March 2016 – Cerno.org

Cerno.org Newsletter – “Close of Business”: Not so obvious as you might think

In the recent case of Re. Elektron Holdings Limited (In Receivership), McCann v Halpin the Supreme Court of England and Wales considered the meaning of the stock phrase “Close of Business”.

The phrase “Close of Business” is a stock expression often used in business documents, with the assumption that it has an established meaning.

In the context of the noted case, which involved a banking institution, the Court, in upholding the decision of the lower court, that “close of business” should be interpreted as meaning the end of the banking business day ; the time at which banks have traditionally and normally closed their doors to customers.

The ordinary meaning of stock phrases are, however, dependent upon context. The phrase “close of business” is not a term of art; it is a flexible expression commonly used to describe the time at which a business might reasonably be expected to close its doors to its clients, or to the public. The meaning can change over time as business and social patterns change. Almost certainly the meanings will depend upon location also.

The lesson to be taken from this is it is wise to avoid the risk of ambiguity by avoiding stock phrases and by including definitions and explanation to put beyond doubt matters which may become controversial.

Cerno.org Newsletter – Damages Clauses and Penalties

Makdessi & Parking Eye

The Supreme Court of England and Wales, in the consolidated appeals in the two cases of Cavendish Square Holding BV v Talal El Makdessi (Cavendish) and Parking Eye Limited v Beavis (Parking Eye), perceived a more flexible test on whether a contract term is considered penal and thus unenforceable.

The traditional English law test on penalty clauses centred on whether a clause that takes effect on breach of contract is a “genuine pre-estimate of loss” and therefore compensatory or whether it is aimed at deterring a breach and therefore penal. In construction contracts this question arises often in relation to the provisions entitling an Employer to claim and deduct damages from the Contractor where the completion of the project has been delayed and there is no entitlement to an extension of the time for completion.

The origins of the penalty rule can be traced back as far as the 16th century. It originates in the concern of the Courts to prevent exploitation in an age when credit was scarce and borrowers were particularly vulnerable.

Essentially, a penalty is a payment of money stipulated in the contract and is unenforceable against the offending party if it is an exorbitant alternative to common law damages.

At the beginning of the 20th century, the judgment in the case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co. Ltd [1915] A.C. 847 (Dunlop) sought to restate the law on the penalty rule by providing four tests which were designed to be “helpful, or even conclusive” in determining whether or not a clause was an unenforceable penalty. The Dunlop judgment distinguished between penalty clauses (which are unenforceable) and “liquidated damages” clauses, which are enforceable provided that the specified sum is “a genuine pre-estimate of loss” – wording which has since appeared in many English law commercial contracts over the last 100 years.

In the present cases and in the words of Lord Sumption, the rule has become, “an ancient, haphazardly constructed edifice which [had] not weathered well”.

In Cavendish and Parking Eye, the Supreme Court restated the rule by introducing a more flexible test as to “whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.” Following this decision, the question is no longer “[is] the clause unconscionable or a genuine pre-estimate of loss”; instead, the innocent party’s wider interest will be taken into account when enforcing obligations.

Commentators have subsequently criticised this decision by highlighting the uncertainty of what will amount to a legitimate interest and the circumstances in which a clause will be considered out of proportion to that interest. This point is likely to be open to debate on a case-by-case basis. The new rule does, however, make way for greater freedom of contract; parties of equal bargaining power will be the best judges of what is a legitimate response to a breach of contract and commercially justified, even if, on the old test, this would be seen as a deterrent for breach.

Cerno.org Newsletter – Retention of Title

Retention of Title

The Court of Appeal of England and Wales has ruled in the recent case of PST Energy 7 Shipping LLC Product Shipping & Trading S.A. v O.W. Bunker Malta Ltd and others [2015] EWCA Civ 1058 that a retention of title clause prevented a contract from being a sale of goods contract. Although the case was decided in the context of shipping, producing direct implications for ship owners, it is likely to have wider implications for retention of title clauses in the context of the supply of goods contracts.

In the PST Energy 7 Shipping case, the contract included a clause that, pending payment, the ship owner held the fuel as a baillee but was able to continue using the bunker. This did not release the ship owners from their obligation to pay for the fuel.

Overall, as reported, this decision has implications for contracts for the supply of consumable goods where a retention of title clause provides ever diminishing security for payment.

Cerno.org Newsletter – Belize v Belize Telecom Ltd clarified

Implying terms into contracts: the old rules revived

In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, almost the same panel of Supreme Court judges as the one in Arnold v Britton clarified the law on when the courts can imply a term which the parties have not expressly included in their contract.

The Court unanimously endorsed the traditional, “officious bystander” approach that an implied term must either be so obvious as to go without saying or be necessary to give “business efficacy” to the contract to make it work properly.

Lord Neuberger commented that a term should not be implied into a detailed commercial contract merely because it appears fair, or because the court considers that the parties would have agreed it if it had been suggested to them.

A majority of the Court said that academics and judges had wrongly understood the decision in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 as meaning that a term may be implied just because it is reasonable to do so. This is not the case.

In addition, the Court found that some comments in Belize were misleading, because they suggested that implying terms is part of the process of interpreting a contract. The position to be adopted is that only once the express terms of the contract have been construed can the subsequent process of implying terms (which is subject to stricter controls) begin.

Belize should now be viewed as providing a helpful discussion, but not authoritative guidance, on the law of implied terms.

Cerno.org Newsletter – Good Faith

Good faith duties are still narrowly construed in English law.

The debate about the extent of a good faith duty in English law continues to rumble on and in 2015 the courts continued to construe express good faith obligations narrowly.

In Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC), a case that considered a general good faith obligation in a long term, Private Finance Initiative (PFI) road maintenance contract, the judge found that the council was not subject to that duty when it came to its contractual obligation to assess the award of service points, which required the exercise of a discretion.

The Judge did find, however, that the council was subject to an implied obligation to make the contract work; namely that it would exercise its discretion by not acting in an arbitrary, irrational or capricious manner and also by acting honestly and on proper grounds.

It seems that the good faith clause was used to import into the implied term two extra, fact-specific duties. Contrary to the approach that was being taken in order to force Ensign to negotiate the original contract, which the council could no longer afford, the council could not simply award the maximum number of points for each contractor default.

(Note this case was heard before the case of Arnold v Britton was decided, the court followed Rainy Sky SA v Kookmin Bank [2011] UKSC 50 by interpreting the contract using commercial common sense.)

Cerno.org Newsletter – When good sense doesn’t always prevail!

A contract’s plain meaning may override commercial good sense.

In the case of Arnold v Britton [2015] UKSC 36 the Supreme Court of England and Wales delivered a significant judgment on interpreting contracts, concluding that where the contractual wording is clear, the courts are reluctant to depart from its plain meaning to invoke considerations of commercial good sense.

This judgment reinforces a recent trend in which the courts have downplayed the importance of looking at whether or not a contract makes commercial common sense unless there is ambiguity or lack of clarity in the language used. The result is that where an event occurs that was not intended or contemplated by the parties, judging from the contract language used, the courts will only give effect to the parties’ intention when it is clear.

In the cited case the decision meant tenants had to pay a service charge much higher than they ever anticipated. Despite the harsh outcome, Lord Neuberger was clear that “there is no principle of interpretation which entitles a court to rewrite a contractual provision simply because the factor which the parties catered for does not seem to be developing in the way in which the parties may well have expected“.