Can a contract term be actionable as a pre-contractual representation?

Posted: April 27, 2015

In an unusual football tickets case, the High Court has ruled that a contract term was actionable as a pre-contractual representation.1…….The ruling may be distinguishable in other cases, as the case was decided on a particular set of facts, including some specific contractual wording.

The decision is also helpful as an example of how the courts will distinguish between incompetence and recklessness in the context of fraudulent misrepresentation.  The case also serves as a reminder to pay close attention to the notice provisions in a contract and to comply with the prescribed procedure when serving notice.

Background

Ticket2Final OU (T2F) entered into an agreement with Wigan Athletic AFC Limited in September 2011, under which T2F agreed to pay a significant fee to Wigan for certain sponsorship and advertising rights.  In return, Wigan agreed to supply T2F with Carling Cup and FA Cup tickets.  T2F planned to sell options for tickets for future matches to Wigan fans. From early April 2013, T2F had been selling options for FA Cup Final tickets at Wembley.  But there was a problem: the Football Association controls Wembley tickets, and when Wigan asked the FA to approve the arrangements with T2F, the FA would not.

Wigan ended up winning the 2012/2013 FA Cup Final on 11 May 2013.  In the words of Mr John Baldwin QC, sitting as a Deputy Judge: “It was its first major trophy in its 81 year history and everyone should have been delighted.  Not everyone was.”

On 17 April 2013, Wigan published an announcement to the effect that it had received an allocation of 21,000 tickets for the final, and tickets were limited to two per season ticket holder and two per person if there were availability for the tickets to go on general sale.  Since Wigan had about 10,000 season ticket holders, only 1,000 tickets would have remained for T2F, less than it had expected.  This caused T2F some concern, and it sent an urgent email to Wigan querying the figures.  There was no reply, but on the same day, Wigan’s solicitors tried to terminate the agreement for non-payment of fees by T2F (and for other breaches by T2F).

On 24 April 2013, Wigan’s solicitors informed T2F that it was unable to supply the FA Cup Final tickets because the FA had not approved the arrangements, and offered to pay T2F £28,000 in compensation, admitting breach of contract.  Clause 12 of the agreement limited Wigan’s liability to the amount of fees that it had received in the calendar year in which any claim(s) by T2F might arise – hence the sum offered (i.e. the full amount of such fees).

T2F issued proceedings against Wigan claiming damages for breach of contract and for pre-contractual misrepresentation.  Given the limitation of liability and T2F’s apparent desire to try to increase damages, T2F claimed fraudulent misrepresentation rather than negligent misrepresentation.

Decision

Breach of contract

Under the agreement, T2F had agreed not to exercise the rights granted to it in a manner that would cause Wigan to infringe any laws or regulations of the Football League, the Premier League or the FA.  Wigan argued that, since providing T2F with tickets for the FA Cup Final would have caused Wigan to breach the rules of the FA, T2F was precluded from claiming breach of contract.  Mr Baldwin QC stated that to interpret the agreement in this way would “deprive the contract of any commercial sense”.  The argument was rejected.

Notice provisions

Wigan argued that it had been entitled to terminate (and did terminate) the agreement on 17 April 2013 by reason of T2F’s contractual breaches, and so any damages payable by Wigan were limited to those flowing from breaches prior to such termination.  Wigan also argued that T2F’s breaches were repudiatory, and that Wigan itself was entitled to £53,000 in damages (sums that would have fallen due during the remainder of the contract).  This counterclaim ultimately failed.

T2F did not dispute that certain payments had not been made on time.  Under the agreement, Wigan had the right to terminate if payment was not made within seven days from receipt of written notice and “any notice” given under the agreement had to be made in writing and delivered by hand or sent by first-class post or fax.  Wigan argued that the notice provisions did not apply to late payment notices or, in the alternative, that the parties had, by their conduct, agreed that notices could be served by email.

The Deputy Judge held that the purpose of the notices clause was to ensure that notices were served in a particular manner so that the recipient would then be in “no doubt about their importance”.  There was no justification for not requiring Wigan to satisfy the notice provisions, and so Wigan’s arguments were rejected and Wigan’s purported termination was found to be ineffective.

Fraudulent misrepresentation

Under clause 3.5.1 of the agreement, Wigan had “agreed” that “the execution of and delivery of this Agreement and the performance and observance of its obligations under this Agreement is and will be within its power and that it is duly authorized to perform and observe each of the terms of this Agreement”.  T2F argued that this was a representation that had been made to induce it to enter into the contract, and that it had been made fraudulently as, at the time of entering into the contract, Wigan had no honest belief in its truth.

While T2F accepted that clause 12 provided a limitation of liability, it claimed that the clause did not apply to Wigan’s representation because the agreement stated, at clause 13.5, that: “Nothing in this Agreement shall operate to limit or exclude any liability for fraud.”  Under English law a contract term cannot exclude a party’s liability for its own fraud.

Unsurprisingly, Wigan denied T2F’s claims, maintaining that the representation in clause 3.5.1 was not false, that the clause was a term of the contract and so it was not actionable as a pre-contractual representation, and that T2F had not relied on the representation.  Accordingly, in Wigan’s view, the limitation of liability applied.

Mr Baldwin QC found that the substance of the representation relied on was “evident from the language of the contract itself”.  Clause 3.5.1 used “readily intelligible language” and was “easy to understand”.  Wigan had not obtained permission from the FA for the sale of options by T2F, and since such permission was essential, at least for matches at Wembley, Wigan could not and had not satisfied its grant of rights in such respect, and the due performance of its obligations under the agreement was not within its power.

Wigan argued that it was T2F’s responsibility to obtain permission from the FA, but the Deputy Judge commented “that seems to me to make a nonsense of the arrangement”, and he found that the representation was false.

According to the Deputy Judge, it is a matter of construction in each case as to whether a warranty in a contract can also be a representation.  In this agreement, T2F’s obligations were characterised as representations, warranties and undertakings under clause 4, whereas Wigan’s were described just as undertakings under clause 3.  Clause 3 set out a number of matters that Wigan undertook to do, including the matters in clause 3.5.1, and “in the context of this contract” the Deputy Judge found that, at the time when the contract was made, Wigan was representing that clause 3.5.1 was true.  Accordingly, it was a representation and it was actionable as a pre-contractual representation if it was false, which he had already found it was.  In addition, the Deputy Judge found that, on hearing evidence from T2F witnesses who had been involved in negotiations with Wigan, T2F had indeed relied on the representation.

As for fraud, Mr Baldwin QC noted that T2F had to establish fraud in the Derry v Peek sense.2  Under the rule in Derry v Peek, it must be shown that a false representation has been made (a) knowingly or (b) without belief in its truth or (c) recklessly, careless whether it be true or false, and to prevent a false statement being fraudulent, there must always be an honest belief in its truth.  Further, the standard of proof is the balance of probabilities, and the court has to apply the standard cautiously when assessing an alleged fraudulent state of mind.3

Mr Baldwin QC applied the case law to witness evidence from the Wigan negotiators of the contract.  He found that the first witness did honestly believe at the time of the contract that Wigan would be able to deliver what it was promising to deliver, and that everything would work out as it should.  The Deputy Judge considered whether the second witness had been reckless in the Derry v Peek4 sense and, after some hesitation, decided that he too had not behaved fraudulently towards T2F, but was “just not very competent and well below the standard reasonably expected of him”.  The claim for fraudulent misrepresentation therefore failed.

Quantum

Mr Baldwin QC held that T2F’s claim against Wigan had arisen in 2011 when the contract was concluded.  Wigan had never been, even at the outset, within its power to perform its obligations.  In 2011, T2F had paid Wigan £30,000. Taking the limitation of liability into account, the Deputy Judge therefore awarded £30,000 damages to T2F for breach of contract by Wigan.

Comment

A contract term is not necessarily actionable as a pre-contractual representation.  Indeed, the Deputy Judge found T2F mistaken in assuming that a contract term would automatically have that dual quality.5  The decision appears to have been based on a particular set of facts and the specific wording of the contractual representation.

Nonetheless, this case demonstrates that a contract term can, in a relevant context, be treated as constituting a pre-contractual representation, especially where there is parallel evidence of an equivalent representation on which the other party has relied in entering into the contract.  So a contracting party should pay close attention to any warranty that could be read as confirming a pre-contractual representation (whether or not it is described as a warranty, representation or undertaking).  A party should also consider carefully whether the warranty can in fact be given and correct any potential for misapprehension by the other party by disclosing against it and/or negotiating any relevant exclusion.

While deceit is far more difficult to prove than negligence, T2F seems to have decided not to plead negligent misrepresentation due to the limitation of liability, as well as a desire to try to increase damages.  In the end, the damages awarded were only £2,000 more than the sum that had previously been offered by Wigan as compensation.

It might seem obvious to comply with the notice provisions prescribed in an agreement to ensure effective service of notice, but this case illustrates how easy it is to overlook, especially when day-to-day communications between the parties might be by email or text.  If the parties are meant to be able to serve notice by email, the contract should expressly say so.

So, as this decision illustrates, careful thought should be given to drafting even the most standard contractual clause, whether a notice provision or a warranty of capacity to perform a contract.  Equally, the clause should match the underlying reality.

Ed Weidman, Associate, Michael Simkins LLP

[1] Ticket2Final OU v Wigan Athletic AFC Ltd [2015] EWHC 61b.

[2] Derry v Peek [1889] UKHL 1.

[3] Smith New Court v Scrimgeour Vickers [1997] AC 254.

[4] Derry v Peek [1889] UKHL 1.

[5] Citing Mann J’s ruling in Sycamore Bidco Ltd v Sean Breslin [2012] EWHC 3443 as an example.