Post and Prejudice

The recent case of HOE International Ltd –v- Andersen and Aykroyd saw the Inner House take an interesting approach to the interpretation of commercial contracts.

Facts

On the 19th September, 2012 parties entered into a share purchase for the sale of Speyside Distillers Company.  As is usual in these circumstances, warranties were granted by the sellers and a disclosure letter confirmed that there were no liabilities existing other than those already mentioned; namely a dispute with Chambers Finance Ltd.

Chambers brought a claim against Speyside and the sellers received a letter from the purchasers purporting to intimate a breach of warranty. The sellers held that the letter giving notice was not issued in line with the share purchase agreement, namely because  it was sent by DX (a courier service) whereas the agreement stipulated that service should be by royal mail, so the notice was invalid.

In the meantime a commercial action was raised against Speyside costing the sellers over £1 million.

The Notice

The notice had to fulfil two requirements: firstly the notice had to contain a sufficient amount of detail about the claim in order that the Respondents could decide whether or not to defend the action.

Secondly, the notice had to be served correctly. In relation to service clause 19.1.c  allowed for “personal delivery, pre-paid first-class post or recorded delivery or (if outside the country) by airmail”.

The Lord Ordinary

At first instance, the Lord Ordinary drew on the case of Arnold v Britton. This case concerned contractual interpretation and took a very literal interpretation of the wording of the contract.  Accordingly, it was found in this case that contractual notices should be assessed on an objective basis :ie. The reasonable man exercising his common sense in the context and circumstances of the particular case.

The Lord Ordinary believed that the notice met the first requirement to give sufficient information to the Respondents.  However, in relation to the second requirement, The Lord Ordinary noted that as the contact was specific in clause 19 about service and specified ‘in some detail’ how a valid notice was to be served and DX service was not covered.  And so the Reclaimers had failed to ‘use the right key and accordingly the lock did not turn’ (Ben Cleuch Estates Limited (138)).

Inner House

On appeal the Inner House overturned the Lord Ordinary’s decision. The Inner House said that the Arnold v Britton case was an over simplification of the issues at hand and the case itself was unusual in its facts and circumstances; described as a specialised situation rather than an ordinary case of contractual interpretation.

Interestingly, the Inner House dismissed English authorities in relation to interpretation  as they did not consider them to be of “great assistance in a legal system that proceeds by way of principle rather than analogy.” A main factor of the Inner House’s judgement was based on the idea of prejudice. The court remarked that:

‘If there is in fact no prejudice, the court should in our opinion be slow to hold that failure to comply with a formal requirement is fatal.  That is so even in cases where the purpose of the notice is drastic, as with a notice invoking a break clause or an option to purchase.  If there is no prejudice, insisting on strict compliance for its own sake serves no useful purpose.’

The court cited two English cases which both focused on an absence of prejudice could remedy a fault in executing the requirements of service of a notice.  (Yates Building Company Ltd v RJ Pulleyn & Sons (York) Ltd and JM Hill & Sons Ltd v London Borough of Camden).

In comparison Scottish cases held that notices were invalid when delivered personally instead of by post (Muir Construction Ltd v Hambly Ltd) and when delivered to a place of business and two agents but not to the registered office (Capital Land Holdings Ltd v Secretary of State for the Environment).

The court admitted that in these Scottish cases the issue of prejudice did not feature yet held that “the absence of any material prejudice as an important factor in analysing whether failure to comply with a formal requirement is fatal to the validity of a contractual notice”.

So it seems the judgment is more in line with English case law when it comes to the idea of prejudice.

The Inner House noted four important points when ruling on contractual interpretation:

When a contract is drafted it is impossible to foresee every contingency that might result. Parties will take great care when drafting key terms of the contract. In this case the notice clause covers a range of different notices with the intention that it should be interpreted flexibly. Clause 19 is possibly based on a style with not as much attention as a key clause would have, therefore its difficult to say how intent the parties were on abiding strictly to the type of service required. The court also mentioned that details in relation to service of the notice may be overlooked under the pressures of everyday business.

If a common sense interpretation is used by the courts,  important features of contracts and transactions can be focused on, leading to contracts being shorter as they would not have to cover such an extensive range of possibilities. In this case the letter arrived to a person who had authority to act on behalf of the defenders and the defenders became aware of the contents. The fact that DX was used to do this is not crucial.

If business contracts have to cover numerous eventualities and possible interpretations they will be longer and impose greater transaction costs on the parties when a contract is drafted. Courts should have due regard to commercial common sense which will reduce transaction costs. The use of DX, although  not a valid delivery method under the contract, was not fatal to the purpose of serving the notice.

Commercial context of cases will comfortably be within judicial knowledge and parties should detail the disputed background facts in pleadings. Each notice should be viewed on its own having regard its purpose in commercial dealings.

Three main points to take from this case are firstly, the court decided that the term of the contract is to be construed not the notice itself. Secondly, it is more important to determine the underlying principles that should govern the validity of contractual notices. Finally, the more drastic the consequence of a notice, ie. if one of the parties are substantially prejudiced, the greater the need for strict compliance with what is prescribed in the contract. 

Although the judgement offers some guidance in cases of contractual interpretation, it conflicts with a large body of case law and in particular the approach taken in Arnold v Britton, which had appeared to be the settled position for some time.  This has left the law in this area more unsettled and uncertain than previously.  It will be interesting to see what weight the courts place on this case in due course.