently authorised by the other shareholders to continue the negotiations as their agent, and in due course a contract was concluded. The House of Lords held that the shareholders were liable in damages to the other contracting party for the misrepresentation, notwithstanding that it had been made by the agent shareholder before he began to negotiate on their behalf. According to Lord Tucker, the duty of the agent to correct his misrepresentation “cannot be regarded as only a personal obligation”. If he is subsequently appointed agent “with authority to make representations for the purpose of inducing a contract he, in his capacity as agent, is by his conduct repeating the representations previously made by him”.
In Cramaso, the converse scenario occurred: a misrepresentation was made to - rather than by - an agent of the contracting party before the commencement of his agency. The Court did not see why the principle in Briess should not also apply in the reverse. As a result, the Court found that E’s change of identity had no effect on the continuing nature of the representation and did not relieve OG of responsibility for its accuracy. The misrepresentation remained operative in the mind of E even after he began to act as Cramaso LLP’s agent and OG had a duty to correct him.
The Court also observed that negotiations between OG and E continued after it became apparent that an LLP was to be used as a vehicle for E’s investment. Additionally, the Court added that:
neither party drew a line under the previous discussions after Cramaso LLP was formed in order to start afresh;
neither party disclaimed what had previously been said in the course of their discussions; and
neither party sought assurances from the other that they could rely on their previous discussions.
As a result the Court held that OG implicitly asserted the accuracy of his earlier representation made to E in his capacity as an individual. Further, it was foreseeable that the representation would induce Cramaso LLP to enter the contract, as it remained operative in E’s mind. The Court concluded that OG owed Cramaso LLP a duty of care which it had failed to fulfil and, as a result, OG was liable in damages for any loss suffered by Cramaso LLP.
The decision in favour of Cramaso LLP was unanimous and appears to be a logical application of the principle laid down in Briess. Contracting parties should ensure that all pre-contractual representations are accurate, regardless of the recipient of the information. If there is a change in status of either party negotiating a contract, it should be considered carefully whether the new entity should be able to rely on representations made during earlier negotiations. If not, be sure to draw a line under those earlier exchanges, ideally by giving notice in writing to the new entity to that effect.
Parties should consider carefully the implications of including an “entire agreement” clause (i.e. a clause which seeks to exclude liability for pre-contractual statements) and whether or not it would be beneficial to extend its application to representations made to third parties. If, as in Cramaso, the identity of one party changes during negotiations, then the inclusion of such a clause would have a negative impact on the party seeking to rely on statements made before the change in identity occurred.
Similarly, if a party is entering into a contract on the basis of one or more key representations made during negotiations, the party relying on those representations should make sure they are included in the contract as warranties to avoid uncertainty as to whether it is able to rely on that statement or not.
10 | Commercial Contracts Bulletin May 2014
To agree or not to agree, that is the question…
A contractual provision which leaves certain terms or issues to be determined in the future is known as an “agreement to agree”. Legal agreements must provide certainty and clarity for those relying upon them. The courts are reluctant to enforce “agreements to agree” on the grounds of lack of certainty. In our April 2013 Commercial Contracts Bulletin we commented on the case MRI Trading AG v Erdenet Mining Corporation  EWCA Civ 156 which concerned the enforceability of an “agreement to agree” provision. Dany Lions Ltd shows that this continues to have the potential to be a contentious and ultimately expensive issue.
Dany Lions Ltd (“DLL”) purchased a 1955 Bristol 405 (a rare classic car) for £20,000 from Bristol Cars Ltd (“BC”) on the understanding that the car would be restored by BC under a separate arrangement. Negotiations for the scope of the restoration works ensued, during which BC was placed into administration. DLL were assured that this would have no impact on the restoration works and entered into an agreement with BC under which, for a fixed price of £153,000, BC would carry out the restoration work (the “Existing Agreement”).
Ultimately, BC was unable to perform the restoration work. DLL and BC entered into a settlement agreement in respect of the restoration work. The settlement agreement contained the following relevant provisions:
“DLL will use its reasonable endeavours to fulfil the Condition Precedent”;
“Condition Precedent means DLL entering into an agreement with JSW [Jim Stokes Workshop Limited] on or before 30 May 2012 to carry out the Works”; and
“If the Condition Precedent is fulfilled the Existing Agreement will come to an end and the parties will be released and fully discharged from their respective obligations under it and the [settlement agreement] shall have effect. If the Condition Precedent is not fulfilled [the settlement agreement] shall have no effect and the parties shall have the same rights and obligations relating to or otherwise in connection with the Existing Agreement which they had immediately before the making of this [settlement] agreement” (clause 4).
The deadline of the Condition Precedent was extended several times as DLL and JSW took part in protracted and unsuccessful negotiations to secure a fixed price for the restoration work. DLL and JSW were unable to reach an agreement in respect of price and after several months of negotiations DLL came to the view that, despite using what it considered to be “reasonable endeavours” to enter into an agreement with JSW, there was no prospect of DLL and JSW reaching an agreement. DLL raised proceedings against BC for damages for non-performance of the Existing Agreement in accordance with clause 4 of the settlement agreement.
BC disputed this on the grounds that DLL had failed to use reasonable endeavours to enter into an agreement with JSW and was therefore not entitled to rely on clause 4 to bring an action against BC.
The court firstly considered whether the obligation to use reasonable endeavours to reach an agreement was enforceable.
In general, an obligation to use reasonable endeavours to achieve a particular objective is not in itself regarded as too uncertain to be enforceable. However, in order for a court to interpret such a provision as enforceable: (i) the object of the endeavours must be capable of being ascertained with
Dany Lions Ltd v Bristol Cars Ltd  EWHC 817 (QB)
In Dany Lions Ltd the court held that an obligation on a party to use “reasonable endeavours” to enter into an agreement with a third party was an “agreement to agree” and lacked the requisite certainty to be enforceable.
sufficient certainty; and (ii) there must be sufficiently objective criteria by which the performance of the endeavours obligation can be evaluated.
In Dany Lions Ltd, the court held that the parties had left the question of price and other terms of any contract between DLL and JSW to future negotiation. Each of DLL and JSW were entitled to seek to agree terms based on their own commercial best interests. There was therefore no difference between this case and a situation where the contracting parties agree to use reasonable endeavours to agree the terms of a new contract. The court concluded that there was no objective criteria by which the court could evaluate whether it was reasonable or unreasonable of DLL to refuse to agree to any particular terms on offer by JSW. The provision was therefore unenforceable and DLL was entitled to raise a claim against BC in accordance with clause 4.
This case serves as a useful reminder of the pitfalls of relying on “agreement to agree” provisions. The court in Dany Lions Ltd expressed regret as to the finding that the provision in question was unenforceable as it had clearly been intended by both parties to be binding. The court commented that, if the essential terms of a prospective agreement were identified in advance, there may be the requisite certainty of object and sufficient criteria by which to judge the endeavours and thus to hold the provision enforceable. However, it is unclear how detailed the terms of any such prospective agreement would require to be for this to apply. The key message remains that, in order to ensure certainty and enforceability of terms, “agreements to agree” should be avoided as far as possible by parties to commercial contracts.
12 | Commercial Contracts Bulletin May 2014
Wine not? Principal fails to end agent’s authority to collect payments
Angove’s PTY Limited (“Angove”), an Australian wine producer, contracted with D&D Wines International Limited (“D&D”) to act as the agent and distributor of its wines. The dispute concerned only D&D’s role as agent. D&D, as Angove’s agent, sold wine to customers on behalf of Angove.
The payment mechanism under the agency agreement was as follows: (i) Angove invoiced D&D for the price of the wine sold to a customer; (ii) Angove issued a credit note for the amount of commission which D&D would receive; (iii) D&D invoiced and obtained payment from a customer; and (iv) D&D would pay this amount to Angove, minus D&D’s commission, within 90 days of receiving the invoice from Angove. D&D’s payment obligation to Angove applied whether or not it received payment from the customer. Upon termination of the agency agreement, both parties were obliged to pay the other all sums due.
D&D went into administration in April 2012. Angove subsquently served notice on D&D terminating the agency agreement. In this termination notice, Angove specifically stated that D&D had no further authority to collect payment on Angove’s behalf from two particular customers (which Angove named on the notice). After receipt of this notice, D&D received money from these two customers for wine delivered prior to the termination of the agency agreement. These payments were placed in escrow pending resolution of the litigation.
The dispute arose around whether D&D had the authority to accept and collect these payments. If so, that money, now that D&D had entered into administration, would be distributed among D&D’s creditors as per the normal insolvency processes. If not, the money should be repaid to the two customers (or paid to Angove on the customers’ direction).
The court felt justified in departing from the general rules of agency that: (i) a principal may end an agent’s authority at any time; and (ii) where an agency arrangement is terminated by the principal in breach of an agency agreement, the agent’s only remedy is to sue for damages, on the grounds that the general rules must yield to the specific provisions which the parties had agreed.
In determining whether Angove’s termination notice was effective, the court considered the provisions of the agency agreement itself.
The court interpreted the payment mechanism to mean that it was implicit after termination of the agency agreement that D&D should remain entitled to collect monies accrued under invoices up to, and including, the date of termination. This proposition was supported in the court’s view by a provision in the agency agreement that any accrued rights of the parties would survive termination of the agreement.
Bailey v Angove’s PTY Limited  EWCA CIV 215
In Bailey, the Court of Appeal held that an agent’s right to collect payments did not terminate on the termination of the agency agreement by the principal.
The court considered the general rule of agency: that a principal is entitled to terminate an agency agreement (and an agent’s sole remedy will be for breach of contract). However, the court departed from this position on the grounds that the parties had agreed otherwise in the agency agreement.
D&D was therefore entitled to collect the monies and Angove was in breach of the agency agreement by attempting to terminate D&D’s rights to do so.
On the grounds that the payment had already been received and was currently held in escrow pending resolution of the litigation, the court considered that this was not a question of forcing a principal to accept services from an agent.
Bailey demonstrates the potential difficulties which a party may experience when trying to terminate an agency agreement. Close attention should be paid to the termination and payment clauses of an agency agreement to ensure that the position is unambiguous. The court in Bailey made it clear that this case was decided on relevant provisions of the agency agreement itself, but it is not clear as to when exactly this reasoning would be applied.
In terms of the steps a principal could take in a situation similar to this to ensure that an agency relationship has been terminated, Angove’s approach of serving notice and calling out specifically that the authority to do certain acts is terminated seems a logical starting place (although in this case it was unsuccessful). To bolster this approach, it may be worth considering practical measures, such as notification to customers and intercepting payment to an agent. It should be borne in mind that termination may be itself a breach of an agency agreement and damages may be payable to the agent.
Angove have applied for leave to appeal this decision and we will provide an update on any further developments in due course.
14 | Commercial Contracts Bulletin May 2014
CMS Cameron McKenna’s free online information serviceReceive expert commentary and analysis on key legal issues affecting your business.
Register for free email alerts and access the full Law-Now archive at www.law-now.comCMS Cameron McKenna LLPMitre House160 Aldersgate StreetLondon EC1A 4DDT +44 (0)20 7367 3000F +44 (0)20 7367 2000The information held in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice.CMS Cameron McKenna LLP is a limited liability partnership registered in England and Wales with registration number OC310335. It is a body corporate which uses the word “partner” to refer to a member, or an employee or consultant with equivalent standing and qualifications. It is authorised and regulated by the Solicitors Regulation Authority of England and Wales with SRA number 423370 and by the Law Society of Scotland with registered number 47313. It is able to provide international legal services to clients utilising, where appropriate, the services of its associated international offices.
The associated international offices of CMS Cameron McKenna LLP are separate and distinct from it. A list of members and their professional qualifications is open to inspection at the registered office, Mitre House, 160 Aldersgate Street, London EC1A 4DD. Members are either solicitors or registered foreign lawyers. VAT registration number: 974 899 925. Further information about the firm can be found at www.cms-cmck.com© CMS Cameron McKenna LLPCMS Cameron McKenna LLP is a member of CMS Legal Services EEIG (CMS EEIG), a European Economic Interest Grouping that coordinates an organisation of independent law firms. CMS EEIG provides no client services. Such services are solely provided by CMS EEIG’s member firms in their respective jurisdictions. CMS EEIG and each of its member firms are separate and legally distinct entities, and no such entity has any authority to bind any other. CMS EEIG and each member firm are liable only for their own acts or omissions and not those of each other. The brand name “CMS” and the term “firm” are used to refer to some or all of the member firms or their offices. Further information can be found at www.cmslegal.com
© CMS Cameron McKenna LLP 2014