UK: Commercial Disputes Update - Summer 2011

Last Updated: 6 June 2011
Article by Stephen Burns and Lynne Gregory


The court will in limited circumstances pierce the corporate veil

Antonio Gramsci Shipping Corp and others v Stepanovs [2011] EWHC 333 (Comm) (25 February 2011)

It is well established that a company has a separate legal personality from those who own and control it. However, in certain circumstances the court may hold those who control the company liable for the acts of the company, which is known as piercing the corporate veil.

Antonio Gramsci Shipping Corporation were 30 "one ship" companies incorporated in a number of off-shore jurisdictions and the ultimate beneficiary of these companies was the Latvian Shipping Company. In previous litigation Antonio Gramsci Shipping Corporation had obtained judgment against five corporate defendants on the basis that they had been used dishonestly to siphon off substantial profits. It was said that the senior executives of the Latvian Shipping Company including Stepanovs, were the beneficial owners of the corporate defendants who had acted fraudulently.

Antonio Gramsci Shipping Corporation sought to pierce the corporate veil and hold Stepanovs jointly and severally liable with each of the corporate defendants for its losses of $100 million resulting from the dishonest scheme.

The court held that there was a good arguable case that the veil of incorporation should be pierced in order to permit Antonio Gramsci Shipping Corporation to seek to enforce the contract against Stepanovs. On the facts, the corporate defendants had no independent or non-fraudulent existence. The companies had been set up for the purpose of the alleged fraud, in order to abuse the company structure.

It did not have to be shown that Stepanovs was in sole control of the corporate defendants. If there were a number of wrongdoers, with a common purpose, in control of the company, then they could all be said to be in material control and the veil of incorporation could be lifted as against one or all of them.

The court held that a victim of fraud is entitled to enforce a contract entered into by a company against both the company and those who control it.

Industry standard terms will generally be upheld even if they mean that parties to a contract have a very tight time limit in which to bring a claim

Rohlig (UK) Limited v Rock Unique Ltd [2011] EWCA Civ 18

The relationship between Rohlig and Rock Unique Ltd's was governed by the British International Freight Association standard trading conditions. These provided that any claims had to be brought within 9 months of the alleged breach The Court of Appeal held that as both parties were experienced companies the clause

would not be unreasonable under the Unfair Contract Terms Act 1977. Therefore the 9 month clause might extinguish causes of action which were and were not discovered before the time bar expired. The court also noted that if standard terms were negotiated between representatives of suppliers and customers they would be likely to represent a fair balance of competing interests.

A contract confirmation accepting an offer but stating that a "full contract" would follow is binding

Immingham Storage Co Ltd v Clear Plc [2011] EWCA Civ 89

Immingham and Clear entered into negotiations regarding the storage of diesel for Clear. On 19 December 2008, Immingham sent a quotation to Clear stating that it was "subject to board approval and tankage availability". All key contractual terms were included and there was a statement that other terms would be "as per our General Storage Conditions", a copy of which was attached. The final sentence of the quotation was "A formal contract will then follow in due course".

On 5 January 2009, Clear faxed a copy of the quotation countersigned by Clear to Immingham. Immingham subsequently accepted the quotation countersigned by Clear and sent out formal contracts. Clear did not return a signed copy of the Contract as it had been unable to source the appropriate fuel.

Immingham issued proceedings for non-payment of invoices on the basis that the return of the countersigned quotation was an offer capable of acceptance. Clear rejected this and argued that it was not an offer capable of acceptance, as it had been stated that a formal contact would follow. Clear also argued that if it was considered to be an offer, Immingham had not accepted the offer as it stated that a full contract would follow. The Court of Appeal held that a contract had come into existence, as the quotation contained all relevant terms and the only conditions to which the quotation was said to be subject to required no further negotiation, namely board approval and confirmation of tank availability. The intention was that once Immingham had communicated its acceptance and the conditions were satisfied, a contract would exist.

The court noted that the absence of the words "subject to contract" was relevant. Therefore the reference to "a formal contract" in the acceptance by Immingham on 9 January 2009 did not prevent the email from being an acceptance, creating a contract. This reference to a formal contract had to be considered in the context of the entire email, which strongly suggested that a contract had been formed.

Whilst each case will be decided on its facts, if control is to be retained over timing of the creation of a contract it is best to state that correspondence is "subject to contract" as simply stating that a formal contract will follow will not have the same effect. However, the use of the words "subject to contract" is not always a guarantee of a contract not coming into existence

Damages will not be awarded for repudiatory breach if the innocent party had no intention of performing

Acre 1127 Ltd (in liquidation) v De Montfort Fine Art Ltd [2011] EWCA Civ 87

The repudiatory breach (i.e. a breach of contract by one party which is sufficiently serious to entitle the other to treat the contract as terminated with immediate effect and enable that party to claim damages for breach of contract) of Acre 1127 Ltd was not accepted by De Montfort Fine Art until 18 months after the event, prior to which De Montfort Fine Art had decided not to perform its obligations under the contract.

The usual rule, where a repudiatory breach is accepted is that the innocent party does not have to prove its readiness and willingness to perform its obligations under the contract in order to recover damages. However, in this instance De Montfort Fine Art's decision not to perform its obligations under the contract was relevant.

It is an established principle that Acre 1127 Ltd would have a possible defence to a claim if De Montfort Fine Art was unable to perform its obligations under the contract, provided that its inability to perform was not a consequence of the repudiatory breach itself. The court held that the same result should follow if it could be proved that rather than being disabled from performance of its obligations, De Montfort Fine Art had no intention of performing its obligations. De Montfort Fine Art's unwillingness to perform its obligations under the contract was found not to be attributable to Acre 1127 Ltd's repudiatory breach and predated it. During the 18 months between the repudiatory breach and De Montfort Fine Art's acceptance of the same, De Montfort Fine Art did not seek performance of the contract or issue a claim for damages. The court therefore dismissed De Montfort Fine Art's counterclaim for loss of profits.

Clause interpreted to give effect to the parties intentions

Scottish Widows Fund and Life Assurance Society v BGC International [2011] EWHC 729 (Ch)

Scottish Widows took a sub-underlease of premises leased by BS Ltd with an upwards only rent provision. This resulted in Scottish Widows paying higher than market rent for premises which it did not require (as it had taken over the lease for commercial reasons). In order to generate income and make use of the premises, Scottish Widows found an occupier for the premises - BGC International and agreed a sub-sub-underlease.

It was agreed that BGC International would pay rent which was less than the rent which Scottish Widows paid under its lease with BS Ltd until December 2010. In effect Scottish Widows subsidised BGC International's rent. The subsidised rent was reviewed in 2001 and 2006. It was agreed that in December 2010 the rent would be reviewed in accordance with Clause 2(c) of the lease with BGC which provided:

'Thereafter the Subsequent Rent or such other sum as shall be agreed or determined to be the Open Market Rent on the immediately preceding Review Date and subject to further review in accordance with the provisions of the Third Schedule'.

The claim arose as Clause 2(c) provided an alternative to the subsequent rent but did not state which should apply. "Subsequent Rent" was defined as £1,285,424 and the immediately proceeding the review date was 2006. The open market rent in 2006 was lower than it had been in 2001. Due to the upwards only rent review which Scottish Widows was subject to, it was paying BS Ltd open market rent as defined in 2001. Therefore both options under Clause 2(c) resulted in BGC International paying less than the rent which Scottish Widows was required to pay.

Scottish Widows argued that this had not been the intention of either Scottish Widows or BGC International when they entered into the lease as it had been agreed that BGC International would only pay a subsidised rent until December 2010. The court held that Clause 2(c) should be interpreted as follows:

'Thereafter [whichever is the greatest of] the Subsequent Rent or such other sum as shall [have been] agreed or determined to be the Open Market Rent on [any] preceding Review Date and subject to further review in accordance with the provisions of the Third Schedule'.

According to this interpretation of Clause 2(c), BGC International would pay the greater of the subsequent rent (being £1,285,424) or any Open Market Rent previously agreed. The court noted that something had gone wrong with the language of the clause and so it corrected that error as a matter of interpretation. Accordingly it had interpreted the clause to give effect to what a reasonable person would have understood the parties to have meant by the words they actually used.

15% rate of interest held to be a penalty

Fernhill Properties (Northern Ireland) Ltd v Mulgrew [2010] NICh 20

Mulgrew contracted to purchase an apartment from Fernhill and paid a deposit. Mulgrew was then unable to obtain finance and therefore could not complete. Fernhill sued for its loss of a bargain, as property prices had dropped during this time and claimed the contractual rate of interest of 15%.

The Northern Irish Court held that the contractual interest rate of 15% per annum was a penalty designed to deter a purchaser from defaulting on completion rather than a genuine pre-estimate of loss, and instead applied a rate of 5%. It was noted that although the court had dealt with a considerable amount of litigation arising out of the property boom and subsequent crash, it had not seen an interest rate as high as 15%.

Fernhill had not disclosed the interest it was paying on its borrowings or proved the rate of 15% to be a genuine pre-estimate of loss. The court considered that if a genuine preestimate of loss can be shown the parties may agree a rate at the upper end of the range of possible loss for the innocent party. The court noted that 10% or 12% might have been justified if the parties believed that the base rate would increase.

It should, however, be noted that a rate of 15% might be upheld if the contract is between two commercial concerns - Taiwan Scott v Masters Golf (where 15% was upheld against a similar 5% base rate).


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Further to the article on Preparing a Witness for a Civil Trial – the Necessary Steps to take to Ensure Credibility in the Winter 2011 issue, this article explores the various ways in which a contract may be terminated. There are a number of ways in which a contract may be terminated and generally the consequences of breach depend on the importance of the term broken.

Termination Using the Contract

Termination using contractual provisions should be the starting point for any party wishing to terminate a contract. The provisions of the contract may provide that a party is entitled to terminate the contract on the occurrence of a specific event, repeated breaches or a "material breach" of a contractual clause. The contract may well define "material breach", however, in the absence of a definition there is a wealth of case law which may assist.

Material Breach

In National Power Plc v United Gas Company Limited [1998] All ER (D) 321 the contract provided that either party could terminate with immediate effect if the other party was in material breach of its obligations and failed to remedy the breach within seven days of a notice requiring it to do so. The contract also provided for certain information to be provided to United Gas Company by National Power on request. National Power failed to provide the information requested by United Gas Company and did not remedy its breach within seven days of the notice provided by United Gas Company. United Gas Company claimed that this constituted a material breach as defined by the contract and that therefore it was entitled to terminate the agreement.

The court held that National Power were in breach of their obligation to provide United Gas Company with information and rejected National Power's argument that "material" meant a repudiatory breach, noting that the clause provided for a period in which the breach could be remedied. However, it was considered that the breach was not material as the term had been used to convey the magnitude of the breach and the breach in this instance was of an ancillary term and "of relatively small consequence" in monetary terms. This case illustrates that the court will consider all the circumstances including the nature of the contract and the obligations of the parties, the breach itself, the circumstances in which it arose, the impact it has on the innocent party, and the consequences for the defaulting party if the breach is considered material. Therefore claims of this nature will turn on their facts, all of which the court will consider.

Termination by Giving Notice

Alternatively, the contract may expressly provide for termination on notice. Where this is the case, notice should be given strictly in accordance the provisions of the contract. If the contract does not provide for termination on notice, it may be possible to imply a term enabling termination on reasonable notice into the contract. However a term to this effect cannot be implied where there are conflicting provisions in the contract.

Repudiatory Breach

Where the contract does not provide for termination or the consequences of a breach, the common law may provide a solution. If a party fails to perform some or all of its obligations under a contract, a breach of contract occurs and as a general rule, the innocent party is entitled to recover damages for resulting losses. However, the consequences of a breach of contract vary dependant on the importance of the term broken. Broadly contracts are made up of three types of term:

Conditions - which are important terms forming the basis of the contract, breach of which enables the innocent party to claim for damages and/or terminate the contract; Warranties – which are less important terms, breach of which would only give rise to a claim for damages; and "Intermediate" or "innominate" terms – which may be treated as either conditions or warranties dependant on the severity of the breach (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1992]).

Breach of a condition is known as a repudiatory breach. A significant breach of an "intermediate" or "innominate" term may also qualify as a repudiatory breach. Once a repudiatory breach has occurred, the innocent party has the right to bring a claim in damages and, in addition, decide either to terminate or affirm the contract.


If the innocent party decides to affirm the contract, i.e. decides to treat the contract as continuing, it retains the right to issue a claim for damages arising from the defaulting party's non performance. It is not necessary for the defaulting party to expressly affirm the contract, as affirmation may be implied from its actions if they can be construed as indicating that it intends to continue its obligations under the contract. Alternatively, the innocent party may wish to terminate the contract, in which case it should bear in mind that its actions could, as noted above, be argued to indicate affirmation of the contract. The contract may also be held to have been affirmed if the innocent party delays in communicating its decision to terminate. Unlike affirmation of a contract, termination after a repudiatory breach has no effect until it is expressly and clearly communicated to the other party.


The innocent party may bring a claim for repudiatory breach based on renunciation of the contract. This occurs where one party outwardly demonstrates its intention, by words or conduct, not to perform its obligations under the contract. This includes a communication by the defaulting party that they are unable to perform their obligations under the contract. If this is an absolute refusal to perform its obligations, the innocent party may treat this as a repudiatory breach. However, where this is not the case, the test is whether a reasonable person would conclude that the defaulting party no longer intends to be bound by the terms of the contract. In addition it will be necessary to prove that the defaulting party's non performance entitles the innocent party to treat the contract as discharged.


If the defaulting party has disabled itself from performing its obligations under a contract or prevented the innocent party from completing the same, the innocent party may bring a claim based on impossibility. The cause of the impossibility must be as a result of the defaulting party's own act or default, however this does not need to be deliberate. The innocent party will be required to prove that the contract was factually impossible to perform due to the defaulting party's act or default. For this reason most claimants prefer to issue proceedings based on renunciation.

Anticipatory Breach

Alternatively, an anticipatory breach may be classified as a repudiatory breach if it is sufficiently serious. An anticipatory breach occurs where after the contract has been created but before the performance of the contract is due, one of the parties informs the other that it does not intend to fulfil its obligations under the contract. Depending on the severity of the breach which will occur, this may equate to a repudiatory breach of contract. As noted above the innocent party is able to claim damages for its losses arising from the breach in addition to terminating the contract. Alternatively, the innocent party could perform its obligations under the contract, in the hope that the other side in breach will change its mind, and if this does not prove to be the case, claim the sums owed under the contract.


As noted above if performance of a contract becomes more difficult or even impossible, the party who fails to perform its obligations under the contract is liable in damages. However this may not be the case if the doctrine of frustration applies, as under this the contract is automatically discharged when a frustrating event occurs. For an event to frustrate a contract it must:

  • occur after the contract is formed and be one which was not in the contemplation of the parties when the contract was formed;
  • neither party should be at fault;
  • strike at the core of the contract; and
  • make performance of the contract illegal, impossible or radically different.

For example if one party contracts with another to sell an original painting and the painting is stolen before the sale has taken place, the contract would be frustrated. It is important to note, however, that events which would merely make the contract more expensive to perform, or require performance via a different method will not frustrate the contract.


Issues may also occur if any or all of the parties to a contract holds a mistaken belief at the time of its formation, as to either a factual or legal issue. Depending on the effect this has on the contract, the court has the option to either find that the contract is void from the date of its creation, correct the mistake as a matter of construction or order rectification of the contract. As a claim based on mistake is not one which alleges wrongdoing, it is generally not possible to recover damages.

By Agreement

Finally, the parties to a contract are free to agree as to how to progress forward and can therefore agree to terminate the contract or amend its terms. However in order for such an agreement to be binding it needs to be made by deed or supported by consideration. This may be an option where the parties to a contract both wish to terminate and maintain a continuing relationship, however there will be instances where this option is not suitable.

The above illustrates that should a party wish to terminate a contract there are various options. However the circumstances surrounding and motivating the wish to terminate will determine the methods of termination which are available. For a defaulting party the key is to reduce its liability and if the contract does not provide for the situation which has arisen, the common law may provide the answer. Similarly, if the contract does not assist, the common law provides a framework which enables an innocent party to recover its losses arising from a breach or termination of contract.

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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