Interpretation of Commercial Contracts WIN Seminar Jonathan Eatough Michelle Ledwidge DLA Piper Manchester Wednesday 25 March 2015 25 March 2015 Programme 1.The Principles Old approach to interpretation Modern principles Modern approach of House of Lords 2.Specific clauses Good faith Entire Agreement Clauses Reasonable/all reasonable/best endeavours Changes/variation Material breach Humpty Dumpty Syndrome "When I use a word," Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean nothing more nor less" "The question is," said Alice, "whether you can make words mean so many different things" 25 March Punctuation "He didn't marry her because she was rich" "He didn't marry her because she was penniless" "He didn't marry her, because she was rich" 25 March Old Approach Parol evidence rule "[W]hen the parties to a contract embody their agreement in writing and intend the writing to be the final expression of their agreement, the terms of the writing may not be varied or contradicted by evidence of any prior written or oral agreement in the absence of fraud, duress, or mutual mistake." Black's Law Dictionary 25 March Old Approach The canons of construction - examples The golden rule Words have their ordinary meaning unless it leads to absurdity The contra proferentum rule The ejusdem generis rule - The Laconian Confidence [1997] Words on face take priority over standard terms and conditions - Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003] HL 25 March 25 March 2015 Modern Principles The objective principle The inquiry is not into what the speaker or writer actually intended but into what a reasonable listener or reader would have understood by the use of the words. The holistic principle The court must look beyond the words in question to examine the whole document or utterance. The contextual principle The court will look beyond the four walls of the document or utterance to the surrounding circumstances constituting the context for the drafting or utterance. The purposive principle The court will look to the purpose of (a) the transaction and (b) the term in question 25 March 2015 Objective Principle The objective meaning of the words used, set against the factual Matrix Prenn v Simmonds [1971] HL Inadmissibility of negotiations the aggregate profits of RTT returned during the four years ending August and available for dividendwhether declared or not shall have amounted to 300,000 after tax. Lord Wilberforce: "The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get "agreement" and in the hope that disputes will not arise. The only course then can be to try to ascertain the "natural" meaning." Objective Principle "Evidence of negotiations, or of the parties' intentions and a portion of Dr Simmonds' intentions, ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties before the date of the contract, including evidence of the "genesis" and objectively the "aim" of the transaction." Evidence should be restricted to the factual background Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003] UKHL 12; [2004] 1 A.C. 715 HL 25 March Contextual Principle Prenn v Simmonds [1971] HL Reardon Smith Line Ltd v Yngvar Hansen Tangen, The Diana Prosperity [1976] HL 25 March 25 March 2015 Contextual Principle Prenn v Simmonds [1971] HL Lord Wilberforce Chartbrook v Persimmon [2009] HL 25 March 2015 Contextual Principle Construction and rectification Lovell & Christmas Ltd v Wall (1911) CA Chartbrook v Persimmon [2009] HL 25 March 2015 Purposive Principle LG Schuler AG v Wickman Machine Tool Sales Ltd [1974] HL It shall be a condition of this agreement that W shall send its representatives to visit [the six largest UK motor manufacturers] at least once in every week. "The fact that a particular construction leads to a very unreasonable remit must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear." Antaios Cia Naviera SA v Salen Rederierna AB, "The Antaios" [1985] HL Lord Diplock: "..if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense." 25 March 2015 Time of Inquiry Wickman Machine Tool Sales Ltd v LG Schuler AG [1972] CA - Lord Denning Estoppel by convention 25 March 2015 Current Approach Mannai Ltd v Eagle Star Assurance Co Ltd [1997] HL Leases terminable on the third anniversary of the term commencement date - 13 January 1995 Notice to determine on 12 January 1995 25 March 2015 Current Approach Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] HL Excluded from the assignment: any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the West Bromwich Building Society in which you claim an abatement of the sums which you would otherwise have to repay to the society Who is the reasonable person? Who is the reasonable person? Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003] HL 25 March 25 March 2015 Current Approach Pre-contract negotiations Chartbrook v Persimmon [2009] HL Not admissible for purpose of drawing inferences as to what the contract means But Is admissible to: establish a fact which may be relevant as background known to the parties support a claim for rectification support a claim for estoppel 25 March 2015 Current Approach Pre-contract negotiations Mopani Copper Mines Plc v Millennium Underwriting Limited [2008] John agrees to sell to Peter his bicycle and everything on it, including the basket, bell and lights, for Specific Clauses 25 March Good Faith Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 Facts: The primary issue was whether a duty of good faith was to be implied into the contract. Decision: A general duty of good faith should be implied into a long term distribution agreement between the parties. Such a duty shouldn't be implied into all commercial contracts, however it could be implied in certain circumstances on the basis of the 'presumed intention' of the parties. The doctrine was more likely to apply to 'relational' contracts JVs/franchises and long term distribution agreements. The rest of whether a party had acted in good faith was an objective one: What would be regarded as "commercially unacceptable by reasonable and honest people"? 25 March Good Faith cont. Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200 Facts: This case concerned a dispute about a hospital cleaning services contract which included a requirement of good faith. Whilst there was an express contractual "duty to co-operate in good faith" in the contract, this duty was not applicable to the matters being disputed. Decision: The Court of Appeal noted that there was no general doctrine of good faith in English contract law a duty might be implied in certain categories of contracts, but warned against construing a wide obligation of that nature in circumstances where that might cut across more specific provisions. The court (obiter as it actually didn't have to get to that point) concluded that there was no general doctrine of good faith and Yam Seng shouldn't be regarded as laying down any general principle. The court also said that a term implying a duty of good faith was unlikely to arise between sophisticated commercial parties negotiating at arms' length. 25 March Good Faith cont. Hamsard 3147 Ltd v Boots UK Ltd [2013] Facts A supply agreement between Boots and previous supplier (in administration) ended and ad hoc supply arrangement with new supplier, Hamsard entered into. Should good faith provision from earlier supply agreement apply to Hamsard's agreement? Decision Implied duty of good faith didn't extend to interim agreement (although it could to any restructured future venture) "I do not accept that there is to be routinely implied some positive obligation upon a contracting party to subordinate its own commercial interests to those of the other contracting party" Norris J. Even if the term was implied: "Boots was free to exercise its contractual rights honestly in its own commercial interests" 25 March Good Faith cont. Bristol Groundschool Ltd v Intelligent Data Capture Limited & Others [2014] EWHC 2145 Facts: One party claimed a breach by the other of an implied term to act in good faith, and said that the breach was repudiatory. Decision The court agreed that the contract between them amounted to a 'relational contract.' The contract did indeed carry with it an implied duty of good faith. The duty had been breached but the breach was not repudiatory. The test for breach was an objective one: What would be regarded as "commercially unacceptable by reasonable and honest people"? 25 March Good Faith Cont. D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB) Issue: Implied term to act with honesty and integrity? The features of the contract in issue warranted the inclusion of the implied term and that it was a relational contract par excellence. The factors taken into consideration were: the length of the contractual relationship; the number of transactions; and the substance of the contract which, in this case, was dealing with the publics property as potential evidence for criminal investigations. Acts which would compromise the mutual trust and confidence between the parties would be a key factor to consider. 25 March Good Faith Practical points The courts have not stamped down on the Yam Seng decision as many thought they would. The good faith argument is more likely to be run in relational agreements e.g. JV/franchise/distribution agreements. But these are not the only categories of agreement anything with an element of trust or co-operation is vulnerable. Everything turns on context/how the contract is worded. Germany, France, Italy, Greece and the US amongst others recognise duty of good faith. So some counterparties will assume that there is an obligation of good faith and be surprised to find out the position is not so clear in England. 25 March Best, reasonable and all reasonable endeavours Purpose: most contractual obligations are absolute "endeavours" clauses are qualified contractual obligations, obligations to "try" and achieve something Meaning of an endeavours clause must be assessed: at the time the contract is formed by reference to its terms, the other provisions of the agreement and the surrounding commercial context This creates uncertainty over the meaning of a particular endeavours clause 25 March Best, reasonable, and all reasonable endeavours Jet2.com v Blackpool Airport Ltd [2012] EWCA Civ 147 Best endeavours: both parties to "co-operate together and use their best endeavours to promote Jet2.com's low cost services from Blackpool Airport" All reasonable endeavours: obligation on BAL to "use all reasonable endeavours to provide a low cost base to facilitate Jet2.com's low cost pricing" CA not concerned with difference between the two concepts more whether the object of the clause is clear 25 March Best, reasonable and all reasonable endeavours - characteristics 25 March Best endeavoursAll reasonable endeavours Reasonable endeavours The most onerous includes steps which a prudent, determined and reasonable obligee acting in his own interests and anxious to obtain that result would take Similar to best endeavoursThe least onerous May require significant expenditure May required significant expenditure May require limited expenditure Not an absolute obligation but requires the obligee to take all reasonable courses it can sometimes sacrificing their own commercial interests May or may not require the obligor to sacrifice its commercial interests Does not require the obligor to sacrifice its commercial interests Balancing act between contractual obligations and commercial considerations Best, reasonable, and all reasonable endeavours Commercially reasonable / reasonable commercial / utmost endeavours These represent other variations to endeavours clauses Aim to soften a reasonable endeavours obligation However, there is little precedent to support these variations. It is not clear that the courts would differentiate between the terms (for example, a reasonable endeavours obligation already involves considering all relevant commercial factors) Utmost endeavours is often seen as an advancement on a best endeavours clause, though there is little precedent on its use in commercial contracts If a modification to one of the more common endeavours clauses is required it may be advisable to consider what the parties should actually do in practice, rather than relying on wordplay 25 March Endeavours Practical Points Keep record of steps taken Define term Set out steps the obligor is expected to take. Consider the following: Whether the obligor should bear any costs or incur any expenditure and, if so, how much. The period for which the obligor should pursue that objective. Whether the obligor must take legal action or appeal to achieve the objective. Whether the obligor must inform the obligee of its progress in meeting the objective. Whether the obligor must step aside if it is unsuccessful and allow, or even assist, the obligee to solve the problem itself. The extent to which a party is entitled to protect its own interests, is required to act in the interests of the other party, or base its actions on its own particular circumstances. These issues are, in part, determined by the type of endeavours clause used but it may be useful to set them out expressly. Specific steps that the obligor is or is not expected to carry out. 25 March Entire Agreement Clauses Purpose: to make clear that the contractual terms governing the relationship are found within the "four corners" of the agreement and not elsewhere Consider: state that the written contract constitutes the entirety of the Agreement between the parties state that neither party is relying on any statement which is not set out in the contract (a non-reliance clause) agree that the only remedies available will be those set out in the contract or a claim in damages for breach of contract explicit exclusion of liability for misrepresentation 25 March Entire Agreement Clauses drafting issues (1) Implied terms Implied terms are not excluded where an entire agreement statement is silent on their inclusion/exclusion (Harrison & others v Shepherd Homes Ltd & others [2011] EWHC 1811; Axa Sun Life Services plc v Campbell Martin Ltd and others [2011] EWCA Civ 133). Clear words to exclude implied terms "extrinsic" to the written agreement : "This instrument contains the entire agreement of the parties [...] and there is no other promise, representation, warranty, usage or course of dealing affecting it"; "this Agreement shall supersede any prior promises, agreements, representations, undertakings or implications"), Terms implied into the contract to give it business efficacy (intrinsic implied terms) were not affected by a general exclusion of implied terms ( Axa Sun Life; Exxonmobil Sales and Supply Corp v Texaco Ltd [2003] EWHC 1964). 25 March Entire Agreement Clauses drafting issues (2) Misrepresentation Only negligent and innocent misrepresentation can be excluded Non-reliance statement works by giving rise to an estoppel preventing the representee from bringing a claim for misrepresentation. exclusion of liability for pre-contractual negotiations and statements in the agreement Subject to the reasonableness test set out in section 11(1) of the Unfair Contract Terms Act 1977 may be liable for the tort of negligent misstatement, but in practice the aggrieved party is likely to prefer to claim for misrepresentation 25 March Entire Agreement Clauses drafting issues (3) Fraud HIH Casualty and General Insurance Ltd and others v Chase Manhattan Bank and others [2003] UKHL 6 "no liability of any nature [] for any information provided" an express carve-out in respect of fraudulent misrepresentation is not necessary. an assumption that the parties will behave honestly: "parties contract with each other in the expectation of honest dealing" 25 March Entire Agreement Clauses drafting issues (4) Rectification An entire agreement clause will not prevent a party from bringing a claim for rectification on the basis that the document does not reflect what was actually agreed. 25 March Entire Agreement Clauses Drafting Issues Problems Can be uncertain and unclear May not exclude representations and remedies for misrepresentation Clear wording needed to exclude implied "conditions" as to contract. If you do decide to exclude implied terms include a separate clause, rather than adding to the entire agreement statement. May be interpreted as an exclusion clause for the purposes of UCTA and be subject to the reasonableness test 25 March Contract Drafting Entire Agreement Contents drafting needs to ensure that: No other documents are incorporated into the contract No oral statements are incorporated into the contract No written or oral terms take effect as separate collateral contract/warranty Neither party was induced to enter the contract by reliance on a statement Incorporates both entire agreement and non reliance provisions Entire agreement provision alone may be insufficient to exclude liability for misrepresentation (even where worded in broad terms) therefore best practice to include non reliance provision Courts more likely to give effect to clause drafted in these terms, recognising the commercial reality that both parties want the certainty of knowing the written agreement constitutes the 'complete bargain' between them 25 March 1. Contract Drafting Entire Agreement Draft Clause ENTIRE AGREEMENT (LONG FORM) 1.1 This agreement and [[IDENTIFY DOCUMENT] OR the documents referred to in it OR the documents annexed to it and initialled by the parties] (together, Transaction Documents)] constitutes the entire agreement between the parties and supersedes and extinguishes all previous drafts, agreements and understandings between them, whether written or oral, relating to its subject matter. include this clause in all entire agreement clauses 1.2 Each party acknowledges that in entering into this agreement it does not rely on, and shall have no remedies in respect of, any representation or warranty (whether made innocently or negligently) that is not set out in this agreement. this combines a non reliance statement with an exclusion of liability for misrepresentation, for representations that have not been incorporated into the final agreement wording relating to remedies is subject to s.3 Misrepresentation Act 1967 and the reasonableness test in s.11(1) of UCTA 1977 the non reliance statement may amount to an exclusion, though not automatically ensures liability for negligent misrepresentation is caught do not add "fraudulently" to the clause would not be valid 1.3 No party shall have any claim for innocent or negligent misrepresentation based upon any statement in this agreement. excludes remedies for innocent and negligent misrepresentation based on statements in the contract (e.g. cannot rescind the contract) restriction of liability for misrepresentation must satisfy UCTA reasonableness test do not add "fraudulently" to the clause would not be valid 25 March 2. Contract Drafting Entire Agreement Draft Clause 2. ENTIRE AGREEMENT (SHORT FORM) 2.1 This agreement constitutes the entire agreement between the parties and supersedes and extinguishes all previous drafts, agreements, arrangements and understandings between them, whether written or oral, relating to its subject matter, include this clause in all entire agreement clauses 2.2 Each party agrees that it shall have no remedies in respect of any representation or warranty (whether made innocently or negligently) that is not set out in this agreement. No party shall have any claim for innocent or negligent misrepresentation based upon any statement in this agreement. excludes all liability for misrepresentation in relation to pre-contractual statements remedies for innocent and negligent misrepresentation for untrue statements in the agreement (cannot rescind contract or claim tortious damages) exclusion of liability for misrepresentation only valid if it satisfies UCTA reasonableness test omits non-reliance statement do not add "fraudulent misrepresentation" to the clause would not be valid. 25 March Changes (Variation) Sample variation clause "No variation of this agreement shall be effective unless it is in writing and signed by the parties (or their authorised representatives)" 25 March Changes (Variation) Are such clauses effective? World Online Telecom Ltd v I-Way [2002] "no addition, amendment or modification of this agreement shall be effective unless it is in writing and signed by and behalf of both parties" Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2013] Can be an oral variation notwithstanding the presence of a clause requiring written amendments, where on the balance of probabilities the evidence establishes such variation was indeed concluded. It is doubtful whether such a clause would protect a party against being bound by a variation if: That party has engaged in conduct that amounts to a clear and unambiguous representation that it agrees to the variation; It has conducted itself so that a reasonable man would have believed it was meant that he should act on it; and The other party to the contract did, in fact, act on the representation A party will be estopped from relying on the original terms of the contract if these three conditions have been fulfilled (Lowe v Lombank Ltd [1960]) 25 March Changes (Variation) Even where a clause is effective, a party could argue there was an oral agreement to amend the clause, followed by an oral agreement to vary the contract In practice it will generally be difficult to prove or evidence oral variations Any benefit? evidentiary and practical benefit encourages the parties to ensure that any variation is set out, documented, and signed off by all parties helps to avoid future dispute between parties about what was and was not agreed to be varied A clause permitting unilateral variation will be subject to the reasonableness test under UCTA 25 March "Material" Breach When deciding whether a breach is material, the courts will take into account the commercial circumstances of the case If the term "material breach" is used in a termination clause, it is advisable to include a definition in the agreement It is not necessarily the same as a repudiatory breach If it is intended that "material" should have a meaning beyond this, the contract should define the term accordingly "One which in all the circumstances is wholly or partly remediable and is or, if not remedied, is likely to become, serious in the wide sense of having a serious effect on the benefit which the innocent party would otherwise derive from performance on the contract in accordance with its terms" National Power plc v United Gas Company Limited [1998] 25 March "Material" Breach Dalkia Utilities Services PLC v Celtech International Limited [2006] When assessing whether a breach is 'material', courts should consider what the breach consists of and the circumstances in which the breach arises Non-payment of three consecutive monthly instalments in a 15 year agreement was a material breach consecutive non-payment, without a mishap, mistake or misunderstanding sums involved were not trivial or minimal A material breach should be defined by the nature of the breach, not by the consequences for the party in breach if the contract is terminated 25 March "Material" Breach Fortman Holdings Ltd v Modem Holdings [2001] Repayment of loan notes in four instalments Contract provided that the principal sum became immediately repayable in full if Modem was in material or persistent breach of any obligation under the loan notes and failing to remedy such breach within 14 days of becoming aware of it First instalment, representing 10% of the total due, was not paid (as Modem believed it had a claim by means of set-off) Modem held by Court of Appeal to be in material breach payment of each instalment represented a separate obligation non-payment of one instalment constituted total non-compliance with that obligation 25 March "Material" Breach Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd [2013] EWHC 4030 (TCC) Factors to consider include: Not only what the breach consisted of, but also the circumstances in which it arose. The contract clauses that indicate the importance of the breach. Whether the consequences of termination were draconian, although the primary focus should be on how the innocent party was affected by the breach. 25 March "Material" Breach Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] House of Lords case stated that detailed semantic and syntactical analysis of words in a commercial contract must yield to business common sense For clarity preferable to define the meaning of 'material', and deal with the possible differences between "material remediable" and "material non-remediable" breaches 25 March Interpretation of Commercial Contracts WIN Seminar Jonathan Eatough - Partner Michelle Ledwidge - Associate DLA Piper Manchester Wednesday 25 March 2015