The recent case of Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC) provides a salient reminder of the need for parties to carefully consider the limitation of liability in contracts and the construction of these clauses.

Innovate sought damages from the University of Portsmouth arising from a Research Agreement between the parties concerning research into a drug patented by Innovate. An academic paper was published by the University which Innovate alleged had been “infected by dishonesty” because the author of the paper (a scientist at the University) either knew, or was reckless as to whether, the paper was in-part fabricated.

The Research Agreement included an exclusion of liability clause as follows:-

“…the University is not liable to [Innovate] because of any representation (unless fraudulent) or any warranty (express or implied), condition or other term, or any duty at common law, or under the express terms of this Agreement for any loss of profits, business, contracts, opportunity, goodwill, revenues, anticipated savings, expenses, costs or other similar loss; and/or any indirect, special or consequential damages or losses (whether for loss of profits or otherwise).”

Innovate sought to claim loss of profits in excess of £1 million on the basis that it alleged there had been a dishonest breach of the Research Agreement by the University.

The issue before the Court was the construction of the limitation clause. The sole carve out in the exclusion clause was for ‘fraudulent misrepresentation’. As a matter of construction the word ‘fraudulent’ applied only to representation and not to the remainder of the clause. The Court found that the exclusion of liability was applicable to all claims except where the claim was based upon a fraudulent misrepresentation. Therefore a dishonest breach of contract was not sufficient to defeat the exclusion of liability.

Further the Court found that the exclusion of liability was reasonable for the purposes of the Unfair Contract Terms Act 1977 and enforceable. The clause did not provide a blanket exclusion for all liability. There was no inequality in the parties bargaining power. A legally qualified individual had negotiated the Research Agreement on behalf of Innovate. Innovate did not blindly accept the terms put to it but actively negotiated amendments including to the wider exclusion clause. Further, the University was being paid a sum far below the commercial market rate for the work to be undertaken and therefore, it was reasonable that it sought to limit its liability for potentially significant sums far in excess of those rates, on the basis of acts of its agents.

The construction of a clause is an issue that needs to be considered on a case-by-case basis. However, this case is a stark reminder that although a clause may not expressly refer to any limitation for a claim of dishonest breach, it may well be caught and excluded by the overall construction of the clause. Careful review of any exclusion and limitation clauses is essential for parties before entering into any agreement.

If you would like to discuss any aspect of this article or require any further information or advice, please contact Jade Salton-Brooks on jkb@blasermills.co.uk.

From 1 October 2023 the fixed costs regime in civil litigation has been extended to cover most claims issued on or after this date with a value up to £100,000 (although there are certain specified exceptions).

This note summarises some of the key changes under the new regime.

A New Intermediate Track
The rules have created a new ‘intermediate track’ to which claims can be assigned. There are now a total of four tracks which generally apply as follows (although the Court retains its discretion to allocate claims as it deems appropriate taking account of factors including complexity):

• Small Claims Track: for claims of a value up to £10,000.
• Fast Track: for claims of a value between £10,000 to £25,000 where (i) the trial is likely to last for no longer than one day (ii) oral expert evidence is likely to be limited to one expert per party per field and (iii) expert evidence is likely to be limited to two fields.
• Intermediate Track: for claims of a value between £25,000 to £100,000 where (i) the trial is not likely to exceed three days (ii) oral expert evidence is likely to be limited to two experts per party and (iii) the claim is brought by one claimant against up to two defendants or up two claimants against one defendant.
• Multi-track: for claims in excess of £100,000 and generally, this will mean that multi-track claims are now the preserve of the High Court. 

The Implementation of ‘Complexity Bands’
Claims allocated to the fast track or intermediate track will also be assigned to a specific complexity band, ranging from 1 to 4. The complexity band will determine the level of recoverable costs, by reference to various tables set out in Practice Direction 45 of the Civil Procedure Rules (CPR) (Cost Tables). The parties can seek to agree a complexity band but the Court retains discretion to assign a claim as it sees fit.

In assigning a complexity band the Court is to have regard to the factors set out at CPR 26.13 these include, amongst others (i) the financial value of the claim (ii) the nature of the remedy sought (iii) the complexity of the facts, law or evidence and (iv) the number of parties. CPR 26.15 and 26.16 provide examples of the claims that may be properly allocated to each complexity band.

General Principles that Apply to Recoverable Costs under the Fixed Costs Regime  
The fixed recoverable costs applicable will depend on the stage at which a claim is settled/discontinued or whether it proceeds to trial.

Each of the Cost Tables provides for a set fixed fee for each stage for cases assigned to complexity band 1. For cases assigned to complexity bands 2 to 4, generally the Cost Tables provide for a fixed fee plus a specified percentage of damages recovered.

For non-money claims, or claims including non-monetary relief, the ‘non-money’ element of the claim will be assigned a specified value for the purpose of calculating fixed costs.

VAT and disbursements are recoverable in addition to the fixed costs specified in the Cost Tables. In the intermediate track a disbursement is recoverable where it is ‘reasonably incurred’.  However, it should be highlighted that disbursements for the instruction of Counsel are included within the fixed costs provided for in the Costs Tables. 

There is provision within the CPR for London weighing which entitles a party to recover an additional 12.5%.

The Cost Tables limit the amount of fees that a successful party may recover from its opponent but it is important to note that they do not restrict the fees that a legal representative may charge. It therefore remains the case that for many cases there will be a significant proportion of unrecoverable cost (and indeed this may in fact increase as a result of the extended fixed cost regime) and this will need to be considered before proceedings are commenced and as litigation progresses.

Cost Budgeting
A significant impact of the extended fixed costs regime is the removal of the requirement for parties to cost budget in claims which are subject to fixed recoverable costs.

Circumstances in which Parties can Claim for Costs Exceeding Fixed Recoverable Costs
CPR 45 confers discretion on the Court and there are limited exceptions in which the Court may depart from the fixed costs regime, including:-

• CPR 49.5 provides that the Court may consider a claim for an amount of costs which is greater than fixed recoverable costs where there are ‘exceptional circumstances’ making it appropriate to do so.
• CPR 45.10 provides that the Court may consider a claim for costs which is greater than fixed recoverable costs where a party or witness is vulnerable, that vulnerability has required additional work to be undertaken and by reason of that additional work alone, the claim is for an amount that is at least 20% greater than the amount of fixed recoverable costs.
• CPR 45.13 where an order for costs is made in favour of/against a party whom the Court considers has behaved unreasonably, the other party may apply for an order that those costs be reduced or increased, respectively, by an amount equal to 50% of the fixed recoverable costs which would otherwise be payable (excluding VAT and disbursements). Unreasonable behaviour is conduct for which there is no reasonable explanation.

Given that the fixed cost regime would apply in the event of an unsuccessful claim for costs exceeding fixed recoverable costs, there are a number of commentators who expect claims of this nature to be made frequently, given that many may view there being limited risk in pursuing such a claim.

Part 36 Offers
A significant impact of the extended fixed costs regime, is the consequences that will flow from offers made pursuant to Part 36 of the CPR. Claimants may be able to recover a 35% uplift on the fixed costs payable from expiry of  the relevant period and the fixed costs payable at the date of judgment, if they obtain a judgment which a Defendant fails to beat. Interestingly, this only applies to Claimants and not a Defendant to a claim.

Contracting Out of the Fixed Costs Regime, Alternative Dispute Resolution (ADR) and Settlement
It will always be open to the parties to agree contractual mechanisms which seek to increase cost recovery beyond the scope of the fixed cost regime. Making appropriate provision for cost recovery in contractual agreements, prior to the commencement of any dispute, is going to be of critical importance. Parties may also want to consider including mandatory ADR clauses, including arbitration clauses.

As part of any settlement, it will remain open to the parties to agree costs and attempts may be made to agree settlement terms that provide for costs in excess of those provided for under the fixed costs regime.

It is of particular interest to note that the extended fixed recoverable costs regime provides for costs to be payable even if a matter is not issued and parties reach a settlement prior to a claim being issued.

Commentary
The extended fixed costs regime is intended to provide more certainty for parties embarking on litigation. The model is more comparable with the regime implemented in a number of European countries, in particular the German system of fixed recoverable costs.

It is anticipated that generally parties will be able to recover less from an opponent than under the previous system and this will need to be borne in mind as part of the prospects of pursuing any claim and/or defence. It will undoubtedly have an impact on the strategy employed in claims subject to the regime given that costs payable will be triggered at set stages. 

The rules are ripe for satellite litigation to arise on many issues, not least of all track allocation and the assignment of complexity bands. We expect to see a spate of case law over the coming months which will provide further guidance on the application of the new regime.

Part 36 of the Civil Procedure Rules (“CPR”) sets out a self-contained procedural ‘code’ for offers made in accordance with its provisions, so called ‘Part 36 offers’.

Part 36 offers can be a useful tactical tool in a Claimant’s armory. If a Defendant fails to ‘beat’ a Part 36 offer at trial, automatic cost consequences flow, which entitle a Claimant to an award of costs, far in excess of any cost order that would be made on a standard basis. The consequences of a Part 36 offer begin from the relevant period, which must be at least 21 days from the date of the Part 36 offer.

CPR 36.17(3) provides that a Court must, unless it considers it unjust to do so, order that the Claimant is entitled to costs on the following basis:-

• interest on the whole or part of any sum of money awarded, at a rate not exceeding 10% above base rate for the period starting with the date on which the relevant period expired;
• costs (including any recoverable pre-action costs) on the indemnity basis from the date on which the relevant period expired;
• interest on those costs at a rate not exceeding 10% above base rate; and
• an additional amount, which shall not exceed £75,000, calculated either as (i) for awards of up to £500,000, 10% of the amount awarded (ii) for awards in excess of £500,000, 10% of the first £500,000 and 5% of any amount above that figure, subject to the limit of £75,000.

In considering whether it would be ‘unjust’ to make such an order, the Court must take into account all of the circumstances of the case including:-

• the terms of any Part 36 offer;
• the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;
• the information available to the parties at the time when the Part 36 offer was made;
• the conduct of the parties with regard to the giving of or refusal to give information for the purposes of enabling the offer to be made or evaluated; and
• whether the offer was a genuine attempt to settle the proceedings.

The recent case of Yieldpoint Stable Value Fund, LP v Kimura Commodity Trade Finance Fund Ltd [2023] EWHC 1512 (Comm), has put these considerations in the spotlight.

The Claimant sought payment of a debt in the sum of $5,000,000 plus interest. The Claimant made a Part 36 offer to settle the claim for $4,950,000 including interest which was equivalent to 99% of the principle debt or 96% of the value of the total claim including interest.

The Claimant was successful at trial and the Defendant was ordered to pay $5,000,000 plus interest and costs. Whilst the Defendant failed to beat the Claimant’s Part 36 offer, Stephen Housman KC sitting as High Court Judge held that it would be unjust for the Claimant to benefit from the enhancements under CPR 36.17 on the basis that the Claimant’s Part 36 offer was not a genuine attempt to settle, particularly in the context of it being an ‘all or nothing’ case. He found that “an offer which is a cynical attempt to manipulate the Part 36 regime and apply pressure on an adversary is unlikely to be effective for such purposes”.

Comment

There will always be a tactical element to Part 36 offers. However, in recent cases the Court does appear to be more critical of parties taking tactical steps aimed at achieving greater cost recovery, instead of a genuine attempt at settlement. Yieldpoint provides a salient reminder that Part 36 is intended to reward constructive offers of settlement.

The Judge was clear that his decision should not dissuade parties from using the Part 36 mechanism but rather it should be “an encouragement to make offers at a level not so perilously close to the full value of the claim in a case of such adversarial intensity”. 

Terminating a contract can be a legal minefield and can often become the subject of a dispute. This note summaries some of the key considerations that should be made before steps are taken to terminate a contract.   

Are there grounds to terminate the contract?

It is important to determine the grounds on which you have a right to terminate any contract. Generally, termination rights fall into two distinct categories: (i) contractual termination rights and (ii) common law termination rights.

Contractual Termination Rights

A contract may expressly provide for a party’s termination rights.

The basis for termination and steps to be taken under any such contractual  provisions will be a matter of interpretation of that specific clause.

Common provisions include:-

• Termination upon expiry of a prescribed notice period: it is essential that any notice of termination is provided in accordance with the requirements of the termination provision and that adequate notice is provided.
• Termination as a result of breach: provisions of this nature can take various forms and common provisions include termination for ‘material’ or ‘serious’ breach or multiple breaches. Whether the right to terminate has been triggered by the act(s) or omission(s) complained of can often become the subject of a dispute. What constitutes a ‘material’ or ‘serious’ breach is matter specific and will be an issue of interpretation taking into account the contract as a whole and the relevant facts of the case.
• Force majeure: a force majeure clause usually provides for termination if certain, unforeseeable events occur that prevent or delay a party from performing the contract. The scope of any force majeure clause will be subject to the specific drafting of each contract.
• Insolvency: contracts will often provide for the right of termination in the event of a party becoming insolvent.

Common Law Termination Rights  

• Repudiatory breach: a repudiatory breach is a breach that is so serious it goes to the heart of the contract and essentially deprives the innocent party of the benefit of the contract. Where such as a breach as occurred, the innocent party has the right to elect whether to terminate the contract or to affirm it and to claim damages. Whether an act or omission constitutes a repudiatory breach can often be a contentious issue and wrongfully terminating a contract without sufficient basis, can itself by a repudiatory breach.
• Reasonable notice: where a contract does not provide any express provisions on termination, generally it can be terminated on reasonable notice (although there are some exceptions). What is considered reasonable, is to be determined on the facts at the time notice is provided.  
• End of term of contract: generally where a contract has been put in place for a specific period of time the contract will automatically expire after the time period has run its course unless the contract provides for automatic renewal or the parties agree to extend the term.
• Frustration: an unforeseen event that prevents one or more of the parties from performing the contract can give rise to an entitlement to terminate. The  law of frustration is complex and the ‘doctrine of frustration’ only operates in very specific, narrow circumstances.

When can you terminate a contract?

There is no standard timeframe for termination of a contract.

Contractual termination rights will often specify a deadline for termination and in such cases, these deadlines are often strict and if not met, a party can lose its right to terminate. It is important to consider the wording of any express termination clause.

Common law rights of termination usually allow a party a reasonable period to terminate and what is ‘reasonable’ will be determined on the facts. However, a party needs to be cautious that it does not inadvertently affirm the contract, or lose its right to terminate, due to delay and/or its continuing performance of the contract. Therefore, in reality, when matters which could lead to termination arise, it is important that a party acts quickly to investigate its position.  

Some contracts will include dispute resolution provisions which provide an escalatory mechanism for resolving disagreements relating to the contract. In some cases these must be complied with before termiatnion can take effect.

What steps need to be taken to terminate?

Whether a party is terminating in accordance with its contractual or common law rights, it will generally be required to give notice of termination. This will usually specify the grounds for termination and the effective date of termination.

The contract may specify the procedure to be followed, this could include provisions on delivery, form of notice, or the length of any notice, and such terms must be complied with strictly, or the notice could be rendered ineffective.  

What are the implications of terminating a contract?

Termination brings a contract to an end and releases the parties from their continuing obligations. Generally, rights that have accrued at the date of termination are enforceable, for example the right to be paid for services rendered under the contract.

However, there are terms that can survive termination and these will usually be expressly provided for in a written contract. Examples often include confidentiality provisions, return of property, intellectual property provisions and dispute resolution clauses.

Can damages be claimed on termination?

An innocent party’s entitlement to damages, derives from the defaulting party’s breach of the contract.

The contractual measure damages provides for an innocent party to be put into the position it would have been had the contract been performed.

The extent to which damages can be claimed will often be dictated by the contract and any exclusion or limitation clauses that have been agreed by the parties. In the absence of any such clauses, a party may be able to claim both direct and indirect losses. 

What commercial considerations that need to be factored into a decision to terminate?

Termination will undoubtedly have commercial impacts for any business. It is important that these are considered before any termination notice is served. Whether termination is a commercially practical decision, will depend on the business in question and the extent to which projects, deadlines and internal and external stakeholder relationships will be impacted by termination.

It is advisable to prepare for termination for example sourcing an alternative supplier/customer and by ensuring that a uniform approach is taken across a business, so that a decision to terminate is upheld and not inadvertently undermined, and the contract affirmed, by one part of the business continuing to act in accordance with the contract.

In some circumstances, it may be advantageous for a business to look at alternative solutions such as suspension, re-negotiation of terms or alternative dispute resolution.

In the recent case of Re Compound Photonics Group Ltd; Faulkner v Vollin Holdings Ltd [2022] EWCA Civ 1371, the Court of Appeal has provided clarification on the meaning of a contractual duty of good faith, in the context of an unfair prejudice petition.

The Issue for Determination
The issue before the Court of Appeal was whether the High Court had been correct to find that two minority shareholders had been unfairly prejudiced when their appointed directors had been removed from office in breach of an express good faith provision in the shareholders’ agreement.

At first instance, the High Court had found that a contractual obligation to act in good faith, was based upon the principles set out in Unwin v Bond [2020] EWHC 1768, which the High Court considered to offer a settled definition of what constituted good faith.

Court of Appeal Decision
The Court of Appeal unanimously allowed the appeal.

Snowden LJ confirmed that a duty of good faith, in general, encompassed a duty to act honestly and a duty to not act in bad faith. However, any further interpretation of ‘good faith’ should be determined by the specific context and facts of each case. Snowden LJ cast doubt on whether it was appropriate to apply concepts from other cases, including Unwin in a formulaic way.

On these facts, the Court found that the duty of good faith did not amount to an obligation prohibiting the shareholders to vote in favour of removing the directors.

Comment
Re Compound presents a significant departure from Unwin. Following Re Compound the position appears to be that the scope of a good faith obligation is really a question of touch and feel. That said, Re Compound does make clear that to show ‘good faith’ will always require (i) honesty and (ii) an absence of bad faith. It appears clear that the Court will favour a narrower definition of good faith.

When entering into any agreement which includes a good faith obligation, parties need to be aware that the scope of this obligation is far from clear and could be subject to change depending on the factual context. Practitioners should take care to consider the scope of a good faith provision in the context of each case, and whether it provides adequate protection in light of the narrow interpretation favoured by the Court in this case. In our view, the Court is likely to continue to adopt narrow definition of good faith and parties should take care not to view good faith provisions as ‘catch-all’ provisions which function as a sort of ‘get out of jail free card’. Any such approach is unlikely to be treated favourably by a Court.

If you require any further information or advice please get in touch with Nick Scott on nxs@blasermills.co.uk.

The recent case of Peregrine Aviation Bravo v Laudamotion GmbH [2023] EWHC 48 (Comm) (“Peregrine”) provides a salient reminder of the importance of a properly drafted termination notice.

It is pretty well settled law that a party terminating a contract can rely on any ground of termination available to them, even if not specified in its notice of termination. A very common example of this is where a party terminates on the express basis of a material breach of the relevant contract, but then subsequently seeks to assert that the contract was also terminated for repudiatory breach. The case of Peregrine suggests that this may no longer be an effective option for a party seeking to terminate a contract, because it may find itself precluded from claiming losses flowing from the originally unspecified ground of termination.

During the Covid-19 pandemic, a dispute arose as to whether Laudamotion, a subsidiary of Ryanair, was obliged to accept delivery of four Airbus A320 aircraft leased by the Claimants. The Claimants sought to terminate the aircraft leases for ‘Events of Default’ under the leases, and brought proceedings against Laudamotion to recover their losses. The Claimants’ termination notice referred to a right to terminate for non-acceptance of delivery and “certain additional Events of Default and breaches”.

The High Court provided obiter commentary on the impact of failing to expressly state the basis of a specific termination right in a termination notice. As a matter of interpretation of the leases, damages for termination were only due if the leases were terminated for a valid Event of Default, the relevant Event of Default here being a suspension of payment. However, the Court found that there was no evidence that it was a suspension of payment that prompted the Claimants to terminate the leases. The suspension of payments had been retrospectively identified as a ground for termination and it had not been expressly relied upon in the termination notice. Therefore, irrespective of whether it was a valid ground for termination, it could not be said that a suspension of payment, caused the losses that the Claimants sought to recover under the contract and as a result, compensation was not payable.

This case does not impact upon a party’s entitlement to defend a claim for wrongful termination of contract on the  basis of a valid ground, not specified in a termination notice. However, it does cast doubt upon a party’s ability to recover losses ‘caused’ by that unspecified ground. As the comments are obiter, it is yet to be seen what impact this could have, but it seems to us an area that is ripe for further judicial input and will be, no doubt, the subject of future litigation. 

In our experience, too often, termination notices are not given sufficient consideration and can be perceived to be nothing more than a simple administrative step. This case serves as a stark reminder of the importance of a properly drafted termination notice and the need to consider and, where appropriate, specify all possible avenues for termination.

If you require any further information or advice please get in touch with Nick Scott on nxs@blasermills.co.uk.

Often in a fraud claim, the identity of the individual/entity that perpetrated the fraud, or the location of misappropriated assets, is usually unknown. You are typically reliant on third parties to provide information about the possible wrongdoers, to put you in a position to start a claim to recover the relevant assets.

The English Court has a number of remedies to help with this common problem, namely Norwich Pharmacal (“NPO”) and Bankers Trust (“BTO”) orders. Broadly, NPOs and BTOs allow a potential claimant to find out information about possible fraudsters from other third parties who may have become enmeshed in the fraud, e.g., banks or other payment processing businesses.

Much fraud is now of an international nature, particularly where crypto assets are concerned. This briefing note focuses on recent changes to English Civil Procedure Rules (“CPR”) designed to make it easier for defrauded parties to get the information they need from foreign third parties (e.g. foreign banks) to identify fraudsters and seek to recover from them.

Updates were made to the CPR on 1 October 2022, following the 149^th Practice Direction Update. This included amendments to Practice Direction 6B (“the PD”) , which deals with service out of the jurisdiction of England and Wales. Paragraph 3.1 of the PD outlines the circumstances in which a claimant may serve a claim form out of the jurisdiction with the permission of the Court. The recent amendments provide a new ‘gateway’ to seek service out of the jurisdiction in respect of ‘information orders against non-parties’.

Paragraph 3.1(25) of the PD now provides that:-      

“The claimant may serve a claim form out of the jurisdiction with the permission of the court under rule 6.36 where…

(25) A claim or application is made for disclosure in order to obtain information—

(a) regarding:

(i) the true identity of a defendant or a potential defendant; and/or

(ii) what has become of the property of a claimant or applicant; and

(b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant  to CPR rule 6.32, 6.33 or 6.36.”

Prior to this amendment, the only basis upon which to seek information of this nature, was to commence an application for a NPO or BTO. However, in the absence of any binding authority, and on the basis of first instance authority precluding service out of an NPO application but permitting service out of a BTO application, the Court has often shown reluctance to grant permission for service out of, in particular, NPO applications and has generally taken quite an inconsistent approach in deciding whether to grant permission to serve out NPO and BTO applications.    

Paragraph 3.1(25) not only provides much needed clarification of a prospective claimant’s ability to serve an application for an information order out of the jurisdiction, but goes a step further in confirming that a potential claimant is entitled to serve a part 8 claim for disclosure of information, without the need to commence part 7 proceedings against persons unknown. This is of real practical significance, because it means that a potential claimant is not saddled with a potentially significant court fee at the outset of a fraud claim, when nothing is really known about the prospects of successful recovery.

Whilst the updates to the PD do not remove the need for a party to seek permission from the Court, to serve out of the jurisdiction, they do remove a significant hurdle for potential claimants in establishing a clear basis upon which to seek permission to serve an information order out of the jurisdiction. This can only assist in providing victims of fraud, an opportunity to seek recourse, at more proportionate cost and underscores why the Courts of England and Wales remain an attractive forum for fraud disputes.

NPO Guide

If you require any further information or advice please get in touch with Nick Scott on nxs@blasermills.co.uk.

In the recent Supreme Court decision of Barton v Morris [2023] UKSC 3, the Court has explored the scope of implied terms in a contractual relationship and their interplay with claims for unjust enrichment.

The Issue in Dispute

Foxpace Limited (“Foxpace”), the defendant seller of a property, orally agreed to pay the claimant, Mr Barton, a fee of £1.2 million (the “Introduction Fee”) if he introduced a buyer to Foxpace and the property sold for £6.5 million. Western UK (Acton) Limited (“Western”), introduced by Mr Barton, initially agreed to purchase the property for £6.55 million but after issues came to light, negotiated a reduced purchase price of £6 million, which Foxpace claimed did not trigger the obligation to pay the Introduction Fee. The Supreme Court was asked to determine a simple question: was Foxpace liable to pay reasonable remuneration to Mr Barton in these circumstances?

The Previous Decisions

High Court

At first instance, the High Court found that there was a binding oral agreement. However, since the agreement did not make provision for what would happen if the property was sold to Western for less than £6.5 million, there was no contractual obligation on Foxpace to pay anything to Mr Barton. Further, Mr Barton was precluded from bringing a claim in unjust enrichment, because it would undermine the contractual terms agreed between the parties.

Court of Appeal

An appeal by Mr Barton was unanimously allowed by the Court of Appeal. They held that the silence of the contract as to what would happen if the sale to Western was for less than £6.5 million, meant that it did not preclude a claim in unjust enrichment. Foxpace would be unjustly enriched if it took the benefit of the introduction to Western, without paying Mr Barton a reasonable fee in the sum of £435,000. In the alternative, it was an implied term of the contract that a reasonable fee would be paid if Western purchased the property for less than £6.5 million.

The Majority Decision of the Supreme Court

Foxpace appealed the decision of the Court of Appeal. By a 3-2 majority the Supreme Court allowed the appeal on the following basis:-

Express Terms of the Contract

The express terms of an oral contract are to be divined from the evidence and are a question of fact. It was not an express term of the agreement that Mr Barton would be paid a fee if the property was sold to Western for less than £6.5 million.

Implied Term of the Contract

The Court considered whether a term should be implied into the contract to give ‘business efficacy’ to the contract i.e. because it is necessary and/or because any such term would be so obvious ‘it goes without saying’ in line with the ‘officious bystander’ test, per the principles set out in the leading case of Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72.

Contradiction of Express Terms

The Supreme Court found that an implied term that Mr Barton would be a paid a reasonable fee if Western bought the property for less than £6.5 million could not be implied into the contract. It would contradict the express terms of the contract under which Foxpace was obliged to pay Mr Barton £1.2 million if the property sold for at least £6.5 million. It did not matter that the parties had not used the words “if, and only if” in their negotiations, the effect of the contract was that Mr Barton was only entitled to payment if the agreed trigger for payment occurred, namely a sale price of £6.5 million.

Business Efficacy

Pursuant to the express terms of the contract, a small reduction in the sale price, could result in Mr Barton being entirely deprived of the fee. Whilst it might be necessary to imply a term that Foxpace would not “play a dirty trick” by agreeing a reduced price to avoid liability to pay the £1.2 million referral fee, it was not necessary to go further and imply a term that Mr Barton is entitled to a reasonable fee if the sale completed for less than £6.5 million.

A contract cannot be rendered ‘bizarre’ or ‘uncommercial’ simply because a party contracts for a higher-than-normal payment on the fulfilment of a condition and is prepared to take the commensurate risk of a lower payment if that condition is not fulfilled. In fact, Lady Rose found that it would have been “strange” and uncommercial if Foxpace had agreed terms based on a “one-way bet” for Mr Barton. There would have been no benefit for Foxpace if Mr Barton should receive a reasonable fee regardless of the sale price.  

Statute

The Supreme Court rejected Mr Barton’s submission that an implied term for Mr Barton to be paid a reasonable fee for his service, could be implied by statute pursuant to s.15 of the Supply of Goods and Services Act 1982. It had no application as consideration was determined by the contract. It was also doubtful whether the contract constituted a ‘relevant contract’ for the purposes of the Act as it was a unilateral contract pursuant to which Mr Barton’s making of the introduction brought the contract into existence.

Implied Term Incident of Kind of Contract

It was also found that the term sought to be implied by Mr Barton, could not be implied as an ‘incident of this kind of contract’. Mr Barton sought to rely on various estate agency cases. However, the Supreme Court held that he could not rely on these authorities, not least of all, because factually, Mr Barton was not an estate agent and any fee that he was to receive was for a one-off introduction. It could not be compared to the efforts an estate agent may take and the costs they may incur to make an introduction.

Lady Rose offered a salient warning on the implication of terms in contracts, noting that “it is difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully drafted contract but have omitted to make provision for the matter in issue”. Whilst the contract between Foxpace and Mr Barton could not be said to be carefully drafted, caution needed to be exercised given the circumstances of the case. The fact that the parties did not refer to the possibility of a sale price being less than £6.5 million, did not automatically mean that they would have agreed what should happen in that event.

Unjust Enrichment

The issue for the Court was whether Foxpace’s enrichment arising from the introduction of Western, by Mr Barton, was unjust unless Mr Barton was paid a reasonable fee. Mr Barton contended that Foxpace would have unjustly enriched where there had been a ‘failure of basis’ as there was a common assumption that Western would purchase the property for £6.5 million. The parties did not consider a lower sale price and when the property sold for less than £6.5 million, the parties’ shared assumption and the basis of their agreement failed.

Lady Rose noted that it would be surprising to conclude that the parties did not at all envisage the possibility of the property selling for less than £6.5 million. The fact that neither of the parties raised the possibility suggests that they were assuming the sale would be for at least £6.5 million, not that they had simply not contemplated the eventuality. The most that could be said was that the parties did not discuss this issue and did not provide for it in the contract. 

Any claim in unjust enrichment would ultimately fail given that the parties had agreed the circumstances in which Foxpace was obliged to pay Mr Barton and in doing so, necessarily excluded any obligation in the absence of those circumstances.  The “silence” of the contract as to what obligations arise on the sale of the property for less than £6.5 million, excluded not only any implied contractual term (as set out above) but also a claim in unjust enrichment.

The Dissenting Judgments

The dissenting judgments of Lord Leggat and Lord Burrows are interesting as they fit much more closely with commercial reality.

The contract was silent on what would happen if the property was sold for less than £6.5 million. As an incidence of the type of contract, unless expressly agreed otherwise, a term should be implied at common law providing for Mr Barton to receive reasonable remuneration in circumstances where the property was sold for less than £6.5 million. As there was no contrary agreement, they found that Mr Barton would have been entitled to receive reasonable payment. Lord Burrows went further and considered that there was an unjust failure of basis, which would have enabled the same result to be achieved in the law of unjust enrichment. 

Comment

The majority decision in this case, may strike some as being somewhat unfair. Whilst the conclusion will no doubt be the subject of debate (and the 3-2 majority of the Supreme Court only serves to demonstrate that these are issues ripe for further deliberation), the decision does fundamentally underline the traditional approach of the Court and its reluctance to interfere with the terms of a party’s bargain.

If you require any further information or advice please get in touch with Nick Scott on nxs@blasermills.co.uk.