Case update - September 2016

The cases featured below are useful reminders of the principles established in earlier decisions. They are also important in increasing the precedent value of the earlier decisions, meaning that they are either binding on or persuasive for a Court when deciding subsequent cases with similar issues or facts.

Teoco UK Ltd v Aircom Jersey 4 - the importance of serving notices strictly in accordance with the terms of the agreement

This case concerned a failure to comply with the requirements of a contract governing the serving of contractual notices relating to a potential warranty claim.

Under a sale and purchase agreement (“SPA”) the buyer had to give notice to the seller:

The buyer initially wrote to the seller saying that grounds for claims “may exist” and referring to “potential claims”. The letter included an “initial estimate” of the possible value of the claims. The seller's solicitors replied saying that the letter was inadequate because it did not provide “reasonable details” of the basis of the claim. The buyer wrote a second letter which contained a detailed breakdown of the claim and the amount of the claim and also issued proceedings. The seller applied to strike out the claim on the basis that the buyer had not fully complied with the notification requirements in the SPA.

Decision: The Court decided that the warranty claims had not been notified as required by the SPA and so the buyer’s claims were struck out.

In coming to this conclusion, the judge commented that the letters had not referred to the provisions in the SPA which governed claims notices and neither did they identify the actual warranties that had been breached. The Court also found that there was too great a delay between the buyer becoming aware of the basis of the claim and providing notice to the sellers.

This decision highlights the critical importance of complying fully with contractual notice provisions and not delaying unduly. See also Telford Homes v Ampurius Nu Homes (CA) [2013]  and Friends Life v Siemens Hearing Instruments (CA) [2014].

Idemitsu Kosan v Sumitomo - difficulties of claiming that a breach of warranty is also a misrepresentation

Here, it was considered whether warranties given under a share purchase agreement were also capable of giving rise to an action for misrepresentation. Misrepresentations made pre-contract which induce a person to enter into a contract can form a separate basis for a claim.

The buyer could not bring a claim for breach of warranty as the time period specified in the SPA to do so had passed. The buyer therefore claimed that the warranties were also actionable misrepresentations in an attempt to circumvent the time limit on warranty claims.

Decision: The Court rejected the buyer’s misrepresentation claim as it concluded that the warranties were not also intended to operate as representations. The contractual clause excluding reliance upon pre-contract representations was also held to be effective.

This is the latest in the line of cases where parties have unsuccessfully sought to argue on the basis of misrepresentation in addition to a standard claim for breach of contract. In Sycamore Bidco v Breslin [2012] the injured party tried, again unsuccessfully, to establish that a contractual warranty was also a misrepresentation due to the fact that a claim for misrepresentation would have been of greater value.

Monde Petroleum SA v Westernzagros - whether termination clauses must be invoked in good faith

The High Court had to consider whether an express right to terminate a contract was subject to an implied term that it must be exercised ‘in good faith’.

WesternZagros (“W”) was negotiating with the Kurdistan Regional Government with a view to executing a contract to grant rights to explore for oil and develop oil production in Kurdistan. Monde Petroleum (“M”) was helping W with these negotiations under a consulting services agreement (“CSA”). Under the CSA, M was to receive certain fees if specified conditions were met. The Kurdistan oil contract was eventually executed, but there was little chance that the specified conditions would be satisfied.

W served notice to terminate the CSA under its express terms, although it did not give the required 30 days’ notice. M maintained that by terminating the CSA, W had acted in bad faith, depriving M of its right to share in the profits of the oil exploration and production contract.

Decision: The Court found that there was no implied term in a commercial contract that a party had to terminate the contract in good faith. An express contractual right to terminate may be exercised irrespective of the terminating party's reasons for doing so. Provided that the contractual conditions for the exercise of the termination right have been satisfied, that is sufficient.  

Also, as the 30 day notice period had not been complied with, in the circumstances, the Court decided that the termination notice had no effect because it had not met all the requirements of the termination clause. It did not terminate the contract and it was not a repudiation or even a breach of the contract.

This case confirms previous rulings, such as Mid Essex Hospital NHS Trust v Compass Group (t/a Medirest) (CA) [2013] and Portsmouth City Council v Ensign Highways [2015], that whilst the exercise of discretion involving an assessment or a choice as to a range of options in which both parties’ interests are relevant may be subject to an implied term of good faith, the exercise of an absolute contractual right, such as a right to terminate, is unlikely to be.

MSC Mediterranean Shipping v Cottonex (CA) - restrictions on the right of an innocent party to affirm a contract and continue claiming liquidated damages

The Court of Appeal (“CA”) upheld the original decision of the High Court in finding that an innocent party, faced with a serious breach, will not have the option to affirm (ie continue the contract) and claim liquidated damages indefinitely following a serious breach of contract if it has become impossible for the defaulting party to perform its contractual obligations. The innocent party's option to affirm the contract only existed where the defaulting party was refusing to perform continuing or future obligations.

However, the High Court's suggestion that the innocent party was prevented from affirming the contract because there was a general duty to act in good faith was rejected by the CA. It warned against a ‘general principle of good faith’ as it would be invoked, “as often to undermine as to support the terms” which the parties had agreed.

This is another case which shows a reluctance by the Courts to create a general principle of good faith. See also the likes of Portsmouth City Council v Ensign Highways [2015], Myers v Kestrel [2015] and Greenclose v National Westminster Bank [2015].

MWB Business Exchange Centres v Rock Advertising (CA) - effectiveness of an oral variation

Finally, a clause requiring contract amendments to be in writing and signed did not prevent a variation of the contract made by an oral agreement between the parties being upheld.

The High Court in this case had originally said that the clause requiring any variation to be in writing was not overridden by a verbal agreement between the parties. However, the CA reversed this decision and held that the most powerful consideration was the principle of party autonomy. In coming to this conclusion, it considered and endorsed the reasoning in Globe Motors v Lucas Varity (CA) [2016], which we reported on in our last Update, which found that the principle of freedom of contract entitles parties to agree whatever terms they choose. The parties were therefore free to include terms regulating the manner in which the contract can be varied, but just as the parties could create obligations at will, they could also discharge or vary them.

This seems like a recipe for confusion and dispute. Parties should warn employees to be aware that verbal and e-mail communications as well as conduct may operate to vary a contract despite what the variation provision in the contract might say.

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