No obligation imposed by use of "shall" in commercial referral agreement

In 2006 a law firm (PML) and an insurance intermediary (Motorplus) entered into an agreement recorded in an email (the 2006 Agreement) in which Motorplus agreed to refer road traffic accident claims to PML. The email stated: “We intend to send approx.. 100 claims a month”. PML and Motorplus then entered into a written contract (the 2007 Agreement) which stated at clause 1:

“In consideration of the payment of referral fees by PM Law Ltd Solicitors…Motorplus Ltd shall refer a quantity of road traffic accident, accident at work, public or private liability and product liability PI & Non PI claims for compensation”.

A dispute arose concerning the meaning and effect of clause 1. Motorplus argued that the 2007 Agreement did not impose an obligation on it to refer any claims to PML. PML argued that Motorplus was in fact obliged to refer some claims to PML, and that in return PML would handle the claims and pay a referral fee.  

The Court of Appeal concluded that despite the use of the word “shall” in clause 1, the agreement did not oblige Motorplus to refer claims to PML. “Shall”, in light of the 2007 Agreement as a whole and the relevant factual matrix, was interpreted as an expression of the parties’ present intention rather than a promise or obligation. The court relied on the fact that clause 1 did not refer to a specific or minimum number of claims. The court rejected the argument that “business common sense” required clause 1 to be read as requiring a “reasonable” quantity of claims to be referred. It endorsed the reasoning of the judge, who pointed out that the business efficacy of the agreement did not depend on there being a minimum number of referrals. The possibility that the other party would fail to deliver any referrals was a risk which businesses often took. The court considered the fact that the pricing structure in the 2007 Agreement dealt with referrals on an individual basis rather than setting a price for a bulk amount, or minimum amount, of referrals. This was more consistent, said the court, with a unilateral contract (where PML would pay a referral fee if Motorplus referred a claim) rather than a bilateral exchange of obligations (referred to by the court as a “synallagmatic contract”).

The court was also persuaded by the fact that the parties’ 2006 Agreement by email had not required Motorplus to guarantee a minimum number of referrals. The intention of the parties was to place the 2006 Agreement on a more formal footing in order to comply with the then new Solicitors’ Code of Conduct of 2007. This pointed against construing clause 1 in a manner which would require Motorplus to refer a minimum quantity of claims to PML.

Comment

 “Shall” is, potentially, an ambiguous term which is capable of: (i) expressing a future intention; and (ii) expressing an obligation. The court decided, in this case, that that the former was the preferred interpretation by using the “documentary, factual and commercial context” of the parties’ agreement to construe the word.  

The case arrives at a time when the courts are tasked with balancing the natural meaning of language used between the parties (emphasised by the Supreme Court in Arnold v Britton [2015] UKSC 36) with a construction that aligns with “business common sense” (as per the guidance set out in Rainy Sky). The implication of the Supreme Court decision in Wood v Capita Insurance Services Ltd [2017] UKSC 24 is that these are not to be seen as rival approaches to interpretation, but considerations to be balanced. The Court in PML v Motorplus expressly stated that where the language used is clear, it cannot “seek out differences of meaning in order to enable it to re-write the bargain in accordance with what it considers to be fair or to be business common sense”. It did, however, consider whether interpreting clause 1 of the 2007 Agreement as an obligation to refer a minimum number of claims was necessary for the arrangement to make commercial sense (the answer was no). 

Following Wood v Capita, we can expect the courts to continue to balance an interpretation which is faithful to the natural meaning of the words used by the parties whilst not offending business common sense.  Clearly drafted contracts will largely avoid having to predict the outcome of this balancing act.

Further information

For more information please contact Amy Edwards, amy.edwards@allenovery.com.