November 2008 - Olswang

• 

Olswang © 2008 | www.olswang.com 

November 2008 

Commercial Dispute Resolution Legal Update

Recent legal 

developments 

Automotive Latch Systems v Honeywell: obligations of reasonable 

endeavours and reasonable time 

The recent decision of the Commercial Court in Automotive Latch Systems Ltd v Honeywell 

International Inc [2008] EWHC 2171 (Comm) adds to the law on obligations of reasonable endeavours 

and reasonable time. 

The factual background was that the parties were in dispute over a joint collaboration agreement for the 

development and manufacture of a car door latch. The managing director of the claimant, Automotive 

Latch Systems (ALS), had invented a new kind of car door latch intended to fit into any car door - the 

Universal Latch System (ULS). The defendant, Honeywell, was a technology and manufacturing company 

with experience in the automotive industry, but with no specific prior experience or expertise in car door 

latches. The parties entered into a joint collaboration agreement for the development and manufacture of 

the ULS by Honeywell. 

A number of problems and delays arose in the design and manufacture of the ULS. Eventually, ALS 

served a notice to terminate the joint collaboration agreement on the ground that Honeywell had committed 

several breaches of its obligation under Article 4.5. Under that provision Honeywell warranted that it would 

take "any and all reasonable actions without unreasonable delay to manufacture the latch". Both parties 

recognised that as with other "reasonable endeavours" obligations, the court was to apply objective criteria 

in determining the standard of performance required. However, the parties differed as to whether there 

was also a subjective element to this analysis, by reference to the precise experience of Honeywell. 

ALS contended that the provision imposed "a clear and all-encompassing obligation" on Honeywell to 

manufacture the latch, without any reference to Honeywell's lack of experience in the specific area of 

expertise. Honeywell argued in response that the standard required was that of the skill and care of an 

automotive component supplier with no specialisation or experience in car door latches. The judge 

agreed, taking into account the fact that Honeywell had made clear to ALS in advance of the contract being 

made the fact that Honeywell did not have specialist experience in manufacturing car latches. He noted 

that if ALS had wanted to impose the standard of an experienced latch manufacturer, it would have had to 

insist on an express term. 

The next question was that of what was required of Honeywell under Article 4.5 in terms of performance 

within a reasonable time (that being the implied obligation in the absence of the contract specifying any 

fixed date for performance). The judge started this analysis by applying the conclusion of the Court of 

Appeal in Peregrine Systems Limited v Steria Limited [2005] EWCA Civ 239 that determining what is a 

reasonable time is not confined to an assessment of what the parties contemplated or ought to have 

foreseen at the time of the contract being made. Instead, the Court of Appeal held that it involves a broad 

consideration, with the benefit of hindsight, at the time when one party contends that the other is in breach, 

Olswang © 2008 | www.olswang.com

of all the circumstances which are by then known to have happened, including the causes of any delay 

which has occurred in the meantime 1 . 

In ALS v Honeywell, Flaux J took the Court of Appeal's conclusion a stage further and held that the 

consideration of the reasonableness of the time taken would include consideration of matters which antedated 

the parties entering into the contract. This meant that it was necessary to consider whether ALS had 

misrepresented to Honeywell the stage which the design of the ULS had reached by the time when the 

contract was made. 

Reasonable endeavours obligations are often agreed in commercial contracts as a compromise position 

where a strict obligation involves too exacting a standard for a supplier. Similarly, obligations of 

reasonable time will often arise by implication, particularly in professional services contracts, where the 

complexity of a task may be too uncertain for a supplier to be willing to commit to a fixed date. Both the 

reasonable endeavours and the reasonable time aspects of the ALS v Honeywell decision illustrate the 

true breadth of such provisions, extending both to the circumstances made known between the parties in 

advance of the contract and to events which occur during the course of performance. 

1 

Olswang acted successfully for Peregrine Systems Limited at both first instance and on appeal. 


Unilateral mistake: the party's error must be as to the terms of the 

contract 

The recent decision of Aikens J in Statoil ASA v Louis Dreyfus Energy Services LP [2008] EWHC 2257 

(Comm) makes clear that a party can only avoid a contract on the ground of a unilateral mistake, which 

mistake is known to the other party, where that mistake is as to the terms of the contract. Where one party 

has made a mistake as to a fact or state of affairs which forms the basis upon which the terms of the 

contract were agreed, but that assumption does not become a part of the contract, the contract is binding 

even if the other party knew of the mistake and decided to keep quiet about it. 

In Statoil v Louis Dreyfus, the claimant entered into a contract with the defendant for sale by the claimant 

of a cargo of liquid propane gas. The contract included delivery of the cargo to a port in Mexico and 

provided for demurrage, i.e. liquidated damages for delays if the cargo was not discharged within the 

stipulated timeframe, at USD 40,000 per day. 

Discharge of the cargo was completed late and the claimant submitted a demurrage claim to the 

defendant. The defendant disputed the amount due and the parties subsequently agreed a sum by way of 

settlement. The settlement sum was agreed on the basis of the claimant's original demurrage calculation. 

However, that calculation was erroneous as the claimant had based the calculation on the wrong date for 

the completion of the discharge. The defendant admitted at trial that it had known that the claimant had 

made a mistake in the calculation but the defendant had decided to keep quiet about it. 

The claimant subsequently brought a claim for the balance of demurrage due to it under the contract for 

sale and argued that the settlement reached with the defendant was not binding because: (1) the 

settlement agreement was void for mistake at common law; or (2) the settlement agreement was voidable 

in equity and the court should declare the contract rescinded. 

Aikens J reiterated the general rule at common law that if one party had made a mistake as to the terms of 

the contract and that mistake was known to the other party, the contract was not binding because there 

was no true consensus between the parties and therefore it could not truly be said that there was a 

contract. However, it was well established law that if one party had made a mistake about a fact on which 

he based his decision to enter into the contract, but that fact did not form part of the contract itself, then, 

even if the other party knew that the first party was mistaken as to this fact, the contract would be binding. 

It was Aikens J's conclusion that, even though the claimant's calculation of the settlement sum had been 

based on the date for the completion of the discharge, that date was not a term of the settlement 

agreement itself. Consequently, the settlement agreement was not void for mistake at common law. 

Aikens J distinguished the present case from instances 2 where there is a unilateral mistake as to the price 

itself, i.e. where (due to, for example, an administrative error) the price stated in the contract is incorrect, 

and the other party knows that a mistake has been made and "snaps up the offer". As such cases 

involved a unilateral mistake as to a term of the contract, the contract would be void at common law. 

2 

For instance, the decision of the Singapore Court of Appeal in Chwee Kin Keong and others v Digilandmall.com Pte Ltd [2005] 1 

SLR 502, which was cited to him. 


Further, disagreeing with an earlier judgment by Andrew Smith J in Huyton SA v Distribuidora Internacional 

De Productos Agricolas SA de CV [2003] 2 Lloyd's Rep 780, Aikens J went on to hold that there was no 

equitable jurisdiction to grant rescission of a contract where one party had made a unilateral mistake as to 

a fact or state of affairs which formed the basis upon which the terms of the contract were agreed, and that 

mistake was known to the other party as being the basis for concluding the contract, but that assumption 

did not become a part of the contract. 

Aikens J reviewed the cases on which Andrew Smith J had based his decision and disagreed because 

each of those cases had been an instance not of unilateral but of common mistake, i.e. where both parties 

make a fundamental assumption of a state of affairs and the mistake renders performance of the essence 

of the obligation impossible. Aikens J commented in particular on the Court of Appeal's decision in The 

Great Peace 3 that there was no such equitable jurisdiction to grant rescission of a contract on the ground 

of common mistake where the contract was valid and enforceable at common law. Given that was the 

case, there was no logical rationale for an equitable jurisdiction in the case of unilateral mistake, at least 

where there had been no misrepresentation by the party not in error. 

In any event, even if there had been such a jurisdiction, on the facts of the case it would not have been just 

and equitable to grant rescission as the mistake was entirely the result of carelessness by the claimant. 

This case may come as a surprise to many people, who might consider it against instinct that the 

defendant, being aware of the claimant's mistaken assumption in the calculation of the settlement sum, 

was found to be entitled to keep quiet about the mistake and benefit from it (although in the event Aikens J 

held that, on the facts, agreement for a greater sum had been reached in a subsequent telephone 

conversation between the parties). 

It serves to reinforce the need for parties to take great care when calculating the monies due under a 

settlement agreement, or indeed any other contract. Where possible, parties may want to consider 

expressly stating the basis for such a calculation in the agreement itself to avoid being tied to 

administrative errors in the calculation. 

3 

Great Peace Shipping Ltd v Tsavliris Salvage (International) Limited [2003] QB 679. 


Restitutionary awards in antitrust cases? No (at least not yet). 

On 14 October 2008 the Court of Appeal handed down judgment in Devenish Nutrition Ltd v Sanofi- 

Aventis SA (France) and others [2008] EWCA Civ 1086, in which the appellant was seeking to establish 

the principle that in an action for breach of statutory duty the court could, in appropriate circumstances, 

make a restitutionary award (i.e. award a sum of money calculated by reference to the gain the wrongdoer 

has made) in place of compensatory damages (i.e. an award which compensates the innocent party for the 

damage he has suffered). 

In November 2001, the European Commission fined a group of vitamin manufacturers more than €855 

million (subsequently reduced to approximately €700 million on appeal) after finding them to be in breach 

of Article 81 of the EC Treaty, a provision that prohibits agreements and concerted practices which 

prevent, restrict or distort competition. The companies had participated in a number of cartels that had, 

over many years in the 1990s, engaged in price-fixing and market-sharing arrangements in relation to the 

supply of various vitamin products. 

The Devenish litigation was issued in 2005 by a number of companies seeking to claim compensation for 

damage suffered as a result of the unlawful cartels. The claimants in these proceedings had all been 

purchasers of products either directly or indirectly (in the form of animal foodstuffs containing the vitamins) 

from the vitamin manufacturers during the cartel's existence. 

The claimants alleged that the defendants' wrongful actions, namely the cartel activities, had been 

performed in the knowledge of and in wilful disregard of the claimants' rights, in a calculating fashion 

and/or with the expectation of profiting from them by amounts exceeding the amounts that would be 

payable by way of damages to the claimants. The claimants were seeking a restitutionary award equal to 

the amount by which they had been overcharged for vitamin products as a result of the price-fixing. 

A preliminary issue before the High Court was whether the claimants were entitled (in addition, or as an 

alternative to compensatory damages) to a restitutionary award for unjust enrichment (being an award of 

money assessed by reference to the defendants' gain rather than by reference to the claimants' loss). 

The first instance judge (see Devenish Nutrition Ltd and others v Sanofi-Aventis SA and others [2007] 

EWHC 2394) considered the decision of the House of Lords in Attorney General v Blake ("Blake") [2001] 1 

AC 268. However, he concluded that by reason of two precedent decisions of the Court of Appeal, Stokeon-Trent 

City Council v W & J Wass Ltd ("Wass") [1988] 1 WLR 1406 and Halifax Building Society v 

Thomas [1996] Ch 217, it was not yet the law that a restitutionary award was available in all tort cases, and 

he was prevented from granting a restitutionary award for a non-proprietary tort (and consequently a 

restitutionary award was not an available remedy in an antitrust case). He also held that as a result of 

there being multiple claimants in the Devenish claim who represented only part of the injured class, this 

prevented a restitutionary award due to the problem of allocating any award between the 

claimants/members of the injured class. 

Following this ruling, one of the claimants, Devenish Nutrition Ltd ("Devenish"), applied for and was 

granted permission to appeal to the Court of Appeal. As Devenish had been unable to establish that it had 

suffered a financial loss entitling it to compensatory damages - in part because of incomplete 

documentation and also as it appeared that Devenish might have passed on all or most of the defendants' 


overcharge to its customers - it sought a share of the cartels' illegally gained profits by appealing the High 

Court's finding in relation to the availability of a restitutionary award. 

The Court of Appeal dismissed the appeal by Devenish, although the three judges did not take a unified 

approach. 

Lady Justice Arden concluded that the decision of the House of Lords in Blake established that a 

retitutionary award is available for breach of contract and that the making of a restitutionary award does not 

depend on a proprietary right being infringed or the award being compensatory for loss, but on whether 

damages alone would be a sufficient remedy in the eyes of the law for the wrong that has occurred. She 

did not consider this to be inconsistent with such a remedy being available in the case of a non-proprietary 

tort. However, she felt unable to develop this line of thinking because she considered that: 

• the Court of Appeal was bound by the decision in Wass which she took to have held that damages 

assessed on a purely compensatory basis are the only damages available for torts other than 

proprietary torts; and 

• Blake had not "necessarily overruled" Wass. 

Lord Justice Tuckey agreed with Lady Justice Arden and stated "I do not think it can be said that Wass, 

which was not cited in Blake, has necessarily been overruled by it. It can stand with Blake". 

Lord Justice Longmore took a different approach in that he did not consider that Wass was authority for the 

proposition that account of profits awards were necessarily confined to tortious claims for breach of 

proprietary rights. However, he dismissed the appeal on the basis that an account of profits outside the 

established categories was to be made only in exceptional cases and cartel cases were not sufficiently 

exceptional. 

Arden and Tuckey LLJ also indicated that even if they had not been bound by Wass, a restitutionary 

remedy would only be available in "exceptional circumstances", and that this condition was not satisfied in 

the present case given that compensatory damages would constitute an adequate remedy for Devenish. 

This was so even in circumstances where there were evidential difficulties in making out the compensatory 

damages claim. It was also noted that such a restitutionary award would confer an unfair windfall on 

Devenish to the extent that it had passed on any overcharge to indirect purchasers. 

Whilst all three judges took the view that Blake supported the possibility of restitutionary damages on a 

broader basis than breach of contract, they disagreed as to the meaning and significance of Wass. The 

breadth of application of restitutionary remedies and whether Wass can stand alongside Blake are issues 

that have some life in them yet. 

What Devenish establishes is that restitutionary damages are not available in cartel damages claims and 

that liability in such cases will be limited to compensatory damages linked to a claimant's provable losses. 

As a consequence the amounts recoverable by claimants in such situations could be significantly lower 

than they might otherwise have been. 

This outcome brings into question the effectiveness of proposals put forward by the Civil Justice Council 

and the Office of Fair Trading earlier this year to encourage so-called private enforcement of competition 

law, which critics suggested would lead to a sudden increase of costly US-style class action lawsuits. In 

deciding that restitutionary awards are not, as a matter of policy, necessary in such cases for justice to be 


done, the Court of Appeal has made the pursuit of private competition damages a far less commercially 

viable and attractive prospect. 

Although Devenish was refused permission by the Court of Appeal to appeal to the House of Lords, it 

remains to be seen whether it will petition the House of Lords for leave to continue arguing this 

fundamental issue for the law of tort. 


Section 994 of the Companies Act 2006 – valuing the minority 

interest 

Any member of a company (whether or not a minority, although in practice a majority will not need to take 

this kind of legal action as they have control of the company) may apply to the court by petition for an order 

on the grounds that: (1) the affairs of the company are being, or have been, conducted in a manner which 

is unfairly prejudicial to the interests of members generally or of some part of its members (including at 

least that shareholder); or (2) any actual or proposed act or omission of the company is or would be so 

prejudicial. 

In the case of Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), a petition of this nature was brought 

under section 459 of the Companies Act 1985 ("the 1985 Act") 4 in respect of McCarthy Surfacing Ltd (the 

"Company"). The petition was brought by Mr Hoare and Mr Hecquet, the registered shareholders of 20% 

each of the shares in the Company, along with Mr Marsden, who claimed beneficial ownership of those 

shares (the "Petitioners"). The petition was against the three other members of the Company, the 

McCarthy brothers, each of whom owned 20% of shares in the Company, along with the Company itself 

(the "Respondents"). 

In 1994 (at which time Mr Hoare, Mr Hecquet and the McCarthy brothers were all working directors and 

equal shareholders in the Company) Mr Hoare and Mr Hecquet launched a petition under section 459 of 

the 1985 Act, making serious allegations of misconduct against the Respondents. The petition was heard 

in 1996 and was unsuccessful and described by the judge as an abuse of process. Consequently, Mr 

Hoare and Mr Hecquet resigned as directors but claimed that they had transferred their shares to Mr 

Marsden. 

In May 2005, the Petitioners submitted a second petition claiming that since 1996 the Company had been 

run in a manner that was unfairly prejudicial to their interests as shareholders of the Company (albeit that 

the Company had refused to register Mr Marsden as a shareholder). 

The Petitioners argued that the following actions of the Company constituted acts of unfair prejudice: 

1. Entering into a set of "bonus agreements" whereby the whole of the net profits of a lucrative 

contract with Thames Water (which from 1998 comprised substantially all of the Company's 

business) were to be divided amongst the directors (and one non-director), to the exclusion of the 

shareholders of the Company (including the Petitioners). 

2. Failing to declare any dividends since 1996. 

3. Making a number of improper payments to or for the benefit of Tom McCarthy (one of the 

McCarthy brothers and managing director of the Company), including payments: (i) for the lease of 

some rooms in a property that was owned by Tom McCarthy and his partner; (ii) for a licence 

agreement made with a company called Digimage Ltd which was owned by Tom McCarthy and his 

partner; and (iii) to The Englishman Ltd, a consultancy service owned by Tom McCarthy. 

4 

Section 459 has now been replaced by section 994 of the Companies Act 2006 ("the 2006 Act"). The new provision remains in 

essence the same and therefore the principles that emerge from this case are likely to be applicable to section 994 of the 2006 Act. 


In reaching his decision, Michael Furness QC (sitting as a deputy judge) noted with disapproval that there 

were almost no minutes of directors' meetings for the Company and formed the view that Tom McCarthy 

was not a reliable witness. 

The judge went on to hold that in relation to the three elements of the claim identified above: 

1. While there was a legitimate commercial reason for giving non-shareholder directors and 

executives a share of the profits from the Thames Water contract as an incentive, the making of 

the "bonus agreements" (amounting to 81% in total - 45% for Tom McCarthy and 18% for each of 

his brothers) in favour of the McCarthy brothers (who were shareholders and already entitled to a 

share of the profits of the Company) constituted unfair prejudice. It was a device deliberately 

designed to ensure that none of the profits of the Thames Water contract would be available to the 

Petitioners. He also held that it was a breach of the directors' fiduciary duties to allow, without 

scrutiny, Tom McCarthy to award himself a substantial share of the profits of the Thames Water 

deal. It was also a breach of duty by Tom McCarthy to award himself such a share of the profits 

taking into account the "impossible conflict of duty and interest in which he had placed himself". 

Accordingly, the bonus agreements were judged to be unenforceable against the Company (as 

they related to the McCarthy brothers). 

2. This was not a case where the board had bona fide decided not to declare dividends in the best 

interests of the Company, but where the board had consistently failed to consider whether or not to 

declare dividends, and "that must be a breach of duty". 

3. "There was a complete lack on the part of the board of any critical scrutiny" of the terms of the 

transactions with Tom McCarthy. In assessing whether the transactions constituted unfair 

prejudice the judge was faced with the difficulty that there was no evidence of what a fair price for 

those transactions would have been. He concluded that in respect of (i) the lease (save in respect 

of one issue) and (iii) the consultancy, it was unclear whether different arrangements would have 

been agreed "had the board paid proper attention to its responsibilities". However, in relation to (ii) 

the licence arrangements, he concluded that "the board's failure to have regard to the Company's 

interests when agreeing to the licence agreements has probably cost the Company money, and 

therefore constitutes unfair prejudice". 

The judge accepted that the appropriate remedy was an order that the Petitioners' shares in the Company 

be bought and he then went on to consider the basis on which their interest should be valued. The 

Petitioners sought a valuation without a discount being applied to reflect that they held a minority interest in 

the Company. The Respondents claimed that a discount should be applied. 

In considering the authorities, the judge identified that an undiscounted approach was appropriate where 

the company was a "quasi-partnership", but a discounted approach would apply where the relevant 

shareholder bought his shares as an investor. In analysing the relationship between Mr Hecquet, Mr 

Hoare and the McCarthy brothers the judge concluded that there was originally a quasi-partnership (not 

least because the five shareholders had equal shareholdings, worked for the company and profits were 

distributed by unanimous agreement of the shareholders). However, by their wrongful acts in relation to 

the original "abuse of process" section 459 petition following which they departed from the Company, Mr 

Hecquet and Mr Hoare had destroyed the quasi-partnership. 


Accordingly, the judge held that the shareholdings to be bought out should be valued as an investment, i.e. 

with a discount. However, the judge also held that, in calculating this value, it should be taken into account 

that Mr Hecquet and Mr Hoare had lost the chance to receive (undiscounted) dividends from the Company 

as a result of the board's failure to give proper consideration as to whether dividends should be declared. 

Re McCarthy Surfacing Ltd identifies examples of the kinds of practices that constitute unfair prejudice. 

The judge's finding is not surprising in that the board had simply permitted Tom McCarthy to do as he 

wished and certain actions had been deliberately intended to prejudice the shareholders. Had there been 

evidence before the judge as to what a fair price for the lease and consultancy transactions with Tom 

McCarthy would have been, it is likely that unfair prejudice would have been found in respect of these 

transactions - it is clear from the judgment that the judge took a dim view of Tom McCarthy and concluded 

that in some respects his evidence was a "deliberate fabrication". 

What is of particular interest in this case is the remedy awarded, including the distinction made between a 

quasi-partnership and a share investment, and how the judge was willing to "adjust" the standard valuation 

to reflect the fact that the unfairly prejudicial conduct included a lost opportunity to receive dividends. 


Olswang's 

Commercial Dispute 

Resolution Group 

The effective resolution and management of disputes is an essential part of corporate risk management 

and strategy. Our Commercial Dispute Resolution Group offers an expert, commercial and focused range 

of dispute resolution services which enables our clients to do just that. 

Our network of established relationships throughout Europe and the rest of the world means we are able to 

offer an effective national and global litigation service. Our Commercial Dispute Resolution Group advises 

on the full range of commercial disputes, in sectors including technology, media, telecoms, sport, life 

sciences, energy and financial services. 

The Group is particularly well-known for its work in: 

• Domestic commercial litigation; 

• Substantial multi-jurisdictional litigation; 

• Judicial review; 

• Regulatory and governmental issues and disputes; 

• International arbitration; 

• Mediation and other forms of alternative dispute resolution; and 

• Conducting investigations and independent enquiries. 

We recognise that litigation is often a last resort for our clients and are aware of the commercial pressures 

that our clients face. In advising our clients as to their best course of action when faced with a dispute, we 

will have regard to those pressures and factors. 

Our commercial litigators have significant experience in all forms of alternative dispute resolution, and a 

number of our partners are trained, and practise, as mediators. 

If a dispute does result in formal litigation proceedings, our experienced Commercial Dispute Resolution 

Group can draw on its considerable experience in litigating complex commercial disputes in many major 

courts and tribunals, both in the UK and overseas, to provide practical, commercial, advice and assistance 

as the litigation progresses. 


For further information please contact 

Jeremy Mash 

Steven Corney 

Partner 

Partner 

+44 (0) 20 7067 3270 +44 (0) 20 7067 3509 

jeremy.mash@olswang.com 

steven.corney@olswang.com 

London 

90 High Holborn 

London WC1V 6XX 

T +44 (0) 20 7067 3000 

F +44 (0) 20 7067 3999 

Thames Valley 

Apex Plaza, Forbury Road 

Reading RG1 1AX 

T +44 (0) 20 7067 3000 

F +44 (0) 20 7071 7499 

Berlin 

Potsdamer Platz 1 

D-10785 Berlin 

T +49 (0) 30 700171-100 

F +49 (0) 30 700171-900 

Brussels 

Avenue Louise 326 bte 26 

Louizalaan 326 bus 26 

B-1050 Bruxelles/Brussel 

T +32 2 647 4772 

F +32 2 644 2165 

3171128-1

November 2008 - Olswang

Create successful ePaper yourself

Delete template?

Save as template?