Supreme Court of Singapore on apparent authority: Skandinavska Enskilda Banken AB (Publ) v Asia Pacific Breweries (Singapore) Pty Ltd and Anor

The English Court of Appeal case of First Energy v Hungarian International Bank ([1993] 2 Lloyd’s Rep 194) poses particular problems for those seeking to understand the law of apparent authority in agency.  The House of Lords in Armagas Ltd v Mundogas SA ([1986] A.C. 717) suggested that there is no such thing as a “self authorising agent.”  For apparent authority to operate, the representation as to the agent’s authority must come from the principal and not from the agent.  Steyn L.J. in First Energy, however, recognised that an agent may be clothed by his principal with the authority to make representations of fact.  Those might include the extent of the agent’s own authority.  In First Energy the third party was aware that the agent was not authorised.  As such, this was a case in which apparent authority could not arise.  The Court of Appeal nevertheless found in favour of the third party, who was able to claim damages from the principal. The case therefore robs the requirements of apparent authority of much of their force.

All may not be lost, however.  The case of Skandinavska Enskilda Banken AB (Publ) v Asia Pacific Breweries (Singapore) Ptd Ltd and Anor (([2011] S.G.C.A. 22) has already been commented on in this blog for useful statements made in the Supreme Court of Singapore on vicarious liability in agency.  This case also provides a useful illustration of the limited nature of First Energy as an authority.  

The Court in Skandinavska noted that each of the judges in First Energy considered their ruling to be consistent with Armagas, and this led them to conclude that First Energy could be distinguished from Armagas only on the facts ([2011] S.G.C.A. 22).  The Court identified three factors that were significant in the exercise of distinguishing the two (para 47):

(a) Whereas in Armagas the third party could easily have checked the agent’s authority, this would have been more difficult in First Energy in view of the agent’s senior role;
(b) Whereas in Armagas the agent was found not to have any authority to enter into a three year charterparty, in First Energy the agent was held to have apparent authority that board approval had been obtained;
(c) Whereas the agent in Armagas had limited authority, the agent in First Energy had wide ranging authority, including the authority to communicate his principal’s approval of the transaction in question.   

The Court’s approach to this issue is encapsulated in para 51 of the judgment:

“It is clear from the foregoing examination of The Raffaella [[1985] 2 Lloyd’s Rep 36 at 42-43].
and First Energy that in both cases, the court’s decision was based on a specific finding of fact that the principal concerned had held out its agent as having authority to make, in relation to the transaction in question, representations of the class or kind of representations that the agent actually made, even though the agent knew he had no actual authority to enter into the transaction itself. In particular, it was made abundantly clear in First Energy that Mr J, as the senior manager of HIB’s Manchester office, had overall responsibility of that office. In such circumstances, it made good commercial sense that a customer of HIB’s Manchester office should be able to rely on what was conveyed to him by Mr J. In contrast, in the present case, Chia was merely the finance manager of APBS, a title which does not connote the possession of any specific authority. The senior management of APBS, including the APBS Board, was also within easy reach of the Appellants. In the circumstances of the case, the Judge found as a fact that APBS had not held out to the Appellants, whether by its actions or by Chia’s position as Finance Manager, that Chia had any authority to make on its behalf any representations of the class or kind of representations that Chia actually made. The Judge’s finding is purely one of fact; therefore, unless the Appellants are able to show that this finding of fact is plainly wrong or is against the weight of the evidence, their appeals based on apparent authority must fail.”

This case correctly emphasises that it is only where the agent occupies a senior position in the principal’s business that the solution in First Energy is relevant.  Only in those circumstances is a third party justified in relying solely on the agent’s representation of the extent of his own authority. 

 

The solicitor’s warranty of authority

A third party is protected against unauthorised activity of agents in different ways.  If the criteria are established, he may be able to raise an action against the principal for damages on the basis of apparent authority.  If the principal, notwithstanding the agent’s lack of authority, chooses to adopt the transaction, then it becomes binding through ratification.  A less familiar action is the action that the third party has against the unauthorised agent: breach of warranty of authority.  In an opinion issued on 23 September, Lord Glennie analysed this action as it applies to solicitors (Cheshire Mortgage Corporation Limited v Grandison and Blemain Finance Limited v Balfour Manson [2011] CSOH 157).  Outcomes in cases of this type are highly fact-dependent.  On the facts of this case, it was held that the solicitor warranted only that he was authorised, not the identity of his clients.   

The fraud which took place in these cases was similar to that which occurred in another case which was commented on in this blog last year: Frank Houlgate Investment Co Ltd v Biggart Baillie LLP 2010 SLT 527, see http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8030.  The scam is simple but effective, as is illustrated by the facts of the first case.  By impersonating an actual couple (the rather appropriately named Mr and Mrs Cheetham), the fraudsters secured a loan of £355,000 secured over the real Mr and Mrs Cheethams’s home.  The fraudsters were able to provide a number of documents including drivers’ licences and utility bills, all suggesting that they were the real Mr and Mrs Cheetham.  On the day the offer letter was issued, the fraudsters consulted Mr Longmuir, a solicitor, instructing him to act on their behalf.  Not surprisingly, the fraudsters did not have the title deeds to the property which the mortgage was to be taken out over.  Extracts were produced by them, under explanation that the original deeds had been lost.  Their dealings progressed in the normal way, the loan was made and a standard security was executed and submitted for registration over the property.  Shortly after the loan had been made, the fraudsters disappeared, leaving the mortgage company unable to recover the loan and unable to rely on the pretended standard securities.  The mortgage company raised actions against the two sets of solicitors who had acted on behalf of the fraudsters.  They argued that the solicitors in acting for their clients warranted not only that they were duly authorised, but also the identity of their clients.  In other words they argued that the solicitors warranted to the mortgage company that their clients were who they said they were.  As is invariably the case in unauthorised agency, “…the issue is fought in each case between two innocent parties” (para [5]). 

Lord Glennie began his analysis of the law with the English case, Collen v Wright [1857] 8 E&B 647, quoting from Willes J at 657:

“I am of the opinion that a person, who induces another to contract with him as the agent or a third party by an unqualified assertion of his being authorised to act as such agent, is answerable to the person who so contracts for any damages which he may sustain by reason of the assertion of authority being untrue….The obligation arising in such a case is well expressed by saying that a person, professing to contract as agent for another, impliedly, if not expressly, undertakes to and promises the person who enters into such a contract, upon the faith of the professed agent being duly authorised, that the authority which he professes to have does in point of fact exist.”

This action is contractual in nature.  Lord Glennie referred to the judgment of Buxton LJ in SEB Trygg Liv Holding AB v Manches [2006] 1 WLR 226 at para 60 who identified the existence of a collateral contract between agent and third party.  There is, of course, no contract between these parties: the action rests on an implied contract, a legal fiction.  This author has argued that the relationship between the two parties is better analysed in Scots law as a unilateral promise or undertaking (‘Unauthorised Agency in Scots Law’ in D. Busch and L. Macgregor, The Unauthorised Agent: Perspectives From European and Comparative Law, (2009)).  This more accurately reflects the one-sided nature of the dealings between agent and third party. The agent undertakes to the third party that he is authorised.  The third party does not place himself under any similar obligation to the agent.  This analysis is not possible in English law given the lack of an enforceable unilateral promise in that legal system.  Consideration, although not part of Scots law, could potentially help us to analyse the fictitious contract which exists.  Lord Glennie stated  (at para [56]):

“…the acts which amount to consideration may also indicate the acceptance necessary to turn the representation or unilateral promise by the agent into a contract between the agent and third party collateral to that purportedly entered into between the third party and the agent’s professed principal.”  

It is unclear whether Lord Glennie in using the phrase “unilateral promise” means the exchange of promises which lies at the heart of contracts in English law, or the Scottish idea of a binding unilateral promise.  If the latter, this may provide a hint of support for a promissory analysis.  The contractual analysis is highly unsatisfactory: agent and third party clearly have no intention to form a contract.  An implied promise more neatly suits the factual context.  

  
Lord Glennie explained that outcomes are highly dependent on the facts (para [56]):  “…one cannot simply assume the existence of a warranty of authority in all cases.  It is necessary in each case to look at the relationship between the parites, and to examine closely what was said, expressly or impliedly, by the agent in the context of that relationship, how what was said could reasonably have been understood by the other party (the test, as always in contract, being objective.)”

Quoting Lord Drummond Young in Houlgate, he confirms the limited scope of the warranty (at para [57], quoting from para [27] of Lord Drummond Young’s judgment:

“Thus the representation relates to the person for whom the supposed agent purports to act.  It does not relate to the capacity in which that person, the supposed principal, will enter into the transaction, or as to the property that person holds, or as to that person’s title to property.”

Finally, Lord Glennie confirms that liability is strict: it makes no difference to the agent’s liability that he honestly believed himself to be authorised (para [58]).

Going back to the facts, Lord Glennie sought to establish whether the warranty in this case could extend to the principal’s identity.  He emphasised the high degree of contact between the mortgage company and the fraudsters before the solicitor became involved (para [62]). “Of particular importance, to my mind, is the fact that, by the time the borrowers’ solicitors became involved, the lenders knew who they were (or thought they were) dealing with.  They had made the decision in principle to lend to those individuals.  The solicitors were instructed by the borrowers for a limited purpose, namely to help draw up the relevant loan and security documentation and to liaise with the Mellicks, solicitors instructed by the lenders, to that end. (para [63])”
This led him to conclude (at para [64]) that “[i]n those circumstances, it is, in my opinion, difficult to see any room for any implied representation by the solicitors as to the identity of the borrowers for whom they were acting, other than that they were acting for the people with whom the lenders were already engaged in a process of finalising a loan transaction.”  

Researches of counsel suggested that there is no reported Scottish case in which a party has been held liable for breach of warranty of authority.    Judicial analysis nonetheless exists in cases such as Anderson v Croall (1903) 6F 153, Rederi Aktibolaget Nordstjernan v Christian Salvesan & Co [1903] 6 F 64, Irving v Burns 1915 SC 260 and Scott v JB Livingstone & Nicol 1990 SLT 305.  To that list of cases to which Lord Glennie was referred could have been added statements made by Lord MacKay in RBS v Skinner (1931 SLT 382 at 387) on the requirement of reliance of the third party on the warranty. 

This case usefully sets out the requirements of a successful case of breach of warranty of authority.  The action is undoubtedly unusual: contractual damages are available in a situation in which there is, in reality, no contract.  The law of agency contains other similar anomalies.  In apparent authority contract again supplies the measure of the damages even there is no contract between principal and third party though (the agent having been unauthorised).  No doubt the contractual measure is appropriate for the commercial situations in which this action operates.  Agency law could be accused of over-use of legal fictions.  Perhaps we need to be more creative and analysis the tri-partite legal relationships which exist in agency in different, non-contractual, ways. 
On a practical level, banks and building societies may now need to rethink the checks they carry out on borrowers.  An action against the borrower’s solicitors is clearly not the easy option.  Lord Glennie did not entirely close the door on this possibility, however.  The outcomes of cases of this type are highly fact-dependent.  In these particular cases, the fraudsters had become well-known to the mortgage company before the fraudsters’ solicitors became involved.  Lord Glennie seems to suggest a remote possibility that, had the facts differed, the outcome too might differ.    

The agent’s fiduciary duties: FHR European Ventures LLP & Ors v Mankarious & Ors

FHR European Ventures LLP & Ors v Mankarious & Ors [2011] EWHC 2308 (Ch) provides a useful illustration of the way in which the English courts treat the acceptance by an agent of secret commission as a breach of the agent’s fiduciary duty towards the principal.  It sheds light on the extent of knowledge which the principal must possess before he can truly be held to have “consented” to the retention of such a payment by the agent.  It also focuses on the wider impact on the agent, airing issues such as whether the agent can recover from the principal an allowance for skill and effort in obtaining the profit which he has to disgorge to the principal and the impact on commission earned in other, unconnected transactions.  Finally, it illustrates the fact that in English law the agent holds such funds on constructive trust for the principal.

The party who was alleged to have retained the secret profit was Mankarious, who had established a business venture, Cedar Capital Partners (‘Cedar’).  He had acted on behalf of a consortium in their purchase of a hotel in Monte Carlo, for a price of 215 million euros.  After the consortium had purchased the hotel it was discovered that the agent had accepted a commission payment from the sellers of the hotel amounting to 10 million euros.  The consortium brought the relationship with the agent to an end immediately, and refused to pay any of the agent’s outstanding invoices relating to work which the agent had carried out on the consortium’s behalf.  The action was raised by the consortium against the agent requiring disgorgement of the alleged secret commission to the consortium, and seeking resolution of other issues between the parties such as payment of outstanding invoices.  

Mr Justice Simon began his discussion of the applicable law with reference to what has become a highly influential case on fiduciary duties in English law, Bristol and West BS v Mothew ([1998] 1 Ch 1).  He quoted from the case, including the following words, encapsulating the idea of the agent’s fiduciary duty (at 18, quoted by Mr Justice Simon at para 74):

“The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary.  This core liability has several facets.  A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.  This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations…where the fiduciary deals with his principal.  In such a case he must prove affirmatively that the transaction is fair and that in the course of the negotiations he made full disclosure of all facts material to the transaction.”       

Authorities on the nature of the principal’s consent were reviewed.  Significantly, it was confirmed that the burden of proving full disclosure rests on the agent (para 78, quoting from Bowstead & Reynolds, Agency, para 6-057).  It was also acknowledged that the factual nature of these enquiries mean that it is difficult to use cases as precedents (para 81).  Finally on this issue, the court considered whether, where the agent has more than one principal, disclosure to one principal can constitute disclosure to all.  This raises the issue of authority: one principal may have actual or apparent authority to receive such information from the agent on behalf of the other principals. 

The agent can be made an allowance for the skill and effort which he expended in obtaining the profit which he has to disgorge.  This principle was recently explored by  the Court of Appeal in Imageview Management v Jack [2009] EWCA Civ 63 at [56].  Imageview, the subject of an earlier blog entry available here:
http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=7912.  In that case, the court had approved the statement of this principle in Snell’s Equity, 31st edition, §7-131:

“…a fiduciary who has acted in breach of fiduciary duty and against whom an account of profits is ordered, may nevertheless be given an allowance for skill and effort in obtaining the profit which he has to disgorge where ‘it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.’ [The quotation is from the judgment of Wilberforce J in Phipps v Boardman [1964] 1 WLR 993, 1018)].  The power is exercised sparingly, out of concern not to encourage fiduciaries to act in breach of fiduciary duty.  It will not likely be used where the fiduciary has been involved in surreptitious dealing…although, strictly speaking it is not ruled out simply because the fiduciary can be criticised in the circumstances.  The fiduciary bears the onus of convincing the court that an accounting of his or her entire profits is inappropriate in the circumstances.”

On the facts it was held that the agent owed duties to each of the principals severally, meaning that the fully informed consent of each one would have been required before the agent could have retained the secret profit.  Unless this consent was obtained “it could not receive and retain the 10 million euros commission from the Vendors.” 

The evidence suggested that the certain of the members of the consortium may have been aware or suspected that the agent was receiving commission from the sellers. Mr Justice Simon held (at para 104) that it was “…incumbent on the Cedar to inform BoS, not only that it was receiving a Commission payment but the amount, 10 million euros.  It was an exceptionally large sum in proportion to the rewards that Cedar was likely to be able to negotiate from its acquisition work for the purchasers…and it was a significantly larger percentage than would have been expected.”  The agent failed to discharge the burden of proving that each of the companies in the consortium had the requisite knowledge. 

Nor was this the type of case in which it would be appropriate to make an equitable allowance to the agent (para 108).  Numerous opportunities had arisen for the agent to inform the principals, but none of these were taken.  The agent was, however, entitled to retain the commission from work performed in relation to another three hotels, presumably on the basis that these other transactions were severable from the tainted transaction (Lord Hunter in Graham & Co v United Turkey Red Co 1922 S.C. 533 at 553, relying on English authority, indicates that a similar priniciple of severability exists in Scots law). 

Although this case is useful for Scots lawyers, a few issues should be borne in mind about the differences between Scots and English law.  Where the agent is in material breach of the agency agreement and yet seeks payment for his skill and effort, the situation moves from a contractual one to an enrichment one.  Given the differences between enrichment law in Scotland and England, this means that, in a Scottish case, a pursuer would be well advised to use Scottish rather than English cases as precedents. The same issue was considered in the case of Graham & Co v United Turkey Red Co (1922 SC 533).  The breach in that case was acting for another principal when that was specifically prohibited by the written agency agreement.  Although the agent was entitled to commission for the period during which he was not in breach, he was not entitled to commission once he placed himself in material, or “flagrant,” breach (per Lord Ormidale at 548).  According to Lords Salvesan and Ormidale, that was not, however, the end of the line for the agent.  He could claim remuneration even after he had placed himself in material breach (at 546 and 549 and see Ramsay & Son v Brand (1898) 25 R. 1212 and Steel v Young 1907 S.C. 360).  As an enrichment remedy, this claim would only be open to the agent (as contract-breaker) if the principal had opted to rescind in response to the agent's material breach.  The onus lay upon the agent to establish that he was entitled to commission (per Lord Salvesan at 546).  If he successfully established that the principal had gained from his services during this time, the measure of recovery would not be quantum meruit the agent, but rather quantum lucratus the principal (i.e. measured not by reference to what the agent deserves, but rather by reference to the principal's enrichment (per Lord Salvesan at 546 and Lord Ormidale at 550).  Thus it is the law of unjustified enrichment and not the law of contract that potentially offers the agent a remedy for remuneration where he has placed himself in material breach of contract.  It should also be noted for the avoidance of doubt that there is no implied term that an agent is not entitled to work for another principal: only an express term can limit the agent’s activities in this way (Lothian v Jenolite 1969 SC 111).

The fact that it was held in this case that the agent held the secret profit on constructive trust for the principals has already been noted.  Whether a constructive trust exists in Scots law, and would apply to the agent in this type of situation is a controversial issue, and one that cannot be analysed here.  Those seeking enlightenment on the constructive trust in Scots law should consult two articles by Professor George Gretton:  Constructive Trusts: Part I (1997) Edin.L.R. 281 and Part 2 (1997) Edin.L.R. 408.   

 

The line between an (enforceable) liquidated damages clause and an (unenforceable) penalty clause

A recent decision from the Inner House,  Hill and Anor v Stewart Milne Group and Gladedale (Northern) Ltd [2011] CSIH 50 sheds light on liquidated damages clauses and when they may amount to unenforceable penalties. 

The alleged penalty was contained in a minute of agreement and provided that, where the construction of the subjects in question had not been completed by both defenders by a Longstop Date, a penalty of £5,000 per month would be payable to the pursuers.  The Inner House, in a decision delivered by Lord Brodie, reminded us of the tension taking place in cases concerning clauses of this type:

“The context is the law's attempt to resolve the tension between competing principles: on the one hand, as Lord Justice Clerk Inglis put it in Craig v M'Beath (1863) 1 M 1020 at 1022, "it is not legal to stipulate for punishment" and, on the other, as Lord Blackburn said in Caledonian Rly Co v North British Rly Co (1881) 8R (HL) 23 at 31, "a bargain is a bargain". Hence the uncontroversial rules that Lord Macfadyen summarised in paragraph [15] of his Opinion in City Inn Ltd v Shepherd Construction Ltd 2002 SLT 781:
"For a contractual provision to be regarded as imposing a penalty, and therefore as being unenforceable, it must, in my opinion, stipulate for payment by one party to another of a sum of money which (a) is payable on the occurrence of a breach of contract committed by the former party (EFT Commercial Ltd v Security Change Ltd 1992 SC 414), and (b) does not constitute a genuine pre-estimate of the loss likely to be suffered by the latter party as a result of the relevant breach of contract, but is instead unconscionable in respect that it is designed to operate in terrorem, or oppressively or punitively (Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co [1915] AC 79, per Lord Dunedin at 86, para 2; Clydebank Engineering and Shipbuilding Co v Castaneda (1904) 7F (HL) 77; AMEV UDC Finance Ltd v Austin (1987) 68 ALR 185)."”

The case contains analysis of whether the defenders were actually in breach.  This argument arose because the defenders were under an obligation to use all reasonable endeavours to ensure completion by the Longstop Date.  Thus, the pursuers argued, although reaching the Longstop Date without the development having been completed might suggest that a breach had occurred, this may not be the case.  The defenders could only be in breach if they failed to use reasonable endeavours to achieve this outcome.  The Inner House, describing this as a “nice question” (para [14]) indicated that they did not require to come to a decision on this point given their decision on the second issue before them.

Looking then at the second issue, i.e. whether the provision was, in fact, a penalty, the Inner House noted that the Sheriff Principal had erred in his analysis of the onus of proof.  It is for the party who has asserted that a provision is a penalty to establish, by evidence and averment, that it is “…exorbitant and unconscionable and designed to operate in terrorem” (para [15]).  The primary question was therefore whether the defenders had made sufficient specific averments to support their proposition (para [15]).  Here the defenders had provided little more than a statement that the provision was a penalty and therefore unenforceable.  This was insufficient to discharge the onus which lay on them. 

The Sheriff Principal had also been wrong when he found the pursuers’ case to be irrelevant on the grounds that the loss they had suffered had not been caused by the defenders’ breach:

“Moreover, stipulating for pre-estimated damages is recognised as a useful means of allowing the need for proof of a loss caused by breach and accordingly, the party founding on such provision does not need to prove such loss: Clydebank Engineering supra at 83 and Dunlop Pneumatic Tyre supra at 95.”

They later summarised the law on this point by saying:
“Whether a party suing on a liquidated damages provision in the contract had in the actual event suffered damage in consequence of the breach was irrelevant.”

A liquidated damages clause is, of course, enforceable if it represents a genuine pre-estimate of loss.  A clause is only unenforceable as a penalty if it seeks to impose a penalty that is not such a pre-estimate of loss. 

Finally, the Inner House confirmed that whether a provision falls to be regarded as an unenforceable penalty is to be determined by reference to the position at the date of conclusion of the contract and not at the date of the breach (para [18]).  It is at the date of formation that the parties have the opportunity to estimate their potential losses in the event of a particular breach and set the level of the liquidated damages accordingly:

“The proper approach for the Court was to consider whether the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach: Dunlop Pneumatic Tyre supra at 87.”

The Sheriff Principal had approached this case by placing the onus of proof on the pursuers (the parties who were not arguing that it was a penalty) and had also found against the pursuers on the basis that they had failed to prove that the breach had caused them loss.  As explained above, the Sheriff Principal’s decision was wrong on both of these points and was overturned by the Inner House.  All in all, this is a succinct judgment outlining both the method to be used in determining whether the clause is a (valid) liquidated damages clause or an (invalid) penalty clause, and outlining the mechanics of dealing with a clause of this type in litigation. 
 

 

Vicarious liability: Skandinavska Enskilda Banken AB v Asia Pacific Breweries (Singapore) Pte Ltd

The vicarious liability of an agent is an issue which has not been analysed in much depth by the Scottish courts.  Some argue that there is no such thing as vicarious liability in agency: merely that the agent is treated as an employee and the established rules relating to employment applied to an agent (P. S. Atiyah, Vicarious Liability, (1967), p.100).  This approach arguably fails to take into account the role of the agent’s authority in assessing the principal’s liability.  The recent case of Skandinavska Enskilda Banken A.B. (Publ.) v Asia Pacific Breweries (Singpore) Pte Ltd and anor [2011] S.G.C.A 22, decided by the Court of Appeal of Singapore, contains extremely useful analysis of the policy factors underlying vicarious liability (available here: http://www.singaporelawwatch.sg/remweb/legal/ln2/rss/judgment/12453.html?utm_source=rss%20subscription&utm_medium=rss

More significantly, the court applied the “sufficient connection” test for vicarious liability developed in the leading English House of Lords case of Lister v Hesley Hall Ltd ([2001] UKHL 22, [2002] 1 A.C. 215)
in a commercial context.  The court recognised that there may be very different policy factors underlying a decision in a commercial as opposed to a domestic or private situation (Lister was a case which concerned the employer’s vicarious liability where an employee had sexually abused vulnerable children in his care.) 
 

Skandinavska also contains very useful analysis of apparent authority in agency, and comments on the difficult case of First Energy v Hungarian International Bank [1993] 2 Lloyd’s Reps 194).  The apparent authority angle is not discussed here, but may appear in this blog in the future.

    
In Skandinavska, the Court of Appeal identified the two main policy reasons underlying vicarious liability as, firstly, effective compensation for the victim and deterrence of future harm (para 76).  Crucially, the Court suggested that in some factual contexts the person best placed to prevent the tort may be the victim himself or a third party (para 81).  They opened the door for other policy reasons to be relevant to the determination of vicarious liability, not all of which could be identified outside the facts of a particular case (para 81).  They suggested that the following was an accurate representation of the law (taken from Bokhary P.J. in Ming An Insurance Co (/HK) Ltd v Ritz-Carlton Ltd [2002] 3 H.K.L.R.D. 844 at para [25], approved by the Singapore Court of Appeal at para 81):

“By “close connection” is meant a connection between the employee’s unauthorised tortious act and his employment which is so close as to make it fair and just to hold his employer vicariously liable….[V]icarious liability [is imposed] when, but only when, it would be fair and just to do so.” 

   
The difference in factual context, i.e. a commercial as opposed to a domestic or private situation was noted (at para 88):

 “…the case of a commercial fraud perpetrated by an employee of a trading company against international banks which could have prevented the fraud by taking basic precautions presents quite a different situation.”

The court then analysed the agent’s authority on the facts of the specific case, which was extremely limited in financial matters.  As such they held that it would not be reasonable for the principal to have expected the agent to carry out the fraud in question, in fact, the sequence of events was “entirely unforeseeable” (para 91).  The Court decided to let the loss caused by the agent's fraudulent act fall on the third party who had purported to contract with the agent on behalf of the principal/employer, and not the principal as the agent's employer.  The Court made the following comment about the role of banks (para 93):

“Banks play a vital role in the economic life of a community as deposit-taking institutions and suppliers of investment capital for the economy.  There is, therefore, a greater need for banks, (as compared to trading companies such as APBS) to act responsibly and not take undue risks with their depositors’ funds so that the public will have confidence in the banking system.”

As a Singapore case, Skandinavska is, of course, persuasive rather than binding.  The Court of Appeal’s approach must surely be correct: vicarious liability ought to take into account the realities of the commercial situation.  These may be very different from those which applied in Lister, where the harm caused was physical rather than financial, and the victim of the delictual conduct a vulnerable person.   

 

Dissolution of Partnerships – Scottish and English Differences

A recent English High Court case, Boghani v Nathoo [2011] EWHC 2101 (Ch) provides an interesting illustration of the differences between Scots and English partnership law caused by the fact that the Scottish firm has separate legal personality whilst the English firm does not.  The decision also sheds light on the meaning of s.38 of the Partnership Act 1890, the interpretation of which has caused difficulties in the past.

The parties to the dispute had been in a partnership at will and had run the Splendid Hotel Group from 1993 until April 2011.  The firm had been dissolved by notice from Boghani to Nathoo.  At the time of dissolution, two major hotel development projects, known as the ICH Development and the Hilton Development, remained uncompleted.  The partners had been unable to agree how the developments should be disposed of in the winding up of the firm’s affairs.  Boghani argued that they should be marketed for a period of three months and then disposed of to the highest bidder, which might include one of the partners.  Nathoo disagreed, arguing that they should be completed first, and then disposed of. 

The terms of s.38 of the Partnership Act were fundamental to the dispute.  These are as follows:

“After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise."

Nathoo argued that s.38 obliged the parties to complete the developments until the court, in its discretion under s.39, determined otherwise. Boghani argued that the section did not have this effect.  He argued that, before dissolution, the partners were under no unconditional obligation to complete the development, and also that completion was not necessary for the partnership to wind up its affairs.  In any event, he argued that the court should exercise its discretion and order the sale on the terms he proposes. 

The issue depended, the Chancellor of the High Court indicated, on what the words “necessary” and “complete” meant in the context of s.38 (para 31).  At the time of dissolution, the partnership was bound by valid contracts with developers requiring them to complete the transactions.  Did such binding obligations under the development contracts mean that it was indeed “necessary” for the firm to complete performance?  The Chancellor thought that it was relevant that many firms would not have the funds to complete every contract at the point of dissolution (para 31).  He interpreted “necessary” as meaning necessary for the purposes of winding up the partnership.  It followed, therefore, that completion of these developments was not necessary for the purposes of dissolution of the partnership (para 33).  Evidence had been led to the effect that other parties were interested in taking on the obligations of the firm in those developments.  Both of the partners individually had also indicated that they would be willing to do so.  This being the case, completion of the developments by the firm was not “necessary” in terms of s.38.   

       
Nathoo did not obtain the order in the terms requested, i.e. ordaining the firm to complete the developments.  The Chancellor indicated that, if the developments were to be completed, it could only be on a consensual basis.  Absent that agreement, either party would be free to bid for the developments against any outside bidders who may also be interested in the developments (para 34).  Boghani’s application, which requested decree that the partners were not under any continuing obligation, whether under s.38 or otherwise, to complete the developments, was also refused (para 35).  To do so would be “at worst incorrect and at best misleading” – the firm remained under obligation to complete the developments notwithstanding dissolution (para 35).
Paragraphs 19 to 27 of the decision contain some interesting and useful discussion of the meaning of s.38.  Reference is made inter alia to two Scottish decisions: a Scottish appeal to the House of Lords, Inland Revenue v Graham’s Trustees (1971 SLT 46) and an Outer House decision from Lord Reed, Duncan v MFV Marigold PD145 [2006] CSOH 128; 2006 SLT 975.  In the former case, on the death of one of the partners, the firm had ceased to exist.  The argument raised was that s.38 permitted the surviving partners to continue the lease of a farm which had been held in the name of the firm.  That argument failed.  The Chancellor quoted from Lord Reid’s speech (at page 48):

"What is meant by transactions begun but unfinished when the partnership was dissolved? If the common law had been clearly settled before 1890, I would interpret this section in light of the earlier law. But it appears that there was then little authority on this matter. So this section should if possible be construed so as to reach a reasonable result. It was argued that "transactions" means bargains. But that would deprive this provision of all content, for it is clear that surviving partners have no right to bind the assets of the dissolved firm by making new bargains or contracts. Their right and duty is to wind up its affairs. In my view this must mean that the surviving partners have the right and duty to complete all unfinished operations necessary to fulfil contacts of the firm which were still in force when the firm was dissolved.  Otherwise the position would be intolerable. Suppose the firm was employed to build a bridge and the bridge was half finished when the firm was dissolved. The surviving partners must be bound to finish the work, for otherwise they could hold the employer to ransom by refusing to proceed unless he made a new contract more favourable to them, and conversely the employer could refuse to allow the work to proceed unless the surviving partners made a new contract more favourable to him. That could not be right."

The Chancellor also quoted Lord Upjohn from that same case, where he indicated that s.38 would not often be required in England, given that the obligations under contracts would bind the outgoing partner and his estate under the general law:

 "Thus, for example, if a firm contracts to build a bridge, that contract is not affected by its dissolution. The remaining partners and the outgoing or the estate of a deceased partner will normally remain both entitled and jointly and severally liable under the general law to complete the bargain. Section 38 makes it plain that the continuing partners can in doing so bind the ex-partners or their estates. But I can well understand that in Scots law, without giving it any different a construction, it may be necessary to invoke the section more often than under English law because of s.4(2) of the Partnership Act, and the partnership having come to an end as a legal person on dissolution, the contract presumably must come to an end. But, nevertheless, this section makes it plain that the ex-partners will remain entitled and bound to carry out the contracts made in the name of the partnership and must complete all those contracts and other matters which are in medio when the partnership was a going concern. But their rights under s.38 are limited by the provision that they may only do so so far as it may be necessary to wind up the affairs of the partnership and, this is the important passage, to complete transactions begun but unfinished at the time of the dissolution, and this is equally true of course of contracts in English law but, as I have said, it is less likely to be necessary to invoke that section."

The Lord Chancellor referred to Lord Reed’s decision in Duncan v MFV Marigold, noting that he had referred to both of the House of Lords speeches quoted above, and, quoting him:

“On any view, however, s.38 cannot warrant the continuation of the business for more than a temporary period…[it is] necessary to examine the facts in order to determine whether a given transaction arose from the conduct of the business of the dissolved partnership by former partners for the purpose of winding up the affairs of the partnership and was "necessary" for that purpose, or whether it was attributable to some other relationship between the partners."

Having analysed this authority, the Chancellor summarised the legal position under s.38 as follows:

“In my view the terms of s.38 as explained in the authorities to which I have referred, in particular Inland Revenue v Graham's Trustees, demonstrate the following propositions:

(1) The obligations of partners to third parties continue notwithstanding the dissolution of the partnership.
(2) In England, if not in Scotland, the satisfaction of those obligations by performance, release or novation or the payment of damages will not usually involve reliance on the terms of s.38.
(3) S.38 does not entitle the surviving partners to engage in new bargains or contracts so as to bind a deceased or former partner.
(4) Even in relation to transactions, not being new bargains or contracts, begun but unfinished at the time of dissolution s.38 applies only if and to the extent that the completion of such transactions is necessary to wind up the affairs of the partnership.
(5) S.38, if applicable, confers a power; it does not impose any additional duty.”

It would be interesting to analyse the source and development of s.38.  The 1890 Act was a codifying statute.  As such, it was not intended to be an exhaustive statement of the law, but rather a statement of the central principles in a series of general propositions.  Lord Reed touched on this point in Duncan v MFV Marigold at para 26.  No doubt, as Lord Reid pointed out in Inland Revenue v Graham’s Trs, there was little case law on the operation of s.38 prior to the entry into force of the 1890 Act.  Arguably, however, the ability of the partner in this respect is simply the common law ability of an agent to continue transactions even if the principal dies or becomes bankrupt.  In theory, an agent cannot act for a non-existent principal.  But the common law permitted the agent to do so in order to complete unfinished transactions.  This idea is analysed in a significant agency case, Pollok v Paterson Dec 10, 1811, F.C. at 375, where the origins of this idea in Roman law are analysed.  Analysis of the the agency law principles underlying s.38 may help to shed further light on this difficult section of the Partnership Act 1890. 

 

 

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.  

 

 

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