Peter Hamilton: The danger of promising what you cannot deliver

Peter Hamilton 160 byline

Useful and instructive court decisions seem to be a bit like buses at the moment. Here is another one.

Last month the Court of Appeal decided that a promise given by one party to another in the course of negotiating a contract and not reflected in the written terms of the contract between them, overrode the written terms. This meant that the promise was binding, despite what the written contract said.

In the course of his judgment, Lord Justice Rix summed up the facts in the following way:

“…Thinc Group Ltd (“Thinc”), recruited… Mr and Mrs Armstrong, to join them as self-employed advisers in the provision of financial services under a contract for services. To induce them to join the company after operating independently for many years in building up their own business, Thinc offered the Armstrongs a so-called “disturbance allowance” or “supplemental payment” based on (50 per cent of) the Armstrongs’ last year’s gross income. In effect, this payment was to compensate the Armstrongs for bringing to Thinc their client base of 10,000 clients and the prospect of recurring as well as new commissions from that clientele. Although the contract between Thinc and the Armstrongs was not so expressed, in commercial terms Thinc was buying the goodwill of the Armstrongs’ business. The supplemental payment concerned was £243,052. …In the protracted negotiations between the parties, the Armstrongs wished to be assured in the clearest terms, and repeatedly so, whether any and if so what conditions might be attached to this payment. Were there any conditions under which it might have to be repaid?”

Mrs Armstrong’s evidence was that she “checked this repeatedly with [the two directors of Thinc who were conducting the negotiations on its behalf] and was told that the only stipulation was that we had to remain with the company for three years. However this was not a worry… I wanted any move at that stage to most definitely be my last one [before retirement]”.

In other words, as long as the Armstrongs did not themselves end the contract within three years, there were no circumstances in which the supplemental payment would become repayable.

The Armstrongs relied on that assurance and entered into the proposed contract with Thinc in March 2008. The contract was not in line with those assurances. The written terms gave Thinc the right to terminate the contract at any time by giving notice and without having any specific grounds for doing so. On top of that, the contract also provided that if for any reason it was terminated within three years, the supplemental payment was then repayable.

In June 2009, only fifteen months after the contract was signed, Thinc gave the Armstrongs notice of termination of the contract claiming that their issued production was considerably below the required standards, although there was no contractual requirement relating to production. In effect that was a notice without any contractual justification, and Thinc then claimed repayment of the £243,052 supplemental payment. When the Armstrongs refused to make the repayment, Thinc sued them.

Thinc lost in the trial before a deputy high court judge, and then it appealed.

The Court of Appeal dismissed its appeal, holding that the trial judge had come to the right decision, namely, that the promise by the Thinc directors was itself a contract binding Thinc.

The essential term was that if the Armstrongs entered into the contract to sell their practice, Thinc agreed that the supplemental payment would only become repayable if the Armstrongs terminated the contract within three years. It was a so-called collateral contract; the main contract being the sale agreement.

The Court of Appeal referred to the well-established principle that the courts could give effect to a promise or warranty collateral to the main contract “so as to enable the promise to take precedence over the inconsistent wording of even a signed contract”.

For example, in his judgment in a case called Mendelssohn v. Normand, decided in 1970, the Master of the Rolls, Lord Denning, said: “There are many cases in the books when a man has made, by word of mouth, a promise or a representation of fact, on which the other party acts by entering into the contract. In all such cases the man is not allowed to repudiate his representation by reference to a printed condition… The reason is because the oral promise or representation has a decisive influence on the transaction – it is the very thing which induces the other to contract – and it would be most unjust to allow the maker to go back on it. The printed condition is rejected because it is repugnant to the express oral promise or representation. As Devlin J said in Firestone Tyre and Rubber Co. Ltd. v. Vokins & Co. Ltd. … ‘It is illusory to say: ‘We promise to do a thing, but we are not liable if we do not do it’.’ To avoid this illusion, the law gives the oral promise priority over the printed clause.”

In the Court of Appeal in the Thinc case, Lord Justice Rix added: “So here, it would be illusory for Thinc to say: ‘The only condition for our recovery of the supplemental payment is if you do not stay with us for three years’ and then for its printed contract to enable it to reclaim the money at will within that period by mere dint of terminating the contract without cause. That would be to impose a new condition for repayment.”

Lord Justice Rix also referred to another Court of Appeal decision from 1976, J Evans & Son (Portsmouth) Ltd v. Andrea Merzario Ltd.

The facts of that case were that the claimant used to import machines from Italy by sea. For this purpose the claimant employed the services of a forwarding agent, the defendant.

Before 1967 the goods were always carried below deck to avoid the risk of corrosion. In 1967, the defendant changed to transporting the machines in containers. In discussions with the claimant, the defendant promised that the goods would still be carried below deck. On that understanding the claimant continued to use the defendant. However, the standard terms in the contract between them gave the defendant the right to ship the goods on deck and also to be free of liability in the absence of wilful neglect or default.

In the event, the claimant’s goods were carried on deck and were lost overboard. The claimant sued the defendant for damages. The Court of Appeal held that the collateral promise overrode the printed conditions.

Giving judgment in that case, Lord Denning MR said: “When a person gives a promise or an assurance to another, intending that he should act on it by entering into a contract, and he does act on it by entering into the contract, we hold that it [the promise] is binding… .”

In the light of those decisions of the Court of Appeal, at least two object lessons emerge.

The first is that parties to a prospective contract must be careful not to make promises unless they are prepared to honour them.

The second is that when one party makes such a promise to the other party, the latter should make sure that the promise is incorporated into the terms of the main contract – to avoid later argument.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder ofmoneymatterslegal.co.uk