Recent Developments in Contract Ed Peel June 2013 Interpretation - - PDF document

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WIN CONTRACT LAW UPDATE

17 June – Leeds  18 June – London

Professor Ed Peel Professor of Law at Keble College, Oxford

Recent Developments in Contract

Ed Peel June 2013 Interpretation Rainy Sky - reminder

• I would accept the submission made on behalf of the appellants that the exercise
• f construction is essentially one unitary exercise in which the court must

consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other” at [21]…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 at [43]

• BUT: “where the parties have used unambiguous language, the court must apply

it [even if it produces a commercially improbable result]” Lord Clarke at [23]

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My commercial vs. Your commercial

• Aston Hill Financial Inc v African Minerals

– 8.3 Disposal Proceeds and Finance Proceeds (a) The Borrower shall prepay, and the Parent shall ensure that the Borrower prepays, the Loans in an amount equal to the amount of Disposal Proceeds or Finance Proceeds promptly upon receipt of any Disposal Proceeds or Finance Proceeds by any member of the Group… – 8.5 Voluntary prepayment of the Loan The Borrower, if it gives the Facility Agent not less than five Business Days’ (or such shorter period as the Majority Lenders may agree) prior notice, may prepay the whole or any part of the Loan (but, if in part, being an amount that reduces the Loan by a minimum amount of $100,000,000). – 8.8(d) On prepayment of all or any part of the Loans pursuant to Clauses 8.5 (Voluntary prepayment of the Loan), the Borrower shall pay to the Facility Agent (for the account of each Lender) a prepayment fee on the date of such prepayment, in the following amount...

My commercial vs. Your commercial

• Aston Hill Financial Inc v African Minerals

– 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... although the refinancing was “voluntary”, the prepayment was not. Eder LJ. – I should emphasise that I remain very uncertain whether this conclusion accords with business common sense... for reasons stated above, I found the arguments in relation to what was supposedly business common sense difficult to apply and whatever such arguments may be, the conclusion which I have reached is one which, in my judgment, is more consistent with the language used in the Facility. Eder J.

Rainy Sky - reminder

• I would accept the submission made on behalf of the appellants that the exercise
• f construction is essentially one unitary exercise in which the court must

consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other” at [21]…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 at [43]

• BUT: “where the parties have used unambiguous language, the court must apply

it [even if it produces a commercially improbable result]” Lord Clarke at [23]

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‘Public’ documents

• Cherry Tree Investments v Landmain

– Our courts have already drawn distinctions between the use of background material in the interpretation of what I might call “ordinary” commercial contracts

• n

the

• ne

hand, and the interpretation

• f

negotiable and registrable contracts

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public documents on the other’… ‘in all these cases 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’. Lewison LJ at [125] – ‘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’ Lewison LJ at [132]

Implied terms: an objective process

• Spencer v Sec of State for Defence

– 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 [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] – 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. Vos J

• Spencer v Sec of State for Defence, CA

– ‘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.’

• But it is still whether the reasonable observer would consider the term to be a necessity,

not simply whether the alleged term is reasonable: Procter & Gamble v Svenska Cellulosa Aktiebolaget SCA

• See also: Dear v Jackson, Gavin v One Housing Group Ltd

Interpretation or implied terms?

‘Whether this is described as choosing the more commercially sensible of rival interpretations of express terms (Rainy Sky SA v Kookmin Bank [2011] UKSC 50 [2011] 1 WLR 2900) or implying a term (Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 [2009] 1 WLR 1988) does not seem to me to matter; since the objective of both is to determine what the reasonable person with the background knowledge of the parties would have understood the contract to mean (Rainy Sky §14; Belize Telecom § 18)’, per Lewison LJ in Mirador International LLC v MF Global UK Ltd [2012] EWCA Civ 1662, at [52].

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Exemption Clauses

• A throwback to the old days?

– KG Bominflot v Petroplus

• There are no guarantees, warranties or representations, express or implied,

[of] merchantability, 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.

• “such obligations can only be excluded by language which expressly (or

perhaps one may add which must necessarily be taken to) refer to conditions” Rix LJ

– Air Transworld v Bombardier

Air Transworld

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

• therwise, including but not limited to a) any implied warranty of

merchantability or of fitness for a particular purpose, and b) any other

• bligation or liability on the part of seller to anyone of any nature

whatsoever by reason of the design, manufacture, sale, repair, lease

• r use of the aircraft or related products and services delivered or

rendered hereunder or otherwise.

Exemption Clauses

• Getting rid of SGA conditions

– KG Bominflot v Petroplus

• “such obligations can only be excluded by language which expressly

(or perhaps one may add which must necessarily be taken to) refer to conditions” Rix LJ – Air Transworld v Bombardier

• “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…

• bligations… or liabilities express or implied arising by law”, which

the purchaser expressly waives, necessarily include the conditions implied by the Sale of Goods Act.” Cooke J. – Dalmare SpA v Union Maritime

• ‘as was’ at the time of inspection
• ‘as is’?

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Exemption Clauses

• Mir Steel UK Ltd v Morris

– Canada Steamship Rules are not rules

• 9.5 The purchaser agrees that it shall be responsible for settling

any claim made against it by Lictor Anstalt in respect of the hot strip mill situated at the Property.

Exemption Clauses

– Kudos Catering UK Ltd v Manchester CCC Ltd – 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...’ – The ‘main purpose rule’: ‘…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.’ – 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].’ – Limited to defective performance, not 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’ – Fundamental breach? – Deliberate breach: ‘I am yet to learn that the consequences of a repudiatory breach of contract differ according to whether it is informed or uninformed, deliberate or inadvertent, hopeful or hopeless’.

Exemption Clauses - UCTA

• Ampleforth Abbey Trust v Turner & Townsend

– in no event shall Our liability exceed the fees paid to Us or £1million whichever is the less

• FG Wilson v Holt (Deutsche Bank v Khan)

– ‘Buyer shall not apply any set-off to the price of Seller's products without prior written agreement by the Seller’. – cf. ‘The Customer shall not be entitled to withhold payment of any amount due to the Company under the Contract by reason of any payment credit set off counterclaim allegation of incorrect or defective Goods or for any other reason whatsoever which the Customer may allege excuses him from performing his obligations

• hereunder. Gill v Myer

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Excluding misrepresentation - Clear Drafting

16.3.2 Each party acknowledges that it has not relied on or been induced to enter into this agreement by a representation other than those expressly set

• ut in the Transaction Documents.

16.3.3 A party is not liable to the other party (in equity, contract or tort, under the Misrepresentation Act 1967 or in any other way) for a representation that is not set out in the Transaction Documents. 16.3.4 Nothing in this clause 16.3 shall affect a party’s liability in respect of fraud or fraudulent misrepresentation. From Sycamore Bidco v Breslin But what about ‘representations’ which do make it into the contract?

• Sycamore Bidco v Breslin

– 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. Mann J.

Excluding misrepresentation - Clear Drafting

A creeping ‘good faith’ in English Contract Law

• Implied term

– Good faith of a sort – Not to act ‘arbitrarily, capriciously, irrationally, or for an improper purpose’ – NOT a duty to act reasonably, or with reasonable care – D allowed to prefer his own commercial self interest – When is it owed?

• In the exercise of ‘discretion’
• ‘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 …’, Moore-Bick LJ in JML Direct Ltd v Freestat UK Ltd

• But not all exercise of discretion

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A creeping ‘good faith’ in English Contract Law

• Implied term

– Good faith of a sort

• Not all exercise of discretion
• Mid Essex Hospital Services NHS Trust v Compass Group
• ‘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]). Jackson LJ

A creeping ‘good faith’ in English Contract Law

• Implied term

– Good faith of a sort

• Not all exercise of discretion
• Other ‘absolute contractual rights’?
• ‘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., Longmore LJ in Lomas v JFB Firth Rixson Inc

• And see TSG Building Services Plc v South Anglia Housing Ltd below
• Implied term?

– Yam Seng Pte Ltd v International Trade Corp Ltd

• ‘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’

• How far does this good faith go?

A creeping ‘good faith’ in English Contract Law

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Yam Seng

• How far does this good faith go?

– 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.’

• Duty to disclose?

– ‘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, 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.’

• Uncertainty?

– ‘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’

A creeping ‘good faith’ in English Contract Law

• Express term?

– Context dependent

• 3.5 The Trust and the Contractor will co-operate with each other in good

faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract. Compass

• In the context of clause 3.5 of the conditions the obligation to co-operate in

good faith in my view means the following. The parties will work together honestly endeavouring to achieve the two stated purposes. Jackson LJ at [112].

A creeping ‘good faith’ in English Contract Law

• TSG Building Services Plc v South Anglia Housing Ltd

– ‘terminate…at any time during the term’ – 1.1 The Partnering Team members shall work together and individually in the spirit

• f 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.

• ‘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.’ Akenhead J.

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A creeping ‘good faith’ in English Contract Law

• TSG Building Services Plc v South Anglia Housing Ltd

– ‘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 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.’ Akenhead J.

Termination

• The ‘Boston Deep Sea Fishing’ principle

– Cavenagh v Wm. Evans – Leofelis v Lonsdale

Leofelis

2014

TM Licence

• Ex. breach

2005

• R. Breach/

Termination 2007 2005 action 2009 action

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Leofelis, CA

• 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

• n 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. Lloyd LJ

Leofelis

2014

TM Licence

• Ex. breach

2005

• R. Breach/

Termination 2007 2005 action 2009 action

Geys v Soc. Gen

• Majority

– No automatic termination: contract terminated on 6 Jan

• Lord Sumption

– ‘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-

• peration. In the case of a contract of employment, neither

condition is satisfied’

• “the party not in default may be compelled to treat the prevention of

performance as a repudiation of the contract and to sue for damages for the breach.” Chitty

29 Nov 07 Dismissed ‘with immediate effect’ 18 Dec 07 Payment in lieu made 6 Jan 08 Notice of payment in lieu took effect

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Termination

• Relief against forfeiture

– Cukurova Finance International Ltd v. Alfa Telecom Turkey Ltd

• Repudiatiory breach

– Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd

• Affirmation and continuing breach

– White Rosebay Shipping SA v Hong Kong Chain Glory Shipping Ltd

Consideration

• Spreadex v Cochrane

– 10.3 You will be deemed to have authorised all trading under your account number. – The consideration necessary to support a contract can of course be found in conduct alone, even if not required by a contractual

• bligation, 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

• f the expressed readiness of a potential contracting party (also

covered in the Consumer Agreement) to enter into contracts by receiving and responding

• rally

to telephone calls. David Donaldson QC

Remoteness – Where are we now?

• Hadley & Baxendale + The Achilleas

– At the time of the contract

• Was the type of loss reasonably contemplated?

– Because would have been expected by any reasonable person (‘ordinary course of things’, ‘first limb’) – Because of D’s special knowledge (‘second limb’)

• If it was, are there circumstances which would indicate that nonetheless a

reasonable person would not understood D to have assumed responsibility for the loss? The Achilleas

• If it was not, are there circumstances which would indicate that nonetheless

a reasonable person would understood D to have assumed responsibility for the loss? Supershield

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Remoteness

• Petrochemical Industries Co v The Dow Chemical Company

– 145. There seems to be no reason to place a burden on Dow to show that it

• r 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.

• Assumption of responsibility?
• First limb or second limb: does it matter?

Remoteness & market falls

• John Grimes Partnership Ltd v Gubbins

– 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. Tomlinson LJ

Remoteness in Tort & Contract

• HSBC v Rubenstein

– It was the bank’s duty to protect Mr Rubenstein from exposure to market forces when he made clear that he wanted an investment which was without any risk (and when the bank told him that his investment was the same as a cash deposit). It is wrong in such a context to say that when the risk from exposure to market forces arises, the bank is free of responsibility because the incidence of market loss was unexpected. Rix LJ. – Cf. Brown v KMR Services – Contract or Tort? – Whether the test of remoteness is expressed in the classic terms found in the leading authorities, or has to reflect that sense of balance (an exercise in judgment) to which Lord Hoffmann referred in SAAMCO… or has to take account of the manner in which the scope of duty may extend responsibility for even unusual events (see Supershield), in my judgment it should not be said that the loss which Mr Rubenstein has suffered by reason of HSBC’s breach is to be regarded as too remote. Rix LJ

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Rule against penalties

– Cavendish Square Holdings BV v Team Y&R Holdings – Imam-Sadeque v Bluebay Asset Management – Andrews v ANZ Banking Group – Cadogan Petroleum Holdings Ltd v Global Process Systems LLC

Recent Developments in Contract

Ed Peel June 2013