- United Kingdom
-  EWHC 745 (Comm)
- High Court of Justice, Queen's Bench Division (Commercial Court)
- Rolls-Royce Holdings Plc v Goodrich Corporation
LONG-TERM CONTRACTS - JOINT-VENTURE AGREEMENT - BETWEEN AN ENGLISH GROUP OF COMPANIES AND A US GROUP OF COMPANIES - FOR THE DESIGN, MANUFACTURE AND SALE OF ORIGINAL ENGINE CONTROLS EQUIPMENT - UNIDROIT PRINCIPLES AS A MEANS FOR INTERPRETING THE APPLICABLE DOMESTIC LAW (ENGLISH LAW)
NOVATION BY CONDUCT OF A CALL OPTION IN FAVOUR OF ONE OF THE PARTIES - COUNTERPARTY ESTOPPED FROM CONTENDING THAT THERE WAS NO SUCH NOVATION - CLAIMANT QUOTING UK COURTS' PRECEDENTS REFERRING TO THE UNIDROIT PRINCIPLES IN ORDER TO SANCTION INCONSISTENT BEHAVIOR - COURT AGREEING WITH ITS REASONING
In 2008 an English group of companies (Claimant) and United States group of companies (Respondent) concluded a joint venture agreement and established a new jointly owned company to carry on the business of the joint venture, being design, manufacture and sale of original engine controls equipment. The contract provided for a call option in favor of the Claimant to allow it to acquire the engine control systems aftermarket business from Respondent.
In 2011 Claimant replaced its holding company following a share for share exchange. In 2018, after long negotiations and a series of new agreements between the parties, Claimant purported to exercise the call option by service of a letter on Respondent in order to trigger the procedure to allow it to purchase the engine control systems aftermarket business, but Respondent disputed the valid exercise of the call option arguing that Claimant after the replacement of the holding company could not exercise the rights attributed to the original contracting party.
Claimant then applied for summary judgment on its claim for a declaration that it has validly exercised its call option as contained in the agreements with Respondent. The Court refused the application for summary judgment, as there was not sufficient evidence to establish an actual novation by conduct between the two Claimant’s holding companies, but it concluded that Respondent was estopped from contending that there was no such novation, whether or not such a novation in fact took place.
In order to support the argument that Respondent was estopped from denying that there was a novation of the call option to Claimant, the latter relied on two UK Courts’ precedents: MWB Business Exchange Centres Ltd v Rock Advertising Ltd (16.05.2018, already in Unilex), where Lord Sumption recalled that “both the Vienna Convention and the UNIDROIT model code qualify the principle that effect is given to No Oral Modification clauses, by stating that a party may be precluded by his conduct from relying on such a provision to the extent that the other party has relied (or reasonably relied) on that conduct. In some legal systems this result would follow from the concepts of contractual good faith or abuse of rights. In England, the safeguard against injustice lies in the various doctrines of estoppel”, adding that “the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself.”; and Kabab-Ji SAL v Kout Food Group (20.01.2020, already in Unilex), in which it was affirmed that “there is little difference between the UNIDROIT approach and the English approach through the doctrines of estoppel. This is borne out by the example of the exception in the second sentence of Article 2.1.18 given in the Comment on the UNIDROIT Principles […] The illustration is a classic example of what Lord Sumption JSC said at  of his judgment was required by way of estoppel. In other words, Lord Sumption JSC is setting out how English law interprets this UNIDROIT principle and is not saying anything different from UNIDROIT.”
The Court agreed with this reasoning and affirmed that Respondent would be estopped from denying that it had given the necessary consent to novation, whether by agreement or by convention.