Litigation and Arbitration: the top things you need to know - September 2016

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.


1.   Is an express right to terminate subject to an implied duty of good faith?

In Monde Petroleum SA v Westernzagros Ltd [2016] EWHC 1472 (Comm), the High Court held that an express right to terminate a contract was not subject to an implied term that it must be exercised in good faith.  

The claimant argued that, as the parties had intended their contract to be long-term and "quasi-partnership" in nature, a duty of good faith should automatically be applied.  The judge rejected this argument, stating that "it is clear that the mere fact that a contract is a long-term or relational one is not, of itself, sufficient to justify such an implication".  The court still had to apply the usual test for implying a term (that the term must be obvious or necessary to give business efficacy to the contract).  The judge found that such a term was neither obvious nor necessary; in particular, it was "impossible … to identify any facts forming part of the commercial background, or any aspects of the relationship between the parties as set out in the [agreement] itself, which indicate that the [agreement] would lack commercial or practical coherence without the implication of a ‘good faith’ term…".

The claimant also argued that the established principle that a contractual discretion had to be exercised in good faith (in the absence of very clear language to the contrary) applied equally to a contractual right to terminate.  This too was rejected.  The Court of Appeal had made it clear in Lomas v JB Firth Rixson Inc [2012] EWCA Civ 419 that the right to terminate could not be made subject to an implied requirement of good faith.  One reason for this was because it was not the exercise of a discretion (which involved a choice from a range of options) but a binary choice.  

The judge observed that: "a contractual right to terminate is a right which may be exercised irrespective of the exercising party's rights for doing so.  Provided that the contractual conditions (if any) for the exercise of such a right (for example, the occurrence of an event of default) have been satisfied, the party exercising such right does not have to justify its actions".  The only relevant enquiry was "whether the conditions laid down in the contract have, on the true interpretation, been fulfilled".

Here, the defendant had not exercised the right to terminate in accordance with the contractual requirements.  The claimant argued that this amounted to repudiation of the contract.  The judge disagreed.  Serving a defective notice of termination was not in itself a breach; the notice was simply of no legal effect.  Neither did it amount to renunciation of the defendant's obligations; it was merely an attempt to operate the contractual machinery.

The judgment is here.

2.   When is an innocent party precluded from affirming the contract following repudiatory breach?

In MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789, the Court of Appeal considered whether it was possible for an innocent party to elect to affirm a contract after a repudiatory breach where the party in default was unable to perform its obligations.  

The contract contained a liquidated damages clause which was unlimited in time or amount.  At first instance, Leggatt J had applied White & Carter (Councils) Ltd v McGregor [1961] UKHL, holding that the innocent party could only affirm if it had a "legitimate interest" in keeping the contract alive, and there was no such interest in this case, where the party was not suffering any loss and the only purpose in continuing the contract was to claim the liquidated damages.  Although the Court of Appeal agreed that it would be unreasonable to affirm merely to claim liquidated damages, it held that the option to affirm did not even arise in this case.  The legitimate interest principle in White & Carter only applied where the party in breach was refusing to perform its continuing or future contractual obligations (so the question arose of whether the innocent party had a legitimate interest in holding him to those obligations).  Here it was impossible for the defaulting party to perform at all; the commercial adventure envisaged in the contract had been frustrated. 

At first instance, Leggatt J had drawn support from what he described as an increasing recognition in the common law world of the need for good faith in contractual dealings, and sought to extend the application of the principle from the exercise of a contractual discretion to a contractual right to terminate (as relied on unsuccessfully by the claimant in Monde Petroleum, above).  The Court of Appeal drew back significantly from this suggestion.  As Moore-Bick LJ put it: 

"The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences and I do not think it is necessary or desirable to resort to it in order to decide the outcome of the present case.  …  In my view the better course is for the law to develop along established lines rather than to encourage judges to look for what the judge in this case called some 'general organising principle' drawn from cases of disparate kinds".

In his view, there was "a real danger" that a general principle of good faith would be invoked as often to undermine as to support the terms on which the parties had agreed.  

The judgment is here.

3.   Settlement agreement set aside for fraud even where defendant suspected claim was fraudulent

In Hayward v Zurich Insurance Company plc [2016] UKSC 48, the Supreme Court set aside a settlement agreement for fraudulent misrepresentation, in circumstances where the defendant suspected the claim to be fraudulent before entering into the settlement.

The Court of Appeal had declined to set aside the settlement agreement, finding that the defendant had not been induced to enter into the agreement by the claimant's fraudulent misrepresentation.  It held that for a misrepresentation to be the basis of rescission, the representee must have given some credit to its truth and have been induced by a perception that it was true rather than false.  

The Supreme Court rejected this reasoning.  The correct test was whether the representee had been "influenced by" the other side's representation in entering into the settlement agreement.  This would be a question of fact in each case.  It was not necessary, as a matter of law, to prove that the representee believed that the representation was true.  His state of mind would, however, be relevant to the issue of inducement: if he did not believe that the representation was true, he might have "serious difficulty" in establishing that he was induced to enter into the agreement or that he had suffered loss as a result.  

In a litigation context, even where a party was sure that a statement made by the other side was a deliberate lie, he could not ignore it as he had to take into account the risk that it would be believed by the judge at trial.  Here, although the defendant suspected that the representations made by the claimant were untrue, those statements had influenced the amount it decided to pay.  It entered into the settlement agreement on the basis that those representations would be put before the court as true and there was a real risk the court would accept them and make a larger award than the defendant would otherwise have considered appropriate.   

The court did not express a final view on whether it always follows from the fact that a representee knows that a representation is false that he cannot succeed; however, Lord Clarke suggested obiter that, as inducement and causation were questions of fact, there might be circumstances in which a representee knows that a representation is false but is still held to rely upon the misrepresentation as a matter of fact.  Hayward might have been such a case, because even if the defendant had been sure the claimant was lying, it still would have had to take account of the risk of the claimant being believed at trial.

The judgment is here.

4.   Warranties in SPA not also representations capable of founding action for misrepresentation

The Commercial Court has held that contractual warranties given by the seller in a sale and purchase agreement ("SPA"), which were expressed solely to be warranties, were not also representations capable of founding an action for misrepresentation under the Misrepresentation Act 1967 (Idemitsu Kosan Co Ltd v Sumitomo Co Corp [2016] EWHC 1909 (Comm)).  This is a point on which there is conflicting first instance authority, but this decision suggests that a buyer may find it difficult to argue that warranties are also actionable in misrepresentation unless the SPA clearly provides that they also take effect as representations, or are to be treated as such.  

The buyer alleged that a number of warranties given by the seller were untrue.  It sought to bring a claim in misrepresentation because a contractual breach of warranty claim was time-barred under the terms of the SPA.  The buyer argued that: (1) the designation of the statements of fact in the warranties as contractual warranties did not derogate from their inherent quality as representations; and (2) by providing the execution copy of the SPA and offering to sign it, the seller had made actionable pre-contractual representations in the terms of the statements of fact contained in the warranties, and the buyer had entered into the agreement in reliance on those representations. 

The court rejected the buyer’s first argument.  Applying the decision of Mann J in Sycamore Bidco Ltd v Breslin and another [2012] EWHC 3443 (Ch), the judge held that if a contractual provision states only that a party gives a warranty, that party does not by concluding the contract make any statement to the counterparty that might found a misrepresentation claim.  In the absence of a provision stating "in so many words or in effect" that the warranty is also to take effect as, or be treated as, a representation, there is no relevant representation.

The court also rejected the second argument.  It accepted that language used to communicate a negotiating position or in a draft contract might in principle amount to a pre-contractual representation capable of founding a claim under the 1967 Act.  This, however, involved divorcing the warranty schedule from the rest of the SPA, and it was "artificial and wrong in principle" to treat the schedule as if it had an existence independent of its function in the execution copy of the SPA, which was to provide content to the warranties.  The seller did not make any representations by the warranty schedule because it was not by nature a set of statements of fact made to the buyer; rather it was the agreed means by which the parties together chose to define the content of the warranties.  The earlier provision of an execution copy of the SPA including the warranty schedule could not give the schedule a different character than it had when the SPA was concluded.

In any event, the buyer’s arguments were defeated on the facts by an entire agreement clause, under which it had acknowledged and agreed that it had not relied on or been induced to enter into the SPA by any representations or warranties other than those in the warranties schedule.   

The judgment is here.

5.   Supreme Court sets out new test on when a claim will fail for illegality

In Patel v Mirza [2016] UKSC 42, a majority of the Supreme Court set out a new "range of factors" test for determining when a defendant can raise the defence of illegality (also known as ex turpi causa) to a civil claim.  It rejected the "reliance principle" adopted by the House of Lords in Tinsley v Milligan [1994] 1 AC 340 (that a claim could not be brought where it involved the claimant relying on his own illegality).  

Under the new test, the defence will apply if enforcing the claim would be harmful to the integrity of the legal system.  In assessing whether the public interest will be harmed in this way, it is necessary to consider: 

  • the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim; 
  • any other relevant public policy on which denial of the claim may have an impact; and
  • whether denial of the claim would be a proportionate response to the illegality.

Here, the claimant provided the defendant with £620,000 to engage in insider dealing in RBS shares.  When the intended transaction failed to take place, the claimant sued for the return of his money.  The Supreme Court held that he could recover it, stating that a claimant who satisfied the ordinary requirements of a claim for unjust enrichment should not be debarred from enforcing his claim only because the money which he sought to recover was paid for an unlawful purpose.  There might be rare cases where such a claim could be regarded as undermining the integrity of the justice system, but that was not the case here.

The judgment is here.

6.   Law Society and CLLS practice note on execution of documents using electronic signatures

The Law Society and City of London Law Society have published a practice note on the execution of commercial contracts and other documents using electronic signatures.  The note explains how to determine whether a document has been validly executed and sets out the Law Society's view of good practice for using electronic signatures.  It also looks at issues such as the evidential weight of an electronic signature and situations where it may be necessary to obtain advice from lawyers in another jurisdiction (for example, on the authority of an overseas company to sign electronically, or where litigation in relation to the document may be required outside England and Wales).  The practice note is here.  


7.   Is an agent's authority irrevocable?

In Bailey and another v Angove's Pty Ltd [2016] UKSC Civ 47, the Supreme Court held that an agent's authority to collect debts owed to the principal was not irrevocable, and did not survive the termination of the agency agreement by the principal.

The general rule is that the authority of an agent may be revoked by the principal, even where the parties contractually agreed that the authority was to be irrevocable.  The main exception is where the agent has a relevant interest of his own in the exercise of the authority: then, it will be irrevocable provided two conditions are satisfied: (1) there is an agreement that the agent's authority is to be irrevocable; and (2) the authority is given with the intention of securing a subsisting proprietary interest or personal liability of the agent.  The mere existence of such an interest will not generally be enough.  

The Supreme Court noted in addition, however, that there was no principled reason why a true agent employed on his principal's affairs should not also be regarded as having a personal interest in the exercise of his authority sufficient to make it irrevocable.  Lord Sumption suggested that, although an agent's commercial interest in continuing to act in order to earn commission was not enough to make his authority irrevocable, his interest in recovering a debt in respect of commission already earned "may well be".

Here, the court held on the facts that the general rule applied.  Lord Sumption noted that the agent's authority to collect payments on behalf of the principal was not expressed to be irrevocable or to survive the termination of the agreement.  In addition, the fact that there was nothing to stop customers paying the principal directly made it difficult to regard collection from the customer (from which the agent deducted its commission before making payment to the principal) as giving the agent a right or security.  

The judgment is here.


8.   Tort of malicious prosecution applies to civil claims; status of Privy Council decisions

A majority of the Supreme Court has held that the tort of malicious prosecution applies to civil claims as well as criminal claims (Willers v Joyce and another [2016] UKSC 43).  In doing so, it overturned previous House of Lords authority (Gregory v Portsmouth City Council [2000] UKHL 3) and instead followed a decision of the Privy Council (Crawford Adjusters (Cayman) Ltd v Sagicor General Insurance (Cayman) Ltd [2013] UKPC 17).

Lord Toulson considered it "instinctively unjust" for a person to suffer injury as a result of the malicious prosecution of legal proceedings for which there was no reasonable ground, and yet not be entitled to compensation.  The question was whether there were countervailing factors which meant that the tort should only apply to civil proceedings in the limited categories of case to which it had previously been held to apply (such as insolvency petitions).  Lord Toulson considered and rejected a number of factors, including: (1) that the tort might deter the pursuit of valid claims for fear of facing a vindictive action for malicious prosecution should the claim fail; (2) that there should be a corollary right to sue for the malicious defence of a civil claim without reasonable or probable cause; and (3) that extending the application of the tort would create uncertainty about the meaning of malice.  

Status of Privy Council decisions

The case also raised an independent but important point in relation to the status of Privy Council decisions.  At first instance, the judge had considered herself bound by the House of Lords' ruling in Gregory that the tort of malicious prosecution was confined to criminal proceedings.  The Supreme Court took the opportunity in this case to hand down a second, unanimous, judgment addressing the status of Privy Council decisions in the courts of England and Wales.  The rule now is that English courts should not follow a decision of the Privy Council which is inconsistent with another decision that would otherwise be binding.  There is one exception: where an appellant gives notice that it will invite the Privy Council to depart from a decision of the Supreme Court, House of Lords or Court of Appeal, it will be open to the Privy Council to expressly direct that domestic courts should treat its decision as representing the law of England and Wales.  

The judgments are here and here.

Civil procedure

9.   Publication of Lord Justice Briggs' final report in the Civil Courts Structure Review 

On 27 July 2016, Lord Justice Briggs' final report in the Civil Courts Structure Review was published.  The key recommendations include:

  • The introduction of an online court, initially for money claims up to £25,000 (but with a phased "soft launch" for claims up to £10,000).  This will be a new court, separate from the County Court.  The court will take a three-stage approach to claims: (1) a largely automated online triage process for users to articulate their case and upload key evidence; (2) conciliation and case management by case officers; and (3) resolution by judges (which may be by traditional trial, video or telephone hearing, or on the documents).  It will have a limited fixed recoverable costs regime and appeals will lie to a Circuit Judge in the County Court, and then to the Court of Appeal.  Briggs LJ explains that a project is already under way, as part of the HMCTS Reform Programme, to develop the online court.  The project has a target date of April 2020, which Briggs LJ acknowledges is a "real challenge".  The Ministry of Justice has already decided that the court should have its own "simple" rules, and will not be governed by the Civil Procedure Rules.
  • Increased use of case officers (senior Court Service officers) for some of the more routine work currently undertaken by judges and for the second stage of the online court process.  Case officers must be legally qualified and will be trained and actively supervised by judges.  Parties will have an unfettered right to have any decision of a case officer reconsidered by a judge.
  • Removing all remaining financial limits on the jurisdiction of the County Court, and increasing the threshold for bringing High Court claims, initially to £250,000, with a view to a second increase to £500,000.  
  • The County Court should be responsible for enforcement of judgments and orders of all civil courts (with provision for transfer to the High Court for more complex cases and special provision for the enforcement of arbitration awards).  If this is not feasible, there should be centralisation, harmonisation, rationalisation and digitisation of enforcement procedures.

The report is here.

10.   Changes to appeals procedure from 3 October 2016

A number of changes will be made to the appeals procedure from 3 October 2016, with the introduction of a revised and restructured version of Part 52 of the Civil Procedure Rules (see here).  The most important changes relate to the procedure in the Court of Appeal and will hopefully have a long term impact on the recent backlogs experienced in the Court of Appeal:

  • The automatic right to an oral hearing when renewing an unsuccessful application for permission to appeal will be removed.  The Court of Appeal will determine the permission application on paper, unless the judge considering the application directs an oral hearing.
  • This approach will be extended to decisions made on other applications in the course of Court of Appeal proceedings (decisions by court officers and reviews and reconsiderations of these by a judge), i.e. they will be determined on paper unless a judge directs an oral hearing. 
  • The threshold test for permission to appeal for second appeals will be re-worded to expressly include the requirement of "a real prospect of success".  The proposal that the general threshold test for appeals to the Court of Appeal should be raised to a "substantial prospect of success" has not been implemented, although it is still being considered and there may be further consultation on increasing the threshold for all appeals.
  • Transitional provisions provide that the revised version of Part 52 will only apply where an appellant's notice is issued on or after 3 October 2016.  The revised rules on requests for review or reconsideration of decisions will only apply where the request is made on or after 3 October 2016.

11.   The effect of a Part 36 offer on the other side's earlier Calderbank offer

Where one party makes a Calderbank (i.e. "without prejudice save as to costs") offer and the other side responds with a Part 36 offer, what is the effect of the latter on the earlier, non-Part 36 offer?  The High Court has now confirmed that the Part 36 offer is a counter-offer which amounts to a rejection of the Calderbank offer (DB UK Bank Ltd (t/a DB Mortgages) v Jacobs Solicitors [2016] EWHC 1614 (Ch)).  This means that the earlier offer is no longer capable of being accepted.

Under the normal contractual rules of offer and acceptance, a counter-offer amounts to the rejection of an earlier offer (the "principle of implied rejection").  Part 36, however, is regarded as a self-contained code, to which the normal rules of offer and acceptance do not apply.  This means that where one party makes a Part 36 offer and the other side subsequently makes a different Part 36 offer, the second offer does not constitute rejection of the first one.  

The question here was whether the fact that the second offer was in the form of a Part 36 offer displaced the principle of implied rejection and meant that the self-contained Part 36 regime applied instead.  The court held that it did not.  The impact on a common law offer of any counter-offer had to be addressed by reference to common law principles.  It made no difference that the second offer was made under Part 36.  The Part 36 regime only applied where the court was considering the impact of a counter-offer on a Part 36 offer.

The judgment is available on LexisNexis.    

The information contained in this update is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action.