Source: http://olrl.ouplaw.com/view/10.1093/law/9780198799948.001.0001/law-9780198799948-chapter-1?print
Timestamp: 2019-04-25 20:19:34+00:00

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1.01 This book is concerned with loan transactions governed by English law under which finance is arranged for provision to those who require it, whether they be located in the United Kingdom or abroad. It will examine the legal issues that arise concerning such transactions, which it will do from the perspective of English law. This book does not purport to consider the multifarious local law matters which may be relevant to such a financing transaction where it involves foreign elements. The focus is solely on the laws applied by courts in England and Wales and arbitral tribunals applying English law.
1.02 There are a number of ways in which finance may be raised, ranging from finance provided under loan facilities of various different types, to capital markets (p. 2) issues of bonds and notes and structured finance in the form of a securitisation. Derivatives transactions may also be a relevant part of the way in which a financial package is structured. Finance may also be raised by a receivables or debt purchase transaction or through an equipment finance facility, in the latter case, by leasing, hire-purchase, and conditional sale. Sometimes a supplier (which may, in fact, be a financier) may be prepared to extend credit by giving time to pay, or a purchaser may be prepared to make an advance payment. In addition, finance may be raised by other methods such as through the issuance of share capital. Project finance utilises one or more methods of raising finance for the development of large-scale asset-based projects. A number of these various methods of raising finance in the London markets are addressed in this book’s parent work McKnight, Paterson, & Zakrzewski on the Law of International Finance. But this book focuses on the most fundamental and most common of these financing methods: loan facilities. It examines the law surrounding loan transactions involving just one lender and one borrower (bilateral loans) and complex multilateral loan transactions involving groups of lenders (syndicated loans) and issues connected with transfers of participations in such loans.
1.03 There are number of important matters that may affect the structure, costs, and risk allocation of an English law-governed loan financing transaction and yet are beyond the scope of this book. The reader is referred to the parent work for their detailed analysis, however, these matters are flagged here at the outset to highlight their importance.
1.06 A perennial problem that must be faced by those who provide credit is the possibility of suffering a default in repayment of the indebtedness that has been incurred in utilising the credit. If it has not become apparent beforehand, the problem will do so when the entity that has obtained the credit becomes insolvent. To guard against this problem, or at least to mitigate against its effect, credit protection may be sought in various different ways. Once again, a conflict of laws analysis will be important in considering the methods of protection that may be available and, of course, the commercial adequacy of what is available will also have to be assessed. The possible methods to achieve credit protection will include taking security over assets of the debtor, use of the techniques of set-off or netting of claims, holding proprietary claims against assets that are used by the debtor or generated by its business or by obtaining the commitment of a third party to be answerable for the debtor’s default by way of a suretyship obligation, which may itself be protected by taking security over the surety’s assets, or using one of the other techniques that have just been mentioned. Equipment finance is a subject that is related to the techniques for holding proprietary protection in assets. These various matters are covered in detail in the parent work and will not be repeated here.
1.07 This book is laid out in the following way. This chapter deals with general matters of contract law that are important to understanding English law-governed loan transactions. Chapter 2 concerns loan facilities. Chapter 3 deals with legal issues arising in respect of syndicated lending. Chapter 4 deals with loan transfers.
1.08 It is now relevant to turn to a consideration of various general issues of a legal nature that might concern a lending transaction (particularly as to contractual matters), which will occupy the remainder of this introductory chapter.
1.09 From a legal perspective, the law of contract lies at the heart of all loan transactions. What follows explores contractual issues that may arise under English law and which are of particular relevance to finance transactions. Similar issues are likely to arise under any other system of law that may be connected with a transaction, although the analysis and outcome may be different. It is not possible to provide a treatise on the whole of the law of contract,3 so the discussion will cover some of the particular contractual issues that may arise in the context of the provision of finance, in particular where the applicable principles may differ from those in continental legal systems.
(p. 5) 1.11 By way of example, a guarantee must be in writing or evidenced by a note or memorandum which is in writing and the guarantee or the note or memorandum must be signed by or on behalf of the guarantor.8 A contract for the disposition of an interest in land must be in writing, signed by both parties.9 A disposition of an equitable interest in an asset must be in writing and signed by the disponor or his agent.10 A conveyance of land or an interest in land must be by way of deed if it is to convey or create a legal estate in the land.11 A power of attorney must be in the form of a deed.12 A dealing with a patent (including the grant of a security interest) must be in writing.13 An absolute (or legal) assignment of a chose in action must be in writing under the hand of (signed by) the assignor and written notice must be given to the debtor.14 The principal statutory enforcement remedies for security only apply if the security was made by deed.15 A further requirement arises in relation to contracts which the law requires to be in writing or evidenced in writing. An amendment or variation of such a contract which requires a written form must also be in writing, otherwise it will be ineffective.16 It is important to note that a loan agreement does not come within any of the aforementioned categories requiring some kind of formality. Accordingly it may be entered into in writing, orally, or by conduct.
1.12 Amendments to simple contracts such as loan agreements have also traditionally been treated by English courts as requiring no particular form. This used to be the case even if the terms of the contract provided to the contrary such as by stipulating that to be effective amendments have to be in writing and signed by both parties.17 However, recently the Supreme Court adopted a different position in Rock Advertising Ltd v MWB Business Exchange Centres Ltd.18 It held that English law should give effect to a contractual provision requiring specified formalities to be observed for a variation.
(p. 6) 1.13 It has become increasingly common for agreements, both simple contracts and deeds, to be executed by the exchange of scanned documents by email. Certain principles have been laid down by case law19 and have given rise to recommended practices in respect of such virtual signings conducted by email. In the Mercury case the judge held that attaching a separately executed signature page to a deed document or using a signature page from a previous draft on a subsequent draft of the deed would not generate a validly executed deed. This led The Law Society Company Law Committee and The City of London Law Society Company Law and Financial Law Committees to prepare guidance on the execution through electronic signings of documents governed by English law.20 In short, the recommended guidance provided that, in the case of deeds, the scanned signature page should be returned with the full final version of the deed being executed (which itself could be in electronic form), whereas simple contracts, such as loan agreements, could be executed through the authorised attachment of pre-executed signature pages to subsequent drafts. However, best practice, to avoid uncertainty and future disputes, is to require signature pages to be emailed with the final form of the document that they relate to.
1.15 There must be an intention on the part of both parties to enter into a legally binding contractual relationship, and there must be certainty as to the essential terms of their agreement, before there can be a valid agreement between them.
1.17 Another of the prerequisites to a valid contract is the requirement as to the certainty of its essential terms.29 ‘There can be no contract without some terms, express or implied. If the express terms that are pleaded are significant, but are too uncertain and vague to be legally enforceable, there can be no concluded and binding agreement.’30 Thus, a supposed agreement between the parties that they (p. 8) will negotiate so as to conclude a contract, even if expressed to be an agreement to negotiate in good faith, is unenforceable and will fail for uncertainty31 because it will amount to nothing more than an unenforceable agreement to agree. On the other hand, a ‘lock out’ agreement, by which a person agrees not to enter into negotiations concerning a specified subject matter with third parties for a defined period, may be enforceable.32 Certainty can be achieved where the contract refers to an external and independent criterion for fixing a matter (as, for instance, is often done in loan facilities where the interest rate is fixed by reference to a Libor rate) or by reference to an objective criterion, such as a standard of reasonableness,33 provided the court can determine what that criterion should be.34 Certainty can also be achieved by the use of a master agreement, by which the parties agree that future dealings between them should be subject to the terms as contained in the master agreement. Such a mechanism will only be effective, however, if it can be certain when the parties deal that they meant to do so by reference to the master agreement and not independently of it.
1.22 In the context of loan agreements, generally it has not been necessary for courts to imply terms in law. Disputes in this context usually concern the question whether a term should be implied in fact into a particular contract which contains a gap.
In my judgment the following principles … can be deduced from [the] authorities, but this is intended to be in no way an exhaustive list. (i) Each case must be decided on its own facts and on the construction of its own agreement. Subject to that, (ii) where no contract exists, the use of an expression such as ‘to be agreed’ in relation to an essential term is likely to prevent any contract coming into existence, on the ground of uncertainty. This may be summed up by the principle that you ‘cannot agree to agree’. (iii) Similarly, where no contract exists, the absence of agreement on essential terms of the agreement may prevent any contract coming into existence, again on the ground of uncertainty. (iv) However, particularly in commercial dealings between parties who are familiar with the trade in question, and particularly where the parties have acted in the belief that they had a binding contract, the courts are willing to imply terms, where that is possible, to enable the contract to be carried out. (v) Where a contract has once come into existence, even the expression ‘to be agreed’ in relation to future executory obligations is not necessarily fatal to its continued existence. (vi) Particularly in the case of contracts for future performance over a period, where the parties may desire or need to leave matters to be adjusted in the working out of their contract, the courts will assist the parties to do so, so as to preserve rather than destroy bargains, on the basis that what can be made certain is itself certain. Certum est quod certum reddi potest. (vii) This is particularly the case where one party has either already had the advantage of some performance which reflects the parties’ agreement on a long-term relationship, or has had to make an investment premised on that agreement. (viii) For these purposes, an express stipulation for a reasonable or fair measure or price will be a sufficient criterion for the courts to act on. But even in the absence of express language, the courts are prepared to imply an obligation in terms of what is reasonable. (ix) Such implications are reflected but not exhausted by the statutory provision for the implication of a reasonable price now to be found in S. 8(2) of the Sale of Goods Act 1979 (and, in the case of services, in S. 15(1) of the Supply of Goods and Services Act 1982). (x) The presence of an arbitration clause may assist the courts to hold a contract to be sufficiently certain or to be capable of being rendered so, presumably as indicating a commercial and contractual mechanism, which can be operated with the assistance of experts in the field, by which the parties, in the absence of agreement, may resolve their dispute.
First, each case must be decided on its own facts and on the construction of the words used in the particular agreement. Decisions on other words, in other agreements, construed against the background of other facts, are not determinative and may not be of any real assistance.
Secondly, if on the true construction of the words which they have used in the circumstances in which they have used them, the parties must be taken to have intended to leave some essential matter, such as price or rent, to be agreed between them in the future—on the basis that either will remain free to agree or disagree about that matter—there is no bargain which the courts can enforce.
Thirdly, in such a case, there is no obligation on the parties to negotiate in good faith about the matter which remains to be agreed between them—see Walford v Miles  A.C. 128, at page 138G.
Fourthly, where the court is satisfied that the parties intended that their bargain should be enforceable, it will strive to give effect to that intention by construing the (p. 12) words which they have used in a way which does not leave the matter to be agreed in the future incapable of being determined in the absence of future agreement. In order to achieve that result the court may feel able to imply a term in the original bargain that the price or rent, or other matter to be agreed, shall be a ‘fair’ price, or a ‘market’ price, or a ‘reasonable’ price; or by quantifying whatever matter it is that has to be agreed by some equivalent epithet. In a contract for sale of goods such a term may be implied by section 8 of the Sale of Goods Act 1979. But the court cannot imply a term which is inconsistent with what the parties have actually agreed. So if, on the true construction of the words which they have used, the court is driven to the conclusion that they must be taken to have intended that the matter should be left to their future agreement on the basis that either is to remain free to agree or disagree about that matter as his own perceived interest dictates there is no place for an implied term that, in the absence of agreement, the matter shall be determined by some objective criteria of fairness or reasonableness.
1.25 Both cases were referred to in the Court of Appeal in MRI Trading AG v Erdenet Mining Corporation LLC,55 and together they provide a useful guide to the approach of the courts in this area.
1.26 One area where the issue as to certainty arises is in relation to contracts where a party is given a discretion which affects its own rights and obligations or the rights and obligations of the other party. This is particularly relevant to loan documentation and is discussed further later in this chapter.
(p. 14) 1.30 Similarly, there is no general duty of good faith or reasonableness that is owed by a party in exercising its rights under a contract,65 as the party is entitled to consider its own interests but, again, this is qualified by restrictions that are placed by the law in relation to the enforcement of penalties, the duties of a fiduciary towards its beneficiaries and the obligation of good faith and clean hands that is imposed on a party seeking equitable relief. In addition, an obligation to act in good faith may arise under an express term of a contract66 and it may also be implied where it is in accordance with the presumed intention of the parties.67 However, both interpretation of an express duty of good faith and implication of a duty of good faith are heavily dependent on the context.
1.32 Something similar to the requirement for certainty raises its head in relation to the identification of the parties to a contract. The consequence of a mistake by one party as to the identity of the other, particularly if that other is a rogue who has misled the mistaken party, was finally settled by the House of Lords in Shogun Finance Ltd v Hudson.69 The majority70 followed the previous case law, which had (p. 15) tended to distinguish between oral contracts concluded face to face and contracts entered into in writing. In the former situation, the courts took the view that, prima facie, the parties meant to deal with the person physically before them.71 In the second situation, however, the courts were prepared to take the view that the only contract that could have existed would have been between the named parties so that the fictitious identity of one of the parties would render it void from the outset72 and no legal relationship will arise between the parties. The majority of the House of Lords declined to adopt the more general approach favoured by the minority,73 that the contract should be considered as being only voidable and so valid and enforceable until such time as it was avoided.
1.34 A similar issue to that concerning the identity of the contracting parties concerns the effect of a contract which purports to extend the benefit of the contract (such as a right to receive a payment, the benefit of warranties or covenants, or the benefit of an exclusion clause) to third parties, including unrelated parties and the (p. 16) servants or agents of a contracting party. There was previously a real difficulty at general law in achieving this as the doctrine of privity of contract would intervene to prevent the third party, which was not a party to the contract, from relying upon the provision or being able to enforce it.77 If a contracting party sought to recover damages for the benefit of the third party, because the other party had failed to perform in favour of the third party, the contracting party would be met by the defence that it had suffered no loss, so it could not recover anything further than nominal damages.
1.36 It should be noted that at common law, two parties to a contract cannot impose the burden of a contract upon a third party that is a stranger to the contract, although an agent can bind its principal because the contract is really between the principal and the other contracting party.
1.38 In similar vein, in Technotrade Ltd v Larkstore Ltd83 the Court of Appeal allowed an assignee of the benefit of a contract for the performance of services relating to an asset to recover substantial damages for breach of the contract by the other contracting party. The breach had occurred prior to the date of the assignment, but the assignor had disposed of the asset to the assignee prior to the loss becoming apparent and consequent damage being suffered. It did not matter that the assignor had itself suffered no loss in that it had disposed of the asset to the assignee for full value and without any responsibility for the loss to the asset that later became apparent. The court distinguished the position in this case from the general rule that an assignment is subject to equities and that the assignee cannot recover for a claim or loss that would not have been recoverable under the contract by the assignor.84 This was done on the basis that it was the cause of action (as opposed to the manifestation and suffering of the loss arising from the breach) that was assigned, and that had accrued prior to the date of the assignment. As a matter of law, the cause of action was complete when the breach occurred, even though the consequences of the breach were not manifested, and the consequential loss was not suffered, until a later time. To have found otherwise would have permitted a legal ‘black hole’ to arise into which the claim would have disappeared, with the result that the defendant would have escaped liability for its breach of the contract.
1.40 It is surprising how frequently what was thought to be a well-crafted contractual document turns out to be ambiguous and not to be as clear as previously imagined. Different interpretations can be put on the same words by those with opposing interests, particularly when something has gone wrong and it is necessary to determine which party should bear the responsibility or suffer the resulting loss. Agreements that have not been carefully prepared are even more susceptible to ambiguity. It is appropriate, therefore, to consider the approach that the courts take to the construction or interpretation of the express provisions of a contract.
(2) The background was famously described by Lord Wilberforce94 as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. Ltd95).
(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios,96 ‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense’.
This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, para 77 citing In re Sigma Finance Corpn  1 All ER 571, para 12, per Lord Mance JSC. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.
Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines (p. 22) which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance JSC spoke in Sigma Finance Corpn  1 All ER 571, para 12, assists the lawyer or judge to ascertain the objective meaning of disputed provisions.
1.45 In short, as Lord Bingham had noted a couple of decades earlier, contractual construction is an exercise which is ‘neither uncompromisingly literal nor unswervingly purposive’.111 It is a combination of both, with the relative weight to be given to the ordinary meaning of the text and to the context (including purpose) varying in accordance with the language used and the surrounding circumstances.
1.46 The third point in Lord Hoffmann’s summary reflects what was said by Lord Wilberforce in Prenn v Simmonds112 and is sometimes referred to as the ‘exclusionary principle’. It also partly reflects the so-called parol evidence rule,113 by which extrinsic evidence was inadmissible to add to or subtract from the contents or meaning of a written agreement or instrument. In Chartbrook in the House of Lords the court indicated, obiter dicta, that there was no clearly established case for revisiting the rule in Prenn.114 The principle is subject to a number of exceptions and qualifications, such as where the written document was not intended to contain the whole agreement,115 where another document is incorporated by reference into the agreement or where there is a collateral contract,116 where there is a claim for misrepresentation, where evidence is admitted as to the validity of the agreement117 or that it is a sham,118 where a term may be implied in the agreement, and where there is a claim for rectification of the document because it does not represent the true agreement between the parties.
1.47 It has also been held that evidence of the prior negotiations between the parties will be admitted to prove the meaning of an unusual expression that was used in the contract and which was commonly understood between the parties in their negotiations to have a particular meaning,119 that evidence of prior negotiations may be admitted to establish the intended contents of an obvious omission on the face (p. 23) of the document,120 and that evidence from prior negotiations can be admitted to prove that background facts were known by the parties.121 Evidence of prior negotiations may be admitted to prove the subject matter of the contract.122 Evidence of a prior agreement between the parties can also be admitted.123 However, the general rule continues to be that evidence of prior negotiations, such as prior drafts of the loan documentation, is inadmissible for the purposes of construing the execution copies.
This Agreement constitutes the entire contract between the parties and supersedes all prior or collateral representations, agreements, negotiations or understandings, whether oral or in writing.
1.51 A lender or financier is often given a measure of discretion in a facility as to what may be required of the borrower and the extent of the rights and obligations of the borrower under the facility. Such a discretion may go to matters such as setting interest rates, determining if conditions precedent have been fulfilled before the facility will be available for drawing, the extent of performance or observance of restrictions by the borrower that is required under the covenants and undertaking provisions of the facility, and the basis on which the lender will give consents when requested by the borrower. Sometimes the discretion has the appearance of being unlimited, in the sense of it being entirely within the will of the lender.132 The question that arises is whether any limitation should be implied in such a case as to the factors that the lender should take into account and the grounds upon (p. 25) which it would be entitled to make a determination or take other action within its discretion.
1.53 There have been a number of Court of Appeal decisions and a recent Supreme Court decision135 that have concerned this issue in relation to a variety of different contracts. These decisions have addressed the issue by seeing if a term could be implied into the contract as to the extent of, and the manner in which, the (p. 26) discretion should be exercised and, if so, what the term should be. In summary, the following propositions may be drawn from the cases.
1.55 Secondly, where a term is to be implied, it should be the minimum that is necessary to meet the tests for its implication. It would appear that, if a term is to be implied, the minimum that might be implied would include an obligation to act in good faith, on the basis of the facts or the available material, with perhaps some obligation to review the adequacy of that material and seek further information if the material was obviously deficient.139 In addition, it might be implied that the discretion should not be exercised capriciously, arbitrarily, or for a collateral purpose which was outside the legitimate scope of the contract.140 For a time it was uncertain whether such an implied obligation would also encompass an (p. 27) obligation to refrain from acting in a way in which no other person in a similar position, acting reasonably, would act (known as the Wednesbury unreasonableness test141) as there were conflicting judicial pronouncements on this point.142 But the Supreme Court in Braganza v BP Shipping Ltd set out to clarify the law by adopting a two-stage approach. First, the court looked at the decision-making process to see whether the right matters had been taken into account in reaching the decision (and also that irrelevant matters had not been taken into account).143 Secondly, the court considered the result arrived at to see whether the outcome is so outrageous that no reasonable decision-maker could have reached it.144 The second stage, somewhat controversially, transposes the Wednesbury unreasonableness public law concept into the law of contract.
1.58 Finally, it is necessary to consider the position where the parties have expressly imposed fetters on the exercise of a contractual discretion; for example, where an express restriction has been inserted that the relevant power must be exercised in a commercially reasonable manner or that the lender must act reasonably (or not unreasonably). There is an important distinction to be drawn here between the parties agreeing that the outcome must be reasonable and only agreeing that the decision-making process must be conducted reasonably. In Lehman Bros Special Financing Inc v National Power Corp152 an express requirement to ‘act in good faith and use commercially reasonable procedures in order to produce a commercially reasonable result’ was held to impose an objective standard of reasonableness, and not only rationality.153 The earlier case of Fondazione Enasarco v Lehman Brothers Finance SA154 had held that the words ‘reasonably determines in good (p. 29) faith’ imposed a standard of rationality, not objective reasonableness. Similarly, in Barclays Bank PLC v Unicredit Bank AG155 where a matter had ‘to be determined by [the Bank] in a commercially reasonable manner’, the Bank was only required to act rationally (the outcome did not have to be commercially reasonable) and could have primary regard to its own commercial interests. In each case, the effect of an express fetter on a contractual discretion will be a matter of construction of the words used in the context of the relevant contract.
1.59 Crowther v Arbuthnot Latham & Co Ltd156 concerned an express obligation ‘not to withhold consent unreasonably’. There the court held that the test was one of objective reasonableness, not merely of rationality (Wednesbury reasonableness) nor one of just subjectively balancing commercial interests in a commercially reasonable manner.157 A bank was found to have acted objectively unreasonably in withholding its consent to the sale of property used as security for the borrower’s indebtedness because it attempted to enhance its rights rather than protect them. An objective standard of reasonableness requires the court to identify what is a reasonable outcome (with the court supplanting the decision-maker), whereas rationality requires the court to assess whether the process followed by the decision-maker adhered to a minimum standard of rationality (with the decision remaining that of the decision-maker).158 Nonetheless, it must be remembered that both rationality and wholly objective reasonableness allow for a result that falls within a range.159 Even when applying the reasonableness standard there is not necessarily a single correct answer.
1.61 In Jet2.com all three judges in the Court of Appeal focused on the need to identify whether the object of the best endeavours clause was sufficiently certain, and sufficient objective criteria had been supplied to determine whether it was met, in order for the clause to be enforceable.164 It has been said that best endeavours does not mean second-best endeavours and, broadly speaking, that no stone should be left unturned in seeking to achieve the desired result: Sheffield District Ry Co v Great Central Ry Co.165 Somewhat less stridently, the Court of Appeal said in IBM United Kingdom Ltd v Rockware Glass Ltd166 that an obligation placed upon a party to use its best endeavours meant that the party should take all of the possible steps that a prudent and determined person would take, if he were acting in his own interests and wished to obtain or achieve the stated objective. (p. 31) This would include incurring reasonable expenditure. In Terrell v Mabie Todd & Co167 it was said that the obligor could have regard to the likely commercial success of the steps to be taken as well as its own financial and commercial position. By way of further qualification, in another case it was held that an obligation on a company and its merchant bank advisers to use their best endeavours to obtain the approval of the company’s shareholders to a transaction did not extend to recommending the transaction if there had been an intervening event which would make the transaction disadvantageous to the company and its shareholders, as to have given the recommendation in such circumstances would have amounted to giving bad advice to the shareholders and contrary to the obligors’ duties to the shareholders.168 Such an obligation cannot require the promisor to perform unlawful acts, including breaches of contracts with third parties by which the promisor is bound.
1.64 In Astor Management AG v Atalaya Mining Plc175 the High Court recently considered an obligation to use all reasonable endeavours to obtain a senior debt facility by a specified date. It is worth noting that the specified date was construed as a target by which the object was to be achieved, and not as the date on which the endeavours obligation expired. If that is the intention, clear wording to that effect will be needed in the relevant clause.
1.65 Illegality is a subject that might raise its head when considering the validity and enforceability of a finance transaction. This is particularly true in the current geopolitical climate where increasing regulation of markets, international sanctions, and trade wars seem to feature on the agenda of the world’s major powers. The law as to the effect of illegality on a transaction is not terribly clear and what follows is an attempt to summarise a rather difficult area.176 Illegality in this sense means unlawfulness under statute or at common law, the latter including contracts to commit a crime or a tort and contracts which offend against morals or public policy. Illegality may affect a transaction where the entry into or the performance of the transaction is unlawful in itself, where the intended purpose or use of the subject matter of the transaction is unlawful, or where some related transaction is unlawful so that it taints the principal transaction. The illegality is likely to be raised as an objection to reliance on the transaction or as a defence against a claim for non-performance of one or more putative obligations under it.
1.66 The discussion that follows will commence by examining the effect of illegality under statute and then turn to unlawfulness at common law. It will go on to examine the situations where title in property may pass notwithstanding an illegal contract and the right of a party to an illegal contract to bring a restitutionary claim to recover benefits it has conferred on the other party under the contract, (p. 33) before concluding with the approach that the courts should take in considering pleadings or evidence which concern illegality.
1.67 As a preliminary matter, a distinction should be drawn between the effect of an illegality that existed under statute at the time the contract was made and supervening illegality under legislation that came into force after that time. In the latter situation, it is likely that the contract will be frustrated177 unless the illegality affects the contract in some minor way that is irrelevant to the main purpose or fulfilment of the contract178 or if it arises in consequence of an earlier default of the relevant party.179 It would appear that the effect of a supervening illegality is not a matter for which the parties can expressly provide in the contract so as to preclude the contract from being frustrated,180 unlike the position in most other situations that would otherwise give rise to a frustration of a contract.
1.72 It is now convenient to consider the position at common law as to the effect of unlawfulness on a transaction.198 This covers transactions which involve (in their formation, their performance, or in the use to which their subject matter will be put) the commission of a crime or, as discussed earlier, a quasi-criminal act which engages the public interest in the same way as a crime.199 A related matter that will also be discussed concerns the enforceability of transactions that, taken in isolation, could be valid and enforceable but which are linked to or tainted by some other unlawful transaction.
1.74 The question then arose as to the extent or degree to which a party’s awareness of the other party’s intended unlawful behaviour (in entering into the transaction, in its manner of performance, in the intended use of the subject matter of the transaction, or in its connection with a related transaction that is tainted by illegality) would be taken to amount to a sufficient knowledge of that unlawfulness, so as to prevent the first of those parties from being able to rely upon and enforce the transaction. Where, on the facts, the essence of the transaction was to engage in an unlawful activity or there is an obvious shared intention to engage in such an activity,207 the parties would be equally complicit and neither would be able to enforce the transaction. In one early case it was held that mere knowledge on its own would amount to a sufficient participation in the other party’s unlawful activities so as to deny the right to enforce the contract,208 but in another case (which was decided a few months later) the court came to the opposite conclusion.209 The approach that developed over time had been to see the issue as a matter of the degree of a party’s involvement or ‘participation’ in the unlawfulness, rather than judging it in absolute terms.210 The question was whether the parties had a common design or a shared intention so that they each participated in the unlawfulness. However, it has not always been easy to draw the line, and the effect of the relevant unlawfulness has depended upon the facts of the particular case.
First, where a contract is ex facie illegal, the court will not enforce it, whether the illegality is pleaded or not; secondly, where the contract is not ex facie illegal, evidence of surrounding circumstances tending to show that it has an illegal object should not be admitted unless the circumstances are pleaded; thirdly, where unpleaded facts, which taken by themselves show an illegal object, have been revealed in evidence (because, perhaps, no objection was raised or because they were adduced for some other purpose), the court should not act on them unless it is satisfied that the whole of the surrounding circumstances are before it; but, fourthly, where the court is satisfied that all the relevant facts are before it and it can see clearly from them that the contract had an illegal object, it may not enforce the contract, whether the facts were pleaded or not.
1.82 English law does not recognise the civil law concept of force majeure, by which a party’s obligations may be adjusted or terminated as a matter of law (and without the need to make express provision in the contract) in consequence of an adverse change in circumstances which makes it uneconomic or more difficult or onerous to perform the contract. The precise parameters of the doctrine of force majeure will depend upon the laws of the particular civil law jurisdiction which governs the contract.
1.84 Nonetheless, English law does permit the parties in their contract to provide for the consequences of events which the contract stipulates will have the effect of modifying or discharging their responsibilities. Such clauses are often referred to, if somewhat confusingly, as ‘force majeure clauses’. They may comprehend matters that might fall within the civil law concept of force majeure or the more fundamental matters required before the common law doctrine of frustration could be invoked. Typically, such a clause will provide a list of possible events and then define the consequences thereof, which may include some or all of a temporary suspension of a party’s obligations, an adjustment in the contract price, an extension of time to perform, restitution of moneys paid and compensation for work or services already performed, or a complete discharge from the obligation to make further performance of the contract. The list of events may include matters such as labour strikes and similar industrial action, external blockades and embargoes, war, terrorist attacks, civil commotion, and acts of God.243 Another typical event is political risk and other governmental intervention which prevents or impedes performance.
1.85 Such provisions are often to be found in project, construction, development, and supply contracts, which contracts themselves will sometimes provide the basis for a financing. In such a case, it is essential for the financier to understand the circumstances in which the clause may operate in the underlying commercial contract and its consequences, both in relation to that contract and the financing arrangements.
1.86 In Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD244 Aikens J made a number of observations concerning the operation of such a clause, (p. 43) as follows. In general and unless they provide otherwise, force majeure clauses are concerned to excuse performance of contracts where the relevant events are outside the control of the party claiming to be excused and their effect could not have been avoided or mitigated by reasonable steps taken by that party.245 The evidential burden was upon the party relying upon the clause to establish that the facts fell within the terms of the clause. The alleged force majeure event had to be the effective cause of the failure to perform, rather than the real cause for such failure arising for some other reason.
1.88 This matter concerns the remedies that are available to a party to a contract (the ‘innocent party’) where the other party (the ‘defendant’) has breached the contract, always assuming that the contract is (and remains) valid and enforceable.247 Needless to say, it is a complex area of law upon which there is a vast amount of case law. All that can be provided here is a summary. In particular cases, questions of waiver, estoppel, and acquiescence may arise as a defence to an innocent party’s claim, which are beyond the scope of this book. The reader is referred to the standard texts on contract law for a fuller analysis. The discussion that follows will deal with breaches of contract in general, before examining the separate position concerning liquidated claims in debt.
1.94 Subject to the rules of remoteness, as referred to below, the general principle261 governing the assessment of the quantum of damages in a claim for breach of contract is that the damages should compensate the innocent party, as the victim of the breach, for the loss it has suffered,262 but it is up to the innocent party to prove its loss263 and it has a duty to take reasonable steps to mitigate its loss (for instance, by finding an alternate source of performance).264 In assessing damages, the innocent party is entitled to be placed, so far as money can do it, in the position it would have been in had the contract been performed.265 Whilst these basic principles appear comparatively straightforward, they are subject to a number of controversies in their application and interaction in practice,266 for example, as to the date at which damage is assessed and the consideration given to events arising after breach but before assessment of damage. No more detailed review is attempted here, and the reader is once again referred to the standard contract texts.
1.96 Under the rules that used to apply relating to privity of contract (as described earlier in this chapter), only a party to the contract (or its agent, trustee, or assignee) may enforce the contract, so that in general a third party could not enforce the contract for its own benefit. If the contracting party sought to enforce the contract for the benefit of a third party, the contracting party (unless it was the agent or trustee of the other person) was likely to be met by a defence that it had suffered no loss and so was only entitled to receive nominal damages. The Contracts (Rights of Third Parties) Act 1999 has overcome many of the problems associated with the privity rule, but the operation of the Act may be excluded or restricted and, in such cases, the rule will continue to be relevant.
1.100 However, the debtor may be able to raise promissory estoppel (discussed at para 1.102) as a defence, if it acted in reliance on the creditor’s assurance that the debt had been discharged. Furthermore, there are various ways in which an agreement to compromise the debt can be made binding on the creditor. The agreement may be made by deed or the debtor may provide fresh consideration, such as by agreeing to pay early,283 by agreeing to pay in a different currency to the currency in which the debt was originally payable, by agreeing to make payment together with the delivery of some other asset or benefit,284 or by agreeing to forbear in the enforcement of a cross-claim. It has also been held that part payment of a debt by a third party, if accepted by the creditor, will release the debtor, and that this does not depend upon an agreement to which the debtor is a party.285 In that regard, it is easy to see that the third party may enter into an agreement which it could enforce against the creditor, by preventing the creditor from suing the debtor, but, prior to the Contracts (Rights of Third Parties) Act 1999, it is difficult to understand how the debtor might have benefited directly from such an agreement.
1.101 In similar vein, a debtor can enter into an enforceable agreement with its creditors, by which they all agree with the debtor to accept a compromise of their respective claims.286 This has been extended by the provisions of the Insolvency Act 1986 concerning voluntary arrangements. In addition, under section 62 of the Bills of Exchange Act 1882, an unconditional renunciation in writing by the holder of a bill, at or after maturity of the bill, of the liability of the acceptor under the bill will amount to a discharge of the acceptor287 and (if specified) other parties to the bill, and an earlier written renunciation by the then holder of the bill will bind the holder but not a subsequent holder in due course who took without notice.
1 See Sarah Paterson and Rafal Zakrzewski (eds), McKnight, Paterson, & Zakrzewski on the Law of International Finance (2nd edn, OUP 2017) ch 2.
2 ibid chs 4 to 6.
3 For a detailed analysis see eg Hugh Beale (ed), Chitty on Contracts (32nd edn, Sweet & Maxwell 2015).
4 Rock Advertising Limited v MWB Business Exchange Centres Limited  UKSC 24 .
5 Consideration is simply ‘something of value’, either a detriment to the recipient of a contractual promise or a benefit to the promisor. The most common form of consideration is a mutual promise (eg to pay a price for goods or services which are to be provided). However, almost anything of value, subject to a few exclusions based on judicial precedent, will suffice to constitute consideration if it confers a practical benefit: Williams v Roffey Bros & Nicholls (Contractors) Ltd  1 QB 1 (CA) and MWB Business Exchange Centres Ltd v Rock Advertising Ltd  EWCA Civ 553.
6 As to the requirements for making a deed, see s 1 of the Law of Property (Miscellaneous Provisions) Act 1989 and HSBC Trust Co (UK) Ltd v Quinn  EWHC 1543 (Ch). As to execution of a deed, see that section, ss 44 and 46 of the Companies Act 2006 (replacing ss 36 to 36AA of the Companies Act 1985), and ss 74, 74A, and 76 of the Law of Property Act 1925. As to execution of deeds by companies incorporated outside the UK see Overseas Companies (Execution of Documents and Registration of Charges) Regs 2009, SI 2009/1917. Where a deed does not satisfy the statutory requirements, it might still take effect as a simple contract: Zurich Insurance plc v Nightscene Ltd  EW Misc 27 (CC), Banque Cantonale de Genève v Sanomi  EWHC 3353 (Comm) ; see also Bank of Scotland v Waugh  EWHC 2117 –; but contrast R (on the application of Mercury Tax Group and another) v HMRC  EWHC 2721 (Admin) .
7 The view taken by the Law Commission in its paper Electronic Commerce: Formal Requirements in Commercial Contracts (2001) was that the requirements for writing and signatures that are required by statutory provisions in relation to commercial contracts can be satisfied by electronic means and that there was no need for English law to take any legislative steps by way of further implementation of the EC Directive on electronic commerce (EC 2000/31 OJ L178/1 17/7/2000) or the EC Directive on electronic signatures (EC 1999/93 OJ L13/12 19/1/2000). See also the Electronic Communications Act 2000 and the Signatures Regs 2002, SI 2002/318. The EC Directive on electronic signatures was repealed by reg (EU) 910/2014 of the European Parliament and Council of 23 July 2014 on electronic identification (eID) and trust services for electronic transactions in the Internal Market which applies from 1 July 2016 and provides for the mutual recognition of electronic signatures and identities across the EU.
8 S 4 of the Statute of Frauds 1677. In N Mehta v J Pereira Fernandes S.A.  EWHC 813 (Ch), it was held that an email can be a sufficient ‘memorandum or note’ of the guarantee for purposes of this section.
9 S 2 of the Law of Property (Miscellaneous Provisions) Act 1989.
10 S 53(1)(c) of the Law of Property Act 1925, but this is subject to reg 4(1)(2) of the Financial Collateral Arrangements (No 2) Regs 2003, SI 2003/3226.
11 S 52 of the Law of Property Act 1925.
12 S 1(1) of the Powers of Attorney Act 1971.
13 S 30(6)(a) of the Patents Act 1977.
14 S 136 of the Law of Property Act 1925, but this is subject to reg 4(1)(3) of the Financial Collateral Arrangements (No 2) Regs 2003, SI 2003/3226.
15 S 101 of the Law of Property Act 1925.
16 McCausland v Duncan Lawrie Ltd  1 WLR 38.
17 Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd  EWCA Civ 396.
19 In particular R (on the application of Mercury Tax Group and another) v HMRC  EWHC 2721 (the ‘Mercury case’).
21 See Sarah Paterson and Rafal Zakrzewski (ed), McKnight, Paterson, & Zakrzewski on the Law of International Finance (2nd edn, OUP 2017) ch 4 for a discussion of these matters.
22 Ss 39 and 40 of the Companies Act 2006 (ss 35 and 35A of the Companies Act 1985).
23 See eg Kleinwort Benson v Malaysia Mining  1 All ER 785 (CA).
24 For instance, Carlton Communications plc v The Football League  EWHC 1650 (Comm) and Manches LLP v Freer  EWHC 991 (QB).
25 Rugby Group Ltd v Proforce Recruit Ltd  EWHC 70 (QB). The case was subject to an appeal, but not on this point:  EWCA Civ 69. See also Taylor v Burton  EWCA Civ 142  and Global Asset Capital Inc v Aabar Block Sarl  EWCA Civ 37. In RTS Flexible Systems v Molkerei Alois Müller GmbH  UKSC 14 an unsigned draft which contained a clause stipulating that it ‘shall not become effective until each party has executed a counterpart and exchanged it with the other’ was waived by conduct which gave rise to a contract on the terms contained in the draft.
26 Pagnan SpA v Feed Products Ltd  2 Lloyd’s Rep 601, 619; Bear Stearns Bank plc v Forum Global Equity plc  EWHC 1576 (Comm); Immingham Storage Co Ltd v Clear plc  EWCA Civ 89; Air Studios (Lyndhurst) Ltd v Lombard North Central plc  EWHC 3162 (QB); Bieber v Teathers Ltd (in Liquidation)  EWHC 4205 (Ch).
27 Pagnan SpA v Feed Products Ltd  2 Lloyd’s Rep 601, 619.
28 Bear Stearns Bank plc v Forum Global Equity plc  EWHC 1576 (Comm) . Thus an agreement made at an informal meeting in a pub did not give rise to a binding contract: Blue v Ashley  EWHC 1928 (Comm).
29 May and Butcher Ltd v R  2 KB 17; Wells v Devani  EWCA Civ 1106.
30 Per Mummery LJ in Cayzer v Beddow  EWCA Civ 644 .
31 Walford v Miles  AC 128; Barbudev v Eurocom Cable Management Bulgaria Eood  EWHC 1560 (Comm). But see also Emirates Trading Agency LLC v Prime Mineral Exports Limited  EWHC 2104 in which an obligation to undertake ‘friendly discussion’ prior to arbitration was an enforceable condition precedent.
32 Walford v Miles  AC 128 and Pitt v PHH Asset Management Ltd  1 WLR 327.
33 Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503.
34 Baird Textile Holdings Ltd v Marks & Spencer plc  EWCA Civ 274,  1 All ER (Comm) 737.
35 Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503; Foley v Classique Coaches Ltd  2 KB 1; Scammell v Ouston  AC 251; British Bank of Foreign Trade v Novimex Ltd  1 KB 623; F&G Sykes (Wessex) Ltd v Fine Fare Ltd  1 Lloyd’s Rep 53; Sudbrook Trading Estate Ltd v Eggleton  1 AC 444; G Percy Trentham Ltd v Archital Luxfer Ltd  1 Lloyd’s Rep 25; Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD  EWCA Civ 406,  2 Lloyd’s Rep 76.
36 However, incorporation of terms by usage and custom can only take place if the usage or custom is notorious, certain, and reasonable, not just if there is a mere trade practice: Bear Stearns Bank plc v Forum Global Equity plc  EWHC 1576 (Comm).
37 Commercial Contracts and the Commercial Court  LMCLQ 382, 391, quoted with approval by Lord Steyn in Homburg Houtimport BV v Agrosin Private Ltd, The Starsin  UKHL 12,  1 AC 715 .
38 Duke of Westminster v Guild  QB 688, 700. In Irish Bank Resolution Corp Ltd (In Special Liquidation) v Camden Market Holdings Corp  EWCA Civ 7 it was held that the implied term must not be substantially inconsistent with the express terms, not only linguistically inconsistent.
39 Luxor (Eastbourne) Ltd v Cooper  AC 108 .
40 Per MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd  2 KB 206, 227 (affd  AC 701).
41 The Moorcock (1889) LR 14 PD 64.
42 BP Refinery (Westernport) Pty Ltd v The President etc of the Shire of Hastings (1978) 52 ALJR 20, 26.
43 See Rix LJ in Socimer International Bank Ltd v Standard Bank London Ltd  EWCA Civ 116 –; and Torre Asset Funding v RBS  EWHC 2670 (Ch).
44  EWHC 655 (Comm) , this point was upheld on appeal  EWCA Civ 2026 –.
45 Belize Bank Ltd v Attorney General of Belize  UKPC 10 .
46 See eg Richard Hooley, ‘Implied Terms After Belize Telecom’ (2014) 73(2) Cambridge Law Journal 315 and Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc  EWCA Civ 531.
48 ‘[T]he fact that without the term the contract might potentially work to the disadvantage of one party in certain circumstances, in that it does not make a profit it might have made other times, does not necessarily render the contract as a whole incoherent’: J Toomey Motors Ltd v Chevrolet UK Ltd  EWHC 276 (Comm) –. As Arnold v Britton  UKSC 36 demonstrates, business necessity can pose a high threshold.
49 Rosenblatt (A Firm) v Man Oil Group SA  EWHC 1382 (QB) .
50 Geys v Société Générale, London Branch  UKSC 63 .
51 Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd  UKSC 72 .
52 In addition, in other situations, statutory law may fill a gap by also providing for implied terms. In addition to the examples given by Rix LJ in the passage from the Mamidoil-Jetoil case that follows (see text to n 53), the following (which is not an exhaustive list) further statutory implied terms might be mentioned: ss 12–15 of the Sale of Goods Act 1979 (implied terms as to title, description, quality and fitness, and samples), together with several other provisions of that Act and provisions of the Supply of Goods (Implied Terms) Act 1973 and of the Supply of Goods and Services Act 1982 (including s 13 as to a duty of care and skill in a contract for the supply of services) and the implied covenants for title contained in the Law of Property (Miscellaneous Provisions) Act 1994.
53  EWCA Civ 406,  2 Lloyd’s Rep 76 .
54 BJ Aviation Ltd v Pool Aviation Ltd  2 P&CR 25.
56 Walford v Miles  AC 128. See also the review conducted by Morgan J in Berkeley Community Villages Ltd v Pullen  EWHC 1330 (Ch) –. See also Rosalina Investments Ltd v New Balance Athletic Shoes (UK) Ltd  EWHC 1014 (QB).
57 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd  1 QB 433 (CA) 439; MSC Mediterranean Shipping Co SA v Cottonex Anstalt  EWCA Civ 789 .
58 Hamilton v Allied Domecq plc  UKHL 33.
59 Depending on the facts, in the tort of deceit as a fraudulent misrepresentation, in negligence for a negligent misrepresentation, or under s 2 of the Misrepresentation Act 1967. It may also be possible to bring a claim based upon a collateral contract and, if the recipient acts expeditiously (but subject to s 2(2) of the Misrepresentation Act 1967), it may be able to rescind the contract. For a detailed consideration of rescission for misrepresentation see Chapter 4 of Dominic O’Sullivan, Steven Elliott, and Rafal Zakrzewski, The Law of Rescission (2nd edn, OUP, 2014).
60 See eg Associated Japanese Bank (International) Ltd v Credit du Nord SA  1 WLR 255, which also discusses the concept of a common mistake that will make a contract void at common law. In Statoil ASA v Louis Dreyfus Energy Services LP (The Harriette N)  EWHC 2257 (Comm) Aikens J, relying on the Court of Appeal decision in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd  QB 679, rejected the existence of any equitable jurisdiction that would render a contract voidable for unilateral mistake rather than void.
61 Bankers Trust International plc v PT Dharmala Sakti Sejahtera (No. 2)  CLC 518; Property Alliance Group Ltd v Royal Bank of Scotland plc  EWCA Civ 355.
62 Pao On v Lau Yiu Long  AC 614; National Westminster Bank plc v Morgan  AC 686.
63 For a detailed consideration of vitiation of contracts due to undue influence and breach of fiduciary duties see Chapters 6 and 8 of Dominic O’Sullivan, Steven Elliott, and Rafal Zakrzewski, The Law of Rescission (2nd edn, OUP 2014).
64 See the review on this subject by the Court of Appeal in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd  1 QB 433. But it must be borne in mind that the Interfoto principle focuses on incorporation of contractual terms by notice and has no, or extremely limited, application when the contractual documentation is signed: Woodeson v Credit Suisse (UK) Ltd  EWCA Civ 1103 .
65 Allen v Flood  AC 1. This may be contrasted with the obligation of good faith and fair dealing which arises under New York law in relation to the performance of a contract and the exercise of disputes and remedial action: see § 1-203 of the New York Uniform Commercial Code and, in relation to the exercise of a right to accelerate a payment obligation, § 1-208 of that Code. For a general commentary, see Robert S. Summers, ‘Good Faith in Contract Law and the Sales Provisions of the Uniform Commercial Code’ (1968) 54(2) Virginia Law Review 195.
66 Unusually a loan agreement contained such an obligation in Horn v Commercial Acceptances Ltd  EWHC 1757. It provided that ‘each party shall act in absolute faith towards the other’. The concept of ‘good faith’ in such clauses was relatively widely construed in Berkeley Community Villages Ltd v Pullen  EWHC 1130 (Ch) and CPC Group Ltd v Qatari Diar Real Estate Investment Co.  EWHC 1535 (Ch) . However, in the interest of certainty, later cases have taken a more conservative and restrictive approach to express undertakings to act in good faith: Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust  EWCA Civ 200 and Sainsbury’s Supermarkets Ltd v Bristol Rovers (1883) Ltd  EWCA Civ 160.
67 Yam Seng Pte Ltd v International Trade Corporation  EWHC 111 (QB) and Al Nehayan v Kent  EWHC 333 (Comm). See also Myers v Kestrel Acquisitions Ltd  EWHC 916 (Ch) and Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd  EWCA Civ 396. But other authorities suggest that duties of good faith would only be implied very rarely, if at all: Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust  EWCA Civ 200 , Greenclose Ltd v National Westminster Bank plc  EWHC 1156 (Ch), Carewatch Care Services Ltd v Focus Caring Services Ltd  EWHC 2313 (Ch), and Ilkerler Otomotiv v Perkins Engines Co. Ltd  EWCA Civ 183.
68  EWHC 1156 (Ch) .
69  UKHL 62,  1 AC 919.
70 Lords Hobhouse, Phillips, and Walker.
71 See eg Phillips v Brooks  2 KB 243 and Lewis v Avery  1 QB 198, although a different conclusion was reached in Ingram v Little  1 QB 31.
72 See eg Cundy v Lindsay (1878) 3 App Cas 459 and Hector v Lyons (1988) 58 P&CR 156. In King’s Norton Metal Co Ltd v Edridge, Merrett & Co Ltd (1897) 14 TLR 98, a different result was reached but that was because the relevant contracting party was using an alias and its identity was not a material concern to the other party.
73 Lords Nicholls and Millett.
74 Bell v Lever Bros Ltd  AC 161. See also Associated Japanese Bank (International) Ltd v Credit du Nord SA  1 WLR 255 and Kyle Bay Ltd v Underwriters  EWCA Civ 57. The Court of Appeal in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd, The Great Peace  EWCA Civ 1407,  QB 679 said that there was no jurisdiction in equity to grant rescission of a contract on the ground that the contract was voidable for common mistake where the common law would not have regarded the contract as void, thereby overruling its previous decision in Solle v Butcher  1 KB 671, as having been given in error.
75 Smith v Hughes (1871) LR 6 QB 597.
76 Kleinwort Benson Ltd v Lincoln City Council  2 AC 349.
77 See eg Scruttons Ltd v Midland Silicones Ltd  AC 446, Cosgrove v Horsfall (1945) 62 TLR 140, and Genys v Matthews  1 WLR 758.
78 See New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon)  AC 154 and Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Australia) Pty Ltd (The New York Star)  1 WLR 138. Clauses under which a party to a contract acts as an agent in obtaining protection for a third party, when used in a contract for the carriage of goods by sea, are often referred to as ‘Himalaya clauses’ after the name of the vessel that was involved in Adler v Dickson  1 QB 158.
79 Beswick v Beswick  AC 58. However, see the further discussion of this issue at para 2.54.
80 But an assignment is subject to equities, including that the assignee should not recover from the debtor or obligor to any greater extent than the rights that were vested in the assignor and could have been recovered by it: Dawson v Great Northern & City Ry Co  1 KB 260 (but see also Technotrade Ltd v Larkstore Ltd  EWCA Civ 1079,  1 WLR 2926). Hence, the purported assignment of all of the rights of a lender under a facility agreement will include the right to receive payment of principal and interest but not necessarily the benefit of clauses that are purely personal to the circumstances of the assignor, such as under an increased costs clause if it relates only to the personal position of the assignor. Having transferred its commitment, it will not be exposed to the risks against which such a clause is intended to protect. However, where the increased costs clause is construed so as to extend to permitted assigns, then it would also cover the transferee.
81 Snelling v John G Snelling Ltd  QB 87.
82 St Martins Property Corp Ltd v Sir Robert McAlpine Ltd  1 AC 85; Alfred McAlpine Construction Ltd v Panatown  1 AC 518. See also Pegasus Management Holdings SCA v Ernst & Young  EWHC 738 (Ch).
83  EWCA Civ 1079,  1 WLR 2926.
84 Dawson v Great Northern & City Railway Co  1 KB 260.
85 Which applies, generally speaking, to contracts made after 11 May 2000 (s 10(2) of the Act), but see also s 10(3) of the Act.
87 In addition, in Nisshin Shipping Co Ltd v Cleaves & Co Ltd  EWHC 2602 (Comm),  1 Lloyd’s Rep 38 it was held that a third party could avail itself of the Act even though at general law the contract might have been enforceable for its benefit under a trust in its favour of the contractual benefit.
88 Ie, it is expressly named as being entitled to enforce the provision, it is a member of an identified class of intended beneficiaries, or if it answers a particular description, even if it was not in existence at the time of the contract: s 1(3). See the discussion on this point in Avraamides v Colwill  EWCA Civ 1533,  BLR 76. See also Prudential Assurance Co Ltd v Ayres  EWHC 775 (Ch), in which it was held that a third party will be treated as entitled to benefit from a contractual term even if the intention that it should do so was not the predominant purpose of the term or that the term was also intended to benefit a contracting party or another person. Although the actual decision in the Prudential Assurance case was overturned on appeal ( EWCA Civ 52,  1 All ER 1266), the appeal was not concerned with this issue.
89 S 1(2). In Nisshin Shipping Co Ltd v Cleaves & Co Ltd  EWHC 2602 (Comm),  1 Lloyd’s Rep 38 it was held that the third party will be entitled to enforce the term for its own benefit unless the right to do so was contrary to the intention of the parties in the contract. Thus, if the contract is neutral on the point, s 1(2) will not operate against the third party. In Laemthong International Lines Co Ltd v Abdullah Mohammed Fahem & Co  EWCA Civ,  1 Lloyd’s Rep 688 the Court of Appeal quoted with approval from the opinion of the Law Commission, Privity of Contract (Report No 242 of 31/7/1996) para 7.18, that the proper construction of a term for the purposes of s 1(2) of the Act would include taking account of the surrounding circumstances in making the contract, such as industry practice relating to that type of contract.
92 Ss 3(1)–3(5). It would also appear that the provisions of the Unfair Contract Terms Act 1977 (except for s 2(1)) would not affect the rights of the promisor under s 3(1)–(5).
93  1 WLR 896, 912–13. His Lordship made it clear that he had drawn his summary from the approach previously enunciated by Lord Wilberforce in Prenn v Simmonds  1 WLR 1381 and in Reardon Smith Line Ltd v Hansen-Tangen  1 WLR 989.
94 In Reardon Smith Line Ltd v Yngvar Hansen-Tangen  1 WLR 989.
97  UKHL 8,  1 AC 251 .
98 See also Spencer v Secretary of State for Defence  EWHC 120 in which knowledge of clear and well-known legal principles may be attributed to the parties.
99 Re Sigma Finance Corporation  UKSC 2 .
100 GSO Credit v Barclays Bank plc  EWHC 146 (Comm) , , and .
102  UKHL 54,  1 WLR 3251 –.
104 HHY Luxembourg SARL v Barclays Bank  EWCA Civ 1248.
105 Rainy Sky SA and ors v Kookmin Bank  UKSC 50.
106 Procter & Gamble v Svenska Cellulosa Aktiebolaget  EWCA Civ 1413.
107 Strategic Value Master Fund Ltd v Ideal Standard International Acquisition  EWHC 171.
108 Arnold v Britton  UKSC 36 (Lord Carnwath dissenting).
111 Arbuthnott v Fagan  CLC 1396, 1400.
112  1 WLR 1381, 1383–85.
113 Goss v Lord Nugent (1833) 5 B&Ad 58.
114 Chartbrook Ltd v Persimmon Homes Ltd  1 AC 1101 –.
115 Allen v Pink (1838) 4 M&W 140.
116 Mann v Nunn (1874) 30 LT 526.
117 Clever v Kirkman (1876) 33 LT 672.
118 AG Securities v Vaughan  1 AC 469.
119 Proforce Recruit Ltd v The Rugby Group Ltd  EWCA Civ 69.
120 Caterpillar Financial Services Ltd v Goldcrest Plant and Groundworks Ltd  EWCA Civ 272. As to the ability of the court to interpolate missing words into a written contract, see Lord Bingham in Homburg Houtimport BV v Agrosin Private Ltd  UKHL 12,  1 AC 715 .
121 Oceanbulk Shipping & Trading SA v TMT Asia Ltd  UKSC 44.
122 Macdonald v Longbottom (1859) 1 E&E 977.
123 Rix LJ in HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co  2 Lloyd’s Rep 161 –, although his Lordship doubted the value of such evidence. The Court of Appeal did find an earlier agreement useful in KPMG LLP v Network Rail Infrastructure Ltd  EWCA Civ 363, as the earlier agreement provided for the form of the later agreement, which erroneously omitted a significant matter which the court was able to correct as a matter of construction of the later document.
124 James Miller & Partners v Whitworth Street Estates (Manchester) Ltd  AC 583, 603 (Viscount Dilhorne) and 606 (Lord Wilberforce); L Schuler AG v Wickman Machine Tool Sales Ltd  AC 325.
125 McCausland v Duncan Lawrie Ltd  1 WLR 38.
126 James Miller & Partners v Whitworth Street Estates (Manchester) Ltd  AC 583.
127  UKPC 28,  2 AC 710 .
128  UKHL 41,  2 AC 680. See, in particular, Lord Walker at .
129 Inntrepreneur Pub Co v East Crown Ltd  2 Lloyd’s Rep 611. See also Matchbet Ltd v Openbet Retail Ltd  EWHC 3067 (Ch) – where such a clause was said to act as a contractual estoppel. However, an entire agreement clause does not prevent the implication of terms: JN Hipwell & Son v Szurek  EWCA Civ 674.
130 Thomas Witter Ltd v TBP Industries Ltd  2 All ER 573, 595–96; AXA Sun Life Services plc v Campbell Martin Ltd  EWCA Civ 133 and Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd  EWHC 484 (Comm) ; but contrast NF Football Investments Ltd v NFCC Group Holdings Ltd  EWHC 1346 (Ch). In any event, as the Thomas Witter case explained, an attempt to exclude or restrict reference to (and thus liability for) a misrepresentation will be subject to s 3 of the Misrepresentation Act 1967. This should be distinguished from the effect of a ‘non-reliance’ clause, by which a party confirms that it did not rely upon any representation in deciding to enter into the contract: contrast the approach in Thomas Witter Ltd v TBP Industries Ltd, at 596–97 with that taken in Watford Electronics Ltd v Sanderson CFL Ltd  EWCA Civ 317,  1 All ER (Comm) 696 –. The approach taken on this latter point in the Thomas Witter case may now also be seen as being inconsistent with that taken by the Court of Appeal in IFE Fund SA v Goldman Sachs International  EWCA Civ 811. See the further discussion at section 3.5.5.
131 Proforce Recruit Ltd v The Rugby Group Ltd  EWCA Civ 69.
132 The position where the discretion is qualified, for example, where the decision-maker is to act reasonably, is discussed at para 1.58 below.
133 The same conclusion would not arise under an overdraft facility as, from a legal perspective, it is considered to be a contract from day to day, with each party being able to terminate at any time. Thus, the lender theoretically is treated as proposing an interest rate each day, which the borrower accepts by maintaining its borrowing or rejects by repaying the outstanding amount. In a term loan, however, the legal mechanics are different as the contract is intended to endure for the term of the facility and thus the borrower is meant to be bound as to the payment of interest for the term. For further discussion of the exercise of contractual discretion in the context of conditions precedent see section 2.9.2.
134 In Watson v Watchfinder.co.uk Ltd  EWHC 1275 (Comm) a discretion to veto a contractual right (a share option) was held not to be unfettered because if it were it would render the underlying contract meaningless, as the contractual right would be entirely within the gift of the party having the veto.
135 Abu Dhabi National Tanker Co v Product Star Shipping Ltd, The Product Star (No 2)  1 Lloyd’s Rep 397; Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd  EWCA Civ 1047,  2 All ER (Comm) 299; Paragon Finance plc v Nash & Staunton  EWCA Civ 1466,  1 WLR 685; Paragon Finance plc v Pender  EWCA Civ 760,  1 WLR 3412; Lymington Marina Ltd v Macnamara  EWCA Civ 151; Socimer International Bank Ltd v Standard Bank London Ltd  EWCA Civ 116; McKay v Centurion Credit Resources LLC  EWCA Civ 1941; Westlb AG v Nomura Bank International plc  EWCA Civ 495; Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd  EWCA Civ 200; Barclays Bank plc v Unicredit Bank AG  EWCA Civ 302; Braganza v BP Shipping Ltd  UKSC 17; LBI EHF v Raiffeisen Bank International AG  EWCA Civ 719.
136 In general, the effect of a court decision on the common law is retrospective and not just prospective: see National Westminster Bank v Spectrum Plus Ltd  UKHL 41,  2 AC 680. However, a change to the parties’ understanding of the law that is brought about by a later court decision might render the contract void and give rise to a restitutionary claim based upon a mistake of law: see Kleinwort Benson Ltd v Lincoln City Council  2 AC 349 and, for the effects of common mistake, see section 1.2.6.
137 Lymington Marina Ltd v Macnamara  EWCA Civ 151; Marks & Spencer plc v BNP Paribas Security Services Trust Company (Jersey) Ltd  UKSC 72.
138 See Rix LJ in Socimer International Bank Ltd v Standard Bank London Ltd  EWCA Civ 116  and . However, both in the Socimer case and in Westlb AG v Nomura Bank International plc  EWCA Civ 495 a qualifier allowing a valuation to be made in a party’s ‘sole and absolute discretion’ did not exclude the implied restrictions. See also Mid Essex Hospital v Compass Group UK and Ireland Ltd  EWCA Civ 200 .
139 Contrast the approach of Arden LJ in Lymington Marina Ltd v Macnamara  EWCA Civ 151  and  with that of Pill LJ in that case, at  and of Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd  EWCA Civ 1047,  2 All ER (Comm) 299 .
140 Lymington Marina Ltd v Macnamara  EWCA Civ 151. An example provided by Paragon Finance plc v Nash & Staunton  EWCA Civ 1466,  1 WLR 685 would be where a lender had a discretion in setting the interest rate payable by a borrower and set an unduly high rate beyond what the lender knew the borrower could afford simply to force the borrower to repay because the borrower was a nuisance and the lender wished to be rid of the borrower. It should be noted that in Sterling Credit Ltd v Rahman  EWHC 3008 (Ch) it was held that a lender would not be obliged to exercise its discretion and reduce the rate it charged the borrower.
141 After the test formulated by Lord Greene MR in Associated Provincial Picture Houses Ltd v Wednesbury Corp  1 KB 223, 233–34, that should be applied in administrative law.
142 Paragon Finance plc v Nash & Staunton  EWCA Civ 1466,  1 WLR 685 ; cf Lymington Marina Ltd v Macnamara  EWCA Civ 151 .
143 However, in Lehman Brothers International (Europe)(in administration) v Exxonmobil Financial Services BV  EWHC 2699 (Comm) Blair J expressed the view that the Braganza case did not require the kind of analysis of the decision-making process that was required in the context of public law.
144 Braganza v BP Shipping Ltd  UKSC 17. The two-stage test was applied in Watson and Others v Watchfinder.co.uk  EWHC 1275 (Comm) and BHL v Leumi ABL Limited  EWHC 1871 (QB).
145 Paragon Finance plc v Nash & Staunton  EWCA Civ 1466,  1 WLR 685 and Paragon Finance plc v Pender  EWCA Civ 760,  1 WLR 3412. In the first of those cases, Dyson LJ said that a lender was free to raise the interest rate payable by a borrower because of financial difficulties suffered by the lender or to set a rate which provided a subsidy to compensate for what it received from other customers. In Barclays Bank plc v Unicredit Bank AG  EWCA Civ 302 the decision-maker was entitled to prefer its own commercial interests even where it had agreed to exercise its discretion in a ‘commercially reasonable manner’.
146 See Bank of Baroda v Panessar  Ch 335. The Court of Appeal has indicated that it might on some future occasion be prepared to consider if the borrower should be allowed time to find the funds to make repayment following the making of a demand upon it: see Lloyds Bank plc v Lampert  1 All ER (Comm) 161, but there is no sign that this will happen. In Nicholson v HSBC Bank plc  EWCA Civ 748, Rix J reiterated that ‘on demand’ means ‘on demand’, and Panessar was followed in Su-Ling v Goldman Sachs International  EWHC 759 (Comm).
147 See Cryne v Barclays Bank plc  BCLC 548.
148 See The Angelic Star  1 Lloyd’s Rep 122. If, within the particular terms of the wording of an event of default, the lender is given an apparently unfettered discretion to make a determination, as for instance in determining (without any express limitation) if an adverse change has occurred, then there may be scope for the implication of a term as to the manner in which the lender may make its determination.
149 To which there are statutory exceptions, such as under the Consumer Credit Act 2006 and under provisions regulating possession proceedings concerning residential land.
150  AC 536. Cf Property Alliance Group Ltd v Royal Bank of Scotland  EWCA Civ 355, where a lender’s power to call for annual valuations of security was found, contrary to the first instance decision, to be subject to an implied term.
151 Monde Petroleum SA v Westernzagros Ltd  EWHC 1472 (Comm) and Monk v Largo Foods Ltd  EWHC 1837 (Comm) .
153 Fondazione Enasarco v Lehman Brothers Finance SA  EWHC 1307 (Ch).
158 Hayes v Willoughby UKSC 17 ; Socimer International bank Ltd v Standard Bank London Ltd (No 2)  EWCA Civ 116 .
159 Lehman Brothers Special Financing v National Power Corporation  EWHC 487.
160 Paradine v Jane (1646) 82 ER 897 which provided that ‘when the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract’. As the foregoing quotation illustrates, English contract law places the onus on the contracting parties to provide for supervening events in their contracts, for example by negotiating force majeure clauses.
161 It is important to note that an endeavours obligation is likely to be construed according to the resources and powers of the promisor: Hugh Beale (ed), Chitty on Contracts (32nd edn, Sweet & Maxwell, 2015) 13-064. Additionally it is usually construed by having regard to the circumstances pertaining at the time for performance: Jet2.com Ltd v Blackpool Airport Ltd  EWCA Civ 417. Accordingly, the strength—and hence benefit of such an obligation to the promisee—may vary according to whether it is given by a resource-rich or resource-poor promisor and may fluctuate in line with the promisor’s financial position. But contrast Ampurius NU Home Holdings Ltd v Telford Homes (Creekside) Ltd  EWHC 1820 (Ch).
162 An agreement to use best endeavours to achieve a stated result, which is an enforceable obligation, has been contrasted with an unenforceable agreement to negotiate: see Lord Ackner in Walford v Miles  AC 128, 138.
163 See Rougier J in UBH (Mechanical Services) v Standard Life Assurance Co (unreported, The Times 13 November 1986), Kim Lewison QC, sitting as a deputy High Court judge, in Jolley v Carmel Ltd  2 EGLR 154, and Julian Flaux QC, sitting as a Deputy High Court judge, in Rhodia International Holdings Ltd v Huntsman International LLC  EWHC 292 (Comm).
164 Jet2.com Ltd v Blackpool Airport Ltd  EWCA Civ 417 (Lewison J dissenting from the result, but not the analysis). In the case of undertakings to use endeavours to enter into an agreement with a third party, there appears to be no problem with the certainty of object because it is easy to determine whether an agreement with a third party had been made: Astor Management AG v Atalaya Mining plc  EWHC 425 (Comm) .
165 (1911) 27 TLR 451.
167 (1952) 69 RPC 234, affirmed by the Court of Appeal (1953) 70 RPC 97.
168 Rackham v Peek Foods Ltd  BCLC 895.
169 Astor Management AG v Atalaya Mining plc  EWHC 425 (Comm).
170 CPC Group Ltd v Qatari Diar Real Estate Investment Company  EWHC 1535.
171 Lewison J in Yewbelle v London Green Developments  EWHC 3166 (Ch) –, which was approved on appeal by the Court of Appeal ( EWCA Civ 475), although a different conclusion was reached on the application of the principle to the facts. See also Rhodia International Holdings Ltd v Huntsman International LLC  EWHC 292 (Comm).
172 Phillips Petroleum Co UK Ltd v Enron Europe Ltd  CLC 329.
173 Rhodia International Holdings Ltd v Huntsman International LLC  EWHC 292 (Comm).
174 See also Mustill J in Overseas Buyers v Granadex SA  2 Lloyd’s Rep 608, 613, Buckley LJ in IBM United Kingdom Ltd v Rockware Glass Ltd  FSR 335, 343, and UBH (Mechanical Services) Ltd v Standard Life Assurance Co, n 163.
176 For a more detailed review, see Law Commission, The Illegality Defence (Law Com No 320). The Law Commission found the rules in the area to be complex and confused but concluded that, other than for a limited reform to trusts law, it was not possible to lay down strict rules about when the illegality defence should apply. In so far as the law of contract is concerned, the Law Commission left it to the courts to ‘consider the policy rationales that underlie the defence and apply them to the facts of the case’ (at p vi).
177 Wynn v Shropshire Union Railways and Canal Co (1850) 5 Exch 420.
178 As eg in Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd  AC 221.
179 Ocean Tramp Tankers Corp v V/O Sovfracht, The Eugenia  2 QB 226.
180 Ertel Bieber & Co v Rio Tinto Co Ltd  AC 260.
181 See ss 26–29 of the Act.
182 Those two sections were repealed by s 334 of the Gambling Act 2005, as to contracts entered into after the date of the repeal (1 September 2007). Prior to that repeal, s 412 of the Financial Services and Markets Act 2000 provided that certain contracts (ie contracts relating to investments that met prescribed criteria) were not avoided or rendered unenforceable by those sections.
183 As eg in St John Shipping Corp v Joseph Rank Ltd  1 QB 267; Archbolds (Freightage) Ltd v Spanglett Ltd  1 QB 374; Yango Pastoral Co Pty Ltd v First Chicago Ltd (1978) 139 CLR 410; and Hughes v Asset Managers plc  3 All ER 669.
184 St John Shipping Corp v Joseph Rank Ltd  1 QB 267, 287–288 (Devlin J).
185 Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd  QB 216, 273 (Kerr LJ).
186 St John Shipping Corp v Joseph Rank Ltd  1 QB 267; Archbolds (Freightage) Ltd v Spanglett Ltd  1 QB 374.
187 Les Laboratoires Servier v Apotex Inc  UKSC 55.
188 Safeway Stores Ltd v Twigger  EWHC 11 (Comm), subsequently reversed on appeal but not on these grounds.
189 Even in cases where a party had knowledge of the other party’s unlawful activity, it may still be able to argue that it was unaffected by mere knowledge which did not amount to ‘participation’ in the unlawfulness, along the same lines as are discussed later in connection with participation in an unlawfulness that affects contracts at common law.
190 See eg the explanations provided in the Court of Appeal in Marles v Philip Trant & Sons Ltd  1 QB 29, 32 (Singleton LJ) and 36 (Denning LJ) as to its earlier decision in Anderson Ltd v Daniel  1 KB 138.
191 As eg in Hughes v Asset Managers plc  3 All ER 669. See also Mistry Amar Singh v Kulubya  AC 142, in which the plaintiff was held by the Privy Council, relying upon Browning v Morris (1778) 2 Cowp 790 and Kearley v Thomson (1890) 24 QBD 742, to be a member of the class for whose benefit the statute had been introduced, so that his claim should not be defeated by the statute. In Kasumu v Baba-Egbe  AC 539, a lender under an unlawful money lending transaction was precluded from enforcing its security but the borrower was held by the Privy Council to be entitled to plead the illegality of the transaction and recover his security without being obliged to repay the moneys that had been borrowed, as the borrower was a member of a class that the statute was intended to protect.
192 Re Mahmoud and Ispahani  2 KB 716 and Chai Sau Yin v Liew Kwee Sam  AC 304.
194 The judgment on this point was obiter, as it was held that the insurer was authorised. However, the statement of principle enunciated by Kerr LJ was followed in Re Cavalier Insurance Co Ltd  2 Lloyd’s Rep 430, Overseas Union Insurance Ltd v Incorporated General Insurance Ltd  1 Lloyd’s Rep 439, and DR Insurance Co v Seguros America Banamex  1 Lloyd’s Rep 120. The statutory provision (subsequently contained in s 2 of the Insurance Companies Act 1982) was replaced by s 132 of the Financial Services Act 1986, which gave the insured the right to enforce the policy against an unauthorised insurer. The Insurance Companies Act 1982 and the Financial Services Act 1986 were, in turn, repealed by art 3 of the Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001, SI 2001/3649. The matter is now governed by ss 26–28 of the Financial Services and Markets Act 2000.
195 Oom v Bruce (1810) 12 East 225.
196 In reliance upon the decision of the House of Lords in Kleinwort Benson Ltd v Lincoln City Council  2 AC 349.
197 Re Cavalier Insurance Co Ltd  2 Lloyd’s Rep 430.
198 To some extent, the analysis on this issue will overlap with that set out earlier concerning the effect of statutory illegality, as a contract which involves a breach of a statute could be seen as a contract to commit a crime and as being against public policy. There may also be an overlap, on the facts of a particular case, between this area and those concerning the tort of conspiracy to commit a crime or to injure a third party (see Belmont Finance Corp v Williams Furniture Ltd (No 2)  1 All ER 383), claims for dishonest assistance in a breach of trust (see Agip (Africa) Ltd v Jackson  1 Ch 265; Royal Brunei Airlines v Tan  2 AC 378; Twinsectra Ltd v Yardley  UKHL 12,  2 AC 164; Barlow Clowes International Ltd v Eurotrust International Ltd  UKPC 37,  1 WLR 1476; and Abou-Rahmah v Abacha  EWCA Civ 1492,  1 Lloyd’s Rep 115), and claims for knowing receipt of trust property (see Agip (Africa) Ltd v Jackson  1 Ch 265; El Ajou v Dollar Land Holdings plc  2 All ER 685; and Heinl v Jyske Bank (Gibraltar) Ltd  Lloyd’s Rep 511).
199 Les Laboratoires Servier v Apotex Inc  UKSC 55.
200 For instance, because the very purpose of the contract binds them into carrying out an unlawful activity.
201 JM Allan (Merchandising) Ltd v Cloke  2 QB 340; Ashmore Benson Pease & Co Ltd v Dawson Ltd  1 WLR 828.
202 Shelley v Paddock  QB 348; Saunders v Edwards  1 WLR 1116. Such a claim was refused in Parkinson v College of Ambulance Ltd and Harrison  2 KB 1 because of the claimant’s own turpitude.
203 Strongman (1945) Ltd v Sincock  2 QB 525.
204 Clay v Yates (1856) 1 H&N 73.
205 Archbolds (Freightage) Ltd v Spanglett Ltd  1 QB 374.
206 Wetherell v Jones (1832) 3 B&Ad 221; St John Shipping Corp v Joseph Rank Ltd  1 QB 267; Coral Leisure Group Ltd v Barnett  ICR 503.
207 As there was in JM Allan (Merchandising) Ltd v Cloke  2 QB 340 and Ashmore Benson Pease & Co Ltd v Dawson Ltd  1 WLR 828.
208 Langton v Hughes (1813) 1 M&S 593.
209 Hodgson v Temple (1813) 5 Taunt 181.
210 See the review of this subject by Toulson LJ in Anglo Petroleum Ltd v TFB (Mortgages) Ltd  EWCA Civ 456 –.
211 Biggs v Lawrence (1789) 3 TR 454 and Weymell v Reed (1794) 5 TR 599, which were cases where goods were sold in a form made ready for smuggling by the other party.
212 Pearce v Brooks (1866) LR 1 Exch 213 (the case concerned the sale of an ‘ornamental’ brougham to a known prostitute, who plied her trade in it. The seller was denied its claim for the price of the goods.) By contrast, in Appleton v Campbell (1826) 2 C&P 347 a contract to let a room to a prostitute who practised her occupation elsewhere was held to be valid. Similarly, in Lloyd v Johnson (1798) 1 B&P 340 a washerwoman who washed the clothes of a prostitute at normal rates was entitled to recover payment. Lord Denning MR suggested in JM Allan (Merchandising) Ltd v Cloke  2 QB 340, 348, that tradesmen who supplied ordinary goods at normal commercial rates to such a person would not usually be taken to be assisting them in an unlawful or immoral purpose. On the other hand, if the price was inflated, that would be evidence of participation in the unlawful or immoral purpose. His Lordship also distinguished Waugh v Morris (1873) LR 8 QB 202 on the grounds that in Waugh v Morris there was no common design nor any participation in an unlawful activity.
213 Fielding & Platt Ltd v Najjar  1 WLR 357; Anglo Petroleum Ltd v TFB (Mortgages) Ltd  EWCA Civ 456.
214 Hounga v Allen  WLR 2889.
215 Tinsley v Milligan  AC 340 and Lord Sumption’s obiter remarks in Les Laboratoires Servier v Apotex  3 WLR 1257.
216 See also Jetivia SA v Bilta (UK) Limited (in liquidation)  UKSC 23 .
217 Andrew Burrows, A Restatement of the English Law of Contract (OUP 2016) 229.
218 Chandrakant Patel v Salman Mirza  UKSC 42.
222 Fisher v Bridges (1854) 3 El & Bl 643 (a separate deed of covenant was held to be unenforceable as it constituted an undertaking by a purchaser to pay part of the purchase price of land that remained outstanding under an earlier illegal contract of sale). See also Spector v Ageda  Ch 30 (the borrower’s obligation to repay a loan was held to be unenforceable as the loan had been advanced to provide the funds to pay off an earlier unlawful loan that had been made to the borrower by a third party) and Mansouri v Singh  1 WLR 1393 (which discussed the enforceability of a cheque or other negotiable instrument given in pursuance of a transaction which is made unenforceable by the Bretton Woods Agreement).
223 Tinsley v Milligan  1 AC 340 and Standard Chartered Bank v Pakistan National Shipping Corp  1 Lloyd’s Rep 218.
224 Sweetman v Nathan  EWCA Civ 115,  PNLR 89; Hewison v Meridian Shipping Services Pte Ltd  EWCA Civ 1821; Donegal International Ltd v Republic of Zambia  EWHC 197 (Comm).
225 Including equitable title: Tinsley v Milligan  1 AC 340.
226 Singh v Ali  AC 167; Belvoir Finance Co Ltd v Stapleton  1 QB 210.
227 In Mistry Amar Singh v Kulubya  AC 142 the Privy Council held that a leasehold interest in land could not have been created in contravention of the relevant statute.
228 Bowmakers Ltd v Barnet Instruments Ltd  KB 65; Mistry Amar Singh v Kulubya  AC 142, although note the overruling of the reliance test in Chandrakant Patel v Salman Mirza  UKSC 42.
229 Kasumu v Baba-Egbe  AC 539; Mistry Amar Singh v Kulubya  AC 142.
230 Oom v Bruce (1810) 12 East 225.
231 Kleinwort Benson Ltd v Lincoln City Council  2 AC 349.
232 Hughes v Liverpool Victoria Friendly Society  2 KB 482.
233 Smith v Cuff (1817) 6 M&S 160; Davies v London and Provincial Marine Insurance Co (1878) 8 ChD 469.
234 Kiriri Cotton Co Ltd v Dewani  AC 192; Re Cavalier Insurance Co Ltd  2 Lloyd’s Rep 430.
235 Parkinson v College of Ambulance Ltd and Harrison  2 KB 1; Berg v Sadler and Moore  2 KB 158. Contrast the position in those cases with Mohamed v Alaga & Co  1 WLR 1815, in which the Court of Appeal allowed a quantum meruit claim for services provided under an unlawful contract because the claimant was less blameworthy than the defendants, who were in a much better position to realise the unlawfulness of the transaction and who had, nonetheless, knowingly entered into the contract in disregard of the unlawfulness.
236 Prudential Assurance Co Ltd v Revenue and Customs Commissioners  UKSC 39.
241 The foregoing statement as to frustration is a summary of a large body of case law, including Wynn v Shropshire Union Railways and Canal Co (1850) 5 Exch 420 (supervening illegality, see also section 1.3); Taylor v Caldwell (1863) 3 B&S 826 (destruction of the subject matter of the contract); Krell v Henry  2 KB 740 (change in the fundamental basis of the contract); Bank Line Ltd v Arthur Capel & Co  AC 433 (government requisition of the subject matter of the contract); Hirji Mulji v Cheong Yue SS Co  AC 497 (the self-executing effect of frustration); Davis Contractors Ltd v Fareham UDC  AC 696 (the requisite nature of a fundamental change in the basis of the contract, as opposed to a contract where performance has been delayed or become more onerous); Peter Cassidy Steel Co Ltd v Osuustukkukauppa  1 Lloyd’s Rep 25 (a party could not plead frustration where it had assumed responsibility under the contract for the risk of the occurrence of the relevant events, in that case for obtaining an export licence); Tsakiroglou & Co Ltd v Noblee Thorl GmbH  AC 93 (contract made more onerous and performance delayed but contract not frustrated); National Carriers Ltd v Panalpina (Northern) Ltd  AC 675 (similar in its analysis to the Davis Contractors case); J Lauritzen AS v Wijsmuller BV, The Super Servant Two  1 Lloyd’s Rep 1 (a party could not plead frustration where it was ‘self-induced’ or the party could have prevented the event from occurring).
242 The Act was reviewed by Goff J in BP Exploration Co (Libya) Ltd v Hunt  1 WLR 783 (upheld at  2 AC 352). Recovery was possible at common law if there had been a total failure of consideration but not if there had only been a partial failure: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd  AC 32.
243 The original author of this chapter always said that he felt that if one believes in a benevolent God (whichever version of the deity that might be) then He receives a rather bad press in this regard. Surely, it would be more correct to refer to ‘acts of the Devil’. In polytheistic systems, the expression might be ‘acts of the gods’.
244  EWHC 2210 (Comm),  1 Lloyd’s Rep 1 (upheld on appeal at  EWCA Civ 1031,  2 Lloyd’s Rep 635).
245 See Channel Island Ferries Ltd v Sealink UK Ltd  1 Lloyd’s Rep 323.
246 This argument is further developed in Rafal Zakrzewski, ‘When is a Material Adverse Change Clause a Force Majeure Clause?’ (2012) 9 Journal of International Banking and Financial Law 547. For detailed discussion of MAC clauses see para 2.195ff.
247 The ambiguous legal concept of a ‘remedy’ is examined in detail in the editor’s doctoral thesis published as Rafal Zakrzewski, Remedies Reclassified (OUP 2005). That book also considers English law remedies such as awards of agreed sums, awards of damages, injunctions and specific performance, and the methods for their enforcement.
248 Terms requiring something to be done by a particular date are usually not considered to be conditions, that is, time is not usually ‘of the essence’. However, it can be made of the essence where the innocent party gives notice requiring the relevant obligation to be performed within a reasonable time: Multi Veste 226 BV v NI Summer Row Unitholder BV  EWHC 2026 (Ch). Cf Dalkia Utilities Services plc v Celtech International Ltd  1 Lloyd’s Rep 599.
249 Lombard North Central plc v Butterworth  QB 527. But a mere right that is expressly given to an innocent party in a contract to terminate the contract for a breach does not mean that the provision that has been breached should always be treated as a condition of the contract or that the breach is so serious as otherwise to amount to a repudiatory breach of the contract: see Financings Ltd v Baldock  QB 104 and Capital Finance Co Ltd v Donati (1977) 121 SJ 270.
250 See Lord Reid in L Schuler AG v Wickman Machine Tool Sales Ltd  AC 235, 251–52.
251 BNP Paribas v Wockhardt EU Operations (Swiss) AG  EWHC 3116 (Comm).
252 This may be a dangerous strategy because if an incorrect assessment of the situation was made and the other party was, in fact, ready and willing to perform, then the party which wrongly purported to terminate will, by doing so, have committed a repudiatory breach of the contract and the tables will be turned upon it.
253 For the effect of a termination in these circumstances, see Lord Diplock in Moschi v Lep Air Services Ltd  AC 331, 350.
255 Société Générale v Geys  UKSC 63.
256 See Lord Wilberforce in Johnson v Agnew  AC 367, 400, such question of reasonableness being relevant in assessing the time at which the buyer’s duty to mitigate had arisen, as explained by Oliver J in Radford v De Froberville  1 WLR 1262, 1285. See also Bear Stearns Bank plc v Forum Global Equity plc  EWHC 1576.
257 Bear Stearns Bank plc v Forum Global Equity plc  EWHC 1576.
258 Financings Ltd v Baldock  QB 104 and Capital Finance Co Ltd v Donati (1977) 121 SJ 270.
259 See Lord Ackner in Fercometal SARL v Mediterranean Shipping Co SA, The Simona  AC 788, 805. See also DRC Distribution Ltd v Ulva Ltd  EWHC 1716 (QB).
260 Bulk Oil (Zug) AG v Sun International Ltd  1 Lloyd’s Rep 531.
261 The House of Lords indicated in Attorney General v Blake  1 AC 268 that, in exceptional circumstances where normal remedies were inadequate to compensate for a breach of contract, the court may be prepared to order the defendant to account for the profits it had received or to which it was entitled. The difficulties that ensue from this are demonstrated by the subsequent decisions of the Court of Appeal in Experience Hendrix LLC v PPX Enterprises Inc  EWCA Civ 323,  1 All ER (Comm) 830 and World Wide Fund for Nature v World Wrestling Federation Entertainment Inc  EWCA Civ 286. In the first of those two cases, the Court of Appeal did not grant an account of profits but it did order the payment of a reasonable sum to compensate for an unauthorised breach of contract, even though no actual loss could be demonstrated. In the second case, the court refused (on a procedural issue concerning the case) to grant a remedy on those lines but acknowledged that an award could be made where it was not possible to demonstrate identifiable financial loss.
262 See Parke B in Robinson v Harman (1848) 1 Exch 850, at 855 and the review conducted by Lord Scott in Golden Strait Corp v Nippon Yusen Kubishika Kaisha  UKHL 12 –.
263 See Lord Nicholls in Sempra Metals Ltd v HM Commissioners of Inland Revenue  UKHL 34 –.
264 The difficult question of when financial benefits brought about by mitigation must be taken into account was recently considered in Globalia Business Travel SAU v Fulton Shipping Inc of Panama (the New Flamenco)  UKSC 43.
265 See Lord Atkinson in Wertheim v Chicoutimi Pulp Co  AC 301, 307.
266 See eg Andrew Dyson and Adam Kramer, ‘There is No Breach Date Rule: Mitigation, Difference in Value and Date of Assessment’ (2014) 130 Law Quarterly Review 259, cf Michael G. Bridge, ‘Markets and Damages in Sale of Goods Cases’ (2016) 132 Law Quarterly Review 404.
267 Hadley v Baxendale (1854) 9 Exch 341. The orthodox view has been that loss falling within the second limb of the rule in Hadley v Baxendale was ‘consequential loss’ for the purposes of interpreting that phrase in contractual provisions: Hotel Services Ltd v Hilton International Hotels (UK) Ltd  EWCA Civ 74. However, the courts are starting to move away from that view: Star Polaris LLC v HHIC-PHIL Inc  EWHC 2941.
268 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas)  UKHL 48.
269 Supershield Ltd v Siemens Building Technologies FE Ltd  EWCA Civ 7; Rubenstein v HSBC Bank plc  EWCA Civ 1184.
270 See the discussion at para 2.69.
271 Subject to the rules as to laches, there may be a benefit in seeking equitable relief by way of an order for specific performance, as the limitation period that applies to an ordinary claim at common law may not apply to such an equitable claim: P&O Nedlloyd BV v Arab Metals Co, The UB Tiger  EWCA Civ 1717,  2 All ER (Comm) 401.
272 Fiona Trust Holding Corporation and ors v Privalov and ors  EWHC 1748 (Comm).
273 Johnson v Shrewsbury and Birmingham Ry Co (1853) 3 De GM&G 358, The Scraptrade  2 AC 694, at 700–01, LauritzenCool AB v Lady Navigation Inc  EWCA Civ 579,  1 WLR 3686.
274 Lumley v Wagner (1852) 1 De GM&G 604; Doherty v Allman (1878) 3 App Cas 709; LauritzenCool AB v Lady Navigation Inc  EWCA Civ 579,  1 WLR 3686. See also the discussion of Briggs J on this point and on the point concerning the enforcement of contracts for personal services in Akai Holdings Ltd v RSM Robson Rhodes LLP  EWHC 1641 (Ch).
276 This should, however, be distinguished from contracts, such as hire-purchase and lease contracts, where the claim relates to loss of the bargain to receive future contractual payments, as the claim in those situations will be an unliquidated claim for damages for the loss of the bargain.
277 Rafal Zakrzewski, ‘The Nature of a Claim on an Indemnity’ (2006) 22 Journal of Contract Law 54; cf Agarwal v ABN AMRO Bank NV  BPIR 816.
278 Jervis v Harris  Ch 195.
279 See Sempra Metals Ltd v HM Commissioners of Inland Revenue  UKHL 34. Departed from in part in Prudential Assurance Co Ltd v Revenue and Customs Commissioners  UKSC 39.
280 See the discussion at section 2.12.
281 (1602) 5 Co Rep 117a.
282 Foakes v Beer (1884) 9 App Cas 605; D&C Builders Ltd v Rees  2 QB 617.
283 Pinnel’s case (1602) 5 Co Rep 117a.
285 Welby v Drake (1825) 1 C&P 557; Cook v Lister (1863) 13 CB (NS) 543.
286 Good v Cheesman (1831) 2 B&Ad 328; Boyd v Hind (1857) 1 H&N 938.
287 As against the acceptor, the renunciation can also be achieved by delivering the bill to the acceptor.
288 (1877) 2 App Cas 439. See also Birmingham and District Land Co v London and North Western Ry Co (1888) 40 ChD 268 and Ajayi v RT Briscoe (Nigeria) Ltd  1 WLR 1326.
289 Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd  1 WLR 761.
290 See the third point mentioned by Lord Hodson in Ajayi v RT Briscoe (Nigeria) Ltd  1 WLR 1326, 1330 and eg Ogilvy v Hope-Davies  1 All ER 683 and Maharaj v Chand  AC 898.

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