24 Jul 2019

On the back of our successful Student Insight series in collaboration with the University of Southampton, we are now supporting a second cohort of law students.

The series will bring fresh and new perspectives to the legal and practical implications of hot topics in commercial law.

 

University of Southampton

 

Articles

Are the courts obliged to impose an injunction if parties do not respect the language laid out within their agreements?

By Niall Simmonds

The court may award an injunction if it is satisfied:

  • that damages would not provide a suitable remedy
  • that the court will not be required to perform an ongoing "policing" role to ensure compliance.

In SDI Retail Services Ltd v The Rangers Football Club Ltd [2018] the court echoed comments made by Cairns LC in Doherty v Allman [1878] 3 App Cas 709, finding that an injunction is more likely to be considered appropriate where parties knowingly contract for a thing to not be done, so that all a court must do is to prevent that thing from happening. For that reason, a "negative" injunction (preventing something from being done) is more likely to be awarded than a "positive" injunction or an order for "specific performance".

Injunctions are always a matter for the court's discretion. Chitty on Contracts emphasises that even where the parties have included clear language to indicate that they would not consider damages to be a suitable remedy, an injunction could still be refused. In practice, however, when considering whether to refuse a negative injunction the court will consider whether it would impose a particular hardship and would therefore be repressive.

What did the contract say?

In SDI Retail Services Ltd v The Rangers Football Club Ltd, Rangers Football Club had a ‘Retail Agreement’ with Sports Direct, which provided that if Rangers were to receive an offer from a third party for the supply of branded products such as replica kits, they must notify Sports Direct notice so they could exercise their right to match the offer. If Sports Direct matched the third party’s offer, then Rangers would not be permitted to enter into a deal with that third party. Rangers breached this provision by entering into an agreement with Elite, without notifying Sports Direct, depriving them of the opportunity to match the relevant offer.

Was the notice requirement a one-off or recurring?

Rangers believed that the contract did not require them to notify Sports Direct and allow them to match a second offer made by Elite. Rangers argued that allowing Sports Direct the opportunity to constantly match offers would be nonsensical and uncommercial because that would allow Sports Direct to block Rangers from entering into agreements with third parties.

In response, Sports Direct stated that if there was only one matching right, its competitive position would be seriously undermined. It would be sound commercial practice for Sports Direct to have the recurring ability to match third party offers. If Sports Direct had only one matching right, Rangers would have been able to carry out dealings with other parties without having to notify Sports Direct.

The Court held that Rangers had breached the contract by not giving Sports Direct a further opportunity to match Elite’s new offer. If Sports Direct had chosen not to match the offer, they could not change their mind. Rangers would be free to engage in dealings with a specific third party once Sports Direct had declined to match that third party's particular offer.

The court's decision allowed Sports Direct, and would potentially allow businesses in similar positions, to retain the competitive edge provided by the contract.

The Agreement reigns

The court held that the injunctive relief sought by Sports Direct was appropriate and granted an "undoing" injunction, requiring Rangers:

(1) to not perform the third party agreement with Elite; (2) to not assist Elite to perform the agreement; and (3) to inform Elite that Rangers would not perform the agreement. Additionally, the court granted prohibitory injunctions refraining the Rangers from future breaches.

"A 'no oral variation' clause ensures that any variation to a contract must be in writing and signed by the parties". Is this an accurate reading of the Supreme Court ruling in Rock Advertising v MWB [2018] UKSC 24?

By George Napier

The decision in Rock Advertising v MWB [2018] UKSC 24 can be taken as definitive authority that 'no oral variation' (NOM) clauses have binding effect. While the NOM clause in this case required signed writing, the judgment does not exclude the possibility that a NOM clause could make different requirements for the variation of the contract. As such, it cannot be said that any variation must be in writing and signed by the parties. In particular, a NOM clause could allow variations to be made via e-mail. Additionally, the judgment contains conflicting arguments regarding exceptions to the applicability of NOM clauses, leaving this issue open to further debate.

Facts

Rock Advertising held a licence to occupy London serviced offices operated by MWB. They could no longer pay the licence and were in significant arrears. The contract contained a NOM (clause 7.6) requiring that "All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect". It was alleged that the parties had orally agreed to a revised payment schedule. MWB excluded Rock from the premises due to non-payment (a right contained in the licence).

Whether this action was legitimate depends on whether the oral variation was binding, or whether the NOM meant that it did not have legal effect.

At first instance, Judge Moloney QC decided in favour of MWB. This decision was then overturned by the Court of Appeal. The case reached the Supreme Court in 2018, who decided in favour of MWB, upholding the validity of the NOM clause.

The contrasting reasoning of Lord Sumption and Lord Briggs

The reasoning of Lord Sumption supports the view that a NOM clause will be strictly applied. He states that the reason for the oral variation not being binding in Rock v MWB was "want of the writing and signatures prescribed by clause 7.6 of the licence agreement", a direct application of the NOM clause in the licence.

His justification for upholding the validity of the NOM clause was that the parties are free to contract as they wish, and that to refuse to uphold their original bargain would be in conflict with the principle of party autonomy.

Supporting of this view are the comments of Sedley LJ in United Bank LTD v Asif [2000] EWCA Civ 465. He states that it is "incontestably right" that an oral variation of a contract containing a NOM clause would not have legal effect. If this is the position, to vary such a contract would require the method specified by the NOM clause.

If this view is adopted, according to Lord Briggs, the consequence is that the oral variation is 'subject to contract'. It would have "no immediately binding force" but is capable of becoming binding once the parties meet the formality requirements of the NOM clause.

Lord Briggs agreed that the NOM clause did bind the parties, but held a slightly different view on why a NOM clause is binding. He felt that its continued existence depends on the parties' continued intention that it is binding on them. He also argued that the NOM clause could be removed orally, stating "What is to my mind conceptually impossible is for the parties to a contract to impose upon themselves such a scheme, but not be free…to vary or abandon it by any method, whether writing, spoke words or conduct" (at [26]).

Lord Briggs felt that a NOM clause could be overcome without its formality requirements being met where it is necessary to imply that the oral variation is binding. He defines a narrow set of circumstances in which this would be permissible "Where…the orally agreed variation called for immediately different performance from that originally contracted for" (at [30]). He does not give an example of a situation where the required level of urgency and necessity would be met, leaving this open as a route for parties seeking to argue an oral variation is binding.

Estoppel

It might be possible for a contracting party who has relied on an oral variation in good faith to rely on estoppel, but the threshold is likely to be high, and there are currently no fixed requirements. Lord Sumption suggested that the courts would look for "something more… than the informal promise itself" (at [16]). Lord Briggs put forward the example of where a party has already performed in reliance of the variation. The reason for a high threshold is that estoppel "cannot be so broad as to destroy the whole advantage of certainty".

It is likely that most parties looking to rely on an oral variation of a contract containing a NOM clause will attempt to argue based on estoppel. This should avoid 'injustices' that could be caused by strictly enforcing NOM clauses, but comes at the cost of certainty as it cannot be said that every NOM clause will be upheld.

The current position on NOM clauses and the future

Following Rock v MWB, the default position is that a NOM clause will be binding and that a non-compliant variation will not be binding, unless a successful estoppel argument is raised.

The courts have adopted this position. In the later first instance case UK Learning Academy Limited v The Secretary of State for Education [2018] EWHC 2915 (Comm), Klein J explicitly referred to and applied the reasoning of Lord Sumption (at [261]). The outcome was that the NOM clause was binding, leading to the invalidation of an oral variation.

The effect of a NOM clause will depend on its construction. It could make a different provision such as allowing for variation to be made via e-mail. Following the case of J Pereira Fernandes SA v Mehta [2006] EWHC 813 (Ch), an e-mail meeting certain requirements could constitute a signature, so this does not appear an unworkably low level of formality.

The key point to take away is to carefully consider whether there is a NOM clause in your contract, and ensure that any variations meet the formality requirements it sets out.

Cryptocurrency as the “natural evolution” of money: good news or bad news?

By Adamantia Karagianni (postgraduate)

In 2018 a Conservative member of the British Parliament, Eddie Hughes, suggested that UK residents should be able to pay their local taxes and utility bills using bitcoin. Bitcoin is the most widely used form of cryptocurrencies, essentially digital money posing challenges in the monopoly exercised by governments in creating official fiat currency. But what are cryptocurrencies and how safe it is to transact in cryptocurrencies?

Cryptocurrencies and the underlying technology

Cryptocurrencies make up a subset of distributed, open-source, math-based peer-to-peer virtual currencies that use blockchain or smart contracts as their underlying technology.

The term “crypto” refers to military-grade cryptography which is used for the generation of cryprocurrencies and for the validation of transactions.

Alongside this important “crypto” feature there is a common commitment to decentralization. Making use of the blockchain technology, which acts as a digital financial record book of all transactions in chronological order, digital money is designed to be free from oversight by an authoritarian body or government. The blockchain is a series of blocks on which transaction details are recorded after suitable authentication and verification by the network participants. A transaction is only confirmed to have occurred when it is included in a block. About every few minutes, on average, a new block of transactions is added to the blockchain, which also reconfirms the validity of previous blocks (prior groups of transactions), going all the way back to the first ever block. The public ledger becomes distributed to all computers on the network and thousands of participants maintain a copy of the ledger. Thus, having a decentralised ledger forces everyone to play fair and prevents the risk of double-spending.

Some types of digital money, such as Ethereum, seek to apply the blockchain technology to execute smart contracts, whose terms are written into lines of code instead of legal language. Smart contracts can in principle be self-executing and self-enforcing. Their potential benefits are the increased speed and the low costs of verification and enforcement.

Why are cryptocurrencies controversial?

The foundational idea behind virtual currencies is creating trust among anonymous participants within the market. Financial institutions have often betrayed people’s trust. Even in the US, one the most developed and regulated financial systems in the world, colossal financial institutions collapsed almost overnight during the Great Financial Crisis. Due to the fact that all transactions are recorded on the blockchain, the problem of asymmetric information is overcome and people can arguably transact without knowing each other. Therefore, the “crypto”-system in which everyone can view and validate transactions is deemed to be the apparent response to the failure of institutions to fulfil their role as intermediaries.

In order to manipulate the data on a blockchain, over 50% of the computers on the network require to be hacked at the same time, which has been considered to be almost completely unattainable. Thus, trust is built from the system itself. However, that assumption may be open to doubt in view of some recent incidents which appear to have been "51% attacks", perhaps launched or sponsored at state-level. Cryptocurrencies are also considered to be a highly efficient way to facilitate fast international transfer of money. Having internet connection and using a proper wallet are sufficient for its use worldwide. While a typical wire transfer can take up to three or five days, transferring cryptocurrencies reduces this time to minutes or even seconds.

Most importantly, digital money is deliberately designed to combat inflation. Under a fiat currency system, money supply has grown at an average rate of 11.5% per annum since 1989. On the other hand, inflation does not affect the purchasing power of cryptocurrencies as their release schedule is pre-programmed. For instance, Bitcoin is designed to continually reduce the reward associated with its mining until its supply grows to 21 million.

Potential risks

Price volatility is one of the main hurdles to the wider use of Bitcoin as a medium of exchange. For example, Bitcoin's price rose more than 20 times in value between September and December 2013, but then lost about 60% of its value over the three months that followed.

Moreover, the preservation of users’ anonymity may obstruct law enforcement. Untraceable digital cash can be used as conduit for money laundering, tax evasion, and other nefarious activities. It is this anonymity that impedes the regulation of virtual money, as authorities cannot often determine whom to regulate.

There has been recorded a growing number of thefts and hack of VC wallets. The biggest scandal in history of digital money is the hack of Mt. Gox – a Tokyo-based company that was one of the major exchanges in the early days of Bitcoin - that caused the loss million worth of Bitcoin. Since transactions in cryptos are irreversible and this type of money is not backed by any central body, in most cases users cannot recover any of their losses unless they are covered by deposit insurance.

Finally, the legal status of smart contracts, that underpin cryptocurrencies, is unclear and raises serious consumer protection issues. The complexity of smart contracts may make it hard for consumers to understand what they are agreeing to. Similarly, these technical intricacies involved in the enforcement of smart contracts make their legal and regulatory treatment difficult.[1]

What’s next?

Due to the inherent problems of cryptocurrencies it is unlikely that they will be the mainstream medium of exchange in the imminent future. However, the distributed ledger technology, that underpins cryptocurrencies, could portend important structural shifts in the financial industry, including stock exchanges or trade repositories. Already, a growing number of blockchain-based financial services are being provided by non-bank startups. At the same time, large global banks are also testing out use of blockchain in space of payments, fraud reduction and loan processing. Therefore, as these new technologies become more widely used, regulators and supervisors should closely monitor the developments in order to establish an effective regulatory framework.

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[1] Dong He, Karl Habermeier, Ross Leckow, Vikram Haksar, Yasmin Almeida, Mikari Kashima, Nadim Kyriakos-Saad, Hiroko Oura, Tahsin Saadi Sedik, Natalia Stetsenko, and Concepcion Verdugo-Yepes , “Virtual Currencies and Beyond: Initial Considerations”, IMF staff discussion note, January 2016, page 23

AI in healthcare: the future of health monitoring devices

By Kelly Bracken

Artificial Intelligence (AI) is of great interest not only to the legal profession but also to businesses that are affected by it. Specifically, for the healthcare sector AI presents significant opportunities both clinically and administratively. As the NHS is under constant financial strain, health monitoring devices may be of interest to relieve some of this pressure. However, the wide use of data that such devices require is still being questioned. The legal implications that arise remain uncertain as this is a new and developing area. Even though there are regulations governing the collection of health data, they may be considered too complex and unsatisfactory for many businesses. Moreover, it is not clear who would be liable if the device missed a change or misdiagnoses a patient and what area of the law should deal with this. Despite this, it is crucial that the law develops as no clear authority may lead to more uncertainty.

Social benefits and disadvantages

Patient monitoring by the NHS is amongst many administrative tasks that could easily be replaced with technology. This would enable a medical professional to spend more valuable time with patients and it will allow them to live at home rather than having long unnecessary stays in the hospital.

Because AI devices are better at sorting through vast amounts of data the health monitoring devices may be more precise in diagnosing a patient or detecting an anomaly. It has been reported that medication errors alone lead to the death of more than 22000 patients in the UK.[1] A major cause of this is the failure to properly monitor patients.

The collection of data is of crucial importance in relation to AI devices as this ensures that the device is able to make accurate and informed decisions. Health monitoring devices are constantly collecting data , which results in acquiring a significantly larger amount of data. Information from all these patients can be put together and irregularities and other patterns may emerge. This means that it is not only important for the future treatment of that particular patient but also for other patients who may suffer from the same condition.

However, there has been a lot of debate around the collection and wide use of patients' data. Many people are sceptic of it as they are worried that their data may not be adequately protected and consequently be misused. However, as there is law governing health data collection the uncertainty is decreased. Nonetheless, complexities arise here as the NHS is underprepared on how to handle large quantities of data and how to securely transfer it to (private) third parties. This has to be done before the NHS can completely delve into the possibilities that AI has to offer.

Legal implications

AI and sophisticated analytics software allows large volumes of patient data to be processed, revealing patterns and correlations that might not otherwise be apparent. Data might be processed on an anonymous basis, which is suitable for large-scale research, but does not allow for diagnosis or treatment in individual cases. Where any element of individual or personalised healthcare is involved, systems must be designed and run in a way that complies with the stringent requirements of the General Data Protection Regulation (GDPR).

The law on collecting health data is largely governed by articles 6 and 9 of GDPR and s10 of the Data Protection Act 2018 (DPA 2018). Article 9 categorises health data as a special category of data, meaning that it is necessary to identify a lawful basis for processing under GDPR Article 6 and to meet the additional safeguarding measures which are set out in s10 and Part 1 of Schedule 1 of the DPA 2018. If consent is relied upon as the lawful basis for processing health data, then it must meet the stronger test of "explicit consent". This is a particularly fragile basis for processing, as consent may be withdrawn at any time. Consequently, it may be preferable for businesses to consider the potential relevance of other grounds, such as processing that is "necessary for the purposes of preventive or occupational medicine, for the assessment of the working capacity of the employee, medical diagnosis, the provision of health or social care or treatment or the management of health or social care systems and services on the basis of Union or Member State law" or pursuant to contract with a health professional and subject to duties of confidentiality.

Alternatively, businesses may take the view that their processing of health data does not engage GDPR because the data is fully anonymized. Any such decision requires considerable care. If data is not anonymized, but is only "pseudonymised", then GDPR will apply. In those circumstances, the strength of security measures applied to prevent the reversing of "pseudonymisation", so that data can be individually identifiable, becomes particularly important.

A barrier to innovation?

AI is a developing area making the legal uncertainties in relation to liability enormous. Even though it is often thought that these new forms of AI are more reliable, and may reduce the deaths relating to medical malpractice, there remains an element of unpredictability because they are machines.

It is important that the law takes an approach to this because deciding these issues on an ad hoc basis may result in even more uncertainty and unpredictability. This may pose not only an issue for the NHS itself but also the companies that have manufactured the products and the businesses behind the idea.

The legal complexities that arise around AI make it difficult to apply the law which is applicable to liability for medical practitioners. The question of who should be accountable has multiple options including:

  • The insurer
  • The product manufacturer
  • The user (hospital or medical practitioner)
  • AI itself.

The answer may well be found within an existing area of the law or a combination of various parts of the law. The areas that may be of interest in relation to health monitoring devices are the law of negligence, vicarious liability and consumer protection. If the product in itself was faulty then liability may be easily placed upon the manufacturer under consumer protection law. However, it is more complicated when there is a misdiagnosis which relates to the defect of not the actual product but the software. Here the healthcare provider may be held vicariously liable for the AI’s negligence if this could be established in relation to the monitoring device’s action. Lastly, AI could be given a legal personality which would mean that it could be accountable for its actions. The hospital, as a consequence, could be held vicariously liable for AI’s actions.

Due to the fast-developing nature of AI, the law is struggling to keep up with these changes. If no action is taken soon to clear some of these ambiguities the courts will be faced with a serious challenge to resolve these matters when they come to court. As we become more dependent on AI, this realisation may come quicker than we think.

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[1] Alex Matthews-King, ‘NHS medication errors contribute to as many as 22000 deaths a year, major report shows’ Independent (London, 23 February 2018) https://www.independent.co.uk/news/health/nhs-medication-errors-deaths-prescription-drugs-jeremy-hunt-york-university-health-a8224226.html accessed 8 March 2019

Shipping container shops

By Lily McDermaid

Shipping containers are used worldwide for transporting all sorts of cargo, but they are also readily adapted for use as low-cost accommodation. Therefore, using old containers to house people and businesses seems wonderful. There might be some unforeseen and jurisdiction-specific legal issues, so businesses should seek expert advice before investing. For example, it might not be easy to obtain suitable and affordable insurance cover for shipping container homes/businesses. Further, the bureaucracy involved with planning permission and building codes might put more obstructions in the way, making this sort of development difficult for all.

The reasoning

Starbucks has built shipping container complexes in Taiwan and Seattle. Container City is a home and business complex in Brixton, London. However, as more containers can always be added and more businesses and tenants move in, there could never be joint tenancies (Antoniades v Villiers [1988] UKHL 8). This opens up the possibility of occupiers only holding a personal licence to be there. The obvious implications of this are that these licensees would have less protection against unfair rent and eviction. It is important not to forget about an issue like this even with a new form of construction like shipping container homes. It could depend on the layout of the complex as to whether you could validly treat each container as a separate property or whether each room is so reliant on the shared spaces that they are like separate rooms in a house. This difference could prove important to inhabitants. As this relies on the specific layout, surveyors and the Land Registry could be left with quite a headache if these container complexes become more widespread and more popular.

There is also the question of how insurance would work on a large scale. For instance, should each container be insured separately? At least this way if there is damage or a theft during construction of the whole complex then it might be easier for individuals to recover specific losses. This would result in lots of extra paperwork for the site manager or the tenants though, costing more time and money.

Should a container complex be insured as a whole? This might require valuations every time that a part is added or taken away from the ‘whole’ as well as difficulties with insurance payouts and covering premiums. It might however be more beneficial in complexes where there are lots of shared, integrated spaces.

Does it depend on how connected the container is to the land? If so, barely connected containers that are easily removable may be insured similarly to a caravan. Then, the issue arises of what is part of the land. The most influential case law in this area is Elitestone v Morris [1997] 2 All ER 513, which concerned the legal status of a wooden bungalow. If it were classed as a fixture, the occupier would have been protected from unfair eviction by the Rent Act 1977. The House of Lords instead categorised this bungalow as a chattel, merely placed upon the land, meaning that the Rent Act protection did not apply and the occupier could be removed. Applying this to shipping containers, the courts could potentially follow the decision in Elitestone, leaving occupiers in an insecure position. Elitestone, in application, means that to have a protected tenancy, there must be a legal basis for occupying the land, like a lease or contractual licence.

Arguably, this means that there is a need for legislation to clarify the law on altered shipping containers and the protections afforded by different legal means. The only recent piece of legislation anywhere near this is the Mobile Homes Act 2013, which is simply a set of amendments to an earlier Act that only applies to caravan sites. Therefore a shipping container may come under the definition of a caravan (Caravan Sites and Control of Development Act 1960), changed to mobile home in 2013 (Mobile Homes Act 2013 and Mobile Homes (Wales) Act 2013). However, this simply is not clear enough. For instance, these Acts apply to structures designed or adapted for habitation only if it is capable of being moved from one place to another. It does not apply to those made of 2 or less sections to be assembled on site as it would not be legal to transport it on a highway, with some restrictions on dimensions. This raises more questions than it answers. What happens if a container rusts to the point where it cannot be moved? What if two containers were adapted into one home? At what point does a shipping container go from being defined as a caravan to being a permanent structure? Illogical distinctions exist that could have easily been dealt with in the 2013 legislation. Therefore, it is down to Parliament to reform this niche and technical area, before it potentially becomes more popular and more difficult to regulate.

Plain old shipping containers go for around £1,500 on eBay. Renovations can cost from around £7,500 to £125,000, depending on how extravagant a lifestyle the occupant wants. Seeing as the shipping container itself needs to be strengthened, made watertight and protected against rust, if this is not done properly or by amateurs, then it might be quite difficult to get insurance. Getting insurance for a non-standard property is not easy anyway, as it takes longer to insure constructions that do not meet the general criteria for a house. This requires inspections, which, depending on where it is, relies on strict adherence to building codes. In cases where amateurs have made their own permanent, standalone house, there has been issues with them not even knowing that building codes exist let alone how they should have adhered to them. This could cause long-term consequences for individuals or small businesses, putting them at risk of financial loss if the worst were to happen and their new home or office be destroyed or damaged.

The decision to live in a container home is not a stable one. Eviction proceedings were brought against a man in Oxford in 2012 when his local council deciding the shipping container he was living in was unfit, meaning he instead faced living in his van.

The future

It could prove quite difficult for this to get off the ground because of extra hoops owners have to jump through. For this reason, it seems like this new architecture trend may not change the UK just yet. If it did, or if it became popular in a different country, the housing market could be devalued slightly, making it easier for people to get on the housing ladder and start their own businesses. This would affect mortgage providers as mortgages would be for lesser values and the capital property would fetch less if sold upon repossession. It could, however, spark demand for a new specialism in insurance, providing scope for other industries to profit from the potential change.

"Fraud unravels all", or does it?

By Victoria Zubareva (postgraduate)

Arbitration awards often have to be enforced in the court of a foreign state where the defendant’s assets are situated. Under s 103 of the Arbitration Act 1996 an English court has a number of grounds for refusing to do so, for example, if such enforcement would be contrary to public policy. One of the instances when public policy might be engaged is where there is some kind of fraud involved in concluding or performing the underlying contract. However, public policy often meets with another important principle of arbitration law – finality of arbitration awards. These principles were considered in Sinocore International Co Ltd v RBRG Trading (UK) Ltd [2018] EWCA Civ 838, where the Court of Appeal enforced a Chinese arbitration award in spite of alleged fraud involved during the performance of the underlying contract.

Facts

Under a sale contract Sinocore was to ship rolled steel coils and RBRG was to make payment by a letter of credit that it opened in a Dutch bank. The parties amended the contract to require RBRG to arrange a quality and quantity inspection before or during loading. Then, instructed by RBRG, the bank issued an amendment to the letter of credit, that had not been agreed to by Sinocore. The required shipment period was changed from “July 2010” to “20th to 30th July 2010”. After the goods had been loaded, bills of lading dated 6 July were issued and Sinocore sent a shipping notice to RBRG the same day. On 22 July Sinocore requested payment under the letter of credit presenting bills of lading dated 20–21 July 2010. It was common ground that these bills of lading had been forged to match the changed date in the letter of credit. The bank refused to pay following the injunction obtained by RBRG in a Dutch court. Sinocore commenced court proceeding against the bank in China but its claim was dismissed on the ground that the bills of lading were forged.

In the China International Economic and Trade Arbitration Commission (CIETAC) arbitration proceedings the tribunal awarded damages to Sinocore for breach of contract by RBRG. RBRG made an application for setting aside the order of the High Court to enforce the award, claiming that it gives effect to a claim by Sinocore that is based on forged bills of lading. The application was dismissed and the Court of Appeal upheld the decision of the lower court for several reasons.

Finality above public policy

It was emphasised that courts should give a restrictive interpretation to public policy. In particular, if the tribunal, staying within its jurisdiction, has ruled that there was no illegality involved under applicable law of the contract, the court should not go behind the award to re-investigate this issue unless “possibly in exceptional circumstances”. Thus, the principle that the finding of the tribunal should be final outweighed public policy against illegality.

Causal link required

To refuse the enforcement of an award on the grounds of public policy, illegality has to be causally linked to the claim on the basis of which the award was made. For example, while awards where the contract was alleged to have been procured by bribery have been enforced (National Iranian Oil Co v Crescent Petroleum Co International Ltd [2016] EWHC 510 (Comm)), an award giving effect to a contract to bribe would not be enforced. In Sinocore v RBRG the courts accepted the tribunal’s findings that there was no causal link present. The arbitrators held that the cause of the termination of the contract and Sinocore’s failure to obtain payment had been RBRG’s instructing the bank to issue a non-conforming amendment to the letter of credit without Sinocore’s consent. Thus, forged bills of lading had been presented after RBRG had incurred liability for breach of contract.

Rethinking the maxim: unified approach

There is a long-established (Holman v Johnson (1775) 1 Cowp 341, 98 ER 1120, Lord Mansfield) rule of English public policy that courts will not be used as enforcers of fraud. It is based on a maxim that once committed, fraud unravels all, that is, taints the whole contract and the claim based on it. Dealing with RBRG’s argument to this regard, Hamblen LJ pointed out that as neither RBRG, nor the bank had been deceived and Sinocore had not benefited from their act, that was “at most a case of attempted fraud”. Given the tribunal’s ruling on causation, this attempt was only collateral so that in enforcing the award the court was not allowing a dishonest person to use its procedures to enforce a fraud.

Interestingly, this reasoning of the Court of Appeal is in line with the latest trends in another field of law, namely, insurance law, where the same maxim found its application. Until 2016 a claim made by the insured using fraudulent means and devices was considered to be a fraudulent claim. That was a genuine claim, based on a real loss, in support of which the insured provided the insurer with false statements or false evidence, for instance, a forged invoice that had been used to obtain funding from a finance company (Sharon's Bakery (Europe) Ltd v Axa Insurance & Anor [2011] EWHC 210 (Comm)). The remedy for fraudulent claims, codified in s 12 of the Insurance Act 2015, is that the insurer is not liable to pay the indemnity and can also terminate the policy as from the date of the falsehood. However, recently in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45 the Supreme Court held that such subsequent conduct (“collateral lies”) in making the claim did not affect the right of the insured to the indemnity if he had suffered a genuine loss.

All in all, the approach of the English courts towards attempted document fraud allows those who have genuine claims that arose prior to falsehood to recover what they are really entitled to. In the context of arbitration, it also helps to make England an attractive forum for enforcing foreign awards.

International transfers of personal data from the UK to the US post-Brexit

By Elena Chavdarova

In light of Brexit, the US Department of Commerce (‘DOC’) has published a guide containing the necessary steps businesses should take to rely on Privacy Shield to transfer personal data from the UK to the US. The European Council and the UK have agreed to extend ‘exit day’ beyond 29 March 2019 with the extension lasting no longer than 31 October 2019. During the extension period, the UK will remain an EU Member State and, as such, EU law will remain applicable to and in the UK. Importantly, Privacy Shield participants must update their privacy policies by the time EU law ceases to apply in the UK (the Applicable Date). Businesses should expressly confirm their compliance with Privacy Shield regarding personal information transferred from the EU and the UK to the US.

Current position

The GDPR restricts the transfer of personal data relating to EU citizens to countries outside the European Economic Area (‘EEA’). Such ‘restricted transfers’ may only take place if:

  • The European Commission has made an adequacy decision regarding the third country; or
  • Appropriate safeguards are adopted; or
  • The transfer fits within one of the Regulation’s derogations.

The European Commission has made an adequacy decision about the US under the EU-US Privacy Shield. The Privacy Shield permits US companies to self-certify that they would adequately protect data transfers from the EU to them. Compliance requirements are clear and cost-effective, which small and medium-sized businesses find particularly beneficial.

Currently, if a UK business wants to transfer personal data to a US organisation under the Privacy Shield, it has to:

  1. Check on the Privacy Shield List whether the target organisation has a current certification.
  2. Make sure that the certification covers the type of data that they want to transfer.

Privacy Shield post-Brexit – recommended steps

The transfers under Privacy Shield from the UK to the US are currently permitted. However, as the EU-US Privacy Shield Framework is an EU-US specific arrangement, when EU law ceases to apply in the UK post-Brexit, the UK will not be able to rely on the framework.

However, according to the Information Commissioner’s Office (‘ICO’), the UK Government intends to implement Privacy Shield for UK-US personal data transfers post-Brexit. Nevertheless, this will be in an adapted form.

In brief, to be able to receive personal data from the UK post-Brexit, a Privacy Shield participant must:

  1. Update their Privacy Shield commitment to comply with the Privacy Shield to expressly include the UK.
  2. If an organisation plans to receive Human Resources (‘HR’) data from the UK under the Privacy Shield, it must update its privacy policy to reflect that.
  3. Organisations must maintain a current Privacy Shield certification, recertifying annually.

These changes should be implemented by the time EU law, and GDPR cease to apply to the UK which is referred to as the Applicable Date. It is currently uncertain when this would happen but the DOC has outlined two possible scenarios for businesses to consider. First, there could be a Transition Period during which EU law, including EU data protection law, will continue to apply in the UK and UK organisations will continue to be able to rely on the Privacy Shield to transfer personal data from the UK to the US. It has been preliminarily agreed for the Transition Period to be from the date the UK leaves the EU until December 31, 2020. The DOC has advised US businesses to use this as an opportunity to update their privacy policies accordingly. Consequently, Privacy Shield participants must update their public commitments to comply with the Privacy Shield by expressly stating that those commitments extend to personal data transfers from the UK before the Applicable date of 31 December 2020.

Secondly, an alternative scenario would involve no Transition Period where the UK and the EU do not finalise an agreement on this matter. Hence, Privacy Shield participants receiving personal data in reliance on the Privacy Shield must make the relevant changes discussed above by the Applicable Date which, in this case, will be the date of the UK’s withdrawal from the EU.

Advice for UK businesses

  • Businesses need to check whether the target US organisation has made the necessary update to its commitment to comply with the Privacy Shield. This can be done by checking the specific US organisation’s publicly available privacy policy.
  • If the company to which data is wanted to be transferred to is not certified, or has not recertified their commitment to Privacy Shield, then businesses cannot rely on the Framework. This can be checked on Privacy Shield List.
  • If a US company to which personal data is needed to be transferred to is not a Privacy Shield participant or has not recertified, it is advisable to use as an alternative Standard Contractual Clauses (SCCs) or Binding Corporate Rules (BCRs). The action to take would largely depend on the business' needs.

As the Brexit saga unfolds, the US DOC updated its guidance as to the necessary steps to be taken by businesses who wish to continue to rely on the Privacy Shield to transfer personal data from the UK to the US. The proposed changes must be implemented by US organisations by the time EU law ceases to apply in the UK (the Applicable Date). As Brexit has been extended beyond the original exit day of 29 March2019, the current position is that ‘exit day’ will be at the latest on October 31, 2019. But there is still by no means certainty as to whether there will be any Transition Period, or potentially any other changes that may affect the Applicable Date. Therefore, both UK and US businesses should pay close attention to Brexit developments. Ensuring that adequate protection is afforded to transfers of personal data should be businesses’ prime concern on both sides of the Atlantic.

Commercial "common sense" does not provide an escape route from a bad bargain

By Robert O'Meara

The literal language of a contract is crucial to construing its meaning. Commercial context may also be employed by the courts. But how can parties to contracts be sure where the line is drawn when balancing these concepts? With the Supreme Court’s guidance (Arnold v Britton [2015] UKSC 36), the law’s position is now clear: the natural meaning of the words must not be undercut by commercial common sense; only where this meaning is ambiguous will the courts look to its factual background. In practical terms, if a contract’s plain meaning is unambiguous, questions arising due to inconsistencies with commercial practice will not save a party from a bad bargain.

Business tenancies and bad bargains: Trillium (Prime) Property GP Ltd v Elmfield Road Ltd [2018] EWCA Civ 1556

The Supreme Court's approach has continued to shape and inform the decisions of the lower courts in recent years. Last summer, the Court of Appeal dismissed calls for the use of commercial context to rectify imprudent rent review terms. The court’s decision meant the true interpretation of the contract was nearly £1.6million, which was over £300,000 higher than it might have been, had the commercial context arguments been victorious. The parties had agreed to a rent review clause which was RPI-linked. This differs from usual practice, where figures reference market rents. Further, the multiplicand stated in the contract referred to “Initial Rent”; whilst this meant the contract, from the tenant’s perspective, was greatly disadvantageous, the court refused to allow these arguments room to breathe. Consequently, Lord Justice Lewison’s application of the law is crystal-clear: “[t]he fact that a contract term … has worked out badly or even disastrously is no warrant for departing from the clear language of the contract” (Trillium (Prime) Property GP Ltd v Elmfield Road Ltd [2018] EWCA Civ 1556 at [18]).

This, of course, can cut both ways. On the one hand, we can be confident that the plain meaning of words is king in contract law. But, on the other, there is no doubt that costs of bad drafting may be extremely high, particularly where contracts have been professionally drafted. But does this indicate the end to commercial context in the realm of contracts? Where a contract’s words are ambiguous, of course their context may assist the courts.

Lack of clarity: commercial background gives context to an ambiguous clause

In the High Court, an ill-placed comma in a financing fee side letter caused great confusion. (Vitol E&P Ltd v New Age (African Global Energy) Ltd [2018] EWHC 1580). The clause in question read:

"provided that, if the Intercreditor Agreement is not executed by the relevant parties by the end of the Intercreditor Negotiation Period, the Borrower may elect to prepay the Facility in full out of the proceeds of the RBL Facility and, following the date of prepayment in full and provided that the Final Discharge Date has occurred, within 10 Business Days following the expiry of the Intercreditor Negotiation Period the Financing Fee shall be reduced to $1.00 per BBL" (Vitol E&P Ltd v New Age (African Global Energy) Ltd, [16]).

The case centred around the comma before “within”. The claimant lender argued that the Financing Fee is reduced only if:

  • no Intercreditor Agreement has been executed by the end of the Intercreditor Negotiation Period; and
  • the Facility is prepaid out of the proceeds of the RBL Facility; but only if repayment (confirmed by the occurrence of the Final Discharge Date) has occurred within 10 business days of the expiry of the Intercreditor Negotiation Period (INP).

Thus, the comma was misplaced. The defendant borrower accepted the first two requirements, but it was argued that the reduction occurred irrespective of when the facility is repaid, and takes effect within 10 business days following the expiry of the INP. (Vitol E&P Ltd v New Age (African Global Energy) Ltd, [17-18]). Thus, the comma was aptly placed.

On the face of it, the borrower’s arguments seem compelling in the light of the previous case. However, the court noted that the clause “immediately strikes an objective reader as odd … that a fee was to be reduced "within" a period of 10 business days; the normal meaning of the word "within" did not connote a fixed date” (Vitol at [25]). Crucially, therefore, the borrower’s interpretation would create an unworkable result, with no fixed mechanism to determine when such a fee should be reduced. Resultantly, the contract’s plain meaning was ambiguous.

This uncertainty allowed the court to analyse the contract’s purpose. Both parties agreed that the purpose of the reduction in the fee was as an incentive to the lender to agree to the Facility being subordinated pursuant to an Intercreditor Agreement (Vitol at [37]). It was stated by Mrs Justice Moulder that “[i]t would in my view, produce a surprising commercial result if the reduction in the fee occurred with effect from the end of the 10 business day window following the expiry of the Intercreditor Negotiation Period even where the loan was not repaid and the claimant continued to have a commercial exposure by reason of its loan to the defendant under the Facility Agreement”. In other words, the clause simply made no commercial sense in its wider commercial context.

Clearly, commercial context still has its place in contractual interpretation. But the courts’ process should not be misunderstood. The plain meaning of the words, provided they are unambiguous, with certain, workable results, will be enforced. Only when the meaning cannot be ascertained will the courts look at its wider context.

Parties should be taken to have agreed to the words within their contracts. Only when they are found to be unworkable will the courts take the parties to have agreed to something other than those words.

Brexit and import taxes: wind of change?

By Tom Sheard

With Brexit looming, businesses should prepare for potential changes to import duties including import VAT. This would mean applying for a UK Economic Operator Registration and Identification (EORI) number and for Authorised Economic Operator (AEO) status. Furthermore, it would be prudent for businesses not yet familiar with import and export declarations to investigate their options to either outsource or automate this process.

Recent government guidance on the handling of VAT and other import duties following the UK’s exit from the European Union indicates that businesses in the UK are unlikely to see huge changes in the operation of such tariffs. However, there are a number of noteworthy transitionary protocols and slight modifications to the practical operation of VAT in the longer term following the UK’s withdrawal from the EU. In addition to import VAT, there are other import duties which may for many businesses arise for the first time following Brexit. This looks set to be most impactful for small to medium sized businesses in the UK, many of whom may not have traded with countries outside of the EU bloc in the past.

The UK’s current rules regarding VAT flow from the EU’s VAT Directive, which – upon Brexit – appear likely to cease to be binding upon the UK. This would allow the UK to amend and adjust its own VAT rules, including the categories of products which are subject to being ‘zero rated’ (still VAT-taxable, but at a rate of 0%). As such, it is possible that even businesses which trade entirely within the UK could see changes to VAT rate charged on certain products which are currently dictated by the EU VAT Directive. However, official guidance on this indicates that such modifications are unlikely. More significant changes are likely to be seen by businesses who trade with the EU due to the complications with aligning the VAT schemes of the UK and the EU.

Brexit means Brexit

A number of recent government regulations sketch the position of VAT following the UK’s exit from the European Union. Of particular note are the regulations pertaining to the provision of cross-border services. Interestingly, where a service is provided over a duration which goes beyond ‘exit day’, the liability for VAT is split proportionally according to how much of the service was provided prior to ‘exit day’ and how much was provided post-‘exit day’. This strategy ensures fair treatment across all sectors as it means that primary, secondary and tertiary sectors are all held equally to account regarding VAT in the face of Brexit.

In order to aid the transition, the Customs (Import Duty) (EU Exit) Regulations 2018 provide relief for imports in certain circumstances. If goods which are located in the customs area of the EU but outside of the UK, and the goods are intended to be moved to (or through) the UK and began such a journey prior to ‘exit day’, import duty will not be charged on such goods. Therefore, business owners who are currently importing from the EU will not have to pay import taxes so long as the shipping process began before ‘exit day’. This provides certainty to business owners whilst allowing for a degree of practical flexibility, ensuring the correct allocation of risk can be made by contracting parties.

No-deal Brexit

Government publications indicate that even in the case of a ‘no-deal Brexit’, the intention would be to keep VAT procedures “as close as possible to what they are now” (VAT for businesses if there’s no Brexit deal – Official guidance from HMRC). The main changes flowing from a ‘no-deal’ appear to be the shift to treating EU countries in the same manner as non-EU countries. This has the advantage of keeping the transition simple for business owners and goes some way to minimise disruption.

Following Brexit, a separate charge may be incurred on import of goods from EU countries. Treatment of import duties will follow a “postponed accounting” system. This is part of Transitional Simplified Procedures (TSP), with aims to mitigate post-Brexit cash flow issues relating to imports. In order to access the TSP, businesses must hold an EORI upon application.

Furthermore, the UK will no longer allow for Low Value Consignment Relief (relief from VAT on goods worth €22 or less) on goods entering the UK from the EU upon withdrawal from the EU without a deal. This move would align the UK with current global attitudes to Low Value Consignment Relief. However, it would also result in higher levels of registration for UK businesses in order to trade with EU member countries. This would inevitably incur business costs and could potentially cause difficulties for some UK businesses, both financial and logistical.

Artificial intelligence: the elephant in your loan eligibility

By Georgina Evans

In modern society the growing use of Artificial Intelligence (AI) comes as no surprise. Its application in the financial services is continuing to grow as we see, for instance, with the successful use of online banking applications making it easier for individuals to use varying services through their phones. However, a more interesting question is to what extent can AI technology play a part in the determination of one’s loan eligibility and how far should this be embraced? At present, across both the UK and USA a mechanical system of credit checks is used to ascertain one’s loan eligibility based upon past loan repayments and credit history.[1]

According to ID Analytics, nearly 20% of US consumers have no credit history and cannot obtain a loan, creating a catch 22 situation where applicants are continually not given the opportunity to improve their credit score.[2] Therefore, AI may bring positive answers to those that lack access to common financial products such as checking accounts, saving accounts, credit cards and loans.

But how does this work?

AI is powered through machine learning technology, this is a system which allows AI software to automatically learn from each data correlation it finds to predict whether a loan application is worth taking the risk or not. This results in a more reliable and accurate loan application outcome. An example of this software in practice is the Singapore startup company ‘LenddoEFL.’ Lenddo reviews behavioral traits and smartphone habits to build up models of creditworthiness for consumers in emerging markets where standard credit reporting does not exist. It specifically takes into account considerations such as avoiding one-line subject lines, which identifies an eye for detail, and how often one uses financial apps on their phones. These data-points are unconventional compared to more traditional methods such as looking at loan repayment history but have proved to be a reliable predictor of creditworthiness for the underbanked.

Algorithms can be used to decide whether a loan is granted, but AI can go one step further. When a loan is approved it is able to match the customer with a suitable product looking to the loan repayment period and selected interest rates. At present, this is confined to consumer loans such as personal loans. However as this takes off, mortgages and business loans should be quick to follow.

Such start-up companies are developing in markets such as Singapore and therefore it is interesting to look to how such software is being used across the UK and USA. JPMorgan Chase has made recent investments into AI technology to introduce a system to analyse legal documentation and extract data points and important clauses. This is merely the beginning of an exciting foray into the AI market. It is predicted that digital lending will double in size over the next three years and make up nearly 10% of loans granted across Europe. This is supported by David Girouard, the CEO of Upstart an online lending site, who stated that “in 10 years’ time, there will hardly be a credit decision made that does not have some flavour of machine learning behind it.”[3]

Legal developments

With the recent concern regarding the use of personal data by third parties, the use of such data to assess a person’s loan eligibility poses a host of issues. Article 22 GDPR is the relevant legal provision dealing with such automated individual decision-making and profiling, and states that a ‘data subject has the right not to be subject to a decision based solely on automated processing.’ This provision is subject to exceptions, these being when the decision is necessary for entering into a contract between the data subject and controller or where the data subject gives explicit consent. It is clear from this that it is likely that the mortgage applicant would have to agree to such monitoring as used by companies such as LenddoEFL as mentioned previously. However, there is potential for a lack of consent to be bypassed if the data company can prove that they are carrying out the data tracking for contractual purposes and are able to demonstrate why it is necessary. If they can do this then both the AI company and the mortgage lender will be compliant with the above GDPR provision.

It is also important to note that Article 22 GDPR applies only to a decision based "solely on automated processing". Consequently, if the automated element of a system merely produces a recommendation to be considered by a human, then Article 22 would not be engaged meaning that, in practice, we are likely to see "human in the loop" decision-making. However, even if there is no initial human involvement in a decision, the data subject's remedy is merely to have the decision reviewed or remade with human involvement. There is no requirement for the second decision to be different.

Looking to the future

Whilst this is only at present being developed and used by startup companies such as Lenddo, it may not be long before big industry players across the globe turn to such software to determine one’s loan eligibility as the function played by AI in the process is refined.

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[1] The use of FICO in the USA is used by 90% of top industry players - https://lending-times.com/2017/07/19/ai-credit-scoring-fad-or-the-future/.

[2] Allen Taylor, "AI credit scoring: fad or the future?" - https://lending-times.com/2017/07/19/ai-credit-scoring-fad-or-the-future/.

[3] Charles Lane, "Will Using Artificial Intelligence To Make Loans Trade One Kind of Bias for Another?" https://www.npr.org/sections/alltechconsidered/2017/03/31/521946210/will-using-artificial-intelligence-to-make-loans-trade-one-kind-of-bias-for-anot.

No cross-undertaking in damages when exercising the right to arrest a ship

By José Salom Linares (Postgraduate)

Stallion Eight Shipping v Natwest Markets Plc (The M.V. Alkyon) [2018] EWCA Civ 2760

A cross-undertaking in damages is not a precondition for the arrest of a ship under English law. The issue of a warrant of arrest is not a discretionary remedy; if the statutory requirements set out in the Practice Direction 61.5 are complied with, the claimant in rem is entitled to issue the warrant of arrest as of a right.

The Court of Appeal upheld the decision of the Admiralty Court confirming the ship arrest as the most advantageous and convenient precautionary measure to secure a claim against a shipowner. Indeed, the arrest of a ship is a very powerful commercially weapon since it prevents a ship from trading until its owner furnishes sufficient security for the relevant claims.

Due to the nature of the seized property, it is important for the arrest of the vessel to be carried out in the most efficient manner, minimising obstructions. Consequently, if there is a valid in rem claim, the procedure for the arrest of a guilty ship is relatively straightforward. Provided that an action in rem is available, the right to arrest the defendant’s ship arises as of a right, being only necessary to comply with the following procedural requirements:

  • The issue and service of the in rem claim form (ADM1)
  • An application for a warrant of arrest using the ADM4 form
  • A sworn declaration on the ADM5 form.

In The M.V. Alkyon, the shipowners challenged this rule, arguing that a claimant who arrests a vessel, like a claimant who seeks a freezing injunction, should provide a cross-undertaking in damages in respect of the damage which an arrest can cause a shipowner.

The facts

The shipowners had secured a loan from a bank by a mortgage on their vessel. The bank considered that the vessel market value had dropped below the required value to loan ratio, so it demanded from the shipowners additional security. After the latter disputed the valuation, the bank notified an event of default and proceeded to issue an in rem claim form, obtained a warrant of arrest and arrested the vessel. The shipowners could not release the vessel as on one hand their P&I cover did not extend to a disputed claim under a loan agreement, and on the other, a security in form of a bank guarantee could not be provided as their only asset was the ship, which was already mortgaged.

The decision

The shipowner’s argument was rejected and consequently the appeal was dismissed. For the following reasons the Court of Appeal has not departed from the usual practice of not requiring an undertaking in damages prior to a ship arrest:

  • Ship arrest and freezing injunctions are not analogous: they have completely different origins, and the proceedings were not of the same character, as the arresting party is entitled to issue of a warrant of arrest as of right and is not dependent upon a court order to that effect. Moreover, ship arrest is asset-specific; unlike freezing injunctions, does not necessarily paralyse the entirety of shipowner’s business activity in the way that a freezing order can
  • There was nothing unusual about the case. If there was a discretion to release vessel without security, requirement of cross-undertaking in damages would become routine. Consequently, claimants may be discouraged from exercising their right of arrest, and P&I Clubs and hulls underwriters may be unwilling to give undertakings either to secure arrest, or avoid released if there is an uncertainty as to whether an arrest would be maintained
  • Damages for wrongful arrest: under English law, unless the arrest is done with bad faith or gross negligence there is no remedy for damages for the ship wrongfully arrested[1]. Although the rule can be very harsh for shipowners, acceptance by the Court of the owner's case would undermine very long-standing law. In addition, for the Court there is no pressure from the maritime industry to redress the balance between shipowner and claimant.

The right to arrest is the unique feature of a claim in rem. After compliance with the statutory requirements the arrest is granted as of a right and no cross-undertaking in damages is needed by the arresting party. Thus, it is a very effective pre-trial security in the shipping business. It is true that, unlike freezing injunctions, in order to serve the arrest the vessel must be within the jurisdiction. However, the expediency with which a ship's arrest is carried out makes it undoubtedly the most attractive option when claiming against the shipowner.

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[1]The Evangelismos (1858) 12 Moo PC 352.

The expectation interest, damages beyond compensation and the objective conception of reasonableness

By Nancy Durosinmi

When a breach of contract occurs, the default remedy is monetary damages. There are three types of damages: expectation, reliance and restitution. Following Robinson v Harman (1848) 1 EX 850, the rule of the common law is, that where a party sustains a loss by breach of contract, he is to be placed in the same position he would have been had the contract been performed. However, as illustrated by Chaplin v Hicks [1911] 2 KB 786, money is an imprecise tool. Thus, assessing damages through loss of money may lead to uncertainty or unjust outcomes. It may seem more logical that courts explore quantification methods other than expectation damages to remedy a loss.

Expectation interest vs test of reasonableness

Reliance damages are available only to those whose loss stems from their reliance on a contractual promise. When assessing damages for breach of contract the courts start with the expectation interest. Expectation damages consider the difference in value between what was promised and what was delivered. However, there are limitations of the expectation interest. Following the decision in Hadley v Baxendale [1854] EWHC J70, parties can only recover damages which flow naturally from the breach, or damages which had been in contemplation by both parties at the time the contract was formed.

In Ruxley Electronics & Constructions Ltd v Forsyth [1995] UKHL 8. Ruxley agreed to build a swimming pool at Forsyth’s home. The contract specified the depth of the pool was to be seven feet and six inches. Ruxley completed the pool to a depth of six feet and nine inches. Forsyth brought action for breach of contract, claiming the cost of rebuilding the pool to the specified depth. The cost of re-building the pool was £21,560. The courts decided that awarding this cost would be wholly unreasonable and disproportionate to the loss suffered. In reaching a rational decision the courts measured the reasonableness of Ruxley’s claim against the expectation interest in order to fairly compensate his loss. Instead of awarding the cost of cure the courts decided loss of amenity was more appropriate, paying him £2,500.

On one hand it could be argued that this undermines the purpose of contract damages. It suggests that if there is a substantial difference between the cost of curing the defect and the diminution in the market value, then the innocent party will ultimately suffer a loss. On the other hand, the expectation interest does not accommodate to the imprecise nature of awarding damages. Although it may seem unjust for the innocent party to receive any less than what he was promised, it seems even more unreasonable to award the cost of cure when there has been no financial loss. 

The expectation interest requires a reasonable level of certainty in order to recover damages. It is important that the law caters for the rare cases in which calculations may be uncertain. Courts are now exploring alternative methods in instances where the expectation interest does not fulfil its aims. Courts have been known to adjust its award of damages to accommodate to the conventions of the relevant sector, as shown in The Achilleas Transfield Shipping inc v Mercator Shipping Inc [2008] UKHL 48 ensuring a more just outcome based on the facts of the case. 

Restitution

A step change occurred in Attorney General v Blake [2001] 1 AC 268, in which Lord Nicholls introduced restitutionary damages as a “discretionary remedy”, which could only be awarded in exceptional cases. Restitutionary damages differ drastically to the expectation interest. Instead of focussing on the loss of the claimant, it focuses on the unjust enrichment of the wrongdoer.

The decision in this case proved to be detrimental to the established principles of remedies for breach of contract. Mainly due to Lord Nicholls’ failure to define what counts as “exceptional”. Meaning restricting the application of Blake to other cases would be difficult in the future. Courts are now awarding restitutionary damages in lieu of the expectation interest.

Courts have the discretion to assess damages on an alternative basis when necessary. As shown in Attorney General v Blake [2001] 1 AC 268, not all financial loss can be remedied by the expectation interest. And not all loss is financial. Courts have had to compensate for the lack of precedent.

On the surface it may seem that deviation from the expectation principle has led to inconsistency within the law. However, the function of the law is to ensure justice. If the expectation interest does not achieve this, it is only logical that the courts take reasonable steps to provide justice.