No implied obligation of good faith in exercising contractual right of termination

The High Court has again considered the circumstances in which a duty of good faith will be implied into a contract, rejecting an argument that a party's contractual right to terminate a consultancy contract had to be exercised in good faith: Monde Petroleum SA v Westernzagros Limited [2016] EWHC 1472 (Comm)

An allegation that a party has breached an implied term of good faith may in some circumstances be a useful tool in a claimant's armoury. In the present case, however, the claimant was unsuccessful in its attempts to deploy this tool.  The deputy judge noted that, outside accepted categories of contract where a duty of good faith is implied by law (eg employment or partnership contracts), such a term will only be implied if the contract would lack commercial or practical coherence without it. That was not the case here. He also suggested that a duty of good faith could not apply to a contractual right to terminate, which can be exercised irrespective of the exercising party's reasons for doing so.

The decision provides another illustration of the difficulties that a claimant will face when seeking to imply a good faith term into a contract, particularly in relation to a contractual right of termination. Other recent cases where the courts have rejected an implied duty of good faith are considered here and here, or see our guide: How far can you act in your own self-interest? The role of good faith in commercial contracts, which forms part of our series of contract disputes practical guides.   

Gregg Rowan and James Robson, a partner and associate in our dispute resolution team, consider the decision further below.

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Commercial Court finds it did not have jurisdiction to permit service of an application for Norwich Pharmacal relief out of the jurisdiction

In a recent decision, the Commercial Court found that it did not have jurisdiction to permit service out of the jurisdiction in respect of an application for Norwich Pharmacal relief, ie an application requiring a third party who had been (innocently) mixed up in wrongdoing to provide information enabling proceedings to be brought against the wrongdoer.  Notably, the judge held – in the first decision of its kind by an English court – that a Norwich Pharmacal order did not constitute "interim relief" under section 25(1) of the Civil Jurisdiction and Judgments Act 1982: AB Bank Limited v Abu Dhabi Commercial Bank PJSC [2016] EWHC 2082.

This decision provides guidance, albeit only at first instance, on what is an uncertain area of the law.  The judge cast doubt on previous authorities that had permitted service of Norwich Pharmacal orders against respondents out of the jurisdiction and indicated that, even if (contrary to the court's decision) it did have jurisdiction to permit service out of the jurisdiction, it should exercise restraint before exercising an "exorbitant jurisdiction" over a foreign bank. The decision cites with approval various passages from Disclosure of Information, Norwich Pharmacal and Related Principles, co-authored by Gary Milner-Moore, a partner in our dispute resolution team.

Overall, this decision suggests that claimants who require information from third parties out of the jurisdiction to enable them to bring proceedings against a wrongdoer may have to look to the relevant local law for assistance. 

James Allsop, a Senior Associate in our disputes team, considers the decision further below.

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Court of Appeal finds innocent party could not affirm contract following repudiatory breach where defaulting party unable (not just unwilling) to perform

The Court of Appeal has upheld a decision that a party was not entitled to keep a contract alive for the purpose of claiming ongoing liquidated damages for delayed performance following its counterparty’s repudiatory breach: MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789.

The Court of Appeal did not however base its decision on whether the innocent party had a "legitimate interest" in affirming the contract, as the High Court had done (see our blog post on the first instance decision). Instead, the Court of Appeal found that it was not open to the innocent party to affirm the contract because the defaulting party was unable to perform its obligations, as the commercial purpose of the venture had become frustrated, rather than simply refusing to do so. The decision suggests that an innocent party's ability to affirm a contract following a counterparty's repudiatory breach will be fettered if performance is no longer possible.

The Court of Appeal also disagreed with the High Court's suggestion that "good faith" principles are relevant in considering whether an innocent party has a legitimate interest in affirming a contract. Its comments on this aspect suggest a reluctance on the part of the senior judiciary to broaden the application of "good faith" principles in matters of interpretation and contractual construction.

Gregg Rowan and Rob Javin-Fisher, a partner and senior associate in our dispute resolution team who commented on the High Court decision, consider the outcome of the appeal further below.

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Party permitted to change experts on condition it disclosed previous expert’s notes setting out substance of views

The Technology and Construction Court has granted a claimant permission to adduce evidence from a new expert, after it became dissatisfied with its original expert's ability to express his views clearly. However, permission was granted subject to the condition that the claimant disclose certain documents in which the original expert had recorded his views (in addition to the expert's draft report, and the instructions to both experts, which the claimant had already disclosed): Allen Tod Architecture Ltd (in liquidation) v Capita Property and Infrastructure Ltd [2016] EWHC 2171 (TCC).

The decision is another reminder that, where a party wishes to change experts, the court is likely to grant permission (if at all) on condition that documents recording the original expert's opinion are disclosed – even if the case is not one of "expert shopping" in the sense of shopping around for a more favourable expert opinion. Such a condition may go beyond disclosure of the original expert's final, signed report, or even a developed draft, to include any document in which the expert's views are recorded.

Another recent decision of the same judge (Coyne v Morgan and Harrison, considered here) suggests that a party will not be required to disclose their solicitors' attendance notes of meetings with the first expert (as opposed to documents prepared by the expert himself/herself) unless it is a "strong case of expert shopping". In the present case, however, it seems there was no attempt to obtain disclosure of solicitors' attendance notes.

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Article published on when jurisdiction clause in prospectus will bind secondary purchaser of securities

The CJEU decision in Profit Investment Sim SpA v Ossi (C-366/13, 20 April 2016) provides guidance on when a secondary market purchaser of securities will be bound by an exclusive jurisdiction clause in the relevant prospectus. However, as the decision means that each case will turn on its facts, it makes it difficult for issuers of securities to predict where they might face claims and gives rise to the risk of parallel claims in multiple jurisdictions.

Donny Surtani and Nick Chapman have published an article in the September edition of the Butterworths Journal of International Banking and Financial Law in which they consider the decision and its implications. Click here to download a copy.

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Court of Appeal considers jurisdiction test in tort claims against employees under Brussels regime

The Court of Appeal has held that claims in conspiracy against former employees did not come within the employment jurisdiction provisions in the Lugano convention (which require an employer to sue an employee in his or her domicile in matters relating to the employment contract). There was therefore no requirement to bring proceedings against the former employees in Switzerland as their place of domicile and proceedings could continue in England against all the alleged conspirators: Bosworth and another v Arcadia Petroleum & Others [2016] EWCA Civ 818.

The court rejected the argument that previous Court of Appeal and CJEU authorities meant that  conspiracy claims which could be pleaded as a breach of an employment contract necessarily came within the employee protection provisions. The correct approach was to consider whether the reality and substance of the conduct related to an individual's contract of employment.

On the facts of this case, the court held that the contracts of employment provided the opportunity for the allegedly nefarious activities, but no more than that.

The outcome of this appeal has been awaited with interest as there has been substantial uncertainty over when a tort claim relates to an individual contract of employment within the meaning of the Brussels regime (the same question arises under the Lugano Convention, Brussels I Regulation and recast Brussels Regulation). The decision rejects a mechanistic approach in favour of looking at the substance of the conduct in issue. How it will apply in any particular case may not however always be easy to predict, given that the proper characterisation of the case will be determined by the substance of the matter and the facts of the case. Considerable scope for a jurisdiction challenge therefore remains where proceedings are commenced against an EU or EFTA domiciled employee in a country other than their domicile.

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Client event: London launch of HSF Guide to Dispute Resolution in Africa, second edition. Locking Horns in Africa? Let us Be Your Guide

Herbert Smith Freehills is delighted to invite clients to the London launch event of the second edition of our Guide to Dispute Resolution in Africa.

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Article published on recent CJEU decision which increases predictability of jurisdiction in tort cases

Under EU rules, a tort claim may be brought in the courts of the member state where the harmful event occurred, as an alternative to suing in the courts of the defendant's domicile. The reference to "where the harmful event occurred" includes where the damage occurred, as well as the event that gave rise to the damage. This can give rise to difficult questions where financial damage is suffered in one member state as a result of an event that occurred in another member state.

In Universal Music International Holding BV v Schilling (C-12/15, 16 June 2016), the CJEU held that that "where the harmful event occurred" could not be read so broadly as to encompass any place where the adverse consequences of an event can be felt, and so the Dutch claimant could not bring a claim against its Czech legal advisers in the Netherlands solely on the basis that the relevant losses had been paid from its Dutch bank account. This limits the scope of the CJEU's previous decision in Kolassa v Barclays Bank plc (E-375/13, 28 January 2015) (considered here).

Donny Surtani and Nick Chapman have published an article in the 12 August edition of New Law Journal in which they consider the decision and its implications. Click here to download a copy.

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Strong grounds required to justify independent re-review of disclosure

A recent High Court decision confirms that the court can order a re-review of disclosure by an independent lawyer, although "strong grounds" are required to justify such an "unusual order": Vilca & 21 Others v Xstrata Limited & another [2016] EWHC 1824.

The court rejected an application for an order requiring the defendants in this case to procure such a re-review. It found that one erroneous (albeit significant) decision to withhold disclosure of a document, which was corrected quickly, did not justify making such an order.

The court did however direct the defendants' solicitors to put forward a plan for a further review of the e-disclosure exercise to ensure that documents falling within certain parameters identified by the decision had not been unjustifiably withheld.  

Philip Lis, Associate in our disputes team, considers the decision below. 

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Supreme Court decision highlights importance of contract terms in protecting principal from agent’s insolvency

The Supreme Court has held that a principal was entitled to recover payments collected by its agent on its behalf following the agent's insolvency: Bailey and another (Respondents) v Angove's PTY Limited (Appellant) [2016] UKSC 47.

The Supreme Court dismissed the principal's argument that the payments were held on a constructive trust, but found that the principal was nevertheless entitled to receive such sums as the agent's authority to collect payments had been revoked.

The decision demonstrates that the courts will be slow to find a constructive trust in favour of a principal whose agent has become insolvent. Whilst this could result in potentially harsh consequences for a principal in this situation, the Supreme Court referred to the important public policy of achieving "a pro rata distribution of the company's estate between its creditors". The judgment appears to indicate that a restrictive approach to constructive trusts will be adopted more generally, rejecting any suggestion that constructive trusts can be used simply to achieve "fairness" in the way that a remedial constructive trust might be in other jurisdictions.

The case also demonstrates the importance of ensuring that agency agreements are carefully drafted so that a principal's right to receive payment is protected in the event of its agent's insolvency. In this case the principal was able to recover the disputed payments because the Supreme Court concluded that the agent's authority to collect payments from customers could be, and had been, revoked. The decision suggests that the courts will be slow to find that an agent's authority is irrevocable – in general, there will need to be not only an (express or implied) agreement that the authority is irrevocable, but the authority must also have been given to secure an interest of the agent. However, principals should be careful to avoid terms which might suggest these criteria are met.

Gareth Keillor and Jade Hu, a senior associate and associate in our dispute resolution team, consider the decision further below.

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