Commercial Court considers when contracting party may have duty to make disagreement known

The Commercial Court has recently considered when a party may have a duty to correct a mistake or assumption by its counterparty under the principle of "estoppel by acquiescence". This principle applies where one party acts on an assumption that is acquiesced in by the other. If a reasonable person would expect the acquiescing party, acting honestly and responsibly, to speak up, that party can be estopped from denying the assumed state of facts or law if it would be unjust to allow him to challenge the assumption.

In obiter remarks in Starbev GP Limited v Interbrew Central European Holdings BV [2014] EWHC 1311 (Comm), Blair J considered the scope of this so-called "duty to speak" and held that:

• "acting honestly" for these purposes does not necessarily imply that the party against whom the estoppel is raised must be guilty of actual dishonesty, but there must at least be some impropriety – acting irresponsibly is not sufficient; and
• the estoppel can arise not only where the party raising it is mistaken as to the true position, but also where that party is proceeding on the assumption that something is agreed or certain and the other knows that this is not the case.

Given the fairly high threshold for establishing an estoppel, contracting parties may wish to agree a contractual duty to speak in certain circumstances, or seek express confirmation of their understanding on any important matters.

On a separate issue, Blair J held that the words "the purpose" in a contractual provision should ordinarily be interpreted as referring to the dominant purpose rather than the sole purpose or one of a number of purposes.

Gregg Rowan and Kasim Khorasanee consider the decision below.

	Gregg Rowan Partner +44 20 7466 2498
	Kasim Khorasanee Trainee solicitor +44 20 7466 2175

Background

The purchaser (claimant) acquired a brewing business (the "Target") from the seller (defendant) under a share purchase agreement. The deal contained a deferred consideration mechanism (the CVR) that entitled the seller to additional payments upon a subsequent sale of the Target by the purchaser. This was to be calculated by reference to the amount that the purchaser applied in acquiring the Target (the "Investment Amount").

After completion, the purchaser notified the seller on two occasions that the Investment Amount was a specific sum. The seller was not under any contractual duty to respond to these notifications and, at the time they were made, did not do so. However, it subsequently disputed the purchaser's calculation when the purchaser sold the target and claimed (based in part on its calculation of the Investment Amount) not to be liable to pay any deferred consideration.

The purchaser argued that, as the seller failed to challenge the notifications when they were given, the purchaser had assumed that the Investment Amount was not disputed and relied to its detriment on this assumption. This was alleged to give rise to an estoppel by acquiescence such that the seller was estopped from denying the purchaser's calculation of the Investment Amount.

In the event, Blair J decided that the purchaser's calculation of the Investment Amount was correct. This meant that the purchaser had no need to rely on the estoppel. However, Blair J nonetheless dealt with the issue.

Decision

Citing the speech of Lord Steyn in Republic of India v India Steamship Co [1998] AC 878 (The "Indian Endurance"), the dissenting speech of Lord Wilberforce in Moorgate Mercantile Co Ltd v Twitchings [1997] AC 890 and ING Bank NV v Ros Roca SA [2012] 1 WLR 472, Blair J described the general rule as follows:

"… a duty to speak may … arise where, having regard to the situation in which the transaction occurred as known to both parties, a reasonable person would expect the other party, acting honestly and responsibly, if he had a claim, to make that claim known."

For the purpose of this rule, the reasonable person is a person in the position of the party who seeks to rely on the estoppel. The duty to speak arises because a reasonable person would expect the party against whom the estoppel is raised to bring the true facts to the attention of the other.

Blair J said that the phrase "honestly and responsibly" cannot be interpreted as meaning that irresponsible behavior alone is sufficient. The words "acting honestly" are clearly intended to add something; this is not necessarily dishonesty, but there must as a minimum be impropriety for an estoppel by acquiescence to be established. That impropriety may come from the act of staying silent itself.

Blair J also rejected the purchaser's submission that estoppel by acquiescence is confined to cases of mistake, where the party to be estopped knows the party raising the estoppel to be mistaken. It can apply in respect of the existence of a dispute or uncertainty, which "is as much a matter which a party, acting honestly and responsibly, must bring to the attention of another, as the existence of a known fact".

On the facts, Blair J would have found that no estoppel by acquiescence could be made out. When the purchasers gave the notifications relied upon, there was no reason for the seller to speak up. The value of the Investment Amount would only become relevant much later when the purchaser sold the Target, whereupon the seller had a right to audit the purchaser's calculation. Moreover, there was evidence that the purchaser anticipated that the seller might wish to exercise this right. The purchaser also failed to establish detrimental reliance.

There was a separate issue as to the proper interpretation of the words "the purpose" in an anti-avoidance provision designed to protect the seller from the purchaser structuring a sale of the Target to a third party in a manner that had the effect of reducing the CVR payable. Blair J rejected submissions that the word meant the only purpose or one purpose amongst others, instead finding that it meant the dominant purpose. In reaching this conclusion, the judge referred to the Supreme Court's interpretation of "the purpose" in the Protection from Harassment Act 1997 in the recent case of Hayes v Willoughby [2013] 1 WLR 935, which he described as authority for the proposition that "the ordinary principle is that the relevant purpose is the dominant one".

On the facts, it was found that the dominant purpose of an aspect of the sale of the Target by the purchaser to a third party was the avoidance of CVR, such that the anti-avoidance mechanism was activated.

Comment

This decision is of interest as a relatively rare discussion of the principle of estoppel by acquiescence, which is a species of estoppel by convention. (The latter term is generally used where the parties act on a shared common assumption, whereas the term "estoppel by acquiescence" is generally used where one party makes the assumption and the other acquiesces in it.)

The decision confirms that the threshold for establishing estoppel by acquiescence, whilst not insurmountable, is a high one. The requirement that the party who knows the true state of affairs behaves as a minimum with impropriety in not speaking up is unlikely to be satisfied in most cases.

If one or both contracting parties require clarity on a particular point that may arise in the future, it is open to them to agree a contractual duty to speak in certain defined circumstances. Another possibility is for the party making the assumption to seek express confirmation that it is shared by the other party. These are likely to be the only reliable ways of ensuring that mistakes are corrected and possible disputes and uncertainties are notified promptly.