Contract law Case law update - St John's · PDF file1 Contract law Case law update January – March 2017 In this issue Unfair terms constrained by implied statutory obligations: Abbot

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ContractlawCaselawupdate

January–March2017

In this issue…

Unfair terms constrained by implied statutory obligations: Abbot v RCI Europe [2016] EWHC 2602 (Ch)

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4A disagreeable agreement to agree: Teekay Tankers Ltd v STX Offshore and Shipbuilding Co Ltd [2017] EWHC 253 (Comm)

From timeshares to all-inclusiveholidays-rollonsummer!

WelcometotheSpring2017editionofourcontract lawcaseupdater,now in its fourth

publication.Wehopeyouwillcontinuetofindthesehandycasesummariestobeauseful

tool inkeepingyouuptospeedwiththemostsignificantcontractlawdevelopmentsof

thelastquarter.

In this issue Nick Pointon considers intentions to create legal relations over dinner

(MacInnesvGross[2017]EWHC46),agreementstoagreetosellships(TeekayTankersv

STX[2017]EWHC253),unfaircontracttermsintimeshareschemes(AbbottvRCIEurope

[2016]EWHC2602)andthemetaphysicsofbuffetsinthepackageholidayindustry(Wood

vFirstChoice[2017]EWCACiv11).

NatashaDzamehreviewsthedutyofsolicitorstowarnclientsabouttherisksofalternative

interpretations(BalogunvBoyesSuttonandPerry[2017]EWCACiv75)andthescopeof

solicitors’professionalindemnityinsurance(AIGEuropeLtdvWoodman[2017]UKSC18).

Wealsotakethisopportunitytodrawreaders’attentiontothelaunchoftheexcitingnew

“SJCJuniorInsight”seminarseries,abrandnewcollectionofseminarsonkeyaspectsof

civil procedure rolling out this Summer. Introductory details of the new series appear

below–pleasedo letusknow ifyourfirmwould liketoarrangeanyseminarswithour

juniorcounselinthecomingmonths.

NickPointon

April2017

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7

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Intentions to create legal relations over dinner: MacInnes v Gross [2017] EWHC 46 (QB)

The metaphysics of buffets: Wood v First Choice [2017] EWCA Civ 11

Solicitors’ duty to warn and alternative interpretations: Balogun v Boyes Sutton and Perry (a firm) [2017] EWCA Civ 75

10The scope of solicitors’ professional indemnity insurance: AIG Europe Ltd v Woodman [2017] UKSC 18

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Contributorstothisedition…

NickPointon(2010call)

RankedasaleadingjuniorincommercialdisputeresolutionbyChambers andPartners 2015, 2016and2017,Nick acts in awiderangeofcommercialandchancerymatters.Nickhasalsotaughtthesubjectofcontractlawatbothundergraduateandpostgraduate level at the University of Bristol and regularlydeliversseminarstoregionalandnationallawfirms.

“He’saclassactwhoisreallygoodatthedetail–hejustoozesability”ChambersUK,2017

“An impressive advocate and one to watch; an extremelycapableandbrightyoungbarrister”ChambersUK,2016

NatashaDzameh(2010call)

Natasha joined Chambers as a commercial and chancerytenantinOctober2016followingthesuccessfulcompletionofherpupillage.Sheenjoysabusycourtandpaperpractice,regularlyappearingintrialsandinterimapplicationsontheWesternCircuitandbeyond.Shehasalreadybeensuccessfulin an application for permission to appeal and the appealitself.Natashaacceptsinstructionsinabroadrangeofcommercialfields including specialist areas such as construction,insolvency,insuranceand intellectualproperty.Shehasaninterestinprofessionalnegligenceclaimsagainstarchitects,builders, solicitors and surveyors. Natasha’s chancerypractice encompasses a variety of real property, personalproperty,trustandwilldisputes.Sheishappytoattendfirmstodeliverseminarsontopicsrelatedtoherpracticeareas.

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Intentionstocreatelegalrelationsoverdinner.

MacInnesvGross[2017]EWHC46(QB)

NickPointon

Fans of the hit television showMadmen

willbefamiliarwiththecustomarypractice

among 1960s advertising executives of

doingeachandeverydealinanupmarket

steak restaurant with a hefty number of

OldFashionedstolubricatetheprocess.In

MacInnesvGrosstheHighCourtreiterated

thatsuchaninformalsettingwouldrarely

(anddidnotonthisoccasion)evidencean

intention to create legally binding

relations, with the result that any deal

donewouldnotaltertheparties’positions

in the slightest, save perhaps by giving

themaraginghangovertocontendwith.

InthiscaseAclaimed€13.5millionfromB

for breach of contract. It all started at a

meeting over dinner in an upmarket

Mayfair restaurant (Zuma). A’s case was

thatduringthismeetingheagreedthathe

wouldleavehisjobataninvestmentbank

(Investec) and provide his services to B

instead, in exchange for which A would

receive 15% of any difference achieved

betweenthetargetandactualsalepriceof

B’s business. That night, after dinner, A

emailedBexpressinghisdelight “thatwe

are agreed on headline terms”. Nine

months laterasaleof thebusinessbegan

tomaterializeandA forwardedhisearlier

email toB.Brepliedinpositivetermsbut

added “next timewe seeeachother let’s

makeapropercontract”.Thebusinesswas

sold and A sued for payment under the

allegedcontract.

Coulson J beganwith the leading caseof

RTS vMolkerei [2010]UKSC14; [2010] 1

WLR 753, surmising that “the governing

criteria is the reasonable expectations of

honest and sensible businessmen” (at [76]).

Paragraphs76–78ofthejudgmentcontaina

very useful summary of the key principles

relating to the intention to create legal

relations.

At[81]CoulsonJsaid“Themerefactthatthe

discussion tookplaceoverdinner inasmart

restaurant does not, of itself, preclude the

comingintoexistenceofabindingcontract.A

contract can be made anywhere, in any

circumstances. But I consider that the fact

that this alleged agreement was made in a

highly informal and relaxed setting means

that the court should closely scrutinise the

contention that, despite the setting, there

wasanintentiontocreatelegalrelations.”

Aalsoputhisclaimonthealternativefooting

ofquantummeruit,againbeginningwiththe

leading case of Benedetti v Sawiris [2013]

UKSC 50. Paragraphs 162 – 164 contain a

useful summary of the key principles

applicable to claims for unjust enrichment.

Interestingly Coulson J suggested that even

where the parties have reached an

agreement about remuneration, it would

usually need to be supplemented with

objective evidence relating to the market

value of the services being provided (at

[166]). Although the parties subjective

valuationof theservices(asreflected inany

agreementaboutremuneration)issomething

of which the court can take account, it

remains the case that the startingpoint for

valuing any benefit to the defendant is the

objective market value of the services

provided.

Surprisingly the claim in quantummeruit

was pleaded at the same value as the

contractual claim (€13.5m) and no lesser

claimadvancedinthealternative.Thatwas

fatal and Coulson J expressly refused to

consideranyclaimforalessersumbecause

it was not pleaded. At [180] Coulson J

explain that “a proper quantum meruit

claim has to be set out in full – services

provided, value ascribed, explanation for

thatvalue–inorderthatadefendantcan

consideritandjoinissuewiththosepartsof

the claim to which it takes objection.”

Applyingthatstatement,theoftappearing

throwawayalternativepleasofaquantum

meruit suddenly look rather precarious

and, in future, care should be taken to

pleadsuchclaimsproperly.

Inbrief…- An informal setting for

negotiations will rarely evidencean intention to create legalrelationsinmattersofimportanceorvalue.

- The governing criteria fordetermining intention to createlegal relations remains the“reasonable expectations ofhonest and sensiblebusinessmen.”

- Vague alternative pleadings ofquantummeruitwillrarelyassistaclaimantwho fails in his primarycontractual claim. The quantummeruit case requires fullparticularization.

4

Adisagreeableagreementtoagree.

TeekayTankersLtdvSTXOffshoreandShipbuildingCoLtd

[2017]EWHC253(Comm)

NickPointon

InTeekayTankersLtdv STXOffshoreand

Shipbuilding Co Ltd [2017] EWHC 253

(Comm) a purported agreement to grant

anoptiontopurchaseshipswasheldtobe

ofnoeffect,beingmerelyanagreementto

agree.

The judgment contains a very detailed

survey of the authorities on both

agreementstoagree[129]–[149]andthe

general principles applicable to the

implicationofterms[152]–[160].

Theclauseinissueprovidedthattheships

would be delivered on a date to “be

mutuallyagreed”andthatSTXwouldmake

“best efforts” to have a delivery within

2016forthefirstvesselsand2017forthe

rest.WalkerJfeltunabletoimplyatermas

to thedate for deliverybecausedoing so

would be inconsistent with the express

languageof theagreement, bywhich the

partiesweretomutuallyagreesuchadate.

The claimant sought to overcome the

apparent uncertainty by arguing that a

term should be implied that, failing

agreement, the delivery date would be

suchdateasthedefendantoffered,having

useditsbestefforts,within2016or2017,

or the earliest date thereafter; or

alternatively an “objectively reasonable

date”determinebythecourt.

AlthoughtheCourtplainlyrecognizedthat

thepartieshad intendedtheiragreement

to bebinding, it ultimately felt unable to

resolve the uncertainty created by the

mutual agreement clause by means of

implying terms. The Court cited

Mamidol-JetoilGreekPetroleumvOkta

Crude Oil Refinery AD (No 1) [2001]

EWCACiv406asauthorityforthe(fairly

obvious) proposition that the court

shouldstrivetogiveeffecttotheparties’

bargainwherepossible.In thatcaseRix

LJ,at[69]setout tenguidingprinciples

whichWalker J adopted here, together

with five similar principles identifiedby

Chadwick LJ in B J Aviation v Pool

Aviation[2002]2P&CR25(towhichhe

gavethecatchytitle,“theRix/Chadwick

principles”).

The first implied term proposed by

TeekayTankerswasrejectedbecauseit

was unilateral in nature (effectively

allowing Teekay to impose the date),

whereas the express terms of the

parties’ agreement clearly envisaged

mutualagreement.

Astothesecondimpliedtermproposed

byTeekayTankers,WalkerJrecognized

that this was mutual in character but

ultimately also impossible to imply. He

drewadistinctionbetweenagreeingto

use best efforts or endeavours to

achieveaparticularresult,andagreeing

to use best efforts or endeavours to

reachagreementuponanessentialterm

in a contract (at [203]). It was the

presence of the reference to “best

efforts” in the later context which

proved fatal and, in Walker J’s words,

“aspirational”.

The importance of the case lies in (1)

reiterating the inclinationof the courts

to uphold a contractual bargain

whereverpossible; but (2) identifyinga

limit upon its ability to do so, namely

where the terms of the parties’

agreement are inconsistent with, and

thereby prevent, the implication of a

termbasedsolelyuponreasonableness.

Inbrief…- Vaguecontractualstatements

aboutterms“tobemutuallyagreed”oragreeingtouse“bestendeavours”toagreemayhavetheunintendedeffectoflimitingthescopefortheimplicationoftermstocompletetheparties’bargain.

“[W]herethepartiesmaydesireorneedtoleavematterstobeadjustedintheworkingoutoftheircontract,thecourtswillassistthepartiestodoso,soastopreserveratherthandestroybargains,onthebasisthatwhatcanbemadecertainisitselfcertain.”

Mamidol-JetoilGreekPetroleum

vOktaCrudeOilRefineryAD(No1)[2001]EWCACiv406

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Unfairtermsconstrainedbyimpliedstatutoryobligations.

AbbotvRCIEurope[2016]EWHC2602(Ch)NickPointon

InAbbot v RCI Europe [2016EWHC2602

(Ch) the High Court considered the

circumstancesinwhichtermswillbeunfair

as creating a significant imbalance in the

parties’ rights and obligations within the

meaningofreg5(1)oftheUnfairTermsin

Consumer Contract Regulations (SI

1999/2083). The latter have since been

replacedbytheConsumerRightsAct2015,

but the relevant provisions of both are

materiallyidentical.

Theimportanceofthiscaseliesinthefact

that (1)a statutorily impliedobligation to

usereasonablecareand skill;and(2) the

commonlawrequirementnottoexercisea

discretion arbitrarily, capriciously or

unreasonably,hadtheeffectofpreventing

a wide contractual discretion from being

unfair.

The facts of this test case involved a

schemeforexchangingweeksattimeshare

properties. The operators of the scheme

had,underitsrules,averywidediscretion

astohowweeksinpropertiesweretraded.

The claimants were members of the

scheme and the defendant was its

operator. In essence the claimants

complained that the operator had been

rentingouttheirtimeshareusagerightsto

people outside of the scheme pool,

effectivelyreducingtherightsavailablefor

exchangewithinthatscheme.

The scheme contained a very widely

wordedclausewhichprovidedthatwhena

member deposited their timeshare rights

into the exchange pool they thereby

relinquished all rights to use them and

agreedthattheschemeoperatorcoulduse

them without restriction (the “permitted

userclause”).

Proudman J held that the permitteduser

clause did not create a significant

imbalance in the parties’ rights and

obligationsbecausetheschemeoperator’s

rights were, even though expressed very

broadly,limitedbystatutoryandcommon

lawprinciples.Firstly,byvirtueofss.13of

theSupplyofGoodsandServicesAct1982

the operators had to operate the system

withreasonablecareandskill.Curiously,at

[46] Proudman J suggested that the

impactofthisimpliedtermwasthatthe

schemehadtobeoperated“fairly,with

reasonable care and skill”, citing the

1982Actinsupport.Nothinginthe1982

Actimposesanyobligationtoactfairly.

Secondly, Proudman J held that at

common law the operator was

prevented from exercising this

discretion arbitrarily, capriciously or

unreasonably,citinginsupportBraganza

vBPShipping [2015]UKSC17.But that

doesnotholdwatereither.InBraganza

itwasheldthatacontractualfact-finder

(in that case an employer considering

whether an employee had committed

suicide after disappearing from a ship)

had to action rationally in the

Wednesbury sense. As all familiar with

basic public principles will know,

Inbrief…- Anotherwiseunbridled

contractualdiscretionmightbesavedfrom“unfairness”byreferencetostatutorilyimpliedtermstousereasonablecareandskilland/orthe(suggested)commonlawrequirementnottoexercisediscretionarbitrarily,capriciouslyorunreasonably.

- Anobligationtoactingoodfaithmightbecraftedbyaliberalinterpretationoftheimpliedobligationtoexerciseadiscretionreasonably.

“Therearesigns,therefore,thatthecontractualimpliedtermisdrawingcloserandclosertotheprinciplesapplicableinjudicialreview.”

BraganzavBPShipping[2015]

UKSC17,perBaronessHaleat[28]

6

Introducing…

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Chambers’ChanceryandCommercialPracticeGrouparepleasedtointroduceabrandnewseriesofseminarsfor2017,

aimed at developing strongworking relationships between junior practitioners at the Bar and in the firms of our

instructingsolicitors.

LaunchinginJuly2017,juniorbarristersspecialisinginchanceryandcommerciallitigationwillbeofferingarangeof

seminarstojuniorsolicitors,traineesandparalegals,withafocusuponkeyaspectsofcivilprocedureastheyapplyto

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Wednesbury unreasonableness is a far

cryfrom“reasonableness”asemployed

in the ordinary contractual (or even

tortious)context.IndeedinBraganzathe

context of the particular contract was

importantand,atleastforLadyHale(at

[32]), the context of the employment

contract in that case differed from an

ordinarycommercialcontractbecauseit

broughtwith itan impliedobligationof

trustandconfidence.

Thus the relatively simple suggestion

that the scheme operator had to

exercise its discretion fairly and could

not do so unreasonably (with no

referencetothenotionofWednesbury

unreasonableness) is not borne out by

the authorities relied upon for those

propositions. In effect, the limitations

which Proudman J has implied so as to

restrain the apparently unbridled

discretion of the scheme operator

approximate quite closely to implying an

obligation to exercise that discretion in

good faith. Given the ever growing and

ever oscillating body of case law on the

implicationofobligationsofgoodfaith,itis

surprisingthatthematterdidnotresurface

here, at least not in those terms. Yet

arguablythatispreciselywhatProudmanJ

has achieved by implying fetters which

prevent the unfair or unreasonable

exercise of an otherwise unbridled

contractualdiscretion.

The case is therefore interesting in two

respects. Firstly, it almost unwittingly

touchesupon the good faithdebateby

reaching something very close to an

obligation to act in good faith by

implying obligations not to act

unreasonably or unfairly. Secondly, it

providesapotentiallyvery far reaching

defencetoclaimsthatbroadcontractual

termswhichprimafacie,contrarytothe

requirement of good faith, create an

imbalance in the parties’ rights and

obligations within the meaning of s.

62(4)ofthe2015Actmightbesavedby

usingthese impliedfetterstocutdown

their effect, even if the contractual

counterparty might never appreciate

thosefettersuntiltestedinlitigation.

“Respectedchamberswithagrowingcommercialpractice,praisedforitsconsiderationofpracticalitiessuchascostsandfunding.Theyhavethefeelofaheavyweightsetandtheyareimaginativeinofferingsolutionstohelpyousettleacase.”

ChambersUK,CommercialDisputeResolution(2017)

7

Themetaphysicsofbuffets.

WoodvFirstChoice[2017]EWCACiv11NickPointon

Everylegalbandwagontendstocomewith

a radio and daytime televisionmarketing

campaign which begins with a forthright

enquiry into the listener’s private affairs,

though the enquirer tends only to be

interestedinthelastthreeorsixyears.The

latest claims industry surrounds food

poisoning while on holiday, and it just

receivedahelpinghandintheformofthe

CourtofAppeal’sdecisioninWoodvFirst

Choice[2017]EWCACiv11.

Theissuewaswhetherpropertyinfoodor

drink consumed while on an all-inclusive

holidaypassedtothecustomer,suchthat

thecontractwasoneforthesaleofgoods

intowhich s.4(2)of theSupplyofGoods

andServicesAct1982wouldimplyaterm

that the food or drink must be of

satisfactory quality. The Court of Appeal

heldthatitwas.

If the contract were only one for the

provisionofservices(i.e.theprovisionofa

holiday) then the furthest one gets is an

implied term that the service will be

providedwithreasonablecareandskill(s.

13 of the 1982 Act). Food might,

conceivably, still induce food poisoning

evenifthetouroperatorhasexercisedall

reasonablecareandskillintheselectionof

hotels,restaurantsetc.Yetwhenatermas

to satisfactory quality of the goods

themselves isimplied, thatpossibilityfalls

away.Onnoviewcanitbesaidthatfood

which induces food poisoning is of

satisfactory quality, even if the fault for

that lies with the hotel and the tour

operatorisfreefromblame.Nevertheless,

the effect of this ruling is that the tour

operatorwillordinarilybeliable.

First Choice put their case quite

attractively.TheyarguedthatallthatFirst

Choicedidwastoprovidealicencetoall-

inclusivecustomerstoconsume foodand

drink with no question of them ever

becomingtheownersofwhatwasontheir

platesorintheirglasses.Onceconsumed,

thegoodsweredestroyed.YettheCourtof

Appeal, founding itself on a first instance

decision in 1938 (Lockett v A&M Charles

[1938]4AllER170)anddistinguishingthe

morerecentSupremeCourtdecisioninPST

Energy 7 Shipping v OW Bunker Malta

[2016] UKSC 23, held that when the

customer takes food from the buffet the

propertyinthefarebecomeshis.

In response to First Choice’s floodgate

concerns,Sir BrianLevesonPopined that

“it will always be difficult (indeed, very

difficult) to prove that illness is a

consequenceoffoodordrinkwhichwasnot

of satisfactory quality, unless there is

cogent evidence that others have been

similarly affected and alternative

explanations would have to be excluded”

(at [34]), though presumably only on the

balance of probabilities. No doubt a

plethora of newly incorporated claims

companieswillhaveagoodgo.

The case is not completely devoid of

academic interest. Query what would

happenif,inquiteflagrantbreachofbuffet

etiquette,aholidaymakertook food from

the buffet (at which point it apparently

becomeshisproperty)beforechanginghis

mind and putting it back. Would he be

responsibleforthehavocitmightwreakon

his fellow holidaymakers digestion, or

wouldthelawperceivesomere-transferof

property, not to the hotel but to the

package tour operator with whom the

guesthadcontracted?

“Wetoohaveenjoyedsubmissionsofa

metaphysicalnaturewhichmightsurprise

themanythousandsofcustomerswhoenjoyedbreakfast,perhapswith

orangejuice,teaorcoffee,intheirhotelsor

guesthouseseverymorning…”

WoodvFirstChoice[2017]EWCACiv11,perCoulsonJ[48]

“StJohn’sChambersisoneofBristol’sleadingsetsofchambersforcompanyadvisoryandadvocacywork,withitsbarristersobtainingregularinstructioninshareholderdisputes,directors’dutiesanddirectors’disqualificationcases.Thesetispraisedbysourcesforitsprovisionofcommerciallymindedadviceandtheprofessionalandincrediblyflexibleattitudeofitsbarristers.”

ChambersUK,Company(2017)

8

Solicitors’dutytowarnandalternativeinterpretations

BalogunvBoyesSuttonandPerry(afirm)[2017]EWCACiv75NatashaDzameh

ThedecisionofBalogunvBoyesSuttonand

Perry(afirm)[2017]EWCACiv75confirms

the fact sensitive nature of determining

whetherasolicitorisinbreachofadutyto

warnaclientastotheriskofalternative

interpretationsbythecourt.

Facts and First Instance Decision (High

Court–QBD)

Mr Balogun was a restauranteur who

retained the service of Boyes Sutton and

Perry (“Boyes”), a solicitors’ firm, in

relation to the acquisition of a 15 year

commercialunderlease(“theUnderlease”)

ofaunitknownasUnit1onthelowerand

upper ground floors of a building on

NorwoodRoadinLondon(“theUnit”).Mr

BalogunspecificallyinstructedMrDavies,a

partner at Boyes, who knew that he

intendedtofitoutandrunarestaurantin

theUnit.MrDaviesqualifiedasasolicitor

in1976andhadsubstantialexperienceof

commercial conveyancing which included

involvementwithapproximately10leases

ofrestaurantsasshellfit-outs.

The Unit was comprised of residential

premises above the ground floor and

commercial premises on the ground and

basement levels. The commercial units

were subject to a 999 year lease (“the

Headlease”) granted to Anacar Ltd

(“Anacar”). The head landlord was

originally Mizen Properties Ltd (“Mizen”)

butatthematerialtimesitwasLondon&

QuadrantHousingTrustLtd(“L&Q”).TheUnit

had planning permission for restaurant use

andapurposebuiltventilationshaftranfrom

thegroundfloorceilingthroughtotheroofof

thesecondfloor.Completionoccurredanda

disputearosebetweenMrBalogunandL&Q

regardingtheworksMrBalogunproposedto

execute,inparticularthesizeofthechimney

which was to be installed above the

ventilationshaft.

Mr Balogun brought a professional

negligence action against Boyes, the key

pointsbeingthat:

1. Mr Davies failed to provide him with

anyoranyadequateadviceconcerning

the permission required fromL&Q for

useoftheventilationshaft;

2. The Underlease created a risk in

relation to which advice and drafting

wererequired;

3. MrDavies failed to proveMr Balogun

with advice as to his rights to install

something in the ventilation shaft

bearing in mind that the planning

permission contained a condition

concerningtheextractionoffumes;

4. Mr Davies failed to adequately advise

Mr Balogun that the plans he was

submittingtoAnacar insupportof the

grantofalicencewereinadequate.

The claim was dismissed and Michael

BowesQCheldthatMrBalogun:

1. Didnot explaintoMrDavies that

ductingwouldneedtobeinstalled

intheventilationshaft.Hedidnot

obtain the necessaryprofessional

advice regarding the ventilation

shaft prior to completion. The

scope of Mr Davies’ duty was

limitedbythetermsofitsretainer

thushewasentitledtoacceptMr

Balogun’s instructions that no

worksneededtobecarriedoutin

relation to the ventilation shaft.

Mr Davies’ duty of care did not

require him to go behind his

instructions and investigate

whetherthiswastrue;

2. Could not show that there was

“real scope for dispute” as to

whethertheUnderleasegavehim

Inbrief…- Asolicitormaybreachthe

dutytowarnevenwherehis/herinterpretationofthecontractiscorrect.

- Thestrengthofthefactorsfavouringanalternativeconstructioniskeytodeterminingwhetherthedutyhasbeenbreached.

9

a right to connect and use the

ventilationshafttoventUnit1;

3. FailedtoproveMrDavieshadaduty

to make further enquiries of Mr

Balogun regarding the specific

condition within the planning

permission;

4. Had submitted planswhich showed

everything hewas asking for in the

licence. Mr Davies had indicated

more detail was necessary but Mr

Balogundidnotprovideitandthere

was no duty onMr Davies to push

himfurtheronthispoint.

CourtofAppeal

Mr Balogun appealed to the Court of

Appealinrelationtopoints2and3ofthe

deputyjudge’sfindingsnotedabove.

Solicitors’dutytowarn

Thiswaspresentedintwoways.Firstlythat

theUnderleasedidnotprovidearightof

access to the ventilation shaft and

secondly,evenifitdid,therewasarisk it

did not andMr Balogun should have been

warnedofthatrisk.

Lloyd Jones LJ determined that the

Underleasedidprovidearighttoconnectto

andusetheventilationshaft.Hestated:

“Thequestionwhetherasolicitorisinbreach

ofadutytowarnhisclientoftheriskthata

courtmaycometoadifferent interpretation

fromthatwhichthesolicitoradvisesiscorrect

will necessarily be highly fact-sensitive and

will depend on the strength of the factors

favouring a different interpretation and

therebygivingrisetotherisk.”

IfMrDavieshadconsideredtheprovisionshe

would have appreciated that theHeadlease

and the Underlease did not necessarily

correspondinrelationtotheventilationshaft

access.Regardlessofthecourt’sfindingasto

thecorrectconstructionoftheprovisions,the

risk of the court arriving at a different

determinationwassufficientlygreatthatMr

Davies should have advised Mr Balogun

accordingly and amended the draft

underleasetoremovetherisk.Failuretodo

soconstitutedabreachofduty.

MrBalogunhadnotsufferedanylossbecause

of the breach of duty as Anacar and L&Q

acceptedhehadtherighttoventthroughthe

ventilation shaft. The dispute had instead

concernedtheextentoftheright.

Failuretomakefurtherenquiries

This point had arisen in the courseof cross

examinationonthelastdayoftrialandhad

notbeen pleaded. Lloyd Jones LJ expressed

concernsastothefairnessofthetrialjudge’s

decision to allow this point to be taken.

Nonetheless he did not consider it

appropriate to determine this ground of

appealonapleadingpoint.

Lloyd Jones LJ stated thatMrDavieswas

not under a duty to investigate whether

writtenapprovalhadbeengiveninrelation

to the relevant planning permission

condition.Further,hadMrDaviesmadean

enquiryofthelocalplanningauthorityand

discoveredtherewasnowrittenapproval,

itwouldnotnecessarilyhaveprovidedhim

with any information as to whether the

workhadbeendoneinconstructingaflue

in the ventilation shaft. The relevant

conditionwastiedtotheoperationofthe

restaurantand therewasnorequirement

tocomplywith ituntil therestaurantwas

tooperate.Lackofwrittenapprovaldidnot

meannofluehadbeenconstructedinthe

ventilationshaft.

Analysis

Thedutytowarnaclientthatacourtmay

arrive at a different construction when

interpreting a contract is particularly

important. The mere fact a solicitor has

correctlyinterpretedthecontractdoesnot

absolve him/her from a finding that the

duty has been breached should the

appropriate advice not have been given.

Thiscasealsoreiteratesthatdetermining

whether the duty has been breached is

fact-sensitive and depends upon the

strength of the factors favouring an

alternativeconstruction.

The saving grace for Boyes was that Mr

Balogun was unable to establish he had

sufferedany lossasaresultofMrDavies’

failure to inform him of the contentious

natureoftheinterpretationpoint.Thiswill

notalwaysbethecase.Solicitorsshouldbe

awarethatifaclientfailstorecoverlosses

whichs/hehassufferedasaresultoftheir

breach,eventhoughtheyhaveinterpreted

the contract correctly, the client may

pursuethemforthesesums.

“Thequestionwhetherasolicitorisinbreachofadutytowarnhisclientoftheriskthatacourtmay

cometoadifferentinterpretationfromthat

whichthesolicitoradvisesiscorrectwillnecessarilybe

highlyfact-sensitiveandwilldependonthestrengthof

thefactorsfavouringadifferentinterpretationand

therebygivingrisetotherisk.”

BalogunvBoyesSuttonandPerry(afirm)[2017]EWCACiv75,per

LloydJonesLJ

10

Thescopeofsolicitors’professionalindemnityinsurance

AIGEuropeLtdvWoodman[2017]UKSC18NatashaDzameh

Facts and First Instance Decision (High

Court–QBD)

A developer was advised by a solicitors’

firm(“theFirm”)whichdesignedascheme

wherebyinvestors’moneywasplacedinan

escrow account and the Firm acted as

escrowagent.Theinvestorswereinvesting

in two proposed holiday home

developments in Turkey and Morocco.

Following the placing of funds in the

escrow account the investors became

beneficiariesofatrustwhichheldsecurity

overthelandthatwastobepurchasedfor

thedevelopments.Theschemefailedand

214 investors sued the Firm for losses

totalling approximately £10 million. The

Firmheldprofessionalindemnityinsurance

(“theInsurance”)withtheclaimantwhich

hadalimitof£3million.TheInsurancewas

requiredtocomplywiththeLawSociety’s

MinimumTermsandConditions(“theMTC”).

Clause 2.5 of the MTC permitted the

aggregationofclaimsasfollows:

"The insurance may provide that, whenconsidering what may be regarded as oneClaim…

(a)allClaimsagainstanyoneormoreInsuredarisingfrom:

(i)oneactoromission;

(ii)oneseriesofrelatedactsoromissions;

(iii) the same act or omission in a series ofrelatedmattersortransactions;

(iv) similar acts or omissions in a series ofrelatedmattersortransactions

…

willberegardedasoneClaim."

The issue arose as to whether the claims

could be aggregated in accordance with

Clause2.5(iv)oftheMTC.Theinsurerapplied

for a declaration that the investors' claims

against the Firm should be aggregated and

considered as one claim with a £3 million

indemnitylimit.Thetrusteescontendedthat

the land purchases had failed for different

reasons so the acts or omissions were not

similar. Alternatively, the individual

investmentswereseparateandindependent

of eachother thus theywere not part of a

seriesofrelatedmattersortransactions.

MrJusticeTearerefusedtheapplication.He

consideredthat:

1. ThepolicyunderlyingtheMTCwasto

ensure solicitors were financially

capable of compensating their client

whenclaimsweremadeagainst them

albeit the limit per claim and the

aggregation meant the ability to

compensatemay be limited to a sum

less than the claim.Whilst the court

mustconsider theunderlyingpolicy it

was too simplistic an approach to

simply adopt the construction which

provided the public with the greatest

level of protection. The court had to

construe Clause 2.5 in a neutral

manner and identify the meaning it

would reasonably be understood to

bearinitscontext.

2. In construing the adjective “similar”,

“therequisitedegreeofsimilaritymust

be a real or substantial degree of

similarity as opposed to a fanciful or

insubstantialdegreeofsimilarity”.The

developercouldnotpaythevendorfor

the land and the firm had failed to

provide effective security thus the

cover test was not properly applied.

Inbrief…

Constructionofaggregationclausesisfact

sensitiveandmustbeviewedobjectivelyratherthanfromthesubjectiveviewpointofoneofthe

parties.

“Becausesuchclauseshavethecapacityinsomecasestooperateinfavouroftheinsurer(bycappingthetotalsuminsured),andinothercasestooperateinfavouroftheinsured(bycappingtheamountdeductibleperclaim),theyarenottobeapproachedwithapredispositiontowardseitherabroadoranarrowinterpretation.”

perLordToulsonJSCat[14]

11

This meant that after the investors’

money was released, they were

exposed to loss when the

developments failed. Consequently,

the requisite degree of similaritywas

present.

3. A “series of related matters or

transactions" referred to transactions

which, byreasonof their terms,were

dependentoneachotherrather than

beingindependent.

CourtofAppeal

AIG appealed the decision. The Court of

Appeal determinedMr Justice Teare had

beenincorrecttosaythetransactionsmust

bedependenton eachother inorder for

aggregation to occur albeit theymust be

inter-connected insomeway.Therewere

differentdegreesofconnectionanditwas

notthecasethatanydegreeofrelatedness

wouldbesufficient.Theaggregationclause

did not adopt a wide formulation. The

historyoforiginof theclauseconstituted

partofthematrixagainstwhichitmustbe

construed. This resulted in a conclusion

thattherelationshipbetweentherelevant

transactionsmustbe intrinsic rather than

remote.

SupremeCourt

The Supreme Court determined that the

Court of Appeal’s formulation was

unsatisfactory.Judgmentwasdeliveredby

LordToulsonJSC.Theterm“intrinsic”was

an elusive term when describing the

relationship between two transactions.

Each limb of sub-clause (iv) must be

satisfiedforittoapply.Theword“related”

implied some inter-connection between

themattersortransactionsorthattheyfit

togetherinsomeway.TheLawSocietyhad

not applied any criterion to “a series of

relatedmattersortransactions”whichwas

unsurprising given the scope of

transactions which could involve solicitors

providingprofessional services.Determining

whether transactions are related is “acutely

fact sensitive” and involves “an exercise of

judgment,notareformulationoftheclauseto

beconstruedandapplied”.

Lord Toulson stated the first step was to

identify themattersortransactions.Theact

giving rise to the claimwas the paymentof

moneyfromanescrowaccountwhichshould

not have occurred. This happened in the

course of a transaction which involved

investment in a development scheme

pursuanttoacontractualarrangementwithin

whichthetrustdeedandescrowagreement

were encompassed as means by which

investors would obtain security. It was a

principally bilateral transaction with a

trilateral component due to the solicitors

beingescrowagentsandtrustees.The trust

deed created a multilateral element as a

resultoftheinvestorsbeingco-beneficiaries.

Thetransactionsenteredintobytheinvestors

were connected in significant ways. The

investors were investing in a common

development and the money they had

advanced was intended to provide

developers with the requisite capital. All

investors participated in a standard scheme

andwereco-beneficiariesofacommontrust.

Lord Toulson further explained that the

applicationof the aggregation clausewas

to be judged by “objectively taking the

transactions in the round” rather than

looking at them exclusively from the

viewpointofonepartyoranother.Onan

objective basis, he considered that the

connecting factors he had identified

resultedintheconclusionthattheclaimsof

eachgroupofinvestorsarosefromactsor

omissions in a series of related

transactions. These transactions fit

together due to the common underlying

objective of execution of a specific

development project and through trusts

whereby the investors were co-

beneficiaries.

The claims of the two separate sets of

investorscouldnotbeaggregatedwithone

anotherasalthoughtherewasasimilarity

that was insufficient. The transactions

enteredintobytheinvestorsintheTurkish

development were not connected to the

transactionsenteredintobythe investors

in theMoroccandevelopment.Whilst the

developmentcompanieswererelatedand

the development projects had a similar

legalstructure,theprojectswereseparate

and unconnected. They concerned

differentsitesanddifferentdeedsoftrust

over different assets which protected

differentgroupsof investors.The insurers

hadnorighttoaggregatetheclaimsofthe

Turkish investors with the Moroccan

investors.

Analysis

TheSupremeCourthasprovidedguidance

astohowtoapproachtheconstructionof

“a series of related matters or

transactions”. Nonetheless it is evident

that this isnotaneasytaskas it isa fact

sensitiveone.Thisjudgmentwillnotbring

an end to claims which turn on

construction of the relevant aggregation

clause but may encourage more careful

policywording.

“Byrequiringthattheactsoromissionsshouldhavebeeninaseriesofrelatedtransactions,thescopeforaggregationisconfinedtocircumstanceswherethereisarealconnectionbetweenthetransactionsinwhichtheyoccurred,ratherthanmerelyasimilarityinthetypeofactoromission.”

perLordToulsonJSCat[18]

12