Archive for the ‘contractual interpretation’ Category

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

Interpretation of service charge clauses

July 22, 2015

Arnold v Britton ([2015] UKSC 36) concerned the construction of the service charge clauses in a number of long leases of chalets in a caravan park. The clauses in question required the lessees to pay, as a proportionate part of the landlord’s costs in providing the relevant services, GBP 90 plus VAT in the first year. This sum was to increase by 10% per annum. The startling result was that the GBP 90 had become GBP 3,366 by 2012 and would rise to GBP 1,025,004 by 2072 (the final year of the leases). It was possible that the sum payable by even one tenant occupying on these terms would exceed the actual cost of the provision of services for the whole estate. The leases of most of the chalets on the estate had been granted earlier than the disputed leases. These earlier leases provided for the initial GBP 90 to rise by 10% every three years (or by roughly 3% per annum). These earlier leases were referred to as the ‘triennial leases’. The clause in the triennial leases gave rise to very much more modest liabilities; even by 2072, the service charge would only have risen to GBP 1,900. These figures are taken from the table in Lord Carnwath’s dissenting judgment (see below).

The first question was whether the landlord’s interpretation of the service charge clause (in line with the above description) was correct so that there would be an automatic increase at 10% per annum. The tenants contended for an alternative construction. They pointed to the fact that the obligation was to pay a proportionate part of the landlord’s cost in providing the services and argued that the compounded GBP 90 merely provided a cap on the amount that was to be paid. The majority of the Supreme Court agreed with Lord Neuberger and rejected this interpretation. The wording of the provision was clear and the fact that it had disastrous consequences for the tenants did not entitle the court to rewrite the clause.

The second question was whether, as the tenants contended, an implied term should be read into the service charge clause. The leases contained a recital to the effect that they were intended to be ‘upon terms similar in all respects to the present demise’. The leases contained a covenant (in clause 4(8)) by the landlord  that the leases of the other chalets ‘shall contain covenants on the part of the lessees thereof to observe the like obligations as are contained herein or obligations as similar thereto as the circumstances permit.’ The questions were whether this created a building scheme or letting scheme and, if so, whether this gave rise to an implied term that would affect the interpretation of the service charge clause. The tenants argued that there was an implied term in the disputed leases to the effect that they were on the same terms as the triennial leases and that this prevented the landlords from increasing the service charge in the disputed leases at a rate that exceeded the rate of increase in the triennial leases.

First, Lord Neuberger was prepared to accept that the relevant terms did indeed create some kind of building or letting scheme and that it was ‘envisaged that there would be a degree of reciprocity and mutual enforceability between the lessees of chalets when it came to the covenants they entered into.’ ([49]). Building schemes can only cover restrictive covenants in the case of freehold land. Lord Neuberger thought it might be possible that they would extend to positive covenants in the case of letting schemes. Even if this were possible, however, it was questionable whether a covenant to pay a service charge or any other sum of money could be within the ambit of a scheme ([51]). In any event, there were other obstacles that, in Lord Neuberger’s view, prevented the tenant’s argument from succeeding: the relevant lease terms appeared to relate to future lettings (not past lettings like the triennial leases); even if there were an implied term as contended for it could not override the obligations that the tenants had expressly assumed; and clause 4(8) referred to ‘like’ or ‘similar’ terms and so envisaged the possibility of some degree of variation. More fundamentally, the implied term that was the best fit with the relevant provisions was to the effect that the triennial leases contained the same service charge provisions as the disputed leases (and not vice versa). While there was a good argument in favour of such an implied term, this did not help the tenants under the disputed leases; they suffered no damage as a result of a failure to impose the same term in other leases.

Lord Neuberger’s judgment contains a section ([14] – [23]) reviewing the major authorities on contractual interpretation. Amongst the points made in this section is that he is ‘unconvinced by the notion that service charge clauses are subject to any special rule of interpretation.’ ([23])

On the major question, the view of the majority is summed up thus:

‘In my judgment, there is no principle of interpretation which entitles a court to re-write a contractual provision simply because the factor which the parties catered for does not seem to be developing as the parties may well have expected.’ ([41] per Lord Neuberger).

Lord Carnwath gave a dissenting judgment. He inclined to the view that service charge clauses did merit special treatment to ensure that they give effect to their intended purpose and to guard against ‘unfair and unintended burdens being placed on the lessees.’ ([123]) Service charge clauses in many residential leases are subject to controls imposed by legislative scheme. There was no obvious policy reason to explain the fact that the disputed leases did not fall within the ambit of this legislation ([90] – [92]).

Lord Carnwath identified the following features of the factual matrix: the huge service charge liabilities that the tenants holding under the disputed leases would face in the later years of the terms and the gross disparity between these sums and those payable under the triennial leases ([104]); the service charge uplift was intended to respond to the very high inflation of the 1970s but the disputed leases were mainly granted between 1977 and 1991 at which time it was possible to anticipate lower rates of inflation ([106]); the lessees were taking the leases as a long term investment and so it is likely that they would have made enquiries of existing lessees (holding under the triennial leases) about their experiences and the costs associated with living on the estate  ([107]).

Something clearly had gone wrong in the drafting of the clause given the disconnection between the idea of contributing a proportionate part of the cost of providing the services and the obligation to pay a fixed sum each year ([125]). It was inconceivable that the lessees under the disputed leases would gamble on inflation being close to or exceeding 10% per annum for over 90 years ([139]). They would have known of the change from the triennial formula to the annual formula in their own leases and the likelihood is that they would have understood it as amounting to a cap or upper limit on their service charge liability ([142]). If questioned by the officious bystander they would have articulated this understanding ([143]).

Michael Lower