Court of Appeal holds that the word "shall" does not automatically create a contractual obligation

A recent decision by the Court of Appeal in PM Law v Motorplus [2018] EWCA Civ 1730 has shown that a contractual obligation to perform will not necessarily be imposed by the use of the word “shall” if the relevant provision only expresses an intention to perform at the time of contracting. As this is an English decision, it is not technically binding in Scotland but it is highly persuasive.

Facts

The case concerned a clause in an agreement between PM Law Limited (a solicitor specialising in personal injury litigation) (“PML”) and Motorplus Limited (an insurance intermediary) (“Motorplus”) relating to the referral of insurance claims for a fee. Clause 1 of the agreement stated:

“In consideration of the payment of referral fees by [PML] [Motorplus] shall refer a quantity of [personal injury] claims…to [PML]”

When no new referrals were made, PML brought an unsuccessful claim for damages for breach of contract. PML appealed to the Court of Appeal. In dismissing the appeal, the Court of Appeal held that, in light of the terms of the agreement as a whole and the relevant facts, Clause 1 was only an “expression of intention” by Motorplus to make referrals rather than a contractual obligation.

Decision

The Court of Appeal held that:

• Clause 1 did not set out a specific quantity of claims to be referred, a formula to determine that quantity, or a minimum number of claims in a particular period even though “it would have been easy to do so”. This suggested there was no obligation to make referrals. In addition “quantity” was not an ambiguous word. The court would not “rewrite the bargain”, seek out a different meaning or infer that quantity meant “some or a reasonable quantity” of claims. It would be “impermissible” for the court to import uncertainty.
• In respect of the “consideration” referred to in Clause 1 of the agreement, the Court of Appeal took the view that the payment of the referral fees did not amount to a promise by PML to accept every referred claim. Rather, the payment of fees was to be made on a referral-by-referral basis for each referral accepted by PML. This indicated that each referral was to be treated separately, which was more consistent with a unilateral contract than the respondent being contractually obliged to refer a particular quantity of claims.
• The construction of the agreement as a whole suggested that there was no obligation for any referrals to be made. In particular, the agreement contained details of the arrangements that applied in “anticipation of a referral” and if a referral was made, showing that referrals would only be made on a contingency basis.
• The parties were prompted to enter into the agreement to comply with the requirements of the Solicitors’ Code of Conduct 2007. As a result, the Court of Appeal looked at a previous oral agreement entered into between the parties under which Motorplus did not guarantee a particular number of referrals.

Comment

This case highlights the importance of clear drafting to ensure that the obligations of the parties are explicit in the contract. The use of words such as “shall” in isolation will not automatically give rise to contractual obligations.

Contractual parties should be careful that any intended performance obligations are clearly expressed. The Court of Appeal’s reasoning makes it clear that, irrespective of the use of the word “shall”, for a contractual obligation to arise, the act of performance should be mandatory, rather than presented as an option. The court will not infer that a contractual obligation exists when the agreement as a whole, the background to the agreement and the relationship of the parties suggest otherwise.