Update | Contract: Jackson v Dear, what is a consumer

The decision of the High Court in Jackson v Dear and another [2012] EWHC2060 (Ch) as to when terms can be implied into agreements appears to extend the law, so that any term could be implied to correct consequences that a reasonable person would not have understood the contract to mean. The Court of Appeal has corrected this impression. While Mr Jackson had the benefit of an express clause in a shareholders’ agreement for his appointment as a director by the other shareholders (and continuing reappointment), the articles undermined this by providing that the other directors could remove any director. The High Court initially implied a term that the directors were not at liberty to exercise that power under the articles by removing Mr Jackson. The Court of Appeal rejected that approach. Such a term could only be implied by a court if “all reasonable people” would agree that the term’s addition was dictated by “commercial common sense”. If a court can see that there is a “sensible bargain” both when an alleged implied term is added and without it, the court should not impose the implied term. An additional reason underpinning this decision was that the proposed implied term was seen to fetter the discretion of the directors to exercise powers granted to them by the members through the articles. Lewison LJ pointed out that other independent directors are entitled to consider what powers the company’s articles of association confer on them and a putative director will have no knowledge of collateral matters such as a shareholders’ agreement. They should therefore be entitled to take the articles at face value. Hence, in this case if they take up office on the footing that the board can remove a director, that power ought not to be restricted by a term implied into the agreement between the members.

Natural person

The Unfair Terms in Consumer Contracts Regulations 1999 (the ‘regulations’) define the consumer as “a natural person who is acting for purposes outside his trade, business or profession” (regulation 3). A number of cases have addressed the question of what happens if the consumer has collateral purposes for a transaction which are related to his trade, business or profession. In Overy v Paypal (Europe) Limited [2012] EWHC 2659 (QB) the High Court has now added to this debate by its decision that a purchaser of Paypal’s payment services was not a consumer where he had a collateral business purpose for the transaction which was “not negligible or insignificant”. The court reviewed all the authorities and determined that the buyer should be regarded as a consumer if he is acting for purposes outside his trade, business or profession if, but only if, “the purpose is to satisfy his own needs in terms of private consumption”. Where there is a series of purposes, the predominant or primary purpose is not relevant (even if it is satisfaction of his private consumption needs), rather the person is only a consumer if any business purposes are “negligible or insignificant”. The court went on to say that the person cannot take the benefit of the protections under the regulations in circumstances where he is entering into the contract wholly outside his trade, business or profession if he has allowed the other party to have the impression that he is acting for business purposes. The court did not need any detailed consideration as to whether the same analysis applied to the terms “consumer” as it appears in the Unfair Contract Terms Act 1977.

However, as the case brings the meaning of consumer for the purposes of the regulations in line with the approach in EU law, some of the lessons may be applied to UCTA in due course – particularly, the necessity for some element of “private consumption” with “negligible or insignificant” business purposes. The court also noted that the normal business activities of the person and his subjective intention for the transaction are not relevant.

‘Just change’

The Supreme Court has given a significant ruling on piercing of the corporate veil. In VTB Capital Plc v Nutritek International Corp & Others [2013] UKSC 5 the court considered the question of whether a person controlling a company can be liable as if he were a fellow party to the contract along with his company, rather than the person being held liable in its place. VTB acted as a bank in London. It lent $225m, believing it was funding an acquisition. It alleged that it had relied upon representations that the parties which owned the borrower had made as to the value of the businesses controlled by the seller and as to the target assets’ ownership. The allegation was that the owners had used the borrower as a vehicle to enter into borrowing arrangements, using the company structure as a device or façade to conceal that this was a simple borrowing mechanism and not the funding of an acquisition. The bank contended that that entitled it to apply to the court to pierce the corporate veil and to hold the owners and controllers jointly liable with the borrower for breach of the loan agreement.

Arnold J (in the first instance in the High Court) felt that it was inappropriate to lift the corporate veil to enable the claimant to pursue a contractual claim. He determined that the requested remedy – damages for breach of contract by breach of the loan agreement – was inconsistent with the claim, which was that there had been ?a fraud.

The Court of Appeal dismissed an appeal by the bank on the basis that there was no precedent or authority for a court to pierce the veil to treat an individual (as the owner or controller of a company) as a party to the contract alongside his company. It was not sufficient merely to show that the company was involved in wrongdoing. For the corporate veil to be pierced, the wrongdoing must be an independent ?wrong involving the fraudulent or dishonest misuse of the fact that a body is ?a corporate entity.

The Supreme Court looked at the relevant law and agreed that it could not find a power in law to pierce the veil as a matter of principle, simply in order to achieve a just result. Instead the court had to look at the law as it had been developed. The conclusion was that, while the corporate veil can be lifted where the language of a statute expressly or impliedly requires or permits it or to follow earlier decisions, there is no power simply to pierce the veil in order to achieve a just result.

Significant changes

In response to the Directive on Combating Late Payment in Commercial Transactions (2011/7/EU) published in February 2011, the UK brought into force on 16 March 2013 the Late Payment of Commercial Debts Regulations 2013 (SI 2013/395). The most significant changes to the existing laws set out in the Late Payment of Commercial Debts (Interest) Act 1988 are as follows:

(i) interest runs on outstanding payments from 30 days of the latest of the ?invoice, receipt of the goods or ?services and contractual or statutory acceptance of the goods or services. This applies both to public authority and to business purchases. Businesses can contract for interest to run from any other date. However, the parties cannot agree a due date for payment which is more than 60 days after the latest of those three events if to do so would be “grossly unfair”;

(ii) gross unfairness in time extensions is determined by all of the circumstances but is particularly likely to be found where there is a gross deviation from good commercial practice or a conflict with good faith and fair dealing. The nature of the goods or services are particularly relevant to the question, as is whether there is an objective reason for the change from the statutory provisions; and

(iii) the supplier may claim a fixed charge for recovery of the debt (from £40, £70 or £100, depending on the size of the debt) and its reasonable costs of recovery. Any attempts to exclude or limit this right are subject to the reasonableness test set out in UCTA.?

The regulations only apply to contracts made after 16 March 2013. It is worth stating that the parties may still agree a contractual remedy which ousts the statutory interest, provided that it is a “substantial remedy” (as per section 2 of the 1998 Act).

Defective performance

In Kudos Catering (UK) Limited v the Manchester Central Convention Complex Limited [2013] EWCA Civ 38, the Court of Appeal considered an exclusion clause which excluded loss of profits and whether it excluded liability for refusal to perform the contract. It is important to recognise that the case related to a contract between businesses which was not on standard terms but which had been negotiated freely. Both sides alleged repudiatory breach by the other.

The Court of Appeal determined that the exclusion clause applied only to defective performance, not to refused performance. It placed great weight on its supposition that the parties would have set out far more clearly the exclusion clause’s purpose and intended effect had it been its intention to exclude all liability for refusal or inability to perform. This reflects a general reluctance on the part of the courts to find enforceable clauses which remove any remedy for deliberate breaches.

The lesson is clearly that if the parties genuinely intend a significant or unexpected outcome, they are far more likely to escape challenge if the possibility of that outcome is clear on the face of ?the agreement.

The Court of Appeal in John Grimes Partnership Limited v Gubbins [2013] EWCA Civ 37 determined that losses arising from reductions in the market value of a property were not too remote for recovery for breach of contract.

The court found that this was consistent with the remoteness test in Hadley v Baxendale [1854] 9 Exch 341 which includes the ability to recover losses arising naturally from the breach as well as those reasonably in the contemplation of the parties at the time of the contract. An engineer was engaged in September 2006 to design works to enable a road to be adopted by the local authority by March 2007. He did not achieve that outcome.

Mr Gubbins refused to pay the engineer the agreed fees and claimed for the reduction in the value of the land as a result of the fall in the property market after March 2007. The Court of Appeal accepted the claim of Mr Gubbins.