England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT
(HIS HONOUR JUDGE COWELL)

		Royal Courts of Justice Strand London, WC2
		12th December 2002

1. LORD JUSTICE BROOKE: I invite Lord Justice Tuckey to give the first judgment.
2. LORD JUSTICE TUCKEY: This is an appeal (with the permission of Simon Brown LJ) by the claimant, Denware Ltd, from a judgment of His Honour Judge Cowell given in the Central London County Court on 26th February 2002 in which he dismissed its claim. The claim was for £32,809 said to be due under two agreements made in connection with the purchase by the defendant, Rosewild Ltd, from Denware of the entire share capital of a third company, Handella Ltd.
3. Prior to 31st January 1998 Handella, wholly-owned by Denware, was trading as a Benetton concessionaire from 522 Oxford Street, London W1, which it held on a lease on favourable terms. Denware and Rosewild were to agree that this lease was worth £285,000. Rosewild were also in the clothing business and wished to acquire the lease. Assignment was not possible because the favourable terms would be lost. So it was agreed that Rosewild would acquire the share capital of Handella so that Handella could then trade from the premises under Rosewild's control.
4. On 30th January 1998 the parties entered into a sale and purchase agreement drawn up by their solicitors. The intention was that in addition to the agreed value of the lease, Rosewild would pay the value of the company's net assets. The price to be paid for the shares was defined as the "Initial Consideration" (£1) plus the "Adjusted Net Asset Value". The latter was defined as:

"the value of the net assets (including but not limited to the Leasehold Property) of the Company as at 31 January 1998 as set out in the Completion Statement;"

5. Handella's accountants, Chantry Vellacott, were to be retained to audit its accounts and deal with its tax position up to 31st January 1998 and to prepare the completion statement within 120 days. The completion statement was to be audited, certified and delivered to Rosewild. Clause 8.3 of the agreement said:

"The determination of the Adjusted Net Asset Value ... as stated in the Completion Statement shall be final and binding on the Purchaser and the Vendor in the absence of manifest error."

The agreement required Rosewild to pay £275,000 into an escrow account on 3rd February 1998. The balance, if any, of the adjusted net asset value was to be paid after production of the completion statement.

6. I have summarised the essence of the agreement, but the transaction was complicated by two features. The first is that Denware had made substantial loans to Handella which were to be written off to the extent that its balance sheet as at 31st January 1998 would show that it had no or nominal value. This however was not to affect what Rosewild would pay for the shares. The second is that by a side letter, also dated 30th January 1998, the parties agreed that the completion statement would give Rosewild credit for £10,000 in consideration for Rosewild agreeing not to make any claim for outstanding service charges which Handella might have to pay. This explains why Rosewild was initially required to pay £275,000 rather than £285,000. At trial it appeared that the £10,000 credit had not been given to Rosewild, but Rosewild have since accepted that it had been and so there is no need to mention this point further.
7. The sale and purchase agreement was completed on 3rd February 1998 from, or shortly after, which date Rosewild through Handella traded from the premises as The Vestry. Unknown to the parties at the time, the fact that the shop ceased trading as a Benetton concession, as the judge found at 12 noon on 31st January 1998, entitled Handella to a corporation tax refund. Chantry Vellacott produced a certified completion statement on 22nd May 1998 which showed that the adjusted net asset value of Handella at 31st January 1998 was £378,711. So taking account of the £275,000 already paid by Rosewild, a further £103,711 then became payable.
8. The accompanying completion balance sheet showed that the assets at 31st January 1998 included trade and other debtors, VAT recoverable, prepayments and cash, but also £32,809 shown as "Corporation Tax Recoverable (inc interest)". When he received the certificate and balance sheet, Mr Vazanias, Rosewild's managing director, disputed the inclusion of "Corporation Tax Recoverable" in the asset calculation. He telephoned Denware's director, Mr Tanner, about this, as a result of which Mr Tanner wrote a letter to him on 10th June 1998 saying:

"I refer to our telephone conversation earlier today and would confirm the following-

1. The completion statement prepared by Chantry Vellacott is agreed.

2. Arrangements have been made to remit a further sum of £70,902 to the Escrow account [and then details of where that was are given].

3. The Escrow account is to be closed and the capital sums of £275,000 and £70,902 together with interest on the account [be] paid to Denware.

4. The further amount of £32,809 will be paid to Denware Limited upon agreement by the Inland Revenue of the tax computations of Handella Limited to 31st January 1998 and repayment of corporation tax recoverable based thereon has been received."

9. There was a further term in the letter which it is not necessary to mention, but the letter concluded by saying:

"Please signify your agreement to the above by signing and returning a copy of this letter by fax."

That is what Mr Vazanias did, signing under the words "agreed for and on behalf of Rosewild Limited". Rosewild subsequently paid the £70,902 in accordance with the terms of this letter.

10. In due course Mr Vazanias completed documentation on behalf of Handella to claim the refund of corporation tax, and between February and May 2000 the Inland Revenue refunded a total of £31,534.10 to Handella. When Denware then claimed the £32,809 Mr Vazanias said that by the time Handella received the refunds it was insolvent, and so he could not procure it to pay over the amounts that it had received to Denware, and that Rosewild had no liability to pay because it had not itself received any refund. These proceedings followed.
11. The judge dismissed the claim for a number of cumulative reasons. First, he said that it was perfectly clear that the parties did not contemplate that the tax refund was an asset of Handella at the time of the sale and purchase agreement, and that it was not an asset within the meaning of this agreement. There was therefore a manifest error in the completion statement. This meant that there was no consideration for the agreement to pay £32,809 contained in the letter.
12. However, the judge went on to consider the conflicting evidence which he had heard from Mr Tanner and Mr Vazanias about what had been said in the telephone conversation which preceded that letter. He accepted Mr Vazanias' evidence that he had not agreed the completion statement or that Rosewild would pay £32,089 when the refund was made. Mr Vazanias had only agreed to pay over to Denware anything which Rosewild itself received by way of refund. Mr Vazanias had signed the letter (I quote from what the judge said):

"because, as he understood it, in some way his signature was needed if anything was to be recovered from the Inland Revenue ..."

13. Denware challenged each of the judge's reasons on this appeal. The first issue therefore is whether the judge was right to conclude that the tax refund was not a net asset of Handella at 31st January 1998. The judge was right to say that the parties did not contemplate that a tax refund would form part of the assets of the company, because both Mr Tanner and Mr Vazanias were unaware of Handella's entitlement to any such refund. But such ignorance is not determinative. The judge attached importance to the fact that the refund was "generated too late" and not "the kind of asset pound for pound available to Rosewild to receive and for which it would pay." In support of this view he relied on a warranty given by Denware in the sale and purchase agreement that the amounts due from debtors would be recoverable within 12 weeks.
14. But all this depends upon the terms of the agreement. This obliged Rosewild to pay for net assets without limitation. If the tax refund was an asset of Handella at 31st January 1998, the fact that its value was unquantified or that it might be difficult to realise does not matter. I think recoverable tax was just as much an asset of Handella as recoverable VAT. It became an asset of Handella when the shop stopped trading as a Benetton concession on 31st January 1998, at which time the right to recovery accrued so it was an asset within the definition of the agreement.
15. In her clear, helpful and, may I say, valiant submissions to support the judge's conclusion, Miss Kennedy-McGregor submitted that the judge was right to rely on the warranty. This says:

"The amounts now due from debtors will be recoverable in full in the ordinary course of business, and in any event not later than twelve weeks from the date of this Agreement."

As a matter of construction it seems to me that this is referring to trade debtors. The words "now due" and "in the ordinary course of business" support this construction. But more importantly, this warranty cannot be used to restrict or alter the unqualified meaning of "asset" in the main part of the agreement. Warranties are the machinery by which purchasers in contracts such as this obtain relief from the primary obligations in the agreement. They are not intended to alter those primary obligations.

16. But even if I am wrong about this, the tax refund was shown by the accountants as an asset in their completion statement. That statement was final and binding on Rosewild in the absence of manifest error. The fact that Mr Vazanias did not agree this part of the statement is not to the point. He did not have to. It was binding on Rosewild. All the judge said about this was:

"I reject the argument that the inclusion of this item was not a manifest error within the meaning of clause 8.3. It simply did not fit the mechanics of the agreement. I have in mind the provision about payment within twelve weeks."

With respect, I think he was wrong about this, although I suspect he might not have reached this conclusion if he had not been so certain about whether the refund was an asset for the purposes of the agreement. If, as I think, the £32,809 was due under the sale and purchase agreement, it was due under that agreement upon receipt of the completion statement.

17. If the letter of 10th June was of contractual effect, it deferred the time for payment until the receipt of the refund. If it was not of contractual effect, Rosewild was liable to pay the money much earlier. On this analysis it is unnecessary, except perhaps for the purpose of calculating interest, to consider whether the judge's conclusions about the letter were right. But I am afraid I do not think they were. First, if the £32,809 was due under the sale and purchase agreement, Denware obviously gave consideration for the variation contained in the letter which allowed Rosewild to pay after receipt of the refund. But Mr Hubbard, for Denware, says that in any event there was consideration for the agreement contained in the letter, because it compromised a dispute between the parties as to whether £32,089 should be included in what Rosewild had to pay and when it should be paid. I think he is right about this, but in the event it is not necessary to elaborate on this conclusion.
18. Turning to the agreement contained in the letter. The judge seems to have focused almost entirely on what may or may not have been said in the telephone conversation which preceded it. The letter purports to confirm that conversation, but the judge seems to have overlooked the fact that the letter itself is an agreement. Mr Vazanias was asked to signify his agreement to its terms on behalf of Rosewild by signing and returning a copy of it, which he did under the words "agreed for and on behalf of Rosewild". This agreement therefore superseded whatever may or may not have been agreed on the telephone or (as Mr Hubbard put it) the letter constituted an offer which, by signing and returning it in this way, Rosewild accepted. The judge does not refer to this at all.
19. The oral evidence which Mr Vazanias gave about his understanding of what he was agreeing to flatly contradicts the terms of the letter. It is a well-established principle of contract law that if the parties reduce their agreement to writing, oral evidence is not admissible to contradict it. This is exactly what Mr Vazanias sought to do. The judge should I think have held that Rosewild was bound by the clear terms of the letter which Mr Vazanias signed.
20. This letter varied the terms of the sale and purchase agreement in two respects. First, by paragraphs 2 and 3 it varied the mechanism set out in paragraph 9.3 of the sale and purchase agreement, whereby the price payable for the shares would be held in escrow until the completion statement had been prepared and the balance (if any) due under it had been paid into that account, at which point it would be paid to Denware and Rosewild would have no further liability. Second, by paragraph 4 it deferred the time for payment of the balance.
21. Miss Kennedy-McGregor submits that clause 4 is ambiguous. It does not say by whom the tax recoverable has to be received in order to trigger the obligation to pay. Mr Vazanias' evidence that receipt by Rosewild was agreed was therefore admissible to resolve this ambiguity. I disagree. The tax refund was due to Handella and Handella alone, although it could authorise its payment to someone else. The parties must have intended that receipt meant receipt by Handella or its authorised payee.
22. Miss Kennedy-McGregor also submitted (possibly at the prompting of Sedley LJ) that the liability was only to pay the actual amount refunded. Rosewild's case was not put on this basis at trial and as a matter of construction I think it is wrong. The words "32,809 will be paid to Denware" are clear. The rest of the paragraph is to do with timing. This is consistent with Rosewild's agreement of the completion statement which required that amount and that amount only to be paid, and businessmen's need for certainty. The refund might be more or less, but this was the accountant's best estimate which they were prepared to certify and Rosewild would want to know where it stood. In the event the estimate proved to be very accurate.
23. For these reasons I would allow this appeal and give judgment for Denware for £32,809 plus interest, which I hope the parties will be able to agree.
24. LORD JUSTICE SEDLEY: The elegant submissions of Miss Kennedy-McGregor in defence of the judgment she secured below may go a long way towards explaining how she secured it. But neither advocacy nor, certainly, parol evidence can undo what is plain on the face of the documents, which Mr Vazanias adopted with open eyes.
25. For reasons which Lord Justice Tuckey has fully explained, but apart from the immaterial question of what paragraph 4 of the letter means, I agree that this appeal has to succeed.
26. LORD JUSTICE BROOKE: I agree with the judgment of Lord Justice Tuckey.

ORDER: Appeal allowed with costs here and below; permission to appeal to the House of Lords refused.

(Order not part of approved judgment)

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