RECENT DEVELOPMENTS IN CONTRACT

Ed PeelOxford

June 2013

These notes aim to cover some of the key developments in Contract in the last 12-18 months. They are not intended as an exhaustive coverage of all developments. They highlight some of those which may be thought particularly relevant to commercial practice.

Some cases may fall a little outside the last 12-18 months but they are noted in order to take account of them in the light of further developments in more recent cases.

It may not be possible to speak to all of the developments referred to in these notes in the presentation itself.

Interpretation

Cherry Tree Investments Ltd v Landmain [2012] EWCA Civ 736Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ 607Fitzhugh v Fitzhugh [2012] EWCA Civ 694Aston Hill Financial Inc v African Minerals Ltd [2012] EWHC 2173 (Comm), [2013] EWCA Civ 416

Implied Terms

Spencer v Sec. of State for Defence [2012] EWHC 120 (Ch), [2012] EWCA Civ 1368Procter & Gamble v Svenska Cellulosa Aktiebolaget SCA [2012] EWCA Civ 1413Wuhan Ocean Economic & Technical Cooperation Co Ltd v Schiffahrts-Gesellschaft MbH & Co KG [2012] EWHC 3104 (Comm)Dear v Jackson [2013] EWCA Civ 89Gavin v One Housing Group Ltd [2013] EWCA Civ 580

Exemption Clauses

KG Bominflot v Petroplus [2010] EWCA Civ 1145Air Transworld Ltd v Bombardier Inc [2012] EWHC 243 (Comm)Dalmare SpA v Union Maritime Ltd [2012] EWHC 3537 (Comm) Mir Steel UK Ltd v Morris [2012] EWCA Civ 1397FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2012] EWHC 2477 (Comm)Ampleforth Abbey Trust v Turner & Townsend [2012] EWHC 2137 (TCC)Kudos Catering UK Ltd v Manchester CCC Ltd [2013] EWCA Civ 38Deutsche Bank v Khan [2013] EWHC 482 (Comm)Olympic Airlines v ACG Acquisition XX LLC [2013] EWCA Civ 369

Misrepresentation

Bikam Ood v Adria Cable S.a.r.l. [2012] EWHC 621 (Comm)

Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch)

A creeping ‘good faith’ requirement in English contract law

(i) Not in negotiation:

Dhanani v Crasnianski [2011] EWHC 926 (Comm)Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 1560 (Comm)Shaker v Vistajet Group Holdings SA [2012] EWHC 1329 (Comm)MRI Trading AG v Erdenet Mining Corp [2013] EWCA Civ 156

(ii) But in performance?

Compass Group v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB)SNCB Holding v UBS [2012] EWHC 2044 (Comm)Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB)TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)

Termination

Cavenagh v William Evans Ltd [2012] EWCA Civ 697Leofelis SA v Lonsdale Sports Ltd [2012] EWHC 485 (Ch), [2012] EWCA Civ 985, [2012] EWCA Civ 1366Crocs Europe BV v Anderson [2012] EWCA Civ 1400Geys v Societe Generale [2012] UKSC 63Cukurova Finance International Ltd v. Alfa Telecom Turkey Ltd [2013] UKPC 2The MV Astra [2013] EWHC 865 (Comm)Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)White Rosebay Shipping SA v Hong Kong Chain Glory Shipping Ltd [2013] EWHC 1355 (Comm)

Damages and the date of assessment

Hooper v Oates [2013] EWCA Civ 91

Remoteness

Rubenstein v HSBC Bank Plc [2012] EWCA Civ 1184 Petro-Chemical Industries Company (KSC) v The Dow Chemical Company [2012] EWHC 2739 (Comm)

John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37

Contracting on-line & consideration

Spreadex Ltd v Cochrane [2012] EWHC 1290 (Comm)

Rule against penalties

E-Nik Ltd v Sec of State for Communities and Local Government [2012] EWHC 3027 (Comm)Cavendish Square Holdings BV v Team Y&R Holdings Hong Kong Ltd [2012] EWHC 3582 (Comm)Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2012] EWHC 3511 (QB)

Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, 6 September 2012Cadogan Petroleum Holdings Ltd v Global Process Systems LLC [2013] EWHC 214 (Comm)Berg v Blackburn Rovers Football Club [2013] EWHC 1070 (Ch)

Interpretation

Cherry Tree Investments Ltd v Landmain [2012] EWCA Civ 736Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ 607Fitzhugh v Fitzhugh [2012] EWCA Civ 694Aston Hill Financial Inc v African Minerals Ltd [2012] EWHC 2173 (Comm), [2013] EWCA Civ 416

1. The decision of the Supreme Court in Rainy Sky v Kookmin Bank1 is seen as something of a vindication of the ‘purposive’ approach to interpretation, ie “if the language is capable of more than one construction, it is not necessary to conclude that a particular construction would produce an absurd or irrational result before having regard to the commercial purpose of the agreement”. This is further emphasized by the fact that Lord Clarke also confirms that interpretation is a ‘unitary exercise’, ie it is not a case of ‘interpreting’ the agreement first and then looking at the surrounding circumstances if there is any ambiguity; one takes into account both the wording and the ‘background’ at one and the same time.2 It may be thought there are not too many contracts which, if considered against the ‘background’ do not admit of at least two or more possible constructions, thus always leaving room for preferring the more commercial over the less commercial.

2. Of course, one person’s commercial may simply be another person’s uncommercial and it did not take long for a judge to find that he had no basis for deciding which of two interpretations was most in accordance with business common sense. Faced with this problem in the Aston Hill case, Eder J. resolved the problem by preferring the interpretation which was ‘more consistent with the language used in the facility’; thus, it seems there is a residual role for ‘literalism’. In Aston Hill itself, a borrower refinanced a loan facility and was obliged, under the original facility, to use the proceeds of the new loan to repay the first loan. The lender contended that this also constituted a ‘voluntary prepayment’ of the first loan which resulted in a pre-payment fee (since the taking out of the new facility was itself a voluntary act). Eder J. disagreed:3

in my judgment, the main fallacy in the claimants’ argument is the failure to distinguish between, on the one hand, the refinancing, and, on the other hand, the prepayment. I agree with Mr Beltrami QC that there are, or at least may be, difficulties in characterising what conduct is or is not “voluntary” but I am content to assume here that the refinancing carried out by the defendant is properly to be characterised as “voluntary”. However, as Mr Boswood QC conceded, the proceeds of such refinancing fell within the definition of “Finance Proceeds” and accordingly the defendant thereby came under an obligation to repay the loan by virtue of Clause 8.3. In other words, although the refinancing was “voluntary”, the prepayment was not.

1 [2011] UKSC 50.2 See also Bright Asset Ltd v Lewis<r> [2011] EWCA Civ 122 at [28]: “The interpretative exercise is the single exercise taking into account the factual matrix”. <i>3 At [33].

3. On appeal, it should be noted, the Court of Appeal did not share Eder J’s doubts and found that the language of the provisions and the commercial sense both pointed clearly in favour of the borrower’s interpretation.

4. In Rainy Sky Lord Clarke did acknowledge that “where the parties have used unambiguous language, the court must apply it”4 even if it produces an improbable result, but it is clear from subsequent cases that this does not amount to a rejection of the principle that where the parties have used such language, it may nonetheless be corrected (as a matter of interpretation (and not of rectification)) where there has been an “obvious mistake”, ie where it is clear that a mistake has been made; and clear what correction should be made.5

5. One consequence of the willingness of the courts to correct obvious mistakes as a matter of interpretation is that it does not seem to leave a lot of room for rectification.6 Where it may still be necessary to resort to rectification is in contracts recorded in ‘public’ documents, i.e. those which may be referred to and relied upon by third parties. This is the point to emerge most clearly from the Cherry Tree case.

6. C and D executed a charge and a facility agreement, the latter of which extended the statutory power of sale so that it did not require that the mortgage monies had become due. D purported to sell the property in question to D2 in circumstances where no sum secured by the charge had become due. C challenged the sale on the basis that, while the charge had been registered, the facility agreement had not, so the extended power of sale could not be invoked.

7. In a dissenting opinion, Arden LJ held that this was a case which was covered by the principles of interpretation outlined above. The charge should be read against the background which included the facility agreement, even to the extent of considering this to be a case for correcting mistakes in that the charge as registered did not contain the extended power of sale. The only limit was whether the admission of such evidence and the consequent interpretation of the document in question would prejudicially affect the rights of any third party. This was not such a case since C had not created any further interest in the property.

8. The majority disagreed that the question of third party prejudice could be dealt with on a case by case basis. Lewison LJ was not particularly concerned whether the issue was the admissibility of the facility agreement, or what was permissible by way of interpretation, if it was admitted.7 What mattered was that the whole point of the registration system is that it aims to protect the interests of third parties; it falls into the category of ‘public documents’:

4 At [23].5 See Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101; and for confirmation of this principle post Rainy Sky, but without success for the claimant, see McKillen v Misland (Cyprus) Investments Ltd [2012] EWCA Civ 179 which was considered in June 2012.6 To this effect, see Burrows, in Burrows & Peel (eds) <i>Contract Terms; Buxton 69 C.L.J. 253.7 ‘But accepting that the court need not shut its eyes to the existence and terms of the facility letter (i.e. it is admissible evidence), there is still the question: what do you do with the evidence once it has been admitted?’, at [104].

Our courts have already drawn distinctions between the use of background material in the interpretation of what I might call “ordinary” commercial contracts on the one hand, and the interpretation of negotiable and registrable contracts or public documents on the other’8… ‘in all these cases9 the justification for the restrictive approach is that third parties might (not will) need to rely on the terms of the instrument under consideration without access to extraneous material’.10

9. Furthermore, and in line with the idea put forward by Rix LJ in the earlier ING case,11

this was not an ‘obvious mistake’ case; there was no mistake in the language used and it made sense12 – it just omitted the extended power of sale: ‘Even the staunchest advocates of the court’s ability to consider extrinsic evidence stop short of saying that by the process of interpretation the court can insert whole clauses that the parties have mistakenly failed to include’.13

10. The extended power of sale could not therefore be read into the charge as a matter of interpretation, but counsel for D2 was invited to consider amending the claim to one in rectification. The key difference with rectification was that although, like interpretation, it too would normally have a retrospective effect, i.e. the document is read as if it had always been in its rectified form, this is subject to the priority provisions of the Land Registration Act 2002 which would protect any third parties who might be affected.

Implied Terms

Spencer v Sec. of State for Defence [2012] EWHC 120 (Ch), [2012] EWCA Civ 1368Procter & Gamble v Svenska Cellulosa Aktiebolaget SCA [2012] EWCA Civ 1413Wuhan Ocean Economic & Technical Cooperation Co Ltd v Schiffahrts-Gesellschaft MbH & Co KG [2012] EWHC 3104 (Comm)Dear v Jackson [2013] EWCA Civ 89Gavin v One Housing Group Ltd [2013] EWCA Civ 580

8 At [124]. See, to similar effect, Longmore LJ at [148].9 For examples referred to by Lewison LJ: Opua Ferries Ktd v Fullers Bay of Islands Ltd [2003] UKPC 19, [2003] 3 NZLR 740 (registered licence); Slough Estates Ltd v Slough Borough Council [1971] AC 958; Sec of State for Communities and Local Government v Bleaklow Industries Ltd [2009] EWCA Civ 206, [2009] 2 P&CR 21 (planning permission); Egyptian Salt and Soda Co Ltd v Port Said Salt Association [1931] AC 677 articles of association); and Masri v Consolidated Contractors (Oil and Gas) Co SAL [2009] EWCA Civ 36, [2009] 1 CLC 82 (injunction or receivership order).10 At [125].11 ING Bank NV v Ros Roca SA [2011] EWCA Civ 353.12 See also in this regard the rejection of ‘corrective construction’ in Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ 607; and in Fitzhugh v Fitzhugh [2012] EWCA Civ 694 (where an alternative case for an implied term was also rejected)13 At [132]. Though one might think this is precisely what was done in the Spencer case below by Vos J (though not the CA).

1. There continues to be some debate as to whether the suggested approach of Lord Hoffmann to terms implied ‘in fact’ in Att-Gen of Belize v Belize Telecom Ltd14 has been accepted, or affected any change in the law15. A useful attempt to summarise the principles in this area is set out by Aikens LJ in in Crema v Cenkos Securities plc:16

“38 The principles are: (1) a court cannot improve the instrument it has to construe to make it fairer or more reasonable. It is concerned only to discover what the instrument means. (2) The meaning is that which the instrument would convey to the legal anthropomorphism called “the reasonable person”, or the “reasonable addressee”. That “person” will have all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed. The objective meaning of the instrument is what is conventionally called the intention of “the parties” or the intention of whoever is the deemed author of the instrument. (3) The question of implication of terms only arises when the instrument does not expressly provide for what is to happen when some particular (often unforeseen) event occurs.17 (4) The default position is that nothing is to be implied in the instrument. In that case, if that particular event has caused loss, then the loss lies where it falls. (5) However, if the “reasonable addressee” would understand the instrument, against the other terms and the relevant background, to mean something more, ie that something is to happen in that particular event which is not expressly dealt with in the instrument's terms, then it is said that the court implies a term as to what will happen if the event in question occurs. (6) Nevertheless, that process does not add another term to the instrument; it only spells out what the instrument means. It is an exercise in the construction of the instrument as a whole. In the case of all written instruments, this obviously means that term is there from the outset, ie from the moment the contract was agreed, or the articles of association were adopted or the statute was passed into law.

2. That the process of implication is an objective one was fully endorsed by Vos J. in Spencer:

The entire construction exercise is about determining what a reasonable person would take the contract to mean, not about determining the subjective intentions of the parties. It was, therefore, particularly helpful when Lord Hoffmann explained in paragraph 16 of his speech in Belize that the objective meaning is what is “conventionally called the intention of the parties”. I would venture to suggest that the subjective element of the normal usage of the word “intention” may in the past have caused much confusion. But it is now clear that the process of interpretation is an objective one. One might ask rhetorically: how could it be otherwise? It would be impossible for the court to construe contracts by reference to the subjective intentions of the parties, when by the time every case came to be decided, the competing parties would be

14 [2009] UKPC 10.15 See a certain ambivalence in The Reborn<r> [2009] EWCA Civ 531; [2009] 2 Lloyd’s Rep. 639; Groveholt Ltd v Hughes<r> [2010] EWCA Civ 538; <i>Leander Construction v Mullaley & Co Ltd [2011] EWHC 3449 (TCC).16 [2011] 1 WLR 2066 at [38] and [39].17 Consolidated Finance Ltd v McCluskey 1 August 2012, CA: No implied term setting out the purpose of a loan agreement could be read into the agreement where the agreement already contained an express, albeit meaningless, purpose clause.

swearing blind that they had subjectively “intended” the meaning for which they were now contending.

What is instructive about Spencer is the acknowledgement that if the relevant question is what would a reasonable person have understood the contract to mean, or would a reasonable person have understood the contract to contain the implied term in question, that person may be endowed with knowledge that the parties did not themselves have.

3. This issue came about because the parties added a small plot of land to an existing tenancy and executed a memorandum to raise the rent slightly. They did so at the time when the rent was the subject of review by way of arbitration. But what neither side realized was that the effect of the memorandum was to set aside the old tenancy and create a new one; but the arbitration was only binding in relation to the old tenancy. The case which had to be advanced by the claimant was that when the memorandum stated: “the within written clear yearly rent of £16,250 … shall in consequence of the above mentioned addition be increased by £83.00 … thereby causing the said rent to be £16,333.00 …”, it had to be read as if it stated: “the within written clear yearly rent of £16,250 shall in consequence of the above mentioned addition be increased by £83, thereby causing the said rent to be £16,333 or such other rent from and after 29 September 1999 as should be determined by the arbitrator [in the rent review under the 1987 Tenancy]”. Vos J. was of the view that this could be reached by way of an implied term (or construction (it is not entirely clear which he did in the end) and stated:

When considering the implication of a term, it is permissible to assume that the reasonable observer had knowledge that the parties did not in fact have, certainly if that knowledge is as to established and well-known legal principles. I need go no further for the purposes of this case, but it seems to me that the same will apply to the knowledge of the reasonable observer when one considers the construction of a contract as much as when one considers the implication of a term.

4. The idea that objectivity can extend to giving the reasonable observer knowledge which the parties did not have is potentially radical for the law of mistake, but Vos J. was careful to confine himself to ‘clear law’. Furthermore, it was not an approach which was taken by the CA, nor one which they found it necessary to comment upon. For them, the solution lay more obviously in interpretation. They emphasized that the memorandum recording the new rent expressly stated: ‘IN ALL OTHER RESPECTS the terms conditions and covenants of the Principal Agreement as varied by the said Memoranda shall remain in force as heretofore unchanged.’ Their view of this was that ‘the legal regime of the Principal Agreement was unchanged’ and that extended to the applicability and binding effect of the rent review; the intention of the parties was, in effect, that it should be carried over into the new tenancy.

5. Even if it is now established that (like interpretation) the existence of an implied term is determined objectively, ie by reference to the reasonable person’s assessment of the intention of the parties, this does not allow or the implication of a term simply because it would be reasonable. That is a factor to be taken into account in making an objective assessment of the parties’ intention. It is not enough on its own. Thus, in Procter & Gamble a contract for the supply of goods stated the prices in euros but

payment was in sterling, and no fixed exchange rate was specified; the court refused to imply a term providing for a fixed exchange rate since that would not be seeking to give effect to the intention of the parties, but would rather simply be seeking to make the contract fairer or more reasonable.18 Moore-Bick LJ expressed his conclusion in this regard by taking up the link between interpretation and implied terms:19

I entirely agree that if a clause is reasonably capable of bearing two possible meanings (and is therefore ambiguous), the court should prefer that which better accords with the overall objective of the contract or with good commercial sense, but the starting point must be the words the parties have used to express their intention and in the case of a carefully drafted agreement of the present kind the court must take care not to fall into the trap of re-writing the contract in order to produce what it considers to be a more reasonable meaning.

6. In Wuhan Ocean Economic the Court agreed with the finding of an arbitral tribunal that a unilateral obligation to extend a refund guarantee which had no express time limit was subject to an implied term that it had to be fulfilled within a reasonable time and also with the finding that 14 days was a reasonable time (Belize applied). The court also found that the implied term was an innominate term, and not merely a warranty, but that its breach did not amount to a repudiatory breach. Since the original guarantee was automatically if the buyer started arbitration proceedings at itsexpiry, it could not be said that the seller’s failure to extend the guarantee within a reasonable time had truly imperilled the buyer’s security.

Exemption Clauses

KG Bominflot v Petroplus [2010] EWCA Civ 1145Air Transworld Ltd v Bombardier Inc [2012] EWHC 243 (Comm)Dalmare SpA v Union Maritime Ltd [2012] EWHC 3537 (Comm)Mir Steel UK Ltd v Morris [2012] EWCA Civ 1397FG Wilson (Engineering) Ltd v John Holt & Co (Liverpool) Ltd [2012] EWHC 2477 (Comm)Ampleforth Abbey Trust v Turner & Townsend [2012] EWHC 2137 (TCC)Kudos Catering UK Ltd v Manchester CCC Ltd [2013] EWCA Civ 38Deutsche Bank v Khan [2013] EWHC 482 (Comm)Olympic Airlines v ACG Acquisition XX LLC [2013] EWCA Civ 369

1. One of the issues for the CA in KG Bominflot v Petroplus was whether a clause in the following terms was sufficiently clearly worded to exclude the implied term under section 14(2) of the Sale of Goods Act 1979 that the goods should be of satisfactory quality:

18 See also: SNCB Holding v UBS [2012] EWHC 2044 (Comm), esp. at [65].19 And for a similar sentiment from a different CA: ‘In my judgment, the implication of the terms proposed would involve an impermissible re-writing of the parties’ contract or, in other words, would subject them merely to one notion of “what might have been the most sensible solution to the parties’ conundrum”. That is not a proper basis for implying terms into the Agreement’, Dear v Jackson [2013] EWCA Civ 89, at [41] per McCombe LJ. See also Gavin v One Housing Group Ltd [2013] EWCA Civ 580.

There are no guarantees, warranties or representations, express or implied, [of] merchantability,20 fitness or suitability of the oil for any particular purpose or otherwise, which extend beyond the description of the oil set forth in this agreement.

The argument that says this wording does not succeed is based on the fact that where the terms implied by the Sale of Goods Act are implied as conditions (i.e terms the breach of which entitle the claimant not only to claim damages but to terminate the contract and reject the goods), as is the case with s.14(2), nothing less than an explicit reference to ‘conditions’ will suffice.

2. If he was free from the constraints of previous authority, it is clear that Rix LJ would have considered this too narrow an approach and that the wording employed was sufficient to indicate the parties’ intention to exclude liability under s.14(2). But he was constrained by a line of cases21 which had established as a general principle that liability for breach of the implied conditions under the Sale of Goods Act could only be excluded by a reference to ‘conditions’. The clause therefore failed, as a matter of construction.

3. This seems certain to be an issue which is destined for the Supreme Court, but for now the decision of Cooke J. in the Air Transworld case22 is significant for demonstrating that the beauty of the common law lies in the ability to find distinctions that may not at first sight have been apparent. In the Bominflot case, Rix LJ had expressed his conclusion that the word “condition” is needed to get rid of SGA conditions in these terms: “such obligations can only be excluded by language which expressly (or perhaps one may add which must necessarily be taken to) refer to conditions”. The words in parentheses were all that Cooke J. needed to say that even SGA conditions had necessarily been excluded by the following provision in an aircraft sale agreement:

4.1 The warranty, obligations and liabilities of seller and the rights and remedies of buyer set forth in the agreement are exclusive and are in lieu of and buyer hereby waives and releases all other warranties, obligations, representations or liabilities, express or implied, arising by law, in contract, civil liability or in tort, or otherwise, including but not limited to a) any implied warranty of merchantability or of fitness for a particular purpose, and b) any other obligation or liability on the part of seller to anyone of any nature whatsoever by reason of the design, manufacture, sale, repair, lease or use of the aircraft or related products and services delivered or rendered hereunder or otherwise.

4. For Cooke J. the first part of the clause made clear that the agreement set out the exclusive remedies of the parties: “There is plainly intended to be no room for the operation of any primary or secondary rights or obligations outside the terms of the

20 Under a previous version of s.14(2) the goods had to be of ‘merchantable quality’; they must now be of ‘satisfactory quality’.21 Most notably: Wallis, Son & Wells v. Pratt & Haynes [1911] AC 394; Henry Kendall & Sons v. William Lillico & Sons [1969] 2 AC 3122 The decision of Cooke J. also goes into a number of issues relating to UCTA (ss.26 (international supply contracts), 27 (choice of law provision), and dealing as consumer). These notes are confined to the interpretation issue).

contract itself”. Although clause 4.1 then went on to refer only to implied “warranties”, this part of the clause was merely illustrative of the exclusivity achieved by the first part (“including but not limited to”). Accordingly:

No person reading this Article could be in any doubt that every promise implied by law is excluded, in favour of the contractual promises set out in the APA. It is right that there is no term which purports to exclude the buyer’s right to reject the goods and recover the price, nor to the specific sections of the Sale of Goods Act, but the words “all other… obligations… or liabilities express or implied arising by law”, which the purchaser expressly waives, necessarily include the conditions implied by the Sale of Goods Act. In my judgment these are apt and precise words which are sufficiently clear to exclude those implied conditions and the Article, by necessary inference does negative the application of those implied conditions.23

5. In Dalmare Flaux J. upheld the finding of arbitrators that in the sale of a vessel, the words ‘as she was’ at the time of inspection were not sufficient to exclude the implied term of satisfactory quality under s.14(2) SGA, on the narrow basis that they were really only concerned with the temporal issue of the period of delay between inspection and delivery. But even if the contract had been for the sale of the vessel ‘as is’, Flaux J. inclined to the view that that would also not have been sufficient, based in part on the line of cases referred to in Petroplus above.

6. The FG Wilson decision is the latest consideration of a no set off clause and whether it falls foul of the test of reasonableness under UCTA. The clause, in a contract for the sale of generator sets was in the following form: ‘Buyer shall not apply any set-off to the price of Seller's products without prior written agreement by the Seller’.24 No set off clauses have fared pretty well in this respect in the contracts between two commercial parties where they tend to be found.25 In Stewart Gill Ltd v Horatio Myer & Co Ltd,26 a no set off clause failed where it expressly included within its ambit no set off for ‘credits’,27 but Popplewell J. rejected an argument that since the no set off clause in the present case was wide enough to cover admitted credits, it therefore did so and, as a consequence, was unreasonable.28

7. While it is the case that it is the whole clause which must be considered for the purpose of the reasonableness test, Popplewell J. followed the earlier approach of Mance J.29 in determining how widely to cast the net in determining the potential width of the clause:30

23 At [29].24 The seller’s standard terms and conditions were found to be incorporated by reasonable notice and the court rejected the argument that the no set off clause was onerous or unusual and therefore required special notice to have been given (Denning’s red hand rule). The court also rejected a rather strained argument based on construction: ‘there is no principle of construction that a no set-off clause cannot be effective unless it is expressed in terms to qualify the payment obligation’, at [85].25 See eg Schenkers v. Overland Shoes Ltd [1998] 1 Lloyds Rep 498.26 [1992] QB 600.27 That also seems to be the basis for the failure of a no set off clause in Axa Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133.28 See similarly Rohlig (UK) Ltd v Rock Unique Ltd [2011] EWCA Civ 18.29 In Skipskredittforeningen v Emperor Navigation [1998] 1 Lloyd’s Rep 66, 75.30 At [96].

The test is whether the term was a fair and reasonable one to have been included at the time of contracting, and what was fair and reasonable at that time should be judged by reference to factual circumstances which might realistically be foreseen as arising in the future. The court should not be too ready to focus on remote possibilities or to accept arguments that a clause fails the test by reference to relatively uncommon or unlikely situations.

8. Popplewell J. took the same approach to an argument that the no set off clause could potentially extend to fraud, but even if it did, that was not enough to render it unreasonable:31

I think that the parties at the time of contracting would have contemplated as remote the possibility that either would act fraudulently towards the other, or would deliberately and knowingly commit breaches of contract or other wrongs. But however that may be, it is not in my view unfair or unreasonable to require Holt Liverpool to pay the price for products in full without any deduction for what is at that stage a mere claim, however arguable, even if for fraud or intentional wrongdoing. In these respects I find myself in agreement with the reasoning of Morritt LJ in WRM Group Ltd v Wood [1998] C.L.C 189 at 196 and Mance J in Skipskredittforeningen v Emperor Navigation [1997] C.L.C 1151 at 1165

9. Having rejected these arguments, Popplewell J. went on to find, for all the usual reasons (commercial contract, equal bargaining power, common form of clause etc.), that the no set off clause was reasonable. As a result, the claimant was entitled to summary judgment on its action for the price.

10. The Ampleforth case is notable as the first instance, as far as I am aware, of a successful claim in negligence (common law and breach of the contractual duty of care) against a project manager for failure to expedite the execution of the formal contract (for construction) so that the employer was left only with the letter of intent and had to reach a less favourable settlement for delay with the contractor. It is a claim which has to get over quite a number of hurdles (duty, breach, causation, loss of chance), but having got over them, the manager sought to rely on a limitation of liability in the following terms:

Liability for any negligent failure by Us [TTPM] to carry out Our duties under these Terms shall be limited to such liability as is covered by Our Professional Indemnity Insurance Policy terms. Liability is also limited to such a sum as it would be equitable for Us to pay having regard to the extent of Our responsibility for any loss or damage suffered by You on the basis that all other consultants, contractors and subcontractors who also have a liability shall be deemed to have provided contractual undertakings to You on terms no less onerous than these Terms and shall be deemed to have paid to You such sums as it would be just and equitable for them to pay having regard to the extent of their responsibility for any such loss or damage and in no event shall Our liability exceed the fees paid to Us or £1million whichever is the less

11. Judge Keyser found such a limitation to be unreasonable on the following grounds: (i) the contract required the defendant to have £10m of PII cover but that made no sense

31 And see the same approach of Hamblen J. in Deutsche Bank v Khan [2013] EWHC 482 (Comm)

if much of it was rendered illusory by the limitation (but quaere whether the £10m was global cover for all claims against the defendant and not just project to project); (ii) the limitation was not included in contracts for earlier works so it had a surprise element.

12. In Mir Steel C purchased the assets of a company from administrators including a hot strip mill which was known to be the subject of an ownership claim by the supplier. It provided the administrators with an indemnity against ‘any claim’ in respect of the mill, but sought to argue that that could not extend to claims later brought by the supplier for intentional wrongdoing such as inducing breach of contract and conspiracy (there was no dispute that it covered conversion). The CA rejected that argument since, in context, it was clear that the parties had intended to pass the risk of any claim re the mill to C and this was reflected in the price paid by C.

13. C had sought to rely, by analogy, on the Canada Steamship rules32 that, in the absence of any express reference to negligence, wide general words of indemnity or exclusion will not suffice. The CA confirmed the view that the rules are not in fact rules, but merely guidance on the proper interpretation of a clause;33 as such, they are subject to the overriding principle of interpretation of ascertaining the intention of the parties. General words may not be enough for negligence (or intentional wrongdoing) because of the inherent improbability that a party would include such wrongs in an exclusion or an indemnity, but it was not improbable here, in the circumstances.34

14. In Kudos Catering one sees the latest application of what is sometimes called the ‘main purpose rule’. The essential idea is that if a potentially very wide exclusion clause is applied literally it may have the effect that a party could never be sued in any circumstances. Not the least of the difficulties which that can lead to is the conclusion that there was no contract between the parties, since on one side there is no enforceable obligation. That makes no sense in circumstances in which the parties clearly understood that they had entered into a contract with mutually enforceable obligations. The courts therefore strive to find some more limited meaning to the clause.

15. In Kudos, D purported to terminate a catering contract with C in circumstances which C said amounted to a repudiation by D which C accepted. In defence to C’s claim for damages for loss of the profits it claimed it would have earned during the balance of the term, D sought to rely on the following clause:

18.6 The Contractor hereby acknowledges and agrees that the company shall have no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits, anticipated savings or wasted expenditure (whether reasonably foreseeable or not) or indirect or consequential loss suffered by the Contractor or any third party in relation to this Agreement...’

32 After Canada Steamship Lines Ld v. The King [1952] AC 192.33 See earlier HIH Casualty and General Insurance Ltd and Others v. Chase Manhattan Bank and Others [2003] 2 Lloyd’s Rep 61.34 The Canada Steamship rules are invoked and applied without comment in the Geys case which is considered below on the issue of termination.

16. At first instance, the judge had thought such wording was perfectly clear and there could be no liability of D in contract for loss of profits. The CA held that this ignored the problem identified above: ‘…the Agreement is, if the judge’s construction of Clause 18.6 is adopted, effectively devoid of contractual content since there is no sanction for non-performance by the Respondent.’35 It also failed to give due weight to the doctrine of contra proferentem: ‘There also in my view comes into play the presumption that neither party to a contract intends to abandon any remedies for its breach arising by operation of law [in the absence of clear words to that effect].’36

17. It is however one thing to identify that the parties must have intended some limit to an apparently wide exclusion clause and quite another to work out what that limited meaning is. In Kudos, the CA drew on the fact that clause 18.6 appeared in a section headed ‘Indemnities and Insurance’. It concluded that since the relevant indemnities were given in the context of the performance of the contract, liability ‘in relation to this Agreement’ in clause 18.6 meant liability in relation to the performance of this Agreement, ie it did not extend to a failure to perform:

‘This section of the agreement, as is apparent from its content if not permissibly form its title, is not the place in which one would expect to find a wide-ranging exclusion clause of general application’.37

18. This distinction (ie between defective performance and non-performance) echoes that drawn in other cases in which the main purpose rule, or its underlying idea has been invoked.38 Does it amount to a reintroduction of the impermissible doctrine of fundamental breach, ie there are some serious breaches for which liability cannot be excluded by rule of law? No, said the CA, though the dividing line between the impermissible rule of law and the failure to use sufficiently explicit words for serious breaches like non-performance may b a fine one.

19. The decision may also be noted for a further rejection of the idea that clauses like 18.6 can be given a limited meaning by confining them to ‘deliberate breaches’:39

I accept that, on the assumption which I have made for the purpose of determining this preliminary issue, we are not concerned with a “deliberate” in the sense of a “knowingly unlawful” repudiation, but I am yet to learn that the

35 At [19]. D sought to avoid this conclusion by arguing that C could get specific performance but the CA dismissed the notion that this was the sort of contract in relation to which specific performance would be granted.36 At [21].37 At [24].38 See for example: A Turtle Offshore SA v Superior Trading Inc [2008] EWHC 3034 (Admlty); [2008] 2 CLC 95339 See the difference of opinion in this regard in Internet Broadcasting Corporation Ltd v MAR LLC [2009] EWHC 84 (Ch); [2009] 2 Lloyd’s Rep 295 and Astrazeneca UK Ltd v Albemarle International Corporation[2011] EWHC 1574 (Comm) at [288]-[301]

consequences of a repudiatory breach of contract differ according to whether it is informed or uninformed, deliberate or inadvertent, hopeful or hopeless’.

20. Finally, one may briefly note the decision of the CA in the Olympic Airlines case that a ‘conclusive proof’ provision in an aircraft lease was sufficiently clearly worded to create a contractual estoppel out of a certificate of acceptance, thereby preventing the lessee from claiming the lessee from claiming that the aircraft was not of satisfactory quality.

Misrepresentation

Bikam Ood v Adria Cable S.a.r.l. [2012] EWHC 621 (Comm)

Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch)

1. Recent decisions of the courts have emphasized the need for clear and express language if the parties wish to exclude liability for pre-contractual misrepresentations, whether in the form of the now ubiquitous ‘no representation’ or ‘non-reliance’ clauses, or otherwise.40 Ideally, this approach should be adopted in any future drafting, but one finds a seemingly more generous approach taken in the Bikam OODcase. The buyer of shares claimed in misrepresentation and argued that the pre-contractual misrepresentations upon which it had relied were those set out in the SPA itself as representations and warranties. On the seller’s application for summary judgment, the judge was prepared to accept the proposition that those representations were also pre-contractual representations because of the exchange of drafts between the parties.41 But the key issue was whether any such claim for misrepresentation had been knocked out by the provisions of the SPA.

2. The key provisions were as follows:

[Clause 9 set out a regime for indemnification for breach of Seller’s Warranties and concluded] 9.10 The Buyer acknowledges and agrees that its sole remedy against Sellers for any breach of the Sellers’ Warranties is set out in this Clause 9 and that, except to the extent that the Buyer has asserted a claim for indemnification prior to the relevant Liability Termination Date, the Buyer shall have no remedy against the Sellers for any breach of the Sellers’ Warranties [“Seller’s Warranties” was defined as “the representations and warranties of the Sellers contained in Schedule 2].

17. The rights, powers and remedies provided in this Agreement are cumulative and not exclusive of any rights and remedies provided by law and no single or partial exercise of any right or remedy under this Agreement or provided by law shall hinder or prevent further exercise of such or other rights or remedies.

40 Most notably Axa Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133 in which an entire agreement clause was found wanting because there was ‘no language to the effect that the parties were agreed that no representations had been made or relied upon’ (Rix LJ, emphasis added). See, to similar effect, the earlier view of Jacob J. in Thomas Witter Ltd v TBP Industries Ltd<r> [1996] 2 All ER 573.41 Note the difference of opinion in this regard expressed in Eurovideo Bildprogramm GmbH v. Pulse Entertainment Ltd [2002] EWCA Civ 1235 at [20] and Leofelis and another v. Lonsdale Sports Ltd and others [2008] EWCA Civ 640 at [141].

21.1 This Agreement (together with all the documents to be entered into under it) contains the complete agreement between the parties on the matters to which it relates, and supersedes all prior agreements and understandings (whether written or oral) between the parties in respect of such matters.

21.2 Each party waives its rights against the other in respect of warranties and representations (whether written or oral) not expressly set out in this Agreement.

21.3 Nothing in this Clause 21 limits or excludes the liability of any party for fraud or wilful misconduct.

3. Simon J. found for the seller. His conclusion may be summed up as follows:42

3.1 Clause 17 may have saved all rights and remedies provided by law, but that simply begged the question of what rights survived the other provisions of the SPA.

3.2 Clause 21.2 clearly excluded liability for representations not set out in the SPA.

3.3 The representations which were set out in Schedule 2 were set out as “representations and warranties” which were then defined as “Seller’s Warranties”. In that context, while there may have been none of the express language of “no representation” or “no reliance”, it was clear that the intention of the parties was to confine the Buyer to claims for breach of warranty and rule out any claims in misrepresentation at all:

“The SPA provided an agreement that there were no representations beyond those contained in Schedule 2 and that the rights in relation to thos representations were to be contractual rights, within the limitations of the SPA.”43

4. In Bikam Ood Simon J. decides, in effect, that the parties had agreed that any representations set out in the contract, while capable of amounting to pre-contractual representations, should only be treated as warranties. In the Sycamore case Mann J. also reaches the conclusion that the only liability of the seller was for breach of warranty, but on the more fundamental basis that all that was given in the contract were warranties and they could not also qualify as pre-contractual representations. He summarized his conclusion as follows:44

(i) There is a clear distinction in law between representations and warranties, and that would be understood by the draftsman of the SPA. That is likely to be the case in any transaction of this nature, but is also apparent from the SPA itself. Representations are referred to in clause 16.3, and Warranties (with a capital "W") are referred to elsewhere.

42 He reached it in part by endorsement of the approach to interpretation taken in the Rainy Sky case (see below) but in part by downplaying the relevance of contra proferentem.43 Simon J. at [47].44 At [203].

(ii) The warranties in this case are clearly, and at all times, described as such, and are nowhere described as representations. Those giving the warranties are described as "Warrantors" (again with a capital "W"). The relevant wording is always in terms of warranties.

(iii) The words of the warranting provision (clause 5) are words of warranty not representation. There is a legal distinction between the two and…there is no reason to extend the words beyond their natural meaning. In order to make the relevant material a representation one has to find something in the SPA which is capable of doing that. It is not enough that the subject matter of the warranty is capable of being a representation. One has to find out why those words are there. One finds that in clause 5; and what one finds is words of warranty, not words of representation.

(iv) The Disclosure Letter (itself referred to in the SPA) also distinguishes between representations and warranties - "The disclosure of any matter shall not imply any representation, warranty or undertaking not expressly given in the Agreement …".

(v) Clause 8 of the SPA contains significant limitations on the liability under the "Warranties". It does not refer to representations. The clause is obviously a significant part of the overall structure of liability. If the warranties were capable of amounting to representations as well, then on the strict wording of this clause it would not apply to any such misrepresentation. The sellers would thus be deprived of a large part of their protection and limitation. That would be a strange and uncommercial state of affairs, and can hardly have been intended. This is strikingly so in relation to clause 8.2 containing the overall cap on recoveries and on what could be recovered from each warrantor, (unless, in relation to the overall cap a misrepresentation claim were construed as a claim under the Agreement, which would be a forced construction). If this cap does not apply then Mr Dawson could find himself liable for £17m, when he had contracted for a cap of £317,000. It is also true of clause 8.1. This consequence would be avoided if one construed claims under the "Warranties" as including representations made in the warranty provisions, but again that would, in my view, be a very forced construction.

(vi) There is a conceptual problem in characterising provisions in the contract as being representations relied on in entering into the contract. The timing does not work. The normal case in misrepresentation involves the making of a representation, and as a result the entering into of the contract. That does not work where the only representation is said to be in the contract itself. Miss Newman expressly disclaimed the relevant representations being made at any earlier time. In some cases that problem is solved by an express provision making certain contractual statements representations. In such a case the parties have agreed as to their nature and how they should be treated. However, that is not the present case.

The difference in approach in the two cases appears to lie in the underlined words: Mann J. was not able to find an agreement of the parties that they would treat any representations only as warranties, but concluded as a result that they intended only to give warranties; Simon J. was able to find such an agreement seemingly because of the definition of ‘warranties’ as ‘representations and warranties’.

5. Furthermore, Mann J. was not dissuaded from his view by the presence of fairly typical clauses knocking out any representations not set out in the contract:45

Miss Newman said that the SPA contained a clear indication that the warranties were capable of amounting to representations. Clause 16.3.2 provided that there had been no reliance on any "representation other than those expressly set out in the Transaction Documents"; and clause 16.3.3 excluded liability for "a representation that is not set out in the Transaction Documents". There was nothing in those documents which expressly described itself as a representation, and in fact there was nothing which was a candidate for a representation other than the warranties. The terms of the SPA just referred to assumed that there was something capable of being a representation (otherwise they were writ in water); so one should construe the only candidates (the warranties) as in fact being representations as well.

I disagree. She is right that the provisions just referred to seem to presuppose the possibility of some representation. However, that is not sufficient reason for forcing that characterisation on something that would otherwise not bear it, particularly in the light of the countervailing matters which I have held as pointing firmly the other way. When one looks to the documentation to find representations, there are none.

6. In reaching his decision, Mann J. also disagreed with the earlier view of Arnold J.46

that representations made in the form of warranties in earlier drafts could retain the character of representations:47

For the reasons given above, I think that there is no satisfactory answer to be given by those claiming representations to have been made, to the question which has to be asked: Why have the warranty provisions been inserted in the contract? The answer is to be found in clause 5 in each case – they are there because they are warranted. There is nothing more to make them into representations. I do not think it affects the position that in the present case, as in Arnold J's, the parties (and in particular the warrantors) knew what was coming because drafts have been exchanged and the terms of the contract negotiated. What the warrantors knew to be coming, or more precisely knew they were going to be providing, were expressed to be warranties, not representations.

45 At [204]-[205].46 In Invertec Ltd v De Mol Holding BV and another [2009] EWHC 2471 (Ch)47 At [209].

A creeping ‘good faith’ requirement in English contract law

(i) Not in negotiation:

Dhanani v Crasnianski [2011] EWHC 926 (Comm)Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 1560 (Comm)Shaker v Vistajet Group Holdings SA [2012] EWHC 1329 (Comm)MRI Trading AG v Erdenet Mining Corp [2013] EWCA Civ 156

(ii) But in performance?

Compass Group v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB)SNCB Holding v UBS [2012] EWHC 2044 (Comm)Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB)TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)

1. The English law of contract is well known for (some would say prides itself in) not having a general duty of good faith. Of course, much of the law of contract is predicated on notions of good faith (e.g. misrepresentation, duress etc.) but the approach of English law is a ‘piecemeal’ one48 and the principal reason given for this approach is the uncertainty which may result from a very general duty of good faith.

2. This continues to be the approach of the courts when it comes to questions of contract formation. If the parties have failed to reach the stage of a contract in relation to the particular deal they have in mind, it will not avail them to argue for a lesser agreement in the form of an agreement to negotiate in good faith. This is amply confirmed by several recent decisions,49 though it may also be noted that the courts continue to strive not to find that the parties have created no more than an unenforceable agreement to agree, or to negotiate.50

3. Where good faith may be gaining a firmer footing is in the performance of valid and enforceable contracts.

4. If one starts with implied terms, the courts have fairly regularly now been prepared to find that where an element of discretion is bestowed on one party, it is subject to a ‘good faith’ limitation in the form of an implied term that it will not be exercised arbitrarily, capriciously, irrationally, or for an improper purpose.51 The extent of this

48 See Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd<r> [1989] QB 433, at 439 per Bingham LJ. 49 See recent consideration of Dhanani v Crasnianski [2011] EWHC 926 (Comm); Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 1560 (Comm);Shaker v Vistajet Group Holdings SA [2012] EWHC 1329 (Comm).50 See recently MRI Trading AG v Erdenet Mining Corp [2013] EWCA Civ 156, in which the CA held that any uncertainty about missing terms as to charges and shipping schedule could be resolved by an implied term that such matters be resolved by arbitration.51 See e.g. Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd’s LR 538 (valuation of securities by seller on termination of a forward sale); Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287, [2005] ICR 402 (discretion whether to grant bonus).

limitation should not be overstated since it still allows for the party in question to prefer its own commercial interest; it is not a duty to act reasonably (save in the Wednesbury sense), or to act with reasonable care.52 But it is just the potential existence of such a limitation that can engender uncertainty and this raises the question of when the necessary discretion is present.

5. The broadest view appears to be expressed by Moore-Bick LJ in JML Direct Ltd v Freestat UK Ltd53 in which he stated that the implied obligation not to act in an arbitrary, irrational or capricious manner was ‘likely to be implicit in any commercial contract under which one party is given the right to make a decision on a matter which affects both parties whose interests are not the same …’.

6. A literal, or broad interpretation, is checked by the decision of the CA in the Compasscase. In brief, in an NHS Trust catering contract performance by the contractor was measured by the calculation of service failure points. The NHS Trust could then award those points to the Contractor and levy deductions from payments due to the Trust. The Contractor claimed that the Trust had exercised its discretion in this regard in a way which was contrary either to the implied term referred to above, or in breach of an express duty of good faith (the express duty is dealt with below); and which entitled the Contractor to terminate the contract. Cranston J. agreed,54 on the basis that the Trust was exercising a discretion which attracted the implied term.

7. The CA disagreed, partly on the basis that such an implied term was unnecessary because any wrong calculation or deduction was itself a breach and regulated by other terms of the Contract, but also on the basis that it was the wrong sort of discretion. Jackson LJ stated:

An important feature of the above line of authorities is that in each case the discretion did not involve a simple decision whether or not to exercise an absolute contractual right. The discretion involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In any contract under which one party is permitted to exercise such a discretion, there is an implied term (at [83])….The discretion conferred simply permits the Trust to decide whether or not to exercise an absolute contractual right (at [91]).

8. This of course invites debate in future cases about whether the discretion involves no more than whether to exercise an absolute contractual right. In this regard, note the following observation from Longmore on the right to terminate a contract:55

The right to terminate is no more an exercise of discretion, which is not to be exercised in an arbitrary or capricious (or perhaps unreasonable) manner, than the right to accept repudiatory conduct as a repudiation of a contract. We have already commented that the specific right to terminate

52 Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd’s LR 538.53 [2010] EWCA Civ 34.54 Though found that both parties had been entitled to terminate so that there was no financial relief available to either.55 Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419, at [46]. And see TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC), dealt with below.

makes theoretical the question whether an Event of Default constitutes a repudiation of the contract which can be accepted by the innocent party as bringing the contract to an end. But no one would suggest that there could be any impediment to accepting repudiatory conduct as a termination of the contract based on the fact that the innocent party can elect between termination and leaving the contract on foot. The same applies to elective termination. Even if, moreover, it could be said that in some sense a contracting party had a discretion to bring the contract to an end and that such discretion should not be exercised capriciously or arbitrarily, it by no means follows that the same considerations could apply to allowing the contract to continue which does not require any positive act on the part of the Non-defaulting Party.

9. Still with the notion of an implied duty of good faith, the decision which goes furthest in this regard and has raised a few eyebrows is that of Leggatt J. in Yam Seng in which he advocates the recognition of a general duty of good faith, at least in the sense of its application by way of an implied term where necessary to give effect to the intention of the parties.

10. The first point to be made about this decision is that it seems to have been unnecessary to resort to any obligation of good faith. The case concerned a distribution agreement (for the distribution of Manchester United Eau de Toilette and other such products would you believe), entered into in informal terms without the benefit of legal advice (or drafting). The distributor purported to terminate for breach and claimed damages, and also had an alternative claim for misrepresentation.56 Both claims succeeded and could be explained on entirely orthodox grounds, eg. that the supplier was guilty of a repudiatory breach when he purported to appoint another distributor in breach of exclusivity. But the judge decided to consider the existence of an implied duty of good faith, and its breach by the supplier, in some detail.

11. The salient points made by the judge may be summarized as follows, before considering the potential impact of his decision, if any:

11.1 He reiterated the point made above that good faith is not alien to the English law of contract. He cited numerous examples:

‘...such a concept is, I believe, already reflected in several lines of authority that are well established. One example is the body of casesalready mentioned in which duties of cooperation in the performance of the contract have been implied. Another consists of the authorities which show that a power conferred by a contract on one party to make decisions which affect them both must be exercised honestly and in good faith for the purpose for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably (in the sense ofirrationally): see e.g. Abu Dhabi National Tanker Co v. Product Star Shipping Ltd (The “Product Star”) [1993] 1 Lloyd's Rep 397, 404; Socimer International Bank Ltd v Standard Bank London Ltd [2008] 1 Lloyd’s Rep 558, 575-7. A further example concerns the situation where the consent of one party is needed to an action of the other and a

56 These notes are confined to the ‘good faith’ issue, but the case also contains useful and orthodox consideration of a claim for ‘reliance damages’ for breach of contract and the measure of damages under s.2(1) of the Misrepresentation Act 1967.

term is implied that such consent is not to be withheld unreasonably (in a similar sense): see e.g. Gan v Tai Ping (Nos 2 & 3) [2001] Lloyd’s Rep IR 667; Eastleigh BC v Town Quay Developments Ltd [2010] 2 P&CR 2. Yet another example, I would suggest, is the line of authorities of which the Interfoto case is one which hold that an onerous or unusual contract term on which a party seeks to rely must be fairly brought to the notice of the other party if it is to be enforced’.57

11.2 Cases of negotiation (eg Walford v Miles) can be distinguished:

‘That case was concerned, however, with the position of negotiating parties and not with the duties of parties who have entered into a contract and thereby undertaken obligations to each other’.58

11.3 A duty of good faith is not to be implied into every contract as a default rule of law, ie implied in law, but may be implied in fact so as to give effect to the intentions of the parties:

‘I doubt that English law has reached the stage, however, where it is ready to recognise a requirement of good faith as a duty implied by law, even as a default rule, into all commercial contracts. Nevertheless, there seems to me to be no difficulty, following the established methodology of English law for the implication of terms in fact, in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties’.59

11.4 In determining such an implied term one takes into account the ‘background’ and the background includes ‘shared values and norms of behaviour’.

11.5 Good faith goes beyond honesty and includes ‘fidelity to the parties’ bargain.60

11.6 It is not determined subjectively:

‘Although its requirements are sensitive to context, the test of good faith is objective in the sense that it depends not on either party’s perception of whether particular conduct is improper but on whether in the particular context the conduct would be regarded as commercially unacceptable by reasonable and honest people.’61

11.7 It may extend to a duty to disclose information:

‘While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer term relationship between the parties which they make a substantial commitment. Such “relational” contracts, as they are sometimes called, may require a high degree of communication,

57 At [145].58 At [122].59 At [131]60 This is a concept also recognised by Cranston J. in the Compass case above.61 At [144].

cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long term distributorship agreements.’62

12. What to make of all of this? First, it is far too soon yet to say that English law now has a general duty of good faith. If it does end up with one, there is much to be said for the judge’s view that, in practice, not that much will have changed because of its piecemeal acknowledgement in the form of a number of discrete instances already.63

13. But it may be that it is just the recognition of a general duty, based on standards of ‘commercially acceptable’ behavior that is the cause for concern because of the uncertainty it may create. Those who think that it is the certainty of an English law of contract which does not include a general duty of good faith which makes it such a saleable product will not be convinced of the following:

‘the fear that recognising a duty of good faith would generate excessive uncertainty is unjustified. There is nothing unduly vague or unworkable about the concept. Its application involves no more uncertainty than is inherent in the process of contractual interpretation’.64

14. There is, of course, nothing to stop parties agreeing to an express duty of good faith, but the issue then is what is meant by good faith. The courts have stressed that this all depends on the context in which good faith is called for.65 This is reiterated by the CA in the Compass case,66 but they rejected a claim based on such an express obligation on the basis that, as a matter of construction, good faith was confined to certain objectives and did not cover the conduct of the Trust in the awarding of service failure points, or the levying of deductions.

15. An express obligation to act in the ‘utmost good faith’ may add something else.67 See most recently the observations of Cooke J. in the SNCB case:68

There is, in my judgment a clear distinction between “good faith” on the one hand and “utmost good faith” on the other. The latter concept is familiar in the context of insurance, with its concomitant duties of full disclosure, but has been held in other contexts, when used in commercial contracts, to impose “a

62 At [142].63 It is noticeable that the judge then found it necessary to put the implied duty of good faith in the present case on a concrete footing in the form of the supplier’s obligation not to give false information on which the distributor would rely (namely the retail price of the products on domestic sale (the distributor deal with ‘duty free sales’).64 At [152].65 See Berkeley Community Villages v Fred Daniel Pullen [2007] EWHC 1330 (Ch); CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch).66 In which it was found to amount to no more than a duty to act honestly, which would appear to render it rather superfluous.67 In Horn v Commercial Acceptances [2011] EWHC 1757 (Ch), the parties agreed to act ‘in absolute faith’ towards each other. Peter Smith J. (obiter) equated this with ‘good faith’ and held that a finding of dishonesty is not a pre-requisite for a breach of good faith (this issue was not considered on appeal: [2012] EWCA Civ 958.68 At [72].

contractual obligation to observe reasonable commercial standards of fair dealing, faithfulness to the agreed common purpose and consistency with the justified expectations” of the other party. (See e.g. Morgan J in Berkeley Community Villages v Fred Daniel Pullen [2007] EWHC 1330 (Ch)). The content of the “utmost good faith” obligation may well vary with the context or contract in which it is found, but in my judgment, it is an expression which has conveyed a meaning beyond “good faith” for a very long period of time. A duty to exercise “good faith” in doing something is one which is usually to be contrasted with a duty to exercise reasonable care. It connotes subjective honesty, genuineness and integrity, not an objective standard of any kind, whether reasonableness, care or objective fair dealing. It cannot be equated with “utmost good faith” and although its exercise in practice may involve different actions or restraint, the concept is not one which goes beyond the notion of truthfulness, honesty and sincerity.

16. The approach taken by the CA in the Compass case is confirmed by the very recent decision of Akenhead J. in the TSG case. The parties entered into a four year contract for gas servicing but agreed in a provision that either party could ‘terminate…at any time during the term’. When D terminated, C challenged the termination on grounds of good faith.

17. So far as any express term was concerned, C could point to the following clause:

1.1 The Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents, and all their respective obligations under the Partnering Contract shall be construed within the scope of such roles, expertise and responsibilities, and in all matters governed by the Partnering Contract they shall act reasonably and without delay.

Akenhead J. found that, as a matter of construction, clause 1.1. did not constrain the ‘unfettered’ right to terminate:69

‘The use of the words "in all matters governed by the Partnering Contract" is readily comprehensible in relation to the assumption, deployment and performance of roles, expertise and responsibilities; it is at least odd that the word "matters" is used in this context if what is intended is that each and every obligation, power or right must be exercised reasonably.’

18. As for any implied limit of good faith on the right to terminate, based on the Yam Seng decision, above, it is fair to say that Akenhead J. was not having it:70

‘Because cases and contracts are sensitive to context, I would not draw any principle from this extremely illuminating and interesting judgment which is of general application to all commercial contracts. I do not see that implied obligations of honesty or fidelity to the contractual bargain impinge in this case at all. There is certainly no suggestion or hint that there has or might have been any dishonesty in the decision to terminate. So far as fidelity to the bargain is

69 At [37].70 At [46]. But see a suggested ‘good faith’ limit of a sort in Timeload v. British Telecommunications Plc [1995] EMLR 459.

concerned, that depends upon what the bargain actually was. In any event, fidelity to the bargain is largely already covered by the expressed terms of Clause 1.1 and, at least to that extent, does not have to be implied as well.’

Termination

Cavenagh v William Evans Ltd [2012] EWCA Civ 697Leofelis SA v Lonsdale Sports Ltd [2012] EWHC 485 (Ch), [2012] EWCA Civ 985, [2012] EWCA Civ 1366Crocs Europe BV v Anderson [2012] EWCA Civ 1400Geys v Societe Generale [2012] UKSC 63Cukurova Finance International Ltd v. Alfa Telecom Turkey Ltd [2013] UKPC 2The MV Astra [2013] EWHC 865 (Comm)Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)71

White Rosebay Shipping SA v Hong Kong Chain Glory Shipping Ltd [2013] EWHC 1355 (Comm)

1. The facts in the Leofelis case are complicated but may be reduced to the following: (i) in a 2005 action C claimed breach of exclusivity by the licensor D under a TM licence and sought damages projected to the end of the licence (potentially until 2014); (ii) in 2007, C purported to accept what it alleged to be a repudiatory breach by D and terminated the licence. D disputed that and the question of who was guilty of repudiation became the subject of a 2009 action, in which C accepted that the breach it had relied upon did not succeed but relied on the principle that it could invoke another repudiatory breach by D of which it had been unaware at the time of termination (under the Boston Deep Sea Fishing principle72). The action before Roth J., by way of an application by D for summary judgment, or strike out, was concerned with the effect of the termination in 2007 on the claim for damages in both the 2005 and 2009 action.

2. So far as the 2005 action was concerned, Roth J. applied the Golden Victory73 to conclude that the damages claim could only be made up until the termination since it was now known that the licence did not run its full term. The fact that it may not have run its full term because of D’s repudiatory breach could be reflected in the damages claim in the 2009 action. The damages there would be for loss of bargain and include losses due to the unexpired term of the licence; such loss could include the inability to project the damages claim in the 2005 action beyond the date of termination.

3. But when it came to the 2009 action, Roth J. and counsel ran into a problem in that they ran out of authority to guide them. It is clear that the Boston Deep Sea Fishingprinciple allows C to invoke a repudiatory breach of which it was unaware to justify its termination and avoid liability for a wrongful termination. It is equally clear that C

71 Dealt with under ‘good faith’ below.72 Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339.73 [2007] 2 AC 353. The effect of the Golden Victory principle, or the Bwlffa principle (after an earlier decision), is that where the assessment of damages at the date of breach (or the date of acceptance of breach) depends on a contingency (eg in Leofelis the remaining term of the licence) but that contingency is resolved by later events prior to the hearing, the court may take into account what it now knows to have happened.

can also claim damages for breach of D’s obligations prior to termination. But can it claim loss of bargain damages (ie those due to the fact the remainder of the contract will not now be performed) in circumstances where it was not in fact terminated for the reason C now relies upon. Here, authority ran out. Roth J. held that the answer had to be derived from first principles and decided that C could not claim for loss of bargain:74

In this situation, if [D] had not committed the repudiatory breach, the contract would still have come to an end as [C] decided to terminate it without knowledge of that breach by [D]. [C] therefore should not be able to rely on [D]’s repudiatory breach as the grounds for recovering damages for the contract coming to an end, i.e. for loss caused by [D]’s non-performance of its primary obligations thereafter...

...The unknown breach of the Agreement by [D] was not accepted by [C] as a repudiation for the obvious reason that it was unknown. Therefore, that alleged breach, although its nature met the test for a repudiatory breach, cannot be the cause of the termination and thus of the loss that flowed from the termination.

4. With respect, this is a little doubtful. As counsel for C submitted it allows D to have benefited from concealing the earlier breach on which C now relies. Nor was C able to avoid this conclusion on the basis that its letter of termination stated “without prejudice to any other breaches”: “This lawyer’s catch-all cannot alter the position in fact, which is that [C] terminated the Agreement irrespective of the [earlier repudiatory breach] or any circumstances surrounding it”75 (quaere whether a more widely, or explicitly, drafted letter of termination would suffice).

5. This result might be avoided by taking the fiction of the Boston Deep Sea Fishingprinciple to its logical conclusion, ie C is deemed to have terminated for the reason now relied upon. However, it is precisely this argument which seems to be rejected by the Court of Appeal:76

The principle underlying the Boston Deep Sea Fishing case has never been put forward as being that the unknown but justified ground for accepting a repudiation is to be read into the letter or other communication by which the unjustified reason is asserted. I do not see that the principle can or should be understood as extending that far. It does not allow the innocent party to assert that it did accept repudiation on the correct (though unknown) ground; rather it allows that party to meet a claim that its conduct in terminating the contract, though apparently unjustified because done on the wrong ground, is to be taken as justified because it could have been done on the right ground, not because it was done on the right ground. It operates as a shield against a claim for damages on the basis of wrongful termination, not as a sword to claim damages (for the future) on the basis of justified termination.

The appeal was made principally on the ground that, even if Roth J. was correct, C’s claim did not fail as a matter of causation because the alleged repudiatory breach which was relied on incorrectly at the time of termination was part of continuous

74 At [65]-[66].75 At [67].76 [2012] EWCA Civ 985 at [33] per Lloyd LJ.

conduct of D which included the later repudiatory breach which C now sought to rely on. As a consequence it did not follow that even if there had been no repudiatory breach by D, the contract would still have been terminated by C on the mistaken basis. This ground for appeal required leave to amend which was rejected in a furtherhearing because it could not be made out on the facts.77

6. A further limit to the Boston Deep Sea Fishing principle is recognised in the Cavenagh case. D was paid six month’s salary in lieu of notice on termination of his contract of employment, but C later discovered that he was guilty of serious misconduct that would have justified immediate dismissal without payment. C was not entitled to return of the payment; the Boston Deep Sea Fishing principle is confined to defending a claim that termination which was wrongful for the reasons actually stated can be made lawful by reliance on the newly discovered valid basis for termination. Those were not the circumstances of the Cavenagh case. Mummery LJ suggested that C might have brought a claim for breach of the fiduciary duty on D to disclose his wrongdoing78 or might have argued that the agreement to make payment in lieu was void or voidable by reason of a vitiating unilateral mistake of C, which was known to D, about its right to terminate the service agreement summarily and without pay in lieu on grounds known to D, but unknown to the C.79

7. An agent disparages the business of his principal; in particular its ordering process (by posting a mock film on the internet). Does it amount to a breach entitling the principal to terminate the contract? Not in the Crocs Europe case. The agent was in breach of reg. 3 of the Commercial Agents Regulations (a commercial agent must look after the interests of his principal and act dutifully and in good faith), but the effect of any breach is left to national law (reg. 5(2)). As a matter of English law, such obligation does not amount to a condition and nor was the breach sufficiently serious (even if it could also be argued to amount to a breach of fiduciary duty: ‘no authority cited supports the defendant’s radical proposition that any breach of the fiduciary duty of loyalty necessarily and automatically results in the repudiation of the agency contract. Breaches of fiduciary duty, like breaches of other kinds of duty, may have different consequences and give rise to different remedies depending on an objective assessment of the effect of all the circumstances surrounding the breach’, at [24]).

8. One might also briefly note the (obiter) decision of Flaux J. in The MV Astra that punctual payment of hire under a charterparty is a condition so that any breach entitles the other party to terminate and a claim ‘loss of bargain’ damages. The status of such a clause has been the subject of a difference of opinion in the courts for some years so this may not be the last word on this.

9. In Geys v Soc. Gen the Supreme Court was required to consider, and affirmed, that with employment contracts, like any other contract, a repudiatory breach does not result in the automatic termination of the contract; C must have elected to terminate. This issue mattered in Geys because of the following circumstances: (i) D dismissed C ‘with immediate effect’ on 29 November 2007; (ii) D was entitled to do so by making payment of three months’ salary in lieu of notice, but made no such payment until 18

77 [2012] EWCA Civ 1366.78 See Item Software (UK)Ltd v. Fassihi [2004] IRLR 928.79 See Horcal Ltd v. Gatland (1984) 1 BCC 99,089 at 99,092

December 2007 and did not state that it was made pursuant to the relevant terminationprovision; (iii) D finally did that by letter on 4 January 2008 which took effect on 6 January 2008. Was the contract therefore terminated on 29 Nov, 18 Dec, or 6 Jan? This mattered because if it was after 31 Dec 2007 a different formula applied to determine the termination payment due to C and the difference was very substantial.

10. The purported dismissal on 29 Nov was clearly unlawful and amounted to a repudiatory breach by D but at no point did C accept such repudiation; indeed, he wrote on 2 January expressly to affirm the contract. The Supreme Court upheld the finding that the contract was not lawfully terminated on 18 Dec because the payment was not accompanied by the necessary notice. So, the argument left for D was that the contract was automatically terminated by its own repudiatory breach on 29 Nov. There had been some apparent support for such ‘automatic’ termination, but theprevailing view had been that employment contracts were no exception to the general rule that election is necessary.80

11. The majority agreed that employment contracts were no exception, mainly on the principled basis that it would too easily allow an employer potentially to benefit from its own wrong, by committing a repudiatory breach at an advantageous date. In many cases, the practical impact of this will be limited since the principal benefit to the employee of affirming the contract is to do the work and get paid, but the employer cannot be compelled to provide the necessary work which the employee will need have to have fulfilled in order to be entitled to payment. As noted by Lord Wilson:81

...the law has been clear that, save when, unusually, a contract of employment specifies otherwise, the mere readiness of an employee to resume work, following a wrongful dismissal which he has declined to accept, does not entitle him to sue for his salary or wages. “He cannot”, as Salmon LJ said in Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699, 726, “sit in the sun...”. The law takes the view that it is better for the employee (as well, of course, as for the employer) that his claim for loss of wages or salary should be confined to a claim for damages and therefore be subject to his duty to mitigate them by taking all reasonable steps to find other work. This principle is not without its critics. In Boyo v Lambeth London Borough Council [1994] ICR 727, 747 Staughton LJ observed that, unconstrained by authority, he would not have accepted it; and, in his dissenting judgment in Cerberus Software Ltd v Rowley [2001] ICR 376, Sedley LJ suggested, at p 386, that it was “one of the great unresolved questions of employment law”. But, even if the question can be said to be unresolved, this court is not invited to resolve it. The facts of this appeal leave no room for an attack on the principle. It has added to the making of a contract of employment into a special case – but, again, only in terms of remedies.

Thus, in most cases, the employee will be compelled to accept the breach (if only by the conduct of seeking alternative employment) and sue for damages. The slightly unusual circumstance in Geys is that C’s claim was not for wages but for a termination payment, the amount of which turned on the date of termination.

80 See discussion in Treitel: The Law of Contract 18-006.81 At [79].

12. Lord Sumption dissented and did so on the basis that there was no ‘exception’ where employment contracts are concerned. Rather, where, in any contract, there is an element of co-operation needed from D, there is, in effect, an automatic termination:82

These decisions are authority for a general rule that the innocent party to a repudiated contract cannot treat it as subsisting if (i) performance on his part requires the co-operation of the repudiating party, and (ii) the contract is incapable of specific performance, with the result that that co-operation cannot be compelled. The purpose of the right to treat a repudiated contract assubsisting is to enable it to be performed at the option of the innocent party. It is difficult to see why the law should recognise such a right in a case where the contract cannot be either performed or specifically enforced.

The principal decision to which he is referring is White & Carter (Councils) Ltd v McGregor83 and his dissenting view raises the fundamental point about whether that decision is concerned with termination, ie the contract terminates because co-operation is needed (Lord Sumption’s view) or remedies, ie the contract subsists until election, but some remedies may not be available, including the action in debt (for, eg. wages) if it requires the co-operation of D to earn it (the majority’s view).

13. In Cukurova the Privy Council has clarified the scope of the doctrine of relief against forfeiture in the context of the termination of commercial contracts. D had loaned $1.352bn to C, for which the security was C’s 51% shareholding in another company. There was evidence that D hoped for C’s default as a means of acquiring the shareholding, via appropriation,84 and that D had attempted to first bring this about and then make it difficult for C to raise the finance needed to discharge the loan. In these circumstances, C applied for relief against forfeiture.

14. When it comes to such relief, there are two separate issues: first, does the court have jurisdiction to grant relief; second, it if does should relief be granted?

15. As to the first, the PC confirmed that the jurisdiction exists in only in relation to the forfeiture of proprietary or possessory rights under the contract and not purely contractual rights,85 and where the primary object of the contract was to secure a stated result which could be effectively attained when the matter came before the court (eg by the award of damages or other monetary relief), and where the forfeiture provision was added as security to produce that result.86 The property in question is not confined to real property and thus the power to grant relief extended to theequitable mortgage of shares granted to secure the repayment to the loan in the present case.

82 At [116]. See also at [130]: ‘The general principle is that the innocent party to a repudiated contract cannot treat it as subsisting unless he can either perform it without the co-operation of the other party or compel that co-operation. In the case of a contract of employment, neither condition is satisfied’. 83 [1962] AC 413. Dealt with below in relation to the Isabella Shipping case.84 The remedy of appropriation is available under the Financial Collateral Arrangements (No 2) Regulations 2003. The PC found that there was nothing in the Regulations precluding relief.85 See The Scaptrade [1983] QB 529, [1983] 2 AC 699.86 See On Demand Information Plc v. Michael Gerson (Finance) Plc [2002] 2 WLR 919.

16. As to the second, whether relief should be granted, the PC highlighted previously identified factors such as C’s conduct, ie the gravity of any default and whether it was wilful, and any disparity between the value of the property being forfeited when compared with the damage caused by the breach.

17. The need for certainty in commercial contracts makes the granting of relief unlikely,87

but the PC granted relief in Cukurova on the basis that C repaid the loan plus interest and costs (to be determined). The PC pointed to the unusual features of the case; in particular the conduct of D in seeking at all times to obtain the shares themselves for the control they gave over the group of companies in question, and not merely as security for the loan.

18. The Telford Homes case is a decision very largely on its facts but one which confirms how fraught it can be to make the call that, in the absence of breach of condition, a breach was sufficiently serious to justify termination for repudiatory breach. D was to develop four blocks of flats, with a gap of 7 months between completion of the first two and the last two, under an agreement for a lease and C would take 999 year leases. Completion of the first two was delayed and work on the second two was suspended because of financial difficulties. On 22 October 2010, C terminated the contract, unaware that work on the second two blocks had restarted on 4 October. The judge found that D’s repudiation occurred in July 2010 when it was clear that completion could not take place in accordance with the target dates, and that C’s termination was lawful.

19. The CA disagreed, for two reasons:

a. While accepting that the usual tests are difficult to apply (was C deprived of substantially the whole benefit of the contract; did the breach go to the root of the contract), one should ask first what was the benefit of the contract to C. Here, it was the 999 year leases and, in relation to them, the delay had/would cause little or no loss: ‘I do not think that the judge gave adequate weight to the ultimate objective of the contract, viz. the grant to Ampurius of 999 year leases. He concentrated on the expected effects on the marketing period’. But even in relation to the marketing period, the parties had envisaged a period when two blocks would have been completed, but work continued on the other two and there was no evidence that the delay had caused any loss to C.

b. The judge placed stress on the uncertainty of knowing when work on the second two would have been completed, but this raised the question of when to assess if the breach was repudiatory. The judge went for July 2010 (the date of breach) but by the date of acceptance (22 October 2010) work had resumed. The CA found that the relevant date was the date of acceptance and not the date of breach; previous dicta that one looked to the former were not confined to cases of anticipatory breach: ‘A breach of contract, although serious, may be capable of remedy. If it is remedied before the injured party purports to exercise a right of termination, then the fact that the breach has been remedied is an important factor to be taken into account. Likewise if

87 See The Scaptrade above.

there is delay in performance of an on-going obligation it may well be possible for the delay to be made up by faster performance.’88

20. Finally, in the White Rosebay case charterers were found to have been guilty of renunciation when, after a lengthy period of late and non-payment of hire, they failed to meet a statutory demand on 7 November. The owners formed the decision to withdraw (terminate) on 11 November, but then allowed the vessel to discharge the cargo (on the reasonable commercial basis that such discharge would be at the charterer’s expense).

21. The arbitral tribunal found, and Teare J. agreed, that an innocent party has a reasonable time in which to make up its mind whether to terminate and there had therefore been no affirmation merely as a result of the four day delay, but the contract had been affirmed when the owners allowed the discharge.89 The case is a good illustration of the difference between mere delay which may amount to affirmation, but where allowances will be made such as the reasonable time to come to a decision, and doing something which is only referable to the continuation of the contract which will be regarded as affirmation (quaere if there had not been any evidence that the owners had decided to terminate before discharge was allowed?).

22. All was not lost for the owners since Teare J. considered that this was a case where the charterers may have been guilty of a continuing renunciation so that the charter could be terminated even after affirmation, but since the tribunal had not made any ofthe relevant findings in this regard, the case was remitted to them for further consideration.

Damages and the date of assessment

Hooper v Oates [2013] EWCA Civ 91

1. Over the years, much ink has been spilled on the date of assessment for damages for breach of contract; in particular, on the ‘date of breach rule’ and exceptions thereto. But it is clear that the reality is that there is no date of breach rule, nor any exceptions. Damages are assessed on the date which is most appropriate to compensate C for his loss. And what primarily dictates that loss is C’s requirement to mitigate: whether he can, and when he should have done so. All of this is nicely summed up by Lloyd LJ in the Hooper case in the following passages which also make clear what the issue was in the Hooper case itself:

38. It seems to me that the breach date is the right date for assessment of damages only where there is an immediately available market for the sale of the relevant asset or, in the converse case, for the purchase of an equivalent asset. This is most unlikely to be the case where the asset in question is land. If the defaulting party is the buyer, much will depend on what the seller does in response to the breach, as is suggested in Chitty at paragraph 26-014, cited above. If he resells, the buyer may be able to show that, in so doing, the seller failed to take reasonable steps to mitigate his loss, for

88 At [63].89 And it did not assist the owners that they had expressly ‘reserved their rights’; if you have affirmed, you have affirmed.

example by taking too long, or failing to follow proper professional advice, or in some other way. Absent any feature of that kind, the eventual resale price is likely to be the figure to be set against the contract price for assessment of the damages, not because it represents the market value at the date of the breach, but because it shows what loss the seller has suffered,uncomplicated by issues of remoteness or failure to mitigate. If the property market has declined during that time, it is of no avail for the defaulting buyer to say that this should not be laid at his door. If he had completed the contract, he would have suffered that decline in value, so this is part of the loss for which the seller needs to be compensated.

39. If the vendor does not resell, and takes no steps to do so, then it may be that the date of the breach is to be taken as relevant, or a date soon after that, when he is shown, or taken, to have decided to retain the property. In the present case, by contrast, the seller only decided not to resell after taking reasonable steps to find a buyer. I can see no basis of policy or principle, in such a case, for imposing on the vendor the value as at the breach date rather than the later date when, after taking steps with a view to mitigating his loss, he finally decided to retain the property upon the failure of his attempt to mitigate.

40. In the present case, there has been no suggestion that Mr and Mrs Hooper failed to take reasonable steps to mitigate their loss. Any such contention would have to have been pleaded and explored in evidence. Accordingly, it seems to me that the appropriate date, as I have said, is the date when they brought to an end their reasonable attempts to resell and took the property back for their own use.

Remoteness

Rubenstein v HSBC Bank Plc [2012] EWCA Civ 1184

Petro-Chemical Industries Company (KSC) v The Dow Chemical Company [2012] EWHC 2739 (Comm)

John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37

1. Rubenstein is notable as a relatively rare instance where a bank has been found liable for mis-selling a financial product (mainly because the investor was an individual and (because he was a lawyer perhaps) he had clear documentary evidence as to the priorities in his investment referred to below). It is noted here for the approach of the CA to the question of remoteness.

2. The bank was held liable for loss of capital in an investment notwithstanding the unprecedented turmoil in and after autumn 2008 which led to it (the trial judge had found that the bank was negligent and in breach of statutory duty but that the loss was too remote). The investor had made clear his priority not to risk capital and had been told the investment was equivalent to a cash deposit; avoiding loss of capital was therefore within the ‘scope of duty’ of the bank and the occurrence of the very thing they were required to avoid could not be too remote, however it came about.

3. The CA therefore reached its result, in part, by a further endorsement of the approach to remoteness taken in The Achilleas,90 ie that one asks whether the type of loss fell within the scope of the duty of D or whether it was a type of loss for which D ‘assumed responsibility’. In this regard, the CA drew a possible distinction between the claim for breach of statutory duty on the one hand and the claims in contract (breach of contractual duty of care) and tort (breach of common law duty of care), but not as between contract and tort; thus appearing to endorse the view that where a claim in tortr is, or may be, made concurrently on the basis of an underlying contractual relationship, the same test of remoteness is applied.91

4. The Dow case is one in which the current approach to remoteness was applied by an arbitral tribunal. Aspects of their reasoning have entered the public domain because the defendants applied for remission to the tribunal on the grounds that their approach amounted to serious irregularity within the meaning of s.68 Arbitration Act 1996.

5. D had failed to close a joint venture under which under which it agreed to purchase 50% of C’s business and assets for $7.5bn. C suffered losses of c.$2bn because of the emergency measures it needed to take to finance its purchase of another business from T because it did not have the proceeds of the JV. D was aware from the market, and from advice from its own financial advisers, of the contract between C and T, but C was said to have stated in the negotiations that completion of the C-T contract was not dependent on completion of the D-C contract. D argued that such losses were too remote because they could only fall within the second limb of the test of remoteness laid down in Hadley v Baxendale and the requisite ‘special knowledge’ of such loss had not come from C, and even if they were reasonably contemplated this was a case where nonetheless D had not assumed responsibility because of C’s statements that the C-T contract was not dependent on the C-D contract.

6. The tribunal found that the losses were not too remote. The claim of serious irregularity from the tribunal was based principally on the following two paragraphs of the Award:

145. There seems to be no reason to place a burden on Dow to show that it or its agents directly communicated to PIC the would-be “special circumstances” of this case …in order to satisfy the Second Limb. To the contrary, it seems to us, this was a sophisticated transaction involving sophisticated parties who were all well aware of the commercial circumstances surrounding the transaction, including Dow’s intention to apply the funds to be received from PIC at closing to the Rohm & Haas deal.

146. Accordingly, PIC reasonably should have expected to be held liable for costs associated with its failure to close, thus forcing Dow to secure elsewhere substitute funding for the purchase of Rohm & Haas. PIC’s knowledge was not gained, as Chitty warns, in a “purely casual way,” but rather through hired professionals, its financial advisers…, through whom PIC was made well aware that Dow would be put in a distressed position without the K-Dow proceeds.

In reaching the conclusion in paragraph 145 the Tribunal endorsed the following test for determining how special knowledge of a type of loss must be communicated:

90 [2008] UKHL 48; [2009] 1 AC 61.91 See also the earlier decision in Brown v. KMR Services Ltd [1995] 4 All ER 598 where no distinction appears to have been drawn.

[T]he test appears to be: have the facts in question come to the defendant’s knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach. The answer to that question may vary from case to case, taking into consideration such matters as, for example, the nature of the facts in question and how far they are unusual, and the extent to which such facts are likely to make fulfilment of the contract by the due date more critical, or to render the plaintiff’s loss heavierin the event of nonfulfilment.92

7. The complaint of serious irregularity was (a) failure by the Tribunal to deal with all the issues that were put to it (section 68(2)(d) of the 1996 Act), and (b) failure by the Tribunal to comply with its general duty under section 33 of the 1996 Act (section 68(2)(a)). Both were rejected by Andrew Smith J.

8. The ‘issue’ which the Tribunal was said to have failed to consider was the ‘assumption of responsibility’ question. But Andrew Smith J. held that they had considered it and their conclusion was to be found in the underlined words above:93

I consider that the Tribunal dealt with the issue, admittedly succinctly, in the first sentence of paragraph 146 of the award: “Accordingly, PIC should reasonably have been expected to be held liable for costs associated with its failure to close” (emphasis added). This echoes the language of the objective test for assumption of responsibility identified in The “Achilleas” (especially at paragraph 9 per Lord Hoffmann and paragraph 32 per Lord Hope), and it can be traced to the language of Robert Goff J in The “Pegase”, which hadbeen set out in the award. It is the Tribunal’s answer on the assumption of responsibility issue.

9. If that amounts to a conflation of the test of foreseeability and assumption of responsibility that does not mean the latter was not considered since they are both ultimately concerned with determining remoteness, as D’s own pleadings had conceded.

10. Any suggestion that the Tribunal had failed to consider the assurances given by C to D about the need for the funds from the C-D contract to finance the C-T contract, because they were not referred to expressly, was dealt with by a finding that the Tribunal must simply have given more weight to the information received by D from its financial advisers.

11. An engineer, D, in breach of contract fails to do the work required of him by the agreed date with the result that the development is delayed and declines in market value. Is the engineer liable for the market loss or is it too remote?

12. It is not too remote said the judge in Grimes and the CA agreed. The CA confirmed the prevailing view that the decision of the HL in The Achilleas did not effect a major

92 Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The “Pegase”), [1981] 1 Lloyd’s Rep 175, 183 per Robert Goff J.93 The submission that the Tribunal failed to consider the test of assumption of responsibility was perhaps not aided by the fact that Lord Hoffmann was one of the members of the Tribunal.

change in the approach to remoteness. One starts with the test of reasonable contemplation (or foreseeability) of the type of loss in question. The answer this provides then needs to be checked to see if there is any evidence to suggest that it does not accord with the presumed intention of the parties, objectively ascertained (which means ascertained by the court).

13. Nothing terribly new or startling in this, but the case is of some additional interest because it involved loss due to market fluctuation and, in The Achilleas, some of their Lordships appeared to suggest that such loss by its very nature was too remote (Tomlinson J. in the later Pindell case94 referred to the irrecoverability of loss due to a volatile market as ‘axiomatic’).

14. This could never have been right, if only because it is contradicted by the decision of the HL in another leading remoteness case, The Heron II. And so the CA confirms. Extraordinary or unprecedented market loss may be too remote, but this was not such a case: it involved a fall over a prolonged period for which D was responsible. Such loss was easily foreseen at the time of the contract and there was nothing to suggest that this was not a type of loss for which D assumed responsibility.

15. It may be noted that Tomlinson LJ was content to withdraw his earlier ‘axiomatic’ comment made as Tomlinson J:

Some markets are extremely volatile by nature. Furthermore, circumstances at the time of contracting may be such as to render it foreseeable that extreme volatility could be experienced in certain foreseeable circumstances within the lifetime of the contract. Accordingly, I wonder in retrospect whether I was correct in paragraph 88 of my judgment in Pindell to attribute to Lord Rodger, Lord Walker and Baroness Hale in The Achilleas, above, the view that the consequences of extremely volatile market conditions are, axiomatically, irrecoverable. Happily this issue does not arise for decision here, as indeed it did not arise for decision in Pindell. When it does, I doubt if it permits of so trenchant or simplistic an answer as I was then, perhaps incautiously, inclined to supply.

Contracting on-line & consideration

Spreadex Ltd v Cochrane [2012] EWHC 1290 (Comm)

1. Spreadex concerned an application for summary judgment where the assumed facts were that D had left his on-line account open and, during this time, trades were made by his girlfriend’s son which led to a loss. D’s defence was that he had not made the trades and his girlfriend’s son had no authority to make them on his behalf.

2. C’s application for summary judgment was based on a term in the Customer Agreement which regulated the trades and to which D had assented by clicking on-line. The term in question stated: ‘You will be deemed to have authorised all trading under your account number’.

3. This did not avail C because it could only be relevant if it was binding on D and the Customer Agreement was not itself a binding agreement. Its terms and conditions

94 Pindell Ltd v Air Asia Berhad [2011] 2 All ER (Comm) 396.

would form part of any individual trades if they were binding, but the very issue in the present case was whether the trades in question were binding on D.

4. The Customer Agreement was not binding because there was no consideration from C (indeed C retained the ‘absolute discretion’ to refuse any bet. Counsel for C suggested that the consideration could be found in granting access to the on-line platform or maintaining the account, but C reserved the right to withdraw them at any time, so no obligation there.

5. As the judge held:95

The consideration necessary to support a contract can of course be found in conduct alone, even if not required by a contractual obligation, if it is a benefit provided or a detriment suffered. That test is, however, in my view not satisfied by arrangements which merely facilitate the making by the two parties of ad hoc contracts in the form of the individual trades. The provision of an on-line interactive platform is in effect simply a more modern equivalent of the expressed readiness of a potential contracting party (also covered in the Consumer Agreement) to enter into contracts by receiving and responding orally to telephone calls.

6. For good measure, the judge found that, even if binding, the term in question was unfair under the Unfair Terms in Consumer Contracts Regulations 1999 and was unenforceable.

Rule against penalties

E-Nik Ltd v Sec of State for Communities and Local Government [2012] EWHC 3027 (Comm)Cavendish Square Holdings BV v Team Y&R Holdings Hong Kong Ltd [2012] EWHC 3582 (Comm)Imam-Sadeque v Bluebay Asset Management (Services) Ltd [2012] EWHC 3511 (QB)

Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, 6 September 2012Cadogan Petroleum Holdings Ltd v Global Process Systems LLC [2013] EWHC 214 (Comm)

1. In Cavendish Square Holdings D sold a business to C by way of the sale of shares at a price which included a premium for goodwill. The price was payable in instalments and some of those instalments depended on future performance of the business based on consolidated operating profit. If D became a ‘Defaulting Shareholder’ he was no longer entitled to the instalments due (clause 5.1) and C could exercise a call option for the purchase of his shareholding at a price calculated by net asset value at the date D became a Defaulting Shareholder (clause 5.6).

2. D breached certain restrictive covenants which made him a Defaulting Shareholder. D challenged the operation of clauses 5.1 and 5.6 on the basis that they infringed the rule against penalties. Burton J. held:

95 David Donaldson QC sitting in as a Deputy High Court Judge.

(i) The rule applied to clause 5.1 notwithstanding that it was in the form of withholding a payment due.96

(ii) It also applied to clause 5.6 notwithstanding that it was in the form of the transfer of shares.97

(iii) Neither clause was a penalty, based very much on the broader approach of ‘commercial justification’ referred to above:98

‘the reality is that, in the modern approach to the concept of penalty discussed above, there is no longer the need for the dichotomy between liquidated damages and genuine pre-estimate of loss (sic.),99 and so the relevant questions seem to me to be simply:-

i) Was there a commercial justification?ii) Was the provision extravagant or oppressive?iii) Was the predominant purpose of the provision to deter breach?iv) If relevant, was the provision negotiated on a level playing field?’

3. He concluded, as follows:100

‘I am satisfied that there was a commercial purpose, such as is asserted by Ms Smith [to adjust the consideration], and the existence of detailed negotiations by experienced solicitors seems to me to negative oppression’.

4. It seems, however, that the penalties rule only applies to the withholding of a payment that was otherwise due. It does not apply to an entirely contingent payment where the contingency is that the payee shall not have been in breach: see the Bluebay decisionin which an employer was no longer entitled to fund units by way of a settlement agreement entered on his departure because of breach of the agreement. The penalties rule was held not to apply: ‘There is a distinction between contingent rights and accrued rights’.101

5. In Andrews, the High Court of Australia has held that the penalty jurisdiction is not confined to sanctions payable upon breach of an obligation owed by the ‘payor’ to the ‘payee.102 One might expect a similar submission to be made here, where the ‘breach

96 Based on Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd<r> [1974] A.C. 689 at 698, 703, 711, 723. The authoritative status of Gilbert-Ash has been questioned by Bingham LJ in <i>The Fanti and the Padre Island (No. 2)<r> [1989] 1 Lloyd’s Rep 239 at 255, but in the same case the majority held that a clause providing for retrospective cesser of cover where a member of a P & I club failed, in breach of contract, to pay a call by the club was a penalty and this was said by Beatson J in The General Trading Co (Holdings) Ltd v Richmond Corporation Ltd [2008] EWHC 1479 (Comm) to be binding ‘whatever may be the position in a higher court’.97 Based on Jobson v Johnson [1989] 1 WLR 1026.98 At [53]. And see, to similar effect, Burton J. again in the E-Nik case.99 It seems that what Burton J. really meant to say here is what he said earlier at [26]: ‘whether a provision was or was not a penalty no longer depended upon the dichotomy between a liquidated damages clause and a penalty and upon the need to concentrate upon whether there was a genuine pre-estimate of loss in order to resolve such dichotomy’.100 At [54].101 At [220] per Popplewell J. The Bluebay decision pre-dates the decision in Cavendish. There is no mention of the former decision in the latter.102 Discussed at 129 LQR 152.

limitation’ is now routinely accepted, but not without controversy,103 but, for now, the breach limitation is applied as a matter of routine.104

6. In Cadogan Petroleum Holdings a dispute was settled on the basis that D would re-purchase gas plants from C. D made some of the payments due, but not others, and C terminated the agreement. On the proper construction of the agreement, C was entitled to retain the instalments already paid and to demand those which had fallen due at the time of termination. Such forfeiture was held not to be subject to the rule against penalties105 because (i) the payments were made/due before breach and not upon breach and (ii) because the penalties rule and relief against forfeiture are just different; in particular relief against forfeiture which differs from the rule against penalties in that it depends upon the exercise of the court’s equitable jurisdiction ‘having regard to the conditions existing when that relief is sought’; the rule against penalties is ‘determined as a matter of construction viewed as at the date of the contract.’106 As for relief, it was not necessary here: the contract should simply stand. If, when the gas plants were eventually sold, they realized a sum in excess of that due to C, the balance would be paid into court pending further order as to their proper disposal.

103 See, eg. Bridge v Campbell Discount Co Ltd [1962] A.C. 600.104 See most recently Berg v Blackburn Rovers Football Club [2013] EWHC 1070 (Ch).105 Though if it had been, Eder J. was sympathetic to the view that the forfeiture was not penal, based on the broader approach referred to above.106 At [34]. See also Amble Assets LLP v Longbenton Foods Ltd [2011] EWHC 1943 (Ch).