Court of Appeal holds that a contract terminated for surreptitious dealing with agent is not void from the beginning

The Court of Appeal has confirmed that, when a contract is terminated as a result of a party’s surreptitious dealing with the terminating party’s agent, it is not void from the beginning of the contract  (ab initio) if the misconduct occurs in the course of the performance of the contract (rather than at the time the contract is made).

Background

Agents have fiduciary duties to their principals which include the duty not to use his position to make a profit for himself. Surreptitious dealing amounts to fraud and entitles the principal to terminate the contract.

The agreement covered the sale of six aircraft. The claimant was a joint venture vehicle between two men to purchase the aircraft from the defendant. Shortly after the agreement was entered into, the claimant began to struggle to keep up with its payment obligations and the two men began to quarrel. The claimant alleged that the one of the men had surreptitious dealings with the defendant, with a view to diverting the sale to a company connected to him, which the claimant purported to accept as ending the contract. Subsequently, the defendant terminated the contract for breaches by the claimant.

Decision

On the facts the court held there was no such surreptitious dealing and dismissed the claimant’s appeal. However, the court went on to consider (obiter) whether, if the seller had been guilty of surreptitious conduct, the buyer would have been entitled to avoid the contract ab initio.

In this case, by the time the surreptitious dealing was alleged, the defendant had already acquired rights to damages in respect of two aircraft. If the claimant had validly terminated the contract it would only have been released from its future obligations and would remain liable for those already accrued, including the damages in relation to the two aircraft. The claimant would have had to give credit for such damages in its own claim.

As a result, the claimant could only have terminated the contract from the moment discovery (ie for the future). Had the agent been bribed to enter into the contract, then the principal would have been able to void it from the beginning.

Tigris International NC v China Southern Airlines Company Ltd and another [2014] EWCA Civ 1649.

 

Source: PLC