Quantum Advisory Limited v Quantum Actuarial LLP

Mr Adams’ submissions for Quad can be outlined as follows. He relied principally on the express terms of the Services Agreement but also maintained that, given the contract was a “relational” one, the court should adopt a purposive approach which paid less attention to the “black letter” and focussed more on ensuring that the arrangement between the parties was workable. Although reference was made to the implication of terms in oral argument, Mr Adams did not ultimately seek to rest his case either on that or on any infelicity of language.

In more detail, Mr Adams’ principal argument was that the concept of “Services” was defined in the first few words of Schedule 7, namely the “provision of pensions consulting, actuarial, administrative and investment services”. What followed were, he submitted, mere examples. The exception to this was the last two sub-headings, Quad Administration and Handling of any claims against Quad. These exceptions were activities undertaken directly for Quad which were necessary to provide the Services (or, in terms of clause 7.3, reasonably necessary for the efficient operation of Quad’s business), rather than being Services themselves. That definition was restricted to services provided to Clients for and on behalf of Quad.

Mr Adams submitted that this was supported by other provisions of the Services Agreement including clause 7.3, which he said only made sense if the concept of Services was so confined. Tendering was a part of Quad’s existing business which was necessary to enable Services to be provided and, bearing in mind that Quad had outsourced its entire operation, was an activity which the LLP was required to carry out. The judge was wrong to conclude that it would be in both parties’ wider interests to tender for new business throughout the 99-year term, or to take that into account. The effect of the decision was to leave the continuation of Quad’s business at the will of the LLP, which made no commercial sense.

Mr Adams further submitted that the judge had accepted that the contract was a relational one. That required the court to respect the parties’ intention to establish a long-term workable relationship and reject technical arguments at odds with its long-term purpose. Mr Adams suggested that this was related to the recognition of implied obligations of good faith under relational contracts, and that to latch on to an aspect of the agreement to disrupt the arrangement was tantamount to sharp practice.

Mr Butler submitted that, insofar as Mr Adams was now advancing a case based on implied obligations of good faith, that was contrary to the way in which the case was put below, and he should not be permitted to do so. Among other things, the LLP would have relied on the fact that the Services Agreement makes express references to good faith where such an obligation was intended. The judge did not intend to refer to relational contracts in a technical sense, and Mr Adams had in any event misinterpreted Amey Birmingham.

Mr Butler submitted that the Services Agreement did not require the LLP to do whatever was required to operate Quad’s business. It simply required it to provide the Services as defined. It was not the complete outsourcing suggested by Mr Adams. The contract was relatively short and was professionally drafted; its language was a reliable guide to the parties’ intentions. The only references to activities in the nature of business retention or development were in the definition of the carved out Sub-Contracted Activities. Further, the definition of Clients was a limited one.

Mr Butler also relied on three points raised in a Respondent’s Notice. First, the judge was wrong to conclude that the fact that a tender had been performed in the months leading up to the conclusion of the Services Agreement did not assist in its interpretation. Secondly, the fact that tendering was not in the same category as other administrative services referred to in Schedule 7 was not only because it was occasional rather than ongoing (as the judge had said) but because it was not administrative in character. Thirdly, in referring to the fact that the cost of tendering was likely to be factored into the fees, the judge overlooked that, on Quad’s case, the LLP would bear 100% of the cost of tendering but would only recover 57% of the corresponding fees.

The judge was clearly correct to conclude that the Services Agreement does not oblige the LLP to undertake tenders or re-tenders.

The Services Agreement is a relatively short, professionally drafted, document. As Carr LJ said in Network Rail at [18(ii)]:

“(ii)

The reliance placed in some cases on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract…”

It is also worth repeating the proposition set out at [18(v)]:

“(v)

While commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party;”

If the parties had intended a full outsourcing, as Mr Adams submitted, they could easily have said so. Instead, they agreed that the LLP would provide the “Services”. The recital, on which Mr Adams relied, is consistent with this in its reference to “certain” responsibilities, which it goes on to refer to as being the Services.

I do not agree with Mr Adams that the defined term “Services” is limited to the provision of services to Clients, excluding the last two sub-headings in Schedule 7. Whilst it is right that certain provisions of the agreement, including sub-paragraphs (a) to (c) in clause 2.1 itself, indicate that the draftsman had primarily in mind services provided externally to Clients rather than matters internal to Quad, it is sufficiently clear that the functions covered by those final two sub-headings are included in the “Services” set out in Schedule 7 that the LLP is appointed to provide under clause 2.1, and for which it is remunerated under clause 9. I note that, were it otherwise, then none of the conferral of authority in the penultimate sentence of clause 2.1, the obligation on Quad to provide necessary information and assets in clause 7.2, nor the service standards in the first part of clauses 7.3 and in clause 7.4, would apply to those “internal” functions. That cannot have been intended.

The contractually agreed Services are a hybrid of client-facing and internal functions. The former, of which examples are set out in all but the final two sub-headings in Schedule 7, are restricted to “Clients”, a concept which is limited to existing clients of Quad and certain business that was in the “pipeline” in 2007. Further, the client-related activities referred to all relate to services supplied to Clients on behalf of Quad, rather than work done to obtain or retain Clients so that services can be provided, which is of course what tendering involves.

It is worth noting here that neither party is prevented by the terms of the Services Agreement from seeking business from a person not caught by the limited definition of Client. However, if Quad wished to do so and succeeded in obtaining business then the Services Agreement would not require the LLP to service that client. Further, even if Quad was correct in its submissions, it was not saying that tendering to persons who are not Clients (as defined) would be required. It follows that to the extent that Quad lost Clients, or pipeline business did not materialise, then even on its own interpretation it could not require the LLP to assist it in replacing that business with different clients.

In contrast to the first part of Schedule 7, the “internal” functions referred to in the last two sub-headings are not, and cannot sensibly be, limited to activities undertaken for Clients. The commitment to prepare accounts and tax returns can only sensibly relate to the entirety of Quad’s business, and claims handling expressly extends beyond claims against Quad by Clients. This no doubt reflects the fact that, when the Services Agreement was entered into, Quad in fact retained no clients that were not serviced by the LLP. However, any oddity in the contrast between the scope of the client-facing and internal functions is not material to the decision that this court needs to make.

Clause 7.3 does not assist Quad. That clause contains obligations relating to the standard at which the Services must be performed. The closing words, which require the LLP to devote “such time and efforts as it deems reasonably necessary for the efficient operation of Quad’s business”, do not amount to an obligation to do whatever is required to operate Quad’s business, however Quad might wish to carry it on or develop it. The obligation is also limited to what the LLP deems necessary.

Mr Adams submitted that, if he needed to rely on any specific wording in Schedule 7, he would rely on the words “…such other administrative support as Quad may reasonably require from time to time” at the end of the paragraph headed “Quad Administration”. I agree with the judge that these words do not cover tendering. Tendering is a form of business development and is not aptly covered by the descriptor “administrative support”. It is also very different from the accounting and tax functions that are specifically referred to in the first part of the paragraph. Both of those are routine, continuing and necessary internal functions. They are neither client-facing nor sporadic in the way that tendering is. The closing words of the paragraph need to be construed in the context of the earlier words.

It is not necessary to have regard to the email correspondence referred to by the judge at [35], on which Mr Butler sought to rely and to which Mr Adams objected. Suffice to say that it is not clear that what the correspondence evidences is background facts known to both parties at the date of the agreement (which would be admissible), as opposed to individuals’ subjective views as to what the 57% was intended to cover.

However, I do respectfully disagree with the judge’s observation at [13] that the fact there had been a recent tender was of no assistance, because the benefit accrued to both parties. Quite apart from Mr Butler’s comment that reflecting tender costs in the fees would not fully reimburse the LLP, the more substantive point is that the tender to Swansea University between April and November 2007 was clearly a substantial piece of work, and that must have been known to both parties. Swansea University was one of the entities listed as a “prospect” in the Services Agreement. Even if existing clients did not require any re-tendering to maintain business, at least some other prospective clients would surely require a formal tender. It would have been straightforward to include tendering in the list in Schedule 7 or elsewhere in the agreement. The fact that it is not there, in circumstances where both parties must have had that activity in mind, supports the conclusion that it was not intended to be included.

Instead, clause 2.1 includes a perfectly sensible provision for the addition of “such other services as the parties may agree from time to time in writing that the LLP is to perform for Quad”. This explicitly contemplates that the LLP may perform further functions, such as the tenders that the judge found at [12] that the LLP did perform during the first year of operation, but also allows scope for a different agreement to be reached as to remuneration, reflecting the substantial and occasional nature of the work. Alternatively, if agreement could not be reached, then there was nothing to prevent Quad’s directors from either doing the work themselves, or entering into an arrangement with another person to do so. To the extent that Quad required information for that purpose it would have a right to obtain it under clause 8.5.

Mr Adams’ submission that Quad’s position was assisted by the contract being relational in nature can be answered shortly. Even if it was the case that the judge was using the term “relational contract” in the sense described by Leggatt LJ in Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Kent [2018] EWHC 333 (Comm) at [167], such that a duty of good faith might be implied, there is no special rule that allows a different approach to interpretation to be applied to relational contracts: see Chitty on Contracts, 34^th ed. at 15-084, referring to the judgment of Beatson LJ in Globe Motors v TRW Lucas Varity Electric Steering [2016] EWCA Civ 396; [2017] 1 All ER (Comm) 601 at [64]-[68]. As Beatson LJ said at [68]:

“… an implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it. It is thus not a reflection of a special rule of interpretation for this category of contract.”

This passage was cited by Coulson LJ in Candey v Bosheh [2022] EWCA Civ 1103; [2022] 4 WLR 84 at [32], where he added:

“Putting that another way, it might be said that the elusive concept of good faith should not be used to avoid orthodox and clear principles of English contract law.”

What Quad seeks to do is to expand the range of Services actually covered by the Services Agreement. Resort to the concept of good faith, even if it could be implied into the Services Agreement beyond the express references to good faith in it (none of which are relevant), would not assist in achieving that. At the most, an obligation of good faith would apply to the way in which the parties acted within the confines of what the Services Agreement provided for. As Snowden LJ said in Faulkner v Vollin Holdings (Re Compound Photonics) [2022] EWCA Civ 1371 at [205] in the context of an express obligation of good faith, any invocation of a concept of the “spirit of the contract” which such an obligation might be said to encompass does not amount to an open invitation to read in additional substantive obligations, particularly in a professionally drafted contract with an entire agreement clause.

The passage in Amey Birmingham relied on by Mr Adams does not assist Quad. That case dealt with a contract of enormous length, in which there were bound to be infelicities and oddities. Jackson LJ’s point that those should not be latched upon to disrupt the project has no application here, where the confines of the Services to be provided are clear.

In conclusion, I would dismiss the appeal.