UK: Contract - September 2016

Last Updated: 28 September 2016
Article by Clyde & Co LLP

Most Read Contributor in UK, November 2017

Court Of Appeal Finds That Deleted Words May Be Used As An Aid To Construction

Narandas-Girdhar and Another v Bradstock (2016)

Although the Court of Appeal emphasised in this case, that care must be taken when drawing inferences from deleted text, as deletions can be made for a range of reasons and are not always indicative of an agreed stance between the parties, the Court was willing to look at them here, to assist in interpreting the parties' contract.

The appellant, Mr Atulkumar Parekh, sought a declaration that his individual voluntary arrangement (IVA) should be set aside. His central argument was that the IVA was conditional on the acceptance of a simultaneous IVA relating to his wife, Mrs Parekh (which was ultimately rejected by Mrs Parekh's creditors). Clause 4.3 of the proposal submitted for approval by Mr Parekh's creditors stated: "the acceptance of my IVA is conditional upon the acceptance of the arrangement for my wife/husband, following acceptance the estates shall be combined for dividend purposes and treated as one." However the proposal submitted actually contained a number of modifications, set out in a separate document. In that document, the above clause was expressly substituted as follows:

"Clause 4.3 is to be substituted with 'I agree to pay the supervisor for the benefit of the creditors not less than GBP 230 per month for the duration of the IVA."

A number of provisions in the proposal remained unaffected by the modifications. The question for the Court of Appeal was whether recourse could be had to the deleted text and what inference, if any, could be drawn from it. The judge at first instance found that the fact that the proposal was drafted first, and the modifications drafted later, could not be ignored and the interdependence of the two IVAs was therefore broken by the modification.

The Court of Appeal explained that deleted words in a printed form may resolve the ambiguity of neighbouring paragraphs. Secondly, that if the fact of the deletion shows what it is that the parties did not agree and there is ambiguity in the words that remain, "then the deleted provision may be an aid to construction, albeit one that must be used with care."

Here, the Court took the view that the IVA proposal (and modifications) were ambiguous over whether the IVA was conditional upon approval of Mrs Parekh's IVA being approved. The Court stated that, "Faced with that level of ambiguity, it is in my view entirely legitimate to have regard to what the Modification removed from the Proposal, by the substitution of a new clause 4.3 for the old. Plainly, the words in the Modification "clause 4.3 is to be substituted with..." mean that the whole of the old clause 4.3 is substituted. The words of conditionality are removed altogether."

In light of the Court's interpretation of the meaning of the existing provisions (with the assistance of the deletion), the Court concluded that the requirement of conditionality had been removed and therefore that Mr Parekh's argument for having the IVA set aside failed.

High Court decides that oral discussions resulted in non-binding heads of terms, not a legally binding agreement

JAS Financial Products LLP v ICAP Plc (2016)

This High Court decision is an interesting example of how the court decides whether or not a binding agreement has been reached. It found that no binding agreement had been concluded and illustrates the importance of parties making absolutely clear, in writing or orally, whether they intend to create a binding agreement or whether their negotiations are subject to contract.

The claimant, JAS Financial Products LLP (a business supplying specialist services to the financial services industry), alleged that it had entered into a binding agreement to provide "middle office support" to the structured products desk of the defendant (ICAP Plc (a broker)) for 24 months. ICAP denied that a binding agreement had been reached. In late 2007 / early 2008 the parties discussed a possible engagement to provide middle office support. On 3 March 2008, JAS set out a proposal in an email to ICAP. There was a meeting on 13 May 2008 between two representatives of JAS and two representatives of ICAP at which they went through the 3 March email point by point. No changes were made, apart from the date on which the engagement was to commence. Handshakes followed. JAS sent ICAP an email on 16 May 2008 stating: "I have set out below the terms...agreed in the meeting...on Tuesday [1]3[th]... I am happy to sign whatever additional documents ICAP requires to record this agreement."

The question for the High Court was whether a binding agreement had been reached at or immediately after the 13 May meeting. The High Court stated that the legal principles were not in doubt; whether or not a binding agreement had been reached depended on an examination of the parties' words and conduct to determine whether, looked at objectively, they intended to create legal relations and agreed all the essential terms.

Three of those present at the meeting on 13 May recalled Mr Bray for JAS saying at that meeting that the parties were "done" or words along those lines. However, the High Court accepted the evidence given by Mr Smith for ICAP that he had challenged the statement and said things had next to go to the lawyers. The High Court said it was quite sure Mr Smith's challenge made it clear to all, and would have made it clear to an objective observer, that although all points had been agreed in the sense that no issues remained outstanding, the stage of a legally binding agreement had not been reached. In other words, non-binding heads of terms had been agreed, but the parties had not yet entered into a binding legal agreement.

The High Court took the view that the parties had not at any stage contemplated that a legally binding agreement would be entered into orally. Although reference had been made at trial to trades in ICAP's area of business being concluded orally, this was not such a trade. It was a proposed 24 month hiring of services to enhance oversight and control risk. At no point had the parties entered into an agreement in writing. Even if the emails of 3 March and 16 May were capable of acceptance by, for example, an email in response, they were not so accepted. The parties might not have contemplated elaborate documentation, but a confirmatory reply was the minimum contemplated.

The High Court considered the contractual status of a document described as a "term sheet" and found that it was a binding contract

New Media Holding Company LLC v Kuznetsov (2016)

In contrast to the decision in JAS Financial Products (above), this High Court decision held that a term sheet (or heads of terms or similar) was binding on the parties.

Although a statement that a document is subject to contract is generally helpful to show that the parties do not intend to enter a binding contract before signing the relevant agreement, this case illustrates that whether a binding contract has in fact arisen before the parties sign will be judged objectively and depends on whether the parties intended the agreement to bind them at an earlier stage.

Two individuals, Mr Ivan Kuznetsov and Mr Vladimir Gusinski, entered a document described as a "term sheet" which related to a Latvian company, SIA Energokom, a joint venture company in which they were investors. The term sheet was a short document setting out "principal terms and conditions of the Company share management and control." Most of it concerned Mr Gusinski's right to serve notice of share redemption on Mr Kuznetsov requiring him to buy Mr Gusinki's shares at the stipulated price. The parties signed the term sheet in 2010. In 2012 Mr Gusinski served notice on Mr Kuznetsov to buy the shares, but Mr Kuznetsov failed to do so. He contended that the term sheet was not legally enforceable because it was never intended to be legally binding or, alternatively, that there was no consideration.

The Court of Appeal rejected both these arguments. On the issue of intention to create legal relations, the Court noted that while the phrase "term sheet" may often describe a framework document, there is no absolute rule that "term sheets" are framework documents and cannot be contractual. Each case depends on its own particular wording and what the parties intended, viewed objectively. The court gave weight to the fact that the two men, both experienced businessmen, had asked their lawyers to draft the term sheet.

The Court also found that the language in the term sheet was consistent with a legally binding agreement and not merely a document that was aspirational. It set out the rights and obligations in unqualified terms. The term sheet included detailed wording on the service of the notice of redemption and an express law and jurisdiction clause. In context, the reference in the preamble to the term sheet as "describing principal terms and conditions", ie suggesting the possibility of further agreement on other matters, did not mean that it was not contractual. An objective appraisal of the words and conduct of the two experienced men led to the conclusion that they did not intend agreement of any other terms to be a precondition to a legally binding agreement.

As to whether or not the parties' agreement was supported by consideration, the fact that the term sheet did not provide for Mr Kuznetsov to receive anything in return for granting Mr Gusinski his rights was not decisive. This was because the surrounding facts pointed to the term sheet being Mr Gusinski's reward for agreeing to arrange further funding for Energokom, and his agreement not to investigate Energokom's management.

Court of Appeal allows the parties to vary their agreement orally even though their agreement contained an "anti-oral variation" clause

MWB Business Exchange Centres Ltd v Rock Advertising Ltd (2016)

In this interesting decision by the Court of Appeal, which places emphasis on contracting parties' freedom to agree terms, it decided that an anti-oral variation clause did not preclude the subsequent oral variation of the agreement. The oral agreement was supported by consideration.

After the appellant, Rock Advertising Ltd (a marketing services company), incurred arrears of licence fees and other charges, the respondent, MWB Business Exchange Centres Ltd (a company managing office space in London), exercised its right under the licence agreement to lock Rock Advertising out of the premises and gave notice. MWB claimed for arrears and damages. Rock Advertising counterclaimed for loss and damage for wrongful exclusion from the premises, claiming that an oral agreement had been made with the respondent's credit controller to re-schedule the licence fee payments to clear the arrears and that it had paid GBP 3,500 on the same day in accordance with the revised payment schedule. MWB denied this, arguing that such an agreement would be unenforceable as it lacked consideration and that an oral variation to the licence was expressly prohibited by the written agreement.

The Court of Appeal held that on the question of the variation of contracts with anti-oral variation clauses, previous decisions on this point (United Bank Ltd v Asif (2000) and World Online Telecom Ltd (formerly Localtel Ltd) v I-Way Ltd (2002)) were inconsistent. World Online was correct and should be followed. The most powerful consideration was party autonomy and the principle of freedom of contract entitling parties to agree whatever terms they chose subject to certain limits imposed by public policy. The judge found that there was an oral agreement and the credit controller had the ostensible authority to agree the terms and the proposed payment schedule. The Court held that the anti-oral variation clause did not preclude any variation of the original agreement.

Secondly, if a party to an agreement promised to make an extra payment in order to secure the other party's promise to perform his existing contractual obligation to provide services and, as a result, secured a benefit then that benefit was capable of constituting consideration for the promise. The judge found that the oral variation agreement would have a number of beneficial consequences for MWB in that it would recover the arrears and that it would retain Rock Advertising as a licensee so that the property would not be left empty. Rock Advertising's payment of GBP 3,500 and its promise to make further payments conferred a benefit on MWB which constituted sufficient consideration to support the oral variation agreement. The oral variation agreement thereupon became binding on MWB and remained binding for so long as Rock Advertising continued to make the payments in accordance with the revised payment schedule.

Court of Appeal finds that a party did not have to give notice before terminating the contract for repudiatory breach

Vinergy International (PVT) Ltd v Richmond Mercantile Ltd FZC (2016)

In this decision, again highlighting the benefit of precise drafting, the Court of Appeal decided that the respondent, Richmond Mercantile Ltd (a manufacturing company), was able to terminate an agreement for repudiatory breach without complying with the notice and remedy requirements in the contract's termination clauses.

The appellant, Vinergy International (PVT) Ltd (a chemical distribution company), had entered an agreement with Richmond for the supply of bitumen for an extendable term of 10 years. Clauses 17 and 18 concerned termination and provided that either party could terminate the agreement immediately upon failure to observe its terms and remedy them "where..capable of being remedied within the period specified in the notice given by the aggrieved party to the party in default" (clause 17.1.1)

Richmond terminated the agreement for breach without serving notice under that provision. An arbitral tribunal found that Richmond had lawfully terminated the agreement and found that Vinergy had committed three repudiatory breaches: breach of the agreement's exclusivity provisions, failure to pay an invoice for over a year and failure to pay demurrage for certain shipments.

The Court of Appeal explained that the key question was whether one could imply into clause 17.1.1 an agreement that before a party terminates the agreement, whether pursuant to clause 17.1.1 or pursuant to the common law, that party must follow the procedure set down in clause 17.1.1 of giving notice to remedy.

It decided that it was not possible to imply this into clause 17.1.1. Firstly, there was no mention in the clause of the common law right to terminate for repudiatory breach. Secondly, the express right to terminate in clause 17.1.1 depended on the failure "to observe any of the terms" and such a failure might be minor or major. Thirdly, clause 17 as a whole provides six contractual rights to terminate, of which clause 17.1.1 was only one. The notice requirement in clause 17.1.1 didn't apply to the other five eg to the right to terminate where one party suffers an insolvency event (17.2.2).

The Court concluded that the procedure in clause 17.1.1 was intended only to apply to the specific right to terminate found in clause 17.1 and not to any of the other express rights to terminate found in clause 17 or to the right at common law to accept a repudiatory breach as terminating the agreement. The Court further observed that even if clause 17.1.1 did apply to repudiatory breaches, "it cannot apply to [Vinergy's] breach of the exclusivity provisions because that breach, as held by the tribunal, was not capable of remedy."

Supreme Court clarifies when to regard contract clauses as "penalties"

Cavendish Square Holding BV v Makdessi : ParkingEye Ltd v Barry Beavis (2015)

In two conjoined appeals, the Supreme Court has provided a landmark restatement of the law relating to contractual penalty clauses. It did this in order to better reflect the complexity of modern day transactions.

In Cavendish, Mr Talal El Makdessi agreed to sell Cavendish Square Holding BV a controlling stake in the holding company of the largest advertising and marketing communications group in the Middle East. Two clauses of the agreement provided that if he breached certain restrictive covenants, Mr Makdessi (a) would not be entitled to receive the final two instalments of the sale price (clause 5.1); and (b) may be obliged to sell his remaining shares to Cavendish at a price that excluded the value of the goodwill of the business (clause 5.6). When Mr Makdessi breached them, he argued that the two clauses were unenforceable penalties.

In ParkingEye, ParkingEye Ltd and the owners of the Riverside Retail Park in Chelmsford agreed to manage a car park together. ParkingEye put up several notices around the car park stating that any failure to comply with a two hour parking time limit would "result in a Parking Charge of GBP 85." When Mr Barry Beavis overstayed that two hour limit by almost an hour, he argued that the GBP 85 charge was a penalty at common law and therefore unenforceable, and/ or that the charge was unfair and unenforceable by virtue of the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) ("the 1999 Regulations").

The Supreme Court held that asking whether a clause is a genuine pre-estimate of loss or not (as per leading case, Dunlop v Pneumatic Tyre (2015)) is unhelpful since the fact that the clause is not a pre-estimate of loss does not automatically mean it should be regarded as a penalty. There may be other justification for the clause and the true question is whether the clause is penal, not whether it is a pre-estimate of loss. The penal character of a clause is a question of construction, to which evidence of the commercial background is relevant.

Further, the Court must ask whether the provision imposes a detriment out of all proportion to any "legitimate interest" of the innocent party in the enforcement of the primary obligation. The penalty must be a secondary obligation flowing from a primary obligation, rather than a primary obligation itself: "if the contract does not impose (expressly or impliedly) an obligation to perform the act, but simply provides that, if one party does not perform, he will pay the other party a specified sum, the obligation to pay the specified sum is a conditional primary obligation and cannot be a penalty."

In Cavendish, the Supreme Court held that both clauses 5.1 and 5.6 were primary obligations and not subject to the penalty rule. The clauses were price adjustment clauses and had a legitimate function that related to achieving Cavendish's commercial objective in acquiring the business and protecting its goodwill.

In ParkingEye, Mr Beavis had a contractual licence to park in the car park on the terms of the notices put up around the car park, including the two hour limit. The GBP 85 was a charge for breaching the terms of that contractual licence. Whilst the penalty rule was engaged in this case, the GBP 85 charge was not a penalty. The charge protected two legitimate business interests: (a) the efficient use of the car park, which benefited the Retail Park's shops and customers by deterring long-stay or commuter traffic; and (b) the generation of income in order to run the scheme, which benefited ParkingEye. These interests extended beyond the recovery of any loss and the charge was no higher than necessary to fulfil those interests.


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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