ON APPEAL FROM THE HIGH COURT OF JUSTICE
John Randall QC
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE STANLEY BURNTON
LORD JUSTICE PATTEN
| CREAM HOLDINGS LIMITED
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Mr Robin Hollington QC and Mr Sebastian Prentis (instructed by Marriott Harrison Solicitors) for the Respondent
Hearing date : 27th October 2011
Crown Copyright ©
Lord Justice Patten :
"In these Articles the term "Fair Value" shall mean the price per Share as agreed by the Board and the Transferor or failing such agreement as determined by the Third Party Accountant and certified in writing by the Third Party Accountant as being the price which, in their opinion, represents a fair value for such Share as between a willing vendor and purchaser of the same as at the date the Transfer Notice is given or is deemed to have been given in respect of such Share. When giving such certificate, the Third Party Accountant shall not take into account whether the Shares concerned comprise the majority or a minority interest in the share capital of the company, nor the fact that the right to transfer such Shares is restricted by these Articles and shall assume that the entire issued share capital of the Company is being sold. However, in so certifying the Third Party Accountant shall take into account such other facts as they, in their absolute discretion, shall consider appropriate including, if they so consider appropriate, the past and current performance of the Group and the apparent future prospects of the Group. The Third Party Accountant shall act as experts and not as arbitrators and, in the absence of manifest error, their decision shall be final and binding on the Company and its members. The costs of the Third Party Accountant in certifying the Fair Value shall be borne as the Third Party Accountant determines."
"… an independent firm of accountants chosen by the Transferor and the Board or failing agreement on such appointment within 7 days as chosen by the President from time to time of the Institute of Chartered Accountants."
"We are willing to accept any of the following firms to act in the role of third party accountant:
Pannell Kerr Foster BDO Stoy Hayward
We trust that on appointment of the third party accountant, we will be given the opportunity to present our views on the basis of valuation and draw to their attention the inherent value in the Intellectual Property Rights and Brand of the Cream name".
"34. In my judgment, the substantial difficulty for the Company on this point is that its construction produces consequences so surprising that it must be doubtful whether they can have been within the contemplation of the parties. The TPA's role is to produce an expert valuation of shares held in the Company by the person who is liable to be compelled to offer his shares for sale at that valuation to those who remain. The TPA also has power to decide who should bear the costs of the exercise. The firm of accountants appointed would also lay down the terms, such as limitation of liability, on which it would be prepared to act.
35. In those circumstances it would be very surprising if a firm of accountants could become the TPA solely as a result of nomination by the parties and without any agreement by both parties and the firm on the terms of engagement as the TPA. The constituting of the TPA, whether characterised in the Articles as being "chosen" or as "agreement on such appointment", is more realistically analysed as a process than as an event, such as nomination. In my judgment, the TPA process is not complete unless and until all parties and the accountants have reached an agreement on the TPA's terms of engagement. The Company and the shareholders may reach an agreement among themselves on the firm of accountants to be approached. But the selected or nominated firm may decline to act for a variety of reasons. Until a firm is found which agrees to act as the TPA there is no TPA. No firm is likely to agree to make a joint valuation without the agreement of both sides on the terms of engagement. The firm which agrees to act on the instructions of one of the parties would not be acting as the TPA.
36. Article 2.1 provides for what is to happen "failing agreement on such appointment". In my view, this pivotal provision must be read in the context of the earlier reference to being "chosen" and the later reference to "as chosen" by the President. In other words the provision should be construed as a whole, not word by word or in parts. Agreement between all concerned on the terms of the appointment is what is required. In my judgment, the selection of an agreed name from a list of 3 named firms would not in itself be sufficient to constitute the TPA. Mr Davenport did no more than indicate his willingness to accept any of 3 different firms acting in the role of TPA. That was insufficient to constitute agreement on an appointment. It was not an offer which was capable of acceptance so as to create a contract for an appointment between Mr Davenport and the TPA. There was no agreement between Mr Davenport and the Board or between him and BDO to their terms of engagement. BDO were not therefore the TPA."
(i) a requirement that he should contribute to an advanced payment of Mr Whitaker's fees;
(ii) the imposition of a cap on liability of £500,000; and
(iii) a restriction on his freedom to disclose the valuation report.
"(a) Within 10 working days of the Expert Accountant accepting the Terms of Reference, the Seller shall provide to the Expert Accountant and to the Purchaser a list of the further documents which the Seller says he does not currently have and which he reasonably requires in order to be able properly to make submissions to the Expert Accountant for the purposes of his determination of the value of the Seller's shareholding, together with such written submissions as to why such documents are so required.
(b) Within 10 working days after receipt by it of such list and submissions, the Purchaser shall provide to the Expert Accountant and to the Seller its written response.
(c) The Expert Accountant shall within 10 working days after receipt by him of such response, determine whether and if so what further documents are to be disclosed; and if so by when.
(d) In any event, the Expert Accountant shall by the same date provide to the Parties the timetable for the subsequent conduct of the valuation.
(e) The Parties shall each make a 'written submission' ("the First Submission") on the Valuation to the Expert Accountant within such period as the Expert Accountant shall direct under paragraph (d). The Parties shall each be entitled to provide such evidence in their written submissions to the Expert Accountant as they each consider relevant to the determination. The First Submission from each party shall set out a reasoned valuation of the Shareholding including the information and evidence on which the Party relies in support of its view on the particular matter.
(f) Immediately following receipt of the later of the two written initial submissions the Expert Accountant shall send one copy of the other Party's written submission to each.
(g) The Parties shall each be entitled to make written comments ("the Second Submission") to the Expert Accountant on the written submission of the other Party, such written comments to be made as soon as reasonably practicable and in any event not later than 2 weeks from the date of receipt of the copy of the other Party's written submission. Immediately following receipt of the later of the two written comments the Expert Accountant shall send one copy of the other Party's written comments to each.
(h) The Parties shall each be entitled to make further written comments on the Second Submission ("the Third Submission") to the Expert Accountant on the Second Submission of the other Party, such written comments to be made as soon as reasonably practicable and in any event not later than 2 weeks from the date of receipt of the copy of the other Party's Second Submission. Immediately following receipt of the later of the two Third Submission comments the Expert Accountants shall send one copy of the other Party's written comments to each, for information only.
(i) The Parties shall each supply to the Expert Accountant three copies of each Submission provided under paragraphs (e) to (h) above, and of any information, documentation or working papers obtained from third parties and any written submissions thereon under paragraph (j) below.
(j) The Seller and Purchaser shall each provide the Expert Accountant with all information and assistance as the Expert Accountant reasonably requires. For the avoidance of doubt, the Expert Accountant shall be entitled at his absolute discretion to request written clarification of any matters contained within the written material received from either of the parties, which the recipient shall supply within five working days of the Expert Accountant's request. The Expert Accountant will address such requests to the Seller and the Purchaser simultaneously copying to each party requests made to the other party. For the avoidance of doubt and for use solely within the valuation exercise, the Expert Accountant shall provide to each Party copies of all documents disclosed by the other Party to the Expert Accountant; and to that end documents disclosed to the Expert Accountant shall be provided, if not electronically, then in duplicate.
(k) Having received the Third Submissions the Expert Accountant will have a period of 3 weeks to raise matters and meet with one or more of the Parties, together or otherwise or not at all, before finalising his determination and issuance on the conditions referred to in the engagement letter.
(l) The Expert Accountant reserves the right to refuse to accept any information other than that provided under these Terms of Reference."
(i) that the appointment of Mr Whitaker was effective by virtue of the President's nomination coupled with the issuing of terms of engagement provided they were neither contradictory nor irrational;
(ii) that it was an implied term of the Articles that terms of engagement issued by a TPA nominated by the President would be binding on the parties unless unreasonable;
(iii) that the Articles should be read as containing implied terms that the transferor would co-operate in doing everything reasonably necessary to procure the appointment of Mr Whitaker as the TPA and would not unreasonably refuse to agree the terms of engagement if reasonable; and
(iv) that if, contrary to submissions (i)-(iii), Mr Davenport was entitled to veto the appointment by refusing to agree the terms of engagement then the court should substitute its own machinery for that of Article 11.14 by carrying out the valuation exercise itself.
"118. Mr Tregear realistically accepts, as his client had already done in correspondence, that one would expect a reputable accountant accepting such an engagement to require some sort of cap. In my judgment, it is inherent in any such appointment as these articles contemplate, that some figure for such a cap is going to have to be determined before the transferor's case on value et cetera is fully refined. I do not accept that Mr Davenport is in an impossible position in this regard, a fortiori since he has not even come out and so asserted in his witness statement. He has given no reasoned basis for why £500,000 is an unacceptable (presumably inadequate) figure, nor any reasoned basis in support of some other figure, because he has not put one forward. In these circumstances I accept Mr Hollington's submission that in this regard Mr Davenport is withholding his consent to an appointment unreasonably. "
"You agree that, otherwise than with our prior written consent, such consent not to be unreasonably withheld, any advice, opinions, and statements, reports and other information that we provide in connection with the services (in whatever form or medium) or any document or statement which bears our name, (other than financial statements in the form in which they have been reported on by ourselves as auditors):
(a) will be held in strict confidence by you, your officers and employees and others engaged by you;
(b) will not be disclosed to any third party; and
(c) will not be used for any purpose except as provided for in this letter."
"This is a point which I would very much prefer to see resolved consensually. Given the approach which the parties have invited me to take for today's purposes, what, at this stage, I will rule is that were PKF/Mr Whitaker to modify General Term and Condition 6.2 for the purposes of this appointment, so as to add the words "(such consent not to be unreasonably withheld)" immediately after the reference to possible consent in 6.2, then there would then, in my judgment, clearly be no reasonable ground in relation to this condition for Mr Davenport to withhold his consent. "
"That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."
"54. It is to the first two parts of the stage 3 argument that I must turn, because Mr Tregear realistically accepts that if the claimant can establish its case on the first two there is no answer to the third. As I earlier summarised, the claimant contends for two implied terms, albeit covering similar ground here: firstly, a positive obligation to co-operate, often referred to by the name of the leading case Mackay v Dick, which supports the passages in Chitty which I have cited; secondly, an implied term that the transferor should not unreasonably withhold his consent to the appointment, or the relevant terms of engagement for an appointment, of the third party accountant. I have already dealt with the relevant legal principles.
55. Mr Hollington points out that in the earlier case, Mr Tregear expressly acknowledged in his submissions to the Court of Appeal that firstly:
"The approach in this case will probably be to ask the court to declare that there are certain implied terms so that in making machinery work the transferor or the company are under an implied obligation to co-operate in the agreement of reasonable terms for the appointment of a valuer";
"It can either be not unreasonably to withhold consent or positively to act in such a way to bring about an appointment on reasonable terms";
and thirdly (both to Ms Prevezer -see her judgment at paragraph 51 - and the Court of Appeal) that there would be an implied obligation not unreasonably to withhold consent.
56. Before me, in the changed forensic context, Mr Tregear submitted, first, that to imply the Mackay v Dick implied term on these facts would be to subvert the principle that an agreement to agree is not binding in English law; and second, that applying these implied terms and, in particular, the Mackay v Dick one, was going to be difficult and give rise to all sorts of problems on the facts, a submission which he developed by reference to three examples. He elegantly sought to draw the forensic sting from what he himself had submitted in the previous action by referring to his own submissions as "thinking aloud".
57. I prefer the submissions Mr Tregear made in the previous proceedings to those which he made to me. There is no inconsistency, in my judgment, between the rule as to agreements to agree and implying either of these suggested implied terms. There is no essential term in the articles left to be negotiated and the subject of subsequent agreement. Some practical difficulties will remain in their working out, but that, as was stated by Slade LJ in Tett v Phoenix, is no sufficient objection to them.
58. The ut res magis valeat quam pereat principle is important. These implied terms are, in my judgment, necessary to imply, and do represent the minimum machinery necessary to make these articles work. I share the view expressed in the form of a question by Wilson LJ during the hearing in the Court of Appeal in the earlier action:
"Clearly neither party unreasonably to withhold consent to proposals as to the terms of an appointment put by the other."
59. Whether or not the learned Lord Justice intended that to be a statement or a question, in any event it accurately reflects my view and judgment. I am satisfied that the implication of these two terms does give effect to the parties' (i.e. here the shareholders') reasonable expectations, objectively determined.
60. The implied term which the Privy Council (Australia) was willing to find, albeit in a somewhat different factual context, in Queensland Electricity Generating Board v New Hope Collieries Pty Ltd  1 Lloyd's Rep 205 at 210 per Sir Robin Cooke, does support Mr Hollington's submissions; its applicability is not negated by the different facts of that case.
61. As I have mentioned, these two terms do cover much the same ground. As the positive obligation is to co-operate, in seeking to establish breaches Mr Hollington would not be limited to the merits of individual points taken by the defendant as to the proposed terms of engagement of Mr Whitaker. As to the other suggested implied term, the burden would clearly lie on Mr Hollington to establish that consent was being unreasonably withheld; it would not be for Mr Davenport to prove that he was acting reasonably in withholding consent. I find for both these suggested implied terms."
Lord Justice Stanley Burnton :
Lord Justice Mummery :