Legal Review of 2009 - Part 1

SUMMARY

We start our review of 2009 with two high-level decisions concerning the interpretation of contracts, highlighting the growing flexibility of at least some judges in this respect.

The first, from the House of Lords (before it was replaced by the Supreme Court) also dealt with issues of the admissibility of pre-contract negotiations (on which we also refer to a Court of Appeal decision) and rectification of contracts. The second, from the Privy Council, was concerned specifically with implied terms.

We then refer to some other cases concerning interpretation of particular contractual terms, terms of a kind not infrequently found in commercial contracts, including contracts in the construction industry ("Not always what it seems to say").

We review cases during the year on the existence or otherwise of a duty of care, both in respect of economic loss and physical damage. The cases on economic loss include potential liability for statements on a website and potential liability of auditors to parties other than their client (i.e. the company whose accounts they are auditing). We include the House of Lords decision in Stone & Rolls Ltd v Moore Stephens, on whether auditors could raise the defence of ex turpi causa against a one-man company engaged in fraud.

It is one thing to owe a duty of care, it is another to be in breach of it. We mention a few cases concerning negligence and the relevant standards of care. Four of these cases concern claims against solicitors, of which three were unsuccessful, and one concerns a claim against a barrister, which was unsuccessful. In the public arena, there is a useful definition of the standard from the Court of Appeal, applied in this case to a man walking his dog. There is also a case concerning a claim against surveyors and the scope of the retainer by their client.

We cover a judgment against engineers, in the Technology and Construction Court and the Court of Appeal, concerning their liability under the Defective Premises Act 1972.

We comment on a judgment concerning apportionment of liability between solicitors and surveyors following a settlement of the claim against the solicitors, which involved a number of complicating factors and a judgment in Scotland concerning the net contribution clause in the conditions published by the Association of Consulting Engineers (the ACE Conditions).

We review cases on limitation during the year, including the Court of Appeal's decision in Axa Insurance Ltd v Akther & Darby Solicitors & Ors.

We consider a number of cases on payment for services in the construction industry, where the contractual entitlement was unclear, or where there was held to be no contract at all. In one of these cases, there was also an issue of fraudulent misrepresentation where the client had been led to believe that a particular person would be working on the job.

We mention a case on the statutory entitlement to interest, where the amount of the principal payment is disputed.

We review a number of cases concerning orders for costs. Courts are now much more flexible in making such orders, but the result is a burgeoning form of satellite litigation. We include a case on cost estimates given by solicitors and a House of Lords decision on the use of "without prejudice" correspondence in subsequent proceedings.

We review a number of cases in the Technology and Construction Court during the year on adjudicator's decisions in the construction industry. We also refer to changes to the legislation passed by parliament during the year, and some cases concerning interpretation of existing statutory provisions.

There were a number of cases during the year on service of legal proceedings, arising out of applications to serve proceedings late. Failure to serve proceedings in time could mean that the claim cannot be pursued, which could lead a claim against the solicitors responsible. We also include a case of a claim being struck out because the claimant had no title to sue.

There were also a number of cases concerning solicitors' undertakings to redeem charges on properties, following sale of the property. The cases illustrate the importance for solicitors of obtaining redemption statements and the mortgagee's agreement to release the properties from all relevant charges upon payment of the ascertained sum, and the danger of any delay in paying over the sums required.

We include some cases that affect insurers particularly, including a case concerning notification of disputes on a construction project, documents held by a firm of solicitors in which the Law Society had intervened and cases involving fraudulent claims.

We end with two major cases involving nuisance claims, including claims arising out of the explosion at Buncefield in 2005.

LEGAL REVIEW 2009

During the year, the judicial functions of the House of Lords were taken over by the newly-created Supreme Court. It was also 10 years since the Woolf reforms, which gave rise to some soul-searching on how much they had achieved their aims. Lord Justice Jackson, a former head of the Technology and Construction Court, was appointed to conduct an enquiry into the costs of civil litigation. His preliminary report was published in 2009 and his final report issued on 14 January 2010.

Interpreting Contracts

The courts have become more flexible in modern times in the way they interpret contracts. If the literal meaning of the words in a contract produces a result which seems commercially absurd, the courts may labour to construe the contract in a different way, taking into account such matters as the presumed intent of the parties to the contract (though not evidence of their actual intentions) and background information presumed to have been known to the parties.

As was said in one of the cases referred to later:

The rejection of literalism when it conflicts with commercial common sense is now a regular feature of the approach of the House of Lords in construing commercial agreements.

The House of Lords seemed to go further than this in Chartbrook v Persimmon Homes Ltd & Ors (1 July). The case concerned a contract for the development of a site, between the owners of the site and the developers. The agreement was that the developers would develop the site at their own cost and pay the owners a guaranteed amount for each of the various units comprising the development (reflecting its site value), plus a further amount in the event of it being sold (in its developed state) for more than a certain price. The formula in the contract for calculating this further amount seemed clear enough, but produced a result that seemed surprisingly favourable to the owners.

The High Court and the Court of Appeal interpreted the formula following the natural meaning of the words used and held that the developers had to pay accordingly. However, the House of Lords held that, in the words of one of the judgments, something had gone wrong with the language and that the contract should be construed so as to give it the more commercially realistic meaning contended for by the developers, even though that meaning could not really be reconciled with the language actually used.

This disposed of the case, but there were other issues on which the House of Lords also commented.

However flexible the approach to construing contracts may have become, the courts have still set their face firmly against what may seem one approach – ask the parties what they meant. Of course, if they did, they might not get the same answer, but they would have some further evidence to go on.

In the Chartbrook case, the developers had contended that, if the courts had been allowed to consider the pre-contract negotiations between the parties as an aid to construing the contract, there would have been no doubt that theirs was the meaning intended by the parties. However, the House of Lords re-affirmed the old common law rule that pre-contract negotiations were not admissible for the purpose of construing the contract (though they may be admissible for other purposes, including the next issue that the House of Lords considered). The approach to construing contracts, therefore, remains firmly objective.

Another possibility open to the developers had been to seek rectification of the contract. However, this is only possible if it can be shown that there had been a mistake in drafting or finalising the contract, in that the contract had failed to set out what the parties had intended to agree. This presumes a common understanding between the parties prior to the signing of the contract as to what the contract was supposed to say. In order to decide whether there was a common understanding of this nature (and therefore a mistake in the final drafting of the contract), the courts have traditionally admitted evidence of the subjective understanding of the parties – in other words, for this purpose it has been permissible to ask the parties what their understanding was. In this case, the owners disputed the developers' view of what had been intended, and as a result the courts below were unwilling to conclude that there had been a common understanding.

However, the House of Lords expressed the view that the question of whether there had been a common understanding between the parties prior to the contract being signed should be judged objectively, so that evidence of the subjective understanding of either party was irrelevant. If the pre-contract correspondence between the parties in this case had been considered in this way, the courts would be likely to have concluded that the parties must be presumed to have had a common intention that the formula for payment in the contract would accord with the developers' understanding. Rectification would then have been possible.

Such an approach to pre-contract negotiations is consistent with the common law approach to construction of the contract itself and is likely to make rectification of contracts easier.

In Anglo...