Substantial new work comparing European contract law

My attention was drawn earlier this week to a substantial new work (2,384 pages in length) edited by Professors Nils Jansen and Reinhard Zimmermann which compares the core doctrines and rules of contract law from the perspective of the plethora of supranational instruments which have sought to set out schemes for organising contract law (e.g. CISG, PECL, the DCFR, PICC, among many others). The work is entitled Commentaries on European Contract Laws. I have not yet had the chance to take much of a look at the work, but at first glance it appears to to be a significant and important undertaking, and will be highly relevant to those with an interest in the harmonisation of contract law and its (possible) codification. Given the breadth and depth of the study undertaken, and the meticulous detail into which the editors and authors appear to have gone in their examination of the texts under study, this must have been a real and herculean labour of love. I look forward to finding time to sit down with what looks like a fascinating and doubtless very rewarding work.

“Causal potency” and contributory negligence

A lot could be said on causation as it relates to contributory negligence, but in this post I will restrict myself to commenting briefly on two fairly recent cases.

The first is the Supreme Court’s decision in Jackson v Murray [2015] UKSC 5. The facts were (in short) that on a winter’s evening, a thirteen-year-old girl was severely injured when, stepping out from behind a minibus to cross a country road, she was struck by a car. The driver of the car, who had seen the minibus but had not contemplated anyone trying to alight from it and immediately cross the road, was driving too fast. He failed properly to observe the road conditions, and had not seen the girl when she stepped out. Had he been driving at a reasonable speed, and had he been properly observing the road conditions, he would not have hit the girl.

The Lord Ordinary found that the accident was the result of the driver’s negligence, but also that the girl had been contributorily negligent. He assessed her contributory negligence at 90%, and reduced the damages to be awarded accordingly. On appeal to the Inner House, the appeal bench reduced the level of contributory negligence to 70%. The girl further appealed to the Supreme Court.

The Justices of the Supreme Court held (by a 3:2 majority) that, in the absence of some identifiable error, only a difference of view regarding the apportionment of responsibility which exceeded the ambit of reasonable disagreement would warrant the conclusion that a lower court had erred in apportioning the quantum of contributory negligence. On the facts of this case, the majority took the view that there was no satisfactory explanation for the view of the Inner House that the major share of responsibility for the girl’s injuries was properly attributable to her. The defender’s conduct played at least an equal role in causing the injuries, and was at least equally blameworthy. The court below having thus erred in its decision, the girl’s appeal was allowed and a figure of 50% reduction in damages on account of contributory negligence was applied to the award.

Is the reasoning underlying the decision right? The Law Reform (Contributory Negligence) Act 1945 governs the allocation of contributory negligence in Scottish delictual claims as well as tort claims arising in other parts of the UK. The principal provision of the Act (sec 1 (1)) states that

‘Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage.’

Though laudable in its aim, this provision suffers from an inherent vagueness: the stipulation that the reduction in damages to be made for contributory negligence is to be such as ‘the court thinks just and equitable’ given the pursuer’s ‘share in the responsibility’ for an injury leaves it unclear on what basis such responsibility is to be judged. Greater responsibility might conceivably be merited for claimant conduct which is more blameworthy than the conduct of the defender; or a court could, for some other reason, hold that one of the causes-in-fact of the injury ought to attract a greater share of responsibility-this is often masked in causal language, by saying that one of the causes is ‘more potent’ than the other, but I think this causal language obscures what is going on. Given the vagueness of the statutory language, the potential for conflicting judicial approaches is evident.

In Davies v Swan Motor Co (Swansea) Ltd [1949] 2 KB 291, Denning LJ opined that causation was the ‘decisive factor’ in the exercise. But that view has not been popular in more recent decisions, which seem to proceed from the approach that blameworthiness and so-called ‘causal potency’ are equally important factors. The court in Jackson refers to the appropriateness of considering both factors: so, Lord Reed states that the defender’s conduct ‘played at least an equal role to that of the pursuer in causing the damage [i.e. was as ‘causally potent’, as it might alternatively have been put] and was at least as blameworthy’ (emphasis added).

Lord Reed addressed the issue of alleged causal potency in some of his remarks. He contrasts cases where a pedestrian may walk out directly in front of a car (in the case before the court, the girl had stepped out some distance ahead of the car), saying that in such cases the pedestrian’s conduct is the ‘more direct and immediate cause of the damage’, interrupting a situation in which an accident would not otherwise have happened. But here we see a difficulty with using causal language to try and solve the problem: the language of ‘direct’ and ‘immediate’ cause adopts the traditional language of so-called legal causation (i.e. determining whether causes-in-fact are sufficiently important to factor in the attribution of responsibility for harmful outcomes). The use of such traditional legal causal language has been forcefully argued in recent years (principally by Jane Stapleton, and in much less impressive style by myself) to mask the true nature of what is going on, and to be suggestive of matters of scientifically observable causal effect. But it is not about that; it is rather about what Stapleton has called the ‘scope of liability for consequences’, which is not a causal question. In this case, each of the driver’s and child’s behaviour was a ‘but for’ cause of the accident; using the language of ‘direct and immediate’ cause to describe either is obfuscatory. What is really going is that the court thinks a driver is in a position of greater power on the roads, and so his/her behaviour ought to attract a great share of responsibility for the accident. Indeed, Lord Reed is suggesting as much at para 26, when he refers to Eagle v Chambers [2003] EWCA Civ 1107, [2004] RTR 115, in which he says ‘[t]he court had consistently imposed a high burden upon the drivers of cars, to reflect the potentially dangerous nature of driving‘ (emphasis added). Putting it that way shows that we aren’t dealing with the supposed ‘potency’ or ‘directness’ of the cause, whatever such phrases are supposed to mean; or about a cause’s ‘immediacy’, an equally unhelpful idea given that the conduct of both parties in Jackson coincided temporally, so neither can meaningfully be said to have been more ‘immediate’. The real reason is, as Lord Reed is I think suggesting in para 26, that a policy choice has been made to view driving as more dangerous than crossing the road, given the power in the hands of a driver, and thus to hold that it is appropriate that the driver is responsible for a greater share of liability for the injuries.

That is what should have been emphasised in this case as the rationale for the apportionment. If the Supreme Court is still wedded to the unhelpful language of legal causation, then I don’t think we are going to get any nearer to understanding what is really going on in decisions like this.

Let me mention a second case, a Scottish Outer House road accident case from March 2017, in which I think the judgment suffers not only from flawed causal reasoning but also, as a result, is wrong in the decision it reaches. The case is Bowes v Highland Council [2017] CSOH 53, 2017 SLT 749, in which the driver of a pickup truck was killed when his vehicle swerved as it approached a bridge, crashing into and through a weakened parapet on the bridge, and falling into a river. The Lord Ordinary (Lord Mulholland), reviewing previous Scottish authorities on the issue, felt obliged to follow the law applied in those authorities, viz that a council owes road users a common law duty of care for failures to remedy hazards caused by the state of the roads (and, by extension, road bridges). The fact that (says Lord Mulholland) English law does not recognise a duty of that scope was thought by the court to be irrelevant. The court held the Council liable for the driver’s death on account of its failure properly to maintain the parapet.

So, the case is interesting from a duty of care point of view. But for our present purposes, the especially interesting issue is the fact that, although the evidence showed that the deceased had been driving carelessly at the time of the accident (i.e. he had been negligent ), this was held to be irrelevant. Why? Because, said the judge (and I quote the entirety of the passage in which the issue was considered):

‘As the deceased did not contribute in any way to the defective parapet and would not have lost his life had the parapet been operating as designed, in fact he would only have sustained minor injuries or none at all, I do not regard the deceased’s negligent driving as having contributed in any significant way to causing the harm. I am consequently of the opinion that there is no basis for any finding of contributory negligence on the part of the deceased and I therefore reject the defender’s case of contributory negligence.’ [para 34]

This reasoning does not I think stand up to close analysis. The fact that, absent the council’s negligence, the deceased would not have died, is an incomplete and insufficient reason for excluding his negligence as a cause of the accident. One could equally make an alternative counterfactual statement, as follows: had the driver not been driving negligently, his vehicle would not have swerved, left the road, and struck the parapet, and he would not have plunged to his death. If one makes that counterfactual statement, then (on the court’s logic) one would end up by saying that it was the driver who was solely responsible for the harm suffered, and that any alleged negligence on the council’s part was irrelevant. Of course, the correct causal analysis is that each of the driver’s negligence and the Council’s negligence were necessary conditions for the outcome, and that a set of causes minimally sufficient for that outcome is one which includes the faulty conduct of each. If therefore one wants to exclude the driver from responsibility, the reasoning for doing so cannot be causal: there would need to be some other reason for justifying such a conclusion (if indeed, that really is the correct conclusion). That reason could perhaps be that the council’s duty is a socially more important one, and that in order to emphasise such importance one needs to exclude the driver’s negligence. I’m not however convinced by that, however, and I think there should have been some discounting for contributory negligence in this case, in order to emphasise that the duty on drivers to drive carefully is also a significant and important one (as we saw in the Jackson case), given the risk that badly driven vehicles pose to their occupants and to other road users. Bowes is a case where I think misguided application of causal reasoning hinders not only the proper analysis of the legal issues but also the correct outcome.

These two recent cases suggest that inappropriate adoption of a supposedly causal analysis is hindering proper application of the principle of contributory negligence. If something is to change, then we need to get away from the language of causal potency and immediacy which is inherent in traditional legal causation thinking.

Contract (Third Party Rights) Bill introduced in Parliament

This blogger is pleased to note that the statutory reform of the rights of third parties under contract has reached the stage when the Scottish Law Commission’s proposed Bill has been introduced in the Scottish Parliament. The text of the Bill as introduced is accessible in PDF form here. It is to be hoped that the Bill will have a smooth passage into law, so that this important area of the law quickly benefits from the reforms embodied in the Bill.

The liability of golf clubs (again)

Reparation actions against golf clubs (or golfers) seem to be occurring with increasing regularity in recent years. In 2014, there were the cases of Phee v Gordon [2014] CSIH 18, which concerned a golfer struck by a golf ball hit by another player, as well as McMahon v Dear [2014] CSOH 100, which related to an injury sustained by a “ball spotter” during a golfing tournament. In 2016 two further golf-related cases are worthy of mention, one concerning product liability and the other personal injury.

In the first of the two cases, Renfrew Golf Club v Motocaddy Ltd [2016] CSIH 57, a Renfrewshire golf club (the pursuers) sued the importers and suppliers of a motorised golf trolley (the defenders). One of the pursuers’ members had purchased one of the defenders’ trolleys, which after use he had left at the entrance to the changing rooms in the clubhouse. In the early hours of the following day, a fire occurred at the clubhouse, causing approximately £500,000 of damage. The pursuers alleged that the fire was caused by wear and tear to the unprotected cabling in the trolley, which in exposing the wiring had caused a short circuit which led to the fire. The pursuers claimed that this amounted to a product defect present at the point of supply, as the design did not include adequate protection against electrical faults.

The pursuers claimed:
(1) that the defenders were in breach of a common law duty of care owed to them by the defenders, and (2) that the defenders were liable under the Consumer Protection Act 1987 (which provides for strict liability in respect of defective products). The defenders claimed that no duty of care was owed at common law, and that statutory liability was excluded by virtue of section 5(3) of the 1987 Act, which provided that

“A person shall not be liable … for any loss or damage to any property which, at the time it is lost or damaged, is not —
(a) of a description of property ordinarily intended for private use, occupation or consumption; and
(b) intended by the person suffering the loss or damage mainly for his own private use, occupation or consumption.”

The defenders argued that the clubhouse was not property ordinarily intended for “private use”.

At first instance, the judge held (1) that there was insufficient proximity between the parties to found a duty of care at common law, and that it was not fair, just and reasonable to impose such a duty, and (2) that a clubhouse which was used by over 700 members and by others was not property “ordinarily intended for private use”. He therefore held the defenders not to be liable under the 1987 Act for the damage caused.

On appeal, the appeal court affirmed the decision at first instance. As regards the common law duty of care, there was no proximity between a supplier of a golf trolley and the owner of a clubhouse in which the trolley happened to be, three years after the supply, and over which the supplier had no control. Whether or not its location at a clubhouse was foreseeable, it might foreseeably have been placed in any number of locations, to each of which it might cause indeterminate damage were it to catch fire. Furthermore, given the regime of the 1987 Act, and the fact that a contract of sale had governed the purchase of the trolley, there was little room for the common law of delict to be extended to a new situation such as the present, where the legislature had declined to act.

As regards the case under the product liability regime of the 1987 Act, the clubhouse was not property ordinarily intended for private use: the underlying idea behind this regime was that, whereas there should be liability for damage to property used in a person’s private life, notably, but not exclusively, in a domestic setting and whether that person was a consumer of the product or not, that liability should not extend to property used by what might loosely be described as economic entities (whether private or not). The pursuers were an economic operation, albeit that they were a “private club”. For these reasons, the case under the 1987 Act was irrelevant.

The judgment is of interest both for what it says about liability under the 1987 Act is concerned, as well as for its observations on the continuing availability of common law, Donoghue v Stevenson, delictual liability for defective products. As regards the meaning of “private use” property under section 5(3) of the 1987 Act, the court in considering what meaning should be attributed to this idea looked at the underlying intention of the EU product liability directive upon which the 1987 Act is based. The court considered that this background suggests that what is important is whether or not the property is used for individual/family/small group of friends’ use as opposed to communal use, based upon financial considerations, by a large number of members of the public. The concern thus seems to be both with the size of the group which might use the property as well as the relationship of that group to the owner. That might well produce a sensible answer in most cases, but one wonders what would view would be taken if the two considerations came into conflict, i.e. what if only one person at a time used the property but such persons had no personal connection to the owner (but used the property in return for payment)? The answer, one suspects, would be that such use would also not be “private use”, the presence of a hire charge being determinative of a commercial rather than a private use. In any event, the approach taken by the appeal bench to this question seems a robust and sensible one.

The second point of interest in the case relates to the extent to which use can be made of common law liability for defective products in cases where (i) a contract for the purchase of the product existed between consumer and supplier and (ii) liability might conceivably exist under the 1987 Act if the necessary requirements for such liability are fulfilled. The 1987 Act does not purport to replace the common law, Donoghue v Stevenson liability for defective products, so in theory a claim might be made under either form of liability. Nor does the presence of a contract necessarily exclude the possibility of delictual liability. The appeal court bench however cites the prior comment of Lord Rodger in Mitchell v Glasgow City Council that

“Where the position of the parties is regulated … by a mixture of contract and statute prima facie there is little room for the common law of delict to impose a duty of car …”

in order to suggest that the combined presence of such features mitigates against the creation of a duty of care at common law, adding that “it would no doubt be difficult for the defenders to obtain limitless product liability insurance, whereas the pursuers … could have insured the premises with reasonable ease”.

The decision of the appeal bench negating a common law duty of care is worthy of analysis. The focus of the bench on the question of the proximity of the pursuers and defenders is noteworthy: traditionally, in cases involving personal injury or damage to property, courts have not stressed proximity as a separate requirement, inferring it from foreseeability of harm (and in this case the type of harm and the mechanism by which it was caused appear to have been reasonably foreseeable). But this was not a classic case of harm caused to a consumer of products: the damage in this case was caused to the premises in which the consumer had left the product, owned by a different party. The concern appears to have been that the claim was being made by a peripheral party, one who fell within an indeterminate class of potential claimants.

The court noted that there was scant prior authority dealing with a similar sort of case: the court mentions only two mid-twentieth century cases that were cited to it. The court states that these two cases cannot be used as a springboard for extending liability of suppliers of defective products for damage caused to property “anywhere that the product might have been left by third parties”. However, the first of these two cases (Stennett v Hancock & Peters) [1939] 2 All ER 578 bears some resemblance to the facts of this case, in that a repairer of a motor vehicle was held liable to a member of the public when the repaired part came loose and struck the member of the public. Liability was founded on Donoghue v Stevenson, and the judge did not trouble himself with the worry that anyone might conceivably have been injured by the defective repair (compare the concern of the appeal bench in this case that the injury might be caused to any number of premises). Stennett has been founded on in subsequent cases, so it cannot be dismissed as an isolated authority or as a novel case. Given this, it might be argued that the dismissal by the appeal court of a common law claim on the basis that a finding of liability would amount to a “substantial increase in existing known fields of liability” was somewhat peremptory.

The second case from 2016 was the Outer House judgment in Taylor v Quigley and others [2016] CSOH 178. In this action, the pursuer, who was a member of the Colville Park Golf Club, sustained serious injuries to his leg when he stepped on a manhole cover between the clubhouse and the first tee, falling partly into the manhole. The pursuer raised an action of damages against eight named members of the Executive Committee of the golf club (the first to eighth defenders) and Tata Steel (UK) Ltd (the ninth defender), who owned the land in question and had appointed the second defender (the club secretary). The defenders challenged the relevancy of the action, claiming that the eight committee members could not be liable to the pursuer in a personal capacity and that the case against the ninth defender was irrelevant.

The judge (Lord Uist) held that (1) the pursuer could not sue any of the first eight defenders in their capacity as members of the club or of its Executive Board. There was a rule against members of a club suing each other for injury allegedly arising in the course of membership, since there was no distinction between the members and the pursuer would in effect be suing himself, but this rule did not afford a defence if a duty of care had arisen independently of membership; (2) On the face of it the pursuer was suing the first to eighth defenders as members of the club: if they had not been members of the Executive Board they would not have been sued. In order to plead a relevant case, therefore, he had to make sufficient averments that they owed him a duty of care independently of their membership; (3) As the pursuer had failed to aver any relevant basis for such an independent duty of care, his case against the first eight defenders was irrelevant and had to be dismissed; (4) As regards the ninth defender, they were sued only on the basis that they were vicariously liable for the acts and omissions of the club secretary. As the club secretary owed no duty of care to the pursuer, it followed that the ninth defenders could not be held vicariously liable for his acts or omissions.  A principal could not be liable to a third party for the negligence of his agent if the agent owed no duty to that third party. The case against the ninth defender was therefore also dismissed.

The case is of interest for its discussion of the liability of committee members of unincorporated associations to fellow members of their club. Unincorporated associations (golf clubs often fall into this legal category) have no separate legal personality: they are merely the collection of individual members who at any one time make up the membership of the association. This judgment reaffirms the view that club members cannot sue committee members of the club in their representative capacity, because that capacity means that they represent all of the members, including the member who wishes to sue. The logic of this is that a member who wished to sue the committee would, in effect, be trying to sue him or herself, which is not permitted.

The exception to this basic rule relates to cases where, in the words of Charlesworth & Percy on Negligence (quoted by the judge):

“a duty of care has arisen independently of membership. So, the court can look to the circumstances, including the terms upon which a club officer or other servant or agent of the club has been appointed, or the club rules, to see whether some responsibility has been conferred upon that individual which caused a duty of care to arise.” 

The result is that, in some cases, courts have been willing to consider committee members liable in delict/tort where a specific duty has been delegated to such member(s). So, in Grice v The Stourport Tennis, Hockey and Squash Club [1997] EWCA Civ 1139, the English Court of Appeal thought that a possible reading of the Club rules was that responsibility had been delegated to the committee to maintain the premises and that this might give rise to a duty of care owed to individual members. It therefore permitted the plaintiff to add the relevant committee members as defendants to the action. This approach did not assist Mr Taylor in the Outer House because the judge thought that there was no evidence of any such delegated responsibility sufficient to support a duty of care owed to individual members.

Given the judge’s assessment of the factual position of the committee members in relation to individual club members, the decision seems a correct application of the law. However, there is the more fundamental question of whether the law needs to be reformed. The current legal rules leave members of unincorporated associations exposed to the hazard of injury without recourse in delict to any party owing a duty of care in respect of such injury. In 2009, the Scottish Law Commission made recommendations (thus far unimplemented in law reform) that not-for-profit unincorporated associations which have more than two members and a written constitution should have separate legal personality. Had those recommendations been implemented, Mr Taylor’s negligence claim might well have been successful. It is a pity that the Commission’s recommendations have thus far not been the subject of any Executive action.

This blogger will continue to monitor the fairways and greens of Scottish golf clubs to see whether 2017 throws up any further golf-related delictual claims.

Unilateral promise within an employment context

A short Outer House judgment of Lord Malcolm from the end of July 2016 has caught this blogger’s attention for its reference to the peculiarly Scots obligation of unilateral promise. In Fisher v Applied Drilling Technology international Ltd the pursuer was arguing that his employer had undertaken to offer him an enhanced redundancy package. There was nothing express in his contract of employment making the commitment, rather the pursuer’s case rested on the basis of “an implied term arising from what is said to be a longstanding policy or practice to offer enhanced redundancy payments” (para [1]). Such an approach would usually rest upon a contractual analysis, but Lord Malcolm makes an interesting suggesting in paragraph 24 of his judgment:

“[24] In Park Cakes (paragraph 35) it was noted that an analysis by way of offer and acceptance “may seem rather artificial, as it sometimes does in this field”. In Scotland, unlike south of the border, we might discuss this in terms of an enforceable unilateral promise created by an inference from facts and circumstances which bar an employer from denying liability. In any event, it seems plain that no hard and fast rules can be laid down. Every case will depend upon its own facts, with phrases such as “reasonableness”, “notoriety”, “certainty” and “widespread knowledge and understanding” regularly figuring in judges’ opinions. The open-ended nature of the description of the proper approach to questions of this nature, as outlined in the cases referred to at the hearing, militates against dismissal without evidence.”

This is worthy of note. Lord Malcolm is suggesting that an employer might be taken to have made an implied unilateral promise to offer the employee an enhanced redundancy package, the implication deriving from an established common practice of the employer (the practice is described in paragraph [2] of the judgment).

The defender’s plea to have the action dismissed was rejected by Lord Malcolm, so we will expect to see much more being said about the conduct of the employer which could amount to an implied promise as the action proceeds. But it offers an attractive added dimension to the case of an employee in the position of the pursuer: a unilateral promissory based approach would not need to demonstrate any actions constituting acceptance on the part of the employee, merely actions which might demonstrate an intention on the part of the employer to be bound. Of course, given that the promise is said to be an implied one, one would expect the employee to have to demonstrate very clear conduct from which the inference of promissory intent can be implied.

Lord Malcolm draws attention to the requirements needed for a promise at the end of his judgment (paragraph [26]), when he notes:

“paragraph 35 in Lord Hodge’s judgment in Royal Bank of Scotland [v Carlyle] is of interest. It highlights that Scots law will enforce a unilateral undertaking that is intended to have legal effect, notwithstanding an absence of consideration. Such an undertaking may, but need not be, collateral to a separate contract, and will be subject to an objective test, ie that which a reasonable outside observer would infer from all the circumstances.”

It will be of interest to follow the progress of this case to see whether the pursuer takes sufficient care to describe the conduct from which an unequivocal promissory intent could be inferred by a reasonable observer.

The “natural meaning” approach to interpreting contracts in the Court of Session

The decision of the Supreme Court last year in Arnold v Britton hinted at a shift in the thinking of the current Supreme Court justices in relation to the proper approach to the interpretation of contracts. In marked contrast to the scepticism of the Lord Hoffmann dominated House of Lords in relation to using the natural meaning of words as the starting point when interpreting a contract, the justices in Arnold showed themselves to be much more open to the utility of using natural meaning as an interpretative tool, and to not artificially creating ambiguities in the text of a contract in order to justify deviating from the natural meaning. Lord Neuberger referred in Arnold to the “sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it”, adding that this did not “justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning” (para 18). Since Arnold, there have been signs that there is also a receptiveness in the Scottish bench to a shift away from the choppy waters of Lord Hoffmann’s wide matrix of fact approach to the safer harbours of a more traditional approach. Such signs have manifested themselves again in the latest decision of the Inner House of the Court of Session on the subject, Hill v Stewart Milne Group Ltd [2016] CSIH 35 (in which the bench comprised Ladies Smith and Clark and Lord Brodie, the latter delivering the most substantial judgment).

Hill concerned a dispute about the interpretation of a clause (2.13) in a contract entitling the pursuers, the Hill brothers, to a stipulated monthly penalty (not challenged as unenforceable under the penalty rule) to be paid by the defenders, Stewart Milne Group Ltd and Gladedale (Northern) Ltd, for each month after March 2008 in which certain sewerage works of the defenders, to which a development of the pursuers’ was to be connected, remained to be “completed and commissioned”. The defenders argued that the works had been completed, while the pursuers denied this, the issue between the parties turning on the proper interpretation of the phrase “completed and commissioned”. The pursuers’ principal argument was that the proper interpretation of that phrase fell to be made by reference to another clause (2.9) in the parties’ agreement, which referred to a requirement falling on the defenders to notify the pursuers within twenty-one days of the sewerage system having “been fully completed to the satisfaction of all relevant statutory authorities”. Because the relevant statutory authority, Scottish Water, had identified snagging issues with part of the works remaining for some considerable time after March 2008, despite those works being otherwise operational, the pursuers contended that this meant that, under clause 2.13, the works remained incomplete and un-commissioned (and thus that the monthly penalty sum continued to be owed). At first instance, the Sheriff had found in the pursuers’ favour, holding that they were owed £345,000 for the ongoing delay in the completion of the works. On appeal, the Inner House overturned this finding, holding that the Sheriff had approached the interpretation of clause 2.13 incorrectly.

A number of points are noteworthy in the substantive judgment of Lord Brodie on the interpretative question:

(1) The starting point: Lord Brodie takes as his starting point on contract interpretation the succinct summary of Lord Neuberger in Arnold:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101,para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.”

Lord Hoffmann is quoted in this summary of Lord Neuberger, but it is noticeable that the summary also makes express reference to the “natural and ordinary meaning of the clause”, a concept for which Lord Hoffmann had no time whatsoever. There is also reference to “commercial common sense” (language described by Lord Hope in another case involving Stewart Milne as a “makeweight”), a concept to which further reference is made below. The mention of the idea of the natural meaning of the words of the contract as the very first of the matters listed by Lord Neuberger makes for a striking contrast with the approach of Lord Hoffmann, and the reference by Lord Neuberger to Lord Hoffman looks, in that light, to be something of a polite piece of judicial realpolitik, intended to recognise the extent to which the Hoffmann approach has bedded in, before his Lordship sets out a new, preferable approach, one in which the natural meaning of words figures prominently (albeit as only the first consideration among a number of others). That Lord Brodie should begin his own comments on interpretation by referring to Lord Neuberger’s views looks to this blogger to be a clear sign of receptiveness in the Inner House to the shift away from the Hoffmann approach.

(2) The order of the words used: A further sign of the somewhat more traditional approach favoured by Lord Brodie is that he makes use of the order in which words appear in the contract as signifying temporal succession. His Lordship takes the view that the phrasing “completed and commissioned” suggests that completion is to be understood to be a temporally prior event to that of commissioning:

“… looking to the natural and ordinary meaning of the phrase, it can be said that the systems were “completed and commissioned” by December 2008. That conclusion is reinforced if it is to be inferred from the order of the words that commissioning is something that comes after completion, as would seem to make sense. What I mean by that is that the word order suggests the stage indicated by “completed” is a stage necessarily prior to the stage indicated by “commissioned” (para 31).

This approach places store on the importance of the text of the contract as drafted, suggesting that it is entirely legitimate to view the words chosen by the drafters of the contract as the best evidence of the underlying intention of the parties. We are some way, in such an approach, from the liberal “red pen” attitude to drafting of Lord Hoffmann.

(3) Unconnected clauses – independent meanings: The most significant piece of traditional thinking is seen in Lord Brodie’s attitude to the relationship between the wording in clauses 2.9 and 2.13. The Sheriff had taken the view that, because the word “completed” appeared in both clauses, the concept of completion was to be interpreted in a “unitary” fashion (and therefore that completion could not be taken to have occurred until the conditions required for notification in clause 2.9 were met). While Lord Brodie agreed with the Sheriff that
“construing any particular contractual provision requires examination of the other provisions and that, as a matter of generality, it would be wrong to read a particular provision (here clause 2.13) in isolation”, his Lordship took the view that a unitary interpretation was not appropriate in the context of this contract. He notes that:

“the result of such an examination may be to find that the various provisions inter-relate to a greater or lesser degree. Some may be inter-dependant [sic]. Some may be free-standing. It will be more readily apparent that provisions are inter-dependant where their drafting is coherent and consistent.” (para 33)

This is an important point. Merely because a similar phrase is used in different clauses does not mean that it serves the same purpose and hence warrants the same interpretation. Clauses in a contract may well serve independent purposes, and thus ought to be interpreted in a way which does not presume that a similar phrase in them was necessarily intended to convey the same meaning in one context as in another. Summing up this point, Lord Brodie comments:

“… any expectation of coherence in a contract may have to give way before the actual wording used by the parties to it. Where the wording is consistent then it may be assumed that the meaning is intended to be consistent. It is different where the wording is not consistent.”

In this contract, the wording was not consistent: cl 2.9 spoke of a date when the works “have been fully completed to the satisfaction of all relevant authorities”, and tied the concept of “completion” in that clause to this date; cl 2.13 spoke of the works being “completed and commissioned”. The wording and the purpose of each clause was different.

Building on this analysis, Lord Brodie sums up with a very clear defence of the importance of treating different wording differently, in accordance with the natural meaning of the phrase in question (emphasis added):

“Generally, when one is construing a text of any sort, if different words or combinations of words are used then it is to be presumed that different meanings are intended. I accept that if the words used are unclear or the drafting is otherwise poor, the more ready the court can properly be to depart from their natural and ordinary meaning. However, that does not justify the court in searching for or constructing drafting infelicities in order to justify a departure from the natural meaning: see Lord Neuberger in Arnold at paragraph 18. The language of the provision being construed is of prime importance and its meaning is most obviously to be gleaned from that language: see Lord Neuberger in Arnold at paragraph 17. In other words the meaning of a provision is primarily to be understood from the natural and ordinary meaning of the actual words used.” (para 34)

The message is very clear, and the supporting reference to Lord Neuberger in Arnold very pointed. Lord Brodie adds a remark which will be of particular interest to those drafting contracts:

“If the intention was to link 2.13 back to 2.9, the draftsman could have used that expression again to import “fully completed to the satisfaction of all relevant statutory authorities” into the Longstop clause. The draftsman did not, however, do so. Whilst that may not be determinative, it certainly puts in question the sheriff’s “unitary” construction of the paragraphs under consideration.” (para 34)

So, if a similar though not identical phrasing is to be used in different parts of a contract, and a drafter wishes the phrases to bear the same meaning despite the difference in wording, a clear link will need to be made between the clauses to show that the same meaning is intended. Going further, of course, one might suggest that providing a definition clause in which the phrase in question is defined would be the surest way of preventing any dispute from arising in the first place.

(4) Commercial common sense: Lord Brodie undertakes a short discussion of the idea of the “commercially sensible” approach to contract interpretation. This blogger has shown a degree of scepticism in the past of the extent to which this concept may prove helpful to courts (given that parties will often be able to adduce perfectly reasonable but opposing commercially sensible considerations, which courts may not be best suited to arbitrate), and to some extent Lord Brodie’s judgment also reinforces the risk in using such a concept to reach a preferred interpretation of a contract. First, he notes that:

“The sheriff saw what she considered was the commercial purpose of the agreement as supporting her construction of clause 2.13 … With all respect to the sheriff, this seems to amount to no more than an assertion on her part with nothing much by way of underpinning in the findings-in-fact (presumably because no relevant evidence was led).”

To this blogger’s mind this criticism highlights that the perennial trotting out of the idea by courts in support of preferred outcomes may have created a culture where it is used in an unreflective way. If “commercial sense” is indeed a makeweight, as Lord Hope previously suggested, it is nonetheless one which, if referred to, will require some support from an analysis of the commercial considerations underpinning the contract.

Second, in discussing the parties’ conflicting suggested interpretations of clause 2.13, Lord Brodie appears to this blogger to suggest (in para 37) that the differing outcomes deriving from each interpretation might each be argued to have some commercial sense underpinning them. That being so, it is unsurprising that he appears ultimately to place no reliance on the conflicting arguments about commercial sensibility in reaching his preferred interpretation. In this blogger’s eyes, we have another example of a case where the vague concept of “commercial sensibility” has been shown to be of elusive assistance in a court’s deliberations.

Overall, this is an interesting and noteworthy decision of the Inner House. The result reached by Lord Brodie and his judicial colleagues looks to this blogger to be the right one. The decision does a number of things: (1) in general, it sets down a marker that the Court of Session appears to be receptive to the flow of contract interpretation doctrine in the Supreme Court away from the Hoffmann “wide matrix of fact” approach (in which interpretation and rectification became so blurred as to be almost indistinguishable) towards a more traditional approach in which the courts begin from the natural meaning of the words used, in the expectation that the parties intentions will usually best be found within the context of the words of the written contract; (2) it reminds us that, while the entire contract forms the context in which words in particular clauses are to be interpreted, similar phrases in unconnected clauses need not be interpreted in a uniform way; and (3) it also reminds us that citing commercial common sense is not some totem which can magically justify a specific interpretation. If commercial common sense is to be cited in support by a court, that court must explain clearly what the commercial factors at play are, and why they support a particular outcome; even then, when commercial common sense is examined, it may be found that equally plausible arguments can be advanced on each side of the debate, so that the concept furnishes no support to the interpretative task of the court.

Some further thoughts on the penalty clause rule in the Supreme Court

The Edinburgh Law School’s Private Law Centre held a very enjoyable lunchtime seminar last week, at which the subject for discussion was the penalty clause rule. There was a good round table discussion, including some interesting observations on how the Cavendish Square/ParkingEye cases were pled before the Supreme Court (Bobby Lindsay, a Glasgow PhD student, had been present during the appeals, and gave us his insights on pleading and on questions from the bench). The attendees were also reminded by Professor George Gretton of a case in the Sheriff Court in which Edinburgh University had sought to recover unpaid parking charges from a repeat non-payer: the case is University Of Edinburgh v Onifade, reported at 2005 SLT (Sh Ct) 63. I was able to add some news of a very recent incident similar to the ParkingEye v Beavis litigation, concerning an individual who repeatedly overstayed at a car park in Glasgow which provided 2 hour free parking for customers using a McDonalds restaurant (the story is reported here).

In leading the discussion at the seminar, I made the following points about the Cavendish Square Holding v Makdessi and ParkingEye v Beavis conjoined appeals before the UK Supreme Court:

• The decision is another example of ever longer judgments, this one running to 316 paragraphs. A lot of this is a recitation of earlier case law – do we really need this? Even allowing for the fact this was a conjoined appeal, the courts need to get a hold of these overly long judgments. If the Bundesgerichthof can deliver judgments on contract cases in 30 paragraphs, our highest court should be able to do the same.
How has the decision changed the law? The shift in the law is that, before this case, the view had taken hold that clauses for the payment of an agreed sum on breach (or forfeiture of an agreed sum) had to equate to the reasonably foreseeable losses arising on breach (with an exception allowed for cases where likely losses were too uncertain to predict). This is now no longer to be taken as being so. As Lords Neuberger and Sumption put it in para 28, the correct approach is that “A damages clause may properly be justified by some other consideration than the desire to recover compensation for a breach. This must depend on whether the innocent party has a legitimate interest in performance extending beyond the prospect of pecuniary compensation owing directly from the breach in question.” In taking this decision, it is interesting to note that the Supreme Court is adopting the same view as the Scottish Law Commission did in its draft Penalty Clauses (S) Bill published in 2010, clause 1(2) of which said: “Any rule of law under which such a clause [i.e. a penalty clause] is unenforceable if it is not founded in a pre-estimate of damages ceases to have effect”. (This Bill has not thus far become law, but the SLC is going to return to considering the penalty clauses rule as soon as its third party rights Report has been completed.)
What has not changed? The penalty clause rule is still tied to a sum payable on breach of a primary contractual obligation, which sum is extravagant or unconscionable: Lords Neuberger and Sumption said that a clause is an unenforceable penalty if it is “a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation” (para 32). Similarly, Lord Hodge expressed the matter as being: “whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract” (para 255). Lords Sumption and Neuberger add (see para 30) that describing penalty clauses as a deterrent, or as in terrorem, is not helpful, as any deterrent effect it may is not what gives it the character of an unenforceable penalty.
• Note also that: (1) the penalty rule was not abolished (as some had thought it might be); and (2) the rule was not extended: the concept of a penalty clause remains restricted to one of a secondary obligation triggered on the breach of a primary obligation, and (unlike developments in Australian law) the SC did not recognise “an equitable jurisdiction to relieve against any sufficiently onerous provision which was conditional on a failure to observe some other provision, whether or not that failure was a breach of contract” (para 41). Lord Hodge notes, in relation to possible extension of the doctrine, that “There is no freestanding equitable jurisdiction to render unenforceable as penalties stipulations operative as a result of events which do not entail a breach of contract. Such an innovation would, if desirable, require legislation” (para 241). This may well be one of the issues which the SLC will consider in due course.
• At the seminar, I offered a few words on the penalty rule’s basis in the distinction between primary and secondary obligations. From what I could tell from a reasonably quick Lexis search conducted in the week before the seminar, there is no UK case law analysing the meaning in general of the language of “primary” and “secondary” obligations. There are a number of different meanings that can be given to such terms in obligations law. A secondary obligation might be an obligation which is triggered if another obligation (the primary obligation) is breached. Or it might be one which is triggered if another obligation is fulfilled. One can add further permutations by bringing in more than two parties: a secondary obligation might be an obligation of C’s which is triggered if an obligation to be performed by B in favour of A is not so performed (in this sense, cautionary obligations are secondary obligations). (As my colleague Lorna Richardson noted at the seminar, a distinction has also been drawn in the case law on retention between primary and secondary obligations, which provides a further sense in which the words have been used) The penalty rule does not embrace all of these meanings: it applies only to secondary obligations in the sense of an obligation of B’s triggered by a failure of B to perform a different (the primary) obligation. But the Supreme Court in these appeals do not explore these different permutations in the meanings of “primary” and “secondary”. Speaking of clause 5.1. Lords Neuberger and Sumption simply state it is “in no sense a secondary provision”, without saying what “senses” they might have in mind. If in reality clause 5.1 is a penalty clause, then it has clearly been well disguised.
• And indeed parties can attempt to disguise penalty clauses, sometimes successfully, sometimes not. So, one can come across clauses referring to one party not doing something which is framed in conditional and not mandatory terms: e.g. without saying that B is obliged not to do something, a clause might just say: “if B doesn’t do x, B will have to pay £1,000”. Lords Neuberger and Sumption say (in para 15) that such a clause can still be a penalty: if the substance of the term is a penalty, it doesn’t matter what its form is. One can see how courts can dig a bit to thwart a clause of the sort “if B doesn’t do x, B will have to pay £1,000”, as there is still a negative act which attracts payment of a sum.
• But what if one disguises potential penalties even further, by seeming to present two positive acts simply as alternative options? e.g. a provision which says: if A pays before 1st January, the price will be £1,000; if A pays after 1st January, the price will be £5,000. Could payment of the higher price be attacked as being in substance a penalty? It’s hard to see how. Such a provision could without too much difficulty be justified as an increased price on account of allowing the buyer more extended payment terms. In the same way, the clauses at issue in CSH were in fact characterised by Lords Sumption and Neuberger simply as providing an alternative basis for payment: £X if Mr Makdessi doesn’t compete against the company; lesser sum £Y if he does. If Lords Neuberger and Sumption are right, then it seems to me that one can without too much difficult simply avoid the penalty rule altogether in many cases. The CSH case doesn’t address this problem of evasion of the rule, but it is perhaps irresoluble: attempts to enable a scrutiny of more subtly disguised penalties might open up all manner of contractual clauses to investigation of whether they are fair or not. Not only would that cause huge certainty, but it is arguably unnecessary given that we already have unfair terms legislation addressing the wider issue of unfairness in contracts. It’s true, however, that such legislation does not allow scrutiny of the fairness of the primary obligations of the parties, including price. So, e.g., the Consumer Rights Act 2015, s 64(1) excludes from scrutiny as to its fairness a term of a contract to the extent that “(a) it specifies the main subject matter of the contract, or (b) the assessment is of the appropriateness of the price payable under the contract …” So, one can still disguise penalties by providing for fluctuating prices which depend on the circumstances of payment. It’s hard to see how one can avoid this happening, and indeed the policy of the Consumer Rights Act is that one ought not to investigate such things.
• The arguably disguised penalty in CSH caused disagreement among the Justices as to whether the penalty rule was engaged: three of the Justices (Neuberger, Sumption, & Carnwath) didn’t think the clauses in question amounted to a penalty they were merely “price adjustment clauses”, thus the penalty clause rule wasn’t engaged. Lords Sumption and Neuberger note that “It is not a proper function of the penalty rule to empower the courts to review the fairness of the parties’ primary obligations, such as the consideration promised for a given standard of performance”. Lord Mance thinks that the penalty rule is engaged, but that the clauses are not extravagant or exorbitant and so are enforceable. Lord Hodge doesn’t seem to reach a concluded decision on one of the clauses: he notes the view of Neuberger and Sumption on cl 5.1, saying “But even if it were correct to analyse clause 5.1 as a secondary provision operating on breach of the seller’s primary obligation, I am satisfied that it is not an unenforceable penalty clause for the following six reasons. …” (para 270); he does see cl 5.6 as a secondary obligation however (see para 280)(Lord Clarke takes the same view: he has an “open mind” on the nature of clause 5.1, and thinks cl 5.6 is a secondary obligation: see para 290). One might argue that there is something wrong with a doctrine whose application depends on a distinction between primary/secondary obligation that seems to be difficult to draw in relation to specific clauses, and something wrong with judgments in which, on a crucial issue, Supreme Court justices feels they can have an “open mind”.
• What about the other appeal? There was agreement among the Justices that the relevant clause in ParkingEye did conceivably engage the penalty rule. But they thought that ParkingEye had a legitimate interest in enforcing the clause: the clause had two purposes (1) to manage the efficient use of parking space in the interests of the retail outlets, and of the users of those outlets who wished to find spaces in which to park their cars, and (2) to provide an income stream to enable ParkingEye to meet the costs of operating the scheme and make a profit from its services, without which those services would not be available. “These two objectives appear to us to be perfectly reasonable in themselves” say Lords Neuberger and Sumption. I agree.
• As to whether the charges were excessive, I think those in the press stirring up ideas of hard done by members of the public forget that ParkingEye was not running a parking business like NCP, so to compare ParkingEye’s charge with usual car park charges misses the point. The amount charged had to be high enough to dissuade people from over-parking. But I agree with Lords Sumption and Neuberger that: “None of this means that ParkingEye could charge overstayers whatever it liked. It could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it is providing the service. But there is no reason to suppose that £85 is out of all proportion to its interests.” (para 100)
• Three further interesting issues struck me about these appeals: (1) could penalty clauses now be used to disgorge profits from a wrongdoer, if such a measure of recovery could be justified by reference to a ‘legitimate interest’ of the party seeking to enforce the clause? If so, a penalty clause could achieve what was not permitted in common law damages under Teacher v Calder. It is interesting that in a famous case allowing an account of profit for breach of contract, AG v Blake, the House of Lords also used the phraseology of the government having a “legitimate interest” in preventing the defendant’s breach of contract and thus in disgorging profits from a contract breaker.
• (2) Roman law: one use of stipulationes poenae was to ensure protection of the interests of a third party which was unable to protect its own interests directly. There is some similarity here with allowing ParkingEye to enforce the charge in order to protect the interests of the landowner. I think this is worth pointing out because we see in the Roman law an earlier recognition that there are other legitimate interests that one might have in enforcing a penalty other than recovering one’s own losses, so the Roman approach offers an extra justification for severing the link between penalties and reasonably foreseeable losses: penalties can be a useful means to encourage performance rather than to insulate oneself against loss. This point about Roman law was not advanced in the appeals, it is simply my own observation.
• (3) There is a further subsidiary issue of interest for English law: one might question whether Mr Beavis really did have a contract with ParkingEye. It’s had to see what consideration he gave. Lord Toulson appears to regard his using the car park as itself consideration: “the use of the car park by Mr Beavis was sufficient consideration for a contract governing the terms of its usage” – para 295 – but this seems to me an entirely fanciful notion of consideration. (Perhaps, it is just about arguable that by parking there Mr Beavis had impliedly promised not to park for more than 2 hours, and that this implied promise was consideration). But I think there is a good argument for saying that this looks very much like a case of a gratuitous licence to park, an arrangement which is not necessarily contractual under English law. And if it’s not contractual, then the penalty rule wouldn’t be engaged. This possibility did not seem to trouble the Supreme Court, however, Lords Neuberger and Sumption briefly noting only that: “Mr Beavis had a contractual licence to park his car in the retail park on the terms of the notice posted at the entrance, which he accepted by entering the site … Moore-Bick LJ in the Court of Appeal was inclined to doubt this analysis, and at one stage so were we. But, on reflection, we think that it is correct.” It’s a pity that this point was not explored properly in the Sup Ct, however. Of course, this issue wouldn’t have troubled Scots law: a gratuitous contract is entirely valid in Scotland. (I should add that Bobby Lindsay offered the useful observation, gleaned from his hearing of the pleadings, that had the ParkingEye arrangements not been considered contractual, less favourable tax consequences would have resulted from this, so that it suited ParkingEye to argue the contractual approach.)
• My conclusion on these appeals was (1) that the realignment of the penalty clause rule away from requiring that stipulated sums represent a reasonable pre-estimate of loss is a sensible one. As the Roman law showed, there are other legitimate interests that one might have in enforcing a penalty other than recovering one’s own losses. The danger of over-charging can be regulated by the courts; (2) that the continuing characterisation of the rule against penalties in terms of the enforcement of a secondary obligation triggered by breach of a primary obligation will inevitably allow some penalties to be disguised and to escape the rule. It is debatable whether the CSH clauses were an example of such a disguised penalty or whether, as Lords Sumption and Neuberger argue, they were simply part of a flexible mechanism for adjusting the final price payable. It is difficult to see how such disguised clauses can be got at, unless one is conceivably to open up all manner of contract provisions to scrutiny, a course of action I think would be undesirable.

There was some good discussion following my presentation, for which I thank the colleagues and students who attended. My further observation during those discussions that the decision could be viewed as a more performance-oriented approach to contract law – i.e. that contractual obligations are not just things to be valued in terms of damages for non-performance, but to be valued as undertakings to be enforced wherever possible – led my Edinburgh colleague Dr Descheemaeker to ponder whether the decision might cause ripples for other aspects of English contract law: might it lead to developments in other areas more receptive of the enforcement of contracts, rather than just compensating for their breach, for instance in changes to the approach taken with specific performance? That would be quite a leap for English law to take, given that specific performance is a remedy of equitable origin in English law, but it will be interesting to see whether any such ripples can indeed be detected in due course.

A further observation offered during the discussion was the thought that the penalty clause doctrine might now effectively be dead in the water, given that so long as some legitimate interest of the enforcing party can be adduced to justify the sum sought, it should (assuming it is not too outrageous in amount) be enforceable. The point is that there are many interests that might conceivably be advanced by a contracting party for enforcement. Whether the courts will take a liberal approach to this matter will be one of the aspects of this decision worthy of tracking as it is received and applied by lower courts.

New Privy Council decision on interpretation of contract

On 19th November, the Privy Council handed down its judgment in the case of Krys v KBC Partners LP [2015] UKPC 46, available here. The Privy Council reach a decision on the complex contract provisions which accords with the natural meaning of the words, which they find to be unambiguous even if they lead to economically harsh results for one of the parties.

Worthy of particular note is a remark of Lord Sumption (for the majority) in response to an argument that the apparent language of the contract would have an extraordinary result for a class of partners, because it would leave them with nothing more than their nominal capital contributions, however valuable the investments remaining in their hands: his Lordship comments that “[e]ven if the Board regarded these consequences as absurd, such arguments have limited force in the face of the clear language of the articles” (para 15). This constitutes a clear application of the natural meaning of words in a case where the terms of the contract give no cause to doubt their apparently clear meaning.

Also worthy of note are further comments of Lord Sumption in which he observes that the idea of commercial common sense or wisdom would be hard to bring to bear on the facts of the case before their Lordships: “It is far from clear by what standards of commercial normality any particular provisions are to be measured. There is little to be gained by imagining more or less far-fetched examples of cases in which the articles of partnership would operate harshly if construed according to the ordinary meaning of the words …” (para 16).

Lord Mance dissents, believing that the majority pay too much attention to the natural meaning of the words, and not enough attention to the context as a whole (para 18). One might imagine Lord Hoffmann having made similar remarks, but it is not a view which persuades the majority.

Coming after the cautious Supreme Court decision in Arnold v Britton (the subject of analysis in the forthcoming January 2016 edition of the Edinburgh Law Review), an observer of current trends in the field of contractual interpretation might venture to suggest we seem to be seeing something of a shift away from a heavy reliance on commercial common sense and on a wider contextual approach, at least where the wording of the contract appears to be unambiguous to the court. If this is not quite a resurgence of the traditional “natural meaning” approach to interpretation, it may at least be a reining in of the Hoffmann approach developed in ICS v West Bromwich Building Society. Future decisions in this field will be watched with interest.

New Supreme Court judgment on penalty clauses

The UK Supreme Court has handed down (on 4th November 2015) its judmgent in two conjoined appeals on the application of contractual penalty clauses: Cavendish Square Holding v Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67. The judgments are important ones, and have generated a degree of press interest in this morning’s newspapers. Not all of this is accurate or helpful. Even The Times has rather missed the point by reporting the story under the headline “Judges clear car parks to charge huge penalty fees.” In fact the Justices of the Supreme Court have done no such thing, their judgments specifically reinforcing the existing penalty clause rule that, to be valid, any contractually stipulated sums payable on breach must not be extravagant, unconscionable or incommensurate with the interest of the party seeking to enforce the clause. Indeed, in the ParkingEye appeal, the charge which the respondent was seeking to enforce was less than the amount of parking penalties regularly enforced by local authorities. One should not always believe what one reads in the press.

Reading the judgment itself is much more illuminating. The first matter worthy of note is that the Supreme Court has taken the opportunity to reiterate its belief that the rule against contractual penalty clauses does not need to be reformed or abolished. Cavendish Square Holding’s argument that the rule ought to be abolished flew in the face of prior recommendations by both the English and Scottish Law Commissions that the rule be retained. The Justices noted that Cavendish’s argument was “made without the benefit of the sort of research into the consequences and merits of such a step, which the Law Commission or Parliament would undertake before venturing upon it” (Para 43). The decision of the Supreme Court is likely to solidify the position of the penalty clause rule in both English and Scots law, securing its status for the foreseeable future.

Two important points about the operation of the penalty clause rule, emerge from the Supreme Court’s decision in the two appeals. First, the rule only operates as a break on the validity of a secondary obligation, i.e. an obligation which comes into being if a primary obligation (of payment or performance) under the contract is broke. The rule does not operate to allow assessment of the reasonableness or potentially exorbitant nature of primary obligations themselves. As Lord Roskill noted in a previous decision of the House of Lords: “it is not and never has been for the courts to relieve a party from the consequences of what may in the event prove to be an onerous or possibly even a commercially imprudent bargain” (Export Credits Guarantee Department v Universal Oil Products Co [1983] 1 WLR 399, at 403). This point was crucial in the determination of the outcome in the first of the two conjoined appeals, Cavendish Square Holding v Makdessi. The two clauses in question in that appeal had the effect of entitling Cavendish Square to deprive, in certain circumstances, Mr Makdessi of a substantial sum that would otherwise have been payable to him (and to force him to transfer shares he owned). Lord Neuberger and Lord Sumption (with whom Lord Carnwath agreed) noted that there was uncertainty in English law of whether a forfeiture provision of this sort could even count as a penalty, commenting “there is some, albeit rather unsatisfactory, authority that such a clause may be a penalty” (para 69). But, proceeding on the assumption (though not deciding) that a contractual provision might in some circumstances be a penalty if it disentitled the contract breaker from receiving a sum of money which would otherwise have been due to him, they concluded that the clause before the court was not a penalty clause; on the contrary, it was “in reality a price adjustment clause. Although the occasion for its operation is a breach of contract, it is in no sense a secondary provision” (para 74). So, although in some cases English law allows a disguised penalty clause to be recognised for what it is (and hence for the disguise to be ignored), a clause which states that a party is only to earn certain consideration if it complies with various restrictive covenants (which Mr Makdessi had not) is fundamentally a clause about the circumstances in which a primary obligation will be due under a contract. As such, it does not fall within the ambit of the penalty clause rule and thus cannot be scrutinised under that rule as to its fairness or proportionateness.

The second important point arises out of the second of the conjoined appeals, that of ParkingEye v Beavis. In this case, Mr Beavis had been charged £85 for overstaying a free two hour parking limit by 56 minutes (i.e. by almost 50% more time than that allowed). He argued that this charge was a penalty clause. ParkingEye did not own the car park in which Mr Beavis had parked; they merely managed it for the owner. That meant that Mr Beavis’s overstaying in the car park did not cause ParkingEye any pecuniary loss at all. Did that mean that its £85 charge was a penalty, being wholly out of proportion to any loss they might suffer? Hitherto, it might have been maintained that the stipulation of a sum payable upon breach could only be justified if some losses accrue to the victim of the breach, and therefore that, if a party cannot or does not suffer any loss as a result of a breach, then it cannot claim any sum stipulated as payable on breach. But that is not so, say the Justices in this judgment: Lords Neuberger and Sumption assert that the real question is – what is the nature and extent of the innocent party’s interest in the performance of the relevant obligation; such interest is not necessarily limited to the mere recovery of compensation for the breach (para 23). In this case, ParkingEye (and the landlord for whom they acted in managing the car park) had a legitimate interest in ensuring that only customers of the shopping centre used the car park, and that such customers did not stay too long in the car park (otherwise they would prevent others from shopping). The £85 charge was designed to act as a deterrent against overstaying, and “deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract” (para 99). Importantly, they added (in opposition to the newspaper headline’s suggestion of “huge penalty fees” that:

“None of this means that ParkingEye could charge overstayers whatever it liked. It could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it is providing the service. But there is no reason to suppose that £85 is out of all proportion to its interests” (para 100).

The application of the common law penalty rule meant therefore that the £85 charge was not a penalty, but a proportionate sum payable on breach of the obligation not to park for more than the 2 hours permitted.

By way of an aside, it is of interest that the Supreme Court thought that Mr Beavis’s parking was the result of a contract he had entered into with ParkingEye. Mr Beavis gave no obvious consideration for the 2 hour free parking he was permitted by ParkingEye. This looks very much like a gratuitous permission to park, an arrangement which one might have thought would not be a valid contract under English law. That did not seem to trouble the Supreme Court, however, Lords Neuberger and Sumption briefly noting only that:

“Mr Beavis had a contractual licence to park his car in the retail park on the terms of the notice posted at the entrance, which he accepted by entering the site … Moore-Bick LJ in the Court of Appeal was inclined to doubt this analysis, and at one stage so were we. But, on reflection, we think that it is correct.”

This blogger at least would have liked to have heard more from the Supreme Court about why this was, under English law, a valid contract, and not merely a gratuitous licence to occupy land for a period of time.

By way of conclusion, and to return to the main thrust of this blog post, this judgment of the Supreme Court is a significant one. It represents a clear defence of the continuing appropriateness of a rule alleviating against excessive contractual penalties. It serves as a reminder of a crucial aspect of the rule, that it only operates so as to allow an assessment of secondary obligations, arising upon breach, and not of primary obligations relating to payment or transfer of property. It also develops the law by holding that, although the victim of a breach may not suffer any pecuniary loss as a result of the breach, that does not mean that it cannot recover a stipulated sum from the breaching party. It can, so long as it has a legitimate interest in so recovering. Such an interest is perfectly possible of arising in relation to a property management scheme, such as the operation of a car park by an agent of the owner of the car park. That said, any sum stipulated cannot be out of all proportion to its interest. There is no danger of this judgment leading to huge or excessive parking charges of the sort suggested in the newspaper reports on the case.

New blog on the Nobile Officium

Having attended the recent book launch at Parliament House of the excellent new Avizandum book “The Nobile Officium” by Edinburgh Law School graduate Professor Stephen Thomson, I was pleased to learn that he has also set up a blog to track new developments relating to the extraordinary equitable jurisdiction of the Scottish supreme courts (that being the so-called nobile officium). The blog can be accessed at the easily remembered address The new book is a fascinating study of an often understood aspect of the Scots legal system, and well worth a read.

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