2nd Edinburgh International Willem C Vis Arbitration Pre-Moot

Over the weekend of 23-24 February 2013 Edinburgh Law School welcomed five guest teams from across the world to a Pre-Moot event in preparation for the prestigious Willem C. Vis International Commercial Arbitration Moot, which will take place in Vienna 22nd-28th March 2013.  This will be the third time Edinburgh Law School has entered the competition, which is now in its 20th year (and the 10th in Hong Kong) and aims to foster practical legal education in international commercial arbitration and international sales law.  Edinburgh is one of 13 UK law schools and the only Scottish one to enter a team this year.

The Pre-Moo saw teams from universities in New Zealand, Sweden, France and Germany join a multinational team of eight Edinburgh LLM students for a weekend of events to practice their performances ahead of the March competition.

The key aim of the Pre-Moot was to provide students with feedback from the profession in an international setting.  Eminent QCs, arbitrators, advocates, solicitors and academics responded to the call to act as Moot arbitrators, as did former Moot participants.  All kindly gave freely of their time and expertise to support the students, some travelling from afar to join in the Edinburgh Pre-Moot.  The list of moot arbitrators comprises many distinguished practitioners; a full list of moot arbitrators is available on the website of the 2nd Edinburgh Pre-Moot at http://www.law.ed.ac.uk/edinburghvismoot/edinburghpremoot201213.aspx.

The high level of participation from the arbitration and legal communities was noted by participants and coaches and helps distinguish the Edinburgh Pre-Moot from competing events.  It is also one of the few ‘Common Law’ Pre-Moots, with many more such events being held in Civil Law countries.

The Pre-Moot was based on the problem for the 20th Vis Moot and consists of arbitration proceedings in a dispute between parties to a contract for the sale of polo shirts governed by the UN Convention on the International Sale of Goods.  The main issue was whether the use of child labour by the seller (but not in the manufacture of the actual shirts in question) constituted a fundamental breach of contract justifying the buyer’s avoidance of the contract.  A secondary issue concerned liquidated damages for alleged late delivery of the shirts which in turn related to an issue as to whether the sale contract had been modified orally.  There was also a conflict of laws issue and an evidentiary one, the latter concerning the admissibility of a witness statement given by an absentee witness.

The Pre-Moot was formally opened by Professor Emeritus Sir David Edward QC (Honorary President, Scottish Arbitration Centre), who welcomed all participants and encouraged students with guidance and advice.  After an induction for arbitrators into the Moot philosophy and practice by Hew Dundas, students pleaded against each other in front of panels of three arbitrators.  After each performance teams received extensive feedback, to enable them to firmly build upon the experience gained.

The atmosphere over the mooting weekend was charged with excitement, enthusiasm and team spirit on all parts and it was rewarding to see how students assimilated the feedback obtained.  Alongside intensive work, arbitrators and teams had time to meet and mingle, whether at the Moot venue, during the Saturday reception at the Playfair Library in Old College, at dinner, or over informal meetings at the Library Bar. 
 
The event was only possible due to the generous support of colleagues throughout the profession.  Our gratitude goes to all Pre-Moot arbitrators for enabling this event and for making it such an outstanding success.  Particular thanks are also due to Hew Dundas for his hands-on support with this event and throughout the years.  We are also very grateful to our sponsors Hogan Lovells International LLP, Terra Firma Chambers, The Scottish Arbitration Centre and Skyscanner.

The date for next year’s Edinburgh Pre-Moot is set for 15th/16th March 2014.   Please save the date. 

Arbitration practitioners or academics with interest in international commercial arbitration and/or international sales law and who would like to be informed/involved in future events and are not yet on our mailing list are encouraged to contact the Edinburgh Vis Moot Organisers.

For further information, including a full list or arbitrators please visit the Edinburgh Vis Moot website http://www.law.ed.ac.uk/edinburghvismoot, or contact Dr Simone Lamont-Black (Simone.Lamont-Black@ed.ac.uk) or Neil Dowers (N.A.Dowers@sms.ed.ac.uk).

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Group companies and agency: The Harbro Group v MHA Auchlochan

The Harbro Group Limited v MHA Auchlochan [2013] CSOH 8, decided earlier this month, provides evidence (if any were needed) of the challenges which the group company structure poses in litigation.  I am grateful to my colleague Dr Dan Carr for bringing this case to my attention. 

The dispute concerned commercial missives to purchase two areas of ground near Lesmahagow.  The purchasers intended to construct a new factory there from which to operate their business, the manufacture, sale and distribution of animal food products.  The sellers of the land were the trustees for the Auchlochan Trust.  The Trust had transferred their assets and liabilities to the defenders.   Certain obligations under the missives were not timeously performed by the Auchlochan Trust, including the dismantling of overhead mains and making up of the access road.  This delayed entry for the pursuers, requiring the pursuers to extend their existing lease and eventually resulting in the cessation of some of their manufacturing.  The action was therefore one of damages for breach of missives, the pursuers seeking to recover both costs related to the extension of the lease and loss of profit through the cessation of manufacturing work. 

So far, so straightforward, except that the lease of the existing premises was held, not by the pursuers, but by a different company, Strathclyde Nutrition Ltd (SNL), a wholly owned subsidiary of the pursuers.  Indeed the manufacturing business seemed to be carried out by SNL too, and SNL earned the profit.  This raised the question of whether the pursuers (the holding company) had actually suffered a loss. 

The pursuers made what seem to this blogger to be confusing averments on the law of agency.  They answered the defenders averments on agency by suggesting that SNL (and another company in the group, HB, who manufactured feed blocks and feed buckets) were acting as agents for the pursuers (para [10]).  However, counsel for the pursuers explained that they were not suggesting that a contract of agency existed (para [23]).  Rather, they used agency averments to “reinforce the de facto control by the pursuers of all the group activities” (para [23]).  The essence of the pursuers' case appeared to be that a holding company can raise an action for losses suffered by its subsidiaries. 

Lord Boyd dealt swiftly with the agency point: “Either the subsidiaries are agents for the pursuers, or they are not” (para [29]).  Not surprisingly he considered the defender’s averments on agency to be irrelevant. 

Lord Boyd allowed the parties a proof before answer.  The defenders had relied on Lord Clyde’s speech in Alfred McAlpine Construction Ltd v Panatown Ltd (2001) A.C. 518 as authority to the effect that one could not sue for another’s losses.  That case is a highly complex one in which the judges took differing approaches.  Lord Boyd hinted at this: “Yet the discussion of the possible exception in building contract cases where there is a group structure in the speeches of their Lordships, seems relevant to the issues in this case, as is the debate on the application of any principles arising in Scotland (see e.g. the article by Professor Joe Thomson, Restitutionary and Performance Damages 2001 SLT 71 and Sheriff J A Taylor in Clark Contracts Ltd v Burrell Company (Construction Management) No 2 Ltd 2003 SLT (Sh Ct) 73)” (para [34]).   

This case report is as interesting for what it doesn’t say as for what it does.  Even though counsel for the pursuers was not seeking to establish agency between the pursuers and SNL, the case provides the opportunity to recap on the principles of creation of agency.  Agency does not require to be formed by a written contract, but rather can arise as an express oral contract or as an implication from the facts.  Where the latter applies, agency is an implied contract between principal and agent.  Relevant averments of fact require to be made to establish this implied contract.  Those averments might describe acts the agent has performed on the principal’s behalf, most obviously the negotiation of a contract but also other commercial activities.  Whatever the activities, they have to create a picture of representative activity on the part of the agent.  The simple connection between a holding and a subsidiary company is not sufficient to create agency.  Indeed, counsel for the defenders cited both Bowstead & Reynolds on Agency, pages 4-18 and Peterson Farms Inc v C & M Farming Ltd ((2004) 1 Lloyd’s Rep 603 per Langley J at para 60) as English authority suggesting that the courts do not look favourably on the existence of a relationship of agency that would circumvent their separate legal personalities (para [20]).  Counsel for the defenders also stated, “like any contract, the existence or otherwise of a contract of agency is not purely a matter of fact, but of fact and law” (para [20]).  

What is (thankfully) missing from the case is any reference to ad hoc agency.  This is an idea which was created by Lord Drummond Young in three cases: Whitbread Group plc v Goldapple Ltd (No 2) (2005 SLT 281); Laurence McIntosh Ltd v Balfour Beatty Group Ltd and the Trustees of the National Library of Scotland ([2006] CSOH 197); and John Stirling t/a M & S Contracts v Westminster Properties Scotland Limited ([2007] CSOH 117).  In these cases, Lord Drummond Young used agency to avoid the consequences of the separate legal personality of companies to reach what he saw as commercially useful results.  Lord Drummond Young offered up his concept for use in group company situations.  He stated in McIntosh (para 16): 

“Within groups of companies, it is relatively common to find one company performing tasks for another company within the group.  This may take many different forms; for present purposes, an example that is relevant is that one company may perform debt collection functions on behalf of other companies within the group.  In such a case, the debts do not become due to the debt-collecting company; they remain due to the original contracting party, but the debt-collecting company acts as an agent for the payment of debts into a bank account in the name of the debt-collecting company; the latter company’s function is merely that of an agent, and the underlying contractual structures are not affected.”

This blogger, in an article published with Niall Whitty, criticised ad hoc agency (‘Payment of another’s debt, unjustified enrichment and ad hoc agency’ (2011) Edin L R 57.  Not only does the concept subvert the separate legal personality of companies, it ignores the rules of creation of agency summarised above.  In the three cases decided by Lord Drummond Young, there was almost no evidence of representative activity on the party of the so-called agent.  Equally, in this case, presumably once again there was no representative activity by the pursuers on behalf of SNL and that may be why the pursuers’ legal team did not seek to establish agency.  Whatever their reasons, it is heartening to see that ad hoc agency is not taking hold. 

We can look forward to the further stages of this case.  The problems caused where loss and the right to sue are split between different entities are very difficult ones.  As such they are also of interest.  Scottish judicial analysis of the concepts discussed by the judges in McAlpine would make interesting reading.  This may provide something for us to look forward to in these dark January days (apart from the Supreme Court decision in Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc). 

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The commercial agent’s duty of good faith: short-changed by the Court of Appeal?

A commercial agent falling within the Commercial Agents (Council Directive) Regulations 1993 owes both a fiduciary duty towards his principal at common law and a duty to act in good faith towards that principal under reg 3(1).  There has been little case law in the UK on the meaning of the statutory duty.  Although, by contrast,  there is a large body of case law on the agent’s fiduciary duty at common law, that duty is often expressed using broad abstract language, making it difficult to apply to concrete situations.  The English Court of Appeal case Crocs Europe BV v Craig Lee Anderson & Anor t/a Spectrum Agencies [2012] EWCA Civ 1400, presented an opportunity to shed light on the meaning of both duties and the effect the agent’s breach has on the agency contract. 

Facts
The dispute centred around a practical joke taken too far.  Employees of the agent were frustrated with the alleged poor service offered by the principal, the manufacturer of the famous crocs shoes.  The agent’s employees created a “Crawl”, i.e. a posting on a website poking fun at this lack of service.  The Crawl was in the form of rolling credits, a spoof of the format used in the Star Wars films.  Unfortunately, the principal did not see the funny side.  Describing the Crawl as “highly derogatory,” the principal treated it as repudiatory conduct on the part of the agent and rescinded the agency contract.  Where the principal has terminated the agency contract because of a default attributable to the agent which would justify immediate termination, no indemnity or compensation is payable to the agent (reg 18, read in conjunction with reg 16).  The agent, not surprisingly, argued that the principal’s identification of the Crawl as repudiatory conduct was nothing other than a veiled attempt to escape from an agency contract which was no longer attractive at the same time avoiding payment of compensation to the agent.  Compensation is, after all, the agent’s entitlement under reg 17.     

Decision at first instance
At first instance judgment was entered by Sir Raymond Jack for the agent, with damages due to be assessed.  Only one point was appealed by the principal, namely that the principal had not been entitled to terminate the contract on the grounds of a repudiatory breach.  The trial judge concluded that a reasonable person would not have concluded that the Crawl showed an intention on the part of the agent not to fulfil the contract (para 42).

Court of Appeal – Defendants’ Submissions
On appeal, the defendants (the principal) argued that reg 3 implied a “condition” into the agency contract.  This is to use the word “condition” as it is understood in English contract law, i.e. as an important contract term, breach of which results in the right to terminate.  It can be contrasted with a warranty, breach of which results only in damages.  This distinction is not part of Scots law where a material breach results in a right to rescind, with non-material breaches resulting in a right to damages only. Scots law has no hierarchy of the importance of contract terms.  The English classification is more complex than has been presented here: innominate terms also exist, but thankfully that class, and indeed the English approach as a whole, need not be analysed here.  If the principal was correct in its assertion that the duty of good faith is a condition, any breach of that duty would result in the principal’s  right to terminate.

The defendant drew interesting analogies in their appeal (the defendant was represented by Fergus Randolph, one of the two authors of the leading English text on commercial agency, The European Law of Commercial Agency, the other author being Jonathan Davey).  The first was with contracts of marine insurance, where they argued that an agency contract was, like a contract of marine insurance, a contract of utmost good faith.  The second was with the duty of trust and confidence which lies at the heart of the employment relationship.  This analogy was supported by the fact that it would be productive of commercial uncertainty if a principal was forced to accept a disloyal agent. 

Court of Appeal – Lord Justice Mummery 
Lord Justice Mummery reviewed the relevant provisions of the Regulations and, in particular, reg 3 which contains the agent’s duty of good faith towards the principal.  He noted that the Regulations did not specify the consequences which flowed from breach of the duty of good faith (para 18).  Rather, reg 6 provides that the law applicable to the contract governs the consequences of breach of the rights and obligations under regs 3 and 4.  Thus, the correct approach is to apply English contract law relating to termination for breach. 

The principal appealed on the basis of both the agent’s duty of good faith under the regulations and the common law fiduciary duty.  Lord Justice Mummery indicated that these duties “co-exist” (para 22).  He noted that, according to Bowstead and Reynolds on Agency, not all breaches of fiduciary duty go to the root of the contract (para 23, referring to this book at para 7-049).  From this he concluded that whether or not a breach was repudiatory “depends, in general, on an objective assessment of all the surrounding circumstances” (para 23).  And, indeed, not all of the agent’s duties are fiduciary in nature (para 24).     

Lord Justice Mummery had no hesitation in rejecting the defendant’s “condition” argument, describing it as suffering from “insuperable difficulties” (para 44).  Reg 3 was not expressed in a way that would suggest an intention to create a condition (para 45).  He emphasised his earlier observations that not all agency duties are fiduciary in nature, and not all breaches of fiduciary duties give rise to a right to rescind.  He indicated that the remedial consequences of breach of fiduciary duty depend “…not only on the nature of the duty owed but also on the factual circumstances in which the particular breach occurred and the intentions of the parties, as expressed or inferred, in relation to the contract” (para 48). 

The analogy with the employee’s duties did not, in Lord Justice Mummery’s opinion, assist the defendant.  He identified a line of employment law cases in which an isolated act of misconduct did not justify termination of the contract (para 49). 

The judge at first instance had, in Lord Justice Mummery’s opinion, used the correct approach which was to judge the seriousness of the agent’s conduct in connection with the Crawl (para 50).  An appeal court could only overturn what was, essentially, an issue of fact if the judge had misdirected himself in law, and there was no evidence to support this conclusion (para 50).  The breach was simply not serious enough to support repudiation: “The Crawl did not in terms disparage the goods to any one (sic).  It referred to the inability of the defendant to meet delivery obligations, a state of affairs that was well known.  The style of the Crawl was obviously jokey, though not everyone might see the joke and though the defendant was not amused.  The circulation of the Crawl was limited and temporary.  The website was soon shut down for other reasons and the Crawl was removed…There was no evidence of harm suffered by the defendant” (para 51).  The breach did not go to the root of the agency, rather it was a “one-off incident that did not involve bad faith on the part of the claimant, was not shown to involve a real risk of harm to the defendant by dissemination to the world at large and did not, when viewed objectively, evince an intention to abandon or to refuse to perform the commercial agency contract” (para 52).  This led him to dismiss the appeal.  

Court of Appeal – Mr Justice Bean
Mr Justice Bean was more persuaded by the analogy with the employee’s duties in the employment contract.  He observed that the agent’s duties were not materially different from the employee’s duties (para 56).  Counsel for the defendant had argued that the agent’s duty was at least as wide as the Malik term.  He referred (at para 56) to the formulation of this implied term in Woods v WM Car Services (Peterborough) Ltd ([1982] ICR 693) and Western Excavating (ECC)Ltd v Sharp ([1978] ICR 221).  This was, in Mr Justice Bean’s opinion, no more than the application to employment contracts of classic principles of general contract law (para 58): “If party A conducts himself in a way which viewed objectively, is likely to destroy or seriously damage the contractual relationship, that amounts to a repudiation of the contract which party B can accept and thus terminate the relationship” (para 58).

The attempts by counsel for the defendant to draw an analogy with shipping law and specifically the obligation to perform timeously were thought to be unhelpful. 

Mr Justice Bean simply agreed with Lord Justice Mummery’s conclusions on the submissions on regulation 3 as a fiduciary duty.        

Although indicating that he thought the breach in question was close to the line between a breach sounding only in damages and one which could be repudiatory in nature, he found no reason to overturn the trial judge’s decision, and dismissed the appeal.  Lord Justice Hughes agreed with both judgments. 

Comment
This is a welcome decision, underlining the fact that not all breaches on the part of the agent necessarily result in termination, and, in the context of commercial agency, the forfeiture by the agent of his rights to either compensation or indemnity.  This must surely be correct.

It is a useful decision for Scots lawyers.  Clearly there are differences in the underlying law of contract in relation to breach in Scotland and England.  Nevertheless, the exercise of examining the breach carried out in the Court of Appeal is highly similar to the one which should be applied in Scotland.  It is a highly factual exercise. 

In other respects one cannot help feeling short-changed by the Court of Appeal’s analysis.  There is no analysis of the meaning of the agent’s fiduciary duty in the context of commercial agency.  There are broad references to “loyalty” but little more. 

There is also a failure to address the manner in which the fiduciary duties at common law interact with the statutory duties of good faith appearing in reg 3.  Randolph and Davey, in The European Law of Commercial Agency (referred to above) concluded that the duties of the commercial agent under reg 3 “essentially mirror the fiduciary duties imposed on the agent by English law” (p. 55).  And yet they later refer to the significant different between the two, i.e. the fact that fiduciary duties require the agent to place the principal’s interests above his own whereas duties of good faith do not impose this very strict requirement (p. 64). It is surely questionable whether there is a mirror-like quality between the two duties.   The need for judicial analysis seems obvious.  They are likely to differ.  In particular, we should understand the duty of good faith imposed by the regulations by reference to the law in other European member states, particularly France and Germany, the acknowledged inspiration for the compensation and indemnity provisions in the Directive.  Where such an exercise of comparison is carried out, the court is more likely to achieve harmonisation, the aim of the Directive.

Finally, I would question Mr Justice Bean’s use of the employment contract as an analogy for the agent’s duty of good faith.  There are sufficient differences between the two types of contract to make such analogies dangerous.  The law is highly protective of employees and rightly so, given that the employee is almost invariably the economically weaker party.  That can be contrasted with the tradition in the UK where agents are economically independent actors.  It is true that the Directive has made a significant inroad into this tradition, extending to agents significant protections on termination of their contracts.  But we are not yet at a stage where an agent can be completely equated with an employee.  Where an employee breaches his duty of trust and confidence, it will indeed be difficult for employer and employee to carry on the employment relationship.  But an agent is in a different position, one step further removed from the principal.  A breach of the fiduciary duty of loyalty is serious, but need not rule out the continuation of the agency contract.  The agent is not in such close proximity to the principal.

Despite these questions, this case is a significant one which should be a point of reference for future cases in Scotland where the question of the commercial agent’s breach of fiduciary or good faith duties arises.       

 

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Illegality in performance of a contract: one of the least satisfactory areas of contract law?

If a contracting party performs an illegal act in the course of performance of a contract, what impact does that conduct have on the availability of remedies for breach of contract?  Can the “innocent” party use that illegality as a defence in order to avoid, for example, payment of damages for breach of contract?  This is the important question considered in the recent English Court of Appeal case, Parkingeye Ltd v Somerfield Stores Ltd [2012] EWCA Civ 1338. 

Facts
The parties had entered into a contract in terms of which P had agreed to provide an automated monitoring and control system for some of the S car parks.  The system read and recorded the vehicle registration numbers and times of entry and departure of vehicles using the car park.  The system was able to determine when a car had overstayed the maximum time permitted for customer use of the car park and therefore when a penalty was due.  P was also responsible for pursuing customers who failed to pay.  This might involve sending out a number of letters to the customer, and in individual cases customers received 4 different letters.  It was the terms of those letters which formed the focus of the dispute.  As further letters were sent to an individual customer, the terms of those letters escalated, becoming more aggressive.  The later letters incorporated a chequered edge in a clear attempt to mimic a police letter and indeed contained falsehoods.  P was entitled to retain the fees levied and so had an incentive to operate the fine system aggressively.  In Sir Robin Jacob’s words, the terms of the later letters were quite “crude and aggressive in fashion” (para 12). 

The contract was to endure for 15 months but was terminated early by S after 5 months.  P raised an action for breach.  S raised the defence of illegality, citing P’s unlawful actions committed in performance of the contract.  At first S alleged that P’s conduct had been both criminal and tortious in nature.  As the case progressed, the allegations of criminal conduct were dropped.  

Decision
First Instance
At first instance the judge indicated that he was not convinced that P intended to perform the contract in an illegal manner.  In fact, he suggested, neither of the individuals managing the two companies had fully appreciated the legal implications of the letters.  The judge awarded P damages of £350,000 for breach of contract by S.  He rejected illegality as a defence although he indicated that he had made a modest discount to the damages to reflect the terms of the third and fourth letters.  On appeal the sole issue before the court was whether S could resist payment of damages on the basis of illegality.     

Court of Appeal – Sir Robin Jacob
In the Court of Appeal Sir Robin Jacob began his substantive analysis by commenting “Illegality and the law of contract is notoriously knotty territory” (para 28).  In his own words he “ducked out of a comprehensive review of the cases” (para 28).  His starting point was two Law Commission papers on the subject, a Consultation Paper from 2009 (No. 189) and a Report from 2010 (No. 230).  A specific point of reference for him in the Law Commission publications was the part on illegality in performance of a contract (paras 3.27 and 3.28 of the Consultation Paper).  Para 3.27 rather depressingly commented that “…the effect of unlawful performance on the parties’ contractual rights is very unclear.”

Counsel for S had argued not only that P had performed the contract in an unlawful way, but also that P had had the intention to perform the contract illegally from the point of formation. As a result, it was argued, the contract was completely unenforceable.  Sir Robin was unconvinced that this was correct, particularly where “the intention was limited to only a partial (and minor on the facts) mode of performance” (para 31). The law is not a “straightjacket” (para 32), in other words not every illegality in performance has this draconian effect.  He rejected too the emphasis on the point of formation as the crucial point at which intention ought to be determined.  To Sir Robin this contract was not intended to be carried out in a wholly illegal manner (para 35), nor was illegal performance an object of the contract or necessary for its performance (para 36). 

In response to Counsel for S’s arguments that P’s intention was imbued by moral turpitude, Sir Robin identified unenforceablity as a disproportionate remedy (para 38).  Although the reference to moral turpitude is reminiscent of the Inner House decision in the famous Scottish case of Cuthbertson v Lowes (1870) 8M 1073, it seems unlikely that it inspired counsel.  Sir Robin was careful to indicate that, in making this decision, he was not exercising a judicial discretion (para 39).  Proportionality is something different: “It involves the assessment of how far refusal of the remedy furthers one or more of the specific policies underlying the defence of illegality” (para 39). 

Sir Robin Jacob rejected S’s entitlement to the illegality defence, Lord Justice Laws agreeing both with this conclusion and Sir Robin's reasons.   

Court of Appeal – Lord Justice Toulson
Referring to Sir Robin Jacob’s description of this area of the law as “knotty”, Lord Justice Toulson raised the stakes: “That is a mild way to describe it.  It is one of the least satisfactory parts of the law of contract” (para 43).  The reason why it is so difficult is because it involves questions of public policy (para 44).  He also acknowledged the difficulties inherent in “weighing” the respective illegalities on the part of the contracting parties:

“But where, as in this case, both parties were complicit in the illegality, denial of one party’s claim on that ground will be to give an unjustified benefit to the other.  The rule that where both parties are equally at fault the defendant should prevail may be right in more serious cases (on the ground that the court should, in effect, wash its hands of the dispute), but may be a disproportionately severe response in less serious cases” (para 45). 

Lord Justice Toulson also referred to the Law Commission work in this area, noting their conclusion on the possible creation of a statutory discretion, i.e. that this “…was not the best solution to the problems of illegality in the law of contract, because of the difficulties which close study showed that such a scheme would itself present” (para 48).  He also noted the relatively high standard that the Law Commission suggested ought to be adopted.  In essence, the Law Commission suggested that the court should identify the policies involved and base their decisions “transparently on these policies” (Consultative Report, para 3.140, quoted by Lord Justice Toulson at para 50):
 
“If this approach were adopted, we consider that the illegality defence would succeed in only the most serious of cases.  That is, we believe that the policy issues underlying the defence would have to be overwhelming before it would be a proportionate response to deny the claimant his or her usual contractual rights” (Consultative Report para 3.141, quoted by Lord Justice Toulson at para 50). 

The Law Commission suggested that “…the courts should consider in each case whether the application of the illegality defence can be justified on the basis of the policies that underlie that defence.  These include: (a) furthering the purpose of the rule which the illegal conduct has infringed; (b) consistency; (c) that the claimant should not profit from his or her own wrong; (d) deterrence; and (e) maintaining the integrity of the legal system.” (para 3.142, quoted by Lord Justice Toulson at para 51.)  Those policies could not be looked at in isolation: “Against those policies must be weighted the legitimate expectation of the claimant that his or her legal rights will be protected.” (para 3.142, quoted by Lord Justice Toulson at para 51).  Whilst endorsing this approach Lord Justice Toulson did not see it as a complete substitute for the rules on illegal contracts developed in the case law (para 53), “…rather that those rules are to be developed and applied with the degree of flexibility necessary to give proper effect to the underlying policy factors” (para 53).  He also recognised the unusual nature of cases of this type:

“In some parts of the law of contract it is necessary in the interests of commercial certainty to have fixed rules, sometimes with exceptions.  But in the area of illegality, experience has shown that it is better to recognise that there may be conflicting considerations and that the rules need to be developed and applied in a way which enables the court to balance them fairly” (para 54). 

In applying the law to the facts of the case, Lord Justice Toulson referred to the seminal case on illegality in performance of a contract, namely St John Shipping Corporation v Joseph Rank Ltd ([1957] 1 QB 267).  A distinction drawn in that case which Lord Justice Toulson supported was between, on the one hand, a party who deliberately sets out to break the law in performance of a contract and, on the other, a person who breaks the law without meaning to do so or in a minor way (para 61).  He quoted Devlin J:

“Persons who deliberately set out to break the law cannot expect to be aided in a court of justice, but it is a different matter when the law is unwittingly broken.  To nullify a bargain in such circumstances frequently means that in a case – perhaps of such triviality no authority would have felt it worthwhile to prosecute – a seller, because he cannot enforce his civil rights, may forfeit a sum vastly in excess of any penalty that a criminal court would impose…” ([1957] 1 QB 267 at 288).

He indicated that Lord Devlin’s decision certainly did not suggest that any element of minor illegality in performance would render a contract unenforceable, the position argued by counsel for S (para 63-64). 

Lord Justice Toulson then proceeded to consider the case under the following headings: object and intent of the claimant; centrality of the illegality; and nature of the illegality.  In relation to the first, he noted that the judge at first instance had decided that P did not have a fixed intention to use letter 3, nor did P appreciate its legally objectionable aspects (para 68).  In relation to the second, he referred again to Devlin J’s decision, in which he had suggested that the a contract might be found unenforceable only where what was prohibited was a contract which had at its centre the prohibited act ([1957] 1 QB 267 at 289, quoted by Lord Justice Toulson at para 70).  By contrast the most important part of the service supplied by P was the installation of the system in 17 car parks, a service which was perfectly lawful.  The misrepresentation in letter 3 was “hardly central to the performance of the contract” (para (71).  Finally, in relation to the nature of the illegality, the only form of illegality at issue here was in tort.  Nor was commission of a tort the object of the contract (para 73).  Given that P had no fixed intention of acting unlawfully and that the illegality was incidental to part of the performance of the contract rather than central to it, Lord Justice Toulson concluded that S’s illegality defence ought to be rejected. 

Analysis
This case usefully illustrates the fact that illegality arguments can be raised where the conduct is minor, and not even criminal in nature.  Here the most serious allegations were the commission of a tort.  “Illegality” does not always mean a breach of the criminal law.  Lesser degrees of culpability can, in theory, have an impact on the availability of normal contract remedies.      

It is questionable whether the first instance judge’s approach of applying a “discount” to damages awarded is a useful one.  It is true that the calculation of damages is an art rather than a science and that the court often has access to different methods of calculation (for example a reliance as opposed to an expectation measure).  Nevertheless, this “discounting” approach has little to commend it.  It might involve the courts having to grade degrees of illegal conduct, something courts have tended to avoid in the past. 

The Court of Appeal is to be commended for its close analysis of and adherence to the approach advocated by the Law Commission.  This is as it should be: recommendations were made by the Law Commission after painstaking scrutiny of this area of the law.  It is heartening to see those recommendations being given such weight. Nevertheless, Lord Justice Toulson, having noted the five policies that the Law Commission had suggested underlie the defence, did not seem to apply them to the facts of the case.  Rather, he adopted three different headings (object and intent; centrality of the illegality and nature of the illegality).  Again, confusion reigns.    

Sir Robin Jacob’s “disproportionality” test deserves further comment.  Is it accurate to describe it as such? To recap, he stated “Proportionality…involves the assessment of how far refusal of the remedy furthers one or more of the specific policies underlying the defence of illegality.”  This is surely less about proportionality, and more simply a policy-based approach.  South African law is a good example of a legal system which adopts a policy based approach: only where non-enforcement of the contract furthers an important policy should the court refuse to enforce the contract (see, for example, Jajbhay v Cassim 1939 AD 537).  To create a new proportionality test only populates this already busy area with one more test.

More broadly the Court of Appeal decision is to be welcomed.  It reminds us of the importance of policy in this area.  It moves us father from a “knee-jerk” response which might dictate, as counsel for S appears to have suggested, that any degree of illegality should lead to non-enforcement of the contract.  This is clearly not correct, and certainly not in a case such as this where the conduct involved was relatively minor.  The fact that this case went as far as the Court of Appeal suggests that parties continue to consider it worth trying to use the illegality defence even where the conduct in question is minor in nature.  Perhaps the clear statements made by the judges might act as a disincentive to such an approach in the future.  Finally, the  case reminds us how many factors are potentially relevant in a case of illegality.  In such a “knotty” area, simplification seems unlikely.      
 

                    

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Edinburgh Centre for Commercial Law: EU Procurement Law Conference 28 September 2012

The Edinburgh Centre for Commercial Law was delighted to host a conference on EU Procurement Law in conjunction with the commercial law firm, Burness LLP for the third year in a row. The Edinburgh Centre for Commercial Law and Burness welcomed approximately 60 delegates to the Playfair Library from a range of organisations in the public and private sectors. 

After intensive prior consultation with stakeholders, the conference focused on the theme of overcoming practical problems in the procurement field. In particular, Graeme Palmer, Director of Burness ‘s presentation concentrated on contract award procedures and the evaluation of tender bids, whilst Pamela Brown, a Community Benefits and Social Enterprise Adviser, looked at the interesting issue of developing and implementing community benefits in practice. Nico Spiegel of the European Commission’s Public Procurement Policy Directorate and Paul McNulty, Deputy Director of the Scottish Procurement Directorate of the Scottish Government, provided a unique insight into the thinking of the European Commission and Scottish Government on impending European and domestic legislation. Meanwhile, Dr. Aris Georgopoulous, Lecturer in European and Public Law of the University of Nottingham, discussed procurement and collaborative relationships and Morag Wise, Advocate of the Scottish Bar furnished a review of recent Scottish case law on procurement law.

The presentations were followed by an interactive question and answer session with the speakers. Delegates were encouraged to formulate questions which were then discussed and debated by the panel.

In conclusion, the conference was a great success and furthered one of the principal objectives of the Edinburgh Centre for Commercial Law: namely, to act as a forum where academic lawyers can interact with practising lawyers in the solicitor and advocate professions, as well as organisations in the public and private sectors.

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Inner House rejects attempt to extend the solicitor’s warranty of authority

Solicitors can today breathe a sigh of relief with the release of the Inner House decision in the joined cases of Cheshire Mortgage Corporation Limited v Grandison and Blemain Finance Limited v Balfour Manson LLP ([2012] CSIH 66.  The Inner House, in an opinion delivered by Lord Clarke, has rejected an attempt to extend the ambit of the solicitor’s warranty of authority.  Lord Clarke summed up the court's view as follows (para [31]) : “We are of the clear view that there are no reasons in principle or practice, for extending the somewhat limited scope and nature of the implied warranty of agents in the way in which the reclaimers’ submissions in the present case contended for.” 

A solicitor warrants to the party transacting with his client (“the third party”) that he is authorised by his client.  If that warranty proves to be incorrect, the solicitor can be liable in damages to the third party.  The action involves strict liability in contract on the part of the agent, the principles having developed before the emergence of the modern idea of delictual liability for negligence.  The issue before the House in this appeal was whether the warranty extended further than simply the existence of authority, in order to encompass facts about his client such as whether the client was indeed who he purported to be.    

The facts of the case are narrated in a blog entry on the Outer House stage of this case see:  http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8745.  The fraudulent schemes involved in both cases can be illustrated by reference to the facts in Cheshire.  A man and woman purported to be real individuals, Mr & Mrs Cheetham of 34 Danube Street, Edinburgh, in order to borrow from a lender, with the borrowings being secured over the property in Danube Street. Once the loan had been obtained from the lender the fraudsters disappeared, leaving the lender with an ineffective standard security.  The fraudsters were represented by a solicitor.  It is well established that that solicitor warrants to the lender (as a third party) that he is authorised.  But does he warrant further that his client is who he claims to be?  Notably, the lenders in both of these cases were separately represented: the solicitors acting for the borrowers did not also act for the lenders.  The Inner House has answered this question with an emphatic negative. 

In these cases the deception carried out was highly convincing.  The fraudsters were able to produce driving licences and utility bills showing the correct addresses.  These were shown to the solicitors acting for them at the meetings which took place.  The absence of title deeds was put down to the deeds having been lost, and extract registered title deeds obtained.   In the Outer House Lord Glennie stated (para [64], quoted at para [22] of the IH judgment):
“In 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.  Borrowing from Willes J’s formulation of the warranty in Collen v Wright [1857 8 E & B 647], the solicitors here in each case did not (sic) more than warrant “that the authority which (they professed) to have, did in point of fact exist.”  The authority which they professed to have was this, that they were instructed by the borrowers who were already known to the lenders to assist in drawing up the loan and security documentation.  I do not consider that they gave any implied warranty beyond that.”

The court’s opinion begins with the statement of principle, cited by junior counsel for the reclaimers, and taken from the judgment of Willes J. in the leading English case of Collen v Wright (1857 8 E & B 647at 657):
“I am of opinion that a person, who induces another to contract with him as the agent of 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.  That is not the case of a bare misstatement by a person not bound by any duty to give information.  The fact that the professed agent honestly thinks that he has authority affects the moral character of his act; but his moral innocence, so far as the person whom he has induceed to contract is concerned, in no way aids such person or alleviates the inconvenience and damage which he sustains.  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 or 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.  The fact of entering into the transaction with the professed agent, as such, is good consideration for the promise.”

Lord Clarke characterises this statement, and others like it in English cases, as the simple process of implying a term into mercantile transactions, drawing an analogy with the implied terms put into statutory form in the Sale of Goods Act and the Bills of Exchange Act. 

There is very little Scottish case law on this action, and it is recognised that the principles were received into Scots law from English law.  Lord Clarke notes this point and refers to a statement of the law in Gloag & Henderson the Law of Scotland (12th edition, the agency chapter having been written by Lord Coulsfield), para 19.26.  He also makes reference to a Scottish case not cited to the court, Irving v Burns (1915 SC 260) in order to illustrate the well-established principle that, where the principal was actually insolvent, the agent will not be liable in damages.  The loss to the third party is the expected contract with the principal.  If that principal was not in a position to honour that contract, the third party has suffered no loss.  This case is used by Lord Clarke to emphasise the limited nature of the warranty.    

Given that this is an English concept, reference is made to the statement of the law in the leading English text, Bowstead & Reynolds, Agency, (Article 105).  Significantly the authors of that text note:

“The basic warranty is only that the agent has authority from his principal: this is something particularly within the agent’s knowledge.  If the principal proves unreliable, that is something in respect of which the third party could have made inquiries.  Merely as agent, therefore, the agent does not warrant that his principal is solvent, or will perform the contract (if any).  As can be seen below, in the context of litigation, the warranty is similarly limited in that the agent (normally a solicitor) does not promise that a claim is valid.”    

Lord Clarke notes (at para 26) the classification in English law of the warranty as a collateral contract and also that English law has been troubled with the issue of the consideration provided by the third party who, in a sense, is given something for nothing.  This is not a concern in Scots law. 

Modern English cases are also noted by the court, including Penn v Bristol & West BS and ors ([1997] 1 WLR 1356), which the Inner House found not to be of assistance in this context.  In SEB Trygg Liv Holding AB v Manches ((2006) 1 WLR 2276) a similar attempt to extend the warranty in the context of litigation was unsuccessful.  There is  extensive discussion of Excel Securities Ltd v Masood ([2010] Lloyds rep P. N. 165), a case described by the court (at para [28]) as being “good law for Scotland.”  The facts of that case involve a similar identity fraud.  Lord Clarke quotes (at para [29]) from the opinion of Judge Hegarty:

“The essential legal principles applicable to such a claim are not in doubt.  An agent acting on behalf of an unidentified principal will not normally incur any personal, contractual liability so long as he acts within the scope of his authority.  Anyone contracting with such an agent must look to the principal for any redress to which he is entitled as a matter of contract.  However, it is now well established that, in such circumstances, the agent will normally be regarded as giving an implied warranty as to his authority.  If, therefore, he never had authority to act on behalf of the principal or if his authority has terminated or if he exceeds the scope of his authority, he will be in breach of the implied warranty and will be liable in damages to any person to whom the warranty was given.  In the common case, where the principal refuses to accept liability, the right of action against the agent for breach of his warranty will be an effective substitute for the loss of any right of action against the principal.”   

  
Judge Hegarty had noted the decision in Penn and concluded that, notwithstanding the result, it was not the case that the solicitor always warranted his client’s identity.   Lord Clarke noted (para [29]) “We agree.”

Lord Clarke concluded the discussion of this point with the following (at para [30]):
“We accept that a warranty may be given by a solicitor, or other agent, expressly to a third party as to a particular attribute or attributes of the solicitor’s or agent’s client.  We consider it more appropriate in such discussions to talk of attributes of clients rather than the identity of a client.  The identity of a person is made up from a bundle of qualifies or attributes.  In particular there is nothing in principle in the law of contract to prevent an agent from guaranteeing to a third party that he has a principal who is the same person as appears on property registers, for example, as the owner of a specific property. …but, in any event, where, as here, no such express warranty was asked for, or given, matters must rest on the implied, warranty of authority to be implied (sic) as a matter of law the extent and nature of which was defined correctly in the Excel case.” 

  
Their Lordships also considered the impact of a Letter of Obligation in unusual terms given in the Cheshire case, although their conclusions on this point are not considered here.

This result is very welcome.  The Inner House reminds us (at para [29]) of the policy reasons behind the warranty of authority: the agent is in a better position than the third party to check that he is actually authorised.  It makes sense, therefore to let the risk of loss fall on that solicitor.  To extend the warranty further in order to encompass the client’s identity would be to place on the solicitor a risk which is the lender’s risk in making a commercial decision to lend (as explained by Judge Hegarty in Excel Securities, para 102, noted by the Inner House at para [31]).  It is hoped that this will lay to rest any further attempts to extend the warranty (there is no sign of an appeal in a similar case,  Frank Houlgate Investments Ltd v Biggart Baillie LLP ([2009] CSOH 165 and [2011] CSOH 160) although there the debate has centred around a possible delictual duty of care owed by the solicitor to the party transacting with his client). 

A final point relates to the legal basis of the warranty.  It is not surprising that English law adopted the vehicle of the collateral contract for this action given the difficulties surrounding unilateral obligations caused by the doctrine of consideration.  In English law, consideration is provided when the third party enters into a contract in exchange for the agent’s promise.  It would be more sensible in Scots law to characterise this action as a unilateral promise in terms of which the agent promises to the third party that he is authorised.  Given that this point has never been aired in the very limited number of Scottish cases, and was not argued before the Inner House it is not surprising that the court did not consider it.  It would be a conceptually neater basis upon which this action could rest.    
 

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Can an agent act for a competitor of his original principal?

To what extent is an agent entitled to act for a competitor of his original principal?  This important question was considered by the Court of Appeal in Rossetti and Anor v Diamond Sofa Company Ltd ([2012] EWCA Civ 1021) in a judgment issued on 27th July. 

This case was an appeal from a decision of Cranston, J., determining certain preliminary issues.  As such, the judgment does not contain a full analysis of all the legal issues.   The Master of the Rolls, Lord Neuberger, delivered the main judgment with which Lords Moses and Rimer agreed. 

Facts
Diamond is a company whose operation is based in Thailand, where it manufactures leather upholstery.  Diamond entered into an agreement with a company called SML.  SML was set up to represent Asian furniture manufacturers and to assist them in penetrating the UK market. 

In February 2004, Diamond and SML orally agreed that SML would act as Diamond’s exclusive agent in connection with the sale of leather upholstery in the UK and Irish markets.  During negotiations, SML informed Diamond that SML was already acting for two other manufacturers of upholstery: Linkwise and ArtPeak.  SML indicated that the furniture range of each of the two companies did not clash with that of Diamond. 
The agency agreement was entered into for one year initially and, because SML proved to be “remarkably successful” at acting on Diamond’s behalf, the agency agreement was continued beyond the initial duration (Lord Neuberger quoting from Cranston J’s judgment at [2011] EWHC 2482 (QB), para 20).

In 2008, the agency agreement came to an end consensually, and Diamond appointed another company, RML, as agent.  RML had in fact been set up by the individuals behind SML to take over the clients of SML.  By this time, however, the parties were beginning to fall out.  Diamond determined the agency agreement on 4 June 2008. 

Decision of the High Court (Queen’s Bench)
In the subsequent dispute, Diamond indicated that it had terminated the agreement because RML had acted for two direct competitors of Diamond, Cassaredo and Creative.  Cranston J., held that there was no express term about SML or RML acting for competing principals but that there was an implied term at the outset of the contract that SML would continue to act for Linkwise and ArtPeak.  He also held that this implied term was varied by a course of dealing between the parties, and in particular that Diamond knew that SML had assumed agencies for Cassaredo and Creative and Diamond had not objected.  Cranston J., found, however, that nothing in the course of dealing meant that there was an implied term in the agency agreement enabling SML or RML to place orders with other principals at the expense of Diamond. 

Court of Appeal decision
Fiduciary Duties in General
Lord Neuberger began his judgment with an explanation of the agent’s fiduciary duty.  Quoting Millett LJ in Bristol and West v Mothew ([1998] Ch 1, 18A-B), he referred to the “single-minded duty of loyalty” that an agent owes to a principal: he “…must not place himself in a position where his duty and his interest conflict, and he “may not act for…the benefit of a third party without the informed consent of his principal.”  He referred to another leading case, Kelly v Cooper ([1993] AC 205, 214D) in which Lord Browne-Wilkinson had said that “it is normally said that it is a breach of an agent’s duty to act for competing principals.”  He had also been referred to Hospital Products Ltd v United States Surgical Corporation ((1984) 156 CLR 41, 97) in which Mason J. stated that where a fiduciary duty arises out of a commercial contractual arrangement, that duty “if it exists at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them.” 

Acting for a competitor
Lord Neuberger identified two types of cases in which an agent may act for a competitor (paras 22 and 23).  The first is where both principals agree.  In such a case the agent must show that the principal not merely consented, but that the consent was given on a fully informed basis (Quoting Tuckey LJ in Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351, para 35, approving a passage from Bowstead & Reynolds on Agency, now at para 6-039 of the 19th edition.)  The second type of case is where the principal must have appreciated that the nature of the agent’s business is to act for numerous principals.  The most obvious example of this type is the estate agent, whose business is to act for a number of principals at the same time. 

Lord Neuberger concluded that there was no reason to conclude that, in this case, the normal non-compete rule did not apply (para 24).  Diamond had not agreed that SML could act for competitors.  Diamond had been told that, although SML acted for Linkwise and ArtPeak, there would be no clash of products.  This supported the conclusion that Diamond would not have expected SML to act for competitors, and had certainly not agreed to this.  An attempt to place SML/RML within the same class as residential estate agents was unsuccessful.  Reference was made (at para. 27) to a conclusion in Bowstead and Reynolds (footnote 294 of para 6-945) that “estate agents are only imperfectly agents and are known to act for many principals.”  He also referred to an article by Joshua Getzler ((2006) LQR 122) in which Getzler supported the House of Lords decision in Hilton v Barker Booth & Eastwood ([2005] UKHL 8, [2005] 1 WLR 567).  Lord Walker in that case referred to the “content of the contractual duty of full disclosure being rooted in the fiduciary relationship” between principal and agent. 

Nor did SML/RML acquire the right to act for competitors after 2004.  Oral evidence established that Diamond was aware that RML was acting for Casserado and Creative.  Diamond was, however, led to believe that those companies’ products did not clash with their own.  Whilst there was informed consent to RML acting for Creative and Casserado in relation to non-clashing products, there was no informed consent in relation to clashing products. 

Lord Neuberger’s inescapable conclusion (at para 48) is worth quoting: “…the sensible and proper course for SML to have taken if it wished to act for a manufacturer of furniture which competed with that made by Diamond, was to inform Mr Charoenyos, [the managing director of Diamond] and to obtain his consent.  By not taking that course, SML, and then RML, took the risk that, when it appreciated what had occurred, Diamond would stand on its strict legal rights, and that is what has happened.” 

Lessons for Scots law?
The case also includes discussion of claims under the Commercial Agents (Council Directive) Regulations 1993, commented on below.  For the moment however, it is important to ask how relevant the Court of Appeal’s conclusion on acting for the principal’s competitor is to the Scots lawyer.  The ability of an agent to act for a competitor of his principal was considered in the Scottish case of Lothian v Jenolite (1969 S.C. 111).    The court decided that it was not necessarily the case that every agency contract has an implied condition that the agent is not entitled to act for a competitor.  Lord Milligan stated (at 117):

“The proposition which the defenders invite us to affirm is that in all agency cases there is an implied condition that the agent will not without the permission of his principal act, even in an outside matter, in such a way as to bring his interests into conflict with those of his principal.  There is admittedly no case in which such a proposition has been affirmed, and the proposition is a sweeping one which, if it is sound, would undoubtedly affect a very large number of cases where an agents acts for two or more principals.  There would normally be no objection to such a condition or term being expressly included in a contract of agency…but it is a different matter to imply such a condition when it does not appear expressly in the contract.  It is, moreover, more difficult to imply a condition in a written contract than a verbal contract…The introduction of the condition would…make the contract a different contract altogether, and moreover it was a condition to which the parties could readily have given expression if that was their intention….The many authorities quoted by the defenders establish that, while actually performing his principal’s business, an agent is not entitled to take advantage of his position and make a profit for himself, but, as I have said, no authority was quoted for the much wider proposition for which the defenders now contend.”   

Notably, Jenolite had not appointed Lothian as full-time agents, nor exclusive agents, whereas in Rossetti SML/RML were exclusive agents in the UK. 

Could Rossetti v Diamond Sofa be used as a persuasive authority in a Scottish case?  Part of the difficulty here is that the pursuers in Lothian framed their claim too broadly.  Clearly, an agent is not completely prohibited from acting for a competitor of the principal in every case.  There is no implied term to that effect.  Having said that, the judges in Lothian did not depart from the general rule that an agent must not let his own interests compete with those of his principal.  Lord Milligan twice referred to the phrase “even in an outside matter”, in other words, the pursuer’s contention, if correct, would have prevented an agent from acting for a different principal even where the agent was selling goods which did not compete with those of his original principal.  That, of course, was not correct either.  The issue probably remains an open one in Scots law.   In a Scottish case in future, those
acting for a principal could frame a legal proposition narrower than that argued in Lothian.  It seems likely that a Scottish court would find that, where the agent acts for a direct competitor of his principal, selling for that competitor the same type of goods as the agent is instructed to sell for his original principal, that conduct will constitute a breach of the agent’s fiduciary duty.  The court may be more likely to reach that conclusion where the agent is appointed an exclusive agent, given that in such a case the original principal will have no other outlet for the sale of his goods.  Rossetti may indeed be a useful case to cite in support of an argument to that effect.     

Commercial Agents (Council Directive) Regulations 1993
The change from SML to RML provided food for thought for the application of the Commercial Agents (Council Directive) Regulations 1993.  Although little was said on this point, Lord Neuberger concluded that the transfer was probably novation rather than assignment.  This is an important point: under regulation 15 the periods of notice differ depending on the duration of the agency agreement.  The length of the agency agreement may also be taken into account in calculation of compensation under reg 17 – the Extra Division of the Inner House in King v Tunnock (2000 S.C. 424) emphasised not only the duration of Mr King’s agency, but also the fact that his father had held the agency before him.   Lord Neuberger concluded (at para 55) from the terms of regulation 18(c) that where a principal agrees to instruct a new agent in place of an existing agent, in circumstances where the existing agent has transferred the agency business to the new agent, the new agent is to be treated as having taken an assignment of the existing agent’s rights and duties.  His conclusion on this point is important.  The English language version of reg 18(c) uses the word “assigns.”  Lord Neuberger did not, in this case, give that word its normal English legal meaning, which would have had the effect of limiting it to cases of true assignation in English law.  Rather, he gave it a purposive interpretation, noting (at para 55):

“…the fact that the common law might treat the new agency as a new contract is neither here nor there.  This conclusion appears to me to comply with the commercial purpose of the Regulations.” 

This is a notable example of the interpretation of the regulations in a purposive manner, consistent with the protective nature of the original Directive. 

Given that this case sought only to determine preliminary issues, there is no analysis of the amount of compensation RML is due under reg 17.  A fully litigated claim for compensation may yet be to follow. 

   

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Thoughts on frustration of contract in Scots law

One of the classes on offer during Innovative Learning Week was a class called "Blogging in private law."  The class discussed the recent case of Lloyds TSB Foundation For Scotland v Lloyds Banking Group plc ([2011] CSOH 105 and [2011] CSIH 87), a case which we understand is being appealed to the Supreme Court.  This case caused us to reflect on the principles of frustration in Scots contract law.  Although neither party in the case has, thus far, argued that the contract has been frustrated, arguments raised by the bank on  equitable adjustment led the class to look back at the development of frustration. Here is a blog on the case of Tay Salmon Fisheries Company Ltd v Speedie (1929 SC 593) drafted by one of the students in the class, Martin Smail:

 "In light of the recent Lloyds TSB Foundation for Scotland case being appealed to the Supreme Court, it seems an appropriate time to take a look back at an early example of frustration in contract – the case of The Tay Salmon Fisheries Company Ltd v Speedie (1929 SC 593).

The Tay Salmon Fisheries Company was the tenant of a lease to fish for salmon in Fife. During the period of the lease, the President of the Air Council (under statutory authority) created by-laws in the fishing area to allow that area to be used as a practice zone for the RAF. The result of the by-laws was that no ‘vehicle, animal, vessel, aircraft or thing’ was permitted to be in the practice zone at certain times, with a breach of this resulting in a fine. Subsequently, the Fisheries Company was unable to fish because of the time it took them to drop and lift their fishing nets, ultimately rendering their rights under the lease unusable. Despite the fact that the ‘zone’ was only in use for part of the time that the Fisheries Company used their fishing rights, it was their (cumbersome) fishing style that led them to raise an action again Mr Speedie arguing that they should be released from the lease.

It was held by the Lord President (Clyde) that the lessor (Mr Speedie) was in breach of the warrandice clause under the contract to provide possession of the fishery to the Fisheries Company. His Lordship stated that the result of the by-laws was to make the fishery ‘unworkable’ and ‘incapable of possession’. In respect of the fact that the bombing zone was not in constant use, it was stated that it was ‘impracticable’ for the Fisheries Company to have to lift their nets at short notice, to their cost and endangerment and therefore that they were ‘deprived of the possession of the fishery under the lease’.

The case was said to resemble the principle of rei interitus (i.e. where the subjects of a lease are completely destroyed) although this did not sit very well in the judgments. The result of this was that the principle had to be applied almost by analogy because the facts of the case did not fit with the general application of the rei interitus principle. The important pivot (again) on which this point was decided was that the Fisheries Company fished in a way that meant that they could not practicably use the lease. Therefore it was ultimately deemed to be useless to them and that the only result of this was that warrandice provided by the lessor was breached, the result of which could only be ‘liberation of the tenant from the bonds of the lease’.

An interesting approach was taken by Lord Sands whose discomfort with the breach of the warrandice (and the application of the rei interitus principle) as a result of the actions of a 3rd party is almost palpable. He states that it is not the lessor’s duty ‘to protect against outside interferences’ and his approach therefore is purely from a commercially practical point of view. He states that the case raises not a question of loss of profits but instead ‘of possible loss’ which is the reason why the Fisheries Company decided not to continue to fish when the by-laws were enacted. He places the burden of proof on the Fisheries Company to show that the use of the fishery was impracticable and that the ‘character of the fishery’ was ‘entirely altered’. He seems satisfied by the evidence given by pursuers that dropping and lifting their nets at such short notice and so many times a week was ‘commercially quite impracticable’. This was not only due to the cost and man-power that would be expended but also because, had the nets not been taken in on time, then there is a chance that the Fisheries Company would have contravened the by-laws and incurred a penalty as a result. His sidestep in having to answer the breach of warrandice or rei interitus question led him to say that that ‘free exercise of the right of salmon fishing’ has been ‘rendered incapable of profitable use’ – a much  more general commercial law approach than one purely borne out of contract law found in the other judgments.

I agree with Lord Sands approach more than I do with the other judgments in the case as I do not feel comfortable with the fact that a breach of warrandice can occur as a result of a supervening action of a third party. Lord Sands’ commercially practicable approach makes more sense and avoids the tricky question of whether a party can be liable for breach of contract when the real cause of the breach is a factor external to the contract itself. 

I feel that the decision that was arrived at (although by different means) by the judges was the correct one. It should serve as a warning to parties undertaking such leases to expect the unexpected (i.e.consider taking out business interruption insurance, trade insurance or even legal expenses insurance) and when they hear aeroplanes overhead to take cover and check their contract again…."

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Aberdeen City Council wins Supreme Court interpretation appeal: Aberdeen CC v Stewart Milne Group Limited [2011] UKSC 56

Earlier today the Supreme Court issued its judgment in the Aberdeen City Council v Stewart Milne Group Limited appeal ([2011] UKSC 56).  The Court had little difficult in reaching a unanimous decision in favour of the Council, upholding the decisions of both Lord Glennie in the Outer House ([2009] CSOH 80) and of the Inner House ([2010] CSIH 21, and see blog at http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8414). 

This case involves the interpretation of commercial missives in terms of which the Stewart Milne Group had purchased land for development from Aberdeen City Council.  The dispute centred around whether the sellers were entitled to an overage payment on the purchase price in terms of clause 9 of the missives, and the extent of that overage payment (this is referred to as a “Profit Share” in the missives and an “uplift” in the Supreme Court judgment). Clause 9 of the missives reads: In addition to the purchase price detailed in Clause 2 hereof, the Purchasers and the Sellers have agreed that the Sellers shall be entitled to a further payment ("the Profit Share") upon the Purchasers purifying the suspensive conditions contained in Clause 4 hereof and issuing a notice to the Sellers intimating to the Sellers that the Purchasers wish to purchase the relevant part of the profit-share as defined in the Schedule to which the Sellers are entitled. The Sellers' entitlement to the relevant part of the profit-share will also be triggered by the Purchasers disposing either by selling or by granting a lease of the whole or any part of the subjects."

The Profit Share was defined as follows: 

“the Profit Share … means 40% of 80% of the estimated profit or gross sale proceeds or lease value lest [sic] the Allowable Costs as herein defined.”

Stewart Milne sold the subjects to a company within the Stewart Milne Group at a price that appears to have been well below market price, namely £483,020.  They argued that the profit share payable to the Council should be calculated by reference to this low, non-market price.  As this amount was less than the allowable costs that were to be deducted from the sale price in terms of the missives, they argued that no uplift was payable. 

The Council argued that, had the subjects been sold on the open market, the price would have been £5,670,000, i.e. more than 11 times the price at which the Subjects were actually sold.  Not surprisingly, the Council argued that the profit share should be calculated by reference to the open market price at the time of sale.

Lord Hope, after identifying the relevant contractual drafting, began his substantive discussion by noting that the drafting of the provisions was not without defects (para 9).  Outlining several minor errors he noted (at paras 9 and 10):

“These infelicities appear to be due more to untidy drafting rather than to differences in matters of substance. I mention these drafting points because they may make it easier to attribute the problem that we have to deal with to oversight rather than to a deliberate choice when the agreement was being drafted.”

The appellants (Stewart Milne) sought to rely on the literal meaning of the clauses in question, whilst the respondents made reference to the commercial purpose of the agreement, which was, they argued:
“…to enable the respondents to participate in a share of the development value of the subjects.  This was to be arrived at by assuming an open market transaction carried out at arms length, whatever the event was that gave rise to the respondents’ right to a share of the uplift.  Effect should be given to that purpose when construing the words of agreement.”

Lord Hope then carefully sought to identify what the agreement appeared to have in mind (para 15).  Clause 9 provided that the profit share was triggered in different ways.  He continued (para 16):
“But the context tends to indicate that they have one thing in common.  This is that the base figure is to be taken to be the amount which the subjects would fetch in a transaction that was conducted at arms length in the open market.  This is expressly provided for in the case of a buy out, in which event a valuation of the subjects must be undertaken.  This is also provided for expressly in the case of a lease.  No mention is made of a valuation exercise in the case of a sale.  But a sale at arms length is usually taken to be the best evidence of the value of the subjects in the open market.  On this view there was nothing more to be said about the base figure in the event of a sale, other than that it was to be the gross sale proceeds.”  
Continuing his analysis of the type of commercial deal which was envisaged by the parties he explained (para 17):

“As the choice between these three methods lay entirely in the hands of the appellants and clause 9.7 precludes the respondents’ entitlement to any further Profit Share in the future, it is a reasonable assumption that these methods were expected to produce the same base figure, albeit by different routes or methods of calculation.  Otherwise it would be open to the appellants to avoid the basis for the calculation in the case of a disposal by lease by disposing of the subjects to an associated company at an undervalue and arranging for the lease to be entered into by that company.  Basing the calculation on the open market value was, on a fair reading of the agreement, the commercial purpose that these various methods were intended to serve.”

Thus Lord Hope considered the contract as a whole, seeking to place the events which actually took place (i.e. a sale) in the scheme provided by the contract as a whole for the different types of event which would trigger an uplift (i.e. a buy-out, a sale or a lease). 

Nowhere in the contract was it stated that the gross sale proceeds were only to be used in the event of a sale at arms’ length in the open market (para 18).  He posed the question: “Was this a deliberate choice, or was it simply an oversight?” (para 18).  The answer to this question was to be found “…by examining how the agreement can be given effect on the assumption that it was an oversight” (para 18).  The problem for the Council was that the “…wording of the definition does not, in terms, confine the method to be used in the case of a sale to the gross sale proceeds” (para 19).  Drawing on the definitions contained in the contract, he concluded (para 20):

“It seems to me therefore that there would be no difficulty in implying a term to the effect that, in the event of a sale which was not at arms length in the open market, an open market valuation should be used to arrive at the base figure for the calculation of the profit share.”  

Although this resembles the test for implication of terms, Lord Hope does not seem to actually a imply a term.  This view is borne out by his opening sentence where he indicates that the issue is one of construction (rather than implication).  He differs on this point from the rest of the Court who clearly preferred implication of terms as a solution. 

At this stage the work of our own Dr Martin Hogg formed a point of reference for Lord Hope.    Described as a “much respected senior lecturer”, Lord Hope summarised (at para 21) Dr Hogg’s criticisms of the Inner House decision in the case ((2011) Edin L R 406 at 420):

“Why, he asks, where a party has been feckless in allowing a clause susceptible of a commercial disadvantageous sense to form part of the contract, should it be protected by the court giving the contract a commercially sensible interpretation rather than allowing the party simply to suffer the results of its commercial fecklessness?  Why should commercial good sense be attributed to a party which has not shown it in the drafting of the contract?  At pp. 421-421 he recommends a departure from what he refers to as a naïve focus on subjective intention in favour of an objective approach to the interpretation of contracts.  That would minimise the temptation which some courts have shown to improve upon the bargain reached by the parties in the name of commercial good sense.”

Lord Hope, however, did not agree that this was such a case (para 22).  It is worth pausing here to consider this argument.  None of us, of course, knows what the actual agreement on this point was.  This being the case, we must balance various policies.  On the one hand we have what, objectively, the parties are likely to have agreed.  A test of commercial good sense is likely to help us reach that goal.  On the other, and this may be where Dr Hogg is coming from, a party who uses imperfect drafting should, arguably, suffer the loss.  But is the latter policy so significant that it should outweigh the former?  Is it not more important, objectively, to reach what is most likely to have been the actual agreement of the parties?  Drafting is not an exact science.  After all, we already use the contract as a whole to understand the meaning of particular clauses.  Surely any other approach is an overly technical one to apply to a less than scientific exercise? 

  
Lord Hope indicated that the context should be used to understand the intention of the parties, which was that the base figure for the calculation of the uplift was to be the open market value of the subjects at the date of the event that triggered the obligation (para 22):

“In other words, it can be assumed that this is what the parties would have said if they had been asked about it at the time when the missives were entered into.  The fact that this makes good commercial sense is simply a makeweight….The only question is whether effect can be given to this unspoken intention without undue violence to the words they actually used in their agreement.  For the reasons I have given, I would hold that the words which they used do not prevent its being given effect in the way I have indicated.”

Again the language is redolent of implied terms without actually going as far as implying a term.  The language in this paragraph is nuanced.  The major issue is the intention of the parties, objectively measured.  The test of good commercial sense is available, and in this case it matches the objective intention of the parties.  It is available, but relatively unimportant in the context of this case.  This is reflected in the use of the word “makeweight” (of the possible definitions of ‘makeweight’ in the Paperback Oxford English Dictionary, “an unimportant person or thing that is only included to complete something” seems the most apt).  This case can therefore be contrasted with the recent English appeal to the Supreme Court, Rainy Sky SA v Kookmin Bank ([2011] UKSC 50)case.  In that case the commercial good sense test was used in order to decide between two competing interpretations.  The commercial good sense test has not had as significant a role to play in this appeal.
 
Lord Hope’s reference to “undue violence” is reminiscent of Lord Glennie’s reference in Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc ([2011] CSIH 105, and see blog at http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8710, the appeal in this case has been heard by the Inner House but no judgment has, as yet been issued).

The legal team acting for the appellants sought to raise an argument which they had attempted to raise at a late stage in the Inner House but had been refused leave by that court to do so.  Although the respondents’ objected to this further attempt, Lord Hope nevertheless identified “the overriding aim” as “to do substantial justice as between the parties” rather than to become involved in “niceties of procedure” (para 14).    This argument (set out in para 25) was that the uplift had not been triggered at all on these facts, being triggered only by a sale by the related company in due course at an open market value.  Lord Hope stated that this alternative argument “created more problems than it solves” (para 24) and in actual fact supported the respondents’ case.
 
Lord Clarke in a short speech (with which Lady Hale, Lord Mance and Lord Kerr agreed) identified the nub of the issue, namely that a literal reading of Clause 9.4 suggested that that the uplift was calculated by reference to the actual sale proceeds.  He characterised this case not as one in which “there are two alternative available constructions” but rather as one in which “notwithstanding the language used, the parties must have intended that, in the event of an on sale, the appellants would pay the respondents the appropriate share of the proceeds of sale on the assumption that the on sale was at a market price” (para 31). 

Lord Clarke agreed with Lord Hope as regards the relevance of the context, which showed that the parties intended the open market value as a base figure for calculation of the profit share (para 32). He, however, favoured implied terms as a solution rather than construction (paras 32 and 33):

“…it can be assumed that this is what the parties would have said if they had been asked about it at the time when the missives were entered into…If the officious bystander had been asked whether such a term should be implied, he or she would have said “of course.”  Put another way, such a term is necessary to make the contract work or to give it business efficacy.  I would prefer to resolve this appeal by holding that such a term should be implied rather than by a process of interpretation.  The result is, of course, the same.”    

Lord Clarke was clearly in no doubt as to outcome, indicating that counsel for the appellants was (para 32):  “…not able to advance any commercially sensible argument as to why the parties would have agreed a different approach in the event of an on sale.”

 A few brief comments can be made summarising the impact of this case as a whole.  Most significantly, the case is a victory for common sense and, indeed, justice.  To give to clause 9 the interpretation argued by the appellants makes no sense in the context of the contract as a whole.  It gives a highly unusual effect to sale, understood as one of three events triggering the profit share.  No explanation was offered by the appellants as to why computation of uplift on sale should be so radically different from the other methods.  This illustrates how important it is for us to have a good grasp of the way in which contracts of this type are drafted.  Lord Hope provided us with a model in this respect, being at pains to interpret the clauses of the contract as a whole.  Secondly, it reminds us that other parts of the law of contract offer a solution to cases of this type, in this case, the implication of terms.  The use of a different solution is perhaps not surprising given that this case differed from many of the cases decided recently.  Here the problem was not the “classic” one of an ambiguity giving rise to alternative interpretations.   Thirdly, Lord Hope’s characterisation of commercial good sense as a “makeweight” is interesting.  Clearly it was not the most significant interpretative method used in the case.  Rather, it is the fact that a specific clause must be understood in the context of the contract as a whole which informed the interpretative exercise here.  Dr Hogg is indeed correct – we should guard against courts substituting their own ideas of commercial good sense for that of the parties.  That is not what occurred here.  Finally, prompted by Dr Hogg’s arguments, we should reflect on the extent to which the rules of interpretation should be “shaped” by the policy of punishment of the “feckless” drafter (if at all). 

 

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International Commercial Arbitration: The Edinburgh Centre for Commercial Law and Hogan Lovells

Members of the Edinburgh Centre for Commercial Law were delighted to welcome Michael Davison from Hogan Lovells as a speaker this week.  Hogan Lovells offer an internship scheme as a prize for the two top students in the International Commercial Arbitration Masters course (details of the prize available from the course organiser, Dr Simone Lamont-Black).  Michael has become a great friend and colleague having delivered lectures here for the last three years and acted as a speaker at an Arbitration Conference held at the Law School in June 2010.

Undaunted by fog which closed London City Airport, according to Michael, "nothing would stop this Edinburgh boy from coming home."  This involved a lengthy and unplanned journey by taxi across London and by train to Edinburgh.  He arrived unruffled, even in the face of a front row comprising leading lights of the Scottish arbitration world, including (in the order in which they were sitting): Iain Murray, Lord Dervaird; Brandon Malone, McClure Naismith; Andrew MacKenzie, Scottish Arbitration Centre; Hew Dundas, Chartered Arbitrator; and David Bartos, advocate; Hew and David being co-authors (together with Professor Fraser Davidson) of the first commentary on the Arbitration (Scotland) Act 2010.  To raise the pressure even more, the Lord President had joined the occupants of the front row.

Michael provided a thorough and thought-provoking analysis of the new ICC Rules of Arbitration.  His perspective as a practitioner was highly valuable, particularly for the many students of the LLM class in the audience.  A particular focus was the scheme for appointment of an Emergency Arbitrator (Article 29(1)).  Arbitration is often compared adversely with litigation, and particularly by contrasting arbitration with the speed with which injunctions or interdicts can be obtained.  The emergency arbitrator scheme goes some way towards narrowing this gap.  The President of the ICC Court appoints an emergency arbitrator usually within two days of the Secretariat's receipt of the application (Appendix V, Article 2(1)).  Given the fact that the parties to the dispute cannot choose the identity of the arbitrator, no doubt the courts will remain an attractive route to those who value the identity of the decision-maker highly. 

Listeners noted the broad discretion surrounding the manner in which the Emergency Arbitrator conducts proceedings (Appendix V, Article 5(2)).  The emergency arbitrator issues an order, not an award (Appendix V, Article 6(4)).  His or her order may be modified, terminated, or annulled by the arbitral tribunal (Article 29(3)).  Listeners also noted the eye-watering 40,000 US dollars required to be paid by the applicant up front (Appendix V, Article 7(1)). Michael provided some thought-provoking comments on the lack of sanctions for failing to comply with an order.  This may be a significant weakness, particularly given that an emergency arbitrator cannot later act as an arbitrator in the same dispute (Appendix V, Article 2(6).)

In an extremely comprehensive paper, Michael took us through questions of jurisdiction and joinder, multiple claims, and multiple contracts.  Of particular interest are the case management rules.  All of this was presented against the backdrop of Michael's extensive practical experience, which he presented in a highly amusing way.  The arbitration world, according to Michael, is peopled with larger-than-life characters, from shipping magnates to Russian oligarchs.  All in all, the lecture was both highly informative and highly amusing (a rare combination indeed).

We in the Centre for Commercial Law would like to express our thanks for the contribution which Michael and his colleagues at Hogan Lovells have made over the last three years.  There is surely no better advert for a career in arbitration than Michael.  He, and his fellow practitioners who contribute to the teaching of International Commercial Arbitration at Edinburgh Law School (many of the occupants of the front row) provide the practical angle on the subject which is so highly valued by our Masters students.  We hope that our relationship with Hogan Lovells and indeed with our friendly practitioners will continue to bear fruit, particularly as the Arbitration (Scotland) Act 2010 becomes established.           

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