In this briefing we look at the lessons to be learnt from some of the English contract law cases decided in 2017. The stability of English contract law is one of the reasons why it is a popular choice of law to govern commercial contracts and indeed there were no major contract law developments in 2017. However, the cases we have chosen all illustrate key points for those drafting and managing contracts. We also give an outline of the issues to consider in the context of Brexit when drafting or reviewing contracts.
JANUARY 2018
London
Table of Contents
1. Formation of contract 2. Interpretation of contracts 3. Endeavours obligations
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4. Limitation and exclusion clauses 6
1. Formation of contract
Numerous cases in 2017 considered the issue of whether a contract had been formed and, if so, on what terms. In the first two
5. Penalties 6. Notice provisions
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cases the courts rejected the claimants' case that a binding contract existed because there was no intention to create legal
7. Termination
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relations and, in any case, the terms were too uncertain to be enforceable. The third case similarly highlights the wisdom of recording the terms of your agreement formally in writing rather
8. English law contracts post-Brexit 11
9. Contacts
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than relying on oral discussions and also underlines the
importance of knowing who you are contracting with.
Bruce MacInnes v Hans Thomas Gross [2017] EWHC 46 (QB)
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Mr MacInnes was employed by an investment bank and Mr Gross
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ran his own business. Mr MacInnes claimed that at a meeting with British and Irish Legal Information Institute
Mr Gross in a restaurant the two men agreed that he would leave
the transcripts of all the cases we refer to
his employment and personally provide services to Mr Gross with a are available free of charge from the BAILII
view to developing his business ready for sale. In return, he would website
receive a percentage of the difference between the target price of
the business and the actual sale price. Mr Gross instead claimed
that there had been an informal discussion about Mr MacInnes buying shares in his business at a preferential rate.
Mr MacInnes subsequently emailed Mr Gross setting out what he alleged was an agreement "on headline terms" between the parties. He handed in his notice to the investment bank but continued to work for the bank in connection with Mr Gross's business. Several months later, having found a potential buyer for the business, Mr MacInnes forwarded a copy of the email to Mr Gross stating that it was important that the parties were "completely aligned". In reply, Mr Gross stated that they needed to make a "proper contract". After the business had been sold, Mr MacInnes brought proceedings seeking payment of the sum of 13.5 million from Mr Gross.
The High Court dismissed the claim. The informal setting for the discussions meant that the court scrutinised whether there was an intention to create legal relations. The subsequent email exchanges suggested that the terms had yet to be finalised and therefore indicated that there was no such intention.
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The terms of the alleged contract were also too complex and too uncertain to be enforceable. The email sent by Mr MacInnes following the restaurant meeting did not refer to the sale of the business, to the proceeds of sale nor to the services to be provided and the terms as to his remuneration were unclear. It was also relevant that Mr MacInnes was employed by the bank at the time and was therefore not in a position to make an immediate personal contract with Mr Gross.
Jeffrey Ross Blue v Michael James Wallace Ashley [2017] EWHC 1928 (Comm)
Mr Ashley owned the majority of the shares in Sports Direct and Mr Blue provided consultancy services to the company. The two men met three representatives of a potential broker at an informal meeting in a pub. Mr Blue claimed that during the meeting Mr Ashley agreed to pay him 15 million if he was able to raise the company's share price from 4 to 8. No written record of the agreement was kept.
Just over a year after the pub meeting, Sports Direct's share price did hit 8 and a few months later, Mr Ashley paid Mr Blue 1 million, which Mr Blue claimed was a sign of Mr Ashley's commitment to the agreement. Mr Ashley could not recall making the offer in the pub and claimed that the 1 million had been paid for unconnected reasons; he denied that any legally binding contract had arisen.
In a judgment that was pored over by the national press because of the individuals concerned, the judge dismissed Mr Blue's claim. The purpose of the meeting was to introduce Mr Ashley to potential new service providers, not to discuss Mr Blue's remuneration. The evidence showed that the conversation was jocular in nature and tone and that the suggestions about Mr Blue's remuneration were just "banter". It also would make no commercial sense for Mr Ashley to make the alleged offer and it would have been out of character for him to do so. There had been no intention to create a legally binding agreement.
The judge also held that there was a lack of certainty. The alleged offer was too vague to be taken seriously. For example, there was no consideration of what work Mr Blue would do to earn the payment and how it could be measured and linked to the increase in share price. None of the witnesses thought that Mr Ashley was being serious and there was even evidence to suggest that Mr Blue himself only attached significance to it once the share price started rising.
The judge was also satisfied that the payment of 1 million was unrelated to the agreement allegedly made at the pub. Applying the objective test required of the court, no reasonable person present at the meeting would have concluded that Mr Ashley's offer was serious and intended to conclude a contract. In the judge's view: "The fact that Mr Blue has since convinced himself that the offer was a serious one, and that a legally binding agreement was made, shows only that the human capacity for wishful thinking knows few bounds."
Erith Holdings Ltd and Others v Ronald William Murphy [2017] EWHC 1364
The parties entered into negotiations for Erith to purchase a waste site owned by Mr Murphy and operated by a company owned by him, Murphy's Waste Limited (MWL). Pending the sale, the parties agreed orally that Erith would carry out waste clearance works from the site. In addition, Erith made three loan payments to MWL. When MWL went into liquidation, Erith brought proceedings against Mr Murphy to recover outstanding sums, claiming that the services had been carried out, and the loan paid, on the back of assurances from Mr Murphy in his personal capacity.
The judge dismissed the claims, finding that the agreement for waste clearance was entered into by Mr Murphy on behalf of MWL and not by him personally. The fact that invoices were addressed to MWL and payments were made from MWL's account was "strong evidence" that both parties considered the agreement to be with MWL.
The judge accepted that Mr Murphy may well have given a general assurance that Erith would be paid by MWL. She did not however accept that Mr Murphy agreed to give a personal indemnity and any guarantee given by Mr Murphy was made orally, and so would be unenforceable under Section 4 of the Statute of Frauds 1677.
Despite accepting that Mr Murphy was indeed enriched at Erith's expense, and that the enrichment was unjust, Erith's claim for unjust enrichment also failed as there was a subsisting, enforceable contract (between Erith and MWL) relating to the waste clearance works.
Practice points Formation of contract
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.
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Discussions which take place in an informal setting can still give rise to a binding contract if these requirements are met.
Beware of conducting detailed negotiations by phone or in person without any third party presence and without keeping any written record. Whenever possible, include all essential terms in a written agreement signed by all the parties before any obligations are performed.
Ensure that any guarantee is properly documented and signed by the guarantor to comply with the requirements of the Statute of Frauds 1677.
2. Interpretation of contracts
The two cases in this section are both Supreme Court decisions in cases which we included in our 2015 contract briefing. We have considered the first case in more detail as the clause in question is a good example of the need for careful drafting of complex clauses and the court also made some general comments about the correct approach to interpretation. In addition, the Zayo case considered below in relation to notice provisions makes some interesting points about interpretation.
Wood v Capita Insurance Services Ltd [2017] UKSC 24
Sureterm was an insurance broker primarily offering bespoke policies to the classic car market. Its shareholders, including Andrew Wood, sold their shares to Capita. After the sale Sureterm's employees raised concerns about potential mis-selling prior to the sale, and these concerns were subsequently reported by Sureterm and Capita to the Financial Services Authority (FSA). The FSA determined that Sureterm's customers had been misled and Sureterm and Capita agreed to carry out a consumer redress exercise under which Sureterm paid out approximately 1.35 million.
The share purchase agreement contained warranties of compliance with regulatory requirements which potentially covered such mis-selling but the time limit for bringing warranty claims had passed. Capita therefore claimed against Mr Wood relying on an indemnity in the agreement which provided that:
"The Sellers undertake to pay to the Buyer an amount...to indemnify the Buyer...against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by [Sureterm] following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against [Sureterm], the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected misselling of any insurance or insurance related product or service."
Both parties claimed that the clause should be read as containing two indemnities:
the first against "all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred; and
the second against all fines, compensation or remedial action or payments imposed on or required to be made by Sureterm.
The key issue was the effect of the words shown in bold above. Mr Wood claimed that these words governed and qualified both of the indemnities set out before the phrase. As a result he claimed that the clause did not apply in circumstances where Sureterm self-reported to the FSA as there was no complaint or claim from customers.
Capita argued that the words in bold qualified just the second indemnity meaning that it could still recover under the first indemnity, as the 1.35 million paid out was a "loss" or "damage" within the scope of that indemnity.
The High Court agreed with Capita's construction but in 2015 the Court of Appeal unanimously reversed the High Court. In March 2017 the Supreme Court unanimously upheld the Court of Appeal decision, so finding in favour of Mr Wood, and attributed the opposing conclusions of the lower courts to the "opaque provision which ... could have been drafted more clearly".
The Supreme Court emphasised that both the language and the commercial implications should be used as tools to ascertain the objective meaning of an agreement - their use will vary according to the circumstances of the particular agreement. Some contracts can be successfully interpreted principally by textual analysis (because of
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their sophistication, or because they have been negotiated and prepared by skilled professionals), whereas others will require a greater emphasis on the factual matrix (because of their informality, brevity or the absence of skilled professional assistance).
The court adopted an iterative process to interpret the indemnity, through a textual analysis of the words in the context of the contract as a whole, and by considering whether the wider relevant factual matrix could provide guidance as to its meaning in light of the commercial effect of rival interpretations. It relied principally on a careful examination of the language of the clause and held that it was not for the court to improve what had turned out to be a poor bargain for Capita. The context was also significant given that Capita had time-limited warranty protection against mis-selling.
In relation to the impact of business common sense, the court noted:
"Business common sense is useful to ascertain the purpose of a provision and how it might operate in practice. But in the tug o' war of commercial negotiation, business common sense can rarely assist the court in ascertaining on which side of the line the centre line marking on the tug o' war rope lay, when the negotiations ended."
In this case both parties could argue that business common sense favoured their preferred interpretation of the indemnity; Capita had an interest in obtaining as broad an indemnity as possible against the adverse consequences of mis-selling and Mr Wood had an interest in minimising his exposure to liability after the two-year period for warranty claims had expired. This was reflected in the rulings of the lower courts as the judge at first instance gave several "business common sense" reasons why it would be wrong for Capita's indemnity claim to be excluded from the terms of the indemnity, whereas the Court of Appeal found just as many reasons why it should be excluded.
MT Hjgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & another [2017] UKSC 59
This case concerns a contract for the design and installation of the foundations for 60 wind turbine generators in an offshore wind farm in the Solway Firth. The contract documents included technical requirements and conditions of contract which provided that those conditions took precedence over the technical requirements.
The contract conditions required the contractor to design the foundations so that the works as a whole should be fit for its purpose as determined in accordance with the technical requirements and using good industry practice. The technical requirements required the works to be designed in accordance with an international design standard and for a minimum site specific design life of 20 years. Shortly after completion of the works, the foundations started to fail due to a deficient design which was based on a fundamental error in the relevant design standard.
The key question for the Supreme Court was whether the contractor was in breach of contract by not ensuring a design life of 20 years, despite the fact that it used due skill and care, adhered to good industry practice and complied with the relevant design standard. The Supreme Court reversed the Court of Appeal's decision and found that the contractor was liable for the cost of the remedial works. It held that where there is a fitness for purpose obligation it should be given its natural meaning despite the fact that it is contained in a technical schedule and is potentially inconsistent with other provisions.
For further information please see our detailed briefing on the case which can be accessed here.
Practice points Interpretation of contracts
Remember that courts may have differing views on what any given clause means and a particular meaning which may be what the contract drafter had in mind may in fact be one of many.
Test the wording of your contract from a litigator's point of view and rectify any potential uncertainties. Where practical, demonstrate in the drafting the commercial rationale for key provisions.
Consider whether your contract covers all of the possible consequences when dealing with a future event.
Break up clauses into sub-clauses and separate paragraphs to make provisions clearer and pay careful attention to the impact of grammar and punctuation.
Remember that the courts will not necessarily use a "business common sense" approach to save a party from a bad bargain if the wording is clear.
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Wherever practical, review the entire contract, including all technical requirements and schedules as a whole, in order to eliminate inconsistences and ambiguities and consider including a priority of document provision where there are multiple documents.
3. Endeavours obligations
Endeavours obligations are common in all types of written contract but disputes frequently arise about the actions required to satisfy such obligations. This case from last year considers the extent to which a party can have regard to its own financial interests and also addresses the question of how long an endeavours obligation continues.
Astor Management AG & others v Atalaya Mining plc & others [2017] EWHC 425 (Comm)
Atalaya bought out Astor's interest in a dormant copper mine. Payment of most of the consideration was deferred until Atalaya secured "senior debt finance ... sufficient for the restart of mining operations". Atalaya was required to use all reasonable endeavours to obtain the debt facility and to restart mining by 31 December 2010.
When mining restarted at the mine (in July 2015) Astor claimed payment of the deferred consideration. However, Atalaya argued that, as it had raised the necessary finance through intra-group loans which were not senior debt finance, it was under no obligation to pay the deferred consideration.
Atalaya also argued that the reasonable endeavours clause was unenforceable, or, if enforceable, that it had expired on 31 December 2010 (before the intra-group loans were arranged). Alternatively Atalaya argued that it had complied with the endeavours obligation.
The judge held that the endeavours obligation was enforceable saying that it should almost always be possible to give sensible content to an endeavours obligation to enter into an agreement with a third party. A court can decide as a matter of fact whether such an agreement has been entered into and is required to make a value judgment as to whether the endeavours used were "reasonable". The burden of proof is on the party alleging failure to comply with the obligation. The fact that it may be difficult to prove a breach does not mean that there is no obligation to use reasonable endeavours.
The judge also held that the endeavours obligation was a continuing obligation and did not expire on 31 December 2010. He construed it as meaning that Atalaya was required to use all reasonable endeavours to obtain the senior debt facility and procure the restart of mining activities on or before 31 December 2010 provided that was practicable and, if not, as soon as practicable thereafter.
On the evidence the judge found that Atalaya had not breached the "all reasonable endeavours" clause. He held that the extent to which it could have regard to its own financial interest depended on the nature and terms of the contract. It was clearly in Atalaya's interests to restart mining operations without using senior debt to avoid paying the deferred consideration. That was not in itself a legitimate reason to prefer another form of financing as it would defeat the purpose of the deferred consideration clause. However, the all reasonable endeavours obligation could not reasonably require Atalaya to obtain senior debt funding at any cost.
The judge also rejected Astor's argument that a duty of good faith to obtain senior debt finance should be implied into the contract; that requirement was subsumed in the express obligation to use all reasonable endeavours.
Practice points - Endeavours obligations
Where possible, include an absolute obligation to achieve a particular outcome, rather than an endeavours obligation, if that outcome is absolutely essential to the transaction.
Consider expressly specifying any action that the relevant party must take and any action which it is not required to take.
State how long the endeavours obligation lasts and remember that an endeavours obligation to achieve a certain outcome by a particular date does not necessarily mean that the obligation expires on that date unless that is expressly stated.
Include monetary caps or minimum spend thresholds if the relevant party is required to bear particular costs or incur expenditure to satisfy the obligation.
Consider the consequences of failing to achieve the desired result of the endeavours obligation and how to provide for such consequences in the contract.
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4. Limitation and exclusion clauses
Limitation and exclusion clauses play a key role in the allocation of risk between contracting parties but they are often poorly drafted and give rise to frequent disputes. An important element in these disputes is the approach which should be taken when interpreting such clauses. The courts have traditionally applied certain principles which tend towards a narrow construction, in particular: (i) the contra proferentem rule, which provides that any ambiguity should be resolved against the party who put the clause forward and relies upon it; and (ii) the so-called Canada Steamship guidelines, which essentially provide that clear words are required to exclude liability for negligence, and that the court will not interpret a clause to cover negligence if there is some other head of damage it might realistically have been intended to cover.
However, in recent years the courts have tended to cast doubt on the extent to which these principles remain applicable, at least where the clause is clear and unambiguous. The first case covered in this section continues that trend, emphasising that the words used, the relevant context and commercial common sense should normally be sufficient in determining the meaning of a contract term.
The second case concerns a poorly-drafted cap on liability which was interpreted differently by the judge at first instance and then the Court of Appeal.
Persimmon Homes Ltd & others v Ove Arup & Partners Ltd [2017] EWCA Civ 373
The claimant consortium bought land around the port of Barry for residential and commercial development. The consortium engaged Arup to provide engineering services, including a contamination investigation. When groundworks began, asbestos was encountered and the consortium claimed that Arup had been negligent in failing to identify and report upon the extent of asbestos contamination. Arup relied on an exclusion clause which stated that:
"Liability for any claim in relation to asbestos is excluded."
The High Court found, as a preliminary issue, that the clause represented an agreed allocation of risks between the parties and its meaning was clear - liability for the claim was excluded.
The Court of Appeal agreed with the High Court and rejected the consortium's argument that the exclusion clause should be interpreted as covering only liability for causing pollution or contamination, or the spread of asbestos, rather than a failure to identify it. The Court of Appeal's conclusion was based on both the natural meaning of the words used and the application of business common sense since, as the court put it, it would be nonsensical for the parties to have agreed that Arup was not liable if asbestos was moved from one part of the site to another, but liable if it was left in place, particularly given that Arup was engaged to investigate and advise on contamination.
The consortium argued that, even if the exclusion clauses were not limited to causing the spread of asbestos, they were not wide enough to exempt Arup from liability. It relied on the contra proferentem rule and the Canada Steamship guidelines, outlined above. The Court of Appeal rejected this argument on both bases.
Firstly with regard to contra proferentem, the court commented that in relation to commercial contracts, negotiated between parties of equal bargaining power, that rule now has a very limited role. Here, the meaning of the clause was clear, and the contra proferentem rule therefore had no impact.
In relation to the Canada Steamship guidelines, the court considered that in commercial contracts the guidelines (in so far as they survive) are now more relevant to indemnity clauses than exclusion clauses and so were of little assistance in the present case. But even if that view was wrong, it did not help the consortium because there was no non-negligent ground of claim relating to asbestos that the parties might realistically have had in mind in agreeing the clause.
Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWCA Civ 2196
The NHS Trust engaged Atos to provide an IT system to hold patient records online. The project did not go well and the Trust eventually terminated the contract and claimed damages for wasted expenditure. A preliminary issue arose as to the effect of a cap on liability, the relevant part of which provided that:
"The aggregate liability of [Atos] ... shall not exceed:
for any claim arising in the first 12 months of the term of the Contract, the Total Contract Price ...; or
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for claims arising after the first 12 months of the Contract, the total Contract Charges paid in the 12 months prior to the date of that claim."
(NB: Both parties agreed that the reference to "claim arising" should be read as "default occurring".)
The Trust argued that the cap was unenforceable for ambiguity or uncertainty. Atos accepted that the relevant provision was poorly drafted but argued that it could be construed and should be enforced. In its view there were two possible interpretations of the provision:
it imposed a single cap which, depending on the timing of the first default, would be either that set out in the first bullet point or the second bullet point above; or
it imposed two caps, the first in respect of defaults occurring in the first 12 months of the contract and the second in respect of subsequent defaults.
At first instance, the judge acknowledged that the cap was not drafted with precision and that the words used were capable of competing interpretations. The question was whether it could be interpreted with sufficient clarity and certainty to make it enforceable. The judge found that the interpretation that made commercial sense was that the provision imposed one aggregate cap, the level of which was determined by the timing of the first default. If a default occurred in the first 12 months of the contract, the level of the cap would be the total contract price. If no default occurred during the first 12 months of the contract, the cap would be the total amount paid in the 12-month period prior to the first default.
On appeal the Trust, while not challenging the enforceability of the liability cap, argued that the provision imposed two caps, not a single one as held by the judge.
The Court of Appeal accepted that the provision was "a homemade clause which, however it is interpreted, will yield some odd results". It rejected the judge's reasoning that the phrase "aggregate liability" in the introductory words of the provision pointed towards one cap rather than two as it could equally mean that the limit was the aggregate of the sums set out in the two sub-paragraphs. The court also rejected the judge's findings that the use of the word "or" at the end of the first sub-paragraph meant that only one of the sub-paragraphs could apply.
Instead the court held that the provision imposed two separate caps; for defaults occurring in the first year the cap would be the total contract price and for defaults occurring in subsequent years the cap would be the amount of the contract charges paid in the relevant 12-month period. This was the natural meaning of the words used, it accorded with business common sense and it gave "the least bizarre consequences".
Practice points Limitation and exclusion clauses
Be aware that the courts may no longer apply the traditional principles which tend toward a narrow construction of limitation and exclusion clauses.
Remember that limitation and exclusion clauses, as with other contractual provisions, will be construed in the context of the contract as a whole.
Use clear and unambiguous drafting, rather than seeking to rely on general wording and always test any limitations on liability against various scenarios.
Pay particular attention to any cap on liability. Where possible, give an express monetary value for the cap. If the cap is instead set by reference to amounts paid under the contract consider how the cap will work at different stages in the contract term. Also think carefully about how multiple caps should interact and reflect this in clear, unambiguous drafting.
5. Penalties
Since the Supreme Court substantially rewrote the law on penalties in its 2015 decision in Cavendish v Makdessi (see our 2015 contract briefing), any case on penalties has been of particular interest as an illustration of how the new test works. As the penalty rule only applies to secondary obligations which take effect on the breach of a primary obligation, both the following cases started by considering whether the provisions in question were in fact secondary obligations and whether they took effect on the breach of a primary obligation. The judge in the second case also considered how a clause could be drafted to take it outside of the penalties regime altogether.
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Vivienne Westwood Limited v Conduit Street Development Limited [2017] EWHC 350 (Ch)
Vivienne Westwood Limited (VW) and Conduit Street Development Limited (CSDL) were, respectively, tenant and landlord of retail shop premises. The lease provided for an initial yearly rent of 110,000 subject to "upwards only" five-yearly rent reviews to the open market rent.
At the same time as entering into the lease, VW and the original landlord also entered into a side letter by which the landlord agreed to accept yearly rent at a lower rate. The agreement to accept a lower rent was expressed to be personal to VW and not by way of variation of the lease.
The side letter gave the landlord the right to terminate with immediate effect if VW breached any of its terms and conditions or any term of the lease. In the event of termination, it provided that:
"the rents will be immediately payable in the manner set out in the lease as if this agreement had never existed".
After VW missed a payment of rent, CSDL gave notice terminating the side letter agreement with immediate effect. VW then paid the rent arrears in full, which CSDL accepted as part payment only pending the first rent review which remained outstanding. The rent review subsequently determined that the yearly rent should be 232,500 compared to a yearly rent of 125,000 as agreed in the side letter.
VW claimed that CSDL's right to terminate the side letter was unenforceable as a penalty and the judge agreed, despite acknowledging that the courts should not "lightly infer a penalty in a contract freely negotiated by two advised parties of equal bargaining power". In coming to his decision the judge applied the staged test set out in the Makdessi case.
The starting point was whether the law of penalties was engaged. This would only be the case if the obligation to pay rent at the higher level was a secondary obligation engaged upon breach of a primary obligation. The judge agreed with VW that the primary obligation was to pay rent at the lower level specified in the side letter (as well as performing the other obligations in the lease). On breach of any of those primary obligations, the secondary obligation took effect, namely to pay rent at the higher level.
The judge then considered whether CSDL had a legitimate interest in enforcing the primary obligation. He accepted that, in theory, a tenant's failure to perform was capable of impacting on the value of a landlord's reversion but that was only likely in the case of serious breaches of covenant. In this case the secondary obligation (to pay the higher rent) was substantial regardless of whether a breach was "one-off, minor, serious or repeated" and without regard to the nature of the obligation broken or its consequences. As the judge commented, that had "long been recognised as one of the hallmarks of a penalty".
The judge concluded that the extra rent payable by VW was exorbitant and unconscionable in comparison with any legitimate interest which CSDL had in VW's performance of its primary obligations. This was particularly so given that the higher rent was payable in addition to various other remedies which CSDL had for the breach, including generous interest and costs provisions. It was therefore a penalty and unenforceable.
Holyoake & another v Candy & others [2017] EWHC 3397 (Ch)
Mr Holyoake borrowed money from well-known property developers, the Candy brothers, to complete the purchase of a mansion block in London which he intended to convert into high-class residential use. He believed that he would benefit from the Candy brothers' expertise in developing properties but the relationship deteriorated and, after obtaining planning permission, Mr Holyoake sold the property. Overall, the project made a substantial loss and Mr Holyoake brought various claims against the Candy brothers including for excessive sums which he alleged he had paid to the Candy brothers and their companies and the profits which he claimed he would have made if he had successfully completed the development.
One of Mr Holyoake's claims was that a number of provisions in the various agreements between him and the Candy brothers were penalties and therefore unenforceable. The judge held that, as a matter of form and substance, the majority of these clauses did not engage the penalty rule at all as they were not triggered by a breach of contract. For example:
A clause in the original loan agreement which required the full amount of interest to be paid if Mr Holyoake repaid the loan early was part of the primary obligations of the deal; it came into play if Mr Holyoake repaid the loan early, not on breach.
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The court came to a similar decision in relation to a subsequent escrow deed which in effect provided for a new debt if Mr Holyoake did not repay the original loan (which would fall away) and did not complete the sale of the property to the Candy brothers. The provision did not operate on a breach but was triggered if the relevant circumstances arose.
Finally the court found that the payment by Mr Holyoake of extension fees was a primary obligation, each fee was in effect a payment in return for the extension of the loan.
The judge considered whether some of the provisions were, in substance, penalties even though they were drafted so as not to take effect on a breach. Although he found that the clauses were not disguised penalties, he made the point that if the penalty rule is to have practical value, it should not be too easy to circumvent it by drafting.
Some provisions in the various agreements between the parties were held to take effect on breach. However in each case the judge found that the consequence of breach was not extravagant or exorbitant and so the provisions were not penalties.
Practice points - Penalties
Remember that the Supreme Court ruling in Cavendish v Makdessi did not abolish the penalty rule it must still be considered when drafting and negotiating contracts.
Pay attention to any contractual provision which deals with the consequences of a breach and assess whether it could be challenged as a penalty.
Keep a record of any negotiations around the consequences of breach (or include express statements in the contract itself) to help show that the clause is proportionate to the legitimate interest of the innocent party in enforcing the primary obligations of the contract.
Where possible, structure any provisions requiring a potential future payment so that payment is required following a triggering event rather than for 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 may look at the substance of a provision rather than mere form.
6. Notice provisions
Although it may be tempting to skip over a boilerplate notice provision, a number of cases over recent years have highlighted the dangers of doing so and non-compliance with notice provisions has led to the failure of several claims. The following case is a further example of this point and the judge's comments on the meaning of the phrase "to the extent that" are also of interest.
Zayo Group International Ltd v Ainger & others [2017] EWHC 2542 (Comm)
Under a sale and purchase agreement Zayo purchased a company from the seven defendants. It subsequently claimed for breach of various accounting warranties. The SPA required written notice of any claim to be given to the sellers within 18 months of completion with reasonable detail about the nature of the claim and a reasonable estimate of the amount claimed. In addition any claim had to be made against all of the sellers.
The notice clause in the SPA was as follows:
"Any notice ... shall be served by delivering it by hand or sending it by special delivery ... to the address ... set out [below] (or as otherwise notified by that Party under this agreement). Any such notice shall be deemed to have been received ... if delivered by [courier], at the time of delivery ... "
Notice was validly served on six of the seven defendants. In the case of the fifth defendant (Ms Jaggard) the courier arrived at the address and was told that Ms Jaggard no longer lived there. Ms Jaggard had not notified Zayo that she had moved house. The courier left with the letter but returned later, after the expiry of the notice period, and delivered it.
The judge dismissed all of Zayo's claims on the basis that notice had not been validly served on Ms Jaggard, and therefore, even though it had been validly served on all of the other sellers, none of the defendants were liable. He found that the ordinary meaning of the notice clause was that notice was served (where a courier is used) by
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delivering the notice to the address listed in the SPA, for example by posting it through a letter box or leaving it under a mat, whether or not the intended recipient resided at the address. As Zayo had not done this by the deadline for claims, it had failed to give Ms Jaggard valid notice of the warranty claim.
The judge rejected Zayo's claim that a term should be implied into the SPA that where an address for notification had not been updated, a reasonable attempt to deliver the notice at the original address would satisfy the notice provisions. The judge also rejected Zayo's argument that, as Ms Jaggard had failed to update her address for receiving notices, she should not be able to rely on that default to deny liability. The failure to update her address was not a breach of the SPA because the updating provision was permissive rather than mandatory.
Although not necessary to decide the case, the judge also found that Zayo had failed to include in the notice a reasonable estimate of the amount claimed, as required by the SPA, because the sums claimed were based on sums paid out by a subsidiary of the target rather than the diminution in the value of the shares purchased by Zayo.
The case is also of interest for its consideration of a standard warranty exclusion that Zayo would not be liable for a claim "to the extent that" provision in respect of the liability was made in the accounts of the target company. Zayo argued that the provision made in the accounts was inadequate and liability could only be excluded up to the amount actually provisioned for, so that liability in relation to any of the actual sum over the provisioned amount remained. The defendants argued that any such provision, however inadequate, meant the exclusion came into operation for the whole amount.
The judge agreed with the defendants, stating surprisingly (and although not necessary to determine the claim given that the notice had been held to be invalid) that the meaning that most closely accorded with business common sense was that any provision for unknown liabilities triggered the application of this exclusion over the whole of that liability. Zayo argued that this could not possibly be the case as a provision of 1 for a 1 million liability should not trigger the exclusion of liability. The judge dismissed this and rejected the argument that the words "to the extent that" indicated that this exclusion clause operated by excluding liability up to the amount of the provision only and stated that those words could, in this case, be substituted by the word `if'.
Practice points Notice provisions and limitations
Don't neglect the boilerplate provisions in any contract because disputes about procedural issues are just as likely as disputes about the substantive provisions. The judge in the Zayo case noted that compliance with contractual notice requirements is not a technical or trivial matter.
If you are up against a contractual time bar assume the least favourable interpretation of any deadlines.
If possible don't leave service of a notice to just before the deadline, as there is then no room for error if things go wrong.
If you are making a claim ensure that the content of the notice complies in every respect with the requirements of the agreement for a notice of claim and is clear on its face that it is such a notice.
If serving notice by courier give very clear instructions on what the courier must do in line with the contractual requirements.
Consider carefully the wording of any exclusion of liability for provisions in accounts to make the intention clear and consider whether a specific indemnity should be sought for any potential liability of particular concern.
7. Termination
Termination is another area which frequently gives rise to disputes and both cases in this section highlight some of the potential pitfalls when terminating a contract. The first case illustrates the distinctions between contractual termination provisions and the common law doctrine of repudiation. It considered whether a letter terminating a contract following an alleged repudiatory breach could also take effect as a notice of termination under the relevant contractual provisions. The second case focused on the drafting of contractual termination provisions and whether the terminating party had complied with them.
Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2017] EWHC 1763 (TCC)
ICI engaged Merit Merrell Technology (MMT) to install piping and steelwork at its new paint manufacturing facility. Either party had the right to terminate the contract on notice for one of a prescribed list of reasons. The financial
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consequences for the parties differed depending on which reason had triggered the contractual termination mechanism.
Following cost overruns and delays to the project, relations between the parties broke down. ICI wrote to MMT alleging that MMT had repudiated the contract by committing various fundamental breaches and stating that it accepted this alleged repudiation as bringing the contract to an end immediately. MMT rejected the idea that it had committed any repudiatory breach and instead claimed that ICI's letter was itself a repudiation of the contract.
The High Court found that MMT was not in repudiatory breach, and that ICI's letter itself amounted to a repudiation of the contract.
The judge rejected ICI's argument that a contractual right of termination should be equated with acceptance of a repudiatory breach and that, as a consequence, its letter primarily took effect as a contractual termination in accordance with the terms of the contract. It was clear that the termination provisions in the contract contemplated termination for different reasons, not just for breach, and the contractual mechanism for termination would be redundant if the termination provisions were equated to acceptance of repudiation. In any case, the judge found that ICI's letter could not be interpreted as exercising a contractual right to terminate.
Interserve Construction Limited v Hitachi Zosen Inova AG [2017] EWHC 2633 (TCC)
The claim involved a sub-contract for the building of an energy from waste plant. Hitachi terminated Interserve's engagement by exercising a contractual right to terminate which was expressed to be "subject to" the following notice and remedy clause:
"[Hitachi] may (at its absolute discretion) notify [Interserve] of the default and if [Interserve] fails to commence and diligently pursue the rectification of the default within a period of seven (7) Days ... terminate the employment of [Interserve] under the Contract."
In its notice of termination Hitachi stated that it was exercising its discretion not to allow seven days for rectification. The question for the court was whether Hitachi was required to serve a notice and allow the period for rectification which Interserve argued was a condition precedent to the right to terminate. Hitachi argued that the words "at its absolute discretion", meant that the giving of notice to allow a period for rectification was not a condition precedent to the giving of a notice to terminate.
The judge found in favour of Interserve's interpretation. The use of the words "subject to" made it clear that the right to terminate only arose if the notice clause had been complied with. The reference to "absolute discretion" did not make the seven-day period optional. Rather it meant that Hitachi's failure to give a notice would not be taken to mean that no default existed or that any breach had been waived.
Practice points - Termination
Include a clear, well-drafted termination provision which sets out the grounds, mechanism and consequences of termination.
Remember the dangers of terminating for repudiatory breach a court may hold that the breach you relied on is not repudiatory but that your termination is itself a repudiation of the contract.
Consider carefully any potential right to terminate and the possible consequences of termination. Where appropriate, take legal advice before acting. Consider all possible interpretations of any relevant contractual provisions rather than proceeding on the basis of the most favourable interpretation.
When exercising a contractual right to terminate, refer expressly to the relevant contractual provision and comply exactly with any requirements.
8. English law contracts post-Brexit
As businesses shift their focus from Brexit analysis to implementation, it is increasingly important to consider what impact Brexit will have on contracts and to take appropriate steps when reviewing and drafting contracts.
English law has long been a popular choice for international parties entering into commercial contracts. It is viewed as stable and predictable, while also being flexible enough to adapt to new developments in commercial practice. It respects "freedom of contract", generally giving effect to the parties' contractual bargain with only limited scope for implied terms or the influence of public policy.
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These key attractions of English law as the governing law of contracts will not be diminished as a result of Brexit. The core principles of English contract law are derived from the common law (judge-made case law) and so are unaffected by Brexit. Only in specific spheres, such as consumer contracts, has English contract law been significantly affected by EU law. Nor will Brexit have any impact on the effectiveness of a choice of English law to govern commercial contracts. EU rules require Member States to respect a choice of law, regardless of whether any contracting party is EU-domiciled or whether the chosen law is that of a Member State.
Brexit may, however, have implications for particular aspects of parties' contractual relationships, including how certain terms may be interpreted and whether any termination rights may be triggered, and on questions relating to jurisdiction and enforcement of judgments. Practical steps which contracting parties can take now include:
reviewing existing contracts for any terms that may be affected by Brexit;
considering whether there may be advantages in seeking to agree amendments to avoid any difficulties in interpretation before a dispute arises;
considering whether there may be a basis to terminate onerous contracts in light of Brexit-related events;
considering whether to make express provision for Brexit in new contracts, for example to allow for termination on Brexit or to make it clear there is no such right, or to make appropriate amendments to reflect Brexit;
considering whether express provision needs to be made for Brexit in relation to the interpretation of provisions in a contract which refer to EU law or EU requirements or the EU as a territory (eg in relation to the territorial ambit of restrictive covenants or service provision); and
considering dispute resolution options carefully, particularly if it is important to be able to enforce judgments in the EU or avoid proceedings being brought in the EU.
For further information on contracts and Brexit please see our Contract Disputes Practical Guide.
We are engaging with clients in developing and implementing their Brexit action plans. Of particular relevance in the contract field is the service that our integrated Alternative Legal Services team provides to help manage change implementation processes in preparation for, and as a result of, Brexit, including contractual reviews and audits, repapering projects and restructuring exercises. Further information on Brexit is available via our Brexit hub at hsf.com/brexit.
