England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Murray Rosen QC
(sitting as a Deputy High Court Judge)
HC2016000078

		Royal Courts of Justice Strand, London, WC2A 2LL
		21/07/2016

LADY JUSTICE ARDEN:

ISSUE: WHEN IS A WAIVER OF SPECIFIED CONDITIONS TO COMPLETION OF PROPERTY PURCHASE PERMITTED UNDER PARTIES' JOINT VENTURE ARRANGEMENTS?

1. The active parties to this appeal are CitizenM LND St Paul's Properties B.V., ("CitizenM") and Chil Ltd ("Chil"). They are parties to a joint venture. The structure of the joint venture is a limited partnership ("the Partnership"). The active parties are the limited partners. The purpose of the joint venture is to acquire a property ("the Property") and develop it as a hotel. CitizenM contributes its expertise in developing hotels and Chil the site.
2. In their non-binding Heads of Terms ("the Heads") dating from 27 May 2011, the active parties (or their parent companies) outlined their deal. They made the purchase of the Property conditional on planning permission and appropriate consents from the transport authorities as the Property is above a railway tunnel. In these Heads, Chil in effect conceded (my word) to CitizenM that it could in its absolute discretion waive these conditions.
3. The structure of the joint venture was then negotiated. The limited partnership was agreed on and a special purpose company set up to be the general partner. This company was called CitizenM – Chil St Paul's Properties Limited ("GP"), and it was jointly owned and controlled by CitizenM and Chil.
4. On 19 July 2011 three agreements setting out the parties' final agreement were executed.
5. Under a conditional Sale and Purchase Agreement ("the SPA") dated 19 July 2011, Chil agreed to sell the Property to the Partnership, acting by GP.
6. Under a shareholders' agreement ("the SHA") GP has power on behalf of the Partnership to waive the conditions in the SPA and it has exercised or purported to exercise that power.
7. The issue very simply is whether GP can exercise its power of waiver so as to bypass the rights and obligations of the active parties under schedules 2 and 3 of the third agreement, the Limited Partnership Agreement ("the LPA") executed by all the partners on the same date. This confers powers on CitizenM and Chil to waive those conditions on terms. Those powers have not been exercised, and would be in effect pre-empted if the waiver notice is valid. We are concerned only with whether such a power is conferred by the parties' agreements and not with the further question whether, if it was so conferred, it was properly exercised. Nor are we concerned with the waiver of any other conditions in the SPA.

WHAT THE PARTIES' AGREEMENTS PROVIDE

The SPA

8. The operative clauses provided for the sale and purchase of the Property, the title to which was in part freehold and in part within a superior lease granted by the British Transport Commission. The Buyer was the Partnership, acting by GP.
9. Schedule 1 to the SPA stated that the sale was conditional on the satisfaction or waiver of Conditions Precedent, or the waiver of those Conditions Precedent by the Buyer, "which the Buyer shall be entitled to do at any time upon giving written notice to this effect to the Seller". The Conditions Precedent ("CPs") were defined in schedule 5 to the agreement, so far as relevant to include the satisfaction or waiver of "all the LPA CPs".

The LPA

10. The LPA CPs were described in the SPA as defined by the LPA signed on the same day as the SPA and made between CitizenM, Chil and GP.
11. The LPA recited that the parties had established the Partnership as a limited partnership for the purpose of acquiring, developing, letting and holding the Property. It further recited that, once the Property was developed, the Partnership would grant a lease of it to an associated company of CitizenM which would run it as a hotel with the profits being divided between Chil and CitizenM.
12. As to funding, the LPA recited that the objective of the parties was that Chil would grant a headlease to the Partnership in satisfaction of its lending obligations and that CitizenM would lend cash to the Partnership equal to Chil's net commitment. The Partnership was set up for the purpose of carrying out the parties' objective. GP was appointed general partner of the Partnership.
13. As to management of the Partnership, clause 5.1 LPA provided that:

[GP] shall have exclusive responsibility for the management and control of the business and affairs of the Partnership, and subject to the terms of this Agreement and the Shareholders' Agreement, shall have the power and authority to do all things necessary to carry out the purposes of the Partnership, and shall devote as much of its time and attention thereto as shall reasonably be required for the management of the business of the Partnership and shall operate the Partnership in accordance with this Agreement and the Shareholders' Agreement.

14. The LPA gave GP numerous more specific powers and authority, including the power to execute documents.  All these powers and authority were subject to "any relevant restrictions and provisions of the [LPA]."
15. The LPA restricted Chil and CitizenM as the limited partners from taking any part in managing the Partnership's business except where the Limited Partnerships Act 1907 ("LPA 1907") or the LPA permitted them to do so. 
16. The sanction imposed by the LPA 1907, section 6(1) on limited partners for being involved in the management of the partnership's business is unlimited liability as if he were a general partner  for the debts of the partnership during the period  of involvement.
17. Clause 16 of the LPA stated that Chil and CitizenM agreed to comply with the obligations on their parts set out in schedules 2 and 3.
18. Schedule 2 LPA provided that CitizenM would use its reasonable endeavours to satisfy "the Funding Condition," which was defined in schedule 4 as a satisfactory offer to finance the cost of the Development. This is the only place where the parties spelt out who was to ensure that the Funding Condition was met.
19. Schedule 2, paragraph 5 entitled CitizenM "to waive the Funding Condition" on certain terms. Essentially CitizenM had to put in place satisfactory intra-group funding. Chil had the express right to give or withhold its consent to this on reasonable grounds. As I see it, this was not strictly a waiver, but the grant of rights to CitizenM to alter the condition and to Chil to object.
20. Schedule 3 imposed an obligation on "the Parties" (i.e. Chil and CitizenM: see clause 16) to take all reasonable endeavours to satisfy the TfL Conditions, which meant essentially to obtain all consents and approvals reasonably required under the Superior Lease and appropriate legislation relating to the integrity and efficiency of the London underground railway which ran close by. Schedule 3, paragraph 4 provided that "if the parties agree (each in their absolute discretion) then the TfL Conditions can be waived…." But the parties would continue to be bound to use reasonable endeavours to satisfy the TfL Conditions.

The SHA

21. CitizenM, Chil and GP made a third agreement, the SHA, on 19 July 2011.
22. The SHA set out CitizenM and Chil's agreement on the internal running of GP and so it dealt with matters such as directors' and shareholders' meetings. Chil and CitizenM could appoint two "A" directors and two "B" directors respectively.
23. The significant SHA provision for the purposes of this appeal is clause 6.8. This provided that the "B" directors appointed by CitizenM

shall have absolute discretion in respect of any waiver of any conditions to the Headlease Completion and the Shareholders agree that any such waiver shall not require the approval of the Board in accordance with clauses 5 and 6.

CONSEQUENCE OF GP'S SERVICE OF THE WAIVER NOTICE

24. As explained, in this case the problem has arisen because CitizenM's directors, the "B" directors, have now given a notice ("the Waiver Notice") under clause 6.8 which exercises, or purports to exercise, the power conferred by clause 6.8 SHA in circumstances where Chil has not agreed to the waiver of the Conditions under either schedule 2 and or schedule 3 LPA.
25. Chil contends in these proceedings that the parties' agreements do not permit GP to serve a waiver notice in these circumstances and that, if it was so permitted, the power was wrongly exercised. A preliminary issue was directed to determine the validity of the Waiver Notice under the SPA, LPA and SHA.  The preliminary issue came before Mr Murray Rosen QC, sitting as a deputy Judge of the High Court of Justice, Chancery Division.  In his judgment delivered on 22 February 2016, the judge held in favour of CitizenM and it is from that judgment that Chil now appeals.

KEY REASONING OF THE JUDGE

26. Logically the first question for the judge was whether the judge could give any weight in the interpretation exercise to the concession to CitizenM in the Heads. The judge did not do so because, even if they were technically admissible as an aid to interpretation (as to which he was not satisfied), they provided little assistance because the Heads did not contain schedules 2 and 3 LPA. CitizenM challenges the judge's conclusion on this in a respondent's notice.
27. The judge concluded that the true construction of the agreement was that the "B" directors had a right to waive the Funding and TfL Conditions without compliance with the schedules to the LPA. In reaching his conclusion, the judge was influenced by a concern that, if Chil was correct that a Waiver Notice could only be served under clause 6.8 where waiver had occurred under those schedules, CitizenM would be at the mercy of failure to proceed by Chil. The judge was apparently concerned that Chil would withhold its agreement under schedule 2 or schedule 3 LPA.
28. The judge was also influenced by a potential inconsistency with the concept of limited partnership if Chil or CitizenM had the power to control when the Waiver Notice was given. The judge was "not satisfied" that there would not be a risk of involvement in management.
29. The judge concluded that the agreements were to be read together and that GP had unlimited power to act on behalf of the Partnership. Schedules 2 and 3 LPA were permissive and provided for additional methods of serving a valid Waiver Notice.

PRINCIPLES OF INTERPRETATION OF PARTIES' AGREEMENTS

30. The parties are in agreement about a number of principles of interpretation and these are so well known that I need not set them out in full. In my judgment, the most significant principles of interpretation for the purposes of the dispute are that (1) agreements should be interpreted so that some weight is given to each provision and none of the provisions is read so as to be ineffective, or "otiose", either in whole or in substance; and (2) a construction which avoids commercial absurdity is to be preferred to one which produces a commercial absurdity.

MY CONCLUSION: THE FUNDING AND TFL CONDITIONS HAVE TO BE WAIVED UNDER THE LPA BEFORE THE "B" DIRECTORS' POWER UNDER THE SHA ARISES

31. In considering this appeal, I have been greatly assisted by the written submissions of the parties and by the oral submissions made by Mr John McGhee QC, for Chil, and by Mr Simon Salzedo QC, for CitizenM, as well as by the judge's judgment. I conclude that Chil is right in its interpretation: the Funding and TfL Conditions have to be waived under the schedules to the LPA before the "B" directors' power under clause 6.8 SHA arises. The judge made points which I accept, such as his point that the powers of waiver in schedules 2 and 3 LPA are permissive. However, in concluding that clause 6.8 gave the "B" directors a separate power of waiver, he was in error.
32. In my judgment, the judge's conclusion is wrong for three reasons.
33. First, my interpretation involves the natural process of reading the agreements in sequence. The SPA involved only the Partnership, acting by the GP, and Chil as Seller and so the right to waive conditions under this agreement was given to GP. The power to give a waiver notice was one of its powers of management. However under the LPA, the GP can only exercise powers of management of the Partnership in accordance with the LPA and the SHA. The LPA includes its schedules. So the effect of clause 5.1 LPA is that GP could not exercise powers of management in conflict with the provisions of the schedules. That means that, unless schedules 2 and 3 have been operated in conformity with their provisions, GP may not serve notice of waiver. By implication any such power is excluded because it cannot co-exist with the powers that were spelt out in schedules 2 and 3 LPA.
34. Second, in relation to the Funding and TfL Conditions, clause 6.8 is a ministerial power to implement a decision taken by the active parties to waive those conditions in conformity with schedules 2 and 3 LPA. That is consistent with the chosen business structure: a limited partnership with GP, a jointly owned special purpose limited company, as general partner. This structure was only created after the Heads were agreed.
35. Third, my interpretation is reinforced by textual points. Clause 6.8 SHA confers powers on the "B" directors, and not CitizenM, which is consistent with clause 6.8 being concerned with the allocation of powers that GP had, and not the creation of some new power. Moreover, clause 6.8 refers to a decision "in respect of any waiver". This phraseology suggests that the waiver precedes the decision by GP. Finally, schedules 2 and 3 LPA are very detailed and from that one must assume that they had some purpose and were not there simply to be pre-empted by the actions of GP.
36. I conclude that as regards the Funding and TfL Conditions GP can only exercise its right to waive under clause 6.8 SHA if a waiver has already taken place under schedules 2 and 3. Therefore the Waiver Notice was invalid.
37. In reaching my conclusion I have been mindful of the submissions of CitizenM and Chil. I need not deal with any of Chil's submissions because my response to them appears in this judgment. I now turn to address the submissions of CitizenM so far as not covered above.

MY RESPONSE TO CITIZENM'S SUBMISSIONS

38. CitizenM contends that the judge was wrong not to place reliance on certain draft Heads. The Heads contain a provision giving CitizenM sole and untrammelled discretion to serve a waiver notice making the purchase of the Property unconditional. CitizenM argues that this provision was an admissible aid to interpretation under the general law and was not excluded by clause 15.2 SHA. This stated that the SPA, SHA and LPA contained the entire agreement of the parties and that there were no terms agreed between them other than those in those agreements.
39. I consider that the judge was right not to place reliance on the Heads. Even assuming (without deciding the point) that the Heads are admissible as an aid to interpretation under the general law and that clause 15.2 does not prevent the court from using the Heads as an aid to interpretation, in my judgment, the court cannot use the Heads to give some different meaning to what seems to be the plain meaning of what the parties finally agreed. This is because the terms of the joint venture changed markedly after the Heads were agreed.
40. In particular, the parties did not in the event grant CitizenM absolute discretion to serve the waiver notice under the SPA in its commercial interest, nor indeed is it a discretion solely vested in CitizenM on CitizenM's case. The parties in their finally agreed document conferred the power to serve a waiver notice on GP acting by the "B" directors. Those directors owed fiduciary duties to GP, which was jointly owned by CitizenM and Chil.
41. There were several other changes showing that the parties obviously departed from the agreement to be found in the Heads when they made their agreements in their final form. These changes included the formulation of a contractual term converting the term about financing in the Heads into the Funding Condition as a condition precedent in the LPA with the specificity to be found in schedule 2 LPA, and the introduction of the limited partnership as the vehicle for the implementation of the joint venture.
42. In short, there is nothing to indicate that at the time of the Heads the discretion given to CitizenM was to remain a feature of the joint venture.
43. CitizenM submits that schedules 2 and 3 LPA can only bind Chil and CitizenM and not GP, and that therefore GP's power is an untrammelled and independent power. It has no expressed limitation.
44. It is of course correct that GP does not have to take any action and acquires no rights under those schedules. However my answer to CitizenM's point here is that it overlooks the significance of the inclusion of those schedules in the LPA. They form part of the LPA and therefore under the terms of clause 5.1 they operate as a limitation on GP's powers of management.
45. CitizenM argues that its interpretation does not render schedules 2 and 3 otiose. CitizenM takes the situation where the "A" directors do not agree to the giving of a waiver notice when under schedules 2 and 3 such a notice should be given. If there was any doubt whether such a notice should be given, GP would be the arbiter. But that argument overlooks the fact that, if CitizenM's argument is correct and that is the vice to which it is directed, the power is much wider than the hole it is intended to cover. This is because under the SPA a waiver notice can be served at any time, without showing that it ought to be given under schedules 2 and 3 LPA. So CitizenM's interpretation cannot be the explanation for clause 6.8 SHA.
46. Moreover, that interpretation deprives schedules 2 and 3 of the obviously intended meaning that CitizenM and Chil should have rights and obligations under those schedules enforceable against each other. If CitizenM is right, the "B" directors could give the waiver notice immediately the agreements were signed giving no opportunity to the active parties to operate schedules 2 and 3 LPA.
47. CitizenM's only answer to this point is to say that it is highly likely that the "B" directors will simply follow what the parties want to do. But, if that were always so, the Waiver Notice would not have been served. The fact is that the power conferred on the "B" directors by clause 6.8 SHA is on CitizenM's submission capable of being exercised in a manner which is contrary to the wishes of Chil in circumstances not expressly provided for in the parties' agreements.
48. CitizenM further argues that there is no express limitation in the documents on the powers of the "B" directors or that of GP. CitizenM relies on the very general wording of the LPA giving power to the GP to manage the business to constitute its power to waive the CPs. It points out that in clause 5.4 LPA there are express restrictions on the powers of management of GP and those express restrictions do not include any arising out of schedules 2 and 3. In my judgment, the fact remains that clause 5.1 LPA for instance is subject to the provisions of the LPA and that is enough to make schedules 2 and 3 limitations also on GP's authority.
49. CitizenM further argues that the right of waiver under the SPA is conferred on the Partnership acting by GP. I agree, but the power in the SPA can be, and is, qualified by agreement between the parties in some other document.
50. CitizenM relies on the fact that the Partnership is a limited Partnership. I agree that this is a significant factor in the design of the parties' business structure. Because the Partnership was a limited Partnership governed by the LPA 1907, Chil and CitizenM could not take part in the management of the Partnership and therefore GP had to serve the waiver notice. But it would not be correct to say that CitizenM's interpretation is to be preferred because under its interpretation there is no risk of either of the limited partners taking part in the management of the Partnership's business. That risk relevantly arises from the fact that it may be the case as a matter of law (which I need not determine) that the operation of schedules 2 and 3 entail acts of management. On CitizenM's approach, however, that risk is just the same because it accepts that those schedules also give rise to powers of waiver.
51. CitizenM's argument is that its interpretation furthers the commercial purpose of the agreements which was to prevent Chil from reneging on the deal. I would accept that the power can be used for that purpose if Chil wrongly fails to do what it is required to do to operate schedules 2 and 3, but that is achieved by my interpretation. There is no commercial purpose in clause 6.8 going beyond that point on the basis of the SPA, LPA and SHA.
52. CitizenM contends that the "B" directors owed fiduciary duties to GP. I accept that submission, but it does not mean that its interpretation is correct. Nor is it enough to justify its interpretation that Chil and CitizenM should have duties to complete the project even if the CPs are waived. By then Chil will have to have transferred the Property to the Partnership so the parties' position will have been altered in a very material way by the waiver effected by GP.
53. As explained, we are not concerned with CPs other than the Funding and TfL Conditions. Mr Salzedo did not press any argument on those conditions when it was pointed out to him that there was no reason why the agreements should not deal differently with different conditions.

CONCLUSION

54. I would allow this appeal and dismiss the respondent's notice.

Lady Justice Black

55. I agree.

Lady Justice King

56. I also agree.