Long term contracts, changing circumstances and interpretation

In recent times there has been a wealth of analysis of the principles of interpretation of contract.  In addition to the Scottish Law Commission report (available at http://www.scotlawcom.gov.uk/law-reform-projects/contract-law-in-light-of-the-draft-common-frame-of-reference-dcf/), useful guidance was provided by the Supreme Court in the Scottish appeal, Multi-Link Leisure Developments Ltd v North Lanarkshire Council ([2010] UKSC 47).  A recent OH decision from Lord Glennie, Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc ([2011] CSOH 105) has shed light on an interpretation issue which generally receives little attention from the courts, namely the way in which rules of interpretation are applied where performance of a long term contract has been affected by changed circumstances.   Should the interpretative rules be amended to take into account unanticipated changes having an impact on the way the contract operates?

The pursuer is a charitable foundation, set up at the time of floatation of the TSB group in 1986 in order to preserve the bank’s charitable status.  The contract at issue is a Deed of Covenant in terms of which payments were made by defender to pursuer.  It was entered into in 1997 and was to endure until terminated by the defenders by nine years’ notice in writing.  The dispute concerned the interpretation of the provision for payment in the Deed, and arose in the context of the defender’s acquisition of HBOS in 2009.  That acquisition gave rise to “negative goodwill.”  A change in accounting practices meant that negative goodwill became included in Audited Accounts as part of pre-tax profits or losses.  At the time this Deed was entered into, the defenders argued, no one could have contemplated that this would be the case.  The pursuers argued that the defender should be held to a literal meaning of the Deed despite the fact that this change, the inclusion within pre-tax profits of a figure for negative goodwill not subject to taxation, was not and could not have been anticipated at the time.  The defenders argued that this new approach should not affect the level of payments to the foundation from year to year. 

Lord Glennie tackled the difference between the parties on the appropriate starting position in the interpretative exercise.  The pursuers argued that the court should start with the words used in the Deed, whilst the defenders argued that one should look first to the relevant background knowledge available to the parties at the moment of formation of the contract.  In contrast to many other interpretation cases recently, Lord Glennie found that the words in question did indeed have a natural and ordinary meaning (para [68]).   He explained his approach as follows (para [67]):

“On the basis of the words used, I should form, in the first instance at least, a provisional view as to what the parties must be taken to have intended.  Where, as here, background or contextual information is to hand and is relied on by the parties, that provisional view must be assessed, or re-assessed, in light of that information, to see whether it makes sense, whether it requires some reconsideration.”

He concluded on this point (paras [72] and [73[]):

“…on the natural meaning of the words and expressions used in the Deed, the parties have settled upon a formula which plainly points, in the present circumstances, to the result for which the pursuer contends.  But this is not the end of the matter.  That construction must be cross-checked against the evidence the court has before it as to the circumstances in which the agreement in the Deed was made.”

This statement provides much-needed guidance.  The correct starting point is surely an important issue.  It seems unsatisfactory to state, as Lord President Hamilton did in the recent case of Luminar Lava Ignite Ltd v Mama Group plc that there is no starting position: it is a matter of choice (2010 SLT 147, para [38]). 

Speaking of the change in circumstances in particular Lord Glennie commented (at para [79]):

“Had they had magical powers of foresight, I have no doubt that the parties would have come up with a different formula to express their basic intention.  The parties not having had such foresight (for which they cannot be blamed), and therefore having expressed themselves in a manner which, in the changed circumstances, gives rise to unintended consequences, is the court powerless to intervene? I think not.”

The actual approach was explained in more detail (at para [80]):

“…it [the court] should ask what are the “purposes and values” expressed or implicit in the wording of the Deed, as understood in the context of the facts and matters in existence at the time it was entered into, and, having identified those purposes and values, attempt to reach an interpretation which applies the wording of the Deed to the changed circumstances in the manner most consistent with them.”

The purpose of the Deed was, Lord Glennie held, to allow the foundation to participate in the Group’s trading profits (para [81]).  Relying on the approach in two other cases, Debenham Retail plc v Sun Alliance and London Assurance Co Ltd and Lian Hwee Choo Phebe v Maxz Universal Development Group Ptd Ltd, Lord Glennie with this specific purpose in mind, disregarded certain of the words in the definition of Pre-Tax Profit and Loss, explaining (at para [81]):

“This is not, to my mind, re-writing the contract so as to alter the bargain the parties have made.  It simply recognises that to find a construction consistent with the parties’ objectives may involve doing some slight violence to the wording of the contract or Deed…This may be necessary not only where something must have gone wrong in the drafting but also where, because of changed circumstances, the drafting gives a result which neither party could have intended.”

The pursuer’s claim failed and decree of absolvitor was granted. 

There is more in the case which is of interest, however.  As an alternative to the case on construction, the defender argued that there was scope in Scots law for the idea of “equitable adjustment.”  This is an attempt to resurrect an idea which, although long dormant, has a distinguished history, having been analysed by Lord Cooper (‘Frustration of Contract in Scots Law’, (1946) 28 Journal of Comparative Legislation, Pt III, 1’ not, it appears, cited to the court).  McBryde is in favour of its resurrection, exhorting the Scots lawyer to “…ignore dicta in English cases,” and “follow the approach of his predecessors” (‘Frustration of Contract’ (1980) J.R. 1 at 4).  The current author analysed it again recently in a comparative analysis of Scots and Louisiana law (‘The effect of unexpected circumstances in contracts in Scots and Louisiana Law’ in V. V. Palmer and E. C. Reid (eds), Mixed Jurisdictions Compared: Private Law in Louisiana and Scotland (2009) pp. 244-280).  Neither party in this case sought to argue that the contract was frustrated.  Rather, the defender submitted (para [85]):

“…in circumstances not amounting to frustration, where performance of a provision in an ongoing contract would, as a result of unforeseen circumstances, no longer bear any realistic resemblance to the performance originally contemplated, and would produce a manifestly inequitable result, the courts would intervene.”         

In support of this argument, the defender cited an old chestnut of a case, Wilkie v Bethune (1848) 11 D. 132.  In that case an agricultural labourer was entitled by contract to be paid partly in money and partly in potatoes.  The 1846 potato crop failed and there was a dramatic price rise.  The defender sought to rely on McBryde’s suggested approach which was to treat this case as an example of adjusting a contract to achieve a fair and equitable approach.  Placing this idea in the context of the ius commune, the defender cited Grotius, De Jure Belli ac Pacis, II.xvi.25.2 and Pufendorf,  De Jure Naturae et Gentium III.vi.6.  Finally, the defender cited Pole Properties Ltd v Feinberg (1982) 43 P&CR 121 and a decision of the US District court of Pennsylvania, Aluminium Company of America v Essex Group Inc 499 F Supp 53 (1980). 

Despite the citation of these distinguished authorities, Lord Glennie rather bluntly concluded (para [89]):

“I am not persuaded that there is a such a doctrine in Scots law.”            

Even if it existed, he did not see it as a doctrine specific to Scots law (para [90]).  Wilkie v Bethune was characterised as an unhelpful authority (para [90]):

“Each of the judges seems to have decided the case on different grounds.  Lord Mackenzie…decided the case on equitable grounds by refusing interdict for payment by potatoes.  Lord Jeffrey emphasised that it was not a mercantile contract and that he was not laying down any principle of mercantile law.  He construed the contract as a contract to provide a certain amount of aliment, and, while it happened to mention potatoes, the provision of potatoes was not an essential part of the obligation.  Only Lord Fullerton dealt with the case on the basis of frustration, but he was in the minority.”

Lord Glennie suggested that, if the doctrine was part of Scots law, it must also be part of English law (para [90]).  This conclusion is surely questionable.  Although, as he pointed out, the law of frustration in both system tends to be discussed by reference to the case of Davis Contractors Limited v Fareham UDC ([1956] AC 696), there are differences in the way each system approaches this whole area.  The law of unjustified enrichment regulates the positions of the parties after frustration.  English law applies a statute which has no application in Scotland, the Law Reform (Frustrated Contracts) Act 1943, and Scots law the common law principles of unjustified enrichment.  With such a different underpinning structure, and a completely different historical development, it seems likely that further differences may exist.       

Finally, he questioned the existence of a concept of equitable adjustment: there appears to be no history of its application in contracts where a steep rise in the cost of performance has occurred (para [91]).  This point can be discussed by analogy with cases involving extraordinary inflation.  Whilst English authority confirms that “ordinary” inflation does not provide grounds for frustration (British Movietone News Ltd v London and District Cinemas[1952] AC 166; Wates Ltd v Greater London Council (1983) 25 BLR 1 (CA)), modern writers are at least open to the possibility that extraordinary inflation could frustrate a contract (G. H. L. Treitel, Frustration and Force Majeure (2004), para 6-045).  Perhaps we should keep an open mind on whether an extraordinarily large hike in the cost of performance of a long term contract could amount to frustration.  Comparative material on this point is interesting.  In Germany, where currency devalued after the Second World War, the German courts were called upon to consider this point regularly (see the discussion in E. Hondius and H. C. Grigoleit, Unexpected Circumstances in European Contract Law (2011) p. 218 et seq).  The lack of discussion of the effect of extraordinary inflation may be explicable because, in the U.K., we have so far been lucky enough not to suffer from drastic currency devaluation. 

For all these reasons the argument on equitable adjustment failed.  This is perhaps not surprising given the lack of authority and the age of the authorities which are available.  It is disappointing, however, that reference appears not to have been made to more of the Scottish academic commentary.  The legal teams appear to venture no further than McBryde’s book.  Whilst this blogger would certainly not question the central role of this book, other academic analysis exists, including an article by Professor McBryde written in 1980.  The relevant section in the Stair Memorial Encyclopaedia (volume 15, Obligations, para 880) also contains support for equitable adjustment.  Lord Cooper’s article would have been particularly useful to the court, setting out the differing history in Scotland and England, and perhaps leading to a recognition that the law may differ in the two countries. 

Lord Glennie’s rejection of the concept is unlikely to be the end of the story.  Equitable adjustment appears in the DCFR III. -1:110(2): “ If, however, performance of a contractual obligation or of an obligation…becomes so onerous that it would be manifestly unjust to hold the debtor to the obligation, a court may: (a) vary the obligation in order to make it reasonable and equitable in the new circumstances: or (b) terminate the contract at a date and on terms to be determined by the court.”  Given that the Scottish Law Commission is currently subjecting Scots law to a “health check” by reference to the DCFR, they may indeed consider this area once more. 

This case presented a useful opportunity for reconsideration of the rules of interpretation and the idea of equitable adjustment.  Lord Glennie provides succinct and practically useful analysis.  The defender’s legal team should be thanked for running an argument based on equitable adjustment, allowing the rest of us to consider it once more.  



Fiduciary duties in agency

John Youngs Insurance Services Ltd v Aviva Insurance Service UK Ltd ([2011] EWHC 1515 (TCC)), decided by Mr Justice Ramsey in the English High Court, makes a contribution to our understanding of fiduciary duties in agency.  Although it is an English case, it leads us to reflect on equivalent issues in Scots law, particularly given that English cases are often treated as authoritative in the Scottish courts.

The proceedings arose out of an agreement between the two companies in terms of which Youngs provided services to Aviva consisting of handling claims made by Aviva policy holders and undertaking building repair work where the damage was insured.  Although there was no written agreement between the parties, both accepted that their relationship was governed by a draft agreement.  The case involved both claim and counterclaims by the parties following termination of the relationship between them.

In terms of the agreement between the parties, Youngs was to act in separate capacities in relation to Aviva.  Youngs was to perform both Claims Handling Services and Building Repair Services for Aviva. In relation to the former, it was held that Youngs acted as agents in a fiduciary capacity for Aviva.  In relation to the latter, however, Youngs were held to have acted as principals.  A party may, therefore, act as an agent for another only in certain respects: agency need not govern the entirety of the relationship between the parties.  Thus the agent may be a fiduciary for some purposes and not for others (New Zealand Netherlands Society v Kuys [1973] 2 All E R 1222)

The case also contains an interesting discussion of the duty to render accounts.  This duty is categorised by Watts and Reynolds in the leading English text, Bowstead and Reynolds, as a fiduciary one.  Counsel for Aviva referred to in Yasuda Fire & Marine Insurance Company of Europe Limited v Orion Marine Insurance Underwriting Agency Limited [1995] 3 All ER 211, where, referring to the agent’s duties to provide records of transactions, Colman J stated: “That, as I have held, is a duty that is imposed by law in consequence of the existence of the agency relationship and is not founded on the existence of a contract of agency.”  What is the status of the agent’s duty to render accounts in Scots law?  Certainly, it is not classified in Scottish textbooks as a fiduciary duty.  Classification of the duty as arising from equity may have advantages in English law, namely, access to remedies of an equitable nature. 

Care may have to be taken with the Yasuda case as an authority in Scottish cases.  Yasuda is a case which emphatically states that the agency relationship need not be a contractual one.  This can be seen in the statements it contains about the duty to render accounts, for example, Colman J at 219: “That obligation to provide an accurate account in the fullest sense arises by reason of the fact that the agent has been entrusted with the authority to bind the principal to transactions with third parties and the principal is entitled to know what his personal contractual rights and duties are in relation to those third parties as well as what he is entitled to receive by way of payment from the agent.”  This contrasts with the position in Scots law where the courts emphasise the contractual nature of the principal/agent relationship.  In Scots law the duty to render accounts may more naturally be considered an implied term of the contract existing between principal and agent rather than a fiduciary duty imposed by law.    

Mr Justice Ramsey also summarises the English authorities on the nature of fiduciary duties.  Relying heavily on the case of Bristol and West Building Society v Mothew [1998] Ch 1 he identified (at para 94) the “…distinguishing obligation of a fiduciary” as the “obligation of loyalty.”

The case also tackles a particularly difficult question, namely the interaction of the agent’s fiduciary duties and the contractual background.  To what extent can the agent’s fiduciary duties be shaped by the contract concluded between principal and agent?  Mr Justice Ramsey’s judgment takes us through all the significant authorities on this point, from England and the wider Commonwealth including Henderson v Merett Syndicates [1995] 1 AC 145 where Lord Browne-Wilkinson stated “…the extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties.”  Other relevant cases including Kelly v Cooper [1993] AC 205, a decision of the Privy Council,   Boardman v Phipps [1967] 2 AC 46 and a decision of the High Court of Australia, Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, in which Mason J stated (at 97): “That contractual and fiduciary relationships may co-exist between the same parties has never been doubted.  Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship.  In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties.  The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them.  The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

If the equitable duty to render accounts is independent of the underlying contract, then it need not cease when the underlying contract between the parties ceases: Mr Justice Ramsey explained: “I have held that Youngs did owe Aviva an equitable duty to account in relation to an aspect of the claims validation process part of the Claims Handling Services.  Whilst the scope of any equitable duty is derived from the contractual relationship between Youngs and Aviva, I consider that the equitable duty to account in relation to claims validations which were carried out by Youngs up to the date of the termination of the contract does not come to an end with that termination.  In that sense the equitable duty to account is independent of the provisions of the Contract and, after the termination of the Contract, the scope and extent of that duty will depend on equitable principles.”
This case marks a step in the development of the understanding of the interaction of the agency contract and the agent’s fiduciary duties in English law.  These questions are equally relevant, and as yet unsolved, in Scots law. 

Commercial Agency – comparative reflections

The Edinburgh Centre for Commercial Law was delighted to welcome Dr Severine Saintier as their most recent  speaker in their series of events.  Her paper on 2nd June focussed on the French system of compensation of commercial agents.  Directive 86/653 introduced into Europe a highly protective regime for commercial agents.  The compensation provisions contained in that Directive are inspired by French law.  Dr Saintier, as a French lawyer working as an academic at Sheffield University, is ideally placed to help us understand the meaning of the compensation provisions as applied in the UK by the Commercial Agents (Council Directive) Regulations 1993.   

It is impossible to do full justice to Dr Saintier's paper here.  Only a few aspects will be touched on.  As the House of Lords case Lonsdale v Howard & Hallam [2007] HL 32 illustrated, the rationale of the compensation provisions is not clear.  A particularly controversial point is whether a court, in valuing compensation, should look to events after termination.  Examples might include the ongoing benefit to the principal through the agent's work accruing to the principal in the future, or indeed, the financial state of the principal and the likelihood of the principal entering into insolvency.  These factors are not referred to in the defintion of compensation in the Directive, and those provisions can be contrasted with the provisions relating to indemnity in the regulations.  It should be recalled that in the UK, the legislation allows the principal and agent to opt for either indemnity or compensation as a form of payment to the agent on termination of the agent's contract.  Dr Saintier's very full analysis of the French jurisprudence suggested that at times the French courts do appear to take into account gains to the principal, and issues going beyond termination of the agency contract. 

Dr Saintier also provided us with some thoughtful reflections on Lord Hoffmann's speech in Lonsdale, and in particular his conclusion that market conditions differed significantly between France and the U.K.  In France, it seems, commercial agencies are regularly traded, allowing the commercial agent, in effect, to "sell" his agency at a premium.  This practice and the premium payable provides the courts with a point of reference for the calculation of compensation on termination of the agency contract.  The French courts (as discussed in the Scottish Inner House case of King v Tunnock 2000 SC 424) use a benchmark or guide in such situations of two year's gross commission.  By contrast, the practitioners in the audience at the event last night were not aware of a practice of regularly trading commercial agencies.  It seems that Lord Hoffmann is correct in his conclusion that practices differ in France and in the U.K.   

Dr Saintier suggested that Lord Hoffmann could, in fact, have been making a wider point when discussing the different economic and market conditions in the Member States.  Dr Saintier tentatively suggested that there may be evidence of Member States applying their own national laws on commercial agency in ways which cater to their own national economic needs.  There are examples of this taking place in the application of the definition of the activities of an agent which are "secondary."  Further empirical research on this point is required, and indeed Dr Saintier is about to embark on an empirical project to find some answers to these questions.  It should be recalled, of course, that the Directive allows a great deal of leeway in its implementation.  An example is the termination provisions themselves: in some Member States only compensation is payable, in others only indemnity, and in the UK the choice is left to the parties.  Clearly, the Directive envisaged a relatively low level of harmonisation.  It seems that now on top of the large margin of discretion allowed to Member States in the implementation of the Directive, commercial agency law may currently be used in particular Members States to address economic issues specific to that Member State.  This might lead us to question whether an acceptable level of harmonisation is being achieved.  The results of Dr Saintier's empirical project are awaited with interest.        

Another interesting issue which arose for discussion was the practice in France in terms of which the principal requires the agent to pay 2 year's gross commission on entering into the agency relationship.  That payment is, in effect, what the agent can expect to achieve on termination of the contract (remembering, of course, that the 2 year figure is a guide only: the agent may receive less depending on the circumstances at the moment of termination).  Again, Dr Saintier's empirical work may shed light on this practice.  All were agreed at the event last night that this practice seems to make compensation little more than a zero sum game. 

There is much more that could be said about this interesting paper.  It makes a significant contribution in the most important area which is to establish a rationale for compensation, and help us to understand the relationship between compensation and indemnity.  This is Dr Saintier's second visit to Edinburgh.  We now expect that her visits will provide an excellent context for some lively debate.  We look forward to welcoming her again once her further work in this practically important area has been completed.   

The meaning of repudiation

Wyman-Gordon Ltd v Proclad International Ltd [2010] CSIH 99, a case decided by the Inner House at the end of 2010, provides useful guidance on what constitutes repudiation in Scots contract law.  The judges in the Inner House characterised their judgment as involving "well-settled" principles, rather than innovating on the law (as noted by Lord Osborne).  Nevertheless these statements provide a useful guide to anyone faced with the task of analysing a situation of breach.   

The facts of case will not be analysed here, suffice to say that the statements made by the Inner House on repudiation related to an email exchange between the parties.  Lord Osborne described the type of conduct which is likely to amount to repudiation:

"Where verbal or written communications are in issue, the key requirement, as we understand it, is that before a repudiation can be held to have occurred, there should be an objectively clear indication that, for whatever reason, material contractual obligations are not going to be performed at the due date. The other party to the contract would then have the option, either to accept the repudiation and consequently to rescind the affected relationship, or alternatively to insist on continued performance of the contract in its existing form. It is only where such an anticipatory breach of contract is clearly established following an objective assessment of the circumstances that the relevant option can arise at all." 

English authorities were also used to illustrate that there is no difference between the law of Scotland and of England on this point:

"As Lord Wilberforce put it in Woodar Investment Development Ltd v Wimpey Construction UK Ltd, (supra), at page 283: "… Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations". Many judicial statements to substantially the same effect are to be found elsewhere. In Freeth & Another v Burr (1874) L.R. 9 C.P. 208, Lord Coleridge C.J. said at page 214: "The principle to be applied in these cases is, whether the non-delivery or the non-payment amounts to an abandonment of the contract or a refusal to perform it on the part of the person so making default." This echoed a passage on the previous page of his opinion, in which he described the search as being for "… Intimation of an intention to abandon and altogether to refuse performance of the contract." In Scotland, nearly two decades after the decision in Woodar Investment Development Ltd v Wimpey Construction UK Ltd, (supra), was approved by the Second Division of the Court of Session in Blyth v Scottish Liberal Club, the matter was again considered by Lord Hamilton, as he then was, in the Outer House in Edinburgh Grain Ltd v Marshall Food Group Ltd. At page 22 he said this: "What, in my view, is required for repudiation is conduct demonstrative of an intention not to perform fundamental contractual obligations as and when they fall due."

The repudiatory statement should be interpreted by reference to the normal rules for interpretation of contracts, including construing the statement in the light of the surrounding circumstances and from the perspective of what a reasonable person in the position of the recipient might legitimately understand.   Subjective evidence is not relevant in this exercise.

Lord Osborne concluded that the commercial judge, Lord Drummond Young, had not misdirected himself in giving his opinion on the meaning of repudiation.  In other ways, however, Lord Drummond Young’s opinion was criticised.  He had stated:

"If a party proposes to continue on terms that are fundamentally different from the existing terms, that too will amount to a repudiation."

The Inner House did not agree with this statement:

"To our mind, that statement as it stands, goes too far.  We consider that a contracting party must always be entitled, especially in altered circumstances, to propose or suggest a future variation of the relevant contractual terms for the other contracting party to consider.  Provided that a refusal to perform on existing terms is not simultaneously demonstrated, it does not seem to us that the mere tabling of such a proposal or suggestion will necessarily amount to repudiation of the contract."

Taking all these factors into account, the Inner House concluded that the commercial judge erred in construing the reclaimers’ email as an outright repudiation of the parties’ contractual arrangements.   Rather,

"From beginning to end, as it seems to us, the general tone of the communication was constructive and forward-looking, and, without ignoring or misreading its major contents, we can see no way in which the respondents or, in turn, the commercial judge, could legitimately have treated it as a repudiation of the parties’ contractual relationship."

The respondent’s reaction to email was also relevant:

"If the contract was so obviously repudiated as the respondents ultimately maintained, it is hard to see why they followed it up with the apparent contractual intimation of rejection notes ten days later.  It is equally hard to see why their purported “acceptance” of the alleged repudiation was delayed for a further eight days during which they apparent acquiesced in the determination of their principal contract with FMC.  What is clear is that the respondents, at some point over a period of nearly three weeks, determined to treat the e-mail of 4 March 2004 as a repudiation of the parties’ contract, and that they did so without taking any steps to try to clarify the position with the reclaimers.  They must therefore, in our view, be taken to have assumed the risk of their purported reading of the reclaimers’ e-mail being deemed untenable, and consequently of their own e-mail of 22 March 2004 being considered repudiatory in its own right."    

This tends to suggest that the conduct of the parties as a whole is relevant in the exercise of determining whether any given communication amounts to repudiation.    

The respondents’ email, rather than constituting an acceptance of the reclaimers’ repudiation, amounted itself to a repudiation.  Again, this particular email message was subject to careful scrutiny by the Inner House:

"While the e-mail of 22 March 2004 is couched in somewhat opaque and oblique language, and while it does not expressly bear to terminate anything, in our opinion, the whole tenor of that communication is negative.  It commences with a rejection of “the terms you have outlined.” 

This is another case which makes us consider the way in which we use email.  All of us would probably admit to showing less care in emails than we do in formal correspondence.  There is probably no easy way to encourage clients to take more care when making statements of this type.  Writing in haste may leave them to repent at leisure, particularly where off-the-cuff statements are analysed in detail by our judges as occurred in this case.  



Establishing agency: Rodewald v Taylor [2010] CSOH 05

The way in which agency is established in Scots law is an issue lacking clarity.  Lord Bannatyne’s decision in the case of Rodewald v Taylor, 18 Jan 2011, [2010] CSOH 05, available at http://www.scotcourts.gov.uk/opinions/2011CSOH5.html, provides some interesting food for thought on this issue.   

Judicial statements on the contractual nature of agency are not difficult to find, examples including Graham & Co v United Turkey Red Co 1922 S.C. 533, 5 per Lord Salvesan 546 and Lord Ormidale 549; Lothian v Jenolite Ltd 1969 S.C. per Lord Milligan at 120; Trans Barwil Agencies (U.K.) Ltd v John S. Braid & Co Ltd 1988 S.C. 222 per Lord McCluskey at 230; Connolly v Brown 2007 S.L.T. 778 per Lady Dorian at para [54].  This contract may be established either orally or in writing.  The conduct of both parties can be used in order to make an inference of the consent necessary to form the contract, see, for example Ben Cleuch Estates Ltd v Scottish Enterprise [2006] CSOH 35 in which Lord Reed (at para [143]) notes that agency may arise through a course of conduct “as a matter of implied agreement.” 

Others have argued that a contract is not necessary in order to establish agency, for example, Gow in The Mercantile and Industrial Law of Scotland at 516, and more recently, Forte and Van Niekerk who go much further, arguing that agency is not only non-contractual but non-consensual: “Agency” in K. Reid, R. Zimmermann and D. Visser, Mixed Legal Systems in Comparative Perspective: Property and Obligations in Scotland and South Africa, (2006, at p. 246).

In Rodewald v Taylor the dispute related to a property known as “Corshellach,” owned by the pursuer and tenanted by the BBC.  Rental payments appear to have been made to the defender.  The pursuer argued that the defender was acting as her agent in receiving these rental payments, and they therefore ought to have been remitted to the pursuer.  Counsel for the defender denied that any relationship of agency existed, and explained that the defender and her husband, Mr Nagy, were occupying another property owned by the pursuer, Glenwood, rent-free. In consideration for such rent-free occupation, the defender was to let and collect the rents for Corshellach.   

The pursuer rested her case on establishing a relationship of agency between her as principal and the defender as agent.  Agency was, counsel argued on her behalf, a contract.  Lord Bannatyne indicated (at para [33]) that, “…to give fair notice to a defender of the case made against that party, it requires the pursuer to aver the essentials of the contract which in my view are as follows:
(a) Who the parties are to the alleged contract;
(b)  Where the contract was entered into;
(c) When the contract was entered into;
(d) The terms of the contract; and
(e) The form of the contract.”

The pursuer was found ultimately to have failed to aver sufficiently the foundation of her case.

This case may appear unremarkable: Lord Bannatyne was, after all, responding to the fact that the pursuer had based her case on contract.  Arguably, therefore, it may contribute little to the debate over whether agency is always both consensual and contractual. 

In English law, one need not establish an actual contract in order to establish agency.   The key is, rather, consent.  According to McKendrick: “It suffices that P consents to the exercise of authority by A and that A consents to exercise that authority.” (Goode’s Commercial Law, (4th edn, 2010), 180, at footnote 16, relying on Yasuda Fire and Marine Insurance Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd [1995] Q.B. 174).  Had an English court been faced with these same facts, the result is likely to have been the same, however.  No averments were made in the case that the pursuer consented to the defender acting on her behalf.  The slight difference of focus between the two legal systems is, however, interesting.  The Scots position may be an echo of a civilian past, agency being built on the consensual but gratuitous contract of mandate (gratuitous contracts being problematic in English law because of the requirement of consideration).

The pursuer’s legal team does not appear to have made use of ad hoc agency, a concept recently articulated by Lord Drummond Young (Whitbread Group plc v Goldapple Ltd 2005 SLT 281; Laurence McIntosh Ltd v Balfour Beatty Group Ltd and the Trustees of the National Library of Scotland, [2006] CSOH 1907; John Stirling t/a M & S Contracts v Westminster Properties Scotland Limited [2007] CSOH 117; [2007] BLR 537).  In those cases, agency was established very easily, on the basis of inferences of consent.  I have argued that Lord Drummond Young’s approach to establishing agency failed to meet the requirements of decided case law (with Niall Whitty, ‘Payment of another’s debt, unjustified enrichment and ad hoc agency’, 2011 Edin L R 57).  In those cases, it seemed clear that Lord Drummond Young was using agency as a concept to achieve justice on the facts of the case.  Rodewald may be a case of equally compelling facts: the pursuer alleged that the defender retained rents which were not due to her.  Ad hoc agency was neither pled by the pursuers nor suggested by Lord Bannatyne. 

If there is, indeed no contract between pursuer and defender, the pursuer could have recovered the rents on the basis of unjustified enrichment.  There appears to have been no attempt by the pursuer to base her case on unjustified enrichment. 

What conclusions can we reach from this case?

(1) Where the pursuer seeks to establish agency as a contract, the standard of proof remains high;
(2) Arguably, it provides evidence of a tendency to use agency where the real solution lies in unjustified enrichment; 
(3) Ad hoc agency may remain stuck on the starting blocks;
(4) We continue to lack evidence that the Scottish courts are willing to conceive of agency as a non-consensual concept.    


An Agent’s Disclosure of a Breach of Duty and Informed Consent: Park’s of Hamilton’s (Holdings) Ltd. v Campbell [2011] CSOH 38; 2011 G.W.D. 8-196

Like the old case of Allen v Hyatt (1914) 30 TLR 444, the recent case of Park's of Hamilton's (Holdings) Ltd. v Campbell [2011] CSOH 38; 2011 G.W.D. 8-196 is one of those unusual cases where it was held that a director of a company owed fiduciary duties under the law of agency to the shareholders of the company. Section 170(1) of the Companies Act 2006 clearly states that a director owes the duties adumbrated in sections 171 to 171 of the Act to the company and not any individual shareholder. However, in Park’s of Hamilton (Holdings) Ltd. v Campbell, the director was held to be an agent of each individual shareholder of a company when he sent a letter to each of the shareholders indicating that a third party had made an offer for the entire share capital of the company and asked them to sign a power of attorney in his favour enabling him to sign the SPA on their behalf. Since the director was an agent of the shareholders, he owed them fiduciary duties under the common law (not sections 171 to 177 of the Companies Act 2006) and the main issue in the case was whether the director had breached the fiduciary duty not to make a personal profit out of his agency. The shareholders contended that the terms of a consultancy agreement to be entered into between the director and the company post-completion relating to his remuneration had been concealed from them. The director's defence was that there had been disclosure of the personal profit under the consultancy agreement to the shareholders and that the latter had provided informed consent. The director based these assertions on the fact that the solicitors of the company were aware of the terms of the share purchase agreement and consultancy agreement and that that their knowledge could be imputed to each of the individual shareholders since the terms of engagement of the solicitors expressly provided that they were acting as agents of the shareholders in respect of the sale of their shares in the company.

In the recent case of Commonwealth Oil & Gas Ltd. v Baxter 2009 SC 156, para. [10], Lord President Hamilton conceived of the ‘no-profit’ rule as having a fluctuating and self-modulating character somewhat alien to the uncompromising hard-edged duty described by Rimer LJ in the Court of Appeal case of [2009] 2 BCLC 666:

“… it seems to me that if, without the identification of any particular opportunity, the company, expressly or implicitly, were to give its prior consent to a director pursuing possibly competing interests, his duty would not extend to avoiding such conflicts. If, for example, in the present case agreement had been reached between [the director] and [the company] that some opportunities (say, any onshore) would be brought to [the company] but that others (say, offshore) could be exploited by [the director] for his own interest and benefit, the scope of [the director]'s duties would have been modified by that arrangement. Even without express agreement, the actings of parties could in some circumstances have given rise to a modification of [the director]'s duties…"

Thus, in terms of the text above, where the principal’s actions are such that it expressly or implicitly provides its consent to the agent exploiting an opportunity or making a personal profit, the agent will not be deemed to be in breach of duty. Thus, there are two stages for the director to go through to be relieved of liability: (1) Disclosure of the breach, including the source and extent of the profit; and (2) the receipt of informed consent of the principal. With regard to the disclosure requirement,  the director in Park's of Hamilton (Holdings) Ltd. argued that disclosure to the company’s solicitors was sufficient and that the shareholders would be deemed to have constructive knowledge in such circumstances. This assertion was predicated on the argument that the terms of engagement of the company's solicitors provided that they were acting as the agents of the director and each of the shareholders in the sale of their shares in the company. Lord Hodge indicated that it might indeed be possible for the disclosure requirement to have been satisfied by virtue of the doctrine of constructive knowledge, but was not convinced that the remit of the company's solicitors could be ascertained without a proof before answer. Evidence would need to be lead about the scope of the company's solicitors' agency and from whom instructions were received. The provisions of the terms of engagement of the company's solicitors would be part of the factual matrix, but of themselves could not be conclusive.

Although Lord Hodge's judgment in Park's did not settle the status and relevance of the constructive/imputed knowledge of a principal (through an agent such as a solicitor or accountant) and whether this was sufficient for another agent to have discharged its duty to disclose a breach of fiduciary duty, there are indications in that judgment that it is perfectly possible for this doctrine to play a role. Of course, if the question in the case had been about the director's duty to disclose the making of a personal profit at the expense of the company itself, the means by which disclosure could have been validly tendered would have been more restricted since section 175(5) of the Companies Act 2006 provides that disclosure must be made directly to the board of directors of the company. In such circumstances, there would be no scope for the company (via its board of directors) to have constructive knowledge of the director's breach of duty. This is another area where the law of director's duties in company law has diverged and followed a different path from its original sources in agency and trust law.

Interpretation of commercial contracts: Macintyre House Ltd v Maritsan Developments Ltd

This Outer House case ([2011] CSOH 45)provided Lord Hodge with the opportunity to summarise the rules of interpretation of commercial contracts in Scots law.

The agreement between the parties was governed by Clause 2 of the contract, as follows:
"2.1 MHL or Maritsan shall identify Development Projects which they shall make available to Maritsan.
2.2 Maritsan undertakes that it shall use all of its reasonable endeavours to ensure that such permissions and consents as shall be required to sell on each Development Project to property developers and builders at the best price are obtained.
2.3 MHL shall provide consultancy services as reasonably required by Maritsan and such services shall in particular relate to the planning process generally. MHL shall make such services available to Maritsan in relation to Development Projects which they introduce."

The mechanism for payment by Maritsan to MHL was contained in Clause 3:
"3.1 Maritsan agrees that it shall remit a sum which is equal to one half of the Net Profits for and in respect of each Development Project to MHL within five working days of the settlement of the Sale. …"

Both parties had instructed the same firm to draft the agreement as a joint venture agreement.  The firm produced a different kind of agreement, and ceased to act on behalf of Maritsan, advising it to obtain independent legal advice.  From this point onwards, although the director of Maritsan continued to revise the agreement that had been produced, he did so without the benefit of legal advice.  The parties had entered into a prior agreement concerning land at Braidwood.  At that time, they had operated as a joint venture.  This being the case, no VAT was payable on MHL’s share of the profits.  Despite the fact that both parties had initially instructed the preparation of a joint venture agreement, the finally agreed document specified that the parties did not intend to enter into a partnership (in clause 7).

The dispute related to the terms of the agreement in relation to the payment of VAT.  This was dealt with in clause 4 of the agreement:
"All sums of money payable under this Agreement are, save where the context otherwise requires, expressed exclusive of Value Added Tax but if Value Added Tax shall be due on any payment due this shall be paid provided a valid Value Added Tax invoice in respect of such payment has been issued. Any taxes to be borne in respect of sums received by the parties to this Agreement shall be borne by the recipient which shall indemnify the other party in respect of any such liability."

Section 19 of the Value Added Tax Act 1994 is also relevant to this discussion.  It provides that a sum of money payable under a contract for a supply of goods or services is inclusive of any VAT on it.  Counsel for the defender referred to both Hostgilt Ltd v Megahart Ltd [1999] STC 141 and Wynn Realisations Ltd (in administration) v Vogue Holdings Inc. [1999] STC 524 as authorities illustrative of this point.

Parties’ submissions
Counsel for MHL argued that the meaning of the agreement was clear.  Clause 3 required Maritsan to remit a sum to MHL Ltd equal to one half of the "Net Profits" and clause 4 obliged Martisan to pay the VAT on that sum. 

Counsel for Maritsan argued that, in the event that his plea for rectification of the contract to provide it with a commercially sensible construction was unsuccessful, clause 3.1 should be interpreted in one or other of two ways which he put forward.  The first was that the sum to be given by Maritsan to MHL was inclusive of VAT.  Maritsan would receive one half of the net proceeds, give one half to MHL, and MHL would be bound to pay VAT out of its half.  The alternative submission was that clause 3.1 should be interpreted so that, after payment of VAT, each of the parties should end up with the same amount of net profit in their hands.

Perhaps not surprisingly, given that one party was not legally represented in the negotiations, Lord Hodge commented (para [29]):
“The contract is not easy to interpret and one is left with the feeling that the parties have given insufficient thought to the expression of their intentions.”

On the rules of interpretation of commercial contracts in Scots law Lord Hodge stated (at para [26]):
“There was no dispute between the parties as to the correct approach to the interpretation of commercial contracts and the exclusion of pre-contractual negotiations as an aid to construction. I was referred to Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffmann at p.912 and Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101.”

In relation to the prior agreement concerning the land at Braidwood, Lord Hodge classed this as a pre-contractual negotiation, and as such the court could not consider its terms in order to interpret the contract before them (para [27]).   

On the applicable rules of interpretation, Lord Hodge stated (para [28]):
“There is no need to reiterate in any detail the principles which govern the interpretation of commercial contracts which judges of this court have summarised in various cases since the decision of the House of Lords in Investors Compensation Scheme Ltd (above). In this case the significant rules are that the court should (i) construe individual provisions of the contract in the context of the whole contract, (ii) apply an objective construction by reference to the meaning which a reasonable third party, who is aware of the commercial context in which the contract occurs, would give to the words which the parties have used, and (iii) adopt a commercially sensible construction, when the court is faced with competing interpretations. Further, the court cannot re-make the contract for the parties on what it considers would be sensible terms or disregard contractual terms. Where parties have included a provision in their contract, the court should strive to give a proper meaning to it: see, for example, Wynn Realisations Ltd (above) Morritt LJ and Clarke LJ at p.529b-e and h-j respectively.”

On clause 4, the clause which governed VAT Lord Hodge commented (para [31]):
“I am left with the clear impression that clause 4 has been lifted from another contract and inserted into this agreement in a context in which nobody has applied his mind to what the effect of VAT would be. I am not persuaded that the ordinary expectation that parties to a formal document have chosen their words with care is met in this case. But the court cannot reframe a formal contract, even if it is not skilfully drafted. As I have said, I have to consider what a reasonable businessman standing in the shoes of parties would have understood the parties to have meant by the words which they have used in the context of the contract as a whole and having regard to the relevant commercial background.”

In response to MHL’s argument Lord Hodge stated (para 34]):
“It makes no business sense that the parties should have agreed such an arrangement. While it is always necessary in construing a contract to bear in mind the possibility that one party has made a bad bargain, I am satisfied that the context, of which clause 4 speaks, qualifies the general rule in that clause, as set out below. Thus applying the ill-thought-out clause 4 results in a rejection of the pursuer's construction.”

In response to Maritsan’s argument Lord Hodge stated (para [33]):
“That may not be quite as unlikely an intention as the pursuers' position. But it makes little business sense in the context of the contract as a whole which sought the equitable deduction of costs, including irrecoverable VAT on the development costs.”

Lord Hodge’s approach can be understood from the following quote (para [36]):
“…I construe clause 3.1 in the context of the agreement as a whole as requiring the parties to share the actual net profits equally and the VAT charge on MHL's services to be calculated accordingly. I thus give effect to the rule in clause 4 but qualify it, rather than exclude it, to reflect the intention of the parties which I derive from the agreement as a whole.”

Finally Lord Hodge set out his calculation of the effect of the agreement (in para [37]).  First of all the net profits were calculated.  Then, one had to acknowledge that VAT was due on the sum payable to MHL as its share of the agreement.  It was necessary to allocate equally between the parties the burden of the VAT in order finally to arrive at the share of net profits payable to each party.
The result was that MHL was entitled to further sums from Maritsan in terms of the contract.  The challenge to the relevancy of the submissions made on behalf of Maritsan failed.  Maritsan was held entitled to a proof before answer on its counterclaim. The case was put out by order to determine further procedure.

Lord Hodge’s judgment is useful for those seeking a brief statement of the governing principles of interpretation of commercial contracts in Scots law.  Beyond that, it suggests that parties should be slow to seize upon an interpretation favourable to them, which has arisen fortuitously as a result of ambiguous drafting.  Such attempts are unlikely to succeed given that the courts, construing the contract as a whole, seek to identify a “commercially sensible” construction. 

The case is an interesting illustration of the difficulties arising where one of the parties has not been represented by a solicitor.  Clearly the parties had contracted in the past and had adopted the format of a joint venture.  VAT was not therefore payable on profit shares on that occasion.  In the transaction which was the subject of this new dispute, the parties had rejected the form of a joint venture, but did either of them realise that decision resulted in a payment to VAT?  Certainly, the party lacking representation seems not to have realised these consequences.  In such circumstances, few of us would be persuaded that the unrepresented party should benefit from more favourable interpretative rules. Nevertheless, given that the eventual contract is likely to be difficult to interpret, it potentially presents a more pressing case for the operation of the “commercially sensible” construction, looking both to the terms of the contract as a whole and the overall transaction contemplated by the parties.  

Data protection: the breaches continue

Despite high profile and damaging data losses in previous years, it seems that data controllers are still not ensuring compliance with their obligations under the Data Protection Act. 

The BBC today reports details of a very serious data loss which, if true, would suggest a significant breach of the seventh data protection principle.  According to the report, confidential police tapes were found at Buchanan Street bus station in Glasgow, relating to a child abuse inquiry.  The tapes reportedly contained an interview of a six year old girl, in relation to an alleged drunken assault by her father on her younger brother.

Such data is of course classified as sensitive personal data, since it has to do with the potential commission of an offence by the father and also relates to the health of the girl and her brother.  Failing to keep personal data or sensitive personal data secure is a breach of the seventh data protection principle, which requires that "Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data".

Since April 2010, the Information Commissioner has enjoyed stronger powers to impose monetary penalties of up to £500,000 for breaches of the data protection principles (in terms of section 55A of the Data Protection Act 1998, which was inserted by the Criminal Justice and Immigration Act 2008, section 144(1).)  It remains to be seen whether this breach, if proven, will lead to a penalty for the responsible authority, but in the meantime, the quest for protecting personal data continues.


A New Start to Data Protection in the New Year?

On 23 December, the Scottish Government launched its "Identity Management and Privacy Principles".  These principles are intended to "help ensure that respect for privacy is central to the way public services prove identity or entitlement."  As this rationale makes clear, the Principles only extend to public sector bodies – often the ones that handle an individual's most private or sensitive data.

The Principles centre round five key areas of data handling, with five corresponding principles:

Proving identity or entitlement – people should not be asked to prove who they are unless it is necessary. Public bodies should ask for as little information as possible, identifying themselves and offering alternative ways to provide identity and/or entitlement for a service

Governance and accountability – public service organisations should adopt privacy and security policies and procedures

Risk management – organisations should carry out Privacy Impact Assessments on any new initiative that enables access to services and involves collection, storage or use of personal information

Data and data sharing – public services should minimise the personal information they hold, avoid creating centralised databases of information and store personal and transactional data separately

Education and engagement – there should be efforts to raise public awareness of the principles and ensure those handling the data have a good working knowledge of the issues.

These standards are the result of detailed work carried out by an expert group, including the University of Edinburgh's Professor Charles Raab.  A consultation exercise followed the initial draft principles, and resulted in the finished product launched last month.

While the principles are not statutory (and have not resulted in any changes to the Data Protection Act 1998), they provide a useful benchmark for public sector organisations when dealing with personal data.  Rather than complying with data protection principles in order to comply with the law, the new Identity Management and Privacy Principles aim to promote the importance of the privacy of personal data.  While the changes are not legally binding, it is to be hoped that they help introduce a new ethos when dealing with personal data – one which may, in time, spread to other sectors.  They are certainly to be welcomed as a new start for the new year.


Elf and Safety? A Christmas Data Protection Thought

The Information Commissioner has confirmed (again) that data protection laws do not prevent parents taking photographs at their child's nativity play.  The myth that the Data Protection Act is a bar to proud parents taking pics has been circulating for some years, and typically pops up twice a year, in relation to summer sports days and Christmas plays. 

However, the Data Protection Act contains a clear exemption for personal use:  section 36 provides that any personal data processed by an individual only for the purposes of that individual’s personal, family or household affairs (including recreational purposes) are exempt from the data protection principles and the provisions of Parts II and III of the Data Protection Act 1998.  So long as the pictures are indeed for personal or family albums, rather than commercial or public use, there should be no problem with parents snapping away – thus providing hours of entertainment for doting relatives over Christmas…

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