Archive for the ‘contractual interpretation’ Category

‘No oral modification’ clauses: Rock Advertising v MWB Business Exchanges Ltd (Part 1)

June 15, 2018

In Rock Advertising Ltd v MWB Business Exchange Centres Ltd ([2018] UKSC 24) the UK Supreme Court had to consider the effects of a ‘no oral modification’ (‘NOM’) clause in a contract. This blog post (part 1) sets out the facts and the essential features of the judgments. The next blog post (part 2) will set out the underlying issues identified in the judgments.


MWB Business Exchange Business Centres Ltd (‘MWB’) operated serviced offices in central London. It entered into a contractual licence with Rock Advertising Ltd (‘Rock’) containing the following NOM clause:

‘This licence sets out all the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

Rock fell into arrears with payment of the licence fee.

Rock’s sole director spoke to a credit controller at MWB to propose a revised schedule of payments. It was found at first instance that an oral agreement had been concluded to vary the licence in accordance with the revised schedule.


Issues and conclusion

The question was whether this oral agreement was effective. This raised two fundamental issues in the law of contract: (1) whether the oral agreement could be effective given the NOM clause; and (2) whether Rock could be said to have given consideration for the variation.

The UK Supreme Court found in favour of MWB since the oral agreement was rendered ineffective by the NOM clause. While there was unanimity as to this conclusion, Lord Briggs did not wholly agree with the reasoning of the majority (who agreed with Lord Sumption).

The Court declined to consider the consideration issue. Given the conclusion as to the effect of the NOM clause, any discussion of the question of consideration would have been obiter.


The NOM clause: the majority approach

Lord Sumption (and the majority) concluded that:

  1. NOM clauses are effective: ‘the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation’ ([10]);
  2. ”if the collateral agreement is capable of operating as an independent agreement, and is supported by its own consideration, then most standard forms of entire agreement clause will not prevent its enforcement’ ([14]);
  3. ‘But if the clause is relied upon as modifying what would otherwise be the effect of the agreement which contains it, the courts will apply it according to its terms and decline to give effect to the collateral agreement’ ([14]);
  4. Estoppel might come into play where the parties have acted on the oral variation ([16]).

Lord Sumption declined to deal with the question as to whether or not Rock had given consideration for the variation: ‘[t]he reality is that any decision on this point is likely to involve a re-examination of the decision in Foakes v Beer … if it is to be overruled or substantially modified, it should be before an enlarged panel of the court and in a case where the decision would be more than obiter dictum’ ([18]).


Lord Briggs’ analysis

Lord Briggs reached the same conclusions as the majority but for different reasons. Lord Briggs was ready to accept that a contract containing a NOM clause could be orally modified. It all depended on whether the necessary unanimous intention to agree an oral variation despite the NOM clause could be shown.

This intention would not be inferred from the fact that the parties had reached an oral agreement. This intention will not be lightly inferred where the oral agreement was made without express reference to the NOM clause ([27]).

It might be inferred where there was evidence of necessity, where it could be shown that there was some urgent reason for the parties to agree to an oral variation before the written record could be made and signed. The same facts would be equally likely to give rise to an estoppel ([30]).

Michael Lower


Car parking spaces: common parts?

July 14, 2017

Tai Fat Development (Holding) Co Ltd v Gold King Industrial Building (IO) ([2017] HKEC 1366, CFA) concerned a dispute as to whether or not thirteen car parking spaces in the building were common parts. The first owner of the building claimed to be entitled to their exclusive use.

As always, this was a question of interpretation of the words used in the light of the DMC as a whole, other relevant documents and the factual matrix. The CFA agreed with the courts below that these factors all pointed to the conclusion that the car parking spaces were common parts.

The DMC referred to the spaces as ‘loading and unloading areas’. If the spaces were not common parts there would be a breach of the terms of the Government Grant. There would also be severe practical difficulties.

The first owners also relied on estoppel by convention. The incorporated owners had taken leases of the spaces from them. The necessary common understanding that the first owners owned the spaces was lacking, however; the incorporated owners disputed this claim even as they accepted the leases. Nor could the first owners point to any detriment.

Michael Lower


Interpretation of DMC apportionment provision and order for sale of defaulting owner’s shares

June 11, 2017

In Hertford Mansion (Un Chau Street) (IO) v Wong Shing Kwan ([2017] HKEC 1154, DC) the Management Committee of an Owners’ Corporation decided to carry out major renovation works at the property.

The building’s DMC provided that each owner would contribute the proportion of the expenses of managing the property set out in the Fifth Schedule to the DMC. This made the defendant liable for 110 / 1300 of any expenditure. The Management Committee demanded that proportion of the costs of the renovation works.

The Third Schedule to the DMC contained another charging provision. It required the owners to pay a ‘due proportion’ of management expenses including costs of repair, renewal and redecoration.

The defendant refused to pay the proportion of the renovation costs demanded of him. He argued that he was only responsible for a ‘due proportion’ of these costs and that the due proportion should be calculated (in the absence of any indication to some other effect) by reference to the proportion of the undivided shares in the building owned by the defendant. Thus calculated, the due proportion would be less than the sum demanded.

Judge Andrew Li rejected the defendant’s argument. The ‘due proportion’ (on a proper interpretation of this DMC) could only be the proportion specified in the Fifth Schedule. The Third Schedule required owners to pay a due proportion ‘in accordance with the provisions of this Deed’. The Fifth Schedule was the relevant provision of the deed for this purpose. It would be absurd to suppose that the Third and Fifth Schedule contained divergent mechanisms for apportioning exactly the same expenditure.

The defendant repeatedly refused to pay the contribution demanded. The DMC provided that unpaid sums were to be charged on the defaulting owner’s shares. The Management Committee registered a Memorandum of Charge accordingly. They now sought an order for sale of the defendant’s undivided shares.

The order for sale was granted. The DMC made the charge enforceable by the Management Committee. The defendant had ignored repeated warnings.

Michael Lower

Sale of land as ‘agricultural land’ in the New Territories

March 20, 2017

In Splendid Resources Inc v Secretary for Justice ([2017] HKEC 504) the plaintiffs had constructed columbaria on land owned by them. The Government contended that this was a breach of the terms of the Government lease.

The lease did not contain an express covenant not to use the land for any purposes other than as agricultural land. It had, however, been sold as ‘agricultural land’.  The question was whether this was purely descriptive of the use at the time of sale or implied a covenant only to use the land for this purpose.

Deputy Judge Le Pichon pointed to various features of the New Grant that could only be explained on the basis that the words imposed a restriction on the use to which the property could be put. These included a provision requiring the land to be cultivated.

The judge referred (at [35]) to a statement in Halsbury’s Laws of Hong Kong that ‘[w]ithout special permission from the Government, all Government leases granted in the New Territories are for agricultural purpose and can not be used for other profitable purposes.’

Further, ‘where an interpretative ambiguity arises in the context of a Government lease, a presumption in favour of the Government applies’ (at [36]).

The landowner’s argument that the covenant was purely personal to the original lessee was also rejected.

Finally, Deputy Judge Le Pichon held that the columbarium was a structure; it was a breach of the covenant not to build any structure on the land.

Michael Lower

Contractual obligation to produce an architect’s certificate before completion: an implied term that it will be produced within a reasonable time before completion

February 24, 2016

In Guo Jianjun v Dragon Fame Investment Ltd ([2015] HKEC 1986, CA) S entered into an agreement to sell to P four office units (all on the same floor of the building). The agreement contemplated that there would be a re-partitioning of the office units owned by S. The units to be sold were the units as they would be after the re-partitioning. The contract contained a clause obliging S to obtain the certificate of an ‘Authorized Person’ to confirm the legality of the re-partitioning works. The agreement went on to provide that P would not raise any requisitions, queries or objections concerning the re-partitioning works. The re-partitioning works were carried out soon after the agreement was entered into. S produced an architect’s certificate of compliance. This satisfied S’s contractual obligations but it was produced at 6.07 pm on the completion date. It was common ground that the midnight rule applied. P argued that S was in breach of an implied obligation to produce the certificate at a reasonable time. It rescinded and sought the return of the deposit and damages. S argued that there was no implied term and that it was enough for it to have produced the certificate before midnight on the completion date.

The Court of Appeal (Lam V-P giving the judgment) looked at the English and Hong Kong authorities setting out the modern approach to contractual interpretation. This required the court to look at the rest of the contract and the whole of the relevant context / factual matrix. It also looked at what was said in Belize Telecom concerning the implication of terms (and linking this process to the broader process of contractual interpretation).

The obligation had to be construed in the context of the related clause which barred the raising of requisitions concerning the partitioning. It was also necessary to take account of the obvious commercial purpose served by the obligation: if S did not produce an adequate certificate there could be a doubt as to the legality of the works which could prevent P from giving good title on any future sale. Thus, there was to be implied a term ‘that the certificate would be a proper certificate prepared by an authorized person in good faith’ ([34]).

Given that the architect was commissioned by, and would report to, S P had to be given a reasonable time to assess whether or not the certificate satisfied the contractual obligation. They had to be given a reasonable time in which to do so. A term to this effect was to be implied ([41]).

What was a reasonable time? Had the implied obligation been observed in this case? The court referred to its earlier decision in Summit Link v Sunlink Group:

‘What should be considered as a reasonable time must be considered in the light of the prevailing circumstances, including the parties’ knowledge at the time if it can be proved and what the parties would each be reasonably contemplating at the time.’ (at 735 – 6 per Woo JA).

The court also referred to the headnote to the report of Kensland Realty Ltd v Whale View Investment Ltd ((2001) 4 HKCFAR 381):

‘The time which a vendor must allow, was the time reasonably required by the purchaser to perform its obligations, in relation to completion, in the ordinary course of business. This would include the purchaser’s dealing with bankers and solicitors.’

Lam V-P explained what this meant in the present case:

‘I am therefore of the view that the certificate should have been provided to the plaintiffs’ solicitors within a reasonable time before the end of the office hours [on the completion date]. The reasonable time should be long enough to afford the plaintiff’s solicitors a reasonable opportunity to conduct the checks which are reasonably necessary and to do so in the normal course of business. The time should not be so short that the solicitors would have to stretch all their available resources to the extreme so as to accomplish the tasks.’ ([46]).

Further, ‘one should proceed on the general assumption that purchasers will rely on mortgage financing in a conveyancing transaction’ ([50]).

Production of the certificate after the close of business on the date of completion did not satisfy the reasonable time requirement.

Michael Lower




Break clause: implied term that rent paid in advance in respect of a period after termination should be repaid?

January 6, 2016

In Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd ([2015] UKSC 72) BNP granted a lease to M & S. The lease contained a break clause. The lease required M & S to pay rent quarterly in advance. The break right could only be validly exercised if there were no rent arrears at the time when the lease would end assuming the valid exercise of the break right (the ‘break date’). M & S had also to make a further payment to BNP if it exercised the break right. M & S served a clause to trigger the break right, paid the quarterly rent due immediately before the break date and made the further required payment. It now sought to recover the proportion of the rent attributable to the period from the break date up to what would have been the next quarter date under the lease. It argued that a term requiring BNP to make such a repayment should be implied into the lease. The Supreme Court upheld the Court of Appeal’s decision that there was no such implied term.

Lord Neuberger gave the main judgment. The decisive factor was ‘the established legal background against which the Lease was entered into, and in particular the general attitude of the law to the apportionability of rent payable in advance.’ ([42]) Rent is not apportionable in time in common law ([43]). Section 2 of the Apportionment Act 1870 varied this with regard to rent payable in arrear but not rent payable in advance ([45]). Thus:

‘Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established. Given that it is so clear that the effect of the case-law is that rent payable and paid in advance can be retained by the landlord, save in very exceptional circumstances (eg where the contract could not work or would lead to an absurdity) express words would be needed before it would be right to imply a term to the contrary.’ ([50])

There was a broader discussion of Lord Hoffmann’s statement in Belize Telecom that the process of implying terms into a contract was part of the general process of contractual interpretation. Lord Neuberger was critical of this view. He saw construction of the express terms of the contract as being logically prior to the question as to whether or not a term was to be implied ([28]) and as being ‘a rather different exercise’ ([29]). Lords Carnwath and Clarke, on the other hand, expressed support for Lord Hoffmann’s formulation. Lord Carnwath expressed the view that Lord Hoffmann’s formulation did not involve any watering down of the previous authorities to the effect that the implication of terms is based on necessity ([58] – [60]). Thus:

‘While I accept that more stringent rules apply to the process of implication, it can be a useful discipline to remind onseself that the object remains to discover what the parties have agreed or (in Lady Hale’s words) “must have intended” to agree. In that respect it remains, and must be justified as, a process internal to the relationship between the parties, rather than one imposed from outside by statute or the common law’. ([69])

Lord Clarke said:

‘like Lord Neuberger (at para 26) I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. On that basis it can properly be said that both processes are part of construction of the contract in a broad sense.’ ([76]).

Michael Lower

Legal tenancy in common: contractual interpretation

November 4, 2015

In Lam Kwok Hing v Lam Siu Keung ([2015] HKEC 2228, CFI) four brothers were tenants in common in equal shares of land in the New Territories (‘the Land’). They were also co-owners of several adjoining lots. The brothers entered into four contemporaneous transactions in 1972 to re-arrange the ownership of the Land and the adjoining lots. The 1972 transaction concerning the land assigned it to two of the brothers, LLW (2/5 shares) and LTW (3/5 shares). A separate ‘Division of Property’ document, signed by the four brothers, confirmed the overall effect of the four transactions. In a  document called ” 執照 ” and dated 2 September 1974, the District Commissioner, New Territories certified that LLW owned 2/5 and LTW owned 3/5 of the shares in the Land. LLW died in 1976 and in 2005 his family contended that his share was 9/20 rather than 2/5 (that he owned an additional 1/20).

The court now had to decide on the parties’ respective shares. The fact that the 1972 assignment recorded LLW as owner of 2/5 provided the starting point. All of the relevant legal and factual material available to the court supported the contention of the LTW family that the assignment accurately recorded the parties’ contractual intention. The undivided shares reflected the physical division of the Land between the two families. the Division of Property and the 執照 confirmed the ownership intention. Finally, the Schedule of Property annexed to the Letters of Administration of LLW’s estate also referred to his ownership of a 2/5 share.

The case is interesting since there was no recourse to the concept of the common intention constructive trust. In Hong Kong, unlike England, disputes as to ownership shares can be resolved through a process of contractual interpretation that focuses on ownership of the legal title.

Michael Lower

Making time of the essence for completion

September 9, 2015

In Many Gain Investment Ltd v Chan Fai Ho ([[2015] HKEC 1553, CFI) P, a property developer agreed to buy a property from D. P raised a requisition about D’s title and there was a dispute as to whether or not it had been properly answered. This dispute continued up to the contractual completion date of 31st May 2011. The parties agreed to extend the completion date to 14th June 2011. The next day, 15th June, D’s solicitors wrote to P’s solicitors requiring completion by 20th June. Despite this, on 16th June, D entered into an agreement to sell the property to another buyer. P now withdrew the requisition and sought specific performance. The question was whether P’s delay in completing amounted to a repudiatory breach entitling D to rescind.

Time was not expressly of the essence for completion and Anthony To J found that time was not impliedly of the essence in this case ([23]). The question then was whether the letter of 15th June made time of the essence (see United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904). As a matter of construction it did not. Anthony To J preferred P’s interpretation which was that the letter was no more than a demand that P should withdraw the requisition within 5 days ([24] – [27]).

For the sake of completeness, Anthony To J considered whether, if the letter were to be construed as a notice making time of the essence, the 5 day period it specified constituted reasonable notice. He held that it could have amounted to reasonable notice had D taken the necessary steps to make completion possible (including notifying P of the amounts of the split cheques that would be required on completion). The only other step to be taken within that time was that P had to decide whether or not it would insist on the requisition. As D had not taken the steps to make completion possible within 5 days, the 5 day period would not amount to reasonable notice ([33]).

P was granted the order of specific performance that it sought.

Michael Lower

Implied terms: the tension between the plain meaning of the words and an evident commercial purpose

August 26, 2015

In Aberdeen City Council v Stewart Milne Group ([2011] UKSC 56) the Council sold some development land to Stewart Milne Group Ltd (‘SMG’). The contract for the sale provided for a further payment (‘Profit Share’) to be paid to the Council in the event of (i) the service of a notice by SMG on the Council to trigger the obligation to pay; or (ii) a sale by SMG; or (iii) the grant of a lease by SMG. There was to be only one such payment and once it had been made there would be no further obligation to make any payment even if one of the relevant events occurred.

SMG sold the property to SMW, another company in the same group, at a price that the Council alleged was well below the open market value. SMG contended that this triggered the once and for all obligation to make a Profit Share payment. The Council refused to accept that this was the case. There was a tension between the wording of the contract and the alleged commercial purpose. The contract did not expressly rule out an intra-group transaction in its definition of event (ii) (a sale triggering the obligation to pay). On the other hand there was evidence from other provisions within the contract pointing to a contractual intention that the Profit Share would be calculated by reference to the property’s open market value.

The Supreme Court decided that there was a clear commercial intention that the Profit Share would be calculated by reference to the open market value.  They preferred to think of this in terms of an implied term rather than as a process of interpretation (though the result is the same whichever route is used ([33] Lord Clarke). A term was to be implied to the effect that where the sale was not at arm’s length, an open market valuation (rather than the actual price paid) would be used in the calculation of the Profit Share ([20] Lord Hope; [32] Lord Clarke).

Michael Lower

Where there are two arguable interpretations of a contractual provision it is reasonable to have regard to the commercial consequences of the rival approaches

August 24, 2015

Rainy Sky SA v Kookmin Bank ([2011] UKSC 50) arose out of contracts for the building and sale of ships. The purchasers were to pay the purchase price in five installments and the contract provided that the installments would be refunded to the purchasers on the happening of any of certain events specified in the contract. The contracts required the shipbuilder to procure refund guarantees to protect the buyers against the possibility that the shipbuilder might fail to refund advance payments when required to do so under the terms of the contract. Kookmin Bank provided the refund guarantees. After the purchasers had paid the first installments due under their respective contracts, an event occurred entitling the purchasers to call for a refund of the installments. The purchasers invoked this clause but the shipbuilder refused to repay the money. The purchasers then sought payment from the Bank under the terms of the guarantee. The Bank refused to pay arguing that the guarantee did not cover the event that had occurred.

Lord Clarke (with whom the other members of the Supreme Court agreed) considered the rival constructions argued for by the parties and concluded that each interpretation was arguable. In such a case, the court could legitimately have regard to the commercial consequences of the rival interpretations. The interpretation that was most in line with the parties’ reasonable interpretations could be preferred:

‘If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.’ ([21])

Where, however, the language was unambiguous then the court must apply it ([23]). At first instance an experienced judge of the Commercial Court expressed the view that the Bank’s construction ‘defies commercial common sense’. The purchasers’ construction was, therefore, to be preferred ([45]).

Michael Lower