Docsity
Docsity

Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity


Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan


Guidelines and tips
Guidelines and tips

Supreme Court Rethinks Penalties and Duties in Commercial Law, Exams of Law

Recent supreme court cases that have challenged conventional wisdom and common practice in commercial law, specifically in relation to the rule against penalties and the determination of a duty of care in tort. The cases have highlighted the importance of flexibility and the dangers of oversimplified tests. The document also touches upon the implications of these decisions for contract law and the role of courts in reaching the 'right' decision.

What you will learn

  • How has the Supreme Court challenged the conventional wisdom on determining a duty of care in tort?
  • What is the rule against penalties in commercial law and how has it been applied in recent years?
  • What are the implications of these Supreme Court decisions for contract law and the role of courts?

Typology: Exams

2021/2022

Uploaded on 09/12/2022

alenapool
alenapool 🇬🇧

4.6

(12)

223 documents

1 / 2

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
20 The Commercial Litigation Journal May/June 2019
When is the law not the law?
David Cook is commercial
dispute resolution director
at Walker Morris LLP
It sounds like the beginning of a
bad joke, but it is no laughing
matter that a recent run of Supreme
Court cases serve to demonstrate that
conventional wisdom and common
practice concerning some of the
apparently established legal principles
underpinning many commercial
disputes may actually miss the mark.
Restatement of the
rule against penalties
Anyone practising in commercial
contract litigation in recent years
will be aware that, in considering
whether a provision amounts to a
penalty in Cavendish Square Holding
BV v Makdessi; ParkingEye v Beavis
[2015], the Supreme Court pointed
out that, over the century since
Lord Dunedin identified a number
of tests which could prove helpful or
conclusive in deciding that question
in Dunlop Pneumatic Tyre Co Ltd v
New Garage and Motor Co Ltd [1914],
those tests had been applied more
rigidly than was ever intended.
Conventional wisdom and
common practice over time had
effectively distilled Lord Dunedin’s
Dunlop tests into an unhelpful,
over-simplified distinction between
a genuine pre-estimate of loss which
is compensatory, and therefore
enforceable; and a deterrent which is
penal, and therefore not. The Supreme
Court in Cavendish stated that it was
‘unfortunate’ that Lord Dunedin’s
judgment ‘had achieved the status of
a quasi-statutory code in subsequent
case-law’. It therefore undertook
a wholesale review of the guiding
principles of the rule against penalties
and brought clarity by restating –
but not outright altering – the law
in this area.
The Supreme Court explained that
a penalty is a secondary contractual
obligation that imposes a detriment
on the party in breach of a primary
obligation which is out of all proportion
to any legitimate interest of the innocent
party in the performance of that primary
obligation. Breaking that down, there
are three questions which can help to
determine whether a provision amounts
to an unenforceable penalty:
The ‘threshold test’: is the
penalty rule engaged at all? In
English law, the court will not
generally interfere with a party’s
‘primary’ contractual obligation
to do something, but it can
regulate the ‘secondary’ liability
that may be imposed when a
party breaches that obligation.
The penalty rule is only engaged
at all, therefore, if the provision
in question imposes a secondary
liability for breach of a primary
obligation.
The ‘legitimate interest test’:
does the clause serve to protect
any legitimate interest? A clause
that is potentially penal in nature
may nevertheless be allowed if
it serves to protect a legitimate
interest of the innocent party in
the performance of the primary
obligation.
The ‘exorbitance test’: if so, is the
provision out of proportion to the
protection of that interest, by being
extravagant or unconscionable? So
long as the provision in question is
not exorbitant or unconscionable
in amount or effect, by reference to
some norm, as against the legitimate
interest which it serves to protect,
then it may not amount to a penalty.
The Supreme Court has therefore
highlighted to contract drafters and
commercial litigators of the dangers
of complacency when it comes to our
Practice
‘Conventional wisdom and
common practice over time
had effectively distilled
Lord Dunedin’s
Dunlop
tests into an unhelpful,
over-simplified distinction.
David Cook seeks certainty from the Supreme Court
pf2

Partial preview of the text

Download Supreme Court Rethinks Penalties and Duties in Commercial Law and more Exams Law in PDF only on Docsity!

20 The Commercial Litigation Journal May/June 2019

When is the law not the law?

David Cook is commercial dispute resolution director at Walker Morris LLP

I

t sounds like the beginning of a bad joke, but it is no laughing matter that a recent run of Supreme Court cases serve to demonstrate that conventional wisdom and common practice concerning some of the apparently established legal principles underpinning many commercial disputes may actually miss the mark.

Restatement of the

rule against penalties

Anyone practising in commercial contract litigation in recent years will be aware that, in considering whether a provision amounts to a penalty in Cavendish Square Holding BV v Makdessi; ParkingEye v Beavis [2015], the Supreme Court pointed out that, over the century since Lord Dunedin identified a number of tests which could prove helpful or conclusive in deciding that question in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1914], those tests had been applied more rigidly than was ever intended. Conventional wisdom and common practice over time had effectively distilled Lord Dunedin’s Dunlop tests into an unhelpful, over-simplified distinction between a genuine pre-estimate of loss which is compensatory, and therefore enforceable; and a deterrent which is penal, and therefore not. The Supreme Court in Cavendish stated that it was ‘unfortunate’ that Lord Dunedin’s judgment ‘had achieved the status of a quasi-statutory code in subsequent case-law’. It therefore undertook a wholesale review of the guiding principles of the rule against penalties and brought clarity by restating – but not outright altering – the law in this area. The Supreme Court explained that a penalty is a secondary contractual obligation that imposes a detriment

on the party in breach of a primary obligation which is out of all proportion to any legitimate interest of the innocent party in the performance of that primary obligation. Breaking that down, there are three questions which can help to determine whether a provision amounts to an unenforceable penalty:

- The ‘threshold test’: is the penalty rule engaged at all? In English law, the court will not generally interfere with a party’s ‘primary’ contractual obligation to do something, but it can regulate the ‘secondary’ liability that may be imposed when a party breaches that obligation. The penalty rule is only engaged at all, therefore, if the provision in question imposes a secondary liability for breach of a primary obligation. - The ‘legitimate interest test’: does the clause serve to protect any legitimate interest? A clause that is potentially penal in nature may nevertheless be allowed if it serves to protect a legitimate interest of the innocent party in the performance of the primary obligation. - The ‘exorbitance test’: if so, is the provision out of proportion to the protection of that interest, by being extravagant or unconscionable? So long as the provision in question is not exorbitant or unconscionable in amount or effect, by reference to some norm, as against the legitimate interest which it serves to protect, then it may not amount to a penalty.

The Supreme Court has therefore highlighted to contract drafters and commercial litigators of the dangers of complacency when it comes to our

Practice

‘Conventional wisdom and common practice over time had effectively distilled Lord Dunedin’sDunlop tests into an unhelpful, over-simplified distinction.’

David Cook seeks certainty from the Supreme Court

The Commercial Litigation Journal 21

Practice

May/June 2019

understanding of fundamental legal principles, and it has advocated a more flexible and more modern approach.

Death of Caparo : have a care?

Similarly, a high-profile case in the public law arena has challenged received wisdom when it comes to determining a duty of care in tort. In the 1990 case of Caparo Industries plc v Dickman , the House of Lords referred to the three-stage test of foreseeability, proximity and fairness. Since that time, it has become habitual to follow that formula when establishing the existence of a duty. However, in Robinson v Chief Constable of West Yorkshire Police [2018] (and also very shortly afterwards in Steel v NRAM [2018]) the Supreme Court reminded us that Caparo was not decided by the three-stage test. In fact, in Caparo , the House of Lords commented that (per Lord Oliver):

… to search for any single formula which will serve as a general test of liability is to pursue a will-o’-the wisp… [and] the attempt to state some general principle which will determine liability in an infinite variety of circumstances serves not to clarify the law but merely to bedevil its development…

Yet, perhaps because lawyers like a nice, neat rule, in almost slavishly adopting the three-stage test, that is exactly what many courts and practitioners have done! In Robinson , the Supreme Court explained that the approach actually endorsed in Caparo , and the correct approach, was and is:

- that established duty situations should be decided in accordance with previous case law; but - otherwise, the court should: - identify and compare novel factual circumstances with any relevant established precedents to allow the law to develop incrementally and by analogy with authorities; and - balance reasons for or against the imposition of a duty of

care to determine whether that would be fair and just.

In Steel the Supreme Court unanimously agreed that Caparo had been wrongly construed for years and it endorsed the interpretation as per Robinson. The Supreme Court went on to confirm that Caparo also decided that, in negligent misstatement cases, the reasonableness of a representee’s reliance on a statement made by a representor is central to the imposition of a duty of care. That is an element that has been missing from the customary three-stage test.

Implying terms: new

Supreme Court ‘spin’

Finally (and turning again to contract law), prior authority on implying terms ( Marks & Spencer plc v BNP Paribas [2015]) established that in order for a term to be implied, it must be necessary to give business efficacy to the contract. That is a clear, almost trite test which simply asks whether, without the term, the contract does not work. However, as Gwendoline Davies and Clare Acklam reported in the March/April 2019 edition of The Commercial Litigation Journal (‘Safe as houses’, CLJ 84, p16), the Supreme Court has, in the recent case of Wells v Devani [2019], seemingly added a new ‘spin’ to the rule. In Wells Lord Kitchen stated that if the contract did not contain the particular term in dispute (emphasis added):

… then a term to that effect must be implied to make the contract work and to give it practical and commercial coherence[and in] carrying out this exercise of implication the court would be reading into the contract that which its nature implicitly requires. Put another way, to leave Mr Wells without any obligation to pay Mr Devani would be completely inconsistent with the nature of their relationship.

Those comments can potentially be read not as changing the established M&S v BNP Paribas rule, but as introducing an additional discretion for the court to imply a term where that is an obvious step which accords with a ‘natural understanding’ of the relationship and agreement between the parties.

It obviously remains preferable, where possible, for contracts to be in writing and drafted clearly, accurately and comprehensively to expressly contain, in unambiguous language, all necessary terms to reflect the parties’ agreement. No doubt it also remains true that where parties have entered into a carefully drafted contract, particularly where they have been legally advised, it will be difficult to imply any term(s). The Supreme Court’s decision in Wells does, however, seem to suggest a less rigid approach than hitherto and to offer increased flexibility for terms to be implied on the basis of an obvious, natural understanding of the parties and their arrangements.

Key takeaways

These cases illustrate that the Supreme Court is currently very active and progressive, with such recent decisions taking into account the importance of flexibility in modern authority, and demonstrating a move away from rigid and oversimplified step-by-step tests. While that can make it difficult for lawyers to accurately predict the outcome of cases, it does also give increasingly greater scope for courts to reach the ‘right’ decision on a practical and factual basis. These decisions also emphasise the old adage: never assume anything. Never assume that you know the law – go back to the original authorities and read them thoroughly and without the bias of hindsight; and never assume that the facts and natural justice won’t play a potentially significant part. n

Caparo Industries plc v Dickman [1990] UKHL 2 Cavendish Square Holding BV v El Makdessi; ParkingEye v Beavis [2015] UKSC 67 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1914] UKHL 1 Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & anor [2015] UKSC 72 Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4 Steel & anor v NRAM Ltd [2018] UKSC 13 Wells v Devani [2019] UKSC 4