UK: Commercial Law Update - An Analysis of Cases and Developments from October 2010

Last Updated: 23 November 2010
Article by Mark Alsop

Serving Termination Notices Prematurely Does Not Necessarily Amount to Repudiatory Breach

Eminence Property Developments Limited v Heaney [2010] EWCA Civ 1168

Mr Heaney had agreed in a series of contracts to buy 13 flats from Eminence. Completion was to take place when the relevant flats were ready for occupation. Time was not to be of the essence unless a notice to complete had been served. In due course, the flats became ready for occupation, by which time the property market had turned and Heaney was unable to find finance to complete. On 5 December 2008, Eminence served notices to complete, stating that it had calculated that the final date for completion was 15 December 2008. In fact, as was common ground, the date should have been 19 December. On 17 December, Eminence's solicitors sent notices of rescission. In response, Heaney's solicitors stated that the act of rescinding the contracts on 17 December constituted repudiatory breach. Mr Heaney accepted the breach and elected to rescind the contracts himself. In due course, he brought an action for return of his deposits. The High Court held that the notices of rescission did constitute repudiatory breach by Eminence as they indicated a clear refusal to perform its future obligations under the sale contracts. Eminence appealed.

The Court of Appeal held that, on the facts, the sending of the rescission notices did not constitute repudiatory breach. It made the point that whether or not there has been a repudiatory breach is highly fact sensitive, so comparison with other cases is of limited value. All circumstances must be taken into account insofar as they bear on an objective assessment of the intention of the contract breaker. "So far as concerns repudiatory conduct, the legal test was simply whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon or altogether refused to perform the contract". The court applied the test as follows:-

  • Eminence was "ready, able and willing to complete" and so entitled to serve the notices to complete. The wording of the notice stated that the solicitors had "calculated the final date for completion as 15 December". This was clearly a calculation based on contractual provisions and not an attempt to vary the contractual provisions, or abandon them.
  • Mr Heaney's solicitors did not point out the obvious error – they lay in wait for Eminence to act on the mistake, so Mr Heaney could be fortuitously extricated from his contracts.
  • A reasonable recipient of the notice of rescission would have appreciated that, had the error been pointed out, it would immediately have been acknowledged by Eminence. This was not a case like many of those cited where the parties were maintaining different interpretations of contractual provisions.
  • It was impossible to find an intention for Eminence to abandon and altogether to refuse to perform the contracts which, in view of the state of the market, had become highly advantageous to it and onerous to Mr Heaney. On the contrary, the obvious inference was that Mr Heaney was aware that Eminence very much wanted to enforce the contracts.
  • The rescission notices, far from clearly indicating an intention to abandon the contracts, showed an intention to implement the contractual procedure for bringing the contracts to an end.

Many will be relieved to see the Court of Appeal refrain from insisting on perfection in relation to notices to terminate a contract which has been repudiated by the other party.

Acceptance of Repudiation Depends on the Facts

Force India Formula One Team Limited v Etihad Airways PJSC [2010] EWC Civ 1051.

The High Court decision was reported in Bulletin 59 for November 2009.

Spyker owned and operated a Formula 1 motor racing team. In early 2007, just before the Australian Grand Prix, it found a title sponsor in the form of Etihad (an Abu Dhabi airline) and entered into a 3 year sponsorship agreement with it. The agreement provided that Spyker would not enter into any sponsorship that might conflict with Etihad's activities. Spyker had the right to source an alternative team sponsor, but, if it did so, Etihad would have the right to terminate. Etihad could terminate for breach as long as it gave Spyker 10 days to remedy the breach.

Shares in Spyker were then sold to Force India who took over the team. The team changed its name to Force India and set about creating a strong affiliation with India. Force India's owners had an interest in a company called Kingfisher which owned and operated an airline of that name. For the winter testing season, the livery on the cars was changed and a Kingfisher's logo placed on the cars. It was disputed whether Etihad's approval to the change had been given. By November 13 2007, Etihad knew about all the matters subsequently relied on as relevant to repudiatory breach of contract. It called for a meeting with Force India to discuss the situation which took place in mid-December. Force India followed up with proposals which did not arrive until mid-January 2008. At the end of January, Etihad terminated the contract for material breach. Force India denied that it had committed any material breaches, but even if it had, Etihad had waived the breaches and affirmed the contract by its delay.

The High Court found in favour of Force India. Force India had told Etihad that the Kingfisher logo would be on the car, and the only concern raised by Etihad had been that it should not include a reference to the Kingfisher airline. In any event, limited use of the new livery was not a material breach. Even if it had been, the breach was remediable, in that Force India merely needed to remove the logo. Etihad should have given notice requiring the breaches to be remedied. Evidence showed that Etihad had waived or acquiesced in Force India's association with the airline (which was potentially a breach of the obligation not to undertake any arrangement which might conflict with Etihad's main activities). Etihad had therefore wrongfully terminated the agreement. Etihad appealed.

The Court of Appeal allowed the appeal and held that Etihad's conduct did not amount to affirmation of the contract. Rebranding to Force India amounted to a series of repeated breaches of the agreement by Force India as the connection to Abu Dhabi and the sponsoring companies had been lost. Force India had ridden roughshod over all Etihad's contractual rights without making any attempt to seek Etihad's involvement and co-operation. These breaches were not remediable – Force India had rebranded the team to appeal to Indian market and the message would have been greatly weakened if the name of Etihad were to be included. And in any event it was plain that Force India would have not been prepared to reverse its new branding, if asked. Etihad's behaviour did not, in the circumstances, amount to affirmation. Timing of the transaction was of great importance – delay in terminating may amount to affirmation where the party in breach requires a decision urgently, e.g. if a seller needs to know if the buyer has accepted goods delivered. In this case, there was no urgency as the meetings happened between racing seasons.

The case does demonstrate that it may be possible to a certain extent to reserve one's position before deciding whether to terminate a contract. But a reservation will not give unlimited protection, especially if an urgent answer is required by the party in breach. The innocent party would be wise to say how much time will be needed for consideration; the breaching party would be wise to set a deadline for termination, explaining why the deadline is appropriate.

Contract Interpreted in Accordance with its Commercial Purpose - Again

HHY Luxembourg SARL v Barclays Bank plc & Others [2010] EWCA

This dispute was between a security trustee, Barclays, and senior lenders on the one side and junior lenders on the other. It concerned Barclays' rights under an inter-creditor agreement. The borrower was the European Directories Group. It ran into financial difficulties which resulted in a complicated restructuring. The point at issue was whether, on the sale of the shares of a group company ("X"), the inter-creditor agreement permitted Barclays to release, without consent of the junior lenders, not only the guarantees and securities granted by X (clearly permitted) but also those granted by its subsidiaries which were also obligors within the meaning of the inter-creditor agreement. If the consent of junior lenders was required, they could essentially block any sale.

The High Court held that the reference in the agreement to release in relation to the "obligor or any holding company" was plainly to the obligor or holding company whose shares were being disposed of, not to other obligors whose shares were not being disposed of. If subsidiary obligors were to be included, the use of the defined term "Subsidiary" could have been used. Overall, it did not flout commonsense to say that the clause provided for a very limited level of release of securities on the sale of shares. This interpretation essentially turned round the positions of senior and junior lenders and caused some considerable concern in the City.

The Court of Appeal overturned the High Court's decision. The judge had applied too literal an approach to the wording. That wording should be read as permitting Barclays to release not only the guarantees and security provided by X, but also those provided by other obligors whose shares were not being sold but which were subsidiaries of X. This was the most natural interpretation in the context of the agreement and made commonsense. It was also the interpretation that made more sense in the commercial context as otherwise the sales would result in even less money for creditors.

The case will be noted in more detail in an article in Charles Russell's forthcoming Banking and Finance Update.

This Court of Appeal decision continues the trend of the recent cases such as Chartbrook v Persimmon and re: Sigma Finance, where the Supreme Court adopted the most purposive interpretation of disputed wording, upholding what the parties must have intended, rather than what a literal reading might say. Whilst that might be a good thing commercially, it does create uncertainty over reliance on contract wording, even when drafted by specialist City lawyers. This case demonstrates, again, the need to be careful and clear with drafting.

Analysis of Equitable Set-Off

Gary Fearns (t/a Autopaint International) v Anglo-Dutch Paint & Chemical Co Ltd [2010] EWHC 2366 (CH)

Mr Fearns, trading as Autopaint International, supplied paint for cars under the Autopaint brand through his shops and franchises. The paint was purchased from ADPC. Mr Fearns brought an action against ADPC for damages on the grounds that ADPC had been supplying Autopaint-branded paint directly to Fearns' franchises. ADPC counter-claimed for unpaid sums due. At trial, the High Court (Mr G Leggatt QC) made an order that ADPC pay damages of £438,569 and Mr Fearns pay the debt of €594,696. The question which remained were the treatment of interest on sums due and whether the currency conversion should take place on the date of the claim (2005) or the date of judgment (2010). The currencies had moved sufficiently since 2005 that it made a difference as to who was to be the net payee.

The judge decided that the term set off was confusing because it had no uniform meaning, so he examined the case law and came up with the following principles:

  • Where a party has a claim against another who has a cross-claim, the two claims cannot be netted off so as to extinguish each liability except by agreement or by a court judgment, and then only once both liabilities have been established by agreement or a judgment.
  • Where the two claims are for specific and certain sums of money, each party can use legal set-off to raise a defence to the extent of its own claim in proceedings brought by the other.
  • Where the two claims are made reasonably and in good faith and are so closely connected that it would be manifestly unjust to allow enforcement of one claim without taking the other into account, an equitable set-off arises as an immediate answer to a liability to pay money otherwise due. However, equitable set-off does not extinguish or reduce liability, but merely prevents each party from enforcing its claim while the other subsists.
  • The court has jurisdiction to order, in its discretion, a judgment sum to be set-off against any other judgment sum. The date of such a set-off is the date on which the existence and amount of the two liabilities is established.
  • Where the amounts are payable in different currencies, the approach is to add to each principal amount any interest at the relevant rate accruing up to the date of set-off and then to convert the smaller amount into the currency of the larger amount at the exchange rate prevailing at that date.

The interest rates awarded on the two amounts were different. Interest on the Euro debt was set at 1.5% over the ECB rate during the relevant period. Interest on the sterling damages award was set at 5% over BoE base rate. The margin was higher because Mr Fearns' cost of borrowing was higher.

With these particular numbers, Fearns lost out due to the currency fluctuations. The court did not believe that this showed the law was defective. It was up to Mr Fearns to claim a loss for those fluctuations, which he could only do if he could have shown that he would have paid his debt but for existence of a cross-claim which was the subject of a valid set off. Otherwise, the other party will not be held liable for a fall in the exchange rate.

There have been a stream of cases recently on set off, mostly on equitable set off. They have clarified the law considerably.

Take Care When Amending an Agreement

Ericsson Limited v Hutchison No. 3G One UK Limited [2010[ EWHC 2525(TCC)

Ericsson provided telecommunications equipment and related services to Hutchison under a master services agreement which was terminable without cause by Hutchison giving at least 12 months notice expiring not earlier than 11 December 2012. The agreement was varied several times. Hutchison gave notice in May 2010 and the question which arose was whether the exit provisions were to commence on the giving of notice and continue for 30 months until the end date or whether they were to apply only in the last 12 months of the agreement. Hutchison claimed that it needed the extra time to prepare for an orderly handover: Ericsson argued that it would be put to significant extra expense if it was subjected to the restrictions and requirements that applied during the period of the exit provisions. [Having heard the evidence the judge was sceptical that the length of the period made much difference to either party.]

The High Court (Akenhead J) considered the agreement carefully and held that the wording pointed to the exit period being no more than 12 months leading up to the end date. One of the considerations was that a deliberate distinction appeared to have been made between "expiry" and "termination". For instance, an amendment was made to the definition of "Expiry Date", but a provision in a schedule was not amended to take into account the new definition – he assumed that this was deliberate, rather than accidental – and this favoured Ericsson's interpretation.

This case perhaps demonstrates two issues. First is that great care should be taken whenever an agreement is to be amended, particularly where the definitions are changed. Secondly, the case is an example of the need to keep terminology consistent. For instance, in this case, if "expiry" and "termination" were intended to mean the same thing, only one of the two words should have been used. If both are used, the courts are likely to assume that the parties meant the terms to have different meanings.

No Term Implied That Goods Would Conform to Specification for a Reasonable Time

Article: KG Bominflot Bunkergesellsehft Für Mineraloele mbh and Co KG v Petroplus Marketing AG [2010] EWCA Civ 1145 (Comm)

The parties entered into an FOB contract under which Petroplus sold gasoil to Bominflot. There was a term that the gasoil had to meet certain specifications at the time of shipment. The gasoil was tested and found to meet the specifications. It was then loaded. When the gasoil arrived at the destination port, it no longer complied with the specifications.

There were 3 points:

  • The High Court held that S 14(2) of the SGA was to be implied to the effect that the goods would remain of satisfactory quality not just at the time of delivery, but for a reasonable time afterwards. This was not appealed by Petroplus (who instead looked to exclude liability by relying on the exclusion clause – see 3rd point).
  • The High Court implied a common-law term that the goods would remain in accordance with the specification for a reasonable time after delivery. The Court of Appeal overturned this part of the High Court's ruling. There was provision in the contract for inspection of the goods at the time of shipment, a provision that would have been rendered worthless or pointless had the goods had to conform after shipment. There was nothing to suggest or require the additional term to be implied. The intention of the contract was that the specification should be determined conclusively at loading, so it did not matter that things might change afterwards. The implied term would not have been understood by a reasonable person to have been part of the meaning of the contract.
  • The exclusion clause in the contract stated that there were no "guarantees, warranties or representations... which extend beyond the description of the oil set forth in this agreement". Bominflot argued that this did not exclude "conditions", i.e. the s 14(2) term as to satisfactory quality implied by the SGA was not excluded. Both the High Court and the Court of Appeal agreed. If the seller had wished to exclude the Section 14(2) condition, it should have said so more clearly in the exclusion clause.

Two conclusions. It not easy to establish an implied term, especially where other terms already cover a similar area. And make sure the exclusion clause is all-encompassing.

Details of Without Prejudice Negotiations Admissible When Construing Settlement Agreement

Oceanbulk Shipping and Trading v TMT Asia Limited [2010] UKSC 44

The Supreme Court was asked to consider whether evidence of without prejudice communications is admissible in the construction of a resulting settlement agreement. The High Court held that the evidence was admissible, the Court of Appeal held that it was not, and now the Supreme Court has held that the evidence is indeed admissible.

The Supreme Court said that there was no reason why ordinary principles governing the interpretation of a settlement agreement should be any different depending on whether the negotiations which led to it were without prejudice. The same reasonable person with the background knowledge test should be used. If a party to negotiations knew that objective facts which emerged during negotiations would be admitted to assist the court to interpret the agreement in accordance with the parties' true intentions, settlement was likely to be encouraged, not discouraged. Such an approach was the only way in which modern principles of construction of contracts could be property respected.

Opinions differ as to whether this outcome is or is not a good thing. On the one hand, evidence of without prejudice negotiations are already allowed for other purposes, such as rectification. On the other hand, there is an argument that without prejudice negotiations are more likely to lead to settlement if the parties are sure that disclosures will not be admissible in court. The Supreme Court did acknowledge this issue and made it clear that the exception to the admissibility was solely in order "to explain the factual matrix or surrounding circumstances to the court". The lesson is to be careful and seek advice before engaging in without prejudice negotiations – and to make sure that settlement agreements are drafted clearly in a way that will not require interpretation by the courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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