England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY
Mr Leslie Blohm QC (sitting as a Judge of the High Court)

		Royal Courts of Justice Strand, London, WC2A 2LL
		18 April 2018

Lord Justice Simon:

Introduction

1. The primary issue raised in this appeal is the extent to which the court can give effect to a contractual term whose overall effect is explicit, but whose detailed terms are incomplete.
2. The appeal is from the judgment of Mr Recorder Blohm QC ('the Judge') dated 14 April 2016. The trial, which took place over a number of days, covered a number of issues which do not arise on this appeal. At the heart of the trial was the claim by the respondent ('Openwork') for the recovery of commission which they had paid to the appellant, Mr Forte.
3. Openwork is a company associated with Zurich Assurance Limited ('Zurich'), which runs a network of franchised advisors. Mr Forte is a financial advisor to a number of clients who are members of the public. In June 2005 Openwork and Mr Forte entered into a written agreement: comprising a written standard-term Franchise Contract and a Financial Manual, whose terms were incorporated into the contract. Mr Forte thereby became one of Openwork's franchisees.
4. The business of Openwork and Mr Forte was the sale of investments provided by (so far as material to the present case), Zurich and an entity within the Zurich group, referred to at trial as 'Sterling'.
5. On the sale of a Sterling investment to a client of Mr Forte, both Openwork and Mr Forte were entitled to commission from the provider of the investment.
6. The investments relevant to the present dispute were provided by Sterling in the form of a Sterling Investment Bond. On the sale of such an investment to one of Mr Forte's clients, Openwork was entitled to a commission from the provider of the investment and Mr Forte was entitled to a commission from Openwork.
7. The investments in question were 'no exit penalty' bonds. This type of investment, as the name suggests, enabled the investor to withdraw from the investment bond without penalty.
8. The commission paid to Mr Forte was 84.85% of the commission payable by the provider to Openwork; and Mr Forte was able to choose to receive either a proportion of the overall commission at the beginning and then further payments (a 'trail fee'), or the entire amount as a lump sum at the outset. In each of the three investments giving rise to the claim Mr Forte chose to receive a single lump sum.
9. One of the terms of the contract between Openwork and Mr Forte provided that if the investor withdrew the funds within three years there was an obligation on Mr Forte to repay a proportion of his commission to Openwork ('the clawback provision').
10. The issues that arise on the present appeal are, first, whether the clawback provision was sufficiently certain in its effect to be operative and enforceable, and second, whether Openwork had itself paid the clawback to Sterling in respect of the bonds that were the subject of the claim.

The background

11. On 26 September 2011, Mrs Sylvia Betterman signed an application form for the purposes of investing the sum of £4,472,993.15 in a single premium 'no exit penalty' Sterling Investment Bond. The investment was made on 3 October 2011 and she made the investment following financial advice from Mr Forte.
12. On 29 August 2012, Mrs Catherine Sytner signed an application form for the purposes of investing the sum of £3 million in another 'no exit penalty' Sterling Investment Bond. On 13 September 2012 and 21 September 2012, she invested the sums of £3 million and £1 million in the Bond. She too made those investments after receiving financial advice from Mr Forte.
13. As a result of Mrs Betterman's and Mrs Sytner's investments in the two bonds, Mr Forte was paid commission by Openwork: £313,107.28 in respect of Mrs Betterman's investment, and £271,511.27 in respect of Mrs Sytner's investments. Both were paid as single further lump sums; and the total paid was £584,618.55.
14. Between March 2012 and June 2013, Mrs Betterman encashed her bond. She held funds invested in the bond for between 5 and 20 months. On 3 April 2013, Mrs Sytner cashed in her bonds in full. Her funds had been invested in the bond for around 7 months.

The material contractual terms

15. The Financial Manual provided:

Appendix 3 – Sterling – investment plans

Base commission rates

High Allocation and No Exit Penalty Bonds

3.5% single premium initial commission and 0.4% trail fee

or

5.5% single premium initial commission and no trail

…

Commission clawbacks:

No exit penalty bond – where funds are withdrawn within 3 years of the most recent investment, a percentage of the initial commission will be debited to your Commission Account. The amount of initial commission clawed back relates to the amount invested, length of time invested and amount withdrawn.

The first issue

16. There is no dispute as to the general intent of the clawback provision: if investments in the bonds were withdrawn within the period of three years there would be an adjustment in favour of Openwork of the commission that had been paid to Mr Forte. The dispute is whether the clawback provision was sufficiently clear in specifying how it was to operate.
17. The Judge made a number of findings which were either not challenged or are no longer challenged on the appeal. First, although the clawback provision refers to a percentage of the initial commission which is related to the three specified factors (amount invested, length of time invested and amount withdrawn), it does not provide any express formula by which the calculation is to be made. It was in this sense that the Judge described the clawback provision as 'vague' (see judgment at §62). Secondly, it was inherently unlikely that a franchisee in the position of Mr Forte would have agreed to confer on Openwork a general discretion to claw back such sums as Openwork considered reasonable. It followed that the clawback provision did not confer a discretionary power in favour of Openwork to make the calculation (see judgment at §§61, 64 and 66).
18. The Judge then made findings which are challenged on the appeal. First, at §69:

… where the contract provides that a party shall be entitled to a part or a proportion of a specified whole, then the issue is, naturally and properly, whether the nature of that whole and proportion can be identified. In the present case there are three factors that are stated to be relevant …

19. Second, although the clawback provision did not stipulate how the clawback was to be assessed, since it was to be calculated on the basis of the three identified factors (amount invested, amount withdrawn and length of time of the investment), the contractual intent was clear. The Judge expressed his conclusion at §77:

I therefore conclude that, in the normal run of events, commission would be clawed back on a reducing basis over time, reducing on a straight-line basis from the full commission at the date of investment to zero at three years.

20. Mr Rory Brown (for Mr Forte) submitted that, having identified the indeterminacy of the clawback provision, the Judge was not entitled to invent his own calculus or means of ascertainment. Mr Brown accepted that the courts do not expect business people necessarily to record agreements with lawyerly precision, and that for this reason courts are reluctant to find that a contract or term is unenforceable for want of certainty. He also accepted that the payment of an amount under a contract may be certain although that amount is not specified; but in such a case, he submitted, the contract must provide either (1) a machinery or process for the ascertainment of the amount (for example, a third-party determination); or (2) a calculus or formula for working out the amount (for example, a percentage of another calculable amount); or (3) reference to an objectively defined standard, according to which the court can determine the amount (for example, an identified bank's promulgated rate of interest); or (4) on its proper construction, a power or discretion on a party to specify the amount.
21. Mr Brown relied on the proviso referred to in a passage from the judgment of Lord Wilberforce in Cudgen Rutile (No.2) Pty Ltd v. Chalk [1975] AC 520 PC at 536F:

Their Lordships consider that, in modern times, the Courts are readier to find an obligation which can be enforced, even though apparent certainty may be lacking as regards some terms such as the price, provided that some means or standard by which that term can be fixed can be found.

Lord Wilberforce referred in this context to WN Hillas & Co Ltd v. Arcos Ltd (1932) 147 LT 503.

22. Mr Brown submitted that the clawback provision provided no means of identifying how the clawback provision was to operate and, in these circumstances, it was simply not open to the Judge to invent and apply the formula that he did.
23. Mr Stefan Ramel, for Openwork, submitted that the Judge was correct in his view that the clawback provision was intended to provide a mechanism for returning commission on the basis of the amount and length of time of the investment, subject to the limitation of 3 years, and in his conclusion that a straight-line calculation gave effect to the parties' bargain.

Discussion on issue 1

24. Although the authorities indicate that cases in which contractual provisions are challenged as being void for uncertainty are to be decided on their own facts, and that Courts should not transpose a decision on a term in one case to a contractual provision in another, there is clear guidance as to how Courts should approach an argument that a contractual provision is too uncertain to be enforced.
25. The Court should strive to give some meaning to contractual clauses agreed by the parties if it is at all possible to do so. This point is illustrated by two decisions of the House of Lords, in which different conclusions were reached on the facts. The first case is Hillas v. Arcos (above). The dispute in that case concerned a term agreed between the parties in 1930 for the purchase by the plaintiff from the defendant during the 1930 Russian timber season of not less than 10,000 standards of softwood timber on terms. The plaintiffs in fact bought substantially more than that; and the parties then entered into an option for the 1931 season: if the plaintiff bought 22,000 more standards during 1930, they would have an option to buy '100,000 standards for delivery during 1931'. The plaintiff bought the extra 22,000 standards and exercised the option. The defendant argued that the option was too uncertain because no price had been agreed for the 100,000 standards, and there was no specification as to the type or quality of such timber. That argument failed. In a familiar passage in his speech at p.514, Lord Wright described the Court's task:

But it is clear that the parties both intended to make a contract and thought they had done so. Business men often record the most important agreements in crude and summary fashion: modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is accordingly the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects, but, on the contrary, the Court should seek to apply the old maxim of English law, 'verba ita sunt intelligenda ut res magis valeat quam pereat.' [words are to be understood such that the subject matter may be more effective than wasted]. That maxim, however, does not mean that the Court is to make a contract for the parties, or to go outside the words they have used, except in so far as there are appropriate implications of law, as for instance, the implication of what is just and reasonable to be ascertained by the Court as matter of machinery where the contractual intention is clear but the contract is silent on some detail. Thus, in contracts for future performance over a period, the parties may neither be able nor desire to specify many matters of detail, but leave them to be adjusted in the working out of the contract. Save for the legal implication I have mentioned, such contracts might well be incomplete or uncertain: with that implication in reserve they are neither incomplete nor uncertain. As obvious illustrations I may refer to such matters as prices or times of delivery in contracts for the sale of goods, or times for loading or discharging in a contract of sea carriage. Furthermore, even if the construction of the words used may be difficult, that is not a reason for holding them too ambiguous or uncertain to be enforced, if the fair meaning of the parties can be extracted.

Later, he added this:

Such matters may require, as the performance of the contract proceeds, some consultation and even concessions between the sellers and the buyers, but there is no uncertainty involved because, if there eventually emerge differences between the parties, the standard of what is reasonable can, in the last resort, be applied by the law, which thus by ascertaining exact dates makes precise what the parties in the contract have deliberately left undefined. Hence in view of this legal machinery id certum est quod certum reddi potest … [that is sufficiently certain which is made certain]

26. The second case was G Scammell & Nephew Ltd v. HC ad JG Ouston [1941] AC 251, in which Lord Wright returned to the subject (while noting that Hillas v. Arcos had 'not found a place in the law reports, even in a note' see p.269). It still has not. The defendants had agreed to purchase a van from the plaintiffs, but stipulated that 'this order is given on the understanding that the balance of the purchase price be had on hire-purchase over a period of two years'. The House of Lords, reversing the decision of the Court of Appeal, concluded that the reference to hire-purchase terms was so vague that no precise meaning could be attributed to it, and consequently there was no enforceable contract. At p.268, Lord Wright said this:

The object of the court is to do justice between the parties, and the court will do its best, if satisfied that there was an ascertainable and determinate intention to contract, to give effect to that intention, looking at substance and not mere form. It will not be deterred by mere difficulties of interpretation. Difficulty is not synonymous with ambiguity so long as any definite meaning can be extracted. But the test of intention is to be found in the words used. If these words, considered however broadly and untechnically and with due regard to all the just implications, fail to evince any definite meaning on which the court can safely act, the court has no choice but to say that there is no contract. Such a position is not often found. But I think that it is found in this case. My reason for so thinking is not only based on the actual vagueness and unintelligibility of the words used, but is confirmed by the startling diversity of explanations, tendered by those who think there was a bargain, of what the bargain was. I do not think it would be right to hold the appellants to any particular version. It was all left too vague. There are many cases in the books of what are called illusory contracts, that is, where the parties may have thought they were making a contract but failed to arrive at a definite bargain. It is a necessary requirement that an agreement in order to be binding must be sufficiently definite to enable the court to give it a practical meaning. Its terms must be so definite, or capable of being made definite without further agreement of the parties, that the promises and performances to be rendered by each party are reasonably certain.

27. In Astor Management AG and anor v. Antalaya Mining Plc and anor [2017] EWHC 425 Comm, Leggatt J (as he then was) reviewed a number of more recent cases in which the same approach emerges. The context was different to the present case since it related to an argument that an obligation 'to use all reasonable endeavours to obtain a Senior Debt Facility' was unenforceable. However, Leggatt J's general observations provide a helpful review of the Court's approach.

64. The role of the court in a commercial dispute is to give legal effect to what the parties have agreed, not to throw its hands in the air and refuse to do so because the parties have not made its task easy. To hold that a clause is too uncertain to be enforceable is a last resort or, as Lord Denning MR once put it, 'a counsel of despair': see Nea Agrex SA v Baltic Shipping Co Ltd [1976] 1 QB 933, 943.

65. This point has often been made but, given its importance, I will quote four clear and authoritative statements of it.

28. The first statement to which Leggatt J referred was the passage in the speech of Lord Wright in Scammell v. Ouston at p.268 set out above. The other three statements were as follows:

In Petromec Inc v Petroleo Brasileiro SA Petrobas [2005] EWCA Civ 891, [2006] 1 Lloyd's Rep 161, at para 121, Longmore LJ noted:

It would be a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered ... To decide that [the clause] has 'no legal content' to use Lord Ackner's phrase [in Walford v Miles [1992] 2 AC 128 at 138G] would be for the law deliberately to defeat the reasonable expectations of honest men …

In Whitecap Leisure Ltd v John H Rundall Ltd [2008] EWCA Civ 429, [2008] 2 Lloyd's Rep 216, at para 21, Moore-Bick LJ said:

The conclusion that a contractual provision is so uncertain that it is incapable of being given a meaning of any kind is one which the courts have always been reluctant to accept, since they recognise that the very fact it was included demonstrates that the parties intended it to have some effect.

And in Durham Tees Valley Airport v Bmibaby [2010] EWCA Civ 485, [2011] 1 Lloyd's Rep 68, at para 88, Toulson LJ observed:

Where parties intend to create a contractual obligation, the court will try to give it legal effect. The court will only hold that the contract, or some part of it, is void for uncertainty if it is legally or practically impossible to give to the agreement (or that part of it) any sensible content (citing Scammel v Dicker [2005] EWCA Civ 404, para 30, Rix LJ)

29. Mr Brown cited a number of cases: Gillatt v. Sky Television [2000] 1 All ER (Comm) 461 at 470; FIS Ltd v. Negril Holdings Ltd (2004) 148 S.J.L.B. 1312; [2004] UKPC 40, at [8]; [27]-[28]; Pensions Regulator v. A Admin Ltd [2014] EWHC 1378, [2014] Pens LR 319 at [10]-[25]. However, in my view these do not assist on the facts of the present case and, if one were to look for a short synthesis of the Court's approach to the issue, one cannot do better than the summary set out in Sir Kim Lewison's, Interpretation of Contracts, (6th Ed.) at p.473 under the heading, 'The Test of Uncertainty', in which many of the cases relied on by Mr Brown appear:

A provision in a contract will only be void for uncertainty if the court cannot reach a conclusion as to what was in the parties' minds or where it is not safe for the court to prefer one possible meaning to other equally possible meanings,

while bearing in mind that what is in the parties' mind is a legal construct and not an enquiry into subjective intent.

30. Applying the approach set out in the authorities to which I have referred, one can draw certain conclusions which apply to the present case. First, the parties plainly intended the words of the clawback provision to have some effect. It follows from this that, if the clause is treated as being so vague and unclear as to give Openwork no rights, it would defeat the intent of the clause. Secondly, that intent was that Openwork would be entitled to recover commission paid to Mr Forte if his client's funds were withdrawn within three years starting with the date of the investment. Thirdly, the parties have not failed to evince any definite meaning on which the court can safely act: such a meaning can be extracted from the criteria expressed in the clause. Thus, fourthly, the amount of the clawback is expressed as a percentage of the amount of the commission paid. If funds are withdrawn after three years there is no clawback and the advisor retains 100% of the commission. Conversely, if the funds are withdrawn the day after the most recent investment, the advisor would not be entitled to any commissions. If the funds are withdrawn on a particular day between the day after the investment and the day which falls three years after that date, the amount of the clawback is the proportion of the commission which reflects the time that has passed between those two dates.
31. It follows that in my view, the Judge was correct to find that the parties' intention was reflected in a straight-line calculation of entitlement to clawback. Such a basis for clawback, although not expressed, gives effect to the identified criteria.
32. The Judge calculated the clawback payable by Mr Forte as follows:

77. I therefore conclude that, in the normal run of events, commission would be clawed back on a reducing basis over time, reducing on a straight-line basis from the full commission at the date of the investment to zero at three years. Given that the claimed clawback is made by Openwork, it seems to me that the burden is on Openwork to prove its entitlement. To the extent that matters are uncertain, I should, all things being equal, err on Mr Forte's side.

78. However, where the assessment becomes a matter of arithmetic, this approach will not have any material effect. I have had regard to the dates of investments, and those dates and investments and withdrawals I have taken from a helpful note handed up to me by Mr Brown during closing. Applying my approach to the encashments that were carried out by Mrs Betterman and Mrs Sytner, I come to the view that Openwork was entitled to clawback the following commission.

79. Mrs Sytner invested £4 million on 13 September 2012. She withdrew £350,000 (or 8.75% of £4 million) on 8 November 2010 – or 61 days later. She withdrew the balance of £3,650,000 (or 91.25% of £4 million) on 5 April 2013 – or 204 days later. The commission paid to Mr Forte was £271,511.27. The commission repayable can, therefore, be clawed back in two slices. The first is calculated by taking 8.75% of the commission, dividing it by 1,095 (being three years in days) and multiplying by 1,034 (being 1,095 less 61 days). The clawback here amounts to £22,433.77. The second is taken by taking 91.25% of the commission, dividing it by 1,095 and multiplying it by 791, resulting in a figure of £178,971.17.

80. As for Mrs Betterman, she invested £4,600,000 on 3^rd October 2011 and made three withdrawals: £200,035 (or 4.34%) on 29 September 2012 – that is 362 days; £80,035 on 8 February 2013 – that is 494 days; and the balance of £4,319,936 on 12 June 2013 – that is 618 days. On commission of £313,107, the three slices of clawback, applying the same mechanism, amount to: £9,096.46, £3,007.39 and £130,773.41.

81. The total clawback in respect of Mrs Sytner's withdrawals, therefore, amounts to £201,404.94, as against the £205,671.42 claimed, and in respect of Mrs Betterman, amounts to £142,887.18, as against the £158,054.25 claimed. The total due is, therefore, £344,292.12, as against the £363,725.67 sought.

33. In my view the Judge was right both in his construction of the clawback provision and in his calculations as to its financial effect. Accordingly, I would dismiss Mr Forte's challenge to the Judge's conclusion on the first issue.

The second issue

34. The second issue arises from what appears to have been common ground at trial: unless Openwork had repaid its share of the commission to Sterling it was not entitled to any clawback from Mr Forte. It is unclear why this was common ground. However, Openwork had pleaded that it had repaid sums to Sterling (£186,297.56 in the case of Mrs Betterman's investment and £21,210 and £221,190 in the case of Mrs Sytner's bonds); and, in circumstances that I will shortly come to, it is unnecessary to express a view on whether the common ground was well founded as a matter of law.
35. The Judge found that Openwork had repaid its share of the commission to Sterling. At §72, he said this:

Mr Forte put Openwork to proof that it had repaid the money paid by way of commission to it by Sterling in respect of these bonds. Having heard Mr Hallatt, I am satisfied that this money was paid, although his knowledge of it was a passing one.

36. Mr Hallatt was the director of Openwork with responsibility for its Distribution Service.
37. Mr Brown submitted on the appeal, as he had before the Judge, that Mr Hallatt's knowledge of these repayments to Sterling/Zurich was negligible and that there was no proper basis on which the Judge could have found that Openwork had made them. First, there was no documentary evidence before the court of any notifications or payments that substantiated Openwork's pleaded case. Secondly, the live evidence did not justify the Judge's finding. Although Openwork called three witnesses, only Mr Hallatt gave evidence about the repayment of commission by Openwork to Sterling/Zurich. He had neither checked the position himself nor had he asked anyone else to check the position and nor had he seen any bank statements showing repayments.
38. Mr Hallatt had made a witness statement which explained at §26, how, when a policy was cancelled, Openwork repaid the clawback to the product provider and claimed the corresponding clawback from the advisor's commission.
39. We were taken by Mr Brown to the transcript of his cross-examination of Mr Hallatt. Two things are clear from this transcript. First, Mr Hallatt was clear that there was a system in place for netting off payments between Zurich/Sterling and Openwork, and second, he was incredulous at the suggestion that this had not happened:

A … In terms of the way the mechanism works … we received an overall payment from Zurich or they will demand one of us, within which you will have a lot of transactions, of which this would have been one. So it wouldn't be that we would send them a payment for this express clawback; it would be part of the overall calculation where they would have clawed it back from us amongst many transactions. (109)

Later he said:

A. In terms of the number of transactions, I think that [a document which showed an individual payment of clawback to Zurich] would be quite difficult, but in terms of the file, I know that it has been checked and I know it was applied correctly … We actually have a payments team (114).

And after some further cross-examination:

A … The fee accounts have to go through a reconciliation process, so records have to match, client records match, agent records match. They are reconciled back in terms of the transactions that we then put through on fee accounts, the margin that Openwork takes, it is all checked back to ensure it is correct … (118)

40. Mr Brown ended his cross-examination with a forensic flourish:

Q. So do I understand correctly that Openwork is asking the court to take away in excess of £400,000 from my client's earnings based on your bare, unsubstantiated assertion that clawback was duly applied, is that right?

A. Yes. (119)

41. It seems to me that the conclusion which the Judge expressed in §72 of his judgment was one which he was fully entitled to draw. He had read the relevant parts of Mr Hallatt's witness statements and heard his evidence. The effect of Mr Hallatt's evidence was that there was a system in place which ensured that its commission was debited to Openwork when a bond was cancelled or withdrawn. There was a netting-off process within a system that dealt with a very large number of transactions on a running account.
42. On this basis the Judge was entitled to conclude that Openwork had proved on the balance of probabilities that there was a system in place in which credit and debit items were accounted for between Openwork and Sterling/Zurich, and that this included the clawback due to Sterling/Zurich in respect of the investments of Mrs Betterman and Mrs Sytner.
43. I would therefore dismiss Mr Forte's challenge to the Judge's conclusion on the second issue.

The application to admit fresh evidence

44. Openwork perceived, somewhat belatedly, that it was in a position to prove by witness statements and schedules what Mr Forte contended in his grounds of appeal on the second issue was a failure to prove the payments to Sterling/Zurich; and it therefore applied under CPR Part 52.21(2) to admit fresh evidence.
45. It is common ground that the admission of fresh evidence turns on the application of the overriding objective and the principles set out in Ladd v. Marshall [1954] 1 WLR 1489 CA. The applicant must show that: (1) the evidence could not have been obtained with reasonable diligence for use at the trial; (2) the evidence must be such that, if given, it would probably have an important influence on the result of the case, although it need not be decisive; and (3) the evidence must be such as is presumably to be believed; it must be apparently credible, although it need not be incontrovertible.
46. Each side submitted full skeleton arguments addressing the issues that arose in relation to the application. On this basis we informed the parties that we did not need to hear oral argument, and that we would consider the matter and give our conclusions and reasons later.
47. In my view the application should be refused since the fresh evidence could and should have been obtained with reasonable diligence for use at trial. Although the matter of proof of payment to Sterling was not highlighted in the pleading, Openwork was put to proof of the matter and would have been able to deploy the matters that they now wish to rely on at trial.
48. Mr Ramel deployed the well-known observations of Lewison LJ in Fage UK Ltd v. Chobani UK Ltd [2014] EWCA Civ 5 [114] on the caution with which the Court of Appeal ought to approach invitations to interfere with the findings of fact made by trial judges. He did so in the context of the second issue. However, among the reasons for not interfering with facts found at trial, Lewison LJ included this:

The trial is not a dress rehearsal. It is the first and last night of the show.

49. Adopting Lewison LJ's colourful analogy, I would reject Openwork's attempt to put on a new show, 22 months after the last night.

Conclusion

50. For the reasons set out above, I would dismiss the appeal.

Lord Justice Newey

51. I agree.

Lady Justice Arden

52. I also agree.