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Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75

A termination clause in a contract excluded the common law right to treat the contract as discharged on the basis of a repudiatory breach and to claim damages.

The court was unwilling to accept that a party would give up  common law rights, unless its intention to do so was clear from the terms of the contract.

It is important to draft precisely and expolicitly in contracts.  A contractual termination clause does not automatically exclude a party’s common law right to damages following a repudiatory breach unless the clause makes this clear.

Lord Justice Moore-Blick:

# It is inherent in the nature of a legally binding contract that each party expects to obtain the benefit of the bargain into which he has entered, or, if the contract is not performed, a right to recover compensation in the form of damages for the loss of that benefit. Accordingly, in a case where one party’s breach is such as, in the words of Diplock L.J. in Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 Q.B. 26, to deprive the other of substantially the whole benefit which it was intended that he should obtain from the contract, the common law recognises the right of the injured party to treat the contract as discharged and to recover damages for the loss of the bargain. Such a breach is commonly described as “going to the root of the contract”. That is all trite law, but it provides the underpinning, should it be required, for Mr. Boyd Q.C.’s submission that parties to a contract of this kind, or indeed to any contract, enter into negotiations in the expectation that if the one of them commits a breach which goes to the root of the contract in the sense just described, the other will be entitled to recover damages for the loss of his bargain. The parties may, of course, agree to depart from that position, but that is the point from which they start.

# Whether a breach is sufficiently serious to go to the root of the contract depends on the terms of the contract and the nature of the breach, but it is open to the parties to agree that the breach of a particular term, however slight, is to be treated as having that effect and shall therefore entitle the other to treat the contract as repudiated. Different words have been used to express that intention. The use of the word “condition” will usually (though not always – see Wickman Machine Tool Sales v Schuler (L.) A.G. [1974] A.C. 235) be sufficient, but many other forms of wording can be found. Sometimes the consequences of a breach are spelled out and sometimes they are not; in each case it is necessary to construe the contract as a whole to ascertain what the parties intended.

……………

# Although the decision itself is clear enough, it is not altogether easy to understand the principles on which the court acted, particularly in the light of more recent expositions of the principles governing the law on repudiation and the doctrine of election. In the case of repudiation, subsequent decisions of the House of Lords, in particular in Moschi v Lep Air Services Ltd [1973] A.C. 331 and Photo Production Ltd v Securicor Transport Ltd [1980] A.C. 827, have established that when a repudiatory breach is accepted by the injured party as discharging the contract, all primary obligations remaining for performance in the future are discharged and replaced in the case of the party in default by a secondary obligation to pay damages imposed by law. In such circumstances damages are to be assessed in the light of all the terms of the contract, including any relevant exclusion clause. This analysis led to the overruling of Harbutt’s “Plasticine” Ltd v Wayne Tank and Pump Co. Ltd [1970] 1 Q.B. 447 in which it had been held that an exclusion clause could not be relied on once the contract had been discharged.

# In Motor Oils Hellas (Corinth) Refineries S.A. v Shipping Corporation of India (The ‘Kanchenjunga’) [1990] 1 Lloyd’s Rep. 391 Lord Goff of Chieveley summarised the principle of election in the following way at page 381 col. 1:

“In the present case, we are concerned with an election which may arise in the context of a binding contract, when a state of affairs comes into existence in which one party becomes entitled, either under the terms of the contract or by the general law, to exercise a right, and he has to decide whether or not to do so. His decision, being a matter of choice for him, is called in law an election. Characteristically, this state of affairs arises where the other party has repudiated the contract or has otherwise committed a breach of the contract which entitles the innocent party to bring it to an end, or has made a tender of performance which does not conform to the terms of the contract.

. . .

In all cases, he has in the end to make his election, not as a matter of obligation, but in the sense that, if he does not do so, the time may come when the law takes the decision out of his hands, either by holding him to have elected not to exercise the right which has become available to him, or sometimes by holding him to have elected to exercise it. Instances of this phenomenon are to be found in s. 35 of the Sale of Goods Act 1979. In particular, where with knowledge of the relevant facts a party has acted in a manner which is consistent only with his having chosen one of the two alternative and inconsistent courses of action then open to him – for example, to determine a contract or alternatively to affirm it – he is held to have made his election accordingly, just as a buyer may be deemed to have accepted uncontractual goods in the circumstances specified in s. 35 of the 1979 Act.”

# With those principles in mind I return to UDT v Ennis. Lord Denning M.R. dealt with the matter in this way at pages 65C – 66B:

“In the absence of a consensual termination, I think the finance company must be taken to have terminated the hiring under the powers given to them by clause 8 of the agreement. That clause says that “should the hirer fail to pay … any subsequent instalment … the owner may forthwith and without any notice terminate the hiring.” That is how this agreement came to an end. The owners exercised their right to terminate the hiring: and the hirer was content that they should do so. On such a termination the owners cannot rely on the minimum payment clause: for the simple reason that they are terminating for a breach; and in that case the minimum payment clause is a penalty and unenforceable under the decision of the House of Lords in Campbell Discount Co. Ltd v Bridge.

………………..

It must be borne in mind that all that is required for acceptance of a repudiation at common law is for the injured party to communicate clearly and unequivocally his intention to treat the contract as discharged: see Vitol S.A. v Norelf Ltd [1996] A.C. 800, 810G-811B per Lord Steyn. If the contract and the general law provide the injured party with alternative rights which have different consequences, as was held to be the case in Dalkia Utilities v Celtech, he will necessarily have to elect between them and the precise terms in which he informs the other party of his decision will be significant, but where the contract provides a right to terminate which corresponds to a right under the general law (because the breach goes to the root of the contract or the parties have agreed that it should be treated as doing so) no election is necessary. In such cases it is sufficient for the injured party simply to make it clear that he is treating the contract as discharged: see Dalkia Utilities v Celtech, paragraph 143 per Clarke J. If he gives a bad reason for doing so, his action is nonetheless effective if the circumstances support it. That, as I understand it, is what Rix L.J. was saying in paragraph 32 of his judgment in Stocznia Gdanska SA v Latvian Shipping Co, with which I respectfully agree.

Construction of Contracts

Chartbrook Limited v Persimmon Homes Limited and others [2009] UKHL 38

The dispute involved a payment due under an agreement. Defective drafting resulted in uncertainty over how a payment should be calculated. The ambiguity resulted in Chartbrook claiming over £3.5 million of the amount Permission argued it was entitled to. The High Court and Court of Appeal decided in favour of Chartbrook by strictly interpreting the language in the agreement. Persimmon appealed to the House of Lords claiming that the contract should be rectified and that the exclusionary rule should not apply.

The House of Lords found the necessary conditions for rectification and on this basis allowed the appeal. However, the House of Lords rejected submissions on departure from the exclusionary rule and upheld an objective approach in the construction of contracts.

Lord Hoffman:’pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute.’ In addition to this, admission of such evidence ‘would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration’.

Contracts will be construed according to their meaning and in drafting contracts attention needs to be paid to ensure that the lanuage used expresses the intention of the parties in clear and unambiguous terms if the parties wish to avoid the imposition of a ‘reasonable man’ test by the courts which, of course, could be quite different from that intended by the parties.

per Lord Hoffman:

# 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.

On the issue of pre-contractual negotiations… these extracts may be of interest
Lord Hoffman:

# 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 v Canterbury 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.

# In his judgment in the present case, Briggs J thought that the most powerful argument against admitting evidence of pre-contractual negotiations was that it would be unfair to a third party who took an assignment of the contract or advanced money on its security. Such a person would not have been privy to the negotiations and may have taken the terms of the contract at face value. There is clearly strength in this argument, but it is fair to say that the same point can be made (and has been made, notably by Saville LJ in National Bank of Sharjah v Dellborg [1997] EWCA Civ 2070, which is unreported, but the relevant passage is cited in Lord Bingham’s paper in the Edinburgh Law Review) in respect of the admissibility of any form of background. The law sometimes deals with the problem by restricting the admissible background to that which would be available not merely to the contracting parties but also to others to whom the document is treated as having been addressed. Thus in Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693 the Court of Appeal decided that in construing the articles of association of the management company of a building divided into flats, background facts which would have been known to all the signatories were inadmissible because the articles should be regarded as addressed to anyone who read the register of companies, including persons who would have known nothing of the facts in question. In The Starsin (Homburg Houtimport BV v Agrosin Private Ltd [2004] 1 AC 715) the House of Lords construed words which identified the carrier on the front of a bill of lading without reference to what it said on the back, on the ground that the bankers to whom the bill would be tendered could not be expected to read the small print. Ordinarily, however, a contract is treated as addressed to the parties alone and an assignee must either inquire as to any relevant background or take his chance on how that might affect the meaning a court will give to the document. The law has sometimes to compromise between protecting the interests of the contracting parties and those of third parties. But an extension of the admissible background will, at any rate in theory, increase the risk that a third party will find that the contract does not mean what he thought. How often this is likely to be a practical problem is hard to say. In the present case, the construction of the agreement does not involve reliance upon any background which would not have been equally available to any prospective assignee or lender.

# The conclusion I would reach is that there is no clearly established case for departing from the exclusionary rule. The rule may well mean, as Lord Nicholls has argued, that parties are sometimes held bound by a contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes. It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention. Your Lordships do not have the material on which to form a view. It is possible that empirical study (for example, by the Law Commission) may show that the alleged disadvantages of admissibility are not in practice very significant or that they are outweighed by the advantages of doing more precise justice in exceptional cases or falling into line with international conventions. But the determination of where the balance of advantage lies is not in my opinion suitable for judicial decision. Your Lordships are being asked to depart from a rule which has been in existence for many years and several times affirmed by the House. There is power to do so under the Practice Statement (Judicial Precedent) [1966] 1 WLR 1234. But that power was intended, as Lord Reid said in R v National Insurance Comrs, Ex p Hudson [1972] AC 944, 966, to be applied only in a small number of cases in which previous decisions of the House were “thought to be impeding the proper development of the law or to have led to results which were unjust or contrary to public policy”. I do not think that anyone can be confident that this is true of the exclusionary rule.

# The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.

s.14(2) Sale of Goods Act 1979

KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co KG -v- Petroplus Marketing AG [2009] EWHC 1088
Mr Justice Field

Summary

Goods must be of satisfactory quality under the Sale of Goods Act 1979 and at common law not only on delivery but for a reasonable time thereafter. Note that SOGA Implied terms are classified as conditions and, therefore, any attempt to exclude them can only be achieced by drafting an exclusion clause in specific terms. The main focus was that in any FOB contract, unless stated otherwise, a term is to be implied under section 14(2) of the Sale of Goods Act 1979 that the goods will be of satisfactory quality not only when delivered onto the vessel but also for a reasonable time thereafter. This is supported by the fact that section 14(2) makes “durability” an aspect of “satisfactory quality”

Per Field J:

# In my judgement, in the absence of any term inconsistent therewith, there is to be implied into an FOB contract a term under s. 14 (2) of the 1979 Act that the goods will be of satisfactory quality not only when the cargo is delivered on to the vessel but also for a reasonable time thereafter. Such a term is also to be implied at common law with the additional dimension that the goods should not only be of satisfactory quality for a reasonable time but also should remain in accordance with the contractual specification (if any) for such a period. I reach this conclusion for the same reasons that Diplock J gave in Mash & Murrell for upholding the buyer’s alternative claims under s. 14 (2) of the 1893 Act and at common law. At the heart of that reasoning was the acceptance of Atkin J’s view based on Beer v Walker that the condition that the goods must be merchantable means that they must be in that condition when appropriated to the contract and that they will continue so for a reasonable time. Hence Diplock J’s words quoted in paragraph 16 above:

[M]erchantability in the case of goods sold cif or c&f means that the goods must remain merchantable for a reasonable time and that in the case of such contracts a reasonable time means time for arrival and disposal upon arrival. [Emphasis supplied].

# So far as the term to be implied under s. 14 (2) of the 1979 Act is concerned, my conclusion is fortified by the fact s. 14 (2B) makes “durability” an aspect of “satisfactory quality”. And in respect of the term to be implied at common law, if the seller has bound himself to supply goods of a particular specification, I think it plain that in the absence of any inconsistent term he is to be taken to have agreed that the goods should remain on specification for a reasonable time after delivery.

# In CIF and C&F contracts, where the seller knows the destination of the goods, Mash & Murrell is accordingly authority for the proposition that the time taken to complete a normal voyage will be the basic measure of what is a reasonable time. However, where the seller does not know the destination of the goods, it is not appropriate in my opinion to adopt the concept of a “normal voyage” as the measure of what is a reasonable time. To this extent, I agree with the approach of Colman J in Navigas Ltd v Enron Liquid Fuels Ltd, but if he meant to go further and to cast doubt on the proposition that goods sold under an FOB contract must be merchantable not only at delivery but also for a reasonable time thereafter, I respectfully disagree with him. Thus, suppose that goods sold FOB contain an ingredient that does not render them of unsatisfactory quality or off-specification when delivered but it has these consequences within a short period of time thereafter: is it not right and just that the buyer should be entitled to hold the seller to account for such an outcome? Put another way, is not the buyer entitled to expect that in exchange for the price he will receive goods that will be of satisfactory quality for a sufficient time to enable him to have some beneficial use of the goods or to sell them on?

# What will be a reasonable time will depend on the circumstances of the individual contract in question, including the fact that there is to be delivery on board a vessel, which renders it likely but not inevitable that the goods are to be carried by sea before they will be used by the buyer or sold on. Other relevant factors will be the nature of the goods and whether the seller knows that the buyer is a merchant dealing in goods of the type sold or is buying the goods for his (or its) own use. The courts are used to applying the yardstick of reasonableness in determining the content of obligations arising under commercial transactions and it is seldom that considerations of certainty preclude resort to the reasonableness yardstick. In my judgement, there is no question of the proposed implied terms being too uncertain to be enforceable.

# What of the pleaded term pursuant to s. 14 (3) of the 1979 Act? Mr Edey did not address me in any detail on preliminary issue (2). In my opinion, even if the sellers knew what it is pleaded they knew in paragraph 5 of the Particulars of Claim, it does not follow that the goods had to be reasonably fit for the purpose of remaining within the specifications set out in the contract of sale whether for the time they were on the vessel or thereafter. Further, even if there were a purpose for which the goods had to be reasonably fit, since the sellers did not know the destination of the goods, the sellers’ obligation would not have been to provide goods fit for this purpose for the length of the voyage actually undertaken, but for what in all the circumstances was a reasonable time.

# In my opinion, there is no good reason in logic, common sense or commerce for confining Mash & Murrell to sales of perishable goods. Nor does s.33 of the Sale of Goods Acts or the width of Diplock J’s proposition quoted in paragraph 29 above throw any doubt on his conclusion that goods must be merchantable for a reasonable time after delivery. Reading the judgement as a whole, it is plain that he did not intend to hold that the seller should be liable if all goods of the contract description would deteriorate in the same way that the goods in question have, or if the deterioration is due to the fault of the buyer or the shipper. Further, the fact that in upholding the buyers’ primary claim under the then s. 14 (1) Diplock J presumed that the buyers had relied on the sellers’ skill and judgement does not detract from the reasons he gave for upholding the buyers’ alternative contentions.

# Two questions remain. (1) Are the proposed terms inconsistent with any of the other terms of the sale contract? (2) Are the proposed terms excluded by clause 18? The only clauses said to be inconsistent with the proposed terms are clause 4 (specification) and clause 12 (quality to be determined by mutually agreed inspector). The requirement in clause 4 that the goods answer a detailed specification is not in my view inconsistent with an obligation that the goods be of satisfactory quality both at the point of delivery and for a reasonable time thereafter. Nor is the contractual specification inconsistent with an obligation that the goods remain on spec post delivery for a reasonable time. As to clause 12, I accept Mr Edey’s submission that this clause is not inconsistent with the proposed implied terms since the specification does not require the gasoil to be otherwise than on spec at the point of delivery and the loadport certificate would only be and was only ever intended to be final as to the matters referred to under clause 4.

# Turning to clause 18, the contract was expressly governed by English law. The parties are accordingly to be taken to know of the distinction drawn in English law between conditions and warranties and of the requirement resulting from cases such as Wallis v Pratt that if liability for breach of a condition as distinct from a warranty is to be excluded this must be very clearly spelled out in the relevant clause.

# Nowhere in clause 18 is the word “condition” used. As recorded above, Mr Jacobs submitted that by referring to “guarantees”, “warranties”, and “representations”, express or implied, the clause covered all the different types of contractual terms, including conditions. I disagree. In my judgement, so deeply ingrained is the status of a condition in English law as an obligation the breach of which gives the counterparty the right to terminate the contract or to affirm the contract and sue for damages, that clause 18 is not to be construed as extending to conditions, particularly the conditions implied under s. 14 of the 1979 Act. As Lord Wright said in Camell Laird & Co v The Manganese Bronze and Brass Co [1934] 402 at 431:

The principle of these authorities [Wallis v Pratt and Baldry v Marshall[7]]is that though a condition is deemed to be and can be treated as a warranty, if it is not availed of to reject the goods, still it remains a condition; once a condition always a condition: hence apt and precise words must be used to exclude it: the words guarantee or warranty are not sufficiently clear.

# I also reject Mr Jacobs’ submission that the obligations implied pursuant to s. 14 (2) and (3) are not “conditions” for the purposes of clause 18 because those provisions, in contrast to the equivalent provisions in the 1893 Act, speak of “terms” and not “conditions”. Section 14 (6) provides: “As regards England and Wales and Northern Ireland, the terms implied by subsections (2) and (3) above are conditions.” Thus, so far as England, Wales and Northern Ireland are concerned, the position is the same post the 1979 Act as it was under the earlier statute: the terms implied pursuant to s. 14 (2) and (3) are conditions for the purposes of construing clause 18.

# Further, in my judgement, the term that I have held stands to be implied at common law is a condition rather than a warranty because it is so similar to the condition implied under s. 14 (2).

# If the failure to use the word “condition” renders clause 18 of little or no effect, so be it. The sellers agreed to the wording of clause 18 in the face of Wallis v Pratt and must live with the consequences.

Damages
Remoteness of Damage

Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48
House of Lords

The House of Lords reviewed the law relating to remoteness of damage in the Contract, narrowing the approach to be taken in connection with the recovery off damges. Professor McKendrick notes in his Contract Law 3ed Chapter 23, 889 ‘although the precise ambit of the decision is unclear’ and goes on to state:

“It is, however, clear that it is no longer sufficient simply to show that the loss which has been suffered is a reasonably forseeable consequence of the breach. In decsiding whether or not the loss is recoverable, it may be important to ask whether or not the defendant accepted responsibility for the loss in respect of which the claim has been brought. The expectation of the market would also appear to be an im[portant factor to take into account when deciding whether the defendant should be held responsible for the loss which has been suffered."

The facts are relatively straightforward: A charted vessel was redelivered late, resulting in the owners having to reduce the hire rate for the follow-on time charter. The claimed a daily loss rate of $8800 for 191 - a claim of $1,364,584 in damages. The House of Lords held that liability was confined to $158,301 - the difference between the market and the charter rates of hire for the nine days during which the owners were deprived of the use of their ship.

Professor Mckendrick notes : "While they agreed in the result, the reasoning of their Lordships differed in significant respects so that it is no easy task to identify the ratio of the case."

Analysis: Lord Hoffman focuses on the issue of whether the defenadant has assumed responsibility, objectively judged, for the loss in question and was attracted by importing the South Australia Asset Management Corp principles into the law of contract. For Lord Hoffman the key question is .... is the loss for which damages can be given of a type or kind which the person breaking the contract ought to be taken to have accepted responsibility? He held that contracting parties in this market would not have considered the losses arising out of a follow on fixture to be of a type or kind which the charter was taking responsibility for.

Lord Hope also focused on the assumption of responsibility issue. Lord Rodger was not troubled by the South Australia Assett Management issue and McKendrick notes " In his view, the loss suffered by the owners was not the ‘ordinary consequence’ of the breach of contract. The loss arose as a result of the ‘extremely volatile market conditions’ which could not have been reasonably foreseen as being likely to arise out of the delay. The difficulty with this approach is that what was not foreseen was the extent of the loss, rather than its nature"

Baroness Hale was not attracted by the idea of importing South Australia Assett Management principles into contract and decided the case on the decided the case the basis that the ‘parties would not have had this particular type of loss within their contemplation.’ In her judgment, the parties would have expected that the owner would be able to find a use for the ship even if it was returned late and that ‘it was only because of the unusual volatility of the market at that particular time that this particular loss was suffered.’


Lord Hoffman:

"The arbitrators, by a majority, found for the owners. They said that the loss on the new fixture fell within the first rule in Hadley v Baxendale (1854) 9 Exch 341, 354 as arising "naturally, ie according to the usual course of things, from such breach of contract itself". It fell within that rule because it was damage "of a kind which the [charterer], when he made the contract, ought to have realised was not unlikely to result from a breach of contract [by delay in redelivery]“: see Lord Reid in C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350, 382-383. The dissenting arbitrator did not deny that a charterer would have known that the owners would very likely enter into a following fixture during the course of the charter and that late delivery might cause them to lose it. But he said that a reasonable man in the position of the charterers would not have understood that he was assuming liability for the risk of the type of loss in question. The general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period and “any departure from this rule [is] likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable.”

# The majority arbitrators, in their turn, did not deny that the general understanding in the industry was that liability was so limited. They said (at para 17):

“The charterers submitted that if they had asked their lawyers or their Club what damages they would be liable for if the vessel was redelivered late, the answer would have been that they would be liable for the difference between the market rate and the charter rate for the period of the late delivery. We agree that lawyers would have given such an answer”.

# But the majority said that this was irrelevant. A broker “in a commercial situation” would have said that the “not unlikely” results arising from late delivery would include missing dates for a subsequent fixture, a dry docking or the sale of the vessel. Therefore, as a matter of law, damages for loss of these types was recoverable. The understanding of shipping lawyers was wrong.

# On appeal from the arbitrators, Christopher Clarke J [2007] 1 Lloyd’s Rep 19 and the Court of Appeal (Ward, Tuckey and Rix LJJ) [2007] 2 Lloyd’s Rep 555 upheld the majority decision.

Lord Hoffman identifies a key point: (my emphasis)

“The case therefore raises a fundamental point of principle in the law of contractual damages: is the rule that a party may recover losses which were foreseeable (“not unlikely”) an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?”

Lord Hoffman reviews a number of shipping authorities and stresses: ” Nowhere is there a suggestion of even a theoretical possibility of damages for the loss of a following fixture. “

Lord Hoffman continues…

# The question of principle has been extensively discussed in the literature. Recent articles by Adam Kramer (“An Agreement-Centred Approach to Remoteness and Contract Damages”) in Cohen and McKendrick (ed), Comparative Remedies for Breach of Contract (2004) pp 249-286 Andrew Tettenborn (“Hadley v Baxendale Foreseeability: a Principle Beyond its Sell-by Date”) in (2007) 23 Journal of Contract Law 120-147) and Andrew Robertson (“The basis of the remoteness rule in contract”) (2008) 28 Legal Studies 172-196) are particularly illuminating. They show that there is a good deal of support in the authorities and academic writings for the proposition that the extent of a party’s liability for damages is founded upon the interpretation of the particular contract; not upon the interpretation of any particular language in the contract, but (as in the case of an implied term) upon the interpretation of the contract as a whole, construed in its commercial setting. Professor Robertson considers this approach somewhat artificial, since there is seldom any helpful evidence about the extent of the risks the particular parties would have thought they were accepting. I agree that cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping, are likely to be more common. There is, I think, an analogy with the distinction which Lord Cross of Chelsea drew in Liverpool City Council v Irwin [1977] AC 239, 257-258 between terms implied into all contracts of a certain type and the implication of a term into a particular contract.

# It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken.

# The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price is paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing. And as Willes J said in British Columbia Saw Mill Co Ltd v Nettleship (1868) LR 3 CP 499, 508:

“I am disposed to take the narrow view, that one of two contracting parties ought not to be allowed to obtain an advantage which he has not paid for.”

# In their submissions to the House, the owners said that the “starting point” was that damages were designed to put the innocent party, so far as it is possible, in the position as if the contract had been performed: see Robinson v Harman (1848) 1 Exch 850, 855. However, in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corpn v York Montague Ltd) [1997] AC 191, 211, I said (with the concurrence of the other members of the House):

“I think that this was the wrong place to begin. Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages.”

# In other words, one must first decide whether the loss for which compensation is sought is of a “kind” or “type” for which the contract-breaker ought fairly to be taken to have accepted responsibility. In the South Australia case the question was whether a valuer, who had (in breach of an implied term to exercise reasonable care and skill) negligently advised his client bank that property which it proposed to take as security for a loan was worth a good deal more than its actual market value, should be liable not only for losses attributable to the deficient security but also for further losses attributable to a fall in the property market. The House decided that he should not be liable for this kind of loss:

“In the case of an implied contractual duty, the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.” (p 212)

# What is true of an implied contractual duty (to take reasonable care in the valuation) is equally true of an express contractual duty (to redeliver the ship on the appointed day). In both cases, the consequences for which the contracting party will be liable are those which “the law regards as best giving effect to the express obligations assumed” and “[not] extending them so as to impose on the [contracting party] a liability greater than he could reasonably have thought he was undertaking”.

# The effect of the South Australia case was to exclude from liability the damages attributable to a fall in the property market notwithstanding that those losses were foreseeable in the sense of being “not unlikely” (property values go down as well as up) and had been caused by the negligent valuation in the sense that, but for the valuation, the bank would not have lent at all and there was no evidence to show that it would have lost its money in some other way. It was excluded on the ground that it was outside the scope of the liability which the parties would reasonably have considered that the valuer was undertaking.

# That seems to me in accordance with the careful way in which Robert Goff J stated the principle in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] Lloyd’s Rep 175, 183, where the emphasis is upon what a reasonable person would have considered to be the extent of his responsibility:

“The test appears to be: have the facts in question come to the defendant’s knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach.”

# A similar approach was taken by the Court of Appeal in Mulvenna v Royal Bank of Scotland plc [2003] EWCA Civ 1112, mentioned by Professor Robertson in the article to which I have referred. This was an application to strike out a claim for damages for the loss of profits which the claimant said he would have made if the bank had complied with its agreement to provide him with funds for a property development. The Court of Appeal held that even on the assumption that the bank knew of the purpose for which the funds were required and that it was foreseeable that he would suffer loss of profit if he did not receive them, the damages were not recoverable. Sir Anthony Evans said:

“The authorities to which we were referred…demonstrate that the concept of reasonable foreseeability is not a complete guide to the circumstances in which damages are recoverable as a matter of law. Even if the loss was reasonably foreseeable as a consequence of the breach of duty in question (or of contract, for the same principles apply), it may nevertheless be regarded as ‘too remote a consequence’ or as not a consequence at all, and the damages claim is disallowed. In effect, the chain of consequences is cut off as a matter of law, either because it is regarded as unreasonable to impose liability for that consequence of the breach (The Pegase [1981] 1 Lloyd’s Rep 175 Robert Goff J), or because the scope of the duty is limited so as to exclude it (Banque Bruxelles SA v. Eagle Star [1997] AC 191), or because as a matter of commonsense the breach cannot be said to have caused the loss, although it may have provided the opportunity for it to occur…”

# By way of explanation for why in such a case liability for lost profits is excluded, Professor Robertson (at p 183) offers what seem to me to be some plausible reasons:

“It may be considered unjust that the bank should be held liable for the loss of profits simply because the bank knew of the proposed development at the time the refinancing agreement was made. The imposition of such a burden on the bank may be considered unjust because it is inconsistent with commercial practice for a bank to accept such a risk in a transaction of this type, or because the quantum of the liability is disproportionate to the scale of the transaction or the benefit the bank stood to receive.”

# It is generally accepted that a contracting party will be liable for damages for losses which are unforeseeably large, if loss of that type or kind fell within one or other of the rules in Hadley v Baxendale: see, for example, Staughton J in Transworld Oil Ltd v North Bay Shipping Corpn (The Rio Claro) [1987] Lloyd’s Rep 173, 175 and Jackson v Royal Bank of Scotland plc [2005] 1 WLR 377. That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But the South Australia and Mulvenna cases shows that it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility.

# What is the basis for deciding whether loss is of the same type or a different type? It is not a question of Platonist metaphysics. The distinction must rest upon some principle of the law of contract. In my opinion, the only rational basis for the distinction is that it reflects what would have reasonable have been regarded by the contracting party as significant for the purposes of the risk he was undertaking. In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, where the plaintiffs claimed for loss of the profits from their laundry business because of late delivery of a boiler, the Court of Appeal did not regard “loss of profits from the laundry business” as a single type of loss. They distinguished (at p 543) losses from “particularly lucrative dyeing contracts” as a different type of loss which would only be recoverable if the defendant had sufficient knowledge of them to make it reasonable to attribute to him acceptance of liability for such losses. The vendor of the boilers would have regarded the profits on these contracts as a different and higher form of risk than the general risk of loss of profits by the laundry.

# If, therefore, one considers what these parties, contracting against the background of market expectations found by the arbitrators, would reasonably have considered the extent of the liability they were undertaking, I think it is clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility. Such a risk would be completely unquantifiable, because although the parties would regard it as likely that the owners would at some time during the currency of the charter enter into a forward fixture, they would have no idea when that would be done or what its length or other terms would be. If it was clear to the owners that the last voyage was bound to overrun and put the following fixture at risk, it was open to them to refuse to undertake it. What this shows is that the purpose of the provision for timely redelivery in the charterparty is to enable the ship to be at the full disposal of the owner from the redelivery date. If the charterer’s orders will defeat this right, the owner may reject them. If the orders are accepted and the last voyage overruns, the owner is entitled to be paid for the overrun at the market rate. All this will be known to both parties. It does not require any knowledge of the owner’s arrangements for the next charter. That is regarded by the market is being, as the saying goes, res inter alios acta.

# The findings of the majority arbitrators shows that they considered their decision to be contrary to what would have been the expectations of the parties, but dictated by the rules in Hadley v Baxendale as explained in The Heron II [1969] 1 AC 350. But in my opinion these rules are not so inflexible; they are intended to give effect to the presumed intentions of the parties and not to contradict them.

# The owners submit that the question of whether the damage is too remote is a question of fact on which the arbitrators have found in their favour. It is true that the question of whether the damage was foreseeable is a question of fact: see Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196. But the question of whether a given type of loss is one for which a party assumed contractual responsibility involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law.

# The owners say that the parties are entirely at liberty to insert an express term excluding consequential loss if they want to do so. Some standard forms of charter do. I suppose it can be said of many disputes over interpretation, especially over implied terms, that the parties could have used express words or at any rate expressed themselves more clearly than they have done. But, as I have indicated, the implication of a term as a matter of construction of the contract as a whole in its commercial context and the implication of the limits of damages liability seem to me to involve the application of essentially the same techniques of interpretation. In both cases, the court is engaged in construing the agreement to reflect the liabilities which the parties may reasonably be expected to have assumed and paid for. It cannot decline this task on the ground that the parties could have spared it the trouble by using clearer language. In my opinion, the findings of the arbitrators and the commercial background to the agreement are sufficient to make it clear that the charterer cannot reasonably be regarded as having assumed the risk of the owner’s loss of profit on the following charter. I would therefore allow the appeal.

Analysis: Lord Hoffman focuses on the issue of whether the defenadant has assumed responsibility, objectiovely judged, for the loss in question and was attracted by importing the South Australia Asset Management Corp principles into the law of contract. For Lord Hoffman the key question is …. is the loss for which damages can be given of a type or kind which the person breaking the contract ought to be taken to have accepted responsibility? He held that contracting parties in this market would not have considered the losses arising out of a follow on fixture to be of a type or kind which the charter was taking responsibility for,

LORD HOPE OF CRAIGHEAD

# The majority arbitrators based their approach on their understanding of the test of remoteness as explained in The Heron II [1969] 1 AC 350, and in particular by Lord Reid at pp 382-383, as being to ask whether the loss in question was

“of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from [the] breach.”

This had the result, as they put it, that the parties’ knowledge of the markets within which they operated at the date of the addendum which extended the original charter period was more than sufficient for the loss claimed to be within their contemplation. Counsel for the charterers had agreed in exchanges with members of the tribunal that the “not unlikely” results arising from the late delivery of the vessel would include missing dates for a subsequent fixture. The majority then asked themselves what was within the contemplation of the parties as a not unlikely result of a breach which resulted in missing such a date, bearing in mind that it was agreed that the market rates for tonnage go up and down, sometimes quite rapidly. They answered this question in the owners’ favour. On the facts, they said, the need to adjust the relevant dates for the subsequent employment of the vessel through the revised terms agreed with the new charterers was within the contemplation of the parties as a not unlikely result of the breach. It might be that the precise amount of the loss could be seriously affected by market factors such as a sharp drop of the rate for the particular type of vessel during the relevant period. But the type of loss was readily identifiable.
# The minority arbitrator pointed out that this would be to impose on the charterers a completely unquantifiable risk in what is a relatively common situation – late delivery under a time charter – given the exigencies of the shipping industry. If the test was what a reasonable man in the position of the charterers would have understood at the time of entering into the charter, it was impossible to conclude that they would or should have understood that they were assuming responsibility for the risk of loss of a particular follow-on fixture concluded by the owners. They had no knowledge of or control over the duration of any follow-on fixture which the owners might conclude. The fundamental problem that he had with the owners’ argument was that if damages of this type were recoverable without particular knowledge sufficient to justify an assumption of risk it was difficult to see where a line was to be drawn, and there was a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable……

…………..

# Assumption of responsibility, which forms the basis of the law of remoteness of damage in contract, is determined by more than what at the time of the contract was reasonably foreseeable. It is important to bear in mind that, as Lord Reid pointed out in The Heron II [1969] 1 AC 350, 385, the rule that applies in tort is quite different and imposes a much wider liability than that which applies in contract. The defendant in tort will be liable for any type of loss and damage which is reasonably foreseeable as likely to result from the act or omission for which he is held liable. Reasonable foreseeability is the criterion by which the extent of that liability is to be judged, and it may result in his having to pay for something that, although reasonably foreseeable, was very unusual, not likely to occur and much greater in amount than he could have anticipated. In contract it is different and, said Lord Reid, at p 386, there is good reason for the difference:

“In contract, if one party wishes to protect himself against a risk which to the other party would appear unusual, he can direct the other party’s attention to it before the contract is made, and I need not stop to consider in what circumstances the other party will then be held to have accepted responsibility in that event.”

……………… The policy of the law is that effect should be given to the presumed intention of the parties. That is why the damages that are recoverable for breach of contract are limited to what happens in ordinary circumstances – in the great multitude of cases, as Alderson B put it in Hadley v Baxendale – where an assumption of responsibility can be presumed, or what arises from special circumstances known to or communicated to the party who is in breach at the time of entering into the contract which because he knew about he can be expected to provide for. This is a principle of general application. We are dealing in this case with a highly specialised area of commercial law. But the principle by which the issue must be resolved is that which applies in the law of contract generally.

# For these reasons, which owe much to my noble and learned friends’ careful review of the authorities, I too would allow the appeal.

Frustration

CTI Group v Transclear SA [2008] EWCA Civ 856
Court of Appeal

This is an appeal against an order of Field J. varying an award made by an arbitration tribunal dismissing a claim by the respondent, CTI Group Inc. (“the buyers”), against the appellant, Transclear S.A. (“the sellers”), for damages for non-delivery of a cargo of cement. The dispute between the parties arose out of a contract made between the buyers and the sellers on 7 th May 2004 for the sale of 27,000 m.t. of Indonesian cement in bulk f.o.b. the ‘Mary Nour’ at Padang. The sellers were unable to provide a cargo for the vessel at Padang and on 17 th May the parties entered into a substitute contract for the sale of the same quantity of cement on substantially the same terms save that shipment was to be made in Taiwan. In the event, however, the sellers failed to provide a cargo for the vessel in Taiwan either, and as a result the buyers made a claim against them for damages in the sum of US$449,726.96 representing the loss incurred in obtaining a cargo from an alternative source in Russia.

Arbitrators found the contract had been frustrated. Mr Justice Field in the High Court held that contract had not been frsutrated because it had become impossible to perform. The Court of Appeal dismissed the appeal and held the contract had not been frustrated,.

The case illustrates the principle that Frustration, as a doctrine, is very narrowly applied. To show frsutration it would be necessary to demonstrate that performance of the new contract would be fundamentally different from that originally contemplated.

The Court of Appeal also confirmed that frustration can apply to a contract for the sale by description of unascertained goods of a specified origin.

Lord Justice Moore-Bick: “…..In my view it is impossible to hold that the contract in this case was frustrated. As the decided cases show, the fact that a supplier chooses not to make goods available for shipment, thus rendering performance by the seller impossible, is not of itself sufficient to frustrate a contract of this kind. In order to rely on the doctrine of frustration it is necessary for there to have been a supervening event which renders the performance of the seller’s obligations impossible or fundamentally different in nature from that which was envisaged when the contract was made.


Lord Justice Moore-Bick

# The dictum of Lord Radcliffe in Davis v Fareham at page 729 that:

“frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”

is generally accepted as encapsulating the modern law on frustration. However, not every supervening event which prevents performance of the contract will result in its being frustrated because it may be apparent from the general nature of the contract, its particular terms and the context in which it was made that it was intended to apply in the circumstances that have arisen. Thus in Davis v Fareham Lord Reid said at page 720:

“It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made. . . . . . On this view there is no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with the new situation if they had foreseen it. The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.”

# As each of these passages makes clear, it is essential to the doctrine of frustration that the performance of the contract in the new situation should be fundamentally different from that originally contemplated. In deciding whether that is the case it is necessary to have regard to the general nature of the contract as well as its specific terms, the context in which it was made and the contemplation of the parties as to the range of circumstances in which it might come to be performed. Having regard to the nature of the arbitrators’ findings it is important to recognise that a contract will not necessarily be frustrated simply because performance has become impossible, as some of the cases to which our attention was drawn show, and that it will not be frustrated simply because one party is prevented from performing in the manner originally intended if performance in some other manner is possible.

# A good example of this latter point is to be found in J. Lauritzen A.S. v Wijsmuller B.V. (The ‘Super Servant Two’) [1990] 1 Lloyd’s Rep. 1, in which this court considered the position of a contracting party placed, as a result of a supervening event for which he had no responsibility, in the position of being unable to perform one or other of two contracts. In that case Wijsmuller had agreed to transport a drilling rig belonging to Lauritzen from Japan to Rotterdam using one or other of two specialised vessels, ‘Super Servant One’ and ‘Super Servant Two’. Wijsmuller intended to perform the contract using ‘Super Servant Two’, but after the contract had been made ‘Super Servant Two’ sank. Wijsmuller had entered into other contracts which they could only perform with ‘Super Servant One’ and in the event they chose to perform those contracts instead of their contract with Lauritzen. In proceedings brought by Lauritzen Wijsmuller contended that the contract had been frustrated as a result of the sinking of ‘Super Servant Two’, but that was rejected on the grounds that since the contract provided for the use of either vessel, the loss of ‘Super Servant Two’ did not render performance impossible or fundamentally different.

# Having regard to the nature of the present case, it is not surprising that Mr. Nolan and Mr. Kenny each drew our attention to a number of authorities relating to contracts for the sale of unascertained goods by description where a failure by the ultimate supplier had led to the seller’s failing to perform the contract. In most, but not all, of those cases the supplier’s failure to make goods available to the seller did not have the effect of frustrating the contract. The first of these was Blackburn Bobbin v T.W. Allen [1918] 2 KB 467 in which the defendant had agreed to sell the plaintiff a certain quantity of Finnish timber free on rail Hull to be delivered between June and November 1914. It was the practice of timber merchants not to keep stocks of Finnish timber in this country but to ship timber from Finland to meet contracts of that kind. At the outbreak of war in August 1914 the defendants had not made any deliveries under the contract and after that date it became impossible due to the disorganisation of traffic for them to obtain Finnish timber for delivery to the plaintiffs. The court rejected the submission that the contract had been frustrated. Pickford L.J. held that having regard to the nature and terms of the contract the continuance of the usual shipping arrangements (which were unknown to the plaintiffs) was not fundamental to the existence of the contract. Another way of putting it might be to say that, having contracted in unqualified terms, the seller took the risk of being able to obtain the goods needed to perform his contract.

# In Lebeaupin v Crispin [1920] 2 K.B. 714 the defendant entered into two contracts with the plaintiff, one for the sale of the first 2,500 cases of ½ lb. tins of Fraser river salmon packed by the St. Mungo Cannery during the season of 1917 and one for the sale of the first 2,500 cases of ½ lb. tins of Fraser river salmon packed by the Acme Cannery during the same season. Each contract contained a wide exception clause and a force majeure clause. The St. Mungo cannery failed to produce more than a small number of ½ lb. tins because the tins it had purchased for the purpose proved defective and by the time it had acquired a new stock the run of salmon had finished. The Acme cannery failed to produce sufficient ½ lb. tins because it chose to use its 1 lb. tins first and before it could fill its ½ lb. tins the run of fish had ceased. McCardie J. held that the sellers were in the same position as the canneries and could not rely on any defence by way of frustration that would not have been available to them. There was no failure of the fish run and clearly neither a lack of sound tins nor a decision to pack a larger size first would provide a defence to the canneries if the contracts had been made with them.

# In Re Thornett & Fehr and Yuills Ltd [1921] 1 K.B. 219 Yuills agreed to sell Thornett & Fehr 200 tons of Australasian beef tallow of specified brands, 1919 make. In the event the manufacturer produced no tallow at one of its works, although it could have done so, and produced only 161 tons of the specified brand at the other because of a strike. The seller claimed that the contract had been frustrated, but the court rejected that argument. Lord Reading C.J., with whom Darling J. and Acton J. agreed, held that since the contract was one for the sale by description of unascertained goods, the failure of the manufacturer to produce the goods did not result in its frustration.

# Lewis Emanuel & Son Ltd v Sammut [1959] 2 Lloyd’s Rep. 629 concerned a contract made on 14th April 1958 for the sale of Maltese potatoes c.i.f. London, shipment on or before 24th April 1958. The seller was unable to obtain space on the only vessel that called at Malta between 14th and 24th April and was therefore unable to perform the contract. The seller argued that the contract was frustrated, or that it was subject to an implied term that if shipping space could not be obtained it should be discharged. Pearson J. rejected both arguments. He expressed the view that there is nothing exceptional in principle about c.i.f. contracts for unascertained goods, but recognised that the very nature of such contracts is likely to make frustration less likely than in the case of other types of contract. Applying the principles enunciated in Davis v Fareham he held that the contract was not frustrated because under a contract of that kind the seller undertakes an obligation to find or provide a cargo, shipping space and insurance and that nothing distinctive, unusual or extraordinary had occurred that would constitute a frustrating event.

# In Intertradex v Lesieur-Tourteaux S.A.R.L. [1978] 2 Lloyd’s Rep. 509 the sellers agreed to sell to the buyers 800 tons of Mali groundnut expellers c.i.f. Rouen, shipment in March 1973. A breakdown of the machinery at the supplier’s factory resulted in the sellers’ being able to deliver only 511 tons and the sellers contended that the contract was frustrated. Donaldson J. at first instance and this court on appeal rejected that argument on the grounds that in the absence of a term to the contrary in the contract the seller takes the risk of disruption resulting from commonplace occurrences of that kind.

# In Atisa S.A. v Aztec A.G. [1983] 2 Lloyd’s Rep. 579 the parties entered into a contract for the sale of 13,000-14,000 tonnes of Kenyan sugar f.o.b. stowed Mombasa. The sellers intended to fulfil the contract using sugar purchased from the Kenyan government, which was the sole exporter. In the event, however, the Kenyan government decide not to perform the contract which it contended was invalid. In an arbitration brought by the buyers the sellers maintained that the contract had been frustrated. The arbitrators found that the Kenyan government had simply been unwilling to deliver the goods and had decided that the contract should be cancelled, acting under private law rather than in the exercise of its sovereign powers. They therefore rejected the sellers’ argument. On appeal Parker J. upheld their decision. He put the matter in this way at page 585 col. 2:

“It is to be observed that for the question to be answered in the affirmative it is not enough to show that without default of either party the contract has become incapable of being performed. It must be shown that the incapability is because the circumstances at the time would render performance radically different from that which was undertaken by the contract.

. . . . . . . . . .

There was, here, no change in the law and nothing of the nature of a failure or destruction of the subject matter. . . . . . . In essence no more has happened than that (1) the sellers’ supplier which was the sole supplier did not wish to supply partly for financial reasons and partly to preserve the build up of stocks and (2) that, having been advised that the contract was not binding, the supplier refused to perform. If the Attorney-General’s advice was correct the sellers failed to make a proper supply contract. If it was incorrect then they will have an action upon the supply contract.”

# Finally it is necessary to refer to the case of Société Co-operative Suisse des Céréales et Matières Fourragères v La Plata Cereal Company S.A. (1946) 80 Ll. L. Rep 530 on which Mr. Nolan placed some reliance. In that case the buyers and the sellers entered into two contracts in December 1944 and January 1945 respectively for the sale of Plate maize f.o.b. Buenos Aires for shipment 16th May/June 1945. On 30th April and 2nd May 1945 the Argentine government promulgated two decrees which provided that all maize destined for export must be purchased exclusively from the Agricultural Products Regulating Board. There was no formal prohibition on the export of maize during 1945, but the Agricultural Products Regulating Board did not have goods of the contract description which they were willing to sell for export before 30th June 1945. Morris J. held that the contract had been frustrated. He said at page 543 col. 1:

“In my judgment, the basis of the contract did become overthrown. Although there was no prohibition of export in the sense that any exporting was absolutely forbidden, there was on the facts as found a de facto prohibition which prevented the sellers from exporting. They were by law prohibited from exporting any maize that they had not purchased from the Argentine Agricultural Products Regulating Board, and that Board had no maize which they were willing to sell. The sellers had 6750 tons of maize. It became illegal for them to export it. The new conditions created by the changes in the law fundamentally altered the situation. Exportable maize was, by law, removed from the scope of private obligation. The parties ought not to be regarded as having contracted to impose upon the sellers a continuing obligation to export goods, even at a time when such exporting would be contrary to the law of the land.”

# These authorities, in particular Société Co-operative Suisse des Céréales et Matières Fourragères v La Plata Cereal Company S.A. and Lewis Emanuel & Son Ltd v Sammut, make it clear that the principles of frustration are capable of applying to a contract for the sale by description of unascertained goods of a specified origin, a conclusion that is also supported by the observations of Russell J. in In re Badische Co Ltd [1921] 2 Ch. 331 at pages 381-383, another case on which Mr. Nolan relied. However, they also make it clear that, in the absence of some exceptional supervening event, such a contract will not be frustrated simply by a failure on the part of the ultimate supplier to make goods available for delivery. The reason for that is not far to seek: it is implicit in a contract of this kind that the seller will either supply the goods himself or (more likely) will make arrangements, directly or indirectly, for the goods to be supplied by others. In other words, he undertakes a personal obligation to procure the delivery of contractual goods and thereby takes the risk of his supplier’s failure to perform. That obligation will be discharged by frustration if a supervening event not contemplated by the contract renders that performance impossible or fundamentally different from what was originally envisaged, but most events which result in the failure of a supplier to provide the goods will not fall into that category. A few, however, such as a prohibition of export rendering the shipment of the goods unlawful, usually will. It is not surprising, therefore, that the authorities support Mr. Kenny’s submission that the contract will not be frustrated if, although delivery remains physically and legally possible, the seller’s supplier chooses (for whatever reason) not to make the goods available.

………….

……In my view it is impossible to hold that the contract in this case was frustrated. As the decided cases show, the fact that a supplier chooses not to make goods available for shipment, thus rendering performance by the seller impossible, is not of itself sufficient to frustrate a contract of this kind. In order to rely on the doctrine of frustration it is necessary for there to have been a supervening event which renders the performance of the seller’s obligations impossible or fundamentally different in nature from that which was envisaged when the contract was made.

Consideration
Proprietary Estoppel

Yeomans Row Management Ltd v Cobbe [2008] UKHL 55
House of Lords

1. It is not sufficient to establish proprietary estoppel to allege and prove that the defendant was guilty of unconscionable conduct

2. Lord Scott defined the essence of properietary estoppel … “An “estoppel” bars the object of it from asserting some fact or facts, or, sometimes, something that is a mixture of fact and law, that stands in the way of some right claimed by the person entitled to the benefit of the estoppel. The estoppel becomes a “proprietary” estoppel – a sub-species of a “promissory” estoppel – if the right claimed is a proprietary right, usually a right to or over land but, in principle, equally available in relation to chattels or choses in action.


Lord Scott

# The essence of the problem to be resolved in this case can be quite shortly stated. A is the owner of land with potential for residential development and enters into negotiations with B for the sale of the land to B. They reach an oral “agreement in principle” on the core terms of the sale but no written contract, or even a draft contract for discussion, is produced. There remain some terms still to be agreed. The structure of the agreement in principle that A and B have reached is that B, at his own expense, will make and prosecute an application for the desired residential development and that, if the desired planning permission is obtained, A will sell the land to B, or more probably to a company nominated by B, for an agreed up-front price, £x. B will then, again at his own expense, develop the land in accordance with the planning permission, sell off the residential units, and, when the gross proceeds of sale received by B equals £2x, any further gross proceeds of sale will be divided equally between A and B. Pursuant to this agreement in principle B makes and prosecutes an application for planning permission for the residential development that A and he have agreed upon. B is encouraged by A to do so. In doing so B spends a considerable sum of money as well, of course, as a considerable amount of time. The application is successful and the desired planning permission is obtained. A then seeks to re-negotiate the core financial terms of the sale, asking, in particular, for a substantial increase in the sum of money that would represent £x. B is unwilling to commit himself to the proposed new financial terms and A is unwilling to proceed on the basis of the originally agreed financial terms. So B commences legal proceedings. The question for your Lordships is what relief, in the circumstances described, B should be granted, for, I believe, none of your Lordships considers that he would not be entitled to any.

# A number of possible bases for the grant of relief to B need to be considered.

(i) First, there is proprietary estoppel. B has, with the encouragement of A, spent time and money in obtaining the planning permission and has done so, to the knowledge of A, in reliance on the oral agreement in principle and in the expectation that, following the grant of the planning permission, a formal written agreement for the sale of the property, incorporating the core financial terms that had already been agreed and any other terms necessary for or incidental to the implementation of the core terms, would be entered into. In these circumstances, it could be, and has been, argued, A should be held to be estopped from denying that B had acquired a proprietary interest in the property and a court of equity should grant B the relief necessary to reflect B’s expectations.

(ii) Second, there is constructive trust. In circumstances such as those described, equity can, it is suggested, give effect to the joint venture agreed upon by A and B by treating A as holding the property upon a constructive trust for himself and B, with A and B taking beneficial interests calculated to enable effect to be given to B’s expectations engendered by the agreement in principle.

(iii) Third, there is unjust enrichment. The grant of planning permission, obtained by B at his expense and through the deployment of his time and planning expertise, has increased the value of the property. So A has been enriched at the expense of B and, since it was A’s repudiation of the oral agreement in principle that frustrated the basis upon which B had been relying, perhaps unjustly enriched.

(iv) Fourthly, there is the question of a quantum meruit. B has supplied valuable services to A in obtaining planning permission for the benefit of A’s property. There is no question of the services having been provided gratuitously but no fee for the services was agreed between A and B. B’s reward was supposed to have been the conclusion of an enforceable contract. In these circumstances a quantum meruit, taking into account the amount of B’s expenditure of time and money and the value of the services, can, it could be argued, be fixed by the court.

(v) Fifthly, the arrangement between A and B for the sale of the property to B can be regarded as involving two stages. The first stage is the making and prosecution by B at his own expense of the application for the grant of planning permission. This stage constitutes, in effect, the consideration given by B to A in return for A’s promise, if planning permission is granted, to enter into a formal written contract of sale embodying, inter alia, the core financial terms that had already been agreed. A’s promise, being no more than an oral promise to enter into a written contract and, moreover, part of an incompletely negotiated agreement, is not contractually enforceable but A’s repudiation of that promise, after B had supplied his first stage consideration and the planning permission had been granted, would, it could be argued, constitute a complete failure of the consideration that A was to have given, and entitle B to a restitutionary remedy.

(vi) Finally, in circumstances such as those described the possibility of a remedy in damages for the tort of deceit must be kept in mind. If A represented to B that he was willing to enter into a written agreement, or regarded himself as bound by an oral agreement embodying the core financial terms that had already been agreed, and so represented at a time when he, A, had already decided to repudiate those terms and demand better ones, B, if and to the extent that he had acted on those false representations and thereby suffered loss, would have an action in deceit for damages.
# Two features of these possible remedies are worth noticing. First, both the proprietary estoppel claim and the constructive trust claim are claims to a proprietary interest in the property. The other remedies do not require proprietary claims but follow upon in personam claims for compensation or restitution. Second, a proprietary estoppel claim and a constructive trust claim would constitute, if successful, a means whereby B could obtain a remedy providing him with a benefit more or less equivalent to the benefit he expected to obtain from the oral and inchoate agreement; in effect a benefit based on the value of his non-contractual expectation. By way of contrast, an unjust enrichment remedy, a quantum meruit remedy and a consideration that has wholly failed remedy are essentially restitutionary in character, concentrating not at all on the value of the expected benefit of which B has been deprived but, as the case may be, on the extent of A’s enrichment at B’s expense, on the value of B’s services or on the amount or value of the consideration provided by B to A. And a tortious remedy for deceit would concentrate on the loss caused to B in acting on A’s false representation and would seek to restore him to the position in which he would have been if the false representation had never been made. One of the main issues for your Lordships to decide on this appeal is, in my opinion, whether B should be held entitled to a proprietary remedy based on the extent of his disappointed expectations or to an in personam remedy of, using the adjective fairly loosely, a restitutionary character. The question of a remedy in deceit does not arise, for no allegation of fraudulent misrepresentation has been made, but the conceptual possibilities of such a claim are useful to keep in mind. It is very well established that the remedy for a fraudulent misrepresentation inducing a contract is, besides rescission of the contract if the victim so elects, a tortious action in deceit for damages for any loss thereby caused; and that, unless the representation has become a term of the contract, the victim is not entitled to claim damages measured by the loss of the benefit he would have obtained if the representation had been true, i.e. he is not entitled to contractual damages….

…Proprietary estoppel

# Both the learned judge and the Court of Appeal regarded the relief granted as justified on the basis of proprietary estoppel. I respectfully disagree. The remedy to which, on the facts as found by the judge, Mr Cobbe is entitled can, in my opinion, be described neither as based on an estoppel nor as proprietary in character. There are several important authorities to which I want to refer but I want first to consider as a matter of principle the nature of a proprietary estoppel. An “estoppel” bars the object of it from asserting some fact or facts, or, sometimes, something that is a mixture of fact and law, that stands in the way of some right claimed by the person entitled to the benefit of the estoppel. The estoppel becomes a “proprietary” estoppel – a sub-species of a “promissory” estoppel – if the right claimed is a proprietary right, usually a right to or over land but, in principle, equally available in relation to chattels or choses in action. So, what is the fact or facts, or the matter of mixed fact and law, that, in the present case, the appellant is said to be barred from asserting? And what is the proprietary right claimed by Mr Cobbe that the facts and matters the appellant is barred from asserting might otherwise defeat?

# The pleadings do not answer these questions. The terms of the oral “agreement in principle”, the second agreement, relied on by Mr Cobbe are pleaded but it is accepted that there remained still for negotiation other terms. The second agreement was, contractually, an incomplete agreement. The terms that had already been agreed were regarded by the parties as being “binding in honour”, but it follows that the parties knew they were not legally binding. So what is it that the appellant is estopped from asserting or from denying? The appellant cannot be said to be estopped from asserting that the second agreement was unenforceable for want of writing, for Mr Cobbe does not claim that it was enforceable; nor from denying that the second agreement covered all the terms that needed to be agreed between the parties, for Mr Cobbe does not claim that it did; nor from denying that, pre 18 March 2004, Mr Cobbe had acquired any proprietary interest in the property, for he has never alleged that he had. And what proprietary claim was Mr Cobbe making that an estoppel was necessary to protect? His originally pleaded claim to specific performance of the second agreement was abandoned at a very early stage in the trial (see para.8 above) and the proprietary claims that remained were claims that the appellant held the property on trust for itself and Mr Cobbe. These remaining proprietary claims were presumably based on the proposition that a constructive trust of the property, with appropriate beneficial interests for the appellant and Mr Cobbe, should, by reason of the unconscionable conduct of Mrs Lisle-Mainwaring, be imposed on the property. I must examine that proposition when dealing with constructive trust as a possible means of providing Mr Cobbe with a remedy, but the proposition is not one that requires or depends upon any estoppel.

# It is relevant to notice that the amendments to Mr Cobbe’s pleaded prayer for relief, made when the specific performance and damages for breach of contract claims were abandoned, include the following :

“(4) Alternatively, a declaration that [the appellant and Mrs Lisle-Mainwaring] are estopped from denying that [Mr Cobbe] has such interest in the Property and/or the proceeds of sale thereof as the Court thinks fit.”

This is the only pleaded formulation of the estoppel relied on by Mr Cobbe and, with respect to the pleader, is both meaningless and pointless. Etherton J concluded, in para.85 of his judgment, that the facts of the case “gave rise to a proprietary estoppel in favour of Mr Cobbe”, but nowhere identified the content of the estoppel. Mummery LJ agreed (paras.60 and 61 of his judgment, concurred in by Dyson LJ (para.120) and Sir Martin Nourse (para.141)), but he, too, did not address the content of the estoppel. Both Etherton J and Mummery LJ regarded the proprietary estoppel conclusion as justified by the unconscionability of Mrs Lisle-Mainwaring’s conduct. My Lords, unconscionability of conduct may well lead to a remedy but, in my opinion, proprietary estoppel cannot be the route to it unless the ingredients for a proprietary estoppel are present. These ingredients should include, in principle, a proprietary claim made by a claimant and an answer to that claim based on some fact, or some point of mixed fact and law, that the person against whom the claim is made can be estopped from asserting. To treat a “proprietary estoppel equity” as requiring neither a proprietary claim by the claimant nor an estoppel against the defendant but simply unconscionable behaviour is, in my respectful opinion, a recipe for confusion.
# Deane J, in Muschinski v Dodds (1985) 160 CLR 583, in a judgment concurred in by Mason J, drew attention to the nature and function of constructive trusts in the common law. His remarks, at 612 to 616 repay careful reading but I would respectfully draw particular attention to a passage at 615 relevant not only to constructive trusts but equally, in my opinion, to proprietary estoppel. He said this:

“The fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction, starting from the conceptual foundations of such principles … Under the law of this country – as, I venture to think under the present law of England … proprietary rights fall to be governed by principles of law and not by some mix of judicial discretion, subjective views about which party ‘ought to win’ … and the ‘formless void’ of individual moral opinion …”

A finding of proprietary estoppel, based on the unconscionability of the behaviour of the person against whom the finding was made but without any coherent formulation of the content of the estoppel or of the proprietary interest that the estoppel was designed to protect invites, in my opinion, criticism of the sort directed by Deane J in the passage cited. However, Mr Ivory QC, counsel for Mr Cobbe both in the Court of Appeal and before your Lordships, has relied on authority and to that I must now turn.
# Oliver J (as he then was) stated the requirements of proprietary estoppel in a “common expectation” class of case in a well-known and often cited passage in Taylors Fashions Ltd v Liverpool Victoria Trustees Co. Ltd [1982] QB 133 at 144 :

“if A under an expectation created or encouraged by B that A shall have a certain interest in land, thereafter, on the faith of such expectation and with the knowledge of B and without objection by him, acts to his detriment in connection with such land, a Court of Equity will compel B to give effect to such expectation.”

Note the reference to “a certain interest in land”. Taylors Fashions was a case where the “certain interest” was an option to renew a lease. There was no lack of certainty; the terms of the new lease were spelled out in the option and the lessees’ expectation was that on the exercise of the option the new lease would be granted. The problem was that the option had not been registered under the Land Charges Act 1925 and the question was whether the freeholders, successors in title to the original lessors who had granted the option, could be estopped from denying the right of the lessees to exercise the option. But what is the comparable expectation and the comparable “certain interest” in the present case? Mr Cobbe’s expectation, encouraged by Mrs Lisle-Mainwaring, was that upon the grant of planning permission there would be a successful negotiation of the outstanding terms of a contract for the sale of the property to him, or to some company of his, and that a formal contract, which would include the already agreed core terms of the second agreement as well as the additional new terms agreed upon, would be prepared and entered into. An expectation dependent upon the conclusion of a successful negotiation is not an expectation of an interest having any comparable certainty to the certainty of the terms of the lessees’ interest under the Taylors Fashions option. In the Taylors Fashions case both the content of the estoppel, i.e. an estoppel barring the new freeholders from asserting that the option was unenforceable for want of registration, and the interest the estoppel was intended to protect, i.e. the option to have a renewal of the lease, were clear and certain. Not so here. The present case is one in which an unformulated estoppel is being asserted in order to protect Mr Cobbe’s interest under an oral agreement for the purchase of land that lacked both the requisite statutory formalities (s.2 of the 1989 Act) and was, in a contractual sense, incomplete.
# A reference to the expectation of “a certain interest in land” had appeared in the speech of Lord Kingsdown in Ramsden v Dyson (1866) LR 1 HL 129 at 170

“If a man, under a verbal agreement with a landlord for a certain interest in land, or, what amounts to the same thing, under an expectation, created or encouraged by the landlord, that he shall have a certain interest, takes possession of such land, with the consent of the landlord, and upon the faith of such promise or expectation, with the knowledge of the landlord, and without objection by him, lays out money upon the land, a Court of equity will compel the landlord to give effect to such promise or expectation.”

Lord Kingsdown went on to say, at 171, that even if there were uncertainty as to the terms of the contract a court of equity could nevertheless interfere in order to prevent fraud but that it was unclear what, in that case, the remedy should be. The choices, he said, were between the grant of a specific interest in the land and the grant of a restitutionary remedy such as monetary compensation. This is an issue to which I must return but it suffices for the moment to notice that Lord Kingsdown’s remarks at 171 show that, when referring at 170 to “a verbal agreement … for a certain interest in land”, he was referring to an agreement that was complete, with no uncertainty as to its terms.
# Lord Kingsdown’s requirement that there be an expectation of “a certain interest in land”, repeated in the same words by Oliver J in the Taylors Fashions case, presents a problem for Mr Cobbe’s proprietary estoppel claim. The problem is that when he made the planning application his expectation was, for proprietary estoppel purposes, the wrong sort of expectation. It was not an expectation that he would, if the planning application succeeded, become entitled to “a certain interest in land”. His expectation was that he and Mrs Lisle-Mainwaring, or their respective legal advisers, would sit down and agree the outstanding contractual terms to be incorporated into the formal written agreement, which he justifiably believed would include the already agreed core financial terms, and that his purchase, and subsequently his development of the property, in accordance with that written agreement would follow. This is not, in my opinion, the sort of expectation of “a certain interest in land” that Oliver J in the Taylors Fashions case or Lord Kingsdown in Ramsden v Dyson had in mind.

# Mr Ivory cited, also, a number of other authorities in support of his proprietary estoppel case. In Plimmer v Mayor of Wellington (1884) 9 App. Cas. 699, a Privy Council case, the question was whether the appellant, Mr Plimmer, had a sufficient “estate or interest” in land to qualify for statutory compensation when the land became vested in the Wellington Corporation. Plimmer had occupied the land under a revocable licence from the Corporation’s predecessor-in-title and at the request of that predecessor-in-title had made extensive improvements to the land. The Judicial Committee held that these circumstances “were sufficient to create in his [Plimmer's] mind a reasonable expectation that his occupation would not be disturbed…” In effect, the owner of the land became estopped from asserting that the licence remained revocable. That was sufficient to constitute the licence an “estate or interest” for compensation purposes. The Plimmer case does not, in my opinion, assist Mr Cobbe, whose expectation was that of further negotiations leading, as he hoped and expected, to a formal contract. To the extent that he had an expectation of a “certain interest in land”, it was always a contingent one, contingent not simply on the grant of planning permission but contingent also on the course of the further contractual negotiations and the conclusion of a formal written contract.

# Inwards v Baker [1965] 2 QB 29 was the case in which an indulgent father had encouraged his son to build a bungalow on his, the father’s, land. The son had done so in the expectation, encouraged by the father, that he, the son, would be permitted to remain in occupation. The Court of Appeal held that the son had an equity entitling him to live in the bungalow as long as he wished. In effect the father, and after his death the trustees of his will, were estopped from denying that the son’s licence to occupy the land was an irrevocable one. The case was on all fours with Plimmer’s case, which was relied on both by Lord Denning M.R. (36/37) and by Danckwerts LJ (38) in their respective judgments. The principle that, if A, an owner of land, encourages B to build on his, A’s, land on the footing that B will be entitled thereafter to occupy the new buildings for as long as he wishes and B, taking A at his word, then acts accordingly, A will be estopped from denying the right of B to continue to occupy the new buildings, is undoubted good law but is a principle of no assistance to Mr Cobbe in the present case. Crabb v Arun D.C. [1976] Ch 179 is likewise of no assistance to Mr Cobbe. The case was one in which the DC had led Mr Crabb to believe that he could have access to his land via a road belonging to the DC. In reliance on that promise Mr Crabb allowed his land to become otherwise landlocked. He was held entitled by way of proprietary estoppel to a right of way as promised. The DC was estopped from denying that he had the right of way.

# Closer to home, so far as support for Mr Cobbe’s promissory estoppel claim is concerned, is the line of cases in which a claimant has expended money on land on the basis of an informal or incomplete agreement and in the expectation that, in due course, a binding agreement would be forthcoming. The present case, if the proprietary estoppel claim is to succeed, must be brought within this line of cases. Laird v Birkenhead Railway Co. (1859) Johns.500 is an early example. The plaintiff applied to the defendant railway company for permission to construct and use a private branch line connecting with the railway company’s main line. Agreement was reached for the plaintiff to do so “on reasonable terms, which were to be afterwards settled” (per Page Wood V-C at 513). The plaintiff, acting on this agreement, constructed and used the branch line and for some two and a half years paid tolls at an agreed rate to the railway company. Agreement in principle was reached on the details of the plaintiff’s user of the branch line but a formal agreement was never signed. The railway company gave notice to the plaintiff to cease his user of the branch line. The Vice-Chancellor said that the railway company had allowed the plaintiff “to expend his money on the faith that he would be permitted to join their line on reasonable terms” (513) and that the tolls agreed upon and paid by the plaintiff for his past user must be assumed to represent reasonable terms. “It must”, said the Vice-Chancellor, “be inferred, from the nature of the transaction, that the privilege of using the line was not to be determinable …” (511). The Vice-Chancellor’s ability, by inference from the nature of the transaction and from the basis on which the plaintiff for the past two and a half years had been using the branch line, to fill in the gaps in the parties’ contractual agreement is not an ability that has its counterpart in the present case. The court could not have made complete the inchoate second agreement. On none of the three outstanding matters referred to in paragraph 6 above would the court have been able to infer the contractual terms that further negotiations would or might have produced and Etherton J, quite rightly, did not attempt to do so.

# Holiday Inns Inc. v Broadhead (1974) 232 EG 951, 1087 has been treated as, but correctly analysed is in my opinion not, a case of proprietary estoppel. The plaintiffs, Holiday Inns, and the defendant, Mr Broadhead, agreed, in effect, on a joint venture, the essential ingredients of which were that a site in the vicinity of Heathrow Airport would be identified as suitable for an hotel. Mr Broadhead, or a company nominated by him, would acquire the site, Holiday Inns would apply for the requisite planning permission and, if planning permission were granted, the site would be leased to Holiday Inns under a lease the terms of which the parties had agreed. A suitable site was identified and was then purchased by a company owned or controlled by Mr Broadhead. Holiday Inns, at their own expense, applied for and obtained planning permission for the building of the hotel. But Mr Broadhead then entered into negotiations for a lease with another hotel group and granted a lease to a company in that group before Holiday Inns could intervene. Whatever equity Holiday Inns had against Mr Broadhead could not have been asserted against the lessee, which had taken the lease without notice of any such equity. Holiday Inns sued Mr Broadhead. The judge, Goff J, accepted that the Holiday Inns executives who had dealt with Mr Broadhead thought that they and he had reached “a gentleman’s agreement which would be honoured” and that Mr Broadhead’s “failure to inform them of his true state of mind was deceitful and unconscionable” (1089). He held that Holiday Inns were “clearly entitled to relief” (1094) and declared that Mr Broadhead’s company, which had purchased the site and granted the lease to the rival hotel group, held the land subject to the lease upon trust to sell it and to divide the net proceeds of sale, after discharging various expenses incurred by the respective parties, between itself and Holiday Inns in equal shares. The relief was granted, therefore, by imposing, or recognising, a constructive trust over the property. Whether, if Mr Broadhead had not pre-empted the choice of relief by granting the lease before any restraining injunction could be obtained, Holiday Inns’ expectation of a lease would have been recognised by an order that they were entitled to a lease on the terms already agreed is an open question. It does not appear from the report of the case that anything remained to be negotiated between Mr Broadhead and Holiday Inns. The terms of the intended lease had been agreed. In the event, however, the relief granted by Goff J was on the same footing as that granted in the joint venture cases to which, starting with Pallant v Morgan, I will later refer, namely, that where a joint venture involves the acquisition by one of the joint venturers of the property intended for the purposes of the joint venture and the pursuit of the joint venture then becomes impracticable or impossible, the acquirer is not entitled to retain the property for his own benefit but must be taken to hold the property upon trust for himself and the other joint venturers jointly. Before leaving the Holiday Inns case, it is to be noted that the judge, Goff J, was Sir Reginald Goff, and not Sir Robert Goff, later Lord Goff of Chieveley, as was erroneously stated at 122F in the judgment of the Board (of which, oddly, Lord Goff was a member) delivered by Lord Templeman in Attorney-General of Hong Kong v Humphreys Estate (Queen’s Gardens) Ltd [1987] AC 114.

# The Humphreys Estate case was one in which a written agreement, expressed to be “subject to contract”, for the purchase of development property had been signed. The agreement said that the terms could be varied or withdrawn and that any agreement was subject to the documents necessary to give legal effect to the transaction being executed and registered. In short the parties had made it clear that neither of them was for the time being legally bound. The Hong Kong government, the intended purchaser, was permitted to take possession of the property and to spend money on it. The owners of the property then decided to withdraw from the transaction and gave notice terminating the government’s licence to occupy the property. In the litigation that ensued, the government contended that the owners were barred by proprietary estoppel from exercising their legal right to withdraw from the transaction (see the submissions of counsel referred to by Lord Templeman at 121). The proprietary estoppel relied on was that which had been enunciated by Lord Kingsdown in Ramsden v Dyson. The government lost in the courts in Hong Kong and appealed to the Privy Council but lost there too. Lord Templeman explained why at 127H

“It is possible but unlikely that in circumstances at present unforeseeable a party to negotiations expressed to be ‘subject to contract’ would be able to satisfy the court that the parties had subsequently agreed to convert the document into a contract or that some form of estoppel had arisen to prevent both parties from refusing to proceed with the transaction envisaged by the document. But in the present case the government chose to begin and elected to continue on terms that either party might suffer a change of mind and withdraw.”

The reason why, in a ‘subject to contract’ case, a proprietary estoppel cannot ordinarily arise is that the would-be purchaser’s expectation of acquiring an interest in the property in question is subject to a contingency that is entirely under the control of the other party to the negotiations (see also British Steel Corporation v Cleveland Bridge and Engineering Co. Ltd [1984] 1 AER 504 per Robert Goff J at 511; Walton Stores (Interstate) Ltd v Maher [1988] 164 CLR 387; London & Regional Investments Ltd v TBI Plc. [2002] EWCA 355 per Mummery LJ at para.42 and Pridean v Forest Taverns (1996) 75 P&CR 447). The expectation is therefore speculative.
# Both Etherton J and Mummery LJ in the Court of Appeal recognised that, in cases where negotiations had been made expressly subject to contract and a contract had not in the end been forthcoming, it would be very difficult for a disappointed purchaser to establish an arguable case for a proprietary estoppel. Etherton J, having referred to the relevant authorities, accepted the improbability that in a subject-to-contract case a proprietary estoppel might arise (paras. 119 and 120), but distinguished the present case on the footing that Mrs Lisle-Mainwaring had encouraged Mr Cobbe to believe that if he succeeded in obtaining planning permission the second agreement would be honoured even though not legally binding (para.123) and, also, I think, that nothing equivalent to a subject-to-contract reservation had ever been expressed (para.119) and that no issue likely to cause any difficulty had been raised in the negotiations that culminated in the second agreement (para.122). In the Court of Appeal Mummery LJ dealt with the subject-to-contract point in paragraphs 53 to 57. The second agreement, he said, “was never expressly stated to be ‘subject to contract’ either by use of that well known expression or by other language to the same effect” (para.57). He agreed with Etherton J that

“proprietary estoppel could be established even where the parties anticipated that a legal binding contract would not come into existence until after planning permission had been obtained, further terms discussed and agreed and formal written contracts exchanged.”

# My Lords, I can easily accept that a subject-to-contract reservation made in the course of negotiations for a contract relating to the acquisition of an interest in land could be withdrawn, whether expressly or by inference from conduct. But debate about subject-to-contract reservations has only a peripheral relevance in the present case, for such a reservation is pointless in the context of oral negotiations relating to the acquisition of an interest in land. It would be an unusually unsophisticated negotiator who was not well aware that oral agreements relating to such an acquisition are by statute unenforceable and that no express reservation to make them so is needed. Mr Cobbe was an experienced property developer and Mrs Lisle-Mainwaring gives every impression of knowing her way around the negotiating table. Mr Cobbe did not spend his money and time on the planning application in the mistaken belief that the agreement was legally enforceable. He spent his money and time well aware that it was not. Mrs Lisle-Mainwaring did not encourage in him a belief that the second agreement was enforceable. She encouraged in him a belief that she would abide by it although it was not. Mr Cobbe’s belief, or expectation, was always speculative. He knew she was not legally bound. He regarded her as bound “in honour” but that is an acknowledgement that she was not legally bound.

# The reality of this case, in my opinion, is that Etherton J and the Court of Appeal regarded their finding that Mrs Lisle-Mainwaring’s behaviour in repudiating, and seeking an improvement on, the core financial terms of the second agreement was unconscionable, an evaluation from which I do not in the least dissent, as sufficient to justify the creation of a “proprietary estoppel equity”. As Mummery LJ said (para.123), she took unconscionable advantage of Mr Cobbe. The advantage taken was the benefit of his services, his time and his money, in obtaining planning permission for the property. The advantage was unconscionable because immediately following the grant of planning permission, she repudiated the financial terms on which Mr Cobbe had been expecting to be able to purchase the property. But to leap from there to a conclusion that a proprietary estoppel case was made out was not, in my opinion, justified. Let it be supposed that Mrs Lisle-Mainwaring were to be held estopped from denying that the core financial terms of the second agreement were the financial terms on which Mr Cobbe was entitled to purchase the property. How would that help Mr Cobbe? He still would not have a complete agreement. Suppose Mrs Lisle-Mainwaring had simply said she had changed her mind and did not want the property to be sold after all. What would she be estopped from denying? Proprietary estoppel requires, in my opinion, clarity as to what it is that the object of the estoppel is to be estopped from denying, or asserting, and clarity as to the interest in the property in question that that denial, or assertion, would otherwise defeat. If these requirements are not recognised, proprietary estoppel will lose contact with its roots and risk becoming unprincipled and therefore unpredictable, if it has not already become so. This is not, in my opinion, a case in which a remedy can be granted to Mr Cobbe on the basis of proprietary estoppel.

# There is one further point regarding proprietary estoppel to which I should refer. Section 2 of the 1989 Act declares to be void any agreement for the acquisition of an interest in land that does not comply with the requisite formalities prescribed by the section. Subsection (5) expressly makes an exception for resulting, implied or constructive trusts. These may validly come into existence without compliance with the prescribed formalities. Proprietary estoppel does not have the benefit of this exception. The question arises, therefore, whether a complete agreement for the acquisition of an interest in land that does not comply with the section 2 prescribed formalities, but would be specifically enforceable if it did, can become enforceable via the route of proprietary estoppel. It is not necessary in the present case to answer this question, for the second agreement was not a complete agreement and, for that reason, would not have been specifically enforceable so long as it remained incomplete. My present view, however, is that proprietary estoppel cannot be prayed in aid in order to render enforceable an agreement that statute has declared to be void. The proposition that an owner of land can be estopped from asserting that an agreement is void for want of compliance with the requirements of section 2 is, in my opinion, unacceptable. The assertion is no more than the statute provides. Equity can surely not contradict the statute. As I have said, however, statute provides an express exception for constructive trusts. So to Mr Cobbe’s constructive trust claim I must now turn

Offer & Acceptance
Letters of Intent

It is not surprising, given the credit-crunch and severe recession over the past few years, that letters of intent have ben litigated. Contracting parties are more reluctant to bind themselves commercially and seem to be relying on letters of intent. Banks, however, are not that enthusiastic about letters on intent as security.

RTS Flexible Systems Ltd v Molkerei Alois Muller GmBH & Co KG (UK Productions) [2008] EWHC 1087 TCC

Christopher Clake J held that parties had entered into a letter of intent contract stating that the parties would enter into a contract within four weeks. The contract was held to have come to an end on the expiry of four weeks with no formal contract having been concluded. The claimant proceeded with work (and was paid for part of it) and it was held that parties had entered into a further contract.


Christopher Clarke J:

# As is apparent from the above, after the Letter of Intent contract expired RTS continued to build the Equipment, delivered it to Müller and were partially paid for it. In those circumstances the court strongly inclines to concluding that the parties have entered into some contract even though such a contract cannot be spelt out by a classic analysis of the sequence of offer and acceptance.

# As Steyn LJ, put it in Trentham v Archital Luxfer [1993] 1 Lloyds LR 25:

“Secondly, it is true that the coincidence of offer and acceptance will in the vast majority of cases represent the mechanism of contract formation. It is so in the case of a contract alleged to have been made by an exchange of correspondence. But it is not necessarily so in the case of a contract alleged to have come into existence during and as a result of performance…..The third matter is the impact of the fact that the transaction is executed rather than executory. It is a consideration of the first importance on a number of levels… The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations. It will often make it difficult to submit that the contract is void for vagueness or uncertainty. Specifically, the fact that the transaction is executed makes it easier to imply a term resolving any uncertainty, or alternatively, it may make it possible to treat a matter not finalised in negotiations as inessential. In this case fully executed transactions are under consideration. Clearly, similar considerations may sometime be relevant in partly executed transactions. Fourthly, if a contract only comes into existence during and as a result of performance of the transaction it will frequently be possible to hold that the contract impliedly and retrospectively covers pre-contractual performance… “

***

See also

Diamond Build Ltd v Clapham Park Homes Ltd [2008] EWHC 1439 TCC

Mr Justice Akenhead:

This is yet another case which relates to a Letter of Intent on a construction project. The issues in this case revolve around whether the Letter of Intent had been superseded by a contract incorporating the JCT Intermediate Form of Building Contract, 2005 edition. There is an estoppel said to have arisen. The case illustrates the dangers posed by letters of intent which are not followed up promptly by the parties’ processing of the formal contract anticipated by them at the letter of intent stage. The Claimant seeks a declaration that by the time its relationship with the Defendant was terminated the Letter of Intent had been replaced by the standard form contract…..

…# Primarily, the issue which arises in this case is a question of construction of the Letter of Intent. There has been a substantial amount of authority about letters of intent, particularly in the context of construction contracts. Mr Justice Robert Goff (as he then was) had to consider such a case in British Steel Corporation v Cleveland Bridge & Engineering Co Ltd (1981) 24 BLR 94. He said this:

‘Now the question whether in a case such as the present any contract has come into existence must depend on the true construction of the relevant communications which have passed between the parties and the effect (if any) of their action pursuant to those communications. There can be no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement; everything must depend on the circumstances of the particular case. In most cases where work is done pursuant to a request contained in a letter of intent, it will not matter whether a contract did or did not come into existence; because if the party who has acted on the request is simply claiming payment, his claim will usually be based upon a quantum meruit, and it will make no difference whether the claim is contractual or quasi-contractual. Of course, a quantum meruit claim (like the old actions for money not received and for money paid) straddles the boundaries of what we now call contract and restitution; so the mere framing of a claim as a quantum meruit claim, or a claim for a reasonable sum, does not assist in classifying the claim as contractual or quasi–contractual. But where, as here, one party is seeking to claim damages for breach of contract, the question whether any contract came into existence is of crucial importance.

As a matter of analysis the contract (if any) which may come into existence following a letter of intent may take one of two forms – either there may be an ordinary executory contract, under which each party assumes reciprocal obligations to the other; or there may be what is sometimes called an “if” contract, ie a contract under which A requests B to carry out a certain performance and promises B that, if he does so, he will receive a certain performance in return [and pay] usual remuneration for his performance. The latter transaction is really no more than a standing offer which, if acted upon before it lapses or is lawfully withdrawn, will result in a binding contract.’ (Page 119-120).

# In Jarvis Interiors Ltd v Galliard Homes Ltd [2000] BLR 33, the preliminaries in the tender bills of quantities indicated that the “contract will be executed as a deed under seal”. In the letter of intent, Galliard wrote that it was its intention to enter into a contract with Jarvis and that:

“In the event that we do not enter into a formal contract with you through no fault of Jarvis … you will be reimbursed all fair and reasonable costs incurred and these will be assessed on a quantum meruit basis.”

# Over the following months, Jarvis carried out a substantial amount of work, but the parties were unable to agree upon terms. In the Court of Appeal, Lindsay J said this at page 37:

‘On the appeal no one has argued that there was as yet any contract between the parties [at the date of the issue of the letter of intent]. Moreover, I see the reference to “a formal contract” as only adding force to a view, to which I shall return, that, absent express agreement or necessary implication otherwise, there was to be no contract on the basis of the Preliminaries unless and until there was a “formal contract”, namely one, in the context of those Preliminaries, under seal. This last paragraph of the Letter of Intent, further, may also go some way to have put in the parties’ minds that a relatively leisurely approach could, if necessary, be endured, at any rate by Jarvis, in the completion of a formal contract, notwithstanding that the work by Jarvis had actually begun on the show flats. So long as no fault could fairly be attributed to Jarvis they could always fall back on the not uncomfortable basis of a quantum meruit. The presence of the paragraph also in my view denies the usual force to be attributed to the dictum of Steyn L.J. in Trentham (G Percy) Ltd -v- Archital Luxfer [1993] 1 Lloyd’s RP 25 at 27 that the fact that a transaction is performed on both sides will often make it unrealistic to argue that there was no intention to enter into legal relations, at all events if the dictum is used to support the existence of some contract other than on a quantum meruit.’

Evans LJ at paragraph 8 said this:

“The correct analysis of the legal situation, in my judgment, is that a contract came into existence on the terms of the Letter of Intent, either when it was acknowledged by Jarvis (24 March), or when Jarvis began work, or, at latest, when Jarvis entered onto the site at Galliard’s request (cf. Steyn L.J.’s reference to the reasonable expectations of sensible businessmen, Trentham (G Percy) Ltd v. Archital Luxfer …

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