Openwork Ltd Respondent v Alessandro Forte

Hearing date: 7 March 2018

Approved Judgment

Introduction

The primary issue raised in this appeal is the extent to which the court can give effect to a contractual term whose overall effect is explicit, but whose detailed terms are incomplete.

The appeal is from the judgment of Mr Recorder Blohm QC (‘the Judge’) dated 14 April 2016. The trial, which took place over a number of days, covered a number of issues which do not arise on this appeal. At the heart of the trial was the claim by the respondent (‘Openwork’) for the recovery of commission which they had paid to the appellant, Mr Forte.

Openwork is a company associated with Zurich Assurance Limited (‘Zurich’), which runs a network of franchised advisors. Mr Forte is a financial advisor to a number of clients who are members of the public. In June 2005 Openwork and Mr Forte entered into a written agreement: comprising a written standard-term Franchise Contract and a Financial Manual, whose terms were incorporated into the contract. Mr Forte thereby became one of Openwork's franchisees.

The business of Openwork and Mr Forte was the sale of investments provided by (so far as material to the present case), Zurich and an entity within the Zurich group, referred to at trial as ‘Sterling’.

On the sale of a Sterling investment to a client of Mr Forte, both Openwork and Mr Forte were entitled to commission from the provider of the investment.

The investments relevant to the present dispute were provided by Sterling in the form of a Sterling Investment Bond. On the sale of such an investment to one of Mr Forte's clients, Openwork was entitled to a commission from the provider of the investment and Mr Forte was entitled to a commission from Openwork.

The investments in question were ‘no exit penalty’ bonds. This type of investment, as the name suggests, enabled the investor to withdraw from the investment bond without penalty.

The commission paid to Mr Forte was 84.85% of the commission payable by the provider to Openwork; and Mr Forte was able to choose to receive either a proportion of the overall commission at the beginning and then further payments (a ‘trail fee’), or the entire amount as a lump sum at the outset. In each of the three investments giving rise to the claim Mr Forte chose to receive a single lump sum.

One of the terms of the contract between Openwork and Mr Forte provided that if the investor withdrew the funds within three years there was an obligation on Mr Forte to repay a proportion of his commission to Openwork (‘the clawback provision’).

The issues that arise on the present appeal are, first, whether the clawback provision was sufficiently certain in its effect to be operative and enforceable, and second, whether Openwork had itself paid the clawback to Sterling in respect of the bonds that were the subject of the claim.

The background

On 26 September 2011, Mrs Sylvia Betterman signed an application form for the purposes of investing the sum of £4,472,993.15 in a single premium ‘no exit penalty’ Sterling Investment Bond. The investment was made on 3 October 2011 and she made the investment following financial advice from Mr Forte.

On 29 August 2012, Mrs Catherine Sytner signed an application form for the purposes of investing the sum of £3 million in another ‘no exit penalty’ Sterling Investment Bond. On 13 September 2012 and 21 September 2012, she invested the sums of £3 million and £1 million in the Bond. She too made those investments after receiving financial advice from Mr Forte.

As a result of Mrs Betterman's and Mrs Sytner's investments in the two bonds, Mr Forte was paid commission by Openwork: £313,107.28 in respect of Mrs Betterman's investment, and £271,511.27 in respect of Mrs Sytner's investments. Both were paid as single further lump sums; and the total paid was £584,618.55.

Between March 2012 and June 2013, Mrs Betterman encashed her bond. She held funds invested in the bond for between 5 and 20 months. On 3 April 2013, Mrs Sytner cashed in her bonds in full. Her funds had been invested in the bond for around 7 months.

The material contractual terms

The Financial Manual provided:

Appendix 3 – Sterling – investment plans

Base commission rates

High Allocation and No Exit Penalty Bonds

3.5% single premium initial commission and 0.4% trail fee

or

5.5% single premium initial commission and no trail

…

Commission clawbacks:

• No exit penalty bond – where funds are withdrawn within 3 years of the most recent investment, a percentage of the initial commission will be debited to your Commission Account. The amount of initial commission clawed back relates to the amount invested, length of time invested and amount withdrawn.

The first issue

There is no dispute as to the general intent of the clawback provision: if investments in the bonds were withdrawn within the period of three years there would be an adjustment in favour of Openwork of the commission that had been paid to Mr Forte. The dispute is whether the clawback provision was sufficiently clear in specifying how it was to operate.

The Judge made a number of findings which were either not challenged or are no longer challenged on the appeal. First, although the clawback provision refers to a percentage of the initial commission which is related to the three specified factors (amount invested, length of time invested and amount withdrawn), it does not provide any express formula by which the calculation is to be made. It was in this sense that the Judge described the clawback provision as ‘vague’ (see judgment at §62). Secondly, it was inherently unlikely that a franchisee in the position of Mr Forte would have agreed to confer on Openwork a general discretion to claw back such sums as Openwork considered reasonable. It followed that the clawback provision did not confer a discretionary power in favour of Openwork to make the calculation (see judgment at §§61, 64 and 66).

The Judge then made findings which are challenged on the appeal. First, at §69:

… where the contract provides that a party shall be entitled to a part or a proportion of a specified whole, then the issue is, naturally and properly, whether the nature of that whole and proportion can be identified. In the present case there are three factors that are stated to be relevant …

Second, although the clawback provision did not stipulate how the clawback was to be assessed, since it was to be calculated on the basis of the three identified factors (amount invested, amount withdrawn and length of time of the investment), the contractual intent was clear. The Judge expressed his conclusion at §77:

I therefore conclude that, in the normal run of events, commission would be clawed back on a reducing basis over time, reducing on a straight-line basis from the full commission at the date of investment to zero at three years.

Mr Rory Brown (for Mr Forte) submitted that, having identified the indeterminacy of the clawback provision, the Judge was not entitled to invent his own calculus or means of ascertainment. Mr Brown accepted that the courts do not expect business people necessarily to record agreements with lawyerly precision, and that for this reason courts are reluctant to find that a contract or term is unenforceable for want of certainty. He also accepted that the payment of an amount under a contract may be certain although that amount is not specified; but in such a case, he submitted, the contract must provide either (1) a machinery or process for the ascertainment of the amount (for example, a third-party determination); or (2) a calculus or formula for working out the amount (for example, a percentage of another calculable amount); or (3) reference to an objectively defined standard, according to which the court can determine the amount (for example, an identified bank's promulgated rate of interest); or (4) on its proper construction, a power or discretion on a party to specify the amount.

Mr Brown relied on the proviso referred to in a passage from the judgment of Lord Wilberforce in Cudgen Rutile (No.2) Pty Ltd v. Chalk [1975] AC 520 PC at 536F:

Their Lordships consider that, in modern times, the Courts are readier to find an obligation which can be enforced, even though apparent certainty may be lacking as regards some terms such as the price, provided that some means or standard by which that term can be fixed can be found.

Lord Wilberforce referred in this context to WN Hillas & Co Ltd v. Arcos Ltd (1932) 147 LT 503.

Mr Brown submitted that the clawback provision provided no means of identifying how the clawback provision was to operate and, in these circumstances, it was simply not open to the Judge to invent and apply the formula that he did.

Mr Stefan Ramel, for Openwork, submitted that the Judge was correct in his view that the clawback provision was intended to provide a mechanism for returning commission on the basis of the amount and length of time of the investment, subject to the limitation of 3 years, and in his conclusion that a straight-line calculation gave effect to the parties' bargain.

Discussion on issue 1

Although the authorities indicate that cases in which contractual provisions are challenged as being void for...