England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE LEEDS COUNTY COURT
RECORDER CAMERON
CLAIM NO. 1LS90073

		Royal Courts of Justice Strand, London, WC2A 2LL
		29/04/2013

Mr Justice Mann :

Introduction

1. This is an appeal from a decision of Mr Recorder Cameron given in the Leeds County Court on 7^th October 2012. In it he decided in favour of the claimant ("Lifeplan") in a claim on a guarantee provision in a share purchase agreement ("SPA"), and dismissed a counterclaim. He gave judgment for the claimant in the sum of £44,932.12.
2. The various issues which arose between the parties arose out of the SPA, which is an agreement dated 23^rd March 2010. Immediately before that agreement Lifeplan owned 50% of the shares in a company called Proline Botanicals Limited ("Proline"); the defendants ("the Carters") owned the other 50%. It was agreed that the latter would buy out the former and the SPA provided for that. The purchase price was £250,000 and the SPA contained the following relevant provisions:

i) Something called the "Inter-Company Balance" was defined as:

"the amount of £135,924 owed by the Company to the Seller or other members of the Seller's Group."

ii) Clause 4.6 contained a guarantee provision in respect of that sum:

"Following Completion the Buyers shall procure that:

4.6.1 the Company repays to the Seller the Inter-Company Balance by three equal instalments no later than the end of each of the first, second and fourth months following Completion…"

3. The SPA also contained various warranties by the seller, which were not particularly extensive but which indicated clearly that thought had been given to how the position of the purchaser was to be protected.
4. Proline did not pay moneys to Lifeplan in accordance with Clause 4.6.1 but it was accepted between the parties that a contra of £62,198.22, agreed on 3^rd June 2010, should be treated as reducing the sum then due. That was said to have left an aggregate of £73,725.78 due and owing at the end of the fourth month. Having failed to enforce payment of that sum via the service of statutory demands, Lifeplan started the present proceedings on 19^th April 2011 seeking the payment of the aggregate just referred to. Prior to that, on 20^th September 2010, Proline had gone into creditors' voluntary winding-up.
5. Various defences were run in the action. The defendants succeeded in reducing the amount otherwise apparently due by satisfying the Recorder that they were entitled to credit for a further contra-payment on 20^th August 2010 in the sum of just over £27,000, and the Recorder decided that the defendants were entitled to credit for a further sum of £1,720-odd which Proline was entitled to render to Lifeplan. That left a balance of £44,932.13. The Recorder dealt with a number of other defences and held that they were not good, and gave judgment for that sum (or actually that sum minus 1p).
6. In this appeal the defendants claim that his rejection of some of those defences was not justified. They appealed in part pursuant to permission granted by the trial judge, and in part pursuant to a later permission granted by Aikens LJ. The grounds of appeal encompassed grounds going to the whole of the liability, and alternative grounds going to parts of it. Approaching the matter in logical order, it is appropriate to start by considering the first class of challenges, because if the defendants are entitled to succeed in relation to those matters then the other points do not arise for determination.

Repudiation and affirmation

7. The defendants ran a repudiation point flowing from an alleged implied term. Paragraph 11 of the Re-amended Defence contained the following averment:

"11. Further, the Share Purchase Agreement contained implied terms that the Claimant would cooperate in and/or would not prevent the performance of the Agreement, in particular by depreciating the value of the goodwill thereby conveyed. Further or alternatively, the Share Purchase Agreement contained an implied term that the Claimant would not solicit the Company's customers."

The words from "in particular" to the end were added by amendment on the second day of the trial. The Lifeplan accepted a form of the first of those those implied terms but disputed the latter.

8. At paragraph 29 of his judgment the Recorder recorded that it was the case of the Carters that the disputed term fell to be implied in this case, and himself impliedly found that such a term existed in this case, relying on Trego v Hunt [1896] AC 7 at page 25. I say "impliedly found" because he does not do so in clear terms, but the terminology of his paragraph suggests that that was what he found. The position becomes clear when one gets to paragraphs 56 and 57 of the judgment, the relevant parts of which I set out below. The non-solicitation term was described by him as the "first implied term". I must confess that I would myself have had serious doubts as to whether such a term fell to be implied in this case, but the Recorder's finding that there was such a term was not challenged by Lifeplan on this appeal, so I proceed on the footing that the implication was appropriate. Nor was there a challenge to the gloss apparently put on the implication in paragraph 29 of the judgment, where the Recorder described the term as being one "preventing the solicitation of Proline's customers by Lifeplan or companies associated with Lifeplan" (my emphasis). This implication was necessary if the defendants were to be able to run the point to any effect, because the act of solicitation relied on was that of a Mr Wood when employed by a company different from Lifeplan, albeit ultimately with the same controller. Again, that was not subject to a challenge on this appeal.
9. At paragraph 40 he turned to the question of whether there was a breach of that term. At paragraph 41 he described the limits of the term:

"41. In this case the implied term not to solicit former customers is limited in time to such time as was necessary for Proline to re-establish to itself the goodwill of its customers in the light of the SPA. I have not heard any evidence dealing directly with this issue, or submissions upon it, but having regard to the pattern of orders from its customers, about which there has been some evidence, I consider that the prohibition on solicitation should have lasted for at least 6 months from the date of the SPA."

He went on to find as a fact that Mr Wood had indulged in acts of solicitation (though not all those alleged) and concluded in paragraph 46 that:

"this amounted to a breach of the non-solicitation term in the SPA…"

Again, this finding is not challenged. He also held that the acts of solicitation did not cause loss because it had not been demonstrated that, absent the solicitation, the relevant business would have gone to Proline.

10. That is the background to the Recorder's consideration of the question which he posed in a heading in his judgment immediately before paragraph 56:

"Are Mr Carter and Mrs Carter discharged from their obligations?"

The following two paragraphs are important and I will have to set them out fully:

"56. When faced with a breach of a term which amounts to a condition of a contract an innocent party may choose whether to treat the contract as continuing, so affirming the contract, or may accept the repudiation and treat himself as discharged. Once the contract has been affirmed, such affirmation is irrevocable, and the innocent party cannot change his mind.

57. In this case I consider that the first implied term was a condition of the contract: it was a matter which clearly had the capacity seriously to damage the company, the shares in which were the subject-matter of the SPA, even if, as I have explained in this judgment, I consider that it did not do so as a matter of fact. It follows that Mr Carter and Mrs Carter had the opportunity to consider themselves as so discharged from their obligations under the SPA. Although some of the evidence upon which I have based some of my decisions in relation to this matter will only have been made available to Mr Carter and Mrs Carter following disclosure during the litigation – some of which only took place at a very late stage, and even during the trial itself – nevertheless, it appears that the essential nature of the breach was known to Mr Carter and Mrs Carter prior to disclosure since it is effectively pleaded in paragraphs 14 and 15 of the Defence and Counterclaim dated 27 July 2011, albeit referred to as diversion of orders between May and September 2010 (which must mean solicitation since Mr Wood was employed by TCM, rather than Proline, between those dates, although the word "solicit" did not actually appear until the amendment on 21 February 2012). It appears therefore that Mr Carter and Mrs Carter would have been aware of the solicitation – even if they were not aware of all the evidence which might prove it – when they procured Lifeplan to make the payments due under the SPA, by means of agreed contras, on the 3 June 2010 and 20 August 2010. These agreed contras appear clearly to indicate an intention to continue to be bound by the terms of the SPA, and it therefore appears that Mr Carter and Mrs Carter therefore lost the right to consider themselves discharged from further performance of their obligations under the SPA at that stage."

11. Thus the Recorder found:

i) The non-solicitation term was a "condition" of the contract.

ii) The breach of condition gave the Carters the opportunity to consider themselves as discharged from their obligations.

iii) But they lost their opportunity to do so because they affirmed the contract.

12. The Carters dispute that affirmation. They rely on the proposition that a party cannot elect to affirm a contract unless he has knowledge of the facts giving rise to the breach and further has knowledge of his legal right to choose between the alternatives open to him (legal propositions which were accepted by Lifeplan on this appeal). They say that there was no evidence that they were aware of the solicitation at the time found by the Recorder, and he makes no reference at all to the latter requirement (of knowledge of legal rights). Lifeplan supports the finding of the judge and says that the evidence shows that the Carters knew of their legal right to choose between alternative courses by at the latest the payment of the second contra agreed on 20^th August 2010. It also takes its own point that the acceptance of a repudiation requires an act of acceptance, and that no relevant act took place here, so even if the Carters had a right to accept a repudiation, they did not exercise it. The Carters' riposte is that this is not a repudiation case. The breach of a "condition" automatically brought the contract (and therefore the guarantee) to an end; and if that is wrong then there were in fact relevant acts of acceptance of a repudiation.
13. Logically the first question which falls for decision is whether the Recorder was right to make a finding of affirmation. There is in fact a short answer to this point. The affirmation point was not pleaded and not argued at the trial, and as a result no evidence (either in the form of evidence in chief or in the form of cross-examination) was adduced in respect of it. Relevant documents may or may not have been disclosed, but if they were there was no positive reliance on them as supporting an affirmation case. In short, as Mr French (who appeared for Lifeplan) accepted the affirmation point was one of the Recorder's own devising when he was writing his judgment. For that reason alone the finding cannot stand. Affirmation is something which requires a factual basis. It is a positive case which requires pleading so that the allegedly affirming party knows it is being raised and so that evidence can be addressed to it. The absence of all those elements means that the point was not one which it was open to the Recorder to take. The appellants therefore succeed on that ground.
14. That brings one to the question of repudiation and its effect. I have already referred to the fact that the finding of the implied term and of its breach were not challenged on this appeal. Nor was there a challenge to the finding that the implied term was a "condition", and that the breach entitled the Carters to bring the contract to an end. However, what Mr French did rely on was what he said was the absence of any act of the Carters prior to judgment which accepted the repudiation, and he submitted that in the absence of such an act the contract remained in existence and the Carters could not avoid liability.
15. The response of Mr Burkitt to this case was twofold. First he said that the condition was, and was found to have been, a condition in the sense that any breach of it would automatically bring the contract to an end. Alternatively, if it was a condition in the sense that any breach of it entitled the Carters to treat the breach as a repudiation and terminate the contract, then they had done so by their Defence which, at paragraph 9, pleads as follows:

"9. The Defendants deny acting in breach of contract per paragraph 14 of the Particulars of Claim or in any other way. The Defendants will say they were discharged from their obligations under the Share Purchase Agreement as the Claimant was in repudiatory breach of the agreement. In this regard the Defendants rely on the following facts and matters."

The Defence then goes on to plead various terms and various acts of breach. Mr Burkitt relies on the 2^nd sentence of paragraph 9 as accepting the repudiation. He does so against the background of proceedings to set aside the statutory demands served on the Carters, in which they made it clear that they resisted the idea that they should have to pay anything, though he did not rely on anything in those proceedings as itself being an acceptance of a repudiation.

16. I do not consider that the Recorder should be taken to have found the non-solicitation term to have been a condition in the first of Mr Burkitt's senses. His sentence beginning "It follows…" suggests that he considered that the Carters had to perform some act, or make some sort of election, in order to have the benefit of the breach of "condition". Furthermore, I consider that it would be wrong to treat the implied term as being a condition in Mr Burkitt's first sense. If it were to be so treated, then that treatment itself would have to have been the subject of an implication. It seems to me that such an implication would fail all the standard tests for the implication of terms – business efficacy, the officious bystander test and necessity. It is therefore right to treat the finding as being one of a condition in the second of Mr Burkitt's senses. It therefore becomes necessary to consider whether paragraph 9 of the Defence does validly amount to an acceptance of what must be treated (in the light of the unappealed findings referred to above) to be a repudiation.
17. Mr French does not dispute the proposition that a defendant can accept a repudiation in pleading a Defence. His challenge to the appellants' case is based on the wording of paragraph 9 in that it says "The Defendants will say they were discharged…" – the emphasis is given by Mr French who says that such a statement of future intent in a pleading cannot amount to an acceptance of repudiation.
18. I do not consider that Mr French is right in his interpretation. An acceptance of a repudiation does not require any particular form. It is sufficient if the defendant does acts which communicate, with sufficient clarity, an intention to terminate. Even a failure to continue to perform can, in appropriate circumstances, amount to an acceptance. See generally Chitty on Contracts, 31^st Edition at paragraph 24-013. In the light of those principles Mr French's submissions require a too literal, or too linguistic, approach to paragraph 9. That paragraph, against its background of a previous refusal to pay and resistance to the statutory demand, makes plain enough that the Carters were claiming the benefits of a repudiation. They were not merely saying that at some stage in the future they would do so. The future tense should not be taken that literally. It is, in reality, a reliance, there and then in the Defence, on the repudiation, and therefore an acceptance.

The result of those determinations on this appeal

19. Those determinations mean that in this case (as a result of the unchallenged findings of the Recorder and the removal of the affirmation case) the appellants have established a repudiation and an acceptance of a repudiation. That being the case, they have a complete defence to the action. That means that the other points which were to be argued on the appeal (which were a challenge to a further £38,000 of the debt and a challenge on causation) do not arise for determination. The Carters are not liable and the appeal must succeed. The order that they pay the balance of the sums which the Recorder found due must be set aside.
20. I would therefore allow this appeal.

Lord Justice McFarlane: I agree.

Lord Justice Laws: I also agree.