United States: UK Corporate Update 18 Nov 2013

This corporate update gives an overview of recent rule changes in respect of director remuneration and summarises recent decisions relating to good faith obligations, MAC provisions and unjust enrichment.


On 1 October 2013 significant changes were introduced to the rules relating to the remuneration of directors of UK "quoted companies" (i.e., companies whose shares are listed on the Main Market in London or in another EEA State, or on the New York Stock Exchange or Nasdaq) by the Enterprise and Regulatory Reform Act 2013.

The changes, which apply to financial years ending on or after 30 September 2013, include:

  • a requirement for the directors' remuneration report (which forms part of the company's annual report and accounts) to contain a separate "forward looking" remuneration policy section (including a statement on how the company intends to implement its approved remuneration policy in the following financial year);
  • a new requirement for a binding shareholder vote on the company's directors' remuneration policy at least every three years - the non-policy part of the remuneration report remains, as previously, subject to an annual advisory vote; and
  • new restrictions on payments to directors for loss of office – essentially, these prohibit companies from making any such payments that are inconsistent with the company's most recently approved directors' remuneration policy.

The Large and Medium-sized Companies and Groups (Account and Reports) (Amendment) Regulations 2013 (SI 2013/1981) also came into force on 1 October 2013. They apply to the same companies as those affected by the above remuneration rules, and apply to financial years ending on or after 30 September 2013. They set out the information to be given in the directors' remuneration report. This must comprise a remuneration policy report and an implementation report. In particular, the Regulations provide for disclosure of the total amount paid to each director as a single figure, taking account of all elements of remuneration. In addition, companies must explain the basis for decisions made on the level of variable pay and how the various elements of a director's remuneration support the company's short and long-term strategies.

Separately, GC100 and the Investor Group (comprising, respectively, representatives of general counsel and company secretaries of companies in the FTSE100 and leading UK institutional investors who arecommitted to best practice principles of governance and stewardship) have published guidance on the new rules. In addition to advice on the new rules, it provides guidance on how to promote an effective relationship between companies and investors in relation to remuneration. A key area of focus in this regard is the remuneration committee's use of discretion and judgement. The guidance also addresses how companies should deal with the situation where there is a lack of shareholder support for the annual remuneration report. The guidance suggests that in that situation, companies should consider the number of votes withheld, as well as those cast against the resolution, and should identify a level of support (which may be as low as twenty per cent.) which would cause them to explain the level of support to their shareholders.


With the exception of certain specific types of contract (such as partnership agreements or employment contracts) the English courts have historically been unwilling to imply a duty of good faith into commercial contracts.


In the recent case of Yam-Seng v. International Trade Corporation, a duty to act in good faith was implied into a distribution agreement on the basis that this reflected the presumed intention of the parties. However, that decision has not been followed in two more recent cases.

First, in Mid Essex Hospital Services v. Compass Group, which was reported in our June 2013 UK Corporate Update, the Court of Appeal found that a duty to co-operate in good faith arising in relation to the contract was limited to certain specific obligations and that it did not extend to the parties' conduct more generally.

The issue has now been considered again in TSG Building Services v South Anglia Housing. In 2009 TSG entered into a four year contract with South Anglia to supply gas servicing and related services to 5,500 properties. The agreement allowed either party to terminate the contract on three months' notice without cause. South Anglia terminated the contract. In the arbitration proceedings which followed, TSG claimed damages for losses arising as a result of the termination. Two of the grounds raised by TSG were that:

  • termination constituted a breach by South Anglia of its obligation under the agreement to "...work together and individually in a spirit of trust, fairness and mutual co-operation within the scope of their agreed roles, expertise and responsibilities" and to "....act reasonably and without delay"; and
  • that an obligation of good faith should be implied into the agreement so as to limit South Anglia's right to terminate without cause to circumstances where it was acting in good faith in terminating the contract.

TSG's claims under these grounds were rejected by the Court. It found that the requirement to work together in the spirit of trust, fairness and co-operation applied only to the provision of the relevant services. The fact that the parties had expressly limited those obligations to their respective roles, expertise and responsibilities meant that they did not apply to the right to terminate the contract itself.

The more significant issue was whether a duty of good faith should be implied into the contract. The Court declined to do so. As the agreement set out how the parties intended to work together the Courtwould not imply any additional obligations. It added that, even if it had been possible to imply a duty of good faith, it would not affect the right to terminate the contract without cause, to which the parties had agreed expressly. The Court referred to the decision in Yam-Seng but held that the principles discussed in that case (of honesty and fidelity) were not relevant because there was no suggestion of dishonesty in relation to South Anglia's termination of the contract, and that the issue of fidelity was already covered by the express terms of the agreement.


The TSG case demonstrates that the normal principle of contractual interpretation, namely that a contract means what it says on its face (or what a reasonable person would understand it to say), continues to apply and that a general duty of good faith will not ordinarily be implied. However the Yam-Seng case shows that in some types of relational contract (e.g. agency, distribution, partnership or joint venture agreements), or where there is a suggestion of dishonesty or lack of fidelity, the courts may be more open to imply a duty of good faith.


There is relatively little case law in the UK on the interpretation of material adverse change (or "MAC") clauses. However, a recent case, Grupo Hotelero Urvasco S.A. v Carey Added Value SL, gives some indication as to the courts' approach in this regard.


The case concerned the development of a property in London by Urvasco Limited ("Urvasco"). Urvasco was an English subsidiary of a Spanish hotel group, Grupo Hotelero Urvasco S.A. ("GHU"). Funding for the project was provided by BBVA. In 2007, additional funding was required. GHU entered into a loan agreement with Carey Added Value SL ("Carey"), a Spanish real estate fund.

In 2008, Carey stopped providing funding. GHU brought a claim against Carey for breach of contract. Carey counterclaimed for repayment of sums advanced under the loan agreement, arguing that an event of default had occurred under the loan agreement as a result of which it was no longer required to lend. The loan agreement contained a MAC clause. The clause was formulated as a representation that there had been no material adverse change in the financial condition of GHU and Urvasco since a given date. As is usual in such agreements, the representation was stated to have been repeated at the date of each drawdown by reference to the circumstances existing at that date. Under the terms of the agreement, an untrue representation by GHU constituted an event of default.

The loan agreement with BBVA contained a similar MAC clause. The agreement deemed an event of default to occur if either GHU or Urvasco negotiated with creditors to re-schedule its indebtedness.

Carey claimed that an event of default had occurred under the loan agreement. Carey argued that the expression "financial condition" should be interpreted broadly to cover not just matters which affected the company's financial statements but also its prospects and general economic or market changes. On this basis, it argued that a MAC must have occurred by June 2008 in light of the then current state of the Spanish property market and economy more generally.

GHU argued that "financial condition" should be interpreted more narrowly, focusing on changes which have affected the company's financial statements, and, in particular, its balance sheet. Decision

The Court held that the MAC clause should be interpreted in accordance with normal principles of English law. This requires effect to be given to the agreement of the parties as it appears in the contract, either by applying the unambiguous words of the contract, or, where ambiguity exists, by applying a test of reasonableness. On this basis, the Court held that:

  • while an assessment of the company's "financial condition" for this purpose should focus on the impact of the relevant events on the company's financial statements, other "compelling evidence", such as a company ceasing to pay bank debts, could also be relevant. The Court determined that "financial condition" did not extend to a company's prospects or general economic or market changes;
  • a change in a company's financial condition is only materially adverse if it significantly affects its ability to perform its obligations;
  • in order for a change to be material, it cannot be temporary; and
  • a lender cannot invoke a MAC clause on the basis of circumstances of which it was aware at the time the agreement was signed, or by reference to a state of affairs which are likely to occur when the agreement was entered into.

Applying these principles the Court concluded that Carey had not shown that there had been a MAC in relation to GHU or Urvasco.


This case provides useful guidance on the interpretation of MAC clauses under English law, and, specifically, on the meaning of "financial condition" in this context. Although the case related to a loan agreement it seems likely that the principles articulated by the Court would be applied more widely, including to share and asset acquisition agreements. The court will consider the terms of the MAC and give effect to them – so the drafting of the MAC will be the key determinant of the protection it provides.


The UK Supreme Court has recently ruled on the principles to be applied when assessing cases of unjust enrichment and determining the value of services provided by one person to another where there is no contract between the parties.


In Benedetti v. Sawiris, the dispute related to services provided by Mr. Benedetti in facilitating a corporate transaction. In 2002, Mr. Benedetti ("B") introduced the opportunity to acquire Wind, an Italian energy company ("W"), to Mr. Sawiris ("S"). A company controlled by B ("ITM") was subsequently appointed by a W subsidiary ("W sub") to provide W sub with brokerage services for €87 million in return for finding third-party investors. In the end, neither party was able to find third-party investors to participate and the agreement was abandoned. Ultimately S, together with family and associates, funded the acquisition of W through a separate acquisition agreement. B continued to be involved in negotiations, even though there was no contract between him and S and, following his appointment to the board of W sub, B procured W sub to enter into a brokerage agreement with ITM. At closing, ITM claimed €87 million. S complained, and B agreed to reduce this to €67 million, which S paid. In addition, B/ITM claimed remuneration for brokerage services. S offered €75.1 million (initially believing that the €67 million already paid was to reimburse B/ITM for expenses), but S subsequently refused to pay any further amount.

In the High Court, B brought a number of claims. He was successful in his claim that S had been unjustly enriched; that is to say, that S and W had received a benefit from B by way of the provision of services for which he had not been paid, and that compensation should be awarded on a "quantum meruit" basis (i.e., an amount which B deserved for the services he had provided). Even though the court found that the market value of the services provided by B/ITM was €36.3 million, he was held to be entitled to €75.1 million because this was the amount S had been prepared to pay.

On appeal by S to the Court of Appeal, B claimed that more than €75.1 million was due because of the value of the brokerage services provided. S argued that nothing was due and even if something was due on a quantum meruit basis, the amount should be less than the €75.1 million awarded by the High Court. The Court of Appeal held that B was entitled to restitution on a quantum meruit basis, but on the basis of market value of the services (i.e., the €36.3 million). Further, the Court of Appeal determined that €21.78 million of the €67 million of "expenses" received by B/ITM was, in fact, payment for the brokerage services and therefore held that the outstanding amount due from S to B was €14.25 million.


Both parties appealed and the Supreme Court overruled the previous decisions, finding in favour of S.

The correct approach to establishing the amount of a quantum meruit payment in the absence of a valid contract between the parties is to consider whether the defendant has been unjustly enriched and, if so, to what extent. Where a restitutionary award is to be made on the basis that there has been unjust enrichment, it is then calculated as the objective value of the benefit received by the defendant from the claimant – i.e., the price which a reasonable person would have to pay. Where the benefit takes the form of services, the value is normally the market value of the services performed, in this case €36.3 million.

The Supreme Court then considered two further issues:

  • Could the award be reduced below market value to reflect the actual value of services to the defendant (the "subjective devaluation basis")?
  • Could the award be increased, and the defendant required to pay more than market value if the defendant himself had valued the services at more than market value (i.e., here, €75.1 million rather than €36.3 million) (the "subjective revaluation basis")?

The majority of the Supreme Court agreed that the principle of subjective devaluation is permissible, so that the amount awarded to a claimant could be reduced to reflect the subjective value of the services to the defendant.

However, the main point in the case was whether B's claim for subjective revaluation could succeed. This would require a defendant to pay more than market value to the claimant where it is shown that the defendant subjectively valued the claimant's services at more than market value. The Supreme Court decided that this principle should not be permitted, as willingness to pay more than market value is irrelevant, unless it is a contractual obligation (although one dissenting judge said it might be possible in exceptional circumstances, which he did not outline). On the facts, the Supreme Court held that, even if the principle of subject revaluation were to be recognised, the evidence that S valued the services at €75.1 million fell far short of what would be needed to establish that he valued services at more than market value. Also, as B had personally received all of €67 million paid to ITM at closing, B had already received more than market value for his services and had no further claim for unjust enrichment/restitution


This is a rare case on the law of unjust enrichment and the concepts of subjective devaluation/revaluation, and it helpfully examines these concepts, about which there has previously been much academic writing, but little judicial authority.

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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