Central Law Training - Hot Topics In Contract Litigation
Posted: January 19, 2006
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Andrew Bowen, MA (Oxon), LLM (Lond), Advocate and Barrister
This seminar focuses on the essential aspects of contract law from the litigators' perspective. These essentials are illustrated with recent commercial case law from Scotland and England. A useful update for busy practitioners, this seminar will include the following:-
- Incorporation and Interpretation of Contract Terms: Including entire agreement clauses and Howgate Shopping Centre Ltd 2004 SLT 231 and the Contract (Scotland) Act 1997
- Jurisdiction and Applicable Law. Updates on the 1982 and 1990 Acts
- Interim Remedies. Common Interim applications, including ss 46 and 47 of the Court of Session Act 1988
- Remedies and Damages. Remoteness and Cosar Ltd v UPS Ltd
- Exclusion and Limitation Clauses. An update on case law, including Watford Electronics
Seminar Programme:
Break at 3.15pm for 20 minutes for coffee.
Incorporation and Interpretation of Contract Terms:
Howgate Shopping Centre Ltd v Catercraft Services Ltd 2004 SLT 231. Lord Macfadyen said in the context of rent review:
[36] In seeking to identify the background circumstances which may legitimately be taken into account in interpreting the rent review provisions of the sub-lease, I bear in mind that regard may be had only to circumstances knowledge of which was, or ought reasonably to have been, available to both parties. The point has been variously formulated in the authorities. In Bank of Scotland v Dunedin Property Investment Co Ltd, Lord Kirkwood said (at 670H):
"... the court can have regard to 'facts which both parties would have had in mind and known that the other had in mind at the time when the contract was made'."
In the first of the principles set out by Lord Hoffmann in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 at 912H reference is made (at 912H) to "all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract". [Lord Hoffman said in full: almost all the old intellectual baggage of 'legal' interpretation has been discarded. Principles: interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The factual matrix, subject to the requirement that it should have been reasonably available to the parties, includes absolutely anything which would have affected the way in which the language of the document would have been understood by the reasonable man, except previous negotiations and declarations of subjective intent.] In BCCI v Ali Lord Bingham of Cornhill referred (at 259F) to "the relevant facts surrounding the transaction so far as known to the parties", and Lord Hoffmann pointed out (at 272E) that:
"It would be contrary to basic principles of construction for the meaning of a document to be affected by facts which were known to one party but not reasonably available to the other".
However, in Reardon Smith Line Ltd v Hansen-Tangen Lord Wilberforce said (at 996E):
"It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties, but this requirement should not be stated in too narrow a sense."
The aspect of this matter which, in my view, presents a need for particular care is where the respective parties to a contract had differing degrees of knowledge about certain of the background circumstances.
[37] The relevance to the interpretation of the rent review provision in the sub-lease of the history of how the rent review provision in the lease came to include the discount to 23.15% of open market rent requires in my view to be particularly carefully assessed. That history - if it had been known or available to both parties - would have been a powerful indicator that the discount was known to be something intended to benefit Mathiesons alone, and therefore not something which the defenders could expect to have passed on to them. But that history was not known or available to the defenders. The details of the history are therefore not in my view part of the relevant background circumstances. On the other hand, there were related matters which were known to the defenders or available to them, and which therefore can properly be taken into account. In the first place, by the time the sub-lease was entered into the defenders were or ought to have been aware of the terms of the lease. They therefore were or ought to have been aware of the terms of paragraph 1 of Part IV of the Schedule. In other words they were or ought to have been aware that the rent under the lease fell to be reviewed at the five-yearly review dates, not to the open market rent (however defined in point of detail) - which would have been in accordance with virtually universal practice in commercial leases - but to 23.15% of open market value. They were or ought to have been aware that that discount was not explained in terms in the lease. They were or ought to have been aware that that provision was unique to the lease. None of the surveyors who gave evidence had ever seen the like of it before. It was quite exceptional. It therefore ought to have been plain to the defenders that, in the absence of some specific reason for Mathiesons wishing to confer on them the windfall benefit of paying (once the discount took effect) less than a quarter of the rent which the unit could attract on the open market, it was unlikely, almost inconceivable, that they intended to pass the benefit of the discount to them.
[40] Another consideration which, in my view, forms a relevant part of the surrounding circumstances is the total absence of reference to the discount prior to its appearance in Clause SECOND of the sub-lease (or, to be more precise, in the draft sub-lease which formed part of the missives). I am conscious that ordinarily it is not legitimate to look to the course of negotiations as an aid to construction of the concluded contract. But the rationale for that rule was explained thus by Lord Wilberforce in Prenn v Simmonds at 1384G:
"There were prolonged negotiations between solicitors, with exchanges of draft clauses, ultimately emerging in clause 2 of the agreement. The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience ... It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties' positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus."
But in the present case it is not a question of looking at the evolution of a particular clause the meaning of which requires to be determined. On the evidence, Clause SECOND appeared for the first time in the draft sub-lease. It was in the same form as it ultimately took in the sub-lease. It was the incorporation into the sub-lease of the rent review provisions in the lease. According to the defenders, that incorporation included the incorporation of a discount of the reviewed rent. One circumstance which can, in my opinion, be taken into account in judging objectively whether the parties intended to confer the benefit of that discount on the defenders is that that matter was not mentioned at all in the negotiations which underlay the missives. Moreover, although express provision was made by way of back letter for other benefits given to the defenders to induce them to take the sub-lease, no such mention is made of the discounted reviewed rent. The discount is, it seems to me, a matter which the objective observer would have expected to be expressly mentioned. The initial rent was mentioned in the heads of terms. Rent review was mentioned only to establish the dates at which review would take place. These circumstances, known to both parties, can in my view legitimately be taken into account in construing the sub-lease.
Enforceability of 'Heads of Agreement':
Latta v Burns 20040304, Lord Carolway (unreported).
[10] The pursuers have set out a relevant case for inquiry. The document entitled "Heads of Agreement" bears all the hallmarks of an agreement intended to be legally binding upon its parties. First, it deals with a commercial bargain and not some social or trivial engagement. Secondly, it purports to be "heads of agreement", that is to say an expression of consensus reached by the parties. Thirdly, it is typed, signed, dated and even witnessed. All of these point towards it being, and intended to be, an enforceable contract. Although certain documents were executed subsequent to it, the terms of the Heads of Agreement, with which this action is concerned, make no reference to the necessity of any such documents. There is no hint in the Heads of Agreement that they are an "agreement to agree". Rather, the clauses appear complete in themselves. The contention that it was a pact not intended to have legal force is rejected.
[11] The document "Heads of Agreement" also appears to have all the essentials necessary for the formation of a completed contract. The test is set out by the Lord President (Hope), delivering the Opinion of the Court (at 32-33), and in the speech of Lord Jauncey (at 39) in Neilson v Stewart (supra). Both quote from Viscount Dunedin's celebrated dicta in May and Butcher v The King [1934] 2 KB 17 (note) (at 21), viz.:
"To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties...As a matter of the general law of contract all the essentials have to be settled. What are the essentials may vary according to the particular contract under consideration."
The contract is one involving the sale of the pursuers' interests in the company and partnership to the defender. The essentials were primarily: parties, subject matter and price. The "Heads of Agreement" document deals with all three items in an adequate manner. First, there is no dispute that the parties are, on the one hand, the pursuers (albeit that the second pursuer did not sign this document) and, on the other, the defender. The company is not a party to the agreement and, as such, cannot be, and is not, bound by it. Secondly, the subject matter is expressed in clauses "1" to "4" as the pursuers' shares and offices in the company and their capital and partnership interests in the firm. Thirdly, the price is set out in two parts. There is the first £100,000 in clause 1, expressed as payable for the shares. There is then the second £100,000 in clause 4. The precise counterpart of this second sum may not be spelled out as clearly as it might have been, but the scheme of the Heads of Agreement makes it apparent that it is to be paid in return for the pursuers' interests, including their capital, in the firm. That is at least a, if not the, "commercially sensible" construction which can be placed upon the clause in the context of the Heads of Agreement looked at as a whole. In that regard, the bargain is complete in all its essentials. In short then, all the essentials of contract appear to be present and, on the construction proferred by the pursuers, the defender is bound to pay to them the second £100,000, one way or another.
[12] The proper construction of clause 4 may be seen as set out above, at least in the context which the pursuers offer to prove. That construction involves no uncertain element. Contracts, under Scots law, are properly construed in the manner succinctly described by the Lord President (Rodger) in Bank of Scotland v Dunedin (supra) (at 661 and 665). Prefacing any attempt by reference to the need to find Lord Steyn's "commercially sensible construction":
"the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used".(at 661)
If there is such a meaning then there may be little point in commencing a detailed exploration of whatever "matrix of fact" might have surrounded the contract. This is so albeit that, as is well known, the Court may look at the surrounding circumstances in order to assist it in arriving at a proper construction. If it does then, as the Lord President also makes clear, it should do so:
"not in order to provide a gloss on the terms of the contract, but rather to establish the parties' knowledge of the circumstances with reference to which they used the words in the contract."(at 665)
The pursuers do set out a matrix which points towards their favoured construction, given that it may be that, even if the content of prior negotiations is irrelevant, nevertheless:
"the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact" (Prenn v Simonise [1971] 1 WLR 1381, per Lord Wilberforce at 1385 quoted by Lord Caplan in Bank of Scotland v Dunedin Property Investment Co (supra) at 677).
Since the pursuers accept that an alternative construction may be possible if the averments of the defender are proved, the appropriate course must be an inquiry into both parties' averments. In that connection, it was not argued that any portion of either parties' averments should be excluded from probation.
[13] Clause 4 is not uncertain if, as it may be, it is construed in the manner contended for by the pursuers. The test is that set out by the Lord President (Inglis) in McArthur v Lawson (supra) (at 1136) (and founded upon by Gloag (supra) at 11), namely whether the clause is sufficiently specific as to be capable of enforcement by a decree for specific implement. As set out above, clause 4 may be read as creating an obligation on the part of the defender to pay £100,000, one way or another, to the pursuers. There is no difficulty with such a provision. The counterpart, at least looking to the ordinary meaning of the words used in the clause and, in any event, certainly having regard to the surrounding circumstances averred by the pursuers, appears to be that the pursuers will make over their interests in the partnership to the defender. There is also no difficulty with that either. Indeed, that part of the bargain has already has been implemented. In these circumstances, at least as a matter of relevancy of the pursuers' case, there is no vague element apparent in the clause which might necessarily render it void.
[14] The defender's contention is, of course, that on a proper construction of the contract and the matrix averred by them, the difference referred to in clause 4 is to be seen as a payment in return for consultancy services. That is not what it says. The words used are that the sum is to be paid "as a consultancy fee". The ordinary meaning of these words may require no interpretation or translation even once that matrix is explored. The words may be seen to be clear in stating that the balance of the £100,000, due after calculation and payment of the capital accounts, is to be paid as a consultancy fee (see also Clause THREE of the Backletter). "Consultancy fee" is the label placed upon the payment. Clause 4 makes no mention of the provision of any consultancy services and there seems to be no reason to read such provision into the bargain. There is no immediately striking "commercially sensible" reason for doing so in a situation where the object of the transaction was to extract the pursuers from the businesses and not to prolong their involvement with the firm. I note, of course, that the Sheriff Principal and the Sheriff have determined that the Consultancy Agreement was void from uncertainty. These decisions have been made and are effective. In reaching their decisions, however, they appear to have been construing the Consultancy Agreement (which was not between the parties here) almost in isolation and certainly without reference to the background of the "Heads of Agreement" and the other documents. Had they been referred to them, then I would have been surprised if the same result could have been reached. Indeed, had the matrix been explored, it would have been surprising if the Sheriff Principal or Sheriff could have regarded the Consultancy Agreement as being anything out of the ordinary, far less that it was void from uncertainty. No doubt the pursuers could have performed some consultancy services but, whatever the terms of the Consultancy Agreement may have been, the bargain which the parties to this action reached did not appear to require them to do so.
[15] I have not expressed a concluded view upon the construction of the Heads of Agreement because of the pursuers' concession that a proof is required before the case can be determined. As a generality, however, what might be said is that the pursuers offer to demonstrate that the object of the transaction expressed in the Heads of Agreement was to transfer their interests in the company and firm to the defender for a price of £200,000, that sum being divided for administrative reasons into two equal sums attributable to each business entity. If they do prove this, and of course the defender may, in terms of his own averments, show otherwise, then the short point in the case is that the defender has not paid the full price for the assets which he in fact acquired from the pursuers.