England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR JUSTICE HART

		Royal Courts of Justice Strand, London, WC2A 2LL Friday 18th May 2001

LORD JUSTICE LAWS:

INTRODUCTORY

1. This is a defendant's appeal against orders made by Hart J pursuant to a judgment delivered by him on 11 November 1999. Permission to appeal was given by the judge below on the same day.
2. The proceedings were commenced by originating summons, by which a number of declarations were sought as to the true construction of an option agreement made by a deed dated 25 July 1988 as varied by a deed dated 30 November 1992, and as to certain related matters. I shall refer to the agreement in its original form as "OA88" and in its final form as "OA92". The history of the case is a little intricate, and it is better to describe it before coming to the issues which faced the learned judge, and which fall for decision before us.

THE HISTORY

3. There were three parties to the agreement: Anthony Richardson, Edward Gloyne and Lady Gardiner. I shall refer to them as R, EMG, and HG. EMG is the claimant in these proceedings. Mr Richardson unfortunately died in March 1995. His widow succeeded to his interests relevant to this litigation, and is the defendant in the proceedings and the appellant before us; and so I shall refer to her also as R. There is a further party, a firm of solicitors by name Barber Young Burton and Rind ("BY"). They acted as solicitors to R at times material to this dispute. They were impleaded by R in third party proceedings in the action, and so are a Part 20 defendant under the Civil Procedure Rules.
4. R owned 32,400 shares in a company by name UIS (Holdings) Ltd ("UIS"). By OA88 he agreed to sell the shares to EMG and HG: 23,231 to EMG for $573,600 and 9,169 to HG for $226,400: in total, $800,000.
5. Completion of this sale transaction was by clause 2 of OA88 stipulated to take place on the same day as completion of the issue to another company, General Atlantic Corporation, of additional shares in UIS.
6. That transaction went forward. R's shares were transferred to EMG and HG pursuant to the agreement. That event having happened, OA88 contained the following provisions which created consequent rights and obligations.

"3 Option in Favour of AFR

3.1 EMG hereby grants AFR the option to acquire from EMG such number of shares in the Company as is equal to 3.49% of EMG's beneficial shareholding in the Company immediately following Completion pursuant to Clause 2.

3.2 HG grants AFR the option to acquire from HG such number of shares in the Company as is equal to 1.344% of HG's beneficial shareholding in the Company immediately following Completion pursuant to Clause 2.

3.3 The "Option Shares" shall mean the shares the subject of the option referred to in this Clause 3.

4 Exercise of the Option

4.1 AFR shall be entitled to exercise either or both of the options granted under Clause 3 by written notice to each of EMG and HG given on or as near as possible to the last business day prior to the Company going public or being acquired or on the 31 day of December 2008 whichever is the sooner against payment by AFR of $400,000 in aggregate payable to EMG and HG pro rata to the number of Option Shares the subject of each option.

4.2 Neither option shall be capable of being executed in part only save only under the provisions of Clause 10 in which case the price paid for the Option Shares and the benefits received under Clause 5.2 shall be proportionate to the number of Option Shares bought and sold.

.....

4.4 EMG and HG shall ensure that AFR is given not less than 30 days prior notice of the intended date for the Company going public or being acquired.

5 Transfer and Sale of the Option Shares

5.1 Subject to Clause 5.2 EMG and HG shall each transfer the appropriate number of Option Shares to AFR free from all liens charges and encumbrances forthwith upon AFR giving notice of exercise of the option.

5.2.1 AFR shall sell (or if more practicable EMG and HG shall sell on behalf of AFR) the Option Shares as soon as possible after the exercise of the option by AFR. AFR shall be entitled to receive from the sale proceeds (a) $400,000 and (b) 75% of the resultant balance of the sale proceeds (up to a cumulative maximum of $1,200,000) taking into account the provisions of Clause 4.2).

5.2.2 EMG and HG shall be entitled to the balance (if any) of the sale proceeds pro rata to the number of Option Shares the subject of each option.

....

10 Early Exercise of Option

10.1 If EMG shall sell or agree to sell in excess of 25% of his beneficial shareholding in the Company as existing immediately following completion pursuant to Clause 2, then AFR shall be entitled to exercise the option granted to him by EMG under Clause 3.1 in respect of such percentage of the Option Shares as is the same cumulative percentage sold or agreed to be sold by EMG.

10.2 The provisions of 10.1 above shall apply mutatis mutandis as between HG and AFR."

7. In 1992 UIS was taken over by an American company, Raxco Inc. In contemplation of this, OA88 fell to be modified; hence OA92, entered into (as I have said) on 30 November 1992. It was stated in the recitals to OA92 that in exchange for their shares in UIS it was proposed that EMG and HG should respectively receive 1,088,775 and 429,770 common stock in Raxco. Raxco later changed its name to Axent Technologies Inc ("Axent").
8. Clause C of the recitals to OA92 was in these terms:

"EMG, HG, and the other shareholders in the Company are proposing to enter into a Share Exchange Agreement on 30 November 1992 with Raxco, Inc. a Delaware corporation having its principal place of business at… Under the terms of the said Share Exchange Agreement EMG will become entitled to 1,088,775 common stock in Raxco Inc and HG will become entitled to 429,770 common stock in Raxco Inc.

Clause D of the same recitals stated:

"The parties have agreed that AFR shall release the 1988 Options in consideration of being granted substitute Options by EMG and HG in respect of their shareholdings in Raxco Inc at the same percentages as referred to in Recital A ("the substitute Options"). [Recital A set out the respective percentages of 3.498% and 1.344% which had been provided for in OA88.]

Then the executive provisions of OA92 included the following:

"2 Grant of Substitute Options

EMG and HG each grant AFR the option to acquire from each of them such number of shares in Raxco Inc as is equal to 3.498% (in the case of EMG) and 1.344% (in the case of HG) of their respective beneficial shareholding in Raxco Inc pursuant to completion of the said Share Exchange Agreement scheduled for 30 November 1992, that is to say 38,085 Raxco Common Stock in the case of EMG and 5,776 Raxco Common Stock in the case of HG.

3 The parties agree that the provisions of the 1988 Agreement should apply mutatis mutandis to the Substitute Options, save that clause 4.1 and 5.2.1 shall be amended to read as set out below (the amendments being underlined).

4.1 AFR shall be entitled to exercise either or both of the options granted under Clause 3 by written notice to each of EMG and HG given on or as near as possible to the last business day prior to the Company going public or being acquired or on or before the 31st day of December 2008 whichever is the sooner against payment by AFR of $400,000 in aggregate payable to EMG and HG pro rata to the number of Option Shares the subject of each option.

5.2.1 If so required by EMG and HG AFR shall sell (or if more practicable EMG and HG shall sell on behalf of AFR) the Option Shares as soon as possible after the exercise of the option by AFR. AFR shall be entitled to receive from the sale proceeds (a) $400,000 (b) 75% of the resultant balance of the sale proceeds (up to a cumulative maximum $1,200,000) taking into account the provisions of clause 4.2."

38,085 is, of course, 3.498% of 1,880,775 to the nearest whole number and likewise 5,776 is 1.344% of 429,770.

9. Then in 1993 EMG and HG each sold 42.2% of their respective shareholdings in Axent. That engaged or triggered R's right under clause 10 of OA88 to effect a partial exercise of his option rights: and on 30 April 1993 EMG's solicitors wrote to BY offering to sell to R. The letter contained these extracts:

"I have suddenly been advised that both Eddie Gloyne and Lady Gardiner are about to sell 42.2% of their current shareholdings in Raxco to a US investor. The sale price is $3 as against $9.12 payable by Tony Richardson under the Option Agreement...

I appreciate that once again notice of the transaction is rather short, although I cannot imagine that Tony will want to pay more than three times the price that an institutional investor is prepared to pay…"

Unsurprisingly R did not then exercise any part of his option. In consequence of the sale of 42.2% of his holding, EMG was left with 629,312 shares in Axent.

10. In about October 1996 EMG was issued with stock in a new company, RSI, although it seems he was not actually aware of it until much later, in about May 1998. This was done pursuant to a de-merger of part of Raxco's (or Axent's) business, following a resolution to that effect passed in December 1995. There was an issue at first instance whether or not this RSI stock was subject to the option agreement: oddly, as it seems, EMG and R adopted positions contrary to their respective interests. The judge held (12G-H) that the RSI shares did not become subject to the option, and there is no appeal against that finding.
11. Meanwhile on 24 April 1996 Axent went public. It was floated on NASDAQ. That triggered R's right to exercise the option under OA88 paragraph 4.1, and under OA88 paragraph 4.4 R was entitled to 30 days notice of the date of the flotation. In fact a purported notice had been given by letter of 26 March 1996 addressed to BY. It included these passages:

"Lady Gardiner has now asked me to notify you pursuant to that agreement, on behalf of the estate, that it is proposed that Axent Technologies Inc will be floated on NASDAQ in the USA some time in the second part of April this year.

The Option Agreement now applies in respect of the remaining shares held by Lady Gardiner and Eddie Gloyne. In Lady Gardiner's case, the number is 248,437 shares. For Eddie Gloyne I believe it is 629,441 shares.

This means that the estate has an option to buy 3,339 shares from Lady Gardiner, and (I believe) 21,986 from Eddie Gloyne...

A further complication is that shareholders other than those who have registration rights with Axent are being asked to agree to lock up their shares for 6 months following flotation. Shareholders with registration rights will be entitled to sell some shares in the initial offering, with the balance being subject to lock up. The estate presumably would have no registration rights."

The learned judge below said (judgment transcript 23B-D) that BY had been "orally notified on 26 March 1996 of the impending flotation". The flotation date was in fact 24 April 1996, and the judge held that for the purposes of clause 4.4 of OA88 this notice was one day short, and in any event bad because the date of flotation was not specified. No less is true of the letter of 26 March. However the judge also found (23D-G) that lack of good notice under 4.4 did not entail the result that the requirement to exercise the option as near as possible to the last business day before flotation was abrogated or set aside. He took the view that clause 4.1 contained no express or implied reference to 4.4: "The agreement is perfectly workable without implying such a reference".

12. Moreover the judge found (22C-F) that there was no document coming into existence in 1996 which was capable of constituting an exercise of the option within clause 4.1. BY admit in their pleaded defence that R instructed them to exercise the option. The judge held (25A-B) that after 24 April 1996 each party proceeded on the footing that notice formally exercising the option had been given, not least in the light of certain letters dated 24 and 26 April 1996, which I should set out in part at this stage. On 24 April EMG's Solicitor wrote to BY as follows:

"Confirming our conversation yesterday, when I had already spoken to Eddie Gloyne, Eddie would be happy for the option rate that applies to his shareholding (3.498%) to apply to the 100,000 shares he hopes to sell fairly shortly in the after-market of the US public offering of Axent Technologies Inc...

Linda Richardson would receive from the sale proceeds of the 3,498 option shares, 75% of the excess over and above the $9.12 per share exercise price (see Clause 5.2.1. of the Option Agreement). According to my calculations, this is subject to an ultimate cap at a price of $27.36...

In your fax of 19 April to Craig Eadie, you ask about changes in shares during 1992 and 1993. If you refer to the Supplemental Option Agreement of 30 November 1992... Recital C and Clause 1 make the position at that time clear. The sales in 1993 reduced the shareholdings of Eddie Gloyne and Lady Gardiner to their present levels... That is to say 629,441 for Eddie Gloyne and 248,437 for Lady Gardiner. This produces 22,018 Option Shares at Eddie Gloyne's rate of 3.498% (reduced to 18,520 to take account of the 3,498 that will shortly be sold) and 3,339 option shares at Lady Gardiner's rate of 1.344%.

As regards Eddie Gloyne's remaining shares, he tells me these are all subject to a six months lock up agreement. This means there will be no further sales until late November/early December of this year.

Perhaps you could confirm that the above is the way to proceed, and we can then deal with the necessary documentation".

BY replied on 26 April:

"...I have spoken to Linda Richardson and I am pleased to confirm that she agrees to the proposals contained in your letter.

The option in relation to the remainder of any shares after the initial sale would stand and will then be exercised as soon as the lock up period has expired.

Please let me know whether you wish to draft the document (which I think should be between just Eddie and Linda with a separate agreement being entered into between Linda and Helen) or whether you would like me to do so."

13. I must return to these letters when I come to address the issues that fall for decision, but it is first convenient to continue and conclude the narrative. On 13 May 1996 R received a cheque for $9,766.76 which she accepted in satisfaction of her option rights over HG's shares, and HG has taken no part in this litigation. That sum was calculated on the premise that the option applied to 3,339 shares only. That in turn was on the assumption that when 42.2% of HG's shares were sold in 1993, and the option was not then exercised under Paragraph 10 of OA88, the number of shares remaining subject to the option was pro tanto reduced: from 5,776 to 3,339.
14. This assumption, or rather a parallel assumption in relation to EMG's shares, is at the heart of a major issue in the case, which I shall articulate in due course. Indeed it is the treatment of the EMG shares that has given rise to all the disputes between the parties.
15. The way in which EMG's shares were dealt with in 1996 involved a document which has been referred to in the proceedings as "the letter agreement". The document was initially produced by EMG's solicitors and, as I understand it, amended by BY. It was to be sent by EMG to R. The text was as follows:

"Dear Linda

As you know I plan very shortly to sell 100,000 shares out of my shareholding in AXENT Technologies Inc. ("Axent"). This letter is to confirm what we have agreed in connection with the anticipated sale of those shares.

In satisfaction of my remaining obligations under the agreement dated 25 July 1988 between your late husband, myself and Lady Helen Gardiner, I will pay you out of the proceeds of sale of my Axent shares an amount in sterling equal to 75% of the excess over $9.12 per share received by me on the sale of 22,018 Axent shares. However, you will not be entitled to any part of the sale proceeds exceeding $27.36 per share. The payment to you will be made net of the 7% underwriting discount and commission.

As requested, I will advise you before going ahead with the sale of both the anticipated sale date and price, although these will only be estimates and the actual date of sale and/or sale price may of course differ in the event.

Please confirm your agreement to these terms (which are intended to be legally binding) by signing where indicated below.

With kind regards.

Yours sincerely

........"

16. The reference in the letter agreement to 22,018 is significant. It will be recalled that EMG's shareholding in Axent was 1,088,775 shares and that R's option entitlement went to 3.498%: as a percentage of 1,088,775, that amounts to 38,085 shares. But if one takes out the 42.2% sold in 1993, as I have said some 629,312 shares remained. 22,018 amounts to 3.498% of that figure (in fact, on my mathematics, the exact figure is 22,013.333...) Thus the letter of agreement proceeded on the same basis is that on which HG's option shares were dealt with: namely R's entitlement to the specified percentage of EMG's shareholding was calculated by reference to the number of shares held by him after the 1993 disposal of 42.2% of his holding. It was common ground, and is plainly the fact, that on the occasion of the sale in 1993 the clause 10 rights which were thereby triggered were not exercised by R.
17. A copy or counterpart of the letter agreement was sent to R in May 1996. On 21 or 21 May 1996 R wrote to BY enclosing the agreement "duly signed". On 21 June 1996 BY informed EMG's solicitors that they had in their possession a copy of the agreement signed by R. EMG's solicitors had in fact passed the agreement to EMG himself for approval and signature on a date before 23 May 1996. There was some delay because (as I understand it) he was out of the country, but at length on 4 August 1996 he wrote to his solicitor enclosing the letter agreement signed by him. On 7 August 1996 his solicitors wrote to BY and stated:

"Eddie Gloyne has now signed and returned the Linda Richardson letter agreement, which I enclose. As Eddie has only signed the one original, perhaps you could get Linda to sign a photocopy, which can then be returned to me."

18. Then on 23 August 1996 BY acknowledged receipt of a telephonic transfer of the sum of £62,944.69 in respect of R's option rights as against EMG. This was the sterling equivalent of $97,879, which was the OA88 price calculated by reference to 3.498% of 629,312 shares - 22,018 - and not 3.498% of 1,088,775 shares - 38,085.
19. That might have been the end of the story. However, on 28 August 1996 BY wrote to EMG's solicitors and said:

"Further to my fax of 23 instant my client has raised several queries concerning the price of shares sold and at this stage I am not prepared to accept that payment is in full final settlement of monies due to her.

I will write to you again shortly with my calculations."

On 18 October 1996 BY wrote again. R had consulted her accountant; and it was now contended that R's option rights ran in respect of 3.498% of the whole of EMG's shareholding as it stood immediately before OA92 was entered into. That is, R claimed to be entitled to purchase 38,085 shares and not merely 22,018. The last sentence of the letter of 18 October 1996 is in these terms:

"My client therefore requires that your client transfer with immediate effect a share certificate for 38,085 shares and upon receipt of the same my client will account to your client under the provisions of Clause 5.2.1."

I should say that the sum of £62,944.69 earlier received by BY was held on deposit by them until a date after 20 November 1996.

THE CLAIMS IN THE PROCEEDINGS AND THE JUDGMENT AT FIRST INSTANCE

20. By his originating summons issued on 2 December 1997, EMG sought inter alia declarations as follows:

(i) that R's option rights went to 3.498% of EMG's shareholding from time to time (so that in 1996 the right number was 22,018 and not 38,085);

(ii) that by the letter of 26 March 1996 from HG's solicitors (acting also as agent for EMG) notice was given to R within paragraph 4 of OA88 of the proposal that Axent should go public (I have earlier described this letter);

(iii) that at no time before 21 August 1996 did R give written notice that she wished to exercise the option (the significance of the 21 August date is, I think, that that is when EMG's solicitors indicated that they would wire $97,879 (in sterling, £62,944.69) to BY to satisfy R's options rights);

(iv) that accordingly EMG held all his shares free of any option in favour of R; and

(v) R was bound to return the sum of £62,944.69 together with interest as money had and received, having been paid under a mistake of fact.

EMG also sought relief on the footing of an alternative case, namely that if the option has been validly exercised his obligations in respect of it had been discharged by payment of £62,944.69.

21. Mr Fisher of R's present solicitors swore an affidavit on 22 January 1998 in opposition to the originating summons. As well as disputing EMG's various claims he indicated that R desired to counterclaim for damages for breach of contract. He questioned the appropriateness of the originating summons procedure. On 2 April 1998 Master Dyson ordered that Mr Fisher's affidavit should stand as the counterclaim. The counterclaim, of course, sought damages based on the proposition that R's option rights went to 3.498% of the whole of EMG's shareholding in 1992 and not the lower number after deduction of the 42.2% sold in 1993: in short it covered 38,085 shares and not merely 22,018.
22. The learned judge below addressed this critical question - whether the amount of shares covered by the option was diminished by the sale of 42.2% of EMG's holding in 1993 - at 13A-17D in the transcript of his judgment. He held that the question turned on the correct construction of OA88 clause 10, and concluded that he preferred the arguments advanced on behalf of EMG.
23. He also held, as I have said, that there was no exercise of the option in writing pursuant to OA88 clause 4.1. Thus he came to pose this question (22F-H):

"Is there then any escape from the conclusion which Mr Walford invited me to draw that the consequence of the absence of such a document was that the option had now lapsed and that the monies which were sent to Mrs Richardson or sent to Mr Burton on her behalf should be returned to Mr Gloyne leaving Mrs Richardson with such remedies as she may have against Mr Burton and his firm?"

The judge indicated (25C-E) that he considered it arguable that on the correspondence the parties were estopped by convention from denying that the option had been exercised: but he did not rest his decision on that ground. At length he held that the letter agreement signed (as I have said) by R before 21 June 1996, and then signed by EMG in early August 1996, constituted a binding agreement - an accord and satisfaction - for the discharge of the parties' respective rights and obligations under OA88 and OA92: (25F-27G). In the result, then, R was held entitled to retain the sum of £62,944.69 paid in August 1996 but not entitled to recover anything further.

THE CONTENTIONS IN THIS COURT

24. On this appeal, that result is challenged by both parties; and BY (the Part 20 defendant) seeks to uphold it on further or additional grounds. EMG, by a respondent's notice, maintains (i) that the judge correctly construed paragraph 10 of OA88; (ii) he correctly held, also, that the option had not been exercised; but (iii) he was wrong to find an accord and satisfaction as to the payment of £62,944.69: he should have held that there was a convention between the parties to the effect that the option had been exercised in respect of the 22,018 shares, but R resiled from it and so should not now be allowed to rely on it; and in consequence he (EMG) is entitled to recover the £62,944.69 paid over. Alternatively if the judge was wrong as to the construction of clause 10 (and thus as to the number of shares which the option covered), nevertheless in that case he was right as to the accord and satisfaction, and his judgment should stand.
25. R in her notice of appeal maintains (i) that in 1996 her option rights covered 38,085 shares; (ii) that the option was validly exercised; (iii) that the letter `agreement never came into force so that there was no accord and satisfaction. She also seeks relief against BY, but it is unnecessary to go into that in order to get at the real issues in the case which are encapsulated in these rival contentions as I have set them out.

THE NEW EVIDENCE APPLICATION

26. It is convenient at this stage to refer to an application made by R to adduce further evidence. In the course of argument we indicated that we did not wish to hear Mr Walford for EMG on the application, so the parties will have understood that we did not accede to it. I give my reasons, shortly, for rejecting it. The subject-matter of the application was (a) a Share Exchange Agreement dated 10 December 1992 made between Raxco Inc, UIS and the holders of UIS common stock; and (b) a report prepared by a gentleman called Professor Letsou. The purpose of introducing these materials was to seek to demonstrate that the offer made by EMG to sell shares to R by letter of 30 April 1993 was in breach of contract and that such a sale would violate the United State Securities Act 1933: thus, it is said, if the learned judge below had been aware of these matters, he would have not have held that R's clause 4.1 rights had been abated by the non-exercise of R's rights under clause 10 in 1993.
27. The first point to be made about this, as it seems to me, is that there is no perceptible basis upon which the Share Exchange Agreement of December 1992 can be regarded as material to the construction of OA88 entered into 4 years earlier. Nor in my judgment can any putative illegality in the offer of 30 April 1993 touch the effect of that offer for the purposes of clause 10 of OA88. Further, I should have thought that if it be the fact that Professor Letsou is able to demonstrate that a potential exercise of the option in 1993 would or might have contravened the law of the United States, so presumably would such an exercise in 1996: but R's case depends on such an exercise, or at least a deemed exercise, of the option at that time. In my judgment, therefore, the new evidence sought to be admitted is simply irrelevant to any event arising in the case.
28. But even if I were wrong as to that I would decline to admit it. As is well known the decision in Ladd v Marshall [1954] 1 WLR 1489, and the three principles there elaborated (which I need not set out) have constituted the basis on which this court has exercised or refused to exercise its discretion to admit new evidence for all but 50 years. Mr Ashton urges that the strict position vouchsafed by Ladd v Marshall has been relaxed by the regime of the Civil Procedure Rules, the relevant rule being Part 52.11(2)(b). In my judgment - and I deal with the matter summarily - learning of this court since the introduction of the CPR shows that any such relaxation is at most very modest and the court will continue to treat Ladd v Marshall as powerful persuasive authority: see Banks v Cox (17 February 2000, unreported) paragraphs 41-42 per Morritt LJ, and Hamilton v Al Fayed (21 December 2000, unreported) paragraphs 11-14 per Lord Phillips MR, giving the judgment of the court.
29. In this case the Share Exchange Agreement was referred to in Recital C and Paragraph 2 of OA92, and in paragraph 4.4 of the affidavit of Mr Gallon sworn in support of the originating summons. Mr Ashton seeks to make something of the interlocutory process in the case before Master Dyson. At the hearing before the learned Master on 2 April 1998, EMG's counsel, opposing R's application for an order that the action continue as if begun by writ, submitted that all relevant documents on the issue of the option agreement's construction had been disclosed in the exhibit to Mr Gallon's affidavit. The Master made an order requiring EMG to exhibit a list of documents limited to the question that had been raised relating to the issue of bonus shares. I understood Mr Ashton to refer to these matters in order to support a submission that R's advisers had no reason to suppose that there might be anything material in the Share Exchange Agreement. He submitted that he or his solicitors were in no sense blameworthy in not having called for the agreement.
30. But references to the Share Exchange Agreement were staring R in the face, as Mr Ashton accepted. If it were desired to investigate the events of 1993 in order to see whether an argument to the effect that R's non-exercise of the option then diminished the number of shares remaining available for the purposes of clause 4.1, it was, as it seems to me, up to R's adviser to call for any material that might be relevant to that question.
31. These are the reasons for which, for my own part, I would dismiss the application to adduce further evidence.

THE ISSUES PRECISELY FORMULATED

32. There are four issues, as follows.

(1) Did R exercise the option in 1996 according to the terms of the option agreement?

(2) Did EMG and R contract to discharge their respective outstanding rights and obligations under the option agreement, by way of an accord and satisfaction in the terms of the letter agreement?

(3) In the events which happened in 1996, did an estoppel by convention arise so that (a) EMG should not be heard to say that the option had not been exercised, and (b) R should not be heard to say that her option applied to 38,085 shares?

(4) After the events which had happened in 1993, did R's rights under the option agreement apply to 38,085 Axent shares in EMG's hands, or only to 22,018?

33. If the answer to (1) is Yes, then (2) and (3) are moot, and the scope of R's option rights would fall to be considered under (4): if they applied to 38,085 of EMG's shares, R would be entitled to an appropriate money judgment on her counterclaim. If the answer to (1) is No, but the answer to (2) is Yes, then (3) is moot, the judgment below would fall to be upheld, and (4) would be material only to R's Part 20 proceedings against BY. If the answer to (2) is No, then (3) arises. If the answer to (3) is Yes, then again the judgment below would fall to be upheld, and (4) would be material only to the Part 20 proceedings. If the answer to (3) is No, EMG would be entitled to recover the £62,944.69 paid by him as having been paid under a mistake, and R would be left to her claim against BY in the Part 20 proceedings, so far as she could make it good; and (4), again, would be relevant only in that context.

THE FIRST ISSUE: WAS THE OPTION EXERCISED IN 1996?

34. I should first indicate that I agree with the judge's view that lack of good notice under clause 4.4 of OA88 did not entail the result that the requirement in 4.1 to exercise the option "as near as possible to the last business day" before flotation was abrogated or set aside. No doubt the absence of a good 4.4 notice might bear, simply as a matter of common sense, on what could reasonably count as being "as near as possible [etc]". In any event, however, the judge was in my view plainly right to hold that there is no document capable of being read as an exercise of R's option rights in 1996 according to the terms specified in OA88. No such exercise can be got out of the exchange of letters on 24 and 26 April 1996, which (a) refers only to 100,000, and not the whole, of EMG's shareholding, (b) assumes that in relation to the 100,000 shares the option had already been exercised (which it had not: and a partial exercise was in any event not permitted save under clause 10), and (c) contemplates a future exercise in relation to the remainder of EMG's shares. No other document (certainly not BY's letter of 18 October 1996, which is suggested as a candidate in BY's Part 20 defence) begins to fulfil the clause 4.1 conditions so as to constitute an exercise of the option according to the option agreement's terms.
35. I conclude that R's option was not exercised in 1996.

THE SECOND ISSUE: WAS THERE AN ACCORD AND SATISFACTION?

36. An accord and satisfaction is an agreement between the parties to an earlier contract to discharge the rights and obligations arising under that earlier contract otherwise than in accordance with its terms. Being no more nor less than a contract itself, an accord and satisfaction requires that there be offer and acceptance, and consideration moving from both parties. A simple instance arises where A agrees to accept less than B owes him under the contract, but on terms that he be paid sooner. As I have said (paragraph 23) the judge below concluded the case on the footing that by the letter agreement there was an accord and satisfaction between EMG and R. That was not a position that had been taken by any party before him.
37. Mr Ashton for R contends that if the true subject-matter of R's option rights in 1996 was 38,085 shares held by EMG, the letter agreement (though certainly signed by R) cannot constitute an accord and satisfaction so as to discharge the mutual obligations arising under the option agreement, because there was no consideration moving form R: R had the value of a lesser number of shares - 22,018 - but got nothing in return for giving up the difference. Conversely, Mr Walford for EMG said that if R's option rights in 1996 extended to only 22,018 shares then EMG gave no consideration in the letter agreement: he has paid full value for R's option, and got nothing in return for the fact that the option was not in truth validly exercised.
38. In fact, the terms of the letter agreement purportedly settled R's option rights on terms different from those in OA88 or OA92, irrespective of the issue as to the quantum of shares to which in 1996 the option attached. EMG's shares other than the 100,000 being dealt with were subject to a lock up. Moreover the price was fixed by reference to the average price obtained by staggered sales over a period of time. These considerations, in my judgment, mean that the letter agreement cannot simply be put on one side on the footing that one or other party gave no consideration for it.
39. However, I consider that the letter agreement fails as an accord and satisfaction for a different reason. To my mind it is entirely plain (as the judge found) that when this letter was written, and signed first by R and then by EMG, both parties assumed that the option had been exercised. That was a mistaken assumption. The letter agreement was concluded on the footing of this very mistake; whereas a true accord and satisfaction proceeds on the basis that there is no mistake and the parties deliberately choose to discharge their mutual obligations on a basis different from that originally provided for. In these circumstances, the letter agreement is in my judgment liable to be avoided, by either party, for a common mistake. And I think it may equally be said (as Mr Walford for EMG submitted) that R resiled from the letter agreement by BY's letter of 18 October 1996, and thereby repudiated such contract as the letter agreement constituted: EMG accepted that repudiation, and so the contract was at an end. In either case, in the events which have happened neither party can in my judgment set up the letter agreement so as to defeat what might otherwise be the other party's rights.

THE THIRD ISSUE: WAS THERE AN ESTOPPEL BY CONVENTION?

40. The doctrine of estoppel by convention was explained in this court in The 'Vistafjord' [1988] 2 Ll LR 343. Bingham LJ (as he then was) said this at 352:

It is sufficient... to say that it [sc the doctrine of estoppel by convention] applies where (1) parties have established by their construction of their agreement or their apprehension of its legal effect a conventional basis, (2) on that basis they have regulated their subsequent dealings, to which I would add (3) it would be unjust or unconscionable if one of the parties resiled from that convention."

41. I accept without demur that conditions (1) and (2) in this formulation are established on the facts of this case. My difficulty is with (3). At the very least, once R had resiled from the terms of the letter agreement by asserting a claim based on option rights covering 38,085 shares (see the letters of 28 August 1996 and 18 October 1996, to which I have referred) it cannot be said that it was unconscionable for EMG thereafter himself to depart from the "convention" constituted by the letter agreement, and to seek to stand on the original terms of OA88/92. In these circumstances, in my judgment there is no estoppel by convention either so as to bind the parties to a basis of 22,018 shares as the subject of R's option rights, or so as to bind the parties to an acceptance (contrary to the fact) that the option had been exercised.

THE FOURTH ISSUE: THE TRUE CONSTRUCTION OF THE OPTION AGREEMENT

42. On its face the option agreement says nothing as to the consequences intended to arise under the contract if R does not exercise the right given him by clause 10, assuming (of course) that an event triggering R's right under that clause has happened. There are two possibilities. (1) The number of shares the subject of R's surviving rights exercisable under clause 4.1 are diminished by the amount which EMG has sold. (2) R's rights survive in full: clause 10 merely gave him an additional right, to exercise his option early, if and to the extent that EMG sold shares before flotation. On this basis if R declined to exercise his right arising under clause 10, his rights under clause 4.1 would remain undiminished in scope. EMG and BY contend for (1). R contends for (2).
43. As I have said (paragraph 22) the learned judge below considered that this issue turned upon the construction of clause 10. I think the judge was right to approach the matter in that way. Much intellectual energy has been spent in the case upon the question whether the combination of clauses 3.1 of OA88 and clause 2 of OA92 have effect so that R's option rights cover 3.498% of EMG's shareholding simpliciter - under OA92 38,085 shares: or whether these provisions simply meant that the option covered whatever number of shares EMG owned from time to time. In short, as it has been put in the course the argument, does the option agreement stipulate for a percentage or numerical basis for the calculation R's option rights?
44. As between these rival contentions, I for my part have little difficulty in accepting the numerical basis, as contended for by Mr Ashton. That is the natural effect of the language of OA88 clause 3.1, with which OA92 clause 2 is perfectly consistent. I acknowledge that OA92 might have expressed the option simply in terms of the numbers referred to at the end of the clause 2, that is 38,085 (EMG) and 5,776 (HG). However, the drafting of clause 2 of OA92 has to be understood in the context of OA88 which preceded it. But this conclusion, that the numerical approach represents the correct construction of OA88 clause 3.1, goes no great distance. There is no inconsistency between such a construction and the proposition that a non-exercise of rights arising under clause 10 diminishes pro rata the number of shares thereafter available for the exercise of R's right under clause 4.1: the argument would be that while the option covers 38,085 shares, once there is a sale to which clause 10 potentially applies and the option is not then exercised upon the shares sold, the option has simply lapsed in respect of those shares, because clause 10 constituted the only opportunity for its exercise.
45. Thus I think that the real question is whether on the true construction of the contract R is given one potential opportunity, or two, to exercise the option. The first of these positions - that he has only one opportunity - would operate, as I have said, on the footing that once EMG sold or agreed to sell any amount of his shares, R must then and there exercise his option upon 3.498% of those shares thus sold or agreed to be sold; and if he does not, the option lapses in respect of them.
46. The judge, rejecting Mr Ashton's argument, said this (15F-17A):

"What in the end I have found to be decisive is the consideration that the parties must have contemplated the possibility that Clause 10 was at least capable of being operated in such a way as to encompass in appropriate circumstances the early exercise of the option over all of the option shares; or, to put it another way, to have envisaged that Gloyne might wish either in one stroke or cumulatively to sell all his shares. This would, however, have been impossible on Mr Ashton's construction. On that construction, even assuming that Richardson exercised his Clause 10 option on every occasion on which it was possible to do so, there would have been an irreducible rump of what I calculate to be 1,332 shares which would remain subject to the restriction of the option and not capable of being dealt with by the machinery of Clause 10. Thus, on that literal construction, the highest number of shares which Gloyne was ever free to deal with would have been the 96.502% of his total holding leaving untouched the 38,085 shares which were the subject of the option. Clause 10 would then, in the event of Gloyne wishing to sell all the shares which he was free to sell, that is to say the 96.502% of his holding, have allowed Richardson to exercise his option over 96.502% of the 38,085 option shares but no further. This seems to me a sufficiently bizarre result to justify me in rejecting the literal construction and in preferring a construction which would have enabled the whole of Gloyne's shareholding to be dealt with under Clause 10 should appropriate circumstances have arisen. In other words, Clause 10 instead of being wholly for Richardson's benefit contained an attempt to balance two potentially competing interests.

Once the assumption is made that Clause 10 had in potential contemplation the possibility of Gloyne dealing with 100% of his shareholding, it must be the case that a non-exercise of the option in that situation (at least if followed by an actual sale of the 100% shareholding) has the effect of extinguishing the option under Clause 3 and as a necessary corollary if anything less than 100% of the shareholding was being so dealt with, again if followed by an actual sale, there would be a pro rata abatement of the number of shares caught by the Clause 3 option in the event of Richardson not availing himself of the opportunity to make an early and partial exercise."

47. I accept that on Mr Ashton's construction on behalf of R, there could arise a state of affairs such that EMG would be obliged to hold back an "irreducible rump" of 1332 shares so as to fulfil R's option right under clause 4.1. (He might, I suppose, instead buy back shares on the market.) Mr Ashton himself accepts as much. As I see it, that would happen only if EMG proposed to sell all his shares and R chose to exercise his clause 10 over 3.498% of all but 38,085 of the shares. But this circumstance does not seem to me to be particularly "bizarre", to use the judge's word. Suppose clause 10 were not in the contract at all. Then if EMG desired to sell all his shareholding before the earliest of the clause 4.1 events fell in, he would likewise have to hold back 38,085 shares against R's clause 4.1 rights. On Mr Ashton's construction, the "irreducible rump" merely illustrates the need on EMG's part not to disable himself from performing his contractual obligation under clause 4.1 in due course.
48. Moreover, I do not think that the judge's observation that "even assuming that Richardson exercised his Clause 10 option on every occasion on which it was possible to do so, there would have been an irreducible rump… not capable of being dealt with by the machinery of Clause 10" was entirely accurate. As Mr Ashton submitted in reply, while it is right that at what one may call the clause 10 stage EMG could not sell (whether cumulatively or all at once) more than 96.502% of his shares to a third party, if he chose to do that he would be obliged to offer the remaining 3.498% to R (again, cumulatively or all at once); and if on every available occasion R exercised the option under clause 10, EMG would on this scenario have sold all his shares with no "irreducible rump". Thus the judge was wrong to proceed on the footing that EMG was unable in any circumstances to sell 100%. He failed, in Mr Ashton's phrase, to factor the option shares into the equation.
49. I also consider that the use of the word "cumulative" in clauses 10 is at least of some marginal significance, though the judge derived no assistance from it (17B-C). As Mr Ashton put it in his reply, suppose at the clause 10 stage EMG first sells 30%, and R does not exercise his right. Then he sells another 30%: still no exercise. After EMG has sold say 90%, as it seems to me R could then seek to exercise the option over all of it. But in that case, clause 10 cannot have effect so that the right it provides has to be exercised by R then and there upon each sale by EMG. In the course of argument Blackburne J suggested that the word "cumulative" was perhaps included so as to prevent EMG from avoiding clause 10 by selling tranches of shares each less than 25% of his holding. With respect I think that may be so; but it does not, as it seem to me, avoid the result I have sought to describe. If that is right, the potential effect of the word "cumulative" in clause 10 tends to undermine the construction of the contract whereby R is given one potential opportunity to exercise the option.
50. Standing back from these somewhat intricate considerations, it seems to me to be important that was has been described as the literal construction of the agreement favours R. Clause 2 of OA92 grants an option over 38,085 of EMG's shares. Clause 4.1 on the face of it entitles R to exercise it in the events there specified. Clause 10 entitles him to exercise it early if EMG chooses to sell early. There is nothing in 4.1 (or 4.2) or 10, or anywhere else in the contract, to provide that to the extent that R chooses not to exercise his right under clause 10, his right under clause 4.1 lapses or abates pro tanto. In my judgment, the natural reading does not allow for any such abatement.
51. For all these reasons I would hold that R's rights under clause 4.1 remained undiminished in scope by any failure or refusal on his part to exercise the right granted to him under clause 10.
52. In opening the appeal Mr Ashton relied on certain evidence given by EMG at the trial in order to demonstrate that the factual context of OA88 and OA92, and the parties' understanding at the time, contemplated the possibility that the company might enjoy a very successful future, so that there would be a flotation on favourable terms, and it was intended that R should have an opportunity to participate in the profit thus generated: hence the option, and clause 4.1 in particular. It was not the intention that this potential benefit should be reduced or abrogated by any application, or non-application, of clause 10. While I have considered the evidence to which Mr Ashton referred, it has in the result had no critical influence on the conclusion at which I have arrived.

DISPOSAL

53. Subject of course to my Lords' views as to the outcome of these various issues with which I have sought to deal, I would propose that we hear argument as to the appropriate orders to be made.

MR JUSTICE BLACKBURNE:

54. I gratefully adopt Laws LJ's recital of the relevant background events, summary of the parties' respective contentions and analysis of the issues which arise on this appeal. Like Laws LJ I shall refer to the two agreements as OA88 and OA92 and shall refer to the relevant parties as R, EMG, HG and BY.
55. I am in agreement with him on his conclusions, and the reasons for those conclusions, in respect of the first, second and third issues identified by him, namely (1) whether the option was exercised in 1996 (2) whether there was an accord and satisfaction and (3) whether there was an estoppel by convention. I also endorse his statement of the reasons for the decision taken during the course of argument to refuse to allow R to adduce further evidence in the appeal. I regret, however, that I feel unable to agree with his conclusion on the fourth issue, namely the true construction of the option agreement. In my judgment, Hart J was correct to conclude that the result of R's non-exercise in 1993 of his right under clause 10 to acquire 3.498% of the 42.2% of EMG's shareholding in Axent then to be sold coupled with EMG's subsequent sale of that 42.2% shareholding had the effect of reducing pro tanto the number of EMG's shares over which the option remained exercisable. The same applies, mutatis mutandis, in relation to HG's shareholding in Axent. I will endeavour to state, as shortly as I can, my reasons for this conclusion.
56. The issue, as Hart J rightly stated, turns on the effect of clause 10 of OA88. But clause 10 falls to be read in conjunction with clause 2 of OA92 (which confers the option and replaced clause 3 of OA88) and clauses 4.1 and 4.3 (which set out the circumstances, other than as provided in clause 10, in which the option is exercisable and the price payable) and clause 4.2 (which provides that, except as mentioned in clause 10, the option is not capable of being exercised in part only).
57. Mr Ashton characterised clauses 3 and 4 as giving rise to an option (amounting to an irrevocable offer which could not be withdrawn pending the occurrence of one of the triggering events set out in clause 4.1) and clause 10 as giving rise to a right of pre-emption or first refusal (in which the offer to sell only arises, if at all, when EMG notifies R of his intention to sell part of his shareholding). He submitted that the two were sufficiently different to give rise to independent rights with the result that the fact that the right or pre-emption under clause 10 was not exercised by R in 1993 did not affect his option right under clause 4 which still subsisted in 1996.
58. I do not accept that the option triggered by the events set out in clause 4.1 was, in any material sense, different from the option triggered by a sale or agreement to sell under clause 10. Both clause 4.1 and clause 10 are concerned with events which trigger a right in R to acquire a percentage of EMG's shareholding. In both cases the price per share acquired in exercise of the right is the same. The only differences are (1) the triggering events and (2) the fact that, under clause 10, the option may be exercised in tranches (subject to an initial threshold) dependant on EMG's share sale intention. Of the four triggering events (three set out in clause 4.1 and the other in clause 10) there was only one which was bound to occur (the arrival of 31 December 2008). The fact that, of the other three, the clause 10 event depends upon a decision by EMG to sell some or all of his shares whereas the other two are triggered by actions on the part of others does not, in my view, make the option, when triggered by one of the clause 4.1 events, different in nature from the option when triggered by a clause 10 event.
59. Once it is appreciated that the various circumstances set out in clauses 4.1 and 10 in which the option becomes exercisable are not relevantly different, it is difficult to see why the consequences of non-exercise of the option should differ according to whether the option has been triggered by a clause 4.1 event rather than by a clause 10 event.
60. It was common ground before the judge (see the judgment at page 13B-C) that if, say, EMG had agreed to sell 50% of his shares and R had exercised his right under clause 2 in respect of those shares (thereby acquiring 19047 shares), his option rights would be pro tanto satisfied so that, upon the occurrence of a triggering event under clause 4.1, he could not claim to be entitled to acquire more than 3.498% (the relevant percentage) of the remaining shares, namely a further 19048 shares. As Hart J observed (at 13D-E) any other conclusion would have opened up the possibility of R taking a greater number of shares than were subject to the clause 2 option.
61. It cannot, I think, be suggested that if, notwithstanding the occurrence of one of the triggering events under clause 4.1 (for example, the passing of 31 December 2008, the company not having gone public or been acquired prior to that date) the option is not exercised, nevertheless the option should continue to be exercisable if, at some later date (i.e. after 31 December 2008), a clause 10 triggering event should occur. The inclusion of clause 10 was intended (as is apparent from the side heading to the clause and, in any event, as Mr Ashton submitted) to provide for an early exercise of the option, that is to say, before 31 December 2008. It was not intended, in my view, to provide R with a separate right capable of surviving the lapse of the option under clause 4.1.
62. There can equally be no good reason, in my view, why, if R's option to purchase is triggered by a clause 10 event but is not exercised, nevertheless the option should continue to be exercisable on the occurrence of any one of the triggering events under clause 4.1. Much of the debate in this connection was directed to what was described as the "irreducible rump" argument. Laws LJ has referred to this in his judgment and set out the relevant passage from Hart J's judgment. The argument is premised on the footing that, under clause 10, the option is not exercisable over the shares which are the subject of the sale or agreement to sell which triggers the option with the result that under that clause EMG may not dispose of more than 96.502% of his shares. I do not accept that the premise is correct. In my view, R's option shares under clause 10 can as easily come out of the shares which EMG has sold or agreed to sell, as they can under clause 4.1 out of the shares which EMG (along with other shareholders) may have agreed to sell which , together, result in the company "being acquired", thereby constituting one of the triggering events under that clause. I see no reason, therefore, why under clause 10 EMG should not be free to dispose of all of his shares. In short I agree with Hart J's conclusion (at 16F to 17A) that:

"Once the assumption is made that clause 10 had in potential contemplation the possibility of Gloyne dealing with a hundred percent of his shareholding, it must be the case that a non-exercise of the option in that situation (at least if followed by an actual sale of the hundred percent shareholding) has the effect of extinguishing the option under clause 3 and as a necessary corollary if any thing less than a hundred percent of the shareholding was being so dealt with, again if followed by an actual sale, there would be a pro rata abatement of the number of shares caught by the clause 3 option in the event of Richardson not availing himself of the opportunity to make an early and partial exercise."

63. Mr Ashton submitted that clause 10 was a late insertion into OA1988 and was, in effect, a concession to EMG (and HG) to enable them to dispose of shares without being constrained to a sale occasioned by one of the clause 4.1 triggers. That may be so but I do not see how this bears on the true construction of the clause. Like Hart J I consider that clause 10 is to be construed without reference to whether it was intended to benefit one side rather than the other or whether, as I suspect, it was considered to be of benefit to both.
64. It is not without interest that both sides had assumed that the non-exercise of the option in 1993 meant that the option was thenceforth confined to the shares held by EMG after the 1993 disposal, until October 1996, some weeks after the letter agreement had been entered into. This was when, for the first time, R's widow having consulted her accountant, the point was taken that R's option was in respect of 3.498% of the whole of EMG's shares (so that R thereafter claimed to be entitled to acquire 38,085 shares and not just 22,018). The parties' common understanding of what they have agreed is an unsure guide to the true construction of an agreement, but where, as here, the agreement is perfectly capable of construction either way, I am all the more inclined to construe the agreement so that it to accords with what, until very late in the day, the parties believed the position to be.

LORD JUSTICE ALDOUS:

65. I have had the advantage of reading in draft the judgment of Laws LJ. I agree, for the reasons he gives, that the application to introduce new evidence be rejected; that R's option was not exercised in 1996; that there was no accord and satisfaction; that there was no estoppel. However I have come to a different conclusion as to the construction of the agreements. I can therefore confine my judgment to that issue.
66. By the agreement of 25th July 1988 (OA88) Mr Richardson (R) agreed to sell all his shares in UIS Holdings (Ltd) to Mr Gloyne (EMG) and Lady Gardiner (HG). As recorded in clause 1 of the agreement R owned 32,400 shares of which HG was to purchase 23,231 and HG the remaining 9,169. The agreement contained options in favour of R in these terms:

"3. Option in favour of AFR

3.1 EMG hereby grants AFR the option to acquire from EMG such number of shares in the Company as is equal to 3.493% of EMG's beneficial shareholding in the Company immediately following Completion pursuant to Clause 2.

3.2 HG grants AFR the option to acquire from HG such number of shares in the Company as is equal to 1.344% of HG's beneficial shareholding in the Company immediately following completion pursuant to Clause 2.

3.3 The 'Option Shares' shall mean the shares the subject of options referred to in this Clause 3."

67. Clause 4 of the agreement contains the provisions for triggering the options. In so far as it is relevant it is in these terms:

"4.1 AFR shall be entitled to exercise either or both of the options granted under clause 3 by written notice to each of EMG and HG given on or as near as possible to the last business day prior to the Company going public or being acquired or on 31st day of December 2008 whichever is the sooner against payment by AFR of $400,000 in aggregate payable to EMG and HG pro rata to the number of Option Shares the subject of each option.

4.2 Neither option shall be capable of being executed in part only save only under the provisions of Clause 10 in which case the price paid for the Option Shares and the benefits received under Clause 5.2 shall be proportionate to the number of Option Shares bought and sold."

68. Clause 5 is also important. It provides:

"5.1 Subject to clause 5.2 EMG and HG shall each transfer the appropriate number of Option Shares to AFR free from all liens charges and encumbrances forthwith upon AFR giving notice of exercise of the option.

5.2.1 AFR shall sell (or if more practicable EMG and HG shall sell on behalf of AFR) the Option Shares as soon as possible after the exercise of the option by AFR. AFR shall be entitled to receive from the sale proceeds (a) $400,000 and (b) 75% of the resultant balance of the sale proceeds (up to a cumulative maximum of $1,200,000) taking into account the provision of clause 4.2.

5.2.2 EMG and HG shall be entitled to the balance (if any) of the sale proceeds pro rata to the number of Option Shares the subject of each option."

69. OA88 was predicated on the basis that it was intended to transfer the shares of R to EMG and HG and that to protect R, in the event that the company proved to be very successful, R would receive further recompense. Thus upon the company going public or being acquired or on the termination date in December 2008, R had the option to repurchase the shares which were to be sold on with the result that if the share value increased over a certain agreed level, R would receive 75% of the increased value up to a maximum of $1,200,000.
70. As stated in clause 4.2 the option had to be executed in respect of all the shares save only under the provisions of clause 10. That clause was in this form.

"10. Early exercise of option

10.1 If EMG shall sell or agree to sell in excess of 25% of his beneficial shareholding in the Company as existing immediately following Completion pursuant to Clause 2 then AFR shall be entitled to exercise the option granted to him by EMG under Clause 3.1 in respect of such percentage of the Option Shares as is the same cumulative percentage sold or agreed to be sold by EMG.

10.2 The provisions of 10.1 above shall apply mutatis mutandis as between HG and AFR."

71. In 1992 EMG and HG were offered the opportunity of exchanging their share-holding in the company for shares in an American company. The 1988 agreement did not provide in terms for that eventuality. Any difficulty that arose was resolved by the OA 1992. It was between the same parties; it recited that EMG's beneficial holding in the company at the relevant time was 77,281 shares and that HG was and remained 30,505 shares. Accordingly the 1988 options applied to 3,113 shares. It went on to recite that EMG and HG and the other shareholders in the company were proposing to enter into a share exchange agreement with Raxco Inc under which EMG would become entitled to 1,880,775 common stock in Raxco and HG would become entitled to 429,770 common stock. It then recited that the parties had agreed that R would release the 1988 options in consideration of being granted substitute options in respect of the shareholding in Raxco Inc at the same percentage as referred to in the previous agreement. Clause 1 therefore cancelled the 1988 options and granted options upon similar terms, thereby enabling R to acquire from EMG and HG such numbers of shares in Raxco "as is equal to 3.498% (in the case of EMG) and 1.344% (in the case of HG) of their respective beneficial share-holding in Raxco Inc pursuant to completion of the said share exchange agreement schedule for 30th November 1992, that is to say 38,085 Raxco common stock in the case of EMG and 5,776 Raxco common stock in the case of HG." Clause 3 provided that the provisions of OA 1988 agreement should apply mutatis mutandis to the substitute options save for certain amendments which are not relevant to this case.
72. An event contemplated by clause 10 of OA 1988, occurred in 1993. Both EMG and HG wished to sell 42.2% of their respective share-holdings in Raxco. R was notified of the proposal and was given the opportunity to exercise his options over the shares being sold. At that time the price which was available on the sale of the shares was considerably below the price payable by R under the option and he therefore declined to exercise his options. The shares were duly sold elsewhere.
73. By 1996 EMG and HG had been issued with shares in Axent in substitute for the Raxco shares. Nothing turns on that substitution. Axent in due course did go public within the meaning of the OA 1988 as a result of begin floated on NASDAQ on 24th April 1996. That event constituted a triggering event for the exercise of the options in OA92.
74. By letter dated 26th March 1996 R purported to exercise the option and the parties proceeded on the basis that the appropriate notice had been given. Thereafter the parties set about working out the financial consequences. The assumption was that when the 42.2% of shares were sold in 1993, the number of shares remaining subject to the options had been reduced pro tanto. As Lord Justice Laws points out in his judgment, it could have been the end of the story if the agreement had not been looked at again by those advising R. Upon that advice, R contended that the option rights under clause 3 were in respect of 3.498% of the whole of EMG shareholding as it stood immediately before the 1992 agreement. Thus the dispute as to whether, upon the events that happened, the number of shares the subject of R's surviving option rights had been diminished by the amount by which those shares had been sold in 1993 or whether R's rights under clause 3 survived in full.
75. We were reminded by counsel of the need to approach construction of these agreements according to the well-known principles summarised by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society Ltd [1998] 1 WLR 896. I shall endeavour to do so.
76. Mr Ashton who appeared on behalf of R submitted that clauses 3 and 4 OA88 should be read as the options and that the right given under clause 10 was a right of pre-emption. In effect the right was similar to that acquired in Du Sautoy v Symes [1967] Ch 1146.
77. I disagree. OA 1988 contains an option which could be triggered by four events, namely the company going public, the company being taken over, or the coming of 31st December 2008 (clause 4.1) and cumulative sales by a party of over 25% of his holding (clause 10). That I believe is made clear by clause 4.2 which prevents the option being exercised in part save for the provisions of clause 10. But that conclusion does not resolve the difference between the parties which depends upon the construction of clause 10 and its effect upon clause 3 as applied by OA92.
78. Clause 10 cannot be read as enabling the party to sell all his shares prior to R being entitled to exercise the option as that would be a step which would to prevent the option being exercised. The words "sell or agree to sell" have to be read as part of the agreement as a whole. When so read, it is apparent that clause 10 was inserted into the agreement to allow the parties to sell a small part of their share-holding without triggering the option in clause 3. Thus the limit of 25% and the word "cumulative" in clause 10. Clause 10 therefore enables sales of say 10% without entitling R to exercise the clause 3 option, but upon agreeing to sell a further 16% the clause 10 trigger is operated giving R an entitlement to exercise the option. That option is stated in clause 10 to be only "in respect of such percentage of the option shares as is the same cumulative percentage sold or agreed to be sold by EMG". Thus upon a party agreeing to sell or selling shares which when added to the shares already sold or agreed to be sold exceeds 25%, R would become entitled to exercise the option in respect of the total amount of the shares that had been sold or agreed to be sold.
79. It is less clear as to what is the result, if, as happened in this case, R did not exercise the option and the parties made sales exceeding the 25% threshold. Even so, I conclude that the clause 3.1 option will in those circumstances only relate to the remaining shares covered by the clause 3 option. Thus in the case of EMG, it would only relate to 38,085 Raxco shares less the 42.2% that had been sold.
80. The intention of the parties can be obtained from the agreements read as a whole. Clause 4.2 of OA88 provides that the clause 3.1 option cannot be executed in part except under the provisions of clause 10. It is therefore envisaged that clause 10 enables the clause 3.1 option to be exercised in part and clause 10 provides for just that: "AFR shall be entitled to exercise the option … under clause 3.1 in respect of such percentage of the option shares as is the same cumulative percentage sold or agreed to be sold by EMG." The effect of exercising the option in part under clause 10 would appear to me to have the same effect as not exercising the option. Thus when the option is exercised or not exercised, the rights of R would be reduced pro tanto. Certainly there is nothing in the agreement to suggest that the parties ever considered that there should be a difference. The purpose of clause 10 was to enable EMG and HG to dispose of their shares in tranches, but at the same time recognising the need of R to benefit in any increase in value obtained by EMG and HG from the shares. Thus the option. The agreement has to be interpreted so as to reduce the number of shares covered by the clause 3 option if the option is exercised in part under claim 10. No separate consideration is given to what happens if R does not exercise the option and it would be seem logical to apply the same effect, particularly as the likelihood would be that the failure to exercise the option would have meant that the shares were less than the option price.
81. I have therefore come to the same conclusion as the judge. His conclusion was in part based on the submission that to accede to Mr Ashton's submissions would result in an irreducible rump. For my part I do not believe that guidance can be obtained from whether or not Mr Ashton's submissions resulted in irreducible rump. The contract does not indicate that the parties ever turned their minds to such a consideration. The words of the contract show a much broader approach by the parties, namely that when small quantities of shares were sold, the clause 3.1 option could be exercised in part.
82. The conclusion that I have reached means that the first thoughts of the parties as to what they had agreed was correct. That of course could not be conclusive, but is of some comfort.
83. Since writing the judgment, I have read the judgment of Blackburne J. I agree with it. I also would seek guidance from counsel as to the terms of any order that should be made.
ORDER: Appeal allowed in part; counsel to draft a minute of order. (Order does not form part of approved Judgment)