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CPD2008 edition

Training in Law

prepared for

CPD Update

Richard Stone

Law of Contract

ILEX CPD reference code: L28 CPD

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Preface

This update has been prepared by ILEX Tutorial College (ITC) to assist Fellows and Members of the Institute of Legal Executives (ILEX) in meeting their continuing professional development (CPD) or lifelong learning requirements for 2008. Fellows are required to complete 16 hours of CPD in 2008 and Members eight hours of CPD. It has been written for Fellows and Members currently practising in this area and it is assumed, therefore, that those using it have a level of knowledge equivalent to an ILEX Level 6 Professional Higher Diploma in Law pass.

Each update contains information on developments in law and/or practice in 2007 and early 2008. Studying each update and completing the accompanying self-assessment test will account for four hours of CPD. Fellows and Members are entitled to two free updates a year.

Details of the completion of the self-assessment test should be recorded by Fellows in their CPD logbooks using the reference code printed inside the front cover of the update. It is not necessary to return the completed self-assessment test to ILEX. All completed self-assessment tests should be retained, however, as ILEX may request their return for monitoring purposes.

Any queries about completion of the self-assessment test and any other CPD issues should be made to the Membership Operations Division on 01234 845733.

Introduction

This update is not intended to be an academic study of the law. It is for those Fellows already practising in this field, and therefore assumes a level of knowledge in this subject equivalent to an ILEX Membership Examination Level 6 pass. It is advised that you do not attempt this update if you are not currently practising in this field of law.

This update is provided for educational updating and tuition purposes. Decisions on legal practice should not be taken on the basis of this update, which is intended to clarify certain areas of difficulty. For further information on any of the subjects, please refer to standard reference works and sources of law. Ensure that you use the latest material, and that you are aware that other legal subjects may impinge on this one.

INTRODUCTION

Contents

i

Chapter 1: Intention to Create Legal Relations

Chapter 2: Interpretation of Contracts

Chapter 3: Duress

Chapter 4: Restraint of Trade

Chapter 5: Remedies for Breach of Contract

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Intention to Create Legal RelationsChapter 1:

1.1 Introduction

1.2 Wilson v Burnett [2007] EWCA Civ 1170

1.3 ConclusionOutline

Introduction1.1

The English law on intention to create legal relations is relatively straightforward. It operates on the basis that “domestic” agreements are presumed not to be intended to be legally enforceable, and that commercial agreements are. Both presumptions are rebuttable, and the main difficulty likely to arise is deciding into which category any particular contract should fall.

There is also, however, the question of how easy it should be to overturn the presumption. In Simpkins v Pays [1955] 3 All ER 10, an agreement between three women to share in the prize of a competition if one of their joint entries should win was clearly domestic. The presumption of unenforceability was overturned by oral evidence that that they had a mutual agreement, which the judge felt went beyond the “sort of rough and ready statement” made in family associations which were not intended to be legally binding. The agreement to share was enforced. This case suggests that it may not be very difficult to overturn the presumption in domestic agreements. A similar situation was considered in Wilson v Burnett [2007] EWCA Civ 1170.

Wilson v Burnett [2007] EWCA Civ 11701.2

Facts1.2.1

In Wilson v Burnett [2007] three young women who worked together, Tania, Stacey and Abigail, had attended a bingo session, at which one of them, Tania, had won a local prize of £153 and then a national prize of over £100,000. Stacey and Abigail alleged, in written statements, that they had previously agreed, when deciding to have a night out at the bingo hall, that they would share any prize of over £10 and that this agreement had been affirmed at the start of the evening.

The trial judge held against them. There was conflicting evidence from third parties who had been present either at the time of the alleged agreement, or at the bingo hall, None of this gave significant support to the claimants. The judge, on the contrary, accepted the evidence of Tania that there had been no such agreement, or at least none that was intended to be legally binding and to apply to the win that occurred. He concluded:

“I do not therefore accept the claimants’ evidence as proving on a balance of probabilities that a binding agreement existed whereby the defendant, or indeed any of them, was under any obligations to share the winnings.”

The claimants appealed.

Judgment1.2.2

The basis of the appeal was that the judge’s decision was not properly reasoned, in that he had not properly explained why he had preferred Tania’s evidence to that of the others. The Court of Appeal appeared to have some sympathy with

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Intention to Create Legal Relations

this criticism, but felt that in any case the evidence of an intention to create a binding agreement was not compelling. As Lord Justice May commented (at para 15):

“There were intrinsic problems with an agreement such as this, both of definition and on the question of whether a necessarily casual conversation could be elevated into an agreement binding and enforceable in law. The reality, I think, is that the claimants’ bare bones account of what they say was agreed at their place of work, taken alone, scarcely stands as an agreement binding and enforceable in law.”

In particular the suggestion of a prior agreement was undermined by the fact that when Tania had won the local prize of £153 and they were waiting to hear the national result, her companions and others repeatedly asked if she was “going to share”. In effect, the court confirmed the judge’s view that the women’s “chat or talk” about sharing winnings had not “crossed that line which exists between talk and ‘meaning business’, or an intention to create a legal relationship”. The appeal was dismissed.

Conclusion1.3

The decision shows the difficulty of overturning the presumption that domestic and social agreements are not intended to be legally binding. The fact that such an agreement was found to exist in Simpkins v Pays does not suggest otherwise. Those who have a clear intention to share prizes in this type of situation (e.g. in a lottery “syndicate”) would be well advised to make their agreement formal, in order to be sure of overcoming the presumption.

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Interpretation of ContractsChapter 2:

2.1 Introduction

2.2 Prudential Assurance Co Ltd v Ayres [2008]

2.3 Chartbrook Ltd v Persimmon Homes Ltd [2007]

2.4 Conclusion

Outline

Introduction2.1

The cases in this chapter deal with the interpretation and construction of contractual provisions. The current approach of the courts to this issue is based on the need to move away from a literal approach, and to interpret agreement in the context of their “factual matrix”, as originally suggested by Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237. This was further developed into five principles by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98. Subsequent case law has tended to be concerned with the precise way in which those principles should be applied in particular cases.

Prudential Assurance Co Ltd v Ayres [2008] EWCA Civ 2.2 52, [2008] 1 All ER 1266n

Facts2.2.1

The case involved a complex sequence of assignments of an underlease of a property, the main leaseholders of which were the Prudential Assurance Company (“PA”). PA arranged an underlease of the property to Guiney and Ayres (“the respondents”) who were partners in a firm of American lawyers. The underlease was for the benefit of the partnership. The respondents later assigned the underlease, with PA’s permission, to another firm of American lawyers Altheimer & Gray (“A & G”). As part of this assignment PA required guarantees in relation to the payment of the rent. A & G insisted that any such liability should attach to the partnership property only, and not to the personal assets of the individual partners. To this end PA and A & G entered into a “supplemental deed”, one of the clauses (clause 2.1) of which stated:

“The liability of the Tenant under the Lease and all documents ancillary to or supplemental to the lease and the liability of the Tenant under any authorised guarantee agreement given in connection with any assignment of the Lease shall be limited to the Partnership (including, but not limited to all its assets, income and accounts) and such liability shall not extend to the personal assets of individual partners (present, past or future) therein. Consequently any recovery by the Landlord against the Tenant or any previous tenant under the Lease for any such default shall be limited to assets of the Partnership and shall not extend to the personal assets of any individual partners therein other than the capital and current accounts of such partners in the Partnership.” [emphasis added]

When A & G later defaulted on the lease, PA sought to recover unpaid rent from the respondents personally. The respondents claimed that they were protected by clause 2.1, above. Although they were not parties to the supplemental deed, they claimed that the reference to “any previous tenant” covered them, and that under the Contracts (Rights of Third Parties) Act 1999 they were entitled to enforce this limitation against PA. This argument was accepted by the trial judge, who felt that the wording of clause 2.1 was unambiguous, if surprising, and that there was no reason to deny the respondents the benefit of it. PA appealed.

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Interpretation of Contracts

Judgment2.2.2

The Court of Appeal disagreed with the conclusion of the trial judge. Their decision turned on the interpretation of clause 2.1, and whether it could be said to be intended to benefit the respondents in the way claimed. Moore-Bick LJ accepted that the clause made grammatical sense. He felt, however, that there were problems with the drafting. What was meant by “any such default”? Moreover, the reference in this document to potential recovery by PA under the lease from “any previous tenant”, did not make sense, “since that could not be of any concern to A & G” (para 30).

As a result the Court of Appeal felt able, under the approach taken in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] to look at the factual background to the supplemental deed. Having done so, the Court found that the document did not affect A & G’s liability to PA, but only the assets against which any liability could be enforced. There was no evidence that there was any intention to extend this restriction to the respondents’ liability. The court concluded that clause 2.1 was actually intended to extend the protection of A & G to any action taken against them by the respondents, but that the words “any previous tenant” had been inserted in the wrong place. On that basis the second sentence of clause 2.1 should have been taken to read:

“Consequently any recovery by the Landlord or any previous tenant under the Lease against the Tenant for any such default shall be limited to assets of the Partnership and shall not extend to the personal assets of any individual partners therein other than the capital and current accounts of such partners in the Partnership.” (emphasis added)

On this interpretation the clause was not intended to provide protection to the respondents in an action by PA, and so no issue under the Contracts (Rights of Third Parties) Act 1999 arose. The respondents remained personally liable for the rent owed to PA.

Chartbrook Ltd v Persimmon Homes Ltd [2007] EWHC 2.3 409; [2007] 1 All ER (Comm) 1083

Facts2.3.1

This case concerned a dispute over the interpretation of a development contract, and the payments to be made to the owners (C) by the developers (P). The contract provided for the payment of an “Additional Residential Payment” (ARP) which was to be stated to be calculated as “23.4 per cent of the price achieved for each Residential Unit (the Unit Price) in excess of the Minimum Guaranteed Residential Unit Value (MGRUV) less the Costs and Incentives (C&I)”. C contended that the calculation should be:

ARP = 23.4 per cent × (Unit Price – MGRUV – C&I)

This would have given them a right to a payment of £4.6 million.

P, in contrast, contended that the clause was intended to mean that the ARP should be calculated on the alternative formula:

ARP = (23.4 per cent × Unit Price) – MGRUV – C&I.

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On this basis the payment due from P to C would have been only £900,000.

P wished to include as evidence the pre-contractual negotiations, which they said indicated that their interpretation of the clause was the one which the parties had intended.

Judgment2.3.2

The judge started from the statements by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] as to the correct way to approach the interpretation of contracts, and noted in particular this passage:

“The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.”

This confirmed the earlier comments of Lord Wilberforce in Prenn v Simmonds [1971] where he said:

“The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience . . . 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 the 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 maybe lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to.”

Counsel for P tried to argue from the comment of Lord Hoffmann that the boundaries of the exception were unclear, to suggest that this was a case where they could be explored. In particular, he argued that the evidence would show that the parties had been in agreement as to the meaning of the clause, so that the dangers arising from the subjective interpretation by each party of their view of the contract would not be an issue.

The judge (Briggs, J) rejected this. He did not interpret either Lord Hoffmann or Lord Wilberforce as stating that material was only inadmissible if it showed subjective intentions (para 24). The policy considerations were broader, and the judge referred (at para 34) to a speech to the Chancery Bar Association where Lord Nicholls suggested that they were:

increased uncertainty and unpredictability in dispute resolution;(1) adverse effect on third party rights;(2) the use of the evidence would be “unhelpful”;(3) subversion of the objective approach.(4)

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Taking account of these, the judge refused to allow the evidence of prior negotiations to be admitted in the context of the construction of the meaning of the contract. His own view of the clause was that the interpretation put forward by C fitted the natural meaning of the words more closely than that suggested by P. On this point he found in C’s favour.

He also rejected a claim by P for rectification of the agreement on the basis of the judge’s interpretation of the evidence, and his conclusion that P had not proved its case with sufficient certainty. No points of law were in issue.

Conclusion2.4

Both of these cases show the continued importance of the approach to construction set out by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] building on Lord Wilberforce’s comments in Prenn v Simmonds [1971]. The results were rather different in the two cases, however. In Prudential Assurance Co Ltd v Ayres [2008] the Court of Appeal found that a clause which was not on its face ambiguous could be given a different meaning in the light of consideration of the factual matrix surrounding the making of the agreement. In Chartbrook Ltd v Persimmon Homes Ltd [2007], by contrast, the clause was arguably ambiguous, but the evidence of negotiations which might have clarified the ambiguity was inadmissible. If this, or a similar case, reaches the appeal courts, there is scope for further consideration of situations where it may be appropriate to refer to pre-contractual negotiations in relation to the construction of contracts, as well as their rectification.

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DuressChapter 3:

3.1 Introduction

3.2 The facts

3.3 Judgment

3.4 Comment

Outline

Introduction3.1

Duress is a common law concept which can lead to a contract being voidable. Its scope has been expanded in recent years by the development of the concept of economic duress and the finding in Attorney General v R [2003] UKPC 22; [2003] EMLR 24 that any illegitimate threat could potentially give rise to duress (including a threat to do an act which was lawful, if the objective was illegitimate – as in blackmail). The only remedy for duress is rescission of the contract – no damages are recoverable. The case of Halpern v Halpern [2007] 3 All ER 478 considered the issue, on which there was no clear authority, as to whether a party who wishes to set aside a contract for duress needs to be able to make full restitution of any benefits received. The Court of Appeal took a different view from that of the High Court.

The facts3.2

The parties had been engaged in a dispute over an inheritance. This was then settled on the basis of a compromise agreement. When the claimants sought damages for breach of this agreement, the defendants alleged that it had been entered into under duress. Clause 4 of the compromise agreement required that all documents relating to the agreement should be destroyed. The claimants argued that since full restitution was not possible the contract could not be rescinded for duress; the defendants argued that inability to make full restitution should be no bar to rescission.

At trial, the High Court found some persuasive authority which suggested that full restitution was a requirement for rescission for duress. The judge was inclined to follow this, and he summarised his reasons as follows (para 11):

(i) “Rescission at common law on the grounds of fraudulent misrepresentation required an ability to give counter-restitution.

(ii) The logic of rescission is that the parties are put back into the position in which they would have been had there been no contract. That logic requires an ability to give counter-restitution.

(iii) Although no case has been found in which it was held that an ability to give counter-restitution is required in order to rescind a contract on the grounds of duress, there is no reason why the nature of the remedy of rescission or the circumstances in which it is available should differ depending upon whether the ground of the decision is fraud or duress.”

It was also established that in cases of undue influence, equity would not allow rescission without full restitution, and the facts of many cases of duress were closely analogous to undue influence, to the extent that it might be possible to plead both duress and undue influence in the same action. The judge concluded (para 27) that there was no good reason of justice or logic why duress should not be treated in the same was as fraudulent misrepresentation or undue influence.

The parties appealed against this conclusion.

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Duress

Judgment3.3

The Court of Appeal adopted a more flexible approach to the issue. It noted that in relation to undue influence the House of Lords in Erlanger v New Sombrero Phosphate Co [1873] 3 App Cas 1218 had held that the courts may do “what is practically just, though it cannot restore the parties precisely to the state they were in before the contract”. In other words, in some cases some monetary compensation may be a substitute for counter-restitution. The Court of Appeal thought that the same approach should apply to duress, so that the exact result will depend on the circumstances of the particular case. Its conclusion was expressed in the following passage from the judgment of Carnwath LJ. He suggested that (para 76):

“A definitive response is not possible or appropriate, until the facts have been found. I would be inclined to agree with the deputy judge that rescission for duress should be no different in principle from rescission for other “vitiating factors”. However, the practical effect of counter-restitution, in the terms explained by Lord Blackburn in the Erlanger case 3 App Cas 1218, will depend on the circumstances of the particular case. In the present case, if (contrary to [the trial judge’s] expectations) the defendants are able to establish that their consent to the compromise agreement was procured by improper pressure (whether that is characterised as duress or undue influence), it would be surprising if the law could not provide a suitable remedy. The form of the remedy, whether equitable or tortious, is a matter which cannot sensibly be decided until the facts are known, not only as to the nature and effect of the improper pressure, but also as to the identity and significance of the documents destroyed.”

These issues would need to be determined at trial.

Comment3.4

The Court of Appeal rejected the strict rule applied by the High Court that there could be no restitution without full counter-restitution. It would be possible to argue that a legitimate distinction could be drawn between deceit or negligent misrepresentation on the one hand, and other vitiating factors on the other. In relation to fraudulent or negligent misrepresentation, the party who cannot rescind will have the alternative of recovering damages for deceit or under s2(1) Misrepresentation Act 1967. This might be a basis for distinguishing the position in relation to duress and undue influence, for which no alternative remedy is available.

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Restraint of TradeChapter 4:

4.1 Introduction

4.2 Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613; [2007] ICR 1539

4.3 ConclusionOutline

Introduction4.1

The basic principles for determining the enforceability of a term in an employment contract purporting to restrict the ability of the employee to work in competition with the employer after leaving the employment are well established. Such covenants are prima facie unenforceable as being in restraint of trade. They may become enforceable, however, if the restraint protects a legitimate interest of the employer, and goes no further than is reasonable in protecting that interest. It must also not be contrary to the public interest. Terms which appear unreasonable, may be rendered reasonable by striking out the unreasonable parts (severance), and allowing the rest to stand. The following case illustrates the modern approach to interpreting restraint of trade clauses, in the light of their factual context, and the operation of severance.

Beckett Investment Management Group Ltd v Hall 4.2 [2007] EWCA Civ 613; [2007] ICR 1539

Facts4.2.1

The defendants (H and Y) were employed as independent financial advisers by the claimants (“BIMG”). This was a holding company of a group of companies involved in the provision of financial services. One of the subsidiaries, “BFS” was involved in providing financial advice and services to clients. The defendants were directors of BFS, and acted as advisers to its clients. They were both based at the company’s Leicester office. In the summer of 2006 both Y and H resigned from BIMG, and started their own financial advice business (“H Ltd”). BIMG sought to enforce provisions in H and Y’s contracts of employment restricting their ability to work in the financial services area. The relevant clauses were 17.3, which provided that:

“The employee hereby agrees with the company that for the period of his . . . employment and for the period of 12 months immediately following the termination of his . . . employment with the company he . . . shall not, whether on his . . . own account or with, through, for or on behalf of any other person, firm, company or organisation, directly or indirectly, deal with or attempt to deal with, any relevant client for the purpose of supplying, or of seeking to supply, thereto any prohibited services.”

“Prohibited services” were defined in clause 17.1.2 as:

the provision of advice in relation to pensions, life assurance, investments and other advice of a type provided by the company in the ordinary course of its business at the date of termination of the employee’s employment with it . . .

At trial the judge interpreted “the company” to mean simply BIMG, and not any of the subsidiaries. He also held that in 17.1.2 the whole of the list of activities was governed by the phrase “by the company”. In other words it only applied to the provision of advice in relation to pensions, life assurance and investments provided by BIMG. Since BIMG was not itself in the business of giving advice,

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and had no clients, the judge held that the clause had no substance, and that the defendants were not restricted by its provisions. No clients of H Ltd had ever been advised by BIMG. The claimants’ claim was therefore dismissed.

The claimants appealed.

Judgment4.2.2

The main judgment in the Court of Appeal was delivered by Maurice Kay LJ. He started by referring to the approach to interpretation set out by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998], and in particular his first principle (para 15):

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.” (Emphasis added by Maurice Kay LJ)

Maurice Kay LJ noted that at the time of the contract all parties, including H and Y, were aware of the arrangements under which BIMG and its subsidiaries were operating, and their different roles. They would have understood the aim of the clause. He indicated that he “would be reluctant to find for a construction which deprives a covenant of all practical utility in circumstances where all parties were familiar with the background to and the aim of the clause” (para 16). He found support for this approach in the words of Sir Nathaniel Lindley MR in Haynes v Doman [1899] 2 Ch 13, 25, quoted with approval by Lord Denning MR in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, 1481 to the effect that “Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them.” He was not persuaded that there was any intended significance in the fact that at some points the contract referred to “subsidiary companies” but that in 17.3 it did not. The parties could not have intended to be agreeing to a pointless provision. Moreover, the realities of modern business discouraged a purist approach to corporate personality. In reality, a group of companies should be treated as one concern, and subsidiary companies are the means by which a holding company conducts its business (paras 18 and 19).

On the construction point, therefore the Court Appeal held for the claimants. It then turned to consider whether the restraint applying to H and Y was enforceable. Maurice Kay LJ approved the approach of the trial judge to this issue, which was to consider first whether the employer had a legitimate interest to protect, and then whether the restraint was no wider than reasonably necessary for the protection of that interest (para 22). On the first point, the trial judge had taken the view that since clause 17.3 referred only to BIMG and BIMG had no relationships with clients to protect, there was no legitimate interest. The Court of Appeal’s broader approach to 17.3 meant that it did not accept this conclusion.

As to reasonableness, there were two aspects to consider – duration and scope. The period of the restraint was 12 months. The trial judge thought that this was too long. Once H and Y had left BIMG and BFS, the companies needed a period to cement their relationship with existing clients, but three months would have been long enough for this. The Court of Appeal disagreed. BIMG/BFS would have had to recruit new staff and train them in order to have any chance of retaining clients who had developed trust in H or Y. Taking into account the seniority of H and Y, the logistics of replacing them, and evidence

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Restraint of Trade

of an industry “standard” of 12 months, the court was not prepared to regard this period as unreasonable (para 29) (though it clearly felt that any longer period might well have been).

Turning to the scope of the restriction the position was more complex. This was because of the definition of “relevant clients” with whom under clause 17.3 the defendants were not to have contact. Clause 17.1.3 started by defining such clients in a standard way, ie:

“any person, firm, company or organisation whom or which was at any time during the period of 12 months immediately prior to the termination of the employee’s employment a client of the company (or subsidiary company) with whom or which the employee dealt in the course of his . . . employment during that 12-month period . . .”

This was uncontroversial. The clause, however, went on to extend the definition as follows:

“If the employee so dealt with an individual in that individual’s capacity as an officer, employee or representative of any firm, company or organisation, that firm, company or organisation shall be deemed to be a relevant client and the individual shall also be deemed to be a relevant client in his or her personal capacity as well. If the employee had, on behalf of the company during the 12-month period, dealt with an individual on behalf of others that individual and those others shall be deemed to be relevant clients as well.”

The trial judge found this extended definition to be unreasonable, particularly as regards the reference to “personal capacity” and going beyond what was necessary to protect the claimant’s interest. The Court of Appeal agreed. To some extent it thought that the extended definition was otiose, in that many of those mentioned would on straightforward agency principles come within scope of the primary definition of “relevant client”. The reference to personal capacity was, however, unnecessary and unreasonable.

That being so, it was necessary to consider whether this extended definition could be severed, so as to render the rest of the restraint reasonable. The trial judge had thought not, on the basis of Attwood v Lamont [1920] 3 KB 571, where it had been held (at para 577) that severance could only take place “if the severed parts are independent of one another and can be severed without severance affecting the meaning of the part remaining”. The suggestion in that case appeared to be that severance could only really take place where there were several distinct covenants, and one could be removed without affecting the others. On that basis the trial judge found that the unreasonable part of clause 17.1.3 was not severable. The Court of Appeal, on the other hand, preferred to look to the test set out in Sadler v Imperial Life Assurance Co of Canada Ltd [1988] IRLR 388, where it was suggested that severance could take place if the following conditions were satisfied.

The unenforceable provision is capable of being removed without the (1) necessity of adding to or modifying the wording of what remains.

The remaining terms continue to be supported by adequate (2) consideration.

The removal of the unenforceable provision does not so change the (3) character of the contract that it becomes “not the sort of contract that the parties entered into at all”.

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The Court of Appeal noted that this test had been applied in a number of subsequent cases. It also found it to be reflection of the approach taken by the Court of Appeal in T Lucas & Co v Mitchell [1974], where Russell LJ reinterpreted the Attwood v Lamont decision as requiring consideration of whether “one obligation can be removed or severed without altering the nature of the contract and without having to add or to modify the wording otherwise than by excision.” (Emphasis added by Maurice Kay LJ). Applying the Sadler test the Court of Appeal held that there was no reason not to sever the extended definition from clause 17.1.3. On that basis the restrictions imposed on H and Y were reasonable, and enforceable. To that extent, the decision of the trial judge was overturned.

Conclusion4.3

This case does not break any major ground in terms of principle. It demonstrates that the Court of Appeal takes the view that restraint of trade clauses should be interpreted in the same way as other clauses in a commercial contract – that is, with regard to the factual context, and the objectives that the parties were trying to achieve. Literal and rigid interpretations are to be avoided, and the agreement should be given effect if it is reasonable to do so.

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Remedies for Breach of ContractChapter 5:

5.1 Introduction

5.2 Basis for award: WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2008] 1 All ER 74

5.3 Time for assessment of loss: Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] 3 All ER

5.4 Conclusion

Outline

Introduction5.1

The cases discussed in this chapter deal with the assessment of damages for breach of contract. WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2008], is the latest decision to consider the implications of the House of Lords decision in Attorney-General v Blake [2000], and the award of compensation based on gains made by the defendant, rather than compensation for the claimant’s loss. Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] deals with the narrower issue of whether events post-breach but pre-trial should be taken into account in assessing damages.

WWF-World Wide Fund for Nature v World Wrestling 5.2 Federation Entertainment Inc [2008] 1 All ER 74

Facts5.2.1

This action arose out of a previous dispute between the parties over the use of the initials “WWF”. They had reached a compromise agreement in 1994. The claimants then alleged breaches of the agreement by the defendant. They brought an action seeking an injunction, and an account of profits (as granted in Attorney-General v Blake [2000]). The trial judge refused the account of profits on the basis that the case was not sufficiently “exceptional” – as required by Attorney-General v Blake). The claimants then sought to claim “damages” on the basis of the sum that they could have charged for allowing using of the initials (using the approach in Wrotham Park Estate Co v Parkside Homes Ltd [1974] 2 All ER 321). The defendant resisted this on the basis that Wrotham Park damages were a “gain-based” (rather than compensatory) award, and this had been rejected by the judge when rejecting an account of profits. The matter was res judicata (a matter which has been adjudicated on), or alternatively, the claim constituted an abuse of process.

Judgment5.2.2

The Court of Appeal engaged in a lengthy analysis of whether Wrotham Park damages are “compensatory” or “gain-based” (i.e. restitutionary). It concluded, despite academic views to the contrary and the judgment of Steyn LJ in Surrey CC v Bredero Homes Ltd [1993] 3 All ER 705, that the balance of opinion, including that of the House of Lords in Attorney-General v Blake, was that Wrotham Park damages are compensatory in nature. The rejection by the judge of the account of profits did not therefore render the decision as to the award of Wrotham Park damages rem judicatam. That issue was not before the judge.

Chadwick LJ, who delivered the judgment of the court, suggested that, although an account of profits, and Wrotham Park damages were distinct remedies, it was not necessarily helpful to discuss them in terms of “gain-based” and “compensatory” remedies. The true position was that (para 59):

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Remedies for Breach of Contract

“When the court makes an award of damages on the Wrotham Park basis it does so because it is satisfied that that is a just response to circumstances in which the compensation which is the claimant’s due cannot be measured (or cannot be measured solely) by reference to identifiable financial loss. Lord Nicholls’s analysis in Blake’s case demonstrates that there are exceptional cases in which the just response to circumstances in which the compensation which is the claimant’s due cannot be measured by reference to identifiable financial loss is an order which deprives the wrongdoer of all the fruits of his wrong. The circumstances in which an award of damages on the Wrotham Park basis may be an appropriate response, and those in which the appropriate response is an account of profits, may differ in degree. But the underlying feature, in both cases, is that the court recognises the need to compensate the claimant in circumstances where he cannot demonstrate identifiable financial loss. To label an award of damages on the Wrotham Park basis as a “compensatory” remedy and an order for an account of profits as a “gains-based” remedy does not assist an understanding of the principles on which the court acts. The two remedies should, I think, each be seen as a flexible response to the need to compensate the claimant for the wrong which has been done to him.”

Nevertheless, the two bases for an award were “juridically highly similar” (para 60). The claimants could have raised the Wrotham Park claim before the judge, but chose not to do so. To allow them to raise such a claim subsequently would be an abuse of process, and inconsistent with the interest in there being finality in legal proceedings. On that basis, the defendant’s appeal was allowed.

Golden Strait Corporation v Nippon Yusen Kubishika 5.3 Kaisha [2007] 3 All ER 1

Facts5.3.1

The contract in this case concerned a seven year charterparty entered into in 1998. The charterparty provided that it could be determined by either party in the event of war or hostilities breaking out between a number of countries, including the United States, the United Kingdom and Iraq. In 2001 the defendants repudiated the contract. This breach was accepted by the claimants, who sued for damages. In 2003 war broke out between the United States and Iraq. The question was whether this event, which would have entitled the defendants to have terminated the contract without being in breach, put a cap on the claimants’ damages. The arbitrator, trial judge, and Court of Appeal all held in favour of the defendants. The claimants appealed.

Judgment5.4

The majority (3:2) of the House of Lords upheld the decision of the lower courts. In deciding on an award of damages a judge or arbitrator was entitled to take account of possible future events which would have an impact on the amount of such an award. If the damages had been assessed in 2001 the award would have appropriately taken account of the possibility of a future war which would have allowed termination. The chance of this occurring, which could range from extremely unlikely, to virtual certainty, would have had to have been assessed. If the assessment was being made, as was the case here, after the event justifying termination had occurred, it was appropriate for it to be fully taken into account in assessing the claimants’ losses. The desirability

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Remedies for Breach of Contract

for certainty should yield to the principle that a claimant’s damages should be assessed on the basis of losses actually incurred. Information which provided a more accurate calculation of those losses should not be ignored.

Conclusion5.5

The linking factor of these two rather different decisions on damages is, perhaps, the emphasis on the compensatory nature of awards for breach of contract.

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Notes

Self-assessment Test

Name: ...........................................................

Date: .............................................................

Membership No: ............................................

Law of Contract

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Please answer all the following questions by selecting the appropriate letter(s). Unless otherwise stated, select only one letter per question. Preferably this self-assessment test should be completed from memory.

Question 1

Which of the following statements is correct?

The defendant in Wilson v Burnett:

agreed that she had agreed to share her winnings, but argued that such (a) an agreement was unenforceable;

denied that she had agreed to share her winnings; (b)

was not believed by the trial judge; (c)

was not believed by the Court of Appeal. (d)

Question 2

Which of the following best represents the Court of Appeal’s decision in Wilson v Burnett:

the parties had agreed to share their winnings and this was (a) enforceable;

even if there was an agreement, it was unenforceable because there was (b) no intention to create legal relations;

there was no agreement between the parties; (c)

there was an agreement between the parties, but the presumption that (d) social agreements are unenforceable had not been rebutted.

Question 3


The decision in Wilson v Burnet:

is inconsistent with (a) Simpkins v Pays in terms of legal principle;

changes the law on lottery “syndicates”; (b)

applies the same legal principles as (c) Simpkins v Pays, but with a different result on the facts;

holds that all agreements to share prizes must be in writing to be (d) enforceable.

Question 4

Which of the following statements is inaccurate:

In Prudential Assurance v Ayres the trial judge:

held that clause 2.1 of the supplemental deed was ambiguous; (a)

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thought that the agreement was covered by the (b) Contracts (Rights of Third Parties) Act 1999);

held that the phrase “any previous tenant” applied to the respondents; (c)

found that the respondents could enforce clause 2.1 of the supplemental (d) deed.

Question 5


In Prudential Assurance v Ayres the Court of Appeal held that:

the (a) Contracts (Rights of Third Parties) Act 1999 applied to the agreement, but did not protect the respondents;

the respondents could rely on the (b) Contracts (Rights of Third Parties) Act 1999;

the agreement was not intended to provide a legally enforceable benefit (c) to the respondents, as required by the Contracts (Rights of Third Parties) Act 1999;

the (d) Contracts (Rights of Third Parties) Act 1999) had no application to the case.

Question 6


In Prudential Assurance v Ayres the Court of Appeal:

found that clause 2.1 was did not make grammatical sense, and that the (a) parties did not intend to provide protection for the respondents;

held that on its literal interpretation, clause 2.1 was not intended to (b) benefit the respondents;

held that there was no scope for taking account of the factual background (c) in interpreting clause 2.1;

held that the factual background could be taken into account in (d) interpreting clause 2.1, with the result that it was held not to provide protection for the respondents.

Question 7

Which of the following statements is inaccurate?

In Prudential Assurance v Ayres the Court of Appeal:

used Lord Hoffmann’s approach in (a) Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] to reinterpret the supplemental deed;

took account of the factual background to the case in reaching its (b) decision;

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distinguished the decision in (c) Investors Compensation Scheme Ltd v West Bromwich Building Society [1998];

adopted an approach consistent with Lord Wilberforce’s in (d) Prenn v Simmonds [1971].

Question 8


In Chartbrook Ltd v Persimmon Homes Ltd [2007]:

the defendant wanted to include evidence of pre-contractual negotiations, (a) as a guide to interpreting the contract;

the claimant wanted to include evidence of pre-contractual negotiations, (b) as a guide to interpreting the contract;

both parties wanted to include evidence of pre-contractual negotiations, (c) as a guide to interpreting the contract, but disagreed as to the outcome;

both parties agreed that the contract should be interpreted without (d) reference to the pre-contractual negotiations.

Question 9


In Chartbrook Ltd v Persimmon Homes Ltd [2007] the judge held that:

pre-contractual negotiations are never relevant in contractual disputes; (a)

pre-contractual negotiations may be used in an action for rectification, (b) but not in the construction of contracts;

pre-contractual negotiations may be used in constructing contracts, but (c) not in an action for rectification;

pre-contractual negotiations may be relevant in any case, depending on (d) the circumstances.

Question 10


In Chartbrook Ltd v Persimmon Homes Ltd [2007] defendant’s counsel argued that Lord Hoffmann’s restriction on the use of pre-contractual negotiations:

was only meant to apply where such negotiations revealed no (a) agreement;

was only meant to apply where on an objective view there was an (b) agreement between the parties;

was only meant to apply where a defendant was arguing against the (c) obvious meaning of the contract;

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was only meant to apply where the agreement itself was not (d) ambiguous.

Question 11

Which of the following was not a reason for the judge’s rejection, in Chartbrook Ltd v Persimmon Homes Ltd [2007], of evidence of pre-contractual negotiations in interpreting a contract?:

such evidence is inherently unreliable, as the parties will always be in (a) dispute as to what was said;

such evidence may only demonstrate one party’s subjective intentions; (b)

use of such evidence would increase uncertainty in dispute resolution;(c)

use of such evidence may have an adverse effect on third party rights. (d)

Question 12


In Halpern v Halpern [2007] the claimant argued that:

rescission for duress is an equitable remedy, and should only be allowed (a) where it is just and fair to do so;

monetary compensation can be used as a substitute for rescission for (b) duress;

rescission for duress can only be allowed where full restitution is (c) possible;

rescission for duress is distinct from rescission for undue influence. (d)

Question 13

In Halpern v Halpern [2007] which of the following was not a reason for the trial judge’s decision that full counter-restitution is a requirement for rescission for duress:

at common law, rescission for fraudulent misrepresentation requires an (a) ability to give counter-restitution;

if counter-restitution was not required the party concerned would gain (b) an unfair advantage;

logic requires that both parties are put in the position that they would (c) have been in had there been no contract;

counter-restitution is required in cases of undue influence, and many of (d) these are closely analogous to duress.

Question 14


In Halpern v Halpern [2007] the Court of Appeal held that:

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whether counter-restitution was required in an action for rescission for (a) duress would depend on all the facts of the case;

counter-restitution is always required in cases of duress; (b)

counter-restitution is never required in cases of duress; (c)

monetary compensation could never be a substitute for counter-(d) restitution.

Question 15


In Halpern v Halpern [2007] the Court of Appeal held that:

duress and undue influence should be treated differently in relation to (a) the need for counter-restitution;

duress and undue influence should be treated in the same way in (b) relation to the need for counter-restitution;

duress, as a common law concept, was distinguishable from undue (c) influence, which was equitable;

monetary compensation was appropriate in relation to undue influence, (d) but not in relation to duress.

Question 16


In Beckett Investment Management Group Ltd v Hall [2007] the defendants were employed by:

a company which gave them direct access to clients; (a)

a company which provided financial advice to the public; (b)

a holding company, whose subsidiaries provided financial advice to (c) clients;

a subsidiary of a company engaged in the business of providing financial (d) advice.

Question 17


In Beckett Investment Management Group Ltd v Hall [2007] the trial judge held that:

BIMG was entitled to restrain the defendants’ post-employment (a) activities;

BIMG was involved in giving advice to clients; (b)

the restraint of trade clause covered both BIMG and its subsidiaries; (c)

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BIMG had no power to restrain the defendant’s post-employment (d) activities.

Question 18


In Beckett Investment Management Group Ltd v Hall [2007] the Court of Appeal held that:

the trial judge had come to the right conclusion, but for the wrong (a) reasons;

a restraint clause had to be interpreted literally, without regard to the (b) surrounding circumstances.

the objectives of a restraint clause cannot be taken into account in (c) deciding its efficacy;

a restraint clause should be interpreted in the light of surrounding (d) circumstances.

Question 19

Which of the following statements is inaccurate?


BIMG had a legitimate interest to protect; (a)

The restraint imposed on the defendants was unreasonable in all the (b) circumstances;

The restraint clause applied to contacts with clients of BFS Ltd; (c)

The restraint clause reasonable in terms of its duration. (d)

Question 20



the scope of the restraint was unreasonably wide, but the unreasonable (a) part could be severed;

the scope of the restraint was unreasonably wide, and the unreasonable (b) part could not be severed without affecting the overall purpose of the clause;

the scope of the restraint was reasonable, and there was no need to (c) consider severance;

severance can only take place where there are separate clauses in the (d) contract, with the unreasonable clauses being able to be excised.

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Question 21


In WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2008] the trial judge held that:

the claimants were entitled to damages on the basis of (a) Attorney-General v Blake;

the claimants were entitled to recover for an account of profits; (b)

the situation was not sufficiently exceptional to justify an award on the (c) basis of Attorney-General v Blake;

the claimants could claim a sum equivalent to what they could have (d) charged for licensing the use of the initials.

Question 22


In WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2008] the Court of Appeal held that:

Wrotham Park(a) damages are “gain-based” rather than “compensatory”;

both an “account of profits” and (b) Wrotham Park damages are aimed at compensating the claimant for the wrong which he has suffered;

both an “account of profits” and (c) Wrotham Park damages are restitutionary in nature rather than compensatory;

Wrotham Park (d) damages are only available where an account of profits would also be available.

Question 23


In WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2008] the defendant succeeded in the Court of Appeal because:

the claimant’s action was (a) res judicata;

the claimant had not proved that it had suffered any loss; (b)

the claimant’s action was an abuse of process; (c)

the claimant had already obtained an injunction which barred any (d) financial remedy.

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Question 24


In Golden Strait Corporation v Nippon Yusen Kubishika Kaisa [2007]

the charterparty contained a (a) force majeure clause on which the defendant relied to limit its liability;

the charterparty contained an exclusion clause on which the defendant (b) relied to limit its liability;

the charterparty allowed for termination if certain external events (c) occurred;

the charterparty contained a liquidated damages clause on which the (d) claimant relied.

Question 25


In Golden Strait Corporation v Nippon Yusen Kubishika Kaisa [2007] the Court of Appeal held that:

post-breach events must always be taken into account in assessing (a) damages;

post-breach events should never be taken into account in assessing (b) damages;

post-breach events can be taken fully into account whenever damages (c) are assessed;

post-breach events are appropriately taken into account if damages are (d) assessed after they have occurred.

Question 26


In Golden Strait Corporation v Nippon Yusen Kubishika Kaisa [2007] the Court of Appeal held that:

the desirability of certainty was subordinate to the principle that only (a) losses actually incurred should be compensated;

certainty was a principle which needed to be given full weight in (b) assessing damages;

the desirability of certainty was a principle which should override other (c) considerations in assessing damages;

taking account of unpredictable events would give rise to undesirable (d) uncertainty.

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Revision questions (27-30)

Question 27


Social and domestic agreements:

are never enforceable as contracts; (a)

are presumed to be enforceable as contracts, unless there is contrary (b) evidence;

are irrebuttably presumed to be unenforceable; (c)

are presumed to be unenforceable, but the presumption can be (d) rebutted.

Question 28


The modern approach to the interpretation of commercial contracts:

requires no account to be taken of the factual context in which the (a) contract was made;

requires the factual context to be taken into account in every case; (b)

allows the factual context to be taken into account where appropriate; (c)

allows the factual context to be taken into account only where the (d) contract is ambiguous.

Question 29


Contracts in restraint of trade:

are (a) prima facie enforceable, unless they are unreasonable;

are (b) prima facie unenforceable, unless they are reasonable;

are always unenforceable as being contrary to public policy; (c)

are always enforceable. (d)

Question 30


The House of Lords decision in Attorney-General v Blake [2000]:

allows an account of profits as an alternative to compensatory damages (a) at the choice of the claimant;

allows an account of profits in exceptional cases, where the claimant (b) has not suffered a financial loss;

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allows an account of profits to be awarded whenever the court feels this (c) is appropriate;

allows an account of profits where the defendant’s behaviour is (d) reprehensible.

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Feedback

Question 1

Answer (b) is correct. The claimant’s evidence was accepted by the trial judge. The Court of Appeal made no finding as to its truth.

Question 2

Answer (b) is correct. The basis of the Court of Appeal’s decision is not stated very clearly, but it supported the trial judge, who clearly analysed the parties’ dealings as suggested at (b). Answers (c) and (d) are incorrect because there was no clear decision as to whether there was an agreement.

Question 3

Answer (c) is correct. The court accepted that “social” agreements to share prize-winnings could be enforceable (as in Simpkins v Pays), but held that the claimants had not on the proved facts rebutted the presumption against enforceability, even if there had been an agreement.

Question 4

Answer (a) is the only statement which is not accurate. The judge thought that the meaning of the clause was clear, and had the effect of giving the respondents protection by virtue of the Contracts (Rights of Third Parties) Act 1999.

Question 5

(d) is the correct answer. The court’s interpretation of the intended meaning of clause 2.1 meant that the Contracts (Rights of Third Parties) Act 1999 had no bearing on the case.

Question 6

Answer (d) is the correct answer. The court took account of the factual background, and took the view that the drafting of the clause was at fault. What was intended was to restrict the respondents right to bring an action, not to protect the respondents.

Question 7

Answer (c) is inaccurate. The court followed the principles set out by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] to interpret clause 2.1 of the supplemental deed in the context of its factual background. A similar approach had previously been suggested by Lord Wilberforce in Prenn v Simmonds [1971].

Question 8

Answer (a) is correct. The defendant argued that pre-contractual negotiations showed that its interpretation of the contract was correct, and that it therefore did not owe any significant sum to the claimant.

Question 9

Answer (b) is correct. The judge adopted the approach of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998].

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Feedback

Question 10

Answer (a) is the correct answer. Counsel tried to rely on the suggestion by Lord Hoffmann that the boundaries of the exception were not clear, but the judge rejected this argument.

Question 11

The judge did not use the reason set out in answer (a). Reliability is not the issue – broader policy considerations are involved. As regards answer (b), the judge rejected this as being the sole reason for rejecting evidence of pre-contract negotiations, but clearly accepted this as part of the argument.

Question 12

Answer (c) is correct. The claimant argued that duress should be treated in the same way as deceit. Note, in relation to answer (a), that duress is a common law concept, not an equitable one.

Question 13

Answer (b) was not one of the reasons relied on by the trial judge. His main approach involved arguing by analogy from other remedies.

Question 14

Answer (a) is correct. The court accepted that counter-restitution might in some cases be appropriate, as might monetary compensation, but all depended on the facts of the case.

Question 15

Answer (b) is correct. The Court held that rescission for duress should be no different in principle from other “vitiating factors”.

Question 16

Answer (c) is correct. They were employed by BIMG, which operated through subsidiaries, including BFS which provided financial advice.

Question 17

Answer (d) is correct. The judge held that the restraint clause applied only to BIMG, and BIMG had no clients. It was therefore ineffective to restrain the defendants’ competition.

Question 18

Answer (d) is correct. The court referred to Lord Hoffmann’s approach in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] in which he stated that background information should be taken into account in construing contractual terms.

Question 19

Statement (b) is inaccurate. The Court of Appeal held that, taking account of the factual background, BIMG could legitimately restrain the defendants’ activities as a means of allowing BFS to re-establish its relationship with its clients.

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Feedback

Question 20

Answer (a) is correct. The Court of Appeal disagreed with the trial judge on the issue of severance. Although the clause covered contacts with too wide a group of people, this part of the clause could be severed without affecting the reasonable part of it.

Question 21

Answer (c) is correct. The claimants did not initially claim on the basis of (d). In relation to an account of profits the judge saw no exceptional circumstances justifying this type of award.

Question 22

Answer (b) is correct. The Court was reluctant to use the “gain-based” and “compensatory” labels, regarding both approaches as part of a flexible response to providing an appropriate remedy for the claimant.

Question 23

Answer (c) is correct. The matter was not res judicata, but the claimant had failed to raise a Wrotham Park claim in its initial action, and should not be allowed to rely on this subsequently.

Question 24

Answer (c) is correct. The contract provided for termination by either party in the event of war or other hostilities between specified countries.

Question 25

Answer (d) is correct. If a contract provides for termination in certain circumstances, then if those circumstances have not yet occurred, the likelihood of their doing so should be taken into account in assessing damages. If they have occurred at the time of assessment it is appropriate to take them fully into account.

Question 26

Answer (a) is correct. Certainty was not a principle, simply a desirable outcome. That damages should compensate for actual losses was a principle which could override the quest for certainty.

Question 27

Answer (d) is correct. The evidence to rebut the presumption needs to be quite clear, as shown by Wilson v Burnett [2007].

Question 28

Answer (c) is correct. This is derived from the judgments of Lord Wilberforce in Prenn v Simmonds [1971] and Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998].

Question 29

Answer (b) is correct. The restraint must be reasonable in protecting a legitimate interest of the party imposing it, and not unreasonable in terms of the public interest.

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Feedback

Question 30

Answer (b) is correct. Subsequent cases have confirmed that the remedy is exceptional, and unlikely to be awarded in standard commercial disputes.

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