Mistaken assumption by another contracting party? When to speak up and when to stay silent

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

You are in the execution phase of a contract. The other side has stated its view on a matter. You disagree. When do you have a duty to speak out? We look at recent developments in the High Court decision of Starbev v Interbrew.

The Starbev case highlights issues which can arise where the other side is proceeding on an assumption which you do not accept and you fail to challenge that assumption. Maybe your focus is on other more pressing issues. Maybe you don't want to have an argument at this stage. Or maybe, as in an earlier case, you see an advantage while they proceed mistakenly. In some situations there will be a duty to speak out over your disagreement and, if you don't, you may be left with a position you do not agree with.

How did the issue arise in the Starbev case?

The Starbev case centred on statements made by the buyer of a brewing business after the purchase had been completed. The statements related to an element of the deferred consideration calculation which depended on the amount the buyer had invested in the transaction. The buyer formally told the seller twice what it considered the investment amount to be. The seller did not challenge this for several years and in fact only did so when the contract provided for the deferred consideration to be calculated and verified, after the on-sale of the business to a new purchaser. The buyer argued that, because of the seller's earlier acquiescence, it had lost the right to challenge the statements (i.e. an estoppel by acquiescence had arisen).

The Judge's decision

The Judge held that, in the absence of a relationship between the parties which implied an obligation of good faith (such as in an insurance context) or partnership or joint enterprise, the court would not impose a duty to speak out in the absence of impropriety. Impropriety could come from the act of staying silent itself - where a reasonable person would expect the party who knows the assumption is wrong, acting honestly and responsibly, to bring the true facts to the attention of the other party.

In Starbev the Judge concluded that there was no impropriety and therefore no duty to speak out. The seller had not acted irresponsibly or unconscionably in failing to communicate its doubts about the investment amount at an earlier stage and instead waiting until after the on-sale before verifying the figure in accordance with the provisions of the contract. On the facts the Judge decided that the buyer had known that the seller would probably want to verify the investment amount.

The Starbev case contrasts with an earlier shipping case (The Lutetian) where an estoppel by acquiescence was held to have applied. There the owners of a vessel purported to withdraw the vessel from charter on the basis that the charterers had tendered an incorrect payment for hire. The owners knew the charterers believed they had paid the right amount but kept quiet, leading the charterers to think, until a very late stage, that there was no objection to their payment calculation. The Judge concluded that it was the owners' duty, acting honestly and responsibly, to disclose their own views about the payment to the charterers. Instead they thwarted the charterers' attempts to discover their views because they were bent on "stage-managing a very profitable withdrawal" (they later re-offered the vessel to the charterers at almost double the original rate).

It is easy to see in this case that the conduct of the owners was unconscionable. Having kept silent on their views as to the correct level of fees to be paid, they were estopped from exercising their right to withdraw.

Practical points

Certainty is almost always preferable to litigation when doing deals. There are a number of ways in which you can improve your position.

• Consider negotiating contractual obligations in relation to key points. Often there is a duty for one side to report on specific matters to the other - consider going further and imposing a contractual duty to speak out if there is disagreement;
• If, during a transaction, something turns out to be important, consider simply asking the other side to confirm your assumption; and
• If you are not able to get confirmation about an issue from the other side, improve your chances of setting up a successful estoppel by acquiescence by being clear and repetitive in your communications. Confirm that you are operating and relying on the assumed basis.

Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Olswang Corporate Quarterly Autumn 2014 publication.