In this briefing we look at the lessons to be learnt from some of the English contract law cases of 2018. With the exception of the Supreme Court ruling on a case concerning variation clauses, the cases we cover do not involve a major change in the law. However, they are all useful illustrations of key points of contract law for those drafting and managing contracts.
1. Formation and certainty of terms
Contract disputes often involve questions around formation of contract - whether a binding contract exists between the parties and whether the terms of the contract are sufficiently certain to be enforceable. There were a number of cases in 2018 which considered these issues and they all highlight the importance of having a full and clearly documented agreement in place.
Mr Forte, a financial adviser, entered into a franchise contract with Openwork for the sale of investment products. The contract contained a clawback clause entitling Openwork to claim back a percentage of the commission which Openwork paid to Mr Forte, when an investment was withdrawn within three years. The clawback clause did not contain a set percentage or a formula for calculating this. However, it stated that the commission would be calculated by reference to the amount invested, length of time invested and amount withdrawn. When Openwork tried to enforce this clause, Mr Forte claimed that it was void for uncertainty.
At first instance, the High Court found that the clawback clause was enforceable. This was upheld by the Court of Appeal, who emphasised that "the Court should strive to give some meaning to contractual clauses agreed by the parties if it is at all possible to do so." As the parties had clearly intended the clawback clause to have the effect of Mr Forte repaying some of his commission to Openwork, the courts had to attempt to enforce it. Otherwise, the intent of the clause would be defeated. While the clause did not contain a calculation formula, it did contain the necessary detail to enable the judges to determine that the amount to be repaid by Mr Forte was a percentage of the commission which decreased over time.
AMEC acted as the specialist concrete sub-contractor on two large projects and instructed Arcadis to carry out certain design works in connection with those projects in anticipation of a wider agreement between the parties that did not materialise. There were wide-ranging discussions and correspondence (not marked "subject to contract") between the parties over many months and three sets of terms and conditions were proposed. Each set of proposed terms and conditions included some sort of limitation of Arcadis's liability, but on "radically different terms".
It was later alleged that one of the projects was defective. Arcadis denied liability for the defects but argued that, if it were found to be liable for the defects, there was a contract in place in respect of its design works which included a cap on its liability.
At first instance the High Court held that there was a contract between the parties pursuant to which Arcadis would carry out design work and would be paid for that work by AMEC. This was evidenced by an initial letter of instruction and by Arcadis's conduct in undertaking the work. However, the contract did not incorporate any set of terms and conditions, as no terms had been accepted by Arcadis – which, importantly, meant that its liability was uncapped, a result recognised by the judge as a harsh consequence. See our 2016 contract briefing for further details of the High Court's decision.
The Court of Appeal has now allowed Arcadis's appeal. It agreed with the judge that there was a contract, but found that it did incorporate terms and conditions including a liability cap. Even though the parties had not reached a concluded agreement on the final terms and conditions, they did agree to the interim terms which would apply pending that agreement.
Each case will turn on its facts and there are clearly risks in commencing work without a clear written agreement as to the terms that will apply on an interim basis. However the Court of Appeal decision suggests that the court may be reluctant to conclude that a party has assumed an unlimited liability for works carried out under an interim contract pending negotiation of a final agreement, when it never would have assumed such liability under that final agreement.
The earn-out schedule in a share purchase agreement provided for the seller, Mr Morris, to earn additional consideration in return for ongoing consultancy services in relation to the target company. The earn-out schedule provided that Mr Morris "shall have the option" to provide consultancy services for a period of four years after completion and "following such period such further period as shall reasonably be agreed between Mr Morris and [Swanton]".
Mr Morris supplied the relevant services for four years but Swanton rejected his request for a "reasonable extension" to the earn-out period. Mr Morris issued proceedings, claiming that he had a contractual entitlement to a further earn-out period during which he would have earned additional earn-out consideration. He argued that the wording of the relevant clause was mandatory because it provided that he "shall" have an "option" for a further period, and that his exercise of this option had been wrongly rejected by Swanton.
The High Court and the Court of Appeal both found that Mr Morris did not have an enforceable right to provide consultancy services during any earn-out period other than the initial period of four years. Insofar as the clause related to a further period, this was an unenforceable agreement to agree. Because the clause contemplated that the parties would be free to agree or disagree about any extension (even if they acted reasonably when discussing a potential extension), it was void for uncertainty.
The Court of Appeal contrasted the drafting in this case with a hypothetical clause which provided for an extension of time for a reasonable period – in that case, there would at least have been an existing agreement for a reasonable period which the courts might be able to enforce, whereas in Mr Morris's case the parties had not reached any agreement (and could not be compelled to reach any agreement) as to an extension.
Practice points – Formation
- Whenever possible, include all essential terms in a written agreement signed by all the parties before any obligations are performed.
- Remember that a contract may become binding, even though there are still terms to be agreed, if the parties have agreed on all the terms that are essential for the formation of legally binding relations between them.
- Take care to avoid entering into a contract unintentionally and avoid saying anything in negotiations or correspondence which may subsequently be construed as evidence of an intention to be contractually bound.
- Consider whether contractual terms contain sufficient detail and are sufficiently certain to be enforced, otherwise the provision may be an unenforceable agreement to agree.
- Be aware that the courts will strive to make contracts workable so do not accept uncertain clauses on the assumption that they will not be enforceable.
2. Implied terms
This next case is a reminder of the strict approach which English courts adopt when asked to imply a term into a contract, as set out in the Supreme Court decision in Marks & Spencer Plc v BNP Paribas  UKSC 72 (see our 2015 contract briefing). The Court of Appeal stressed the need to construe the express terms of the contract before considering whether a term should be implied and also the importance of not applying hindsight when determining whether to imply a term.
BGC loaned £336,000 to Mr Bou-Simon, one of its employees. The loan agreement, which assumed that Mr Bou-Simon had, or would shortly, become a partner at the firm, provided that the loan was to be repaid from Mr Bou-Simon's partnership distributions and that any unpaid amounts would be written off once Mr BouSimon had served four years. An earlier draft of the agreement provided that the loan would become immediately due and payable if Mr Bou-Simon ceased to be a partner within four years. However this provision was deleted on behalf of Mr Bou-Simon during negotiations and the final agreement only required repayment in the event of an impairment of Mr Bou-Simon's creditworthiness.
Mr Bou-Simon resigned within four years and BGC claimed the repayment of the loan, arguing that there was an implied term that, if Mr Bou-Simon resigned before the four-year period ended, the loan would become immediately repayable. At first instance, the High Court ruled in favour of BGC that there was indeed such an implied term; without it, the agreement would lack commercial or practical coherence, since Mr Bou-Simon would be able to leave his employment without repaying the loan and without having made any significant contribution to BGC's business.
The Court of Appeal allowed Mr Bou-Simon's appeal. The High Court had used the correct test, as set out in the Marks & Spencer case, but it had misapplied the test. The judge had erred in that he "implied a term in order to reflect the merits of the situation as they now appear" rather than approaching the matter from the perspective of the reasonable reader of the agreement at the time it was entered into. The Court of Appeal emphasised that it is not appropriate to apply hindsight and seek to imply a term in a commercial contract simply because it appears to be fair or because it seems likely that the parties would have agreed to it had it been suggested at the time the contract was formed. In addition, the question of implied terms can be considered only after the process of construing the express terms of the contract is complete.
The Court of Appeal did not make a ruling as to the admissibility of the deletions but, in the view of one of the judges, the fact that parties were seeking to rely on wording which they had deleted from an earlier version of the agreement should be given consideration.
Practice points – Implied terms
- Remember that English courts take a strict approach to implying terms.
- Don't rely on the courts implying a provision into a contract – if a provision is required it should be expressly included.
In May 2018 the Supreme Court overturned the Court of Appeal decision in Rock v MWB  EWCA Civ 553 and held that an oral variation of a contract was invalid because the contract provided for any variation to be in writing. The Court of Appeal decision (covered in our 2016 contract briefing) had caused a degree of concern among commercial parties who regularly include "written variation only" clauses in their contracts. So the Supreme Court ruling restores an element of certainty about the effect of these clauses.
The second case covered in this section (although it was heard at the end of 2017 rather than in 2018) concerns the effect of a contract amendment on liquidated damages provisions included in the original contract and highlights the need to consider fully the impact of any variation on other contractual terms.
MWB operated and managed office space in central London. Rock occupied premises managed by MWB under a licence agreement which provided:
"This licence sets out all of the terms as agreed between MWB and [Rock]. No other representations or terms shall apply or form part of this licence. All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect."
After taking on larger premises (at an increased fee) Rock was unable to meet the increased licence payments and incurred arrears. MWB exercised its contractual right to exclude Rock from the premises, sought to terminate the agreement and claimed the arrears. Rock counterclaimed for loss and damage suffered as a result of being, in its view, wrongfully excluded from the premises.
Central to Rock's case was its claim that an oral agreement had been made between its managing director and MWB's credit controller to reschedule its payments. The judge at first instance found, as a matter of fact, that there had been an oral agreement. However the oral agreement could not take effect because of the clause in the licence agreement requiring any amendments to be in writing.
The Court of Appeal allowed Rock's appeal and found that the oral amendment to the licence contract was effective despite the express contractual provision requiring amendments to be in writing. The Supreme Court unanimously overturned the Court of Appeal's decision, finding that the oral amendment was not effective. Lord Sumption, giving the lead judgment, pointed out that the Court of Appeal's decision meant that contracting parties could not validly bind themselves as to how future changes to their legal relations could be achieved, no matter how clearly they expressed their intention to do so. He recognised the reasons for commonly including a clause requiring variations to be in writing (now commonly referred to a "no oral modification" or "NOM" clause) in commercial contracts: (i) they prevent attempts to undermine written agreements by informal means; (ii) given that oral discussions can easily give rise to misunderstanding, they avoid disputes about whether a variation was intended; and (iii) they make it easier for corporations to police internal rules restricting authority to agree variations.
Aker employed HSM to provide pieces of kit for an oil rig in the North Sea under a contract which included a liquidated damages provision for failure to have the kit Ready for Sail Away ("RfSA") by a specified date. When it became apparent that HSM would not meet the RfSA date, the parties entered into a Memorandum of Understanding ("MoU"). The MoU did not expressly set a new RfSA date but instead stated that HSM should use its "fullest endeavours" to achieve "mechanical completion" by a given date. As required by the MoU, HSM drew up a revised programme for the project which gave a new RfSA date. There was no mention of liquidated damages in the MoU.
Aker subsequently claimed liquidated damages for HSM's failure to meet the original RfSA date or the new RfSA date specified in the revised programme. The court found that the absolute obligation to meet a particular date had been replaced by something different in the MoU. There was no longer an absolute obligation to meet any specified dates; provided that HSM used its fullest endeavours, it would not be in breach of contract, whatever the actual dates.
Practice points – Variation
- Remember that a contract may be varied orally or by conduct, so consider including a clause requiring all variations to be in writing and specifying who may agree amendments on behalf of each party.
- Ensure that any variations comply with the requirements of any variation clause in the original contract. In any correspondence or discussion about a potential variation, state that the variation will not take effect until it has been agreed in accordance with the variation clause.
- Think carefully about the administration of ongoing contracts and ensure that contract management teams are aware of, and comply with, any variation provisions.
- When agreeing a variation, pay careful attention to the effect of the proposed variation on other provisions of the 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.