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On Whose Authority? – The perils of negotiating contractual variations

Posted on 17 November 2021

In CBPE Capital Fund VIII A LP v Taranissi [2021] EWHC 2855 (Ch) the High Court had to decide various questions of construction, estoppel, and authority to determine which party's understanding of a variation to the terms of an investment was correct.

In doing so, the court provided helpful guidance on these areas of law, as well as highlighting the importance of having the right witnesses take the stand.

The Case

This dispute arose out of an investment made by the first two claimants, two private equity funds (CBPE Capital Fund VIII A and B), in May 2012. The investment was in an in-vitro fertilisation clinic set up and developed by Dr Mohamed Taranissi through ARGC Topco (the first and second defendants respectively).

By 2013, both CBPE and Dr Taranissi were unhappy with aspects of the deal that had been reached. Accordingly, the parties entered into negotiations to vary the terms of the investment.  A variation letter (the "December 2013 Letter") was ultimately agreed and signed on CBPE's behalf by one of its partners. However, this was done without the knowledge of anyone else at CBPE. A dispute then arose between the parties as to what the terms of the investment were. CBPE sought a declaration as to the correct construction of the December 2013 Letter, which they claimed entitled CBPE to additional interest payments from Dr Taranissi.

Dr Taranissi, on the other hand, claimed that the December 2013 Letter had effectively increased his stake in the business from 60% to 70%, and that as a result all interest due to CBPE under the terms of the agreement had already been paid in full. In the alternative, he brought a counterclaim for rectification of the letter to reflect his understanding of the terms, and, in the further alternative, argued that the Claimants were estopped from enforcing the terms as they believed them to be. In response, the Claimants argued that, if Dr Taranissi's construction was correct, the partner who signed the December 2013 Letter on CBPE's behalf had not had authority to agree to and bind the claimants to such terms.

High Court Judge Paul Matthews found in favour of Dr Taranissi. He accepted Dr Taranissi's construction of the letter; held that the signing partner had had both implied and express authority to bind CBPE on those terms; and held that the contractual change was therefore valid and binding in the terms Dr Taranissi claimed. As a result, CBPE was not entitled to the additional interest payments claimed.

Legal implications for variations agreed between contracting parties

Amendments to commercial arrangements and the parties' intentions

This is an important judgment for contracting parties, with pertinent lessons for parties seeking to agree important variations to existing contractual arrangements.

First, clear and precise distinctions must be drawn when drafting "one off" variations to ensure that they cannot be interpreted as a wide-ranging change to the entire agreement.

Second, parties must also be clear as to what they intend the effect of the variation(s) to be and, more importantly, must inform the other parties if they believe that the written terms do not reflect their counterparts' expressed intentions.  In this case, written communications evidencing the parties' intentions and understanding of the agreement were of great significance. In particular, the Judge relied upon email correspondence between the CBPE signatory and CBPE's solicitors in concluding that the signatory was aware that Mr Taranissi had a different understanding of the effect of the provisions and deliberately did not correct him. This therefore would have supported Dr Taranissi's alternative claim for rectification of the agreement to reflect his intentions, or his defence of estoppel by convention, had the Judge not found in favour of Dr Taranissi's interpretation of the agreement in any case.

The Judge also commented that the fact that CBPE had not called the signing partner to give evidence on the matter weakened their arguments on what was intended to have been agreed.  This is in direct contrast to Dr Taranissi, who gave evidence and was cross-examined before the Court.

Authority to bind

The Judge held that the partner in question had both express and implied authority to bind the CBPE partnership.

Rejecting CBPE's arguments to the contrary, he held that it was clear that the signing partner had been authorised to negotiate and agree a variation of the agreement. In his view this included express authority to agree to the terms contended for by Dr Taranissi.

However, and in any case, if there had been any limitations on the extent of that authority, they were not communicated to Dr Taranissi. Whilst the signatory had said that she needed to confirm her partners were happy with the letter before signing it, this was not unusual.  Further, Dr Taranissi had been entitled to assume that such approval had been given when the letter was subsequently signed on behalf of CBPE. Accordingly, it was clear that the signing partner had apparent authority (from Dr Taranissi's perspective) to agree the terms Dr Taranissi claimed.

The Judge also noted that the signatory was a partner in CBPE, and therefore entitled to make agreements on its behalf. Another point raised was that lawyers were instructed by CBPE to draft up an agreement, which would have strongly indicated that this was intended to be a binding agreement. Finally, the December 2013 Letter was signed by the CBPE partner “for and on behalf of CBPE Capital LLP, acting in its capacity as manager of CBPE Capital Fund VIII A LP and CBPE Capital Fund VIII B LP”. All of these factors also strongly argued in favour of the signatory having apparent authority to bind CBPE, even if she had not had actual authority to do so.

This judgment is therefore a powerful reminder of the difficulties parties will face in avoiding contractual obligations agreed by someone with the appearance of authority to contract on their behalf.

How to ensure contracting parties are protected

This judgment raises three issues to be aware of when making changes to commercial arrangements: authority to bind; drafting of documents to make amendments to a commercial relationship; and intention of the parties.

Authority to bind

Authority to bind is an interesting concept following this judgment, as there seems to be some fluidity and alternative influences in determining authority. It is important to keep in mind that authority to bind can be derived from an array of different sources, and may well go beyond the authority expressly given. Parties must therefore be careful to ensure that negotiations are only conducted by individuals with clear instructions and understanding of their side's aims and objectives. Where it is intended that there are limits on the extent of the negotiator's authority to bind their party, these must be clearly communicated both to them and to the other parties.

Drafting of documents

With regards to drafting documents, strikingly, the Judge suggested that, at least in this case, the instruction of solicitors to draw up the December 2013 Letter could be said to indicate that an agreement had been reached by the parties (ie. that they had formed a binding contract before the letter was actually signed). This is likely to be, to some extent, due to the unusual facts of this case. However, it emphasises the importance of ensuring that any draft agreement or proposed terms of agreement are expressed to be a proposal or draft, and ideally marked as "Subject to Contract", to avoid any subsequent suggestion that agreement was reached at an earlier stage and/or on different terms than intended.

Intention of the parties

Finally, this judgment emphasises that where the above issues are not properly and clearly dealt with, questions of the parties' intentions, which would usually be irrelevant and/or inadmissible in contractual disputes, will become of supreme significance. In reaching this conclusion, the Judge looked to correspondence and emails between Dr Taranissi and the lead partner (prior to and after the execution of the December 2013 Letter) which evidenced inconsistencies between what was contained in the December 2013 Letter and what was understood and/or agreed by or explained to Dr Taranissi.  Indeed, the Judge indicated that, had it been necessary, he would have been willing to accept that Dr Taranissi's understanding of the terms of the agreement was different to what was recorded in writing, that the signing partner had been well aware of this and failed to correct him, and accordingly to rectify the agreement to reflect Dr Tarinissi's understanding.

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