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Contractual certainty

Contractual certainty


Mark Lucas and Alice Hallsworth consider the meaning of the term 'purpose' and the circumstances in which the prescribed mode of acceptance can be waived

Last year brought many surprises and left some of us jaded. As the triggering of article 50 is debated in the Supreme Court, a review of some of the cases on commercial contracts from 2016 is a reminder that the courts, at least, generally do not surprise.

Over the year they once again reminded us to draft commercial contracts with clarity and purpose so that they are complete and their enforceability is not in question, and to ensure that there are clear termination events so that one need not rely on intervening events or force majeure. Purpose of a contract

In Starbev GP Ltd v Interbrew Central European Holdings BV [2016] EWCA Civ 449, the Court of Appeal looked at the meaning of the term ‘purpose’ in an agreement for the sale and purchase of a business. Was a subsequent transaction by the buyer ’structured or undertaken... with the purpose of reducing the payments due to [the seller]’? Does the purpose mean the ‘sole’ purpose, the specified purpose, even if only one of many, or the ‘dominant’ purpose?

The Court of Appeal and the High Court relied on the words of Lord Sumption in Hayes v Willoughby [2013] UKSC 17: ‘A person’s purposes are almost always to some extent mixed, and the ordinary principle is that the relevant purpose is the dominant one.’ On that basis, the Court of Appeal agreed with the High Court that the dominant purpose of the instrument under consideration was indeed to reduce the payments due to the seller, even if there were other, subsidiary purposes.

Of course, the parties would not have had to go to court if the original wording had been more nuanced and specific, for example by using ‘for the sole purpose of’, ‘if the purpose... includes’, or ‘for the dominant and principal purpose of’. Alternatively, one might also prosper by avoiding generally expressed conditions and making the trigger far more clear.Prescribed mode of acceptance

Reveille Independent LLC v Anotech International (UK) Ltd [2016] EWCA Civ 443 was a fascinating examination of the circumstances in which a provision requiring both parties to sign a document in order for the document to be enforceable could be waived.

One of the parties, Reveille, had entered into a legally binding contract on the basis of an amended version of its own ‘deal memo’. The deal memo included a signature requirement on both parties. The other party, Anotech, had altered, signed, and returned the deal memo (thus making a counter-offer), but later argued that there was no contract based on the amended document, because Reveille did not accept the terms as it had never signed it.

Despite the signature requirement, Reveille had of course accepted the terms of the amended contract through its conduct. The court noted that:

  • It was established law that a party can waive a prescribed mode of acceptance if it acquiesces in a different way, so long as that acceptance has not prejudiced the other party;

  • As Anotech was receiving all the benefits of Reveille’s performance of the deal memo, its position had not been prejudiced. The only uncertainty arising from the absence of a signature was the precise date on which the contract was made; andThe parties’ conduct after the date on which the contract was made was relevant in confirming their beliefs that there was in fact a binding contract.

This is an excellent example of the application of existing law and a succinct summary of the case law in this area. It serves to underline that a prescribed mode of acceptance can be waived.

Incomplete contracts

It was held by a majority in the Court of Appeal case of Wells v Devani [2016] EWCA Civ 1106 that where there was a lack of certainty in a contract, a missing term could not be implied if the contract would otherwise be deemed unenforceable due to lack of agreement over essential terms. The facts of the case involved the sale of 14 flats and an estate agent who explained how his commission was calculated but failed to outline the trigger event for when the payment fell due until after the sale was agreed. His terms of business had outlined that the commission was due upon exchange of contracts. The seller refused to pay the commission.

Lord Justice Lewison gave the leading judgment, which has wide implications for all contracts that include commission payments. He relied on Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, which stated that in transactions such as these, it was crucial to identify the event triggering the entitlement to commission, and that unless the parties identified these events, their agreement was incomplete. It was deemed inappropriate for the court to apply a standard of ‘reasonableness’ when deciding the trigger event.

Lewison LJ relied on the Court of Appeal decision in Little v Courage Ltd (1995) 70 P & CR 469, which approved the Privy Council’s decision in Scancarriers A/S v Aotearoa International Ltd [1985] UKPC 26 as authority that there must be a legally binding contract before a court is able to imply any extra terms that become ‘necessary and reasonable to make that bargain work’.

The court noted that in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co [2010] UKSC 14, the Supreme Court demonstrated that formation of contract cases always turn on their facts. Ultimately, the governing criterion as to whether the parties have reached agreement on all essential terms remains ‘the reasonable expectations of honest sensible businessmen’. Doctrine of frustration

Cases of late have infrequently considered the doctrine of frustration. The Court of Appeal had the opportunity to discuss it in the recent case of Armchair Answercall Ltd v People In Mind Ltd [2016] EWCA Civ 1039. The case displays quite how reluctant the courts still are to find that a contract has been frustrated. The court reconfirmed that a ‘supervening outside event which the parties could not reasonably be thought to have foreseen as a real possibility’ was required in order for an event to be frustrated.

The defendant had entered into a service agreement with a third party to provide a new method of service delivery involving the centralisation of a telephone answering service for ten franchisees. Those businesses would maintain their existing clients and could earn commission by recruiting new clients, while t

he defendant would take over the general management of the service (as well as the invoicing of the clients).

A contractor agreement ran for an initial 12-month period between the defendant and the claimant but the transition did not go well: the franchisees did not accept some of the changes. The defendant continued to make payments for several months but then sought to bring the main service agreement to an end, arguing that the contractor agreement had been frustrated when the franchisees had made it clear that they regarded their franchise agreements as void and terminated them, with some setting up rival businesses.

Lord Justice Clarke rejected the defendant’s arguments of frustration and stated that it was impossible to argue that there was no scope to support the claimant once the franchisees had rejected the new method.This case is particularly relevant in these unpredictable times. Cases will continue to be considered on their individual facts, even as businesses start to argue that commercial contracts have been frustrated as a result of Brexit. Greater contractual certainty through express termination rights is much to be preferred to material adverse change or force majeure clauses.

Mark Lucas, pictured, is a partner and Alice Hallsworth a trainee solicitor at Barlow Robbins