Ascertaining Terms
Cases
Bank of Ireland v. Smith.
[1966] IR 646
Kenny J.
The next contention was that the decision of the House of Lords in Hedley Byrne & Co. Ltd. v. Heller (2) had established that a person who relies on an innocent misrepresentation and suffers loss as a result is entitled to damages. The speeches in that case establish that, in some cases, a negligent misrepresentation made to anyone who, to the knowledge of the speaker or writer will rely on it and will be damaged if it is incorrect, gives a right to damages: they do not establish that every innocent misrepresentation gives such a right. I shall be dealing with this decision in a later part of this judgment in connexion with the claim for negligence against the auctioneers.
The next argument was that the statement in the advertisement about the undersowing of the barley was a warranty and not an innocent misrepresentation. Counsel for the defendants said that the statement was not a warranty and that the matter was concluded by the speech of Lord Moulton in Heilbut, Symons & Co. v. Buckleton (3). Lord Moulton, who quoted the much praised remark of Holt C.J., “An affirmation at the time of the sale is a warranty, provided it appear on evidence to be so intended” (a statement which contains at least two ambiguities), went on to say:”It is . . . . of the greatest importance, in my opinion, that this House should maintain in its full integrity the principle that a person is not liable in damages for an innocent misrepresentation, no matter in what way or under what form the attack is made. In the present case the statement was made in answer to an inquiry for information. There is nothing which can by any possibility be taken as evidence of an intention on the part of either or both of the parties that there should be a contractual liability in respect of the accuracy of the statement. It is a representation as to a specific thing and nothing more. The judge, therefore, ought not to have left the question of warranty to the jury, and if, as a matter of prudence, he did so in order to obtain their opinion in case of an appeal, he ought then to have entered judgment for the defendants notwithstanding the verdict.” In an earlier part of his speech he had said:”It is not contested that the only company referred to was the Filisola Rubber and Produce Estates, Limited, or that the reply of Mr. Johnston to the plaintiff’s question over the telephone was a representation by the defendants that the company was a ‘rubber company,’ whatever may be the meaning of that phrase; nor is there any controversy as to the legal nature of that which the plaintiff must establish. He must show a warranty, i.e., a contract collateral to the main contract to take the shares, whereby the defendants in consideration of the plaintiff taking the shares promised that the company itself was a rubber company. The question in issue is whether there was any evidence that such a contract was made between the parties.”
“It is evident, both on principle and on authority, that there may be a contract the consideration for which is the making of some other contract. ‘If you will make such and such a contract I will give you £100,’ is in every sense of the word a complete legal contract. It is collateral to the main contract, but each has an independent existence, and they do not differ in respect of their possessing to the full the character and status of a contract. But such collateral contracts must from their very nature be rare . . . . . Such collateral contracts, the sole effect of which is to vary or add to the terms of the principal contract, are therefore viewed with suspicion by the law.” See also the decision in Gilchester Properties v. Gomm (1), in which an innocent misrepresentation made in connexion with a sale was held not to be a warranty and not to entitle the purchaser to damages.
The modern cases, however, show a welcome tendency to treat a representation made in connexion with a sale as being a warranty, unless the person who made it can show that he was innocent of fault in connexion with it. The rule that an innocent misrepresentation causing loss does not entitle a person to recover damages for its falsity produces injustice in many cases. In Oscar Chess Limited v.Williams (1), Denning L.J., having referred to the famous ruling of Holt C.J., said:”The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice,” and in Dick Bentley Productions Limited v. Smith (Motors) Limited (2) the same Judge said:”It seems to me that if a representation is made in the course of dealings for a contract for the very purpose of inducing the other party to act on it, and it actually induces him to act on it by entering into the contract, that is prima facie ground for inferring that the representation was intended as a warranty. It is not necessary to speak of it as being collateral. Suffice it that the representation was intended to be acted upon and was in fact acted on. But the maker of the representation can rebut this inference if he can show that it really was an innocent misrepresentation, in that he was in fact innocent of fault in making it, and that it would not be reasonable in the circumstances for him to be bound by it.” I have not had the advantage of hearing counsel on these two cases but I believe that they express the true rule.
The statement in the advertisement was a representation and was made with the intention of inducing a purchaser to act on it: the purchaser was induced to enter into the contract by it. The representation was incorrect, but was made innocently and honestly: Mr. Mulcahy was innocent of fault in making it, but it would be unreasonable that his principals should not be bound by it. In this connexion the remarks of Lord Macnaghten which I have quoted are relevant, for it would be against conscience that the vendor in a Court sale should not be bound by a representation made by his agent in connextion with that sale.
It follows, in my opinion, that the purchaser is entitled to recover damages for breach of warranty relating to the undersowing of 40 acres.
I think I should deal with the other ground on which the purchaser based his claim. It was said that an auctioneer acting for a vendor should anticipate that any statements made by him about the property will be relied on by the purchaser and that he, therefore, owes a duty of care to the purchaser and is liable in damages to him if the statement was incorrect and was made carelessly. In my opinion, the decision in Hedley Byrne & Co. v. Heller (1) does not give any support to this startling proposition. It decides that, if a person seeks information from another in circumstances in which a reasonable man would know that his judgment is being relied on, the person giving the information must use reasonable care to ensure that his answer is correct, and if he does not do so, he is liable in damages: but the relationship between the person seeking the information and the person giving it, if not fiduciary or arising out of a contract for consideration, must be, to use the words of Lord Devlin, “equivalent to contract,” before any liability can arise. The basis of the decision in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. is, I think, contained in the speech of Lord Devlin when he said (at p. 528):”I think, therefore, that there is ample authority to justify your Lordships in saying now that the categories of special relationships which may give rise to a duty to take care in word as well as in deed are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which in the words of Lord Shaw in Nocton v. Lord Ashburton (2) are ‘equivalent to contract,’ that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract.” Even if an auctioneer’s fees are paid by the purchaser (and in this case the vendors are liable for them), a contractual relationship between the vendors auctioneers and the purchaser does not exist. The decision of Davitt P. in Securities Trust Limited v. Hugh Moore & Alexander Limited (3) supports this conclusion. Moreover, the purchaser has not proved that Mr. Mulcahy was negligent. He was told by an employee of Mr. Smith that the lands had been undersown, he visited them on many occasions and the error which he made is one which could be made by the most careful of auctioneers. The claim in negligence against the vendors fails.
There has been the usual difference in opinion between the experts about damages. I accept the view that the yield of hay from grass undersown in barley is 2 tons to the acre. The representation complained of refers to “approximately 40 acres” the price of hay in the barn would have been £10 per ton. The purchaser lost the hay crop which he expected and so lost £800. There has also been conflict about the cost of sowing the lands to make them pasture. The agricultural contractor said that the cost would be £15 15s. 6d. an acre, but this includes the use of fertilizer which is not necessary. I will allow £11 an acre for the cost of ploughing, discing, sowing and harrowing. A claim is also made for loss of grazing, but this is not referred to in the letter of the 26th May, 1966, in which the purchaser’s claim is stated. The purchaser will be awarded compensation of £1,240, which will be paid out of the money in Court after the claim of the Bank but before the claim of the defendants.
All this unfortunate litigation has been caused by Mr. Smith who admitted in evidence that he had read the advertisement but said that he did not notice the error. I do not accept his evidence on this. The purchaser will be awarded his costs of this motion which will be taxed on the basis that they were incurred in the trial of an action, but limited to two days, and I will award these costs against Mr. Smith personally. As it may not be possible to recover them from him, the amount of the costs when taxed will be retained in Court on the allocation of the purchase money, and if the purchaser establishes that he cannot recover them from Mr. Smith by the usual methods of legal execution, they will be paid out of the sum retained.
Carey v. Independent Newspapers (Ireland) Ltd.
[2003] IEHC 67 Gilligan J
The law of warranty
Not every statement or representation of fact made by parties in pre-contractual negotiations will form part of any concluded contract: such statements may be made in the interests of extracting the best possible bargain from the give and take nature of negotiations. Further, any potential for contractual effect such statements may have could be negated by the express intentions of the parties. However, there is a tension between such situations and situations where (for one party at least) the contractual incorporation of a matter ventilated in negotiations may be of fundamental importance: circumstances could leave a question mark hovering over whether such matters were in fact mutually understood as having contractual effect. Given the need to define the boundaries of any contractual arrangement, the common law has drawn a distinction between representations having no contractual effect and those having such contractual effect: the textbooks classify the former as “mere representations” and the latter as “warranties” (for example, see McDermott, Contract Law, p.269).
Broadly, “warranty” means a term having contractual effect: more narrowly, it denotes a contractual term any breach of which will give rise to an entitlement to damages.
The manner in which the courts will approach the question of whether a representation constitutes a warranty or a matter having no contractual effect is outlined in Scales v. Scanlan (1843) 6 ILRCL 432 by Lefroy B at p.457 of the report:
“To make a warranty it is not necessary that the word “warrant” or “warranty” should be used. There was a time in law when it was otherwise… but it has long since been well settled, that words of affirmation, affirming a matter of fact, on the faith of
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which the party contracts, are as competent to make a warranty as any strict technical term.”
It is well established that the significance of the representation to the eventual entry into the contract on the part of either or other of the parties is a relevant factor in ascertaining the existence of a warranty: see Murphy v. Hennessey (1897) 31 ILT 404 and Gill v. Cape Contracts Ltd [1985] ILR 49.
In Dick Bentley Productions Ltd v. Harold Smith [1965] 2 All ER 65 at 67, Lord Denning MR stated:
“Looking at the cases once more, as we have done so often, it seems to me that if a representation is made in the course of dealings for a contract at the very purpose of inducing the other party to act on it, and it actually induces him to act on it by entering into the contract, that is a prima facie ground for inferring that the representation was intended as a warranty. It is not necessary to speak of it as being collateral. Suffice it that the representation was intended to be acted on and was in fact acted on. But the maker of the representation can rebut this inference if he can show that it really was an innocent misrepresentation, in that he was in fact innocent of fault in making it, and that it would not be reasonable in the circumstances for him to be bound by it.”
This statement of principle was approved and applied in the employment context by the Queen’s Bench Division of Northern Ireland in Gill v. Cape Contracts Ltd. [1985] ILR 49. In that case, the defendant company required around 40 insulation engineers to complete a contract in the Shetland Islands. The defendant company contacted their representatives in Northern Ireland who passed word among the insulation engineers employed by Harland and Wolff (which included the plaintiffs). The plaintiffs, who were married men in the main, were informed that they would receive a much higher wage than they were earning at Harland and Wolff to compensate for the difficult conditions working in the Shetlands would entail. They were told that the job would last for at least six months: as a result of the assurances they received, the plaintiffs applied for employment with the defendants. When the plaintiffs were informed that they were acceptable, they gave notice to Harland and
Wolff which, irked at losing workers in this way, told the plaintiffs that they would not be employed there again. The opportunity in the Shetlands fell through due to industrial relations problems and the plaintiffs sued for damages. O’Donnell LJ held that the plaintiffs were entitled to damages for breach of a warranty by the defendants as the defendants failed to honour a representation to the plaintiffs forming a collateral contract that if they gave up their existing employment, they would be employed by the defendant company in the Shetlands for approximately six months at wages considerably in excess of their existing earnings. The court again reaffirmed the basic principle that if a representation is made in the knowledge and intention that the representee will act on it, it constitutes a warranty. In Gill, the court characterised the representations made by the defendants as representations which the defendant intended the plaintiff to act upon and upon which the plaintiffs did act. With regard to the role of the representations in the plaintiffs’ decision to switch their employment from Harland and Wolff to the defendant, the court remarked at p.51:
“The plaintiffs were in the main married men, in steady employment. To give up such employment on the mere expectation of obtaining employment at Sullum Voe, albeit with vastly increased wages, would have been foolhardy in the extreme. Both parties were aware of this and it appears to me that negotiations never proceeded on this basis. I do not believe that the plaintiffs would have terminated their employment with Messrs Harland & Wolff, had they been offered no more than a reasonable expectation of obtaining employment.” Accordingly, the court awarded damages for loss of bargain.
Negligent misrepresentation/ misstatement
The nature of misrepresentation required- will silence constitute a representation?
In Stafford v. Mahony, Smith and Palmer [1980] ILRM 53 at 64, Doyle J laid down the criteria for the action of negligent misrepresentation as follows:
“In order to establish the liability for negligent or non-fraudulent misrepresentation giving rise to action there must first of all be a person conveying the information or the representation relied upon; secondly, that there must be a person to whom that information is intended to be conveyed or to whom it might reasonably be expected that the information would be conveyed; thirdly, that the person must act upon such information or representation to his detriment so s to show that he is entitled to damages.”
In principle, the Irish courts have accepted that silence or non-disclosure regarding facts or changes in circumstance not known to the other party can give rise to an obligation to disclose such facts and circumstances and such failure to disclose will constitute a misrepresentation. In Pat O’Donnell and Co v. Truck and Machinery Sales Ltd. [1998] 4 I.R. 191 at 202, O’Flaherty J remarked:
“In general, mere silence will not be held to constitute a misrepresentation. Thus, a person about to enter into a contract is not, in general, under a duty to disclose facts that are known to him but not to the other party. However, in certain circumstances, such a party may be under a duty to disclose such facts. A duty of disclosure will arise, for example, where silence would negate or distort a positive representation that has been made, or where material facts come to the notice of the party which falsify a representation previously made.”
The duty of care and contractual negligent misrepresentation
The substance of the plaintiff’s claim in this respect is that she was induced to enter the contract by the representation made by Mr. Drury that she would be allowed to work from home from lam until the first edition deadline: thereafter, she would work from the Dail.
In Securities Trust Ltd. v. Hugh Moore & Alexander Ltd. [1964] I.R. 417. Davitt P. defined the context in which liability may arise as follows at p. 421:-
“… circumstances may create a relationship between two parties in which, if one seeks information from the other and is given it, that other is under a duty to take reasonable care to ensure that the information given is correct…”
In Esso Petroleum v. Mardon [1976] QB 801, Lord Denning MR formulated the duty of care in the following manner at p. 820:-
“… if a man, who has or professes to have special knowledge or skill, makes a representation by virtuethereof to another – be it advice, information or opinion – with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading information or expresses an erroneous opinion, and thereby induces the other side to enter into a contract with him, he is liable in damages.”
Irish law reflects this line of thinking. In Forshall v. Walsh (unreported, High Court, Shanley J, 18th June, 1997), Shanley J stated at p.64 of the transcript:
“A party seeking damages for negligent misrepresentation must establish that the representative failed to exercise due care in making the representation as a result of which representation the person to whom it was made was induced to enter into the particular agreement and suffered damage in consequence of the inaccurate representation. Closely aligned to the claim of negligent misrepresentation is the wider tort of negligent misstatement. In relation to negligent misstatement the first matter a plaintiff must establish is that the defendant owed him a duty of care.”
The most recent affirmation of these principles in Irish law is King v. Aer Lingus plc [2002] 3 I.R. 481. So far as apposite to the present context, the facts and issues in this case were as follows. In 1989, Aer Lingus transferred its service and maintenance engineering component into a new subsidiary company, a process which involved lengthy and detailed negotiations between management and trade unions. The workforce felt that the only option was a secondment type arrangement where employees would retain their employment relationship with Aer Lingus while working in the subsidiary. As part of the negotiation process, the defendant companywrote similar letters to the plaintiffs, containing statements to the effect that in the event of TEAM (i.e. the subsidiary to which the service and engineering component was transferred) getting into financial difficulties, existing employees would continue to maintain the Aer Lingus fleet at a minimum. The agreement also contained a clause that the company would not cause or permit a lockout during the lifetime of the agreement. The plaintiffs transferred to TEAM, which ran into financial difficulty in 1993 and was eventually sold in 1997. 97% of the workforce transferred to the purchasing company: however, the plaintiffs were among those who instead decided to return to Aer Lingus. The plaintiffs failed to secure the fleet maintenance jobs they were assured they would retain in any circumstance in the 1989 letters and were working on clerical or operative positions on their return. They claimed that they were entitled to do the same kind of work that they had always done and claimed that insofar as Aer Lingus had failed to provide such work, the plaintiffs were entitled to damages for breach of the assurances given to them in 1990.
At p. 48 of the report, Kearns J held:
“The commitment contained in the letter… can only be seen, be it a representation or term of the agreement, as conveying that fleet maintenance work would be available ‘at a minimum’ with the defendant at the point of return for those workers who, having transferred to TEAM in 1990, opted to return to the parent company in 1998 against the backdrop of difficulties described in evidence. For the avoidance of any doubt, however, I find that the assurance contained in Mr. O’Neill’s’ letter of the 30th April, 1990, was both a representation and a term of the agreement and that, insofar as it may be regarded as a representation, the defendants, in making it, were under the duty of care alluded to in Hagen & ors. v. ICI Chemicals and Polymers Limited [2002] IRLR 31. It is proper to record that the defendants did not deny the existence of such a duty in a transfer of undertaking situation, which for all practical purposes existed in this case, but rather sought to argue that the plaintiffs had failed to plead any specific misrepresentations. The duty of care, it seems to me, it self-evident and no more than basic common sense, and a general plea of misrepresentation is sufficient in the circumstances.”
With regard to the question of damages, Kearns J held at p.489 of the report:-
“… the plaintiffs are entitled to be treated as though they had never transferred to TEAM, that they are entitled to all appropriate increments or benefits on the basis that they earned and achieved the same seniority by 1998, as those Aer Lingus employees who did not transfer, that they were, on returning, entitled to such recognition and are now entitled to compensation in lieu thereof if they have suffered financial loss as a consequence of not getting such recognition.”
This case re-affirms two propositions. First, there is a duty of care to avoid making negligent representations or statements in pre-contractual, negotiation stages which have the effect of inducing a plaintiff to act to his/ her detriment. The case took place in a “transfer of undertaking” context, but there is nothing in the language of the judgment to suggest that the duty of care is confined to this situation. Where a new contract and terms of employment are being negotiated with prospective employees, there is a duty of care on the part of the prospective employer to avoid making negligent misrepresentations/ statements which are intended or have the effect of inducing an employee to leave his present position and which results in detriment to the employee. As regards the question of damages, Kearns J treated the employees as though the inducement to transfer to TEAM never took place: this is consistent with the basis on which damages for negligent misrepresentation are awarded in tort.
Is there any duty on the representee to ascertain the truth of the position before he acts on the representation?
The cases are uncertain in the context of claims for misrepresentation where the representation complained of induced a plaintiff to enter into a contract. In several cases, it has been suggested that when the representee is, or in the circumstances should be, informed or better informed of matters relating to the misrepresentation, any carelessness in reliance upon the misrepresentation will not deprive the misrepresentee of a remedy.
In Redgrave v. Hurd (1881) 20 Ch.D 1 at 13, it was held that it was not a “sufficient answer” to an action to rescind the contract between two solicitors for the
purchase of a practice that the representee had the means of discovering and might, with reasonable diligence, have discovered the truth. In Nocton v. Ashburton [1914] AC 932, Lord Dunedin stated at p.962:
“No one is entitled to make a statement which on the face of it conveys a false impression and then excuse himself on the ground that the person to whom he made it had available the means of correction.”
In Strover v. Harrington [1988] Ch. 390, Sir Nicholas Browne-Wilkinson VC stated at p.410-
“… if it is once shown that a misrepresentation has been made, it is no answer for the representor to say that the representee has been negligent and could have found out the true facts if he had acted otherwise. The representee is under no duty of care to the representor to check on the accuracy of the representation. The representor is bound by his representations, however careless the representee may have been.”
At p.596 of Butterworth’s’ The Law of Contract, it is stated that “In Scotland, in contrast, Walker asserts a general rule to the contrary that there is no recission (reduction) if the error was attributable to the negligence of the plaintiff (pursuer). The true state of the law may lie between these positions. Courts engage in what has been described as ‘balancing the equities’.”
However, in the broader tort action of negligent misstatement, the court will enquire whether it was reasonable for the former to rely on the statements of the representor in the circumstances of the case: see Smith v. Eric S Bush [1990] 1 AC 831.
Degree of inducement necessary
The next question is the degree of inducement necessary to satisfy the requirement of inducement. There are four possible scenarios. In the first situation, the significance of the truth to the plaintiff of what turns out to be a misrepresentation may be such that, if the plaintiff representee appreciated the true position, they would not have entered the contract at all (see Horry v. Tate and Lyle Refineries Ltd [1982] 2 Lloyd’s Rep 416 at 422, per Peter Pain J). This obviously meets the standard required for a legally effective inducement. The second situation is where, depending on the circumstances, a representation may be material to the decision of the plaintiff representee to enter into the contract without being decisive: if the representee had known the truth, the representee would still have been willing to conclude the contract, but perhaps on different terms. This will also suffice to meet the requirement of inducement: the best example of this in Irish law is Donnellan v. Dungoyne Ltd. [199511 ILRM 388.
The third situation is where, despite the relevance of the misrepresentation to the eventual contract, if the plaintiff representee had known the truth, the plaintiff would still have concluded the contract. This will not meet the standard of an operative inducement. The fourth possibility lies somewhere between the second and third possibilities: it cannot be said for certain whether the misrepresentation induced the plaintiff to enter the contract or not, but it might be said that the misrepresentation might have been material, if not decisive, to the decision to enter the contract.
In an action for negligent misstatement, the law requires that any loss be caused by the misstatement or misrepresentation. In other words, the effect of the misrepresentation (which constituted the inducement) must be causal in the sense of decisive (see Edgington v. Fitzmaurice (1885) 29 Ch.D 459 at 483, per Bowen LJ). The plaintiff who has been misled by the representation must have relied upon the representation in the sense that but for the misrepresentation, the plaintiff would not have made the contract at all, or at least not in the same terms: in short, the first and second situations of inducement outlined above.
Quantum of damages for negligent misrepresentation
The measure of damages applicable in the tort of deceit (i.e. where a fraudulent misrepresentation has been made) is also applicable to negligent misrepresentation. In Forshall v. Walsh (unreported, High Court, Shanley J, 18th June, 1997), Shanley J adopted the following passage from the judgment of Henchy J in Northern Bank Finance v. Charlton [1979] IR 149 at 199 (which occurred in the context of an action for fraudulent misrepresentation) and held that it was an accurate statement of the measure of damages in actions for negligent misrepresentation also:
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd
[1961] EWCA Civ 7
Diplock LJ
“Every synallagmatic contract contains in it the seeds of the problems In what event will a party be relieved of his undertaking to do that which he has agreed to do but has not yet done? The contract may itself expressly define some of these events, as in the cancellation clause in a charter-party; but, human prescience being limited, it seldom does so exhaustively and often fails to do so at all. In some classes of contracts such as sale of goods, marine insurance, contracts of affreightment evidenced by bills of lading and those between parties to tills of exchange, Parliament has defined by statute some of the events not provided for expressly in individual contracts of that class; but where an event occurs the occurrence of which neither the parties nor Parliament have expressly stated will discharge one of the parties from further performance of his undertakings it is for the court to determine whether the event has this effect or not.
The test whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same things Does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?
This test is applicable whether or not the event occurs as a result of the default of one of the parties to the contract, but the consequences of the event are different in the two cases. Where the event occurs as a result of the default of one party the party in default cannot rely upon it as relieving himself of the performance of any further undertakings on his part and the innocent party, although entitled to, need not treat the event as relieving him of the performance of his own undertakings. This is only a specific application of the fundamental legal and moral rule that a man should not be allowed to take advantage of his own wrong. Where the event occurs as a result of the default of neither party each is relieved of the further performance of his own undertakings and their rights in respect of undertakings previously performed are now regulated by the Law Reform (Frustrated Contracts) Act 1943.
This branch of the common law has reached its present stage by the normal process of historical growth, and the fallacy in Mr. Ashton Roskill’s contention that a different test is applicable when the event occurs as a result of the default of one party from that applicable in cases of frustration where the event occurs as a result of the default of neither party lies, in my view, from a failure to view the cases in their historical context. The problems in what event will a party to a contract be relieved of his undertaking to do that which he has agreed to do but has not yet done? has exercised the English Courts for centuries, probably ever since assumpsit emerged as a form of action distinct from covenant and debt and long before even the earliest cases which we have been invited to examine; but until the rigour of the rule in Paradine v Jane[5] was mitigated in the middle of the last century by the classic judgments of Mr Justice Blackburn in Taylor v Caldwell [6] and Baron Bramwell in Jackson v Union Marine Insurance [7] it was, in general, only events resulting from one party’s failure to perform his contractual obligations that were regarded as capable of relieving the other party from continuing to perform what he had undertaken.
In the earlier cases before the Common Law Procedure Act 1852, the problem tends to be obscured to modern readers by the rules of pleading peculiar to the relevant forms of action-covenant, debt and assumpsit, and the nomenclature adopted in the judgments, which were mainly on demurrer, reflects this. It was early recognised that contractual undertakings were of two different kinds; those collateral to the main purpose of the parties as expressed in the contract and those that were mutually dependent so that the non-performance of an undertaking of this class was an event that excused the other party from the performance of his corresponding undertakings. In the nomenclature of the eighteenth and early nineteenth centuries undertakings of the latter class were called “conditions precedent” and a plaintiff under the rules of pleading had to aver specially in his declaration his performance or readiness and willingness to perform all those contractual undertakings on his part that constituted conditions precedent to the defendant’s undertaking for non-performance of which the action was brought. In the earliest cases such as Pordage v Cole[8] and Thorpe v Thorpe[9] the question whether an undertaking was a condition precedent appears to have turned upon the verbal niceties of the particular phrases used in the written contract and it was not until 1773 that Lord Mansfield, in the case, which is a legal landmark, Boone v Eyre,[10] swept away these arid technicalities. “The distinction”, he said,
“is very clear. Where mutual covenants go to the whole of the consideration on both sides they are mutual conditions, the one precedent to the other. But where they go only to a part, where a breach may be paid for in damages, there the defendant has a remedy on his covenant and shall not plead it as a condition precedent”.
This too was a judgment on demurrer but the principle was the same when the substance of the matter was in issue. Other phrases expressing the same idea were used by other judges in the cases which have already been cited by Lord Justice Sellers, and I would only add to his comments upon them that when it is borne in mind that until the latter half of the nineteenth century the only event that could be relied upon to excuse performance by one party of his undertakings was a default by the other party no importance can be attached to the fact that in occasional cases, and there may be others besides Freeman v. Taylor (1831) 8 Bingham page 124 , the Court has referred to the object or purpose of the party not in default rather than to the object or purpose of the contract, for the relevant object or purpose of the party not in default is that upon which there has been a consensus ad idem of both parties as expressed in the words which they have used in their contract construed in the light of the surrounding circumstances.
The fact that the emphasis in the earlier cases was upon the breach by one party to the contract of his contractual undertakings, for this was the commonest circumstance in which the question arose, tended to obscure the fact that it was really the event resulting from the breach which relieved the other party of further performance of his obligations; but the principle was applied early in the nineteenth century and without analysis to cases where the event relied upon was one brought about by a party to a contract before the time for performance of his undertakings arose but which would make it impossible to perform those obligations when the time to do so did arrive: for example, Short v Stone;[11] Ford v Tiley;[12] Bowdell v Parsons.[13] It was not, however, until Jackson v. Union Marine Insurance (1874) 10 Common Pleas page 125, that it was recognised that it was the happening of the event and not the fact that the event was the result of a breach by one party of his contractual obligations that relieved the other party from further performance of his obligations. “There are the cases”, said Baron Bramwell (at page 147. of the report in 10 Common Pleas)
“which hold that, where the shipowner has not merely broken his contract, but has so broken it that the condition precedent is not performed, the charterer is discharged. Why? Not merely because the contract is broken. If it is not a condition precedent, what matters it whether it is unperformed with or without excuse? Not arriving with due diligence or at a day named is the subject of a cross-action only. But not arriving in time for the voyage contemplated, but at such a time that it is frustrated is not only a breach of contract, but discharges the charterer. And so it should though he has such an excuse that no action lies”.
Once it is appreciated that it is the event and not the fact that the event is a result of a breach of contract which relieves the party not in default of further performance of his obligations two consequences follow. (1) The test whether the event relied upon has this consequence is the same whether the event is the result of the other party’s breach of contract or not, as Mr. Justice Devlin pointed out in Universal Cargo Carriers Corporation v Citati.[14] (2) The question whether an event which is the result of the other party’s breach of contract has this consequence cannot be answered by treating all contractual undertakings as falling into one of two separate categories: “conditions” the breach of which gives rise to an event which relieves the party not in default of further performance of his obligations, and “warranties” the breach of which does not give rise to such an event.
Lawyers tend to speak of this classification as if it were comprehensive, partly for the historical reasons which I have already mentioned and partly “because Parliament itself adopted it in the Sale of Goods Act, 1893, as respects a number of implied terms in contracts for the sale of goods and has in that Act used the expressions “condition” and “warranty” in that meaning. But it is by no means true of contractual undertakings in general at common law.
No doubt there are many simple contractual undertakings, sometimes express but more often because of their very simplicity (“It goes without saying”) to be implied, of which it can be predicated that every breach of such an undertaking must give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract. And such a stipulation, unless the parties have agreed that breach of it shall not entitle the non-defaulting party to treat the contract as repudiated, is a “condition”. So too there may be other simple contractual undertakings of which it can be predicated that no breach can give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and such a stipulation, unless the parties have agreed that breach of it shall entitle the non-defaulting party to treat the contract as repudiated, is a “warranty”.
There are, however, many contractual undertakings of a. more complex character which cannot be categorised as being “conditions” or “warranties” if the late nineteenth century meaning adopted in the Sale of Goods Act, 1893, and used by Lord Justice Bowen in Bensen v Taylor Sons & Co[15] be given to those terms. Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the • event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a “condition” or a “warranty”. For instance, to take Baron Bramwell’s example in Jackson v. Union Marine Insurance itself (at page 142), breach of an undertaking by a shipowner to sail with all possible dispatch to a named port does not necessarily relieve the charterer of further performance of his obligation under the charter-party, but if the breach is so prolonged that the contemplated voyage is frustrated it does have this effect.
In 1874 when the doctrine of frustration was being foaled by “impossibility of performance” out of “condition precedent” it is not surprising that the explanation given by Baron Bramwell should give full credit to the dam by suggesting that in addition to the express warranty to sail with all possible dispatch there was an implied condition precedent that the ship should arrive at the named port in time for the voyage contemplated. In Jackson v Union Marine Insurance there was no breach of the express warranty; but if there had been, to engraft the implied condition upon the express warranty would have been merely a more complicated way of saying that a breach of a shipowner’s undertaking to sail with all possible dispatch may, but will not necessarily, give rise to an event which will deprive the charterer of substantially the whole benefit which it was intended that he should obtain from the charter. Now that the doctrine of frustration has matured and flourished for nearly a century and the old technicalities of pleading “conditions precedent” are more than a century out of date, it does not clarify, but on the contrary obscures, the modern principle of law where such an event has occurred as a result of a breach of an express stipulation in a contract, to continue to add the now unnecessary colophon “therefore it was an implied condition of the contract that a particular kind of breach of an express warranty should not occur.” The common law evolves not merely by breeding new principles but also, when they are fully grown, by burying their ancestors.
As my “brethren have already pointed out, the shipowner’s undertaking to tender a seaworthy ship has, as a result of numerous decisions as to what can amount to “unseaworthiness”, become one of the most complex of contractual undertakings. It embraces obligations with respect to every part of the hull and machinery, stores and equipment and the crew itself. It can be broken by the presence of trivial defects easily and rapidly remediable as well as by defects which must inevitably result in a total loss of the vessel.
Consequently the problem in this case is, in my view, neither solved nor soluble by debating whether the shipowner’s express or implied undertaking to tender a seaworthy ship is a “condition” or a “warranty”. It is like so many other contractual terms an undertaking one breach of which may give rise to an event which relieves the charterer of further performance of his undertakings if he so elects and another breach of which may not give rise to such an event but entitle him only to monetary compensation in the form of damages. It is, with all deference to Mr. Ashton Roskill’s skilful argument, by no means surprising that among the many hundreds of previous cases about the shipowner’s undertaking to deliver a seaworthy ship there is none where it was found profitable to discuss in the judgments the question whether that undertaking is a “condition” or a “warranty”; for the true answer, as I have already indicated, is that it is neither, but one of that large class of contractual undertakings one breach of which may have the same effect as that ascribed to a breach of “condition” under the Sale of Goods Act and a different breach of which may have only the same effect as that ascribed to a breach of “warranty” under that Act. The cases referred to by Lord Justice Sellers illustrate this and I would only add that in the dictum which he cites from Kish v. Taylor (1912 Appeal Cases page 604, at page 617) it seems to me from the sentence which immediately follows it as from the actual decision in the case and the whole tenor of Lord Atkinson’s speech itself that the word “will” was intended to be “may”.
What the learned judge had to do in the present case as in any other case where one party to a contract relies upon a breach by the other party as giving him a right to elect to rescind the contract, was to look at the events which had occurred as a result of the breach at the time at which the charterers purported to rescind the charter-party and to decide whether the occurrence of those events deprived the charterers of substantially the whole benefit which it was the intention of the parties as expressed in the charter-party that the charterers should obtain from the further performance of their own contractual undertakings.
One turns therefore to the contract, the Baltime 1939 Charter, of which Lord Justice Sellers has already cited the relevant terms. Clause 13, the “due diligence” clause, which exempts the shipowners from responsibility for delay or loss or damage to goods on board due to unseaworthiness unless such delay or loss or damage has been caused by want of due diligence of the owners in making the vessel seaworthy and fitted for the voyage, is in itself sufficient to show that the mere occurrence of the events that the vessel was in some respect unseaworthy when tendered or that such unseaworthiness had caused some delay in performance of the charter-party would not deprive the charterer of the whole benefit which it was the intention of the parties he should obtain from the performance of his obligations under the contract – for he undertakes to continue to perform his obligations notwithstanding the occurrence of such events if they fall short of frustration of the contract and even deprives himself of any remedy in damages unless such events are the consequence of want of due diligence on the part of the shipowner.
The question which the learned judge had to ask himself was, as he rightly decided, whether or not at the date when the charterers purported to rescind the contract, namely 6th June, 1957, or when the shipowners purported to accept such rescission, namely 8th August, 1957, the delay which had already occurred as a result of the incompetence of the engine room staff, and the delay which was likely to occur in repairing the engines of the vessel and the conduct of the shipowners “by that date in taking steps to remedy these two matters, were, when taken together, such as to deprive the charterers of substantially the whole benefit which it was the intention of the parties they should obtain from further use of the vessel under the charter-party.
In my view, in his judgment – on which I would not seek to improve – the learned judge took into account and gave due weight to all the relevant considerations and arrived at the right answer for the right reasons.”
Attorney General of Belize v Belize Telecom Ltd
2009] UKPC 10
Lord Hoffmann’s
“ 16. Before discussing in greater detail the reasoning of the Court of Appeal, the Board will make some general observations about the process of implication. The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913. It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument.
17. The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.
18. In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.
19. The proposition that the implication of a term is an exercise in the construction of the instrument as a whole is not only a matter of logic (since a court has no power to alter what the instrument means) but also well supported by authority. In Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601, 609 Lord Pearson, with whom Lord Guest and Lord Diplock agreed, said:
“[T]he court does not make a contract for the parties. The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be. The court’s function is to interpret and apply the contract which the parties have made for themselves. If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable. An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves.”
20. More recently, in Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459, Lord Steyn said:
“If a term is to be implied, it could only be a term implied from the language of [the instrument] read in its commercial setting.”
21. It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson’s speech that this question can be reformulated in various ways which a court may find helpful in providing an answer – the implied term must “go without saying”, it must be “necessary to give business efficacy to the contract” and so on – but these are not in the Board’s opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?
22. There are dangers in treating these alternative formulations of the question as if they had a life of their own. Take, for example, the question of whether the implied term is “necessary to give business efficacy” to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word “business”, is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. That was the basis upon which Equitable Life Assurance Society v Hyman [2002] 1 AC 408 was decided. The second, conveyed by the use of the word “necessary”, is that it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.
23. The danger lies, however, in detaching the phrase “necessary to give business efficacy” from the basic process of construction of the instrument. It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. Lord Steyn made this point in the Equitable Life case (at p 459) when he said that in that case an implication was necessary “to give effect to the reasonable expectations of the parties.”
24. The same point had been made many years earlier by Bowen LJ in his well known formulation in The Moorcock (1889) 14 PD 64, 68:
“In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men”
25. Likewise, the requirement that the implied term must “go without saying” is no more than another way of saying that, although the instrument does not expressly say so, that is what a reasonable person would understand it to mean. Any attempt to make more of this requirement runs the risk of diverting attention from the objectivity which informs the whole process of construction into speculation about what the actual parties to the contract or authors (or supposed authors) of the instrument would have thought about the proposed implication. The imaginary conversation with an officious bystander in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227 is celebrated throughout the common law world. Like the phrase “necessary to give business efficacy”, it vividly emphasises the need for the court to be satisfied that the proposed implication spells out what the contact would reasonably be understood to mean. But it carries the danger of barren argument over how the actual parties would have reacted to the proposed amendment. That, in the Board’s opinion, is irrelevant. Likewise, it is not necessary that the need for the implied term should be obvious in the sense of being immediately apparent, even upon a superficial consideration of the terms of the contract and the relevant background. The need for an implied term not infrequently arises when the draftsman of a complicated instrument has omitted to make express provision for some event because he has not fully thought through the contingencies which might arise, even though it is obvious after a careful consideration of the express terms and the background that only one answer would be consistent with the rest of the instrument. In such circumstances, the fact that the actual parties might have said to the officious bystander “Could you please explain that again?” does not matter.
26. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 282-283 Lord Simon of Glaisdale, giving the advice of the majority of the Board, said that it was “not… necessary to review exhaustively the authorities on the implication of a term in a contract” but that the following conditions (“which may overlap”) must be satisfied:
“(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’ (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”.
27. The Board considers that this list is best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so. The Board has already discussed the significance of “necessary to give business efficacy” and “goes without saying”. As for the other formulations, the fact that the proposed implied term would be inequitable or unreasonable, or contradict what the parties have expressly said, or is incapable of clear expression, are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant.
28. The Board therefore turns to consider the question raised by the articles of association. Two things are immediately apparent. The first is that the board has been constructed so that its membership will reflect the interests of the various participants in the company: the political interest of the Government, represented through its special share; the economic interest (if any) of the Government, represented by its holding of C shares; the economic interests of the ordinary B and C shareholders. The second is that the powers which the articles confer upon the Government (or its successor as special shareholder acting upon its written instructions: see article 11(A)) are carefully graduated according to its economic interest in the company at the relevant time. Thus, the power to block certain board resolutions in article 113 is exercisable “at any time at which the holder of the special share is the holder of C Ordinary shares amounting to 25% or more of the issued ordinary share capital”. The power to block certain shareholder resolutions in article 8 is likewise exercisable “at any time” when the special shareholder has a 25% or more holding. And the power to appoint and remove special C directors is exercisable “at any time” when the special shareholder has a 37.5% or more holding.
29. In the case of board and shareholder resolutions, the relevant time for determining whether a blocking power exists is of course the time at which the resolution is proposed. In the case of appointments to the board, the draftsman appears to have assumed that it would be the time at which the appointment was made or the director was to be removed. In some cases, that would be sufficient to ensure that the board at any given time reflected the appropriate shareholder interests. For example, articles 90(B) and (C) give a majority of B shareholders the right to appoint and remove two directors. This is enough to ensure that the B directors will at any given time represent the interests of a majority of the B shareholders. If the majority lose confidence in their directors, or if there is a transfer of B shares which results in a different majority, it will always be open to the majority to remove the directors in office and appoint others. The same is true of the ordinary C directors appointed and removable by a majority of C shareholders under articles 90(D)(i) and 90(E).
30. The situation with which the articles do not expressly deal is where a change in shareholding results in the board no longer reflecting the appropriate shareholder interests, but without enabling this to be corrected by exercise of the power to remove directors. Assume, for example, that the special shareholder exercises its power under article 11(E) to require redemption of the special share. What then happens to the Government Appointed Directors appointed under article 88(A)? They cannot be removed from office because there is no longer a special shareholder who has power to do so. Does that mean that they remain in office indefinitely? The Board considers that, if one considers the role of the Government Appointed Directors and the policy of giving the Government the power to require redemption of the special share, namely, to enable it to relinquish its influence over the conduct of the company’s business, the articles cannot reasonably mean that the Government Appointed Directors should remain in office after the special share has ceased to exist. They must be read as providing by implication that when the special share goes, the Government Appointed Directors go with it. In the opinion of the Board it is no answer to say that the special shareholder could have thought of the problem in advance and removed the Government Appointed Directors before redemption. No doubt he could, but the question is what the articles mean in the situation in which he has not done so. Nor is it relevant that the articles could be amended. They must be construed as they stand.
31. If, as the Board thinks, it would plainly be necessary to imply such a term in relation to the Government Appointed Directors, it must follow that upon the redemption of the special share, the special C directors will also cease to hold office. They are also there by virtue of the special share and when there is no longer a special share, there will again be no one who has power under the articles to remove them. That means that the whole basis upon which they are distinguished from ordinary C directors appointed by the majority of the C shareholders under article 90(D)(i) has ceased to exist. It is true that article 90(E) says that C directors shall hold office “subject only to article 112”, but that cannot in the Board’s opinion be construed as contradicting the proposed implied term, to which the draftsman plainly did not address his mind. In any case, the words “subject only” cannot be read literally because, for example, the provisions for retirement by rotation in article 94 are expressly applied to C directors (other than special C directors.)
32. If implication is necessary to prevent what would otherwise be absurd consequences following from redemption of the special share, the Board considers that there is no difficulty about applying the same principle to the case in which the special shareholder continues to exist but no longer has the 37.5% holding which would entitle him to appoint and remove special C directors. In such a case too, the implication is required to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles.
33. The Court of Appeal felt unable on the authorities to read the articles as having such a meaning. Morrison JA referred to Holmes v Keys [1959] Ch 199, 215, where Jenkins LJ said:
“I think that the articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to that result is admissible on the language of the articles, in preference to a result which would or might prove unworkable.”
34. Both Carey JA and Morrison JA thought that the meaning which the Chief Justice had adopted was not “admissible on the language of the articles” (“requires remarkable mental gymnastics”, said Carey JA). It should be noted, however, that Holmes v Keys was not a case about an implied term. It was a dispute over the meaning of a particular phrase in the articles, namely, whether, in an article which required a director to acquire qualifying shares “within two months after election”, the date of “election” meant the date of the general meeting or the date on which the result of the election was declared. In a case such as that, in which it is argued that language should be given a certain meaning, it is usually essential (unless there has been an obvious mistake) that the language should, according to ordinary conventional usage, be capable of bearing that meaning. In the case of an implied term, however, the question is not what any particular language in the instrument means but whether, without it having been expressly stated, that is the meaning of the instrument.
35. The other case to which Morrison JA referred was Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693. This was a case about the extent of the background which is admissible in construing articles of association. The company was set up to acquire and manage a property divided into flats which also included “amenity areas” (tennis courts, swimming pool, gardens). It was argued that there should be implied into the articles of association an obligation on the part of each flat owner/member to contribute to the expenses of maintaining the amenity areas. The implication was said to be derived from the circumstances in which the property was acquired and the terms of the conveyance to the company.
36. The decision of the Court of Appeal was that these background facts were not admissible to construe the meaning of the articles. Without them, there was not the slightest basis for implying such an obligation. Because the articles are required to be registered, addressed to anyone who wishes to inspect them, the admissible background for the purposes of construction must be limited to what any reader would reasonably be supposed to know. It cannot include extrinsic facts which were known only to some of the people involved in the formation of the company.
37. The Board does not consider that this principle has any application in the present case. The implication as to the composition of the board is not based upon extrinsic evidence of which only a limited number of people would have known but upon the scheme of the articles themselves and, to a very limited extent, such background as was apparent from the memorandum of association and everyone in Belize would have known, namely that telecommunications had been a state monopoly and that the company was part of a scheme of privatisation.
38. For these reasons the Board will humbly advise Her Majesty that the appeal should be allowed with costs before the Board and in the Court of Appeal and the declarations made by the Chief Justice restored.”
Southern Foundries (1926) Ltd v Shirlaw
[1940] AC 701
MacKinnon LJ Court of Appeal
“I recognize that the right or duty of a Court to find the existence of an implied term or implied terms in a written contract is a matter to be exercised with care; and a Court is too often invited to do so upon vague and uncertain grounds. Too often also such an invitation is backed by the citation of a sentence or two from the judgment of Bowen LJ in The Moorcock.[2] They are sentences from an extempore judgment as sound and sensible as all the utterances of that great judge; but I fancy that he would have been rather surprised if he could have foreseen that these general remarks of his would come to be a favourite citation of a supposed principle of law, and I even think that he might sympathize with the occasional impatience of his successors when The Moorcock is so often flushed for them in that guise.
For my part, I think that there is a test that may be at least as useful as such generalities. If I may quote from an essay which I wrote some years ago, I then said: “Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!'”
At least it is true, I think, that, if a term were never implied by a judge unless it could pass that test, he could not be held to be wrong.
Applying that in this case, I ask myself what would have happened if, when this contract had been drafted and was awaiting signature, a third party reading the draft had said:
“Would it not be well to put in a provision that the company shall not exercise or create any right to remove Mr Shirlaw from his directorship, and he have no right to resign his directorship?”
I am satisfied that they would both have assented to this as implied already, and agreed to its expression for greater certainty. Mr. Shirlaw would certainly have said:
“Of course that is implied. If I am to be bound by this agreement, including the barring of my activities under clauses 11 and 12 when I cease to be managing director, obviously the company must not have, or create, the power to remove me at any moment from the Board and so disqualify me from that post”
… and the company, which must be presumed to have been then desirous of binding him to serve them as managing director for ten years, would, I think, with equal alacrity have said:
“Of course that is implied. If you were tempted by some offer elsewhere, it would be monstrous for you to be able to resign your directorship and, by so disqualifying yourself from being managing director, put an end to this agreement.”
In the result, I think that the learned judge came to a right decision and this appeal fails.”
Goddard LJ concurred with MacKinnon LJ
House of Lords
Lord Atkin
“My Lords, the question in this case is whether the appellant company have broken their contract with the respondent made in December, 1933, that he should hold the office of managing director for ten years. The breach alleged is that under the articles adopted by the company, after the agreement, the respondent was removed from the position of director of the company by the Federated Foundries, Ld. There can be no doubt that the office of managing director could only be held by a director, and that upon the holder of the office of managing director ceasing for any cause to be a director the office would be ipso facto vacated. Under the articles in existence at the date of the agreement, by art. 89 the office of a director could be vacated on the happening of six various events, bankruptcy, lunacy, etc., including the giving by the director of one month’s notice to resign; while by art. 105 the company by extraordinary resolution could remove him from his office. I feel no doubt that the true construction of the agreement is that the company agreed to employ the respondent and the respondent agreed to serve the company as managing director for the period of ten years. It was by the constitution of the company a condition of holding such office that the holder should continue to be a director: and such continuance depended upon the terms of the articles regulating the office of director. It was not disputed, and I take it to be clear law, that the company’s articles so regulating the office of director could be altered from time to time: and therefore the continuance in office of the managing director under the agreement depended upon the provisions of the articles from time to time. Thus the contract of employment for the term of ten years was dependent upon the managing director continuing to be a director. This continuance of the directorship was a concurrent condition. The arrangement between the parties appears to me to be exactly described by the words of Cockburn C.J. in Stirling v Maitland:[4] “If a party enters into an arrangement which can only take effect by the continuance of an existing state of circumstances”; and in such a state of things the Lord Chief Justice said: “I look on the law to be that …. there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative.” That proposition in my opinion is well established law. Personally I should not so much base the law on an implied term, as on a positive rule of the law of contract that conduct of either promiser or promisee which can be said to amount to himself “of his own motion” bringing about the impossibility of performance is in itself a breach. If A promises to marry B and before performance of that contract marries C, A is not sued for breach of an implied contract not to marry anyone else, but for breach of his contract to marry B. I think it follows that if either the company of its own motion removed the respondent from the office of director under art. 105, or if the respondent caused his office of director to be vacated by giving one month’s notice of resignation under art. 89, either of them would have committed a breach of the agreement in question. As Kennedy L.J. said in Measures Bros Ltd v Measures[5] in discussing this very question of the effect upon a contract of employment as managing director of the managing director resigning his office of director: “It is elementary justice that one of the parties to a contract shall not get rid of his responsibilities thereunder by disabling the other contractor from fulfilling his part of the bargain.” I cannot agree with the view of the contract taken by the Master of the Rolls that the parties must be taken to have agreed that the term, though expressed to be for ten years, was subject to be determined by any cause, including the will of either party expressed in accordance with the articles; and that such determination therefore could not constitute a breach. I should have construed the agreement as I do on the first two clauses alone, but the remaining clauses and particularly those dealing with the mutual obligations between the respondent and Sir Berkeley Sheffield in this tripartite agreement in my view strongly reinforce that construction. I agree, therefore, with the trial judge, with the majority of the Court of Appeal, and with I believe all your Lordships in thinking that if during the term the respondent had given a notice of resignation, or if the company had exercised its power of removal under art. 105, either would have committed a breach of the contract.
The question that remains is whether if the removal by the company would have been a breach by the company, the removal under the altered articles by the Federated Foundries, Ld., was a breach by the company. In this matter the Master of the Rolls agreed with the other members of the Court of Appeal; but all the members of this House are not agreed. My Lords, it is obvious that the question is not as simple as in the case just considered of the removal being by the Southern Foundries, Ld.; but I venture respectfully to think that the result must be the same. The office of director involves contractual arrangements between the director and the company. If the company removes the director it puts an end to the contract: and indeed the contract relations cannot be determined unless by events stipulated for in the contract, by operation of law, or by the will of the two parties. The altered art. 8 which gives power to the Federated Foundries, Ld., to remove from office any director of the company is, when analysed, a power to the Federated to terminate a contract between the Southern and its director. It is an act which binds the Southern as against its promisee; and if a wrong to the respondent if done by the Southern it surely must be a wrong to the respondent if done by the Federated who derive their power to do the act from the Southern only. If a landlord gives power to a tenant to discharge the landlord’s servants, gardener or gamekeeper; it is the master, the landlord, who is bound by the consequences of that discharge whether rightful, or whether wrongful, and so involving the payment of damages. If a man buys goods and contracts with a sub-purchaser to take delivery direct from his vendor, and contracts with his vendor to give delivery to the sub-purchasers, the latter’s recourse for breach of contract to deliver is against his own intermediate seller and not against the head vendor. If then the Federated of their own motion determine the concurrent condition it appears to me that necessarily they cause the Southern to break the contract. I can quite see that the position may be altered where the Federated remove a director from office for such reasons as those contained in the old art. 89 or in art. 72 of Table A, which was not incorporated in the new articles. In such a case it may well be said that the company is not acting of its own motion, but is reasonably moved to act by the acts or omissions of the director. But in the present case no such question arises. The action of the Federated was, I think I may say avowedly, taken for the sole purpose of bringing the managing director’s agreement to an end. I do not think that it could be said that the Southern committed any breach by adopting the new articles. But when the Federated acted upon the power conferred upon them in the new articles they bound the Southern if they acted in such a way that action by the Southern on the same articles would be a breach. It is not a question of agency but of acting under powers conferred by contract to interfere with a contract between the party granting the power and a third person. For these reasons I am of opinion that this appeal should be dismissed with costs.
”
Lord Wright
“ In my opinion the appellant company would beyond question have been guilty of a breach of contract sounding in damages if without just cause they had removed him from his directorship and thus terminated his tenure of office, as was done in March, 1937, in the circumstances which will appear later. The case would have been simply a case of wrongful dismissal of a servant or employee. The servant or employee is in such a case effectively dismissed. His employment is terminated but the termination is wrongful, and the employer has to answer in damages. The employers here are the appellant company, but for this purpose they are like any other employers. The articles may give them the power to dismiss, but the power to dismiss is to be distinguished from the right to dismiss. I do not think that in this particular case the fact that the office includes that of a director, affects this conclusion. It is said that it is impossible to accept that a company would guarantee to a director a ten years’ tenure of his office. But the answer is that they have actually done so, according to the terms of the contract, though subject to the express exceptions of the contract and to the general exceptions which the law reads into the contract. The word guarantee is inappropriate. No one, individual or company, can be compelled against his or their will, to employ a man, though, if the contract is broken, damages will have to be paid. When the respondent was appointed managing director for ten years, the contract necessarily meant that the appellant company would not without good cause remove him from his directorship during that period, because if they did so they would ipso facto terminate his employment. There is no question of implying a term that the appellant company would not remove the respondent from his directorship. He could not serve for the agreed term of ten years unless the appellant company continued him in his office. As Lord Blackburn said in Mackay v Dick:[7] “where in a written contract it appears that both parties have agreed that something shall be done” [as here that the respondent shall hold office for ten years] “which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing.” The agreement involved for its fulfilment the concurrence of the appellants and the respondent and imported that each should do its part in carrying it out. ”
Equitable Life Assurance Society v Hyman
[2000] UKHL 39
Lord Steyn
“ It is necessary to distinguish between the processes of interpretation and implication. The purpose of interpretation is to assign to the language of the text the most appropriate meaning which the words can legitimately bear. The language of article 65(1) contains no relevant express restriction on the powers of the directors. It is impossible to assign to the language of article 65(1) by construction a restriction precluding the directors from overriding GARs. To this extent I would uphold the submissions made on behalf of the Society. The critical question is whether a relevant restriction may be implied into article 65(1). It is certainly not a case in which a term can be implied by law in the sense of incidents impliedly annexed to particular forms of contracts. Such standardised implied terms operate as general default rules: see Scally v Southern Health and Social Services Board [1992] 1 AC 294. If a term is to be implied, it could only be a term implied from the language of article 65 read in its particular commercial setting. Such implied terms operate as ad hoc gap fillers. In Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, 137 Lord Wright explained this distinction as follows:
“The expression ‘implied term’ is used in different senses. Sometimes it denotes some term which does not depend on the actual intention of the parties but on a rule of law, such as the terms, warranties or conditions which, if not expressly excluded, the law imports, as for instance under the Sale of Goods Act and the Marine Insurance Act. . . . But a case like the present is different because what it is sought to imply is based on an intention imputed to the parties from their actual circumstances.”
It is only an individualised term of the second kind which can arguably arise in the present case. Such a term may be imputed to parties: it is not critically dependent on proof of an actual intention of the parties. The process “is one of construction of the agreement as a whole in its commercial setting”: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, 212E, per Lord Hoffmann. This principle is sparingly and cautiously used and may never be employed to imply a term in conflict with the express terms of the text. The legal test for the implication of such a term is a standard of strict necessity. This is how I must approach the question whether a term is to be implied into article 65(1) which precludes the directors from adopting a principle which has the effect of overriding or undermining the GARs.
The enquiry is entirely constructional in nature: proceeding from the express terms of article 65, viewed against its objective setting, the question is whether the implication is strictly necessary. My Lords, as counsel for the GAR policyholders observed, final bonuses are not bounty. They are a significant part of the consideration for the premiums paid. And the directors’ discretions as to the amount and distribution of bonuses are conferred for the benefit of policyholders. In this context the self-evident commercial object of the inclusion of guaranteed rates in the policy is to protect the policyholder against a fall in market annuity rates by ensuring that if the fall occurs he will be better off than he would have been with market rates. The choice is given to the GAR policyholder and not to the Society. It cannot be seriously doubted that the provision for guaranteed annuity rates was a good selling point in the marketing by the Society of the GAR policies. It is also obvious that it would have been a significant attraction for purchasers of GAR policies. The Society points out that no special charge was made for the inclusion in the policy of GAR provisions. So be it. This factor does not alter the reasonable expectations of the parties. The supposition of the parties must be presumed to have been that the directors would not exercise their discretion in conflict with contractual rights. These are the circumstances in which the directors of the Society resolved upon a differential policy which was designed to deprive the relevant guarantees of any substantial value. In my judgment an implication precluding the use of the directors’ discretion in this way is strictly necessary. The implication is essential to give effect to the reasonable expectations of the parties. The stringent test applicable to the implication of terms is satisfied.
In substantial agreement with Lord Woolf MR I would hold that the directors were not entitled to adopt a principle of making the final bonuses of GAR policyholders dependent on how they exercised their rights under the policy. In adopting the principle of a differential policy in respect of GAR policyholders the directors acted in breach of article 65(1).”
Baird Textile Holdings Ltd v Marks & Spencer Plc
[2001] EWCA Civ 274
Vice Chancelloer
In his application of those principles to this case the judge said:
“13. On this head of the claim I am satisfied that Baird’s case in favour of an implied contract cannot succeed. In the first place, it would be unlikely that one could properly imply a contract when it is the pleaded case of Baird that M & S deliberately refrained from concluding any express contract because it could achieve greater flexibility without one. To imply a contract against such a party would seem to me to offend against the principle that the parties’ conduct must show an implied common intention to create legal relations by contract.
In any event, the alleged terms are far too imprecise to be capable of being enforced. [After referring by way of analogy to Blue Metal Ltd v Robert Frank Hughes & Others (1963) AC 74. Morison J continued] Mr. Field [counsel for Baird] could not say that so long as the implied contract continued with Baird, M & S were prevented from appointing principal suppliers. And I cannot understand how the various factors listed by him would work in practice. If M & S’s future requirements were for fewer and more expensive garments of a type which Baird was unable or unwilling to produce at an acceptable cost, what then? There is, in my judgment, no firm base upon which one could ascertain either a particular quantity or a particular share which should be attributed to Baird in the future. Were the alleged contract to have legal effect then the court would, to all intents and purposes, be making a bargain for the parties rather than seeking to enforce a bargain which they themselves had made.”
For Baird counsel submits that where, as alleged in paragraph 9, one party intentionally induces a particular belief in another, on which the other relies, such conduct attracts legal responsibility. The responsibility relied on is (1) to give reasonable notice to terminate the relationship and (2) during the subsistence of the relationship, to acquire garments from Baird in such quantities and at such prices as were in all the circumstances reasonable. More specifically he contends that the judge was wrong in three respects, namely (a) necessity is not the test for the implication of a contract from conduct, (b) there is a sufficient prospect of success in establishing an intention to create the legal relations relied on, and (c) the obligations are sufficiently certain to be enforceable as part of the alleged contract.
In connection with the wide proposition counsel referred to academic discussion with regard to “relational contracts” and the legal implications to which they may give rise. But the articles which he produced did not suggest that the normal rules as to the implication and formation of contracts or the usual requirements of certainty did not apply to “relational contracts”. Accordingly it is to those rules that I turn.
Counsel suggested that the requirement of necessity to which the judge referred was derived from the judgment of Bingham LJ in The Aramis [1989] 1 Ll.L.R 213. He submitted that it was either confined to the cases exemplified in that case or, at least, inapplicable to cases in which there had been a long continuing relationship or an intentional inducement such as Baird relies on in this case.
The Aramis [1989] 1 Ll.L.R 213 concerned the question whether a contract could be implied between the transferee of a bill of lading to whom the goods had been delivered and the carrier. Prior to the Carriage of Goods By Sea Act 1992 the implication of such a contract was necessary if the transferee and the carrier were to have rights enforceable between themselves in respect of, for example, damage to the goods or the payment of freight. Bingham LJ considered the authorities at some length to see how the implication of contracts in this field had grown and developed. He cited with approval from the judgment of May LJ in The Elli [1985] 1 Ll.R. 107, 115 that
“…no such contract should be implied on the facts of any given case unless it is necessary to do so: necessary, that is to say, to give business reality to a transaction and to create enforceable obligations between parties who are dealing with one another in circumstances in which one would expect that business reality and those enforceable obligations to exist.”
Bingham LJ accepted that the authorities showed that “a contract will only be implied if it is necessary to do so”. In expressing his own view Bingham LJ said (page 224):
“…it would, in my view, be contrary to principle to countenance the implication of a contract from conduct if the conduct relied upon is no more consistent with an intention to contract than with an intention not to contract. It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties. Put another way, I think it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract.”
Counsel for Baird relied on the fact that in Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195, a case concerning the implication of a contract from a request for tenders and a submission in response, Bingham LJ put the matter somewhat differently. In that case he referred (pp. 1201 and 1202) to the “confident assumptions of commercial men” and the need to “be able to conclude with confidence both that the parties intended to create contractual relations and that the agreement was to the effect contended for”.
For M&S it was submitted that it would be odd if the principle for the implication of a contract at all should be different or less onerous than the principle for the implication of a term in a contract. Reliance was placed on Wilson v Partenreederei Hannah Blumenthal [1983] AC 854 and The Gudermes [1993] 1 Ll.R.311. The former concerned the question whether a contract to abandon an arbitration might be implied from conduct, or more precisely lack of conduct. Lord Brandon of Oakbrook considered (p.914) that an actual abandonment, as opposed to an estoppel precluding an assertion of continuance, required proof of conduct of each party, as evinced to the other party and acted on by him, as “leads necessarily to the inference of an implied agreement” between them to abandon the contract. Lord Roskill referred (p.923) to “the only possible inference [being] that the agreement to arbitrate has been rescinded by mutual consent”. Though Lord Diplock made no similar observation both Lords Keith of Kinkel and Brightman agreed with Lords Brandon and Roskill. In The Gudermes the cargo owner sought to establish a further contract with the ship-owners arising out of arrangements made to cope with the situation arising from an unauthorised diversion to Malta rather than Ravenna. The judge, Hirst J, held that the appropriate test was that described by May LJ in The Elli [1985] 1 Ll.R. 107, 115. The Court of Appeal upheld that direction. Staughton LJ giving the judgment of the court considered (p.320) that
“..it is not enough to show that the parties have done something more than, or something different from, what they were already bound to do under obligations owed to others. What they do must be consistent only with there being a new contract implied, and inconsistent with there being no such contract.”
In my view the judge did not adopt the wrong test for the implication of a contract from conduct. It is apparent that the statements in The Aramis are not confined to the limited circumstances with which that case was concerned and are reflected in one form or another in Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council, Wilson v Partenreederei Hannah Blumenthal and The Gudermes.
The second issue arises not only from the terms of paragraph 12(1) of the judgment of Morison J but also from the terms of paragraph 9.28 of the particulars of claim. Baird contends that the judge placed undue weight on that allegation and overlooked the references to “detailed contract or contracts”. It submitted that the wish to maintain flexibility and so to abstain from detailed contracts was not inconsistent with an intention to have a contractual umbrella to regulate the commercial relationship, more particularly given the belief M&S had intentionally induced in Baird as alleged in paragraph 9 of the Particulars of Claim. In this connection counsel relied on the speech of Lord Hoffmann in Carmichael v National Power plc [1999] 1 WLR 2042, 2050/1 to the effect that the subjective views of one party is some evidence as to what, objectively, the court should conclude to have been agreed.
Counsel for M&S pointed out that the allegation is that M&S “abstained from concluding any express contract…to regulate the parties on-going relationship..”. Nevertheless Counsel for M&S did not suggest that the allegation in paragraph 9.28 was conclusive, merely a serious impediment to the implication for which Baird contends. In my view it would be inappropriate at this stage to take too literal a view of the pleading. I am prepared to assume that in the passage I have quoted some reference to “detail” should be implied so as to reflect the later reference to the need to maintain flexibility by abstaining from detailed contracts. On that reading there is some force in this point. But it cannot be conclusive either way.
The crucial point, in my view, arises from the third issue, namely whether the obligations arising from the alleged implied contract would be sufficiently certain to be contractually enforceable. Counsel for Baird submitted that on questions of certainty the court takes a benevolent view and seeks to uphold the contract by so construing its terms as to produce certainty rather than the converse. He relied on the dictum of Steyn LJ in First Energy (UK) Ltd v Hungarian International Bank [1993] 2 Ll.R. 194, 196 on the need for the law to protect the reasonable expectations of honest men. He cited as examples Abrahams v Reiach Ltd [1922] 1 KB 477 and Paula Lee v Robert Zehil & Co Ltd [1983] 2 AER 390 in which problems of certainty were overcome by the implication of a requirement of reasonableness.
In relation to the facts Counsel for Baird suggested that there were a number of links in the relevant chain. He relied on a representation to Baird of a long term relationship to induce it to participate in the M&S supply base. He asserted that given that intentional representation M&S must have intended that Baird would get a reasonable level of M&S business year on year. He contended that not only did Baird so understand the representation but that was the way the relationship was in fact operated. Although, as I have already pointed out in paragraph 5, the proportion of business given by M&S to Baird remained relatively constant in percentage terms Counsel did not contend that M&S allocated its business amongst the four principal suppliers in accordance with any predetermined formula. He contended that the past could, with the assistance of experts, indicate what would be a reasonable allocation for the future.
Any debate about certainty of contractual terms and implications of reasonableness to avoid uncertainty must start with the decision of the House of Lords in Hillas v Arcos (1932) 147 LT 503. In that case the question was whether an option to buy “100,000 Standards for delivery in 1931” was sufficiently certain against the background of a contract concluded and performed the previous year for the purchase of “22,000 standards softwood goods of fair specification over the season 1930”. The House of Lords concluded that the contract was sufficiently certain. Lord Tomlin interpolated into the option the requirement of “fair specification” expressly required by the previous year’s contract. He considered that (p.512) in that context the words
“mean that the 22,000 standards are to be satisfied in goods distributed over kinds, qualities and sizes in the fair proportions having regard to the output of the season 1930, and the classifications of that output in respect of kinds, qualities and sizes. That is something which if the parties fail to agree can be ascertained just as much as the fair value of a property.”
Lord Wright (p.517) referred to the legal implication of reasonableness running through modern English commercial law and supplying the requisite degree of certainty in appropriate cases. The distinction between those cases in which the implication of reasonableness provides for certainty and those in which it does not appears most clearly from the speech of Lord Thankerton. He distinguished (p.513) between cases where the contract provides for an objective standard which the court applies by ascertaining what is reasonable and those where, there being no such standard, the test of reasonableness is being used to make an agreement for the parties which they have not made for themselves. He was impressed by the consideration that a commercial matter was involved and the parties themselves thought that they had made a contract.
The same principle is apparent from Australian Blue Metal Ltd v Hughes [1963] AC 74. That case concerned a mining lease containing a grant of the right to mine for magnesite in a specific area for an agreed royalty. The lease was silent as to the period for which it was to run, the means of its termination, the quantity of magnesite which might be mined and whether or not the right was exclusive. The issue was whether it was terminable at will or only on notice. The Privy Council considered that it was terminable at will. Lord Devlin giving the advice of the Board said (p.94/5)
“The second feature is that no express obligation was imposed on the appellants to do any mining at all, and in their Lordships’ opinion none can be implied. The only practical way of framing such an obligation with sufficient precision to make it enforceable is to do what was done in the 1942 agreement and specify a minimum quantity of material that has to be won in a given period. Their Lordships were referred to Hillas & Co Ltd v Arcos Ltd a case in which the House of Lords was able to use the implication of reasonableness to fill the gaps left by the parties. But in the present case there are no criteria which would enable a court of law to determine what would be a reasonable quantity. There would be too many uncertain factors to be taken into account, such as the profitability of mining in the future and the possibility of mining being done by other licensees…”
In both the cases relied on by Baird, namely Abrahams v Reiach Ltd [1922] 1 KB 477 and Paula Lee v Robert Zehil & Co Ltd [1983] 2 AER 390, the existence of a contract was not in doubt. The court was concerned with the assessment of damages for the breach of an undoubted obligation. The issue was how it was to be performed. I do not consider that either of them is of relevance to this case.
The issue of certainty arises, not with regard to the alleged obligation to give reasonable notice of termination, but with the allegation that
“..during the subsistence of the relationship Marks & Spencer would acquire garments from BHT in quantities and at prices which in all the circumstances were reasonable..”
Counsel for Baird accepted that this involved an obligation on Baird to supply such garments irrespective of whether it had accepted the order. It is not alleged that there was some objective criteria by which to assess what was a reasonable quantity or price. Counsel disclaimed any contention that M&S in fact allocated business from year to year in accordance with some formula of its own. The annual allocation was separately determined in each year in the light of the circumstances then prevailing.
I agree with the conclusion of the judge. The alleged obligation on M&S to acquire garments from Baird is insufficiently certain to found any contractual obligation because there are no objective criteria by which the court could assess what would be reasonable either as to quantity or price. This is not a case in which, the parties having evidently sought to make a contract, the court seeks to uphold its validity by construing the terms to produce certainty. Rather it is a case in which the lack of certainty confirms the absence of any clear evidence of an intention to create legal relations. The allegation in paragraph 9.28 also confirms the lack of intention to create legal relations for if there had been the requisite certainty because of the objective criteria then to that extent there would have been a detailed contract and a loss of flexibility. It cannot be said, let alone with confidence, that the conduct of the parties is more consistent with the existence of the contract sought to be implied than with its absence. The implication of the alleged contract is not necessary to give business reality to the commercial relationship between M&S and Baird. In agreement with the judge, I do not think that Baird has a real prospect of success on its claim in contract.
Whether there is some other compelling reason for requiring the contractual claim to be disposed of at a trial depends on the view one takes of the estoppel claim. If, as the judge thought, the estoppel claim has a real prospect of success then it may be inconvenient to preclude any consideration of a contractual claim. I turn, then, to consider the estoppel claim.
Chartbrook Ltd v Persimmon Homes Ltd & Ors
[2009] UKHL 38 (1 July 2009)
Lord Hoffmann
There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913. They are well known and need not be repeated. It is agreed that the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. The House emphasised that “we do not easily accept that people have made linguistic mistakes, particularly in formal documents” (similar statements will be found in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, 269, Kirin-Amgen Inc v Hoechst Marion Roussel Ltd [2005] RPC 169, 186 and Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, 296) but said that in some cases the context and background drove a court to the conclusion that “something must have gone wrong with the language”. In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.
It clearly requires a strong case to persuade the court that something must have gone wrong with the language and the judge and the majority of the Court of Appeal did not think that such a case had been made out. On the other hand, Lawrence Collins LJ thought it had. It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another: compare the Kirin-Amgen case [2005] RPC 169 at pp. 189-190. Such a division of opinion occurred in the Investors Compensation Scheme case itself. The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appears to be an exceptional case in which the drafting was careless and no one noticed.
I agree with the dissenting opinion of Lawrence Collins LJ because I think that to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense. The term “Minimum Guaranteed Residential Unit Value”, defined by reference to Total Residential Land Value, strongly suggests that this was to be a guaranteed minimum payment for the land value in respect of an individual flat. A guaranteed minimum payment connotes the possibility of a larger payment which, depending upon some contingency, may or may not fall due. Hence the term “Additional Residential Payment”. The element of contingency is reinforced by paragraph 3.3 of the Sixth Schedule, which speaks of the “date of payment if any of the Balancing Payment.” (My emphasis).
The judge declined to regard the terms Total Land Value and Minimum Guaranteed Residential Unit Value as indicative of an intention that MGRUV was to be the minimum Chartbrook would receive as the land value of a flat because both terms were defined expressions. They might just as well have been algebraic symbols. Indeed they might, and I strongly suspect that if they had been, they would have made it clear that the parties were intending to give effect to Persimmon’s construction. But the contract does not use algebraic symbols. It uses labels. The words used as labels are seldom arbitrary. They are usually chosen as a distillation of the meaning or purpose of a concept intended to be more precisely stated in the definition. In such cases the language of the defined expression may help to elucidate ambiguities in the definition or other parts of the agreement: compare Birmingham City Council v Walker [2007] 2 AC 262, 268. I therefore consider that Lawrence Collins LJ was right to take into account the connotations of contingency to be derived from the defined terms.
On Chartbrook’s construction, there is virtually no element of contingency at all. ARP is payable in every case in which the flat sells for more than £53,438. Chartbrook submits that is still a contingency. Who could tell whether or not the market for flats in Wandsworth might not collapse? In the Court of Appeal, Rimer LJ accepted that submission. He said that the “relevant language”, i.e. the language of contingency, was “strictly consistent also with Chartbrook’s construction.”
My Lords, I cannot believe that any rational parties who wished to make provision for such a catastrophic fall in the housing market (itself an unlikely assumption) would have adopted so precise a sum to represent their estimate of what might happen. Why £53,438? That was the agreed minimum figure for that part of the value of a flat attributable to the land which Chartbrook was selling. It was clearly based upon a careful and precise estimate of current market prices and building costs. But how could this figure have been appropriate as a minimum expected sale price of the entire flat at some future date? If the parties were wanting to guess at some extraordinary fall in the market against which Chartbrook was to be protected, why £53,438? Why not £50,000 or £60,000, or £100,000? A figure chosen to represent someone’s fears about a possible collapse in the market could only have been based upon wild speculation, not the kind of calculation which produces a figure like £53,438. That figure cannot have been meant to play the part in the calculation which Chartbrook’s construction assigns to it. It must have been intended to function as a minimum land value, not a minimum sale price. To compare it with the realised sale price would not be comparing like with like.
It is of course true that the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says. The reasonable addressee of the instrument has not been privy to the negotiations and cannot tell whether a provision favourable to one side was not in exchange for some concession elsewhere or simply a bad bargain. But the striking feature of this case is not merely that the provisions as interpreted by the judge and the Court of Appeal are favourable to Chartbrook. It is that they make the structure and language of the various provisions of Schedule 6 appear arbitrary and irrational, when it is possible for the concepts employed by the parties (MGRUV, C & I etc) to be combined in a rational way.
I therefore think that Lawrence Collins LJ was right in saying that ARP must mean the amount by which 23.4% of the achieved price exceeds the MGRUV. I do not think that it is necessary to undertake the exercise of comparing this language with that of the definition in order to see how much use of red ink is involved. When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties (“12th January” instead of “13th January” in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; “any claim sounding in rescission (whether for undue influence or otherwise)” instead of “any claim (whether sounding in rescission for undue influence or otherwise)” in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896) is no reason for not giving effect to what they appear to have meant.
In East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61 Brightman J stated the conditions for what he called “correction of mistakes by construction”:
“Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.”
Subject to two qualifications, both of which are explained by Carnwath LJ in his admirable judgment in KPMG LLP v Network Rail Infrastructure Ltd [2007] Bus LR 1336, I would accept this statement, which is in my opinion no more than an expression of the common sense view that we do not readily accept that people have made mistakes in formal documents. The first qualification is that “correction of mistakes by construction” is not a separate branch of the law, a summary version of an action for rectification. As Carnwath LJ said (at p. 1351, para 50):
“Both in the judgment, and in the arguments before us, there was a tendency to deal separately with correction of mistakes and construing the paragraph ‘as it stands’, as though they were distinct exercises. In my view, they are simply aspects of the single task of interpreting the agreement in its context, in order to get as close as possible to the meaning which the parties intended.”
The second qualification concerns the words “on the face of the instrument”. I agree with Carnwath LJ (at pp 1350-1351) that in deciding whether there is a clear mistake, the court is not confined to reading the document without regard to its background or context. As the exercise is part of the single task of interpretation, the background and context must always be taken into consideration.
What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbalrearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.
That leaves the question of the deduction of C & I, which the judge and the majority of the Court of Appeal regarded as an insuperable obstacle to Persimmon’s construction. I cannot see why this should be so. Everyone agrees that the only sum from which C & I can rationally be deducted is the headline price achieved on the sale, so as to arrive at the net amount received by Persimmon. That is accordingly what the parties must have meant. You deduct the C & I from the nominal price achieved and the ARP is the excess, if any, of 23.4% of that net sum over the MGRUV. Giving this meaning to the provision about C & I does not in any way weaken or affect the argument for interpreting the rest of the definition in a way which gives ARP a rational meaning. To say, as Rimer LJ said, that it requires “rewriting”, or that it “distorts the meaning and arithmetic of the definition” is only to say that it requires one to conclude that something has gone wrong with the language – not, in this case, with the meanings of words, but with the syntactical arrangement of those words. If however the context drives one to the conclusion that this must have happened, it is no answer that the interpretation does not reflect what the words would conventionally have been understood to mean.
If your Lordships agree with this conclusion about the construction of the contract, the appeal must be allowed. There is no need to say anything more. But Persimmon advanced two alternative arguments of veryconsiderable general importance and I think it is appropriate that your Lordships should deal with them. The first was that (contrary to the unanimous opinion of the judge and the Court of Appeal) the House should take into account the pre-contractual negotiations, which in the opinion of Lawrence Collins LJ (at paragraph 132), were determinative confirmation of Persimmon’s argument on construction. The second was that the judge and the Court of Appeal had misunderstood the principles upon which rectification may be decreed and that if Persimmon had failed on construction, the agreement should have been rectified.
The rule that pre-contractual negotiations are inadmissible was clearly reaffirmed by this House in Prenn vSimmonds [1971] 1 WLR 1381, where Lord Wilberforce said (at p. 1384) that earlier authorities “contain little to encourage, and much to discourage, evidence of negotiation or of the parties’ subjective intentions.” It is clear that the rule of inadmissibility has been established for a very long time. In Inglis v John Buttery & Co (1878) 3 App Cas 552, 577 Lord Blackburn said that Lord Justice Clerk Moncreiff (at (1877) 4 R 58, 64) had laid down a principle which was nearly accurate but not quite when he said that in all mercantile contracts “whether they be clear and distinct or the reverse, the Court is entitled to be placed in the position in which the parties stood before they signed”. The only qualification Lord Blackburn made was to reject Lord Moncreiff’s view that the Court was entitled to look at the pre-contractual negotiations because unless one did so, one could not be fully in the position in which the parties had been.
Instead, Lord Blackburn preferred (at p. 577) the opinion of Lord Gifford ((1877) 4 R 58, 69-70):
“Now, I think it is quite fixed – and no more wholesome or salutary rule relative to written contracts can be devised – that where parties agree to embody, and do actually embody, their contract in a formal written deed, then in determining what the contract really was and really meant, a Court must look to the formal deed and to that deed alone. This is only carrying out the will of the parties. The only meaning of adjusting a formal contract is, that the formal contract shall supersede all loose and preliminary negotiations – that there shall be no room for misunderstandings which may often arise, and which do constantly arise, in the course of long, and it may be desultory conversations, or in the course of correspondence or negotiations during which the parties are often widely at issue as to what they will insist on and what they will concede. The very purpose of a formal contract is to put an end to the disputes which would inevitably arise if the matter were left upon verbal negotiations or upon mixed communings partly consisting of letters and partly of conversations. The written contract is that which is to be appealed to by both parties, however different it may be from their previous demands or stipulations, whether contained in letters or in verbal conversation. There can be no doubt that this is the general rule, and I think the general rule, strictly and with peculiar appropriateness applies to the present case.”
To allow evidence of pre-contractual negotiations to be used in aid of construction would therefore require the House to depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged: see Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, 665 (“well-established and salutary”, per Lord President Rodger; Alexiou v Campbell [2007] UKPC 11 (“vouched by…compelling authorities”, per Lord Bingham of Cornhill.) The House is nevertheless invited to do so, on the ground that the rule is illogical and prevents a court from, as the Lord Justice Clerk in Inglis v John Buttery & Co (1878) 3 App Cas 552 said, putting itself in the position of the parties and ascertaining their true intent.
In Prenn v Simmonds [1971] 1 WLR 1381, 1384 Lord Wilberforce said by way of justification of the rule:
“The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). 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. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. 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. Far more, and indeed totally, dangerous is it to admit evidence of one party’s objective – even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.”
Critics of the rule, such as Thomas J in New Zealand (Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523, 538-549) Professor David McLauchlan (“Contract Interpretation: What is it About?” (2009) 31:5 Sydney Law Review 5-51) and Lord Nicholls of Birkenhead (“My Kingdom for a Horse: The Meaning of Words” (2005) 121 LQR 577-591) point out that although all this may usually be true, in some cases it will not. Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement. Why should court deny itself the assistance of this material in deciding what the parties must be taken to have meant? Mr Christopher Nugee QC, who appeared for Persimmon, went so far as to say that in saying that such evidence was unhelpful, Lord Wilberforce was not only providing a justification for the rule but delimiting its extent. It should apply only in cases in which the pre-contractual negotiations are actually irrelevant. If they do assist a court in deciding what an objective observer would have construed the contract to mean, they should be admitted. I cannot accept this submission. It is clear from what Lord Wilberforce said and the authorities upon which he relied that the exclusionary rule is not qualified in this way. There is no need for a special rule to exclude irrelevant evidence.
I do however accept that it would not be inconsistent with the English objective theory of contractual interpretation to admit evidence of previous communications between the parties as part of the background which may throw light upon what they meant by the language they used. The general rule, as I said in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, 269, is that there are no conceptual limits to what can properly be regarded as background. Prima facie, therefore, the negotiations are potentially relevant background. They may be inadmissible simply because they are irrelevant to the question which the court has to decide, namely, what the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement. For the reasons given by Lord Wilberforce, that will usually be the case. But not always. In exceptional cases, as Lord Nicholls has forcibly argued, a rule that prior negotiations are always inadmissible will prevent the court from giving effect to what a reasonable man in the position of the parties would have taken them to have meant. Of course judges may disagree over whether in a particular case such evidence is helpful or not. In Yoshimoto vCanterbury Golf International Ltd [2001] 1 NZLR 523. Thomas J thought he had found gold in the negotiations but the Privy Council said it was only dirt. As I have said, there is nothing unusual or surprising about such differences of opinion. In principle, however, I would accept that previous negotiations may be relevant.
It therefore follows that while it is true that, as Lord Wilberforce said, inadmissibility is normally based in irrelevance, there will be cases in which it can be justified only on pragmatic grounds. I must consider these grounds, which have been explored in detail in the literature and on the whole rejected by academic writers but supported by some practitioners.
The first is that the admission of pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration. Everyone engaged in the exercise would have to read the correspondence and statements would have to be taken from those who took part in oral negotiations. Not only would this be time-consuming and expensive but the scope for disagreement over whether the material affected the construction of the agreement (as in the Yoshimoto case) would be considerably increased. As against this, it is said that when a dispute over construction is litigated, evidence of the pre-contractual negotiations is almost invariably tendered in support of an alternative claim for rectification (as in Prenn v Simmonds and in this case) or an argument based on estoppel by convention or some alleged exception to the exclusionary rule. Even if such an alternative claim does not succeed, the judge will have read and possibly been influenced by the evidence. The rule therefore achieves little in saving costs and its abolition would restore some intellectual honesty to the judicial approach to interpretation.
There is certainly a view in the profession that the less one has to resort to any form of background in aid of interpretation, the better. The document should so far as possible speak for itself. As Popham CJ said in the Countess of Rutland’s Case (1604) 5 Co Rep 25, 25b, 26a:
“it would be inconvenient, that matters in writing made by advice and on consideration, and which finally import the certain truth of the agreement of the parties should be controlled by averment of the parties to be proved by the uncertain testimony of slippery memory.”
I do not think that these opinions can be dismissed as merely based upon the fallacy that words have inherent or “available” meanings, rather than being used by people to express meanings, although some of the arguments advanced in support might suggest this. It reflects what may be a sound practical intuition that the law of contract is an institution designed to enforce promises with a high degree of predictability and that the more one allows conventional meanings or syntax to be displaced by inferences drawn from background, the less predictable the outcome is likely to be. In this respect, it is interesting to consider the reaction to the statement of principle in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896,912-913, which was viewed with alarm by some distinguished commercial lawyers as having greatly increased the quantity of background material which courts or arbitrators would be invited to consider: see Lord Bingham’s recent paper (“A New Thing Under the Sun: The Interpretation of Contract and the ICS Decision” (2008) 12 Edinburgh LR 374-390) and Spigelmann CJ, “From Text to Contract: Contemporary Contractual Interpretation” (2007) 81 ALJ 322. As Lord Bingham pointed out, there was little in that statement of principle which could not be found in earlier authorities. The only points it decided that might have been thought in the least controversial were, first, that it was not necessary to find an “ambiguity” before one could have any regard to background and, secondly, that the meaning which the parties would reasonably be taken to have intended could be given effect despite the fact that it was not, according to conventional usage, an “available” meaning of the words or syntax which they had actually used.
Like Lord Bingham, I rather doubt whether the ICS case produced a dramatic increase in the amount of material produced by way of background for the purposes of contractual interpretation. But pre-contractual negotiations seem to me capable of raising practical questions different from those created by other forms of background. Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute. It is often not easy to distinguish between those statements which (if they were made at all) merely reflect the aspirations of one or other of the parties and those which embody at least a provisional consensus which may throw light on the meaning of the contract which was eventually concluded. But the imprecision of the line between negotiation and provisional agreement is the very reason why in every case of dispute over interpretation, one or other of the parties is likely to require a court or arbitrator to take the course of negotiations into account. Your Lordships’ experience in the analogous case of resort to statements in Hansard under the rule in Pepper v Hart [1993] AC 593 suggests that such evidence will be produced in any case in which there is the remotest chance that it may be accepted and that even these cases will be only the tip of a mountain of discarded but expensive investigation. Pepper v Hart has also encouraged ministers and others to make statements in the hope of influencing the construction which the courts will give to a statute and it is possible that negotiating parties will be encouraged to improve the bundle of correspondence with similar statements.
Supporters of the admissibility of pre-contractual negotiations draw attention to the fact that Continental legal systems seem to have little difficulty in taking them into account. Both the Unidroit Principles of International Commercial Contracts (1994 and 2004 revision) and the Principles of European Contract Law (1999) provide that in ascertaining the “common intention of the parties”, regard shall be had to prior negotiations: articles 4.3 and 5.102 respectively. The same is true of the United Nations Convention on Contracts for the International Sale of Goods (1980). But these instruments reflect the French philosophy of contractual interpretation, which is altogether different from that of English law. As Professor Catherine Valcke explains in an illuminating article (“On Comparing French and English Contract Law: Insights from Social Contract Theory”) (16 January 2009), French law regards the intentions of the parties as a pure question of subjective fact, their volonté psychologique, uninfluenced by any rules of law. It follows that any evidence of what they said or did, whether to each other or to third parties, may be relevant to establishing what their intentions actually were. There is in French law a sharp distinction between the ascertainment of their intentions and the application of legal rules which may, in the interests of fairness to other parties or otherwise, limit the extent to which those intentions are given effect. English law, on the other hand, mixes up the ascertainment of intention with the rules of law by depersonalising the contracting parties and asking, not what their intentions actually were, but what a reasonable outside observer would have taken them to be. One cannot in my opinion simply transpose rules based on one philosophy of contractual interpretation to another, or assume that the practical effect of admitting such evidence under the English system of civil procedure will be the same as that under a Continental system.