Unjust enrichment: High Court finds claimant entitled to restitution of the value of services provided in anticipation of a contract

The High Court has held that a supplier of soft toys was entitled to restitution of the value of the services it had provided to a toy designer, in anticipation of a contract to mass produce the developed toy. The judge further found that a claim in restitution for services provided in anticipation of a contract, unless such services are provided gratuitously or in such a way that indicates they were provided speculatively and at the provider’s risk, may still succeed “even if the idea of an enduring benefit to the defendant is essentially a fictional one”: Dowman Imports Ltd v 2 Toobz Ltd [2020] EWHC 291 (Comm).

Given the amount of work undertaken by the claimant in the development of the toy, the defendant’s encouragement and acceptance of the development services to advance the toy concept, and the defendant’s behaviour towards the claimant, the court held that the claimant had made out its claim in restitution. The defendant’s counterclaim, in respect of an initial sample order of the toys which the defendant alleged were defective, was dismissed.

Although the decision does not establish new legal principles, it illustrates that the absence of a concluded contract will not necessarily preclude a remedy where a party has performed services for the defendant – in particular where the defendant requested the services or accepted them when offered, knowing that such services were not intended to be given freely. Continue reading

Court of Appeal decision illustrates proper application of compensatory principle of damages, as well as modern approach to contractual interpretation

The Court of Appeal has held that a charterer was liable for substantial damages for its failure to make shipments of iron ore pellets under a shipping contract, where the charterer was unable to perform the contract due to a dam burst: Classic Maritime Inc v Limbungan Makmur SDN BHD [2019] EWCA Civ 1102.

The court held that the charterer could not rely on an “exceptions” clause in the contract to avoid liability. On the proper interpretation of the clause, the charterer was required to show that it could and would have performed the contract but for the dam burst, and it could not meet this requirement. The court rejected arguments based on authorities which, the charterer argued, showed there was no need to prove “but for” causation where a party relied on a contractual frustration or force majeure clause.

The Court of Appeal emphasised that the question was not how the clause should be labelled (whether as an exceptions clause or a force majeure clause) but rather how it should be interpreted, based on its language and having regard to its context and purpose. The decision does suggest that, in cases of uncertainty, the court’s approach may be influenced by whether the effect of a clause is to relieve a party of liability for past performance (in which case it may be more likely to find that the party must prove it would have been willing and able to perform) or to relieve a party of obligations to perform in future (where the focus may be simply on whether the relevant event makes performance impossible). But the practical message for those drafting or entering into contracts is to ensure the parties’ intentions are made clear in the language of the clause.

The decision is also of interest in illustrating the proper approach to applying the compensatory principle of damages. The High Court had held that the charterer was liable for only nominal damages since, even if it had been willing and able to perform, it would have been prevented from doing so due to the dam burst. The Court of Appeal said this was a misapplication of the compensatory principle, under which the innocent party must be put in the position it would have been in if the contract had been performed. The charterer’s obligation to make shipments was absolute, subject only to the exceptions clause which the court had found it could not rely on. Accordingly, the shipowner was entitled to be put in the position it would have been in if the charterer had in fact made the shipments as contracted – not simply the position it would have been in if the charterer had been willing and able to do so absent the dam burst. Continue reading

High Court awards full purchase price as damages for breach of warranty under share purchase agreement

The High Court has held that a purchaser was entitled to an award of damages amounting to the full purchase price under a share purchase agreement (“SPA”), where the sellers were found in breach of warranty relating to the accounts of the target company: 116 Cardamon Ltd v MacAlister & Anor [2019] EWHC 1200 (Comm).

In assessing damages for the sellers’ breach, the judge applied the diminution in value measure and found that the difference between the value of the shares “as warranted” and their value “as is” exceeded the purchase price by more than the de minimis threshold for warranty claims contained in the SPA. The SPA also contained a cap on liability (equal to the purchase price), so the judge therefore awarded the full purchase price as damages.

Though the decision applies orthodox principles, it highlights the possibility that shares “as warranted” can be worth significantly more than the purchaser in fact agreed to pay for them, meaning that – even with market standard limitation and de minimis provisions – the sellers may be liable for the entire purchase price if the shares have zero or nominal value “as is”.

The case is unusual in that it is a rare example of a purchaser both recovering the entire purchase price from the sellers and retaining the shares which were sold. In contrast, in a claim for rescission of a share sale, most obviously on the basis of misrepresentation, the purchaser would have to hand back the shares in exchange for the refund of the purchase price.

The decision also serves as a reminder of the need to exercise care in complying with contractual provisions regarding the notification of warranty claims, and in particular to ensure that all potential claims are included. A failure to do so may mean that a claim cannot be brought, even if it would otherwise be well-founded.

Andrew Cooke, a senior associate in our disputes team, considers the decision further below. Continue reading

Court of Appeal confirms no claim for third party’s loss unless common intention to benefit the third party at the time of contracting

The Court of Appeal has held that, where a buyer wrongly terminated a two year contract, the seller could only claim its own loss of profit and not that of a sister company that was supplying 50% of the products in question: BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, inc [2019] EWCA Civ 596.

The decision confirms that a party to a contract can claim for a third party’s losses resulting from a breach, as an exception to the usual rule, only if at the time the underlying contract was made there was a common intention to benefit the third party (or a class of persons to which the third party belonged).

As a practical matter, contracting parties should think carefully about arrangements which effectively allow a group company or other third party to take on all or part of the benefit of a contract, where that was not envisaged at the time of contracting and there is no formal assignment. Such arrangements may mean that there is no recoverable loss in the event of a breach, or the recoverable loss is reduced.

The decision is also of interest for its discussion on the requirement of inducement/reliance in cases of fraudulent misrepresentation. The decision confirms that the requirement differs from negligent or innocent misrepresentation. In cases of fraudulent misrepresentation (i) there will be a rebuttable evidential presumption of fact (not an irrebuttable inference of law) that the representee was so induced to enter into the contract and (ii) that what must be proved is that he or she was influenced by the representation, in the sense that it was actively present to their mind.

Ben Steed in our disputes team considers the decision further below. Continue reading

High Court reaffirms orthodoxy in assessing damages for breach of warranty in a share purchase agreement

The High Court has dismissed a purchaser’s claim for breach of warranty under a share purchase agreement (“SPA”) where it alleged that damages should be assessed on a “hypothetical indemnity” basis, ie on the basis that had the true position been known, the purchaser would have contracted for an indemnity that it did not in fact negotiate: Oversea-Chinese Banking Corp Ltd v ING Bank NV [2019] EWHC 676.

The relevant warranty was that the accounts gave a true and fair view of the state of affairs of the target company. This was treated as a warranty as to quality – a term that is more often associated with the sale of goods context, but which has been applied to other assets including shares. The court reaffirmed that the correct measure of damages for claims for breach of warranty as to quality under a SPA is the diminution in value measure, ie the difference between the value of the shares as warranted and their actual value.

This decision arises out of unusual facts, in that the purchaser did not allege that any loss had been suffered on the diminution in value measure. In other words, it did not allege that the value of the shares would have been any different had the accounts been prepared on a proper basis. The case illustrates the lack of protection that a warranty as to quality offers in these circumstances.

Andrew Cooke, a senior associate in our disputes team, considers the decision further below. Continue reading

Employment Appeal Tribunal finds penalty rule did not apply where no breach relied on

The Employment Appeal Tribunal (EAT) has held that the rule against penalties did not apply where an employer imposed certain contractual provisions (which required the employee to resell shares at acquisition cost and to forfeit loan notes) following an employee’s resignation, without alleging any breach of contract on the part of the employee: Nosworthy v Instinctif Partners Ltd [2019] UKEAT 0100_18_2802.

Under the test established by the Supreme Court in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (considered here) a clause that takes effect on breach will be unenforceable as a penalty if it is out of all proportion to the innocent party’s legitimate interest in enforcing the counterparty’s obligations under the contract.

In the present case the clause could potentially take effect in two situations: (i) where the employee voluntarily resigned; and (ii) where the employee was (or could have been) dismissed for cause, ie for the employee’s breach. On the facts, the employee resigned and the employer relied on the clause. The EAT held that the rule against penalties did not apply as the employer did not allege a breach.

The EAT did not consider whether the rule against penalties would have applied in this case if the clause had taken effect in circumstances where the employee was dismissed for cause. It was sufficient that, on the facts, the employer was not alleging a breach. The decision is therefore of interest in suggesting that a clause will not be susceptible to the rule on penalties where it takes effect on a non-breach event – even if the same clause could potentially have been caught by the rule where it took effect on breach.

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Court of Appeal finds clause imposing liquidated damages for delay did not apply where work was never completed

In a recent decision, the Court of Appeal held that a clause providing for liquidated damages for delay did not apply where the contractor failed to complete the contracted work (the installation of a new software system). The employer under the contract was therefore entitled to recover damages for breach assessed on ordinary principles, rather than liquidated damages: Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230.

The Court of Appeal said that the question of whether such a clause applied in these circumstances would depend on the wording of the clause itself. In relation to the specific clause before the court, the clause was focused specifically on delay between the contractual completion date and when the work was actually completed by the contractor and accepted by the employer. If that never occurred, the liquidated damages clause did not apply. The case is a useful reminder that, when drafting a liquidated damages clause, it is important to ensure there is no room for doubt as to when the clause will apply.

The Court of Appeal also rejected the appellant’s argument that the liquidated damages clause should be struck out as a penalty clause, under the test established by the Supreme Court in the leading case of Cavendish v Makdessi (considered here). The court noted that the total sums as calculated under the clause were modest when compared to the financial consequences of delay in installing the software, and concluded that it was a genuine pre-estimate of loss.

Anthea Brookes, an associate in our disputes team, outlines the decision below. Continue reading

Supreme Court considers loss of chance in professional negligence claim

The Supreme Court has given a rare judgment on the court’s approach to awarding damages for a “loss of a chance” in a professional negligence claim: Perry v Raleys Solicitors [2019] UKSC 5. The decision confirms the approach laid down by the Court of Appeal in Allied Maples Group Ltd v Simmons & Simmons (a firm) [1995] 1 WLR 1602, describing it as establishing a “clear and common-sense dividing line” between the matters the claimant must prove, and those which may better be assessed on a loss of chance basis. In summary:

  • To the extent that the question of whether the claimant has suffered a loss depends on what the claimant would have done in the absence of negligence, that must be proved on the balance of probabilities.
  • To the extent that the supposed beneficial outcome depends on what others would have done, that will be evaluated on a loss of chance basis, applying the relevant percentage to the prospective benefit.

The decision also clarifies the extent of the general rule that, for the purpose of evaluating the loss of a chance, the court does not undertake a “trial within a trial”. The court rejected the notion that it is always inappropriate for the court to try an issue relevant to causation merely because that same issue would have fallen for determination in the trial of the underlying claim which was lost due to the solicitors’ negligence.

The question whether any given issue should or should not be tried in the negligence proceedings depends upon whether it is one upon which the client must prove his case on the balance of probabilities, or only one which should be subjected to the valuation of a lost chance. If the latter, it is generally inappropriate to conduct a trial within a trial. If the former, however, the court said there is no reason why either party to the negligence proceedings should be deprived of the full benefit of an adversarial trial of that issue.

For more information, please see our Insurance and reinsurance disputes ebulletin on the decision.

Court of Appeal clarifies “advice” vs “information” distinction when applying SAAMCO principle in advisers’ negligence cases

The Court of Appeal has confirmed that an auditor was not liable for break costs incurred as a result of its negligent advice in relation to the accounting treatment of interest rate swaps, as those costs fell outside the scope of the auditor’s duty of care – upholding the decision of the High Court (considered here), but on different grounds: Manchester Building Society v Grant Thornton UK LLP [2019] EWCA Civ 40.

The judgment helpfully clarifies the approach to be taken in cases involving the application of the principle established in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 (SAAMCO) as expanded upon in Hughes-Holland v BPE Solicitors [2017] UKSC 21.

In particular, the court should consider at the outset whether it is an “advice” or an “information” case. It will be an advice case if the adviser is responsible for considering what matters should be taken into account in deciding whether to enter into the transaction, and for guiding the whole decision-making process. Otherwise, it will be an information case, and the adviser will be responsible only for the foreseeable consequences of the information being wrong. This will require the claimant (who has the burden of proof) to prove the counter-factual, namely that loss would not have been suffered if the advice had been correct. Applying the relevant counter-factual scenario so as to determine which, if any, losses are recoverable will remain a complex exercise in many cases.

For more information, please see our Banking litigation ebulletin on the decision.

High Court finds liquidated damages clause for delay in construction contract was not unlawful penalty

The High Court has found that clauses in engineering, procurement and construction (EPC) contracts relating to solar power plants, which provided for a delay damages rate of £500 per day per MWp, were enforceable liquidated damages clauses: GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm).

Applying the Supreme Court’s recast penalties test from Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (considered here), the court rejected the contractor’s argument that the clauses were unenforceable as penalties. It found that the provisions did not exceed a genuine pre-estimate of loss, and that the sums were not in any way extravagant or unconscionable in comparison with the legitimate interest of the employer in ensuring timely performance of the contracts.

The court reached that conclusion despite the provisions being described as a “penalty” in the relevant clauses. It said this was nothing more than an equivocal indication, requiring an enquiry into the substance of the matter.

The court reached its conclusion for a number of reasons including because the parties were experienced and sophisticated commercial parties of equal bargaining power, who were capable of assessing the commercial implications of the liquidated damages provisions. The sum provided for in each liquidated damages clause was payable only on a single type of breach. The fact that the loss resulting from that breach might vary in amount depending on the circumstances did not of itself give rise to any inference that the sum was a penalty, provided that it was not extravagant and unconscionable in comparison with the greatest loss that might have been expected as likely to flow from the breach when the contract was made.

For more information please see our construction e-bulletin on the decision.