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The validity of contractual notices and the decision in Friends Life Ltd v Siemens Hearing Instruments

Questions about the interpretation of, service of, or conditions attached to contractual notices have produced a great deal of litigation in recent years, particularly in the context of the operation of break clauses.

What appeared to be clear however is the approach that the court should take when considering how to interpret a break clause or a break notice. The first question is whether the clause prescribes as an indispensable condition for its effective exercise that the notice must contain specific information. In such a case, the omission of that information invalidates the notice. As Lord Hoffmann put it in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, if a clause requires an option notice to be given on pink paper it is not validly exercised by giving it on blue paper no matter how clear the intention to exercise the option may be.

Therefore a landlord seeking to argue that a break notice was of no effect and that the lease subsisted could be sure of one thing at least: if it could persuade the judge that an indispensable condition attached to the option had not been complied with, the notice would be of no effect, even if the tenant’s intention was clear.

That was at least until the recent first instance decision of Nicholas Strauss QC, sitting as a deputy judge of the Chancery Division in Siemens Hearing Instruments Ltd v Friends Life Ltd [2013] All ER (D) 188 (Jul). In that case the tenant Siemens failed, when giving notice of its intention to exercise the break clause, to comply with a condition requiring that the “notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954”.  That condition was in fact meaningless. However, as the judge found, the fact that the tenant’s notice omitted reference to the statute meant that it fell foul of the blue paper / pink paper test.

There, the landlord Friends Life might have thought, is where the matter should have ended. However the judge went on to decide that the notice was not invalidated by the failure to state that it was given under section 24(2) of the Act. How did he get there?

The judge’s solution was to dip into case law about the interpretation of notices given under statute and discussed the question of when a notice may be invalidated by its inaccuracy. The question in such cases is what consequences should follow from a failure to comply and the distinction is made between requirements which are ‘mandatory’ and those which are ‘directory’ (or ‘permissive’). As explained by Millet LJ in  Petch v Gurney [1994] 3 All ER 731 at 736:

Bringing this approach to the question of the break notice in the case before him the judge set out seven propositions at para. [39]. The first three are uncontroversial since they re-state the approach taken post – Mannai.

However at (d) he suggested that where the draftsman has not provided either way for the consequences of non-compliance, it has been left to the court to decide what those should be and that the notice should in some circumstances survive non-compliance; then  at (e), the use of the word ‘must’ or ‘shall’ is not decisive; and at (f) he suggests that it is important to consider what the effect of non-compliance is – was the omitted information material for the other party to have?; finally (g) non-fulfilment of the conditions attached to a notice may not be fatal.

On the basis of this analysis, the notice was held to be valid and Siemens succeeded.

Friends Life appealed – successfully. The lead judgment was given by Lewison LJ with whom Black LJ and Sir Timothy Lloyd agreed.

Paragraphs [24] – [66] of Lewison LJ’s judgment are worth reading and keeping as a clear and succinct exposition of the law on the exercise of options as it is presently understood.

At para. [24] he explains that:

“In its classic form an option is a unilateral (or “if”) contract. The promisor agrees to do something (typically to sell something) if the promisee does or refrains from doing something. The promisee himself does not make any promise: it is up to him whether he does or refrains from doing whatever it is that triggers the promisor's obligation. That is why it is called an option.”

He then refers to Lord Diplock’s speech in United Scientific Holdings v Burnley B.C. [1978] AC 904 at 929:

“In point of legal analysis, the grant of an option in such cases, is an irrevocable offer (being supported by consideration so that it cannot be revoked). In order to be turned into a binding contract, the offer must be accepted in exact compliance with its terms. The acceptance must correspond with the offer.”

It follows that where an option prescribes substantive conditions that must be fulfilled by the promise before the promisor’s obligations are triggered, those conditions must be completely fulfilled. Substantial fulfilment, said Lewison LJ at para. [27] (disagreeing with the judge at first instance) is not enough. Hence the blue paper / pink paper test.

Lewison LJ then went on to explain the decision in Mannai, referring to Lord Hoffman’s speech at p774 where he said:

(This reminds us that that the decision in Mannai does not mean that it is ok to get notices ‘nearly right’; it does not relax the principle that if something is a condition of an option that it is indispensable; the focus of the decision is on whether the notice, properly read, is unambiguous or not).

Lewison LJ then distinguished the decision in Petch v Gurney (relied upon by the judge): in that case, he said, the question was not whether the requirement had been complied with – it had not – but what were the consequences of failing to comply with the time limit. In the case of an option the common law supplies the answer – failure to exercise the option in time means that it has not been validly exercised (para. [60]):

Hence the appeal was allowed.

Paragraph [65] of  Lewison LJ’s judgment is worth quoting in full:

“I do not accept that in the field of unilateral (or ‘if’ contracts) there is any room for the notion of substantial compliance. As Diplock LJ said in United Dominions Trust the question is whether the relevant event has occurred. That question is to be answered ‘Yes’ or ‘No’. It cannot be answered ‘Almost’. Either a purported exercise of an option satisfies both the formal and substantive provisions of the clause, or it does not. If it does not, then it is ineffective. In my judgment ours is such a case. I appreciate that that is a harsh result, but hard cases make bad law.”

Thus (para. [66]) the moral is – “... if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely.”