UK: Commercial Bulletin No. 100 - September 2013

COMMERCIAL

How to calculate a quantum meruit award

Benedetti v Sawiris & Another [2013] UKSC 50

A starting point for accessing a quantum meruit award is the open market value. It might be possible to reduce this where the services are of less value to the defendant, but rarely if ever to increase it.

The Court of Appeal decision was reported in Commercial Bulletin no. 71 from December 2010.

Benedetti provided financial advisory services to Sawiris who were looking to buy a subsidiary of a big energy company in Italy. The proposed agreement between them had fallen by the wayside, not least because the eventual deal was very different from that originally envisaged. The Supreme Court had to decide what sums were due to Benedetti by way of quantum meruit for services rendered.

Relevant numbers - the original contract sum was €75 million; Mr Benedetti had already been paid €67 million (for arguably other services); and, during negotiation, Sawiris offered €75.1 million, apparently on top of the €67 million, a sum which was rejected by Benedetti as being insufficient. The High Court found that the ordinary market value of the services was €36.3 million.

The High Court held that, although the ordinary market value of the services was €36.3 million, the appropriate fee was €75.1 million, on the basis of evidence that Sawiris regarded the value of the services as being at least that sum, based on the offer of that amount in negotiations. The Court of Appeal disagreed and held that the starting point should be ordinary market value. As Benedetti had provided 60% of the services for which he was claiming a quantum meruit (and had effectively been paid for those out of the €67 million), he was entitled to 40% of €36.3 million, i.e. €14.52 million extra.

The Supreme Court accepted the judge's finding that the objective market value of Beneditti's services was €36.3 million. But as he had already received more than that, no further sums were payable. The €75 million fee set out in the abandoned agreement was not relevant to the assessment of market value.

The question which arose was the extent to which that figure for ordinary market value could be decreased if the services were of less value to the particular defendant ("subjective devaluation") or increased if the services were worth more ("subjective revaluation"):

• All the judges agreed that the starting point in valuing services was the ordinary market value, being the price that a reasonable person in the defendant's position would have had to pay for the services.
• The judges diverged on what happened if the services were in fact worth less to the defendant, Lord Clarke and two of the judges held that it was permissible for a defendant to prove that the services were worth less than market value. Lord Neuberger declined to express an opinion, thinking that cases where subjective devaluation could be argued would be extremely rare. Here, for instance, services were provided at the defendant's request, there was no agreement as to how the value of the services should be quantified and neither party had indicated the service should be provided at other than market value. Lord Reed said that the key was the "position of the defendant", so that position of the reasonable person would be adjusted according to the actual characteristics of the defendant (e.g. his credit rating). It was an argument open to someone who had not chosen to receive the services; it was not available to someone who had freely accepted the services.
• All the judges agreed that subjective revaluation was not possible, i.e. a defendant should never have to pay more than market value for services valued on a quantum meruit basis. [i.e. the High Court award of €75.1m was wrong]

Comment. As Lord Neuberger acknowledged, legal academics have developed the law of unjust enrichment/quantum meruit considerably in the last fifty years, but the subject has not received much attention from the UK courts. There will be no doubt more cases to follow on the subject of subjective devaluation.

Beware of not making an offer "subject to contract"

Malcolm Newbury v Sun Microsystems [2013] EWHC 2180 (QB)

Where a settlement offer was made and accepted subject to recording the terms in "a suitably worded agreement", a binding agreement was made and it was not open for the offeror to introduce new terms into that agreement

Newbury was claiming sales commission from Sun Microsystems. A few days before the matter was due to come to trial, Sun's solicitors wrote to Newbury's solicitors saying that Sun "was willing to settle the entire proceedings by paying the Claimant within 14 days of accepting this offer, the sum of [ ]..... by way of damages by means of an electronic transfer..... in full and final settlement of the Claim and counterclaim,...... such settlement to be recorded in a suitably worded agreement." The offer was stated to be open until the end of the day. Newbury's solicitors responded the same day accepting the terms of the settlement in an email marked "Without prejudice save as to costs". They said that they would forward a draft agreement for approval the next day. A dispute then arose as to whether the terms of the settlement should be put onto the public record, with the result that no formal agreement was executed.

Newbury claimed that the exchange of letters constituted a binding agreement and that the execution of the "suitably worded agreement " was not a condition of the agreement coming into effect. Sun claimed that their original offer was not an offer capable of acceptance, but even if it were, a settlement had to be recorded in a separate agreement and the courts would look at conduct after the letter to determine the issue of whether there was a binding agreement.

The High Court (Mr Justice Lewis) found in favour of Newbury. He had little doubt that, viewed objectively, the correspondence did give rise to a legally binding contract between the parties. He reached that conclusion for the following reasons:

• The letter from Sun was expressed in terms constituting an offer of settlement. The offer was stated to be available for acceptance by a specified time and that if accepted an acceptance payment would be made. Both factors were a clear indication that Sun's email was intended to be a binding offer capable of acceptance.
• The offer referred to "such settlement to be recorded in a suitably worded agreement". "Such" referred back to the earlier terms, i.e. it was not a reference to terms still to be negotiated and agreed. That conclusion was reinforced by the use of the word "recorded" i.e. the terms would be committed to writing as an authentic record of that which had already been agreed.
• The letter was not expressed to be "subject to contract". The absence of reference to those words could be significant .
• Marking the acceptance email "without prejudice" made no difference and did not mean that the parties were still negotiating. The two emails read together were consistent with a binding agreement.
• The factual background reinforced the conclusion, namely that this was to be a final attempt to compromise and avoid litigation.
• As for the argument that the parties were still negotiating, it was not legitimate to have regard to the parties' subsequent conduct for the purposes of considering whether those documents gave rise to a binding agreement. Once the parties have agreed in the same terms on the same subject matter, a contract will have been formed. In any event, the subsequent conduct of Newbury and his solicitors were consistent with a binding contract having been formed.

Comment.This case shows the importance of stating that negotiations are "subject to contract" if it is the intention that they are not to form a binding contract. It is worth noting that this is only one of several recent cases in which reference to a formal agreement to be entered into did not prevent an agreement arising in the first place.

Tests for whether there is a binding agreement

Mehboob Travel Limited & Others and Pakistan International Airline Corp QBD

A memorandum of understanding did not amount to a contract for various reasons.

Mehboob and the other Plaintiffs were travel companies in dispute with PIA about payment of commission. They entered into negotiations to settle the dispute. A "memorandum of understanding" was signed by PIA and two of the claimants. PIA submitted that the MOU was a binding contract and that all the claimants had been bound by actual or apparent authority.

Not surprisingly, the High Court rejected the claim. There is no full judgment, but the case note provides a useful list of matters to be borne in mind in determining the issue:

• whether there was a binding contract was not a question of the subjective state of mind of the parties, but what they had objectively agreed.
• unless all material terms were agreed, there was not a contract.
• from the point of view of a reasonable person in the same situation, there was no intention to create legal relations. The travel agents were bringing highly complex and high value claims and it was highly unlikely that they would have intended to conclude all matters via an MOU which was rushed and drawn up without lawyers.
• it was material that the words "contract" and "full and final" were missing from the MOU.
• there was no evidence for a finding of actual authority to settle. Having actual authority to negotiate did not mean having authority to settle. This was particularly the case where PIA knew that not all the claimants were even aware of the meeting.

Comment.The result seems obvious, but the items taken into account by the court in reaching its decision provide a useful checklist.

Obligation to disclose emails simply a matter of agency law

Fairstar Heavy Transport NV v Adkins and Claranet Limited [2013] EWCA Civ 886

The Court of Appeal has ignored High Court reasoning that there is no property right in information and has instead held that agency law obliged a self employed CEO to disclose emails from his personal account relating to the company's business

Mr Adkins had been Fairstar's chief executive officer, but not an employee. Emails sent to Mr Adkins at Fairstar were automatically forwarded to Mr Adkins' private email address and deleted from the server. Emails sent by him from home were not copied to Fairstar. Fairstar was taken over following a hostile bid and wished to have access to the emails received and sent by Mr Adkins.

Because the relevant contract provided that the Dutch courts would have exclusive jurisdiction, Fairstar confined its claim in the High Court to a proprietary claim in the content of the emails. The High Court held that there was no proprietary right in the content of information, so it declined to make an order for delivery up of the emails. The decision was reported in Bulletin 91 covering October 2012.

The Court of Appeal allowed Fairstar's appeal and ordered disclosure. The preliminary issue decided by the judge (i.e. whether there was a property right in information contained in emails) was an unnecessary complication. The right to inspect and copy the content of emails on Mr Adkin's computer rose from an agency relationship that survived its termination. The matter could be decided without a jurisprudential debate about the legal characteristics of "property", or whether the contents of emails was "information". Fairstar was entitled to relief against Adkins because their former relationship was that of principal and agent. As a general rule a principal was entitled to require production by its agent of documents relating to the affairs of the principal and those documents could include information stored other than on paper.

Comment.The agency point was not argued before the High Court. The Court of Appeal did not actually overrule (or even discuss) the High Court decision, so in theory the judge's remarks about proprietary rights in information still stand.

Recital creates an estoppels

Prime Sight Limited v Lavarello (Official Trustee) [2013] UK PC 22

Where a recital confirmed that consideration had been paid, the proposed recipient could not bring a claim for payment.

Clause 1 of a deed of assignment recited that : "In consideration of the sum of £499,950 now paid by the Assignee to the Assignor (receipt and payment of which the Assignor hereby acknowledges), the Assignor as beneficial owner hereby assigns...". It was common ground that no payment had in fact been made and the question arose as to whether the assignor could claim the agreed purchase price in light of the "recital". It was not known why consideration was stated but not paid; one witness said that it was done for tax reasons.

The Privy Council held that the assignor was estopped by the terms of the deed from asserting that the purchase price had not been paid. If a recital in a deed amounted to a mutual agreement to treat it as true, and there were no vitiating factors such as illegality or misrepresentation, the contract should be enforced. There was nothing inherently contrary to public policy if parties agreed to contract on the basis that certain facts were to be treated or established for the purposes of their transaction, although they knew the facts to be otherwise. Here, there was no question of mistake or misrepresentation.

Comment. Be careful that recitals are accurate.

Guarantee not in effect until all guarantors sign

Harvey v Dunbar Assets Plc [2013] EWCA Civ 952

A guarantee which was a single composite document prepared for signature by several persons as joint and several guarantors had to be signed by all the individuals before it came into effect.

Harvey and three other individuals entered into a guarantee with Dunbar to secure the liabilities of a company to which Dunbar was loaning money in relation to a property finance project. The project was unsuccessful and Dunbar demanded repayment of the loan from the company. The company failed to repay the sum due, so Dunbar sought to enforce the guarantee.

Harvey applied to have the statutory demand made against him set aside, on the basis that one of the guarantors claimed his signature on the guarantee had been forged. The district judge and Chancery Division refused to set aside the statutory demand and Harvey appealed to the Court of Appeal.

The Court of Appeal set aside the guarantee. There was an established principle of law in relation to guarantees that a guarantee which on its face has to be signed by specific named persons, will not be treated as having been entered into by any one of those persons until all of them have signed. This "rule" can be displaced if all the signatories consent, which requires express wording, clearly and unambiguously drafted. Whether or not a signatory to a guarantee has assumed liability under it was therefore essentially a matter of construction of the guarantee itself.

The guarantee here was clearly intended to be a joint composite guarantee contained in a single document. As a result, the starting point was that the signature of all four guarantors was an essential precondition to the liability of each individual guarantor. The next step was to see if any wording in the guarantee displaced this precondition. The court held there was nothing in the wording of the guarantee to do so and the statutory demand was therefore set aside.

Comment. If a guarantee is to be enforceable against individual co-guarantors in situations where the guarantee document has not been executed, or has not been executed properly, by one party, you need to ensure the guarantee obligations are drafted to be independent of the co-guarantors. Include express wording that each signatory shall be bound by the guarantee from the time it is signed by him/her even if other persons are named as signatories and expected to sign the guarantee but do not do so.

What can happen when notices do not track required Wording

Sea-Cargo Skips AS v State Bank of India [2013] EWHC 177 (Comm)

A demand under a performance bond which did not track the wording was ambiguous and therefore invalid.

SBI issued two refund guarantees (i.e. performance bonds) to SCS guaranteeing advance payments under a ship building contract. SBI had an irrevocable and unconditional obligation to pay the buyer if the buyer made a written demand with a statement that:

In due course the buyer served a notice on the bank referring to delay in delivery (where the right to terminate was contained in article IV 1 (C):

The question was whether it conformed with the prescribed form. The bank argued that the demand was not in the required form because it referred to delays in delivery whilst the required form related to delays in construction.

The High Court looked at the wording of the guarantee and the demand. It held that although the demand did not have to repeat the precise words of the refund guarantee, it either did not contain the necessary statements showing entitlement to cancel or was ambiguous. In either case it was not compliant. The bank was not a party to the ship building contract and was unable to tell, just by looking at the demand, that the buyer was entitled to cancel the contract.

Comment.This case goes to show that when drafting a notice it is always best to follow exactly the language set out in the contract. If that language is not to be used, then the demand must be absolutely clear and comply with all the requirements in the contract clause.

Importance of making express choice of law

Lupofresh Limited v Sapporo Breweries Limited [2013] EWCA Civ 948

English buyers were unable to argue the English law doctrine of economic duress because, on the facts, Japanese law applied.

The Court of Appeal has considered whether contracts for the supply of hops by a Japanese company (Sapporo) to an English company (Lupofresh), which were subject to the EU Convention on the law applicable to contractual obligations (Rome Convention), were governed by English or Japanese law.

The parties originally concluded four contracts in 2005, which were subsequently renegotiated due to difficulties encountered by Sapporo in meeting its contractual obligations. The renegotiated contracts were on substantially less favourable terms for Lupofresh, which subsequently refused to pay amounts due. None of the contracts contained an express choice of law. Sapporo commenced proceedings, contending that the agreements were governed by Japanese law. Lupofresh counterclaimed for duress, contending that English law applied.

Bean J held that Japanese law applied and gave judgment for Sapporo. Lupofresh appealed.

The Court of Appeal turned down the appeal. It agreed that under the Rome Convention (which governed the law of contracts made before 17 Dec 2009) the place of "characteristic performance" governed and this was Japan. It rejected two "incidents" relied on by Lupofresh as demonstrating an implied choice of law, namely a ceremonial handshake in Kent and a reference in correspondence to the approach the English court would take on a particular issue. These factors "fell very far short" of demonstrating with reasonable certainty an implied choice of English law. The court also rejected Lupofresh's contention that the characteristic performance of two of the renegotiated contracts was the surrender of rights by Lupofresh. It was not appropriate to identify the characteristic performance of a contract by reference to features which were not immediately apparent from its terms. Any argument as to the effect of duress would be a matter for Japanese jaw.

Comment.The decision highlights the importance of making an express choice of law (or checking that the stated law is suitable), and illustrates the hurdles which a party may have to overcome in demonstrating an implied choice of law where no provision has been made.

More guidance on meaning of commercial agent

Invicta UK v International Brands Limited [2013] EWHC 1564 (QB)

An agent was a "commercial agent" where he procured transactions and acquired customers for repeat orders, whether or not negotiation was involved.

Invicta was a business run by two partners to import and sell wine in the UK. For this purpose it had supplier listings with major retailers. International Brands wanted to enter the market, but would have trouble being listed as a supplier, so it appointed Invicta as its agent so that it could use Invicta's listing to sell wine to retailers. Invicta was successful, but International Brands terminated the agency contract. Invicta brought a claim under the Commercial Agency Regulations for compensation, to which International Brands responded that Invicta was not a "commercial agent" as it had no "continuing authority to negotiate the sale ... of goods on behalf of [International Brands] or to negotiate and conclude the sale ... of goods on behalf of and in the name of [International Brands] ...", as required by the Regulations.

The High Court (Judge Ralls QC) held that Invicta was a commercial agent. The purpose of the Commercial Agents Directive which was to protect commercial agents. As was clear from previous case law, the word "negotiate" should be construed widely. "The premise of Article 7 of the Directive was that transactions were concluded as a result of the agent's action, including transactions with his own previously-acquired customers. Thus, the activities of a commercial agent extended to procuring transactions and acquiring customers for repeat orders, neither of which needed to include negotiating the terms, provided that the agent acquired business for the principal. Whether the authority was exercised infrequently or not was immaterial unless the continuing authority was withdrawn. The context of the agreement constituted a classic commercial agency. Invicta was to sell goods on behalf of International Brands to customers, and could not perform its duties without such authority. Alternatively, there was an implied term of continuing authority to negotiate on the grounds of obvious implication/necessity or business efficacy."

Comment.In practice almost any activity which furthers a principal's business is likely to make the agent a "commercial agent". This decision is consistent with previous decisions where the word "negotiated" has been given a wide meaning. Note that no judgment has been published, so the above summary consists of extracts from the Westlaw report on the case.

Various findings on breach of confidentiality

Force India Formula 1 Team Limited v Aerolab SRL and Fondmetal Technologies SRL

The Court of Appeal has made various findings in relation to breach of confidentiality and termination for breach.

Aerolab agreed to provide, exclusively, services involving wind tunnel aerodynamic testing and development for Force India's Formula 1 cars. In the agreement, IP developed by Aerolab for Force India was to belong to Force India. The confidentiality clause was detailed. There was a wide definition of "Information" and then an obligation on Aerolab to maintain the confidentiality of the information which it had obtained or gathered from Force India or had created or developed as part of the performance of its work. There were the usual exclusions for Information in the public domain or received from a third party.

Force India went into arrears on payment, resulting in Aerolab stopping Force India's access to Aerolab's servers containing the information which Aerolab had developed for Force India. Two weeks later, Aerolab told Force India that it was ceasing to work for Force India and had instead started working for another Formula 1 company (Team Lotus). As part of the work for Team Lotus, Aerolab's employees used information developed for Force India. Questions arose as to breach of confidentiality, amongst other things.

The High Court found that the confidential information had been used by Aerolab only as a short cut and the information had not been reproduced in the work for Team Lotus. As to damages, the information was not of value in itself because it was not transferable to another car. The judge imposed what he considered to be a reasonable licence fee for use of the confidential information which he assessed at €25,000, rather than the £14 million that Force India had been claiming. Force India appealed.

The Court of Appeal rejected the appeal. Some points of detail were as follows:

• As to contractual breach of confidence, there was a clear breach of the confidentiality provision which provided that the information would be used exclusively for work conducted under the contract. However Force India was not seeking compensation for breach of the clause.
• As to the equitable claim for breach of confidence, if the Aerolab employees had treated the confidential information as being theirs to use as they saw fit, then compensation should have been assessed on the basis of the value to Aerolab of the whole corpus of information. But here, there was no claim that Force India had suffered any loss as a result of misuse of the confidential information. Its case on quantum was squarely aimed at the benefit alleged to have been derived by Team Lotus from the use of the confidential information. The Court was happy to accept the High Court's ruling that the benefit to Aerolab should be measured by reference to what it would have cost Aerolab to commission a consultant to produce equivalent designs. Aerolab did not obtain any knock on benefit in relation to other projects.
• The High Court had agreed with Aerolab that where a piece of information had become memorable, it became part of an employee's skill, knowledge and experience and could be reused not in breach of confidence. The Court of Appeal disagreed. "An identified piece of confidential information does not cease to be confidential simply because it is memorable."

Comment.Note the finding that a piece of information that can be memorised by an employee (i.e. without being committed to writing) can still be confidential information.

Permitted time for offering bargains

Consumer Protection from Unfair Trading Regulations – conviction of Tesco Stores Limited

Tesco was convicted and fined £300,000 for offences under the Regulations where it sold "half price" strawberries for too long

Tesco sold strawberries for £1.99 "half price". It did this for more than 14 weeks, having sold strawberries for the full price of £3.99 for just one week, followed by a further week at £2.99.

Tesco pleaded guilty to offences under Regulations 5 and 9 of the Regulations for engaging in commercial practices which were misleading. The case was brought by Birmingham City Council followed from a complaint received by Trading Standards from a member of the public.

The general principle is that a discount should not be available for longer than the period during which the product was sold at full price. This is stated in the Pricing Practices Guide published by the BIS. It is also set out in "Principles on good pricing display and promotional practices" agreed by Tesco and seven other supermarkets with the OFT.

IT/IP

IT suppliers may not be able to terminate on customer Insolvency

Section 93 of the Enterprise and Regulatory Reform Act 2013

Under Section 233 of the Insolvency Act 1986, suppliers of "essential supplies" (gas, water, electricity and communications services) may not demand payment of pre-insolvency debt as a condition on further supply).

The Government is considering extending this protection to IT supplies on the basis that they are equally critical to the continued operation of an insolvent business. Section 92 in the Enterprise and Regulatory Reform Act 2013 gives the Government the power to extend the list of essential suppliers to include supplies: "for the purpose of enabling or facilitating anything to be done by electronic means". The Government will also have the power to render void any contractual terms that allow providers of essential supplies to withdraw supply or alter the terms of a supply contract on account of certain insolvency circumstances. Any extension will be undertaken by way of secondary legislation, following consultation by the Government.

Two potential issues. The first is what happens when the IT supplier is not situated within the UK (utility suppliers always are). The second is whether an IT supplier will be entitled to object to assignment of its contract to a third party as part of a pre-pack sale.

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