Supreme Court gives M&S permission to appeal

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Break clause lease dispute: wider implications

In a long running saga, the Supreme Court has recently given Marks and Spencer permission to appeal a decision of the Court of Appeal[i]. The dispute relates to a lease between the parties which was terminated early under a break provision. There were earlier conflicting decisions of the High Court and the Court of Appeal as to whether M&S were entitled to a refund from their Landlord. The case is likely to have wider importance in view of differing legal interpretations on the importance of “necessity” in relation to terms that should be implied into a contract.

This extends beyond Landlord and Tenant law, and may touch any commercial or other contract. The Supreme Court (formerly the House of Lords) deals only with cases which:

“raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at that time, bearing in mind that the matter will already have been the subject of judicial decision and may have already been reviewed on appeal”

 Background

In May 2014 the Court of Appeal held that M&S had no express right to a refund on the exercise of the break clause: any intention should have been set out in express terms if there was to be a refund. No such right could be implied into the contract without express provisions. M&S lost out on their claim for a refund of rent, insurance and car parking charges for the period after the break date. Before M&S could activate the break clause, they were obliged to pay the full quarter’s rent in advance.

The High Court had previously decided that because the break conditions required payment of a penalty by M&S, the parties could not have intended that the Landlord would be entitled to retain the excess rent in addition. Accordingly, the High Court found that there should be an implied term that the excess rent was in fact repayable. This was rejected by the Court of Appeal.

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Issue

The Court of Appeal followed the previous leading case, Attorney General of Belize v. Belize Telecom [2009] UKPC 10. The Privy Council found the test to decide whether a term should be implied as a fact (as opposed to law) into a contract was broadly:

 “Is that what the instrument, read as a whole against the relevant background, reasonably be understood to mean?”

So, in order to be implied, a term must be necessary to achieve the express intention of the parties in the context of the admissible background. The importance of the decision in early 2009 is clear from the fact that it was cited in eight other cases that year.

Next step

The Supreme Court is likely to be considering the extent of inconsistency as to interpretation of the word “necessary” across the board, and the meaning of the word itself in the context of the case. That the Supreme Court has granted permission to appeal suggests that it may be reviewing break conditions in particular, or undertaking a wider analysis of how terms are implied into leases and commercial contracts more generally in order to achieve a just outcome.

No date has yet been fixed for the appeal before the Supreme Court.

Implications

Although the decision will be awaited with interest, this is a timely reminder that, so as to avoid uncertainty and ambiguity, parties should

  • expressly set out their commercial intentions in the written contract
  • consider the likely outcome of events that are described in the contract or are otherwise predictable, and whether these are sufficiently provided for in the contract
  • obviously, leaving matters to chance and calling on the Court to intervene and imply terms much later leads to uncertainty and avoidable expense.

[i] Citation:

Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2014] EWCA Civ 603
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8 Ways to avoid a Business Dispute

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Despite the best of intentions on all sides, disputes can arise when entering in to a new commercial contract or business relationship. According to Government figures, between April and June 2014 a total of 370,744 claims were issued in the Civil Courts (excluding Family Cases). This was a decrease on the previous quarter, but that saw the highest number of claims since 2009. A significant number  relate to business disputes.

From long experience, the following ground rules should help to reduce the risk of things going wrong in a business contract, or if they do, ensure you are in the best position to protect your interests:

1 Contractual Terms

These are key to many disputes, and the outcome of claims often turns on what the contract says. The terms and conditions should be read carefully. Ensure that your terms and conditions are drafted or approved by a specialist contract lawyer with experience of your sector. It is essential that these are regularly reviewed and kept up to date, and of course, that the terms represent your understanding of what has been agreed.

Be careful about negotiations and representations made during pre contractual discussions. Although many statements will be just sales talk, others might be construed as a term of the contract.

2 Entire Agreement

This should ensure that the contract between the parties is contained in a single document. The aim is to prevent extraneous documents or communications being relied on e.g. statements or representations made during pre contract discussions.

3 Exclusion clauses

Exclusion clauses may seek to exclude liability for consequential loss, or limit liability to a specified figure. Consideration should be given to whether these are enforceable:

  • do they apply to the areas of dispute most likely to arise?
  • are they as wide as might be assumed?
  • exclusions of “consequential” or “indirect” losses might not apply to claims for loss of profits or other loss amounting to reasonably foreseeable direct losses, within the reasonable contemplation of the parties when entering in to the contract

NB: Under the “contra preferentum” rule, any contractual term which is unclear is interpreted against the party that wants to rely on it.fun-and-games-until-204943-sfreeimages

4 Deadlines

Be realistic about fixing deadlines and be circumspect about specific dates if possible. If it seems as though a date under a contract might be missed, a revised timetable should be negotiated and recorded in writing, before time runs out. Any such variation of the contract terms should be signed by both sides.

5 Dispute Resolution Clauses

You can specifically set out means of settling disputes before they arise, e.g., good faith negotiations, Alternative Dispute Resolution, or mediation stand every chance of resolving a dispute, whilst preserving relations with the other side. This could be crucial where a valuable supplier or customer is involved. Serious consideration should be given as to whether Arbitration, as opposed to court proceedings should be specified. This may often be inserted, without considering the pros and cons, because Arbitration is not necessarily simpler or cheaper than the courts.

6 Internal Communications

Take care over written internal communications, including by email and on any company and employee’s devices. This applies pre contract, and after the contract has been agreed. If a dispute arises, under the Civil Procedure Pre Action Protocols and court rules, all relevant internal communications have to be disclosed (unless subject to legal advice privilege – where lawyers are already advising as to a dispute).

7 Negotiations

Clear communications with your supplier or customer is essential too. Being assertive but not confrontational and having clear lines of communication can help avoid misunderstandings in the first place that can otherwise lead to disputes. If it transpires that some contractual terms can’t be met, inform those affected as soon as possible.

 

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8 Identify Potential Issues Early

Early dialogue can often resolve problems, and prevent them turning in to a dispute. The party claiming breach of contract will have to prove that they acted reasonably to mitigate their loss. As such, the earlier a potential difficulty is addressed, the better chance of a satisfactory resolution being reached, or losses minimised.

Often a case that ends up in court is due to the potential problem not being identified early on, or not dealt with appropriately. In this way, seemingly innocuous molehills can turn in to mountains.

Whist not advocating full scale crisis management procedures for every teething problem, there should be a routine reporting system enabling potential litigious issues to be reviewed. Although businesses may be reluctant to involve solicitors at the start, in fact reporting at an early stage to in-house or external lawyers would be likely to make the communications privileged from production.
This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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