England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
APPEALS (ChD)
ON APPEAL FROM Mrs Recorder McAllister Claim No. C10CL358
IN THE COUNTY COURT AT CENTRAL LONDON

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		05/12/2017

Mr Justice Birss:

1. This is an appeal from the judgment dated 3^rd May 2017 of Mrs Recorder McAllister sitting in the County Court at Central London. The claimant and the defendant are brothers and the action concerns the meaning and effect of a cross-option agreement entered into by them. The judge dismissed the claim and found for the defendant.

The circumstances

2. The parties were directors of the family business B. Frankland Ltd which was set up by their father in 1996. From 2001 they ran the business. They each held 45% of the shares with the remaining 10% held by their mother. In June 2003 they entered into a cross-option agreement. The way the agreement worked was that each brother would take out and maintain a life and critical illness insurance policy naming the other brother as beneficiary. Each policy was for £250,000. The agreement provided for options whereby if one brother died or was critically ill, call and put options could be exercised whereby the shares of the person I will call the "leaving brother" would be bought by the person I will call the "continuing brother" for the sum provided by the life policy. The options were exercisable by the leaving or continuing brother respectively, to require their sibling to purchase or sell the shares.
3. The most recent life policies were taken out in 2011. The policies had a five year term. The appellant had suffered gastro-intestinal illness over the years. He was admitted to hospital in March 2014. On 11^th April 2014 a form for an insurance claim under the policy was completed and signed on the basis that the appellant had been diagnosed with a critical illness within the terms of the policy. On 15^th April 2014 the family company ceased to trade. It is common ground that this means the agreement terminated in accordance with its terms on 15^th April 2014. On 28^th April 2014 the appellant made the claim under the policy. The claim was accepted and the policy paid out in November 2014. Of course the payment was to the respondent. The appellant purported to exercise his option to require his brother to buy the shares and pay him the £250,000. The respondent disputed the validity of the option. That is the nub of the dispute.
4. Subsequently the company was wound up. It is agreed that the appellant does not now have to pass the shares to the respondent even if the appellant is correct and the option was validly exercised. The question is who gets to keep the £250,000. There are provisions for interest but nothing turns on that.
5. The appellant argued that the right to exercise the option survived termination and was validly exercised. Alternatively even if that is not right, the law of unjust enrichment means that the respondent should pay over the money to his brother. The respondent argued that the clear words of the contract mean that the right to exercise the option did not survive termination and he was not obliged to pay the sum to the appellant. The respondent also submits that the parties' rights and obligations were entirely governed by the contract and that, if the appellant's claim in contract fails, there is no unjust enrichment.

The relevant clauses

6. The contract is entitled "Cross Option Agreement (Linked to Life Policies)". The parties are the two brothers and the company. The two brothers are defined as the Shareholders. Recitals (C) and (D) provide:

"(C) Prior to the execution of this Agreement each of the Relevant Shareholders has taken out in contemplation of this Agreement a life and critical illness policy for the benefit of the other Relevant Shareholder. In the event of a claim under either policy it is intended that the Relevant Shareholder to whom the policy proceeds are paid shall use such sum to purchase from the other Relevant Shareholder or his estate his shares in the Company.

(D) The Relevant Shareholders desire to grant to each other put and call options to be exercisable in the event of the death or critical illness of either Relevant Shareholder, upon the exercise of which the critically ill Relevant Shareholder or the personal representatives of the deceased Relevant Shareholder, as the case may be will become bound to sell and the remaining Relevant Shareholder will become bound to complete a purchase of the critically ill or deceased (as the case may be) Relevant Shareholder's shares in the Company on and subject to the terms hereinafter appearing."

7. Clause 1 contains definitions. The definition of "Life Policy" includes a policy taken out in contemplation of the agreement (as in fact occurred) and any replacement policy taken out pursuant to Clause 6.
8. Clause 2 contains the options:

"2 Put and Call Options

2.1 On the death of a Relevant Shareholder or in the event a Relevant Shareholder is diagnosed with a critical illness, the Continuing Relevant Shareholder shall have the option to purchase all (but not some only) of the option shares from the Relevant Shareholder or his PRs (as the case may be), on the exercise of which the Relevant Shareholders with the critical illness or the PRs (as the case may be) will become bound to sell and the Continuing Relevant Shareholder will become bound to complete the purchase of all of the option shares on the transfer terms.

2.2 Upon the occurrence of (a) the death of a Relevant Shareholder or a Relevant Shareholder being diagnosed with a critical illness and (b) upon payment to the Continuing Relevant Shareholder under the relevant life policy of the transfer price, the Relevant Shareholder with the critical illness, or the PRs (as the case may be shall have the option to require the Continuing Relevant Shareholder to purchase all (but not some only) of the option shares, on the exercise of which the continuing shareholder will become bound to purchase and the Relevant Shareholder with the critical illness or the PRs (as the case may be) will become bound to complete the sale of all the option shares on the transfer terms.

2.3 An Option must be exercised by notice in signed writing by or on behalf of the Relevant Shareholder or the PRs (as the case may be) served only during the Option Period, failing which it will lapse and cease to have any further effect. A notice, once given, may not be withdrawn except with the written consent of the recipient(s).

2.4 If an Option is exercised, then the remaining provisions of this Clause 2 and the provisions of Clauses 3 and 4 will apply.

2.5 The Relevant Shareholders… shall use all their reasonable endeavours to make a valid claim under the relevant life policy as soon as reasonably practical upon the death of a Relevant Shareholder or upon a Relevant Shareholder being diagnosed with a Critical Illness."

9. Clause 2.1 is therefore a call option, giving the continuing brother the option to call for the shares to be sold to him by the leaving brother (or in the event of his death, his personal representatives). The Transfer Terms are defined in clause 1 as being that the shares are bought and sold for the Transfer Price free of encumbrances; and the Transfer Price is defined in clause 1 as the sum assured under the Life Policy.
10. Clause 2.2 is the corresponding put option, giving the leaving brother (or his PRs) the option to require the continuing brother to buy the shares from him on the Transfer Terms. Note that clause 2.2 refers to two triggering events (a) and (b) which are: (a) the death (or illness) of the leaving brother and (b) the payment to the continuing brother of the sum under the policy. By contrast clause 2.1 refers only to one triggering event – the death or illness of the leaving brother. One aspect of this case is whether this distinction makes a difference.
11. The Option Period referred to in clause 2.3 is defined in clause 1. The relevant part of the definition, which applies in the case of a shareholder being critically ill, is that the period is a three month period starting from the date the benefit is paid under the relevant policy. So although clause 2.1 does not contain a provision like sub-paragraph (b) in clause 2.2, neither option can in fact be exercised until the benefit is paid under the policy.
12. Overall therefore both options provide that in the event they are exercised, the continuing brother must buy the shares by paying £250,000 to the leaving brother in the relevant circumstances, irrespective of the value of the shares.
13. Clauses 3, 4 and 5 concern interest, completion and ownership of the shares. So for example a Shareholder may not dispose of or encumber their shares during the agreement.
14. Clause 6 is concerned with the Life Policies. Clause 6.1.1 provides in effect that each Shareholder undertakes to maintain a Life Policy while he is a party to the agreement.
15. Clause 7 relates to the company and to the Shareholders' mother.
16. Clause 8 is entitled "Duration of Obligations" and provides:

"8.1 A Relevant Shareholder shall cease to be a party to this Agreement if he shall no longer hold any shares or if this Agreement shall be terminated in accordance with Clause 8.3.

8.2 Upon a Relevant Shareholder ceasing to be a party to this Agreement his obligations and rights hereunder shall cease and determine save for any provision hereof which in relation to him is expressly or by implication intended to come into force on or to continue in force after such cessation, and without prejudice to the due performance by him of all his obligations up to the date of such cessation and the remedies of any of the other parties in respect of a breach thereof.

8.3 the Agreement shall automatically terminate and be of no further effect upon the earlier of…

[…]

8.3.2 the Company enters into liquidation (whether compulsory or voluntary) or has a receiver, administrative receiver or administrator appointed or becomes insolvent or makes any voluntary arrangement with its creditor or ceases to carry on business."

17. Clause 8.2 starts with the words "upon a relevant shareholder ceasing to be a party to this agreement". It is common ground that this is satisfied in the present case in the following way. The company ceased trading and therefore clause 8.3.2 applied. As a result the shareholders ceased to be parties to the agreement because clause 8.1 provides that that will happen if the agreement is terminated under clause 8.3. So clause 8.2 applies.
18. The remaining clauses do not matter.

The judgment

19. The judge heard evidence from the parties and from their father. She noted correctly that there was no claim for rectification and that the subjective intentions of the parties were not relevant. She accurately summarised the background facts in paragraph 1 to 13 of her judgment, setting out the history and the relevant terms.
20. As the judge made clear in paragraph 19, the main issue was one of interpretation of the contract. She summarised the appellant's case in paragraph 21 as being that he had acquired an unconditional right which survives termination. The appellant argued that the two conditions set out in clause 2.2 (that is the death or illness in 2.2(a) and the payment in 2.2(b)) are incidents attached to the right but not conditions of that right. The appellant has a contingent unconditional right under the contract because the policy was taken out and paid for.
21. At paragraphs 22 -23 the judge referred to the two cases cited by the appellant to support the submission that an unconditional right acquired prior to termination can survive termination. They are Hurst v Bryk [2002] 1 AC 185 and Bank of Boston Connecticut v European Grain and Shipping [1989] AC 1056. She explained in paragraph 23 that it was not in dispute that such rights can continue, depending on the terms of the contract. As the judge said, "the question is whether those principles apply to this case". I agree with that in the sense I believe it was intended by the judge, i.e. that those cases are concerned with other circumstances but they show that it is possible for rights to survive termination. The question in this case is not whether such a thing is possible but whether this contract, as a matter of its interpretation, provides for the particular rights in issue to survive in the relevant circumstances.
22. At paragraph 24 the judge summarised the respondent's submissions. The respondent's key submission is that the agreement is clear and against the appellant. The defendant had also cited McKenzie v Duke of Devonshire (1896) AC 400 for the proposition that recitals are not relevant when there is a clear agreement. Therefore since the agreement is clear the recitals do not help. For the right to have survived termination the two conditions in clause 2.2 had to have been satisfied before the agreement had terminated, but they were not. Clause 8.2 might come into play if the option had been exercised before termination but the money not paid, but that was not this case. The purpose of the agreement was to create options and it would make no sense if the options survived termination.
23. The judge resolved these contentions in paragraph 25, as follows:

"I agree with the defendant's submissions. It seems to me that this is a clear and unambiguous agreement entered into between the parties. The Agreement creates an option for the claimant to call for the insurance moneys to be paid in return for the shares. The terms do not admit of any analysis which allows the provisions to continue beyond termination of the Agreement itself."

24. Counsel for the respondent submitted that what the judge had decided was that an option was not an unconditional right which could survive termination (within the principles set out in Hurst v Bryk and Bank of Boston) because an option depended on the choice of the party holding the option whether to exercise it or not. Whereas once a party exercised an option (before termination) they had then got an unconditional right which could survive termination – hence the submission that clause 8.2 might come into play if the option had been exercised before termination but the money not paid. I think counsel is correct that that is what the judge decided although it is not spelled out.
25. Similarly, although it is not spelled out, the judge has accepted the submission based on MacKenzie that nothing would be gained by looking at the recitals because the contract was clear.
26. Unjust enrichment was dealt with by the judge in paragraphs 27 and 28. The parties had cited Menelaou v Bank of Cyprus [2015] UKSC 66 for the applicable principles (judgment paragraph 27). The judge accepted the respondent's submission that they had no application in this case because the parties' respective rights and obligations were entirely governed by the contract (and there was no total failure of consideration). Under the contract each brother took out a policy for the benefit of the other. The recipient of the money was always the intended recipient unless an option was validly exercised.

The appeal

27. The appellant sought permission to appeal. It is submitted on his behalf that the judgment gives rise to a grave injustice because the appellant, who is critically ill and whose diagnosis led to the claim under the policy, receives nothing whereas the respondent receives a windfall which would not have resulted but for termination of the agreement.
28. The appellant submits that the clear intention of the parties can be seen in recitals (C) and (D) and that the result which has occurred is contrary to that intention. The issue is one of construction of clause 8.2 and there is nothing in that clause to indicate in what circumstances it applies and when it does not. Therefore even following MacKenzie regard can be had to the recitals and if that is done then the clause ought to be construed as wide enough to cover this case, in which the first event in clause 2.2 has taken place (the leaving brother is diagnosed with a Critical Illness) before the contract terminates. In that circumstance the second event, the payment out from the policy, should not be seen as a condition which must be satisfied before a right is recognised to exist but rather as a contingency whose fulfilment is out of the party's hands but which must be satisfied before the existing right can be exercised. The right to exercise the option is an unconditional right (albeit subject to contingencies) and survives termination under clause 8.2.
29. The appellant's case is put on three grounds: (1) that the appellant acquired a right under the contract prior to termination, (2) that under clause 8.2 that right survived termination and (3) that if this is wrong the case is one of unjust enrichment as a failure of basis (see Goff and Jones Chapter 12).
30. The submissions on behalf of the respondent supported the judge. The general principles of construction set out in Arnold v Britton [2015] AC 1619 were relied on (see paragraphs 15 to 23 of the judgment of Lord Neuberger). The respondent's case is that the words of the contract are clear and do not support the appellant. MacKenzie is also applicable.
31. Barling J gave permission to appeal on paper.

Assessment

32. I start with unjust enrichment. I agree with the judge. In this case the two parties bargained for mutual rights, benefits and obligations under an agreement. The life policies were entered into pursuant to that agreement (or in contemplation of it). There has been no total failure of consideration nor any other reason to look outside the agreement to find any source of legal obligations between the parties. If the correct construction of the agreement means that the money stays with the respondent then that is not unjust enrichment. There is no failure of basis whatever the outcome under the contract. This case has to be decided by considering the agreement.
33. In my judgment, the critical question in this case is about clause 8.2. This clause expressly contemplates that some "rights and obligations" of a shareholder cease on termination while others defined in the words after "save for …" do not. The saving provision refers to "any provision hereof which in relation to him is expressly or by implication intended to come into force on or to continue in force after such cessation".
34. The parties agree that the saving provision in clause 8.2 does not continue clause 6 after termination. In other words it is common ground that once the agreement terminated neither brother is obliged to renew a life policy. That makes sense.
35. It is also common ground that the saving words clause 8.2 do have some effect. The respondent accepts the clause would apply to keep alive the obligation to pay after termination, if the option had been exercised before termination but the money not paid. The disagreement is therefore about the scope of this clause.
36. As a matter of language I do not see anything in the words of clause 8.2 itself which explains where to draw the line between a provision which is intended to continue in force after cessation and one which is not. The option clause in paragraph 2.2 is obviously "a provision hereof" and the saving provision could apply to it. The question is whether it does or not.
37. In those circumstances it seems to me that it is appropriate to look at the recitals to the agreement. I distinguish MacKenzie on the basis that the reason Lord Halsbury LC refused to look at recitals was because the terms of the deed were clear and the purposes of the trust were set out in the paragraphs of the deed itself. In this case the scope of the relevant clause is not clear. In any event the overall purpose of a clause and a contract as a whole is something to take into account in the exercise of interpretation (Arnold v Britton paragraph 15(iii)) and in this contract an indication of the overall purpose is set out in the recitals. The recitals do not merely reflect the subjective intentions of the parties since the recitals are part of the words of the document agreed to by both of them.
38. Turning to the recitals, they firmly support the appellant's case. The point of the money paid to the continuing shareholder in the event of a successful claim under the policy was for it to be used to purchase the leaving shareholder's shares, assuming at least one brother wanted that to happen. The point of the options was that they would be exercisable in the event of death or critical illness and if they were exercised, the parties would be bound to complete the transaction. The recitals do not justify interpreting the terms of the options themselves in any manner other than the way they are drafted and it may be that that was something which concerned the judge, in which case I would agree. However in order to interpret clause 8.2 one needs to identify what the purpose of the overall transaction is. To do that one is entitled to take account of the recitals.
39. Clause 8.2 is capable of being interpreted in the appellant's favour and in my judgment, in order to fulfil the intention of the contract expressed as it is in the recitals, clause 8.2 should be interpreted that way. At least in a case in which the life policies remain in force (as here) and the relevant shareholder has died or been diagnosed as critically ill before termination (as here), the right way to read clause 8.2 is that the provisions of clause 2 should continue. I put it that way because although clause 2.1 has one triggering event and clause 2.2 has two triggering events, it seems to me that the proper interpretation of this contract is to see all of parts of clause 2 set out in clauses 2.1 to 2.5 together as a unified scheme which operates together. By clause 2.5 once the first event has taken place (death or diagnosis of critical illness) the relevant persons are required to make a claim on the policy using reasonable endeavours. That applies as much to clause 2.1 as it does to clause 2.2.
40. I agree with the appellant that part (b) of clause 2.2 should be seen as a contingency which is not within the power of the party to control but which must occur before that option can be exercised.
41. The respondent submitted that clause 2.2 could not be clearer. I agree and I think that approach to arguing the case may explain the judge's approach. To focus on clause 2.2 leads one to consider the wrong question. It may be that I have differed from the judge because of the different way in which the appellant's argument was put before me, focussing on clause 8.2. I do not agree with the statement in paragraph 25 of the judgment that the terms of the contract do not admit of an analysis which allows provisions to continue beyond termination. Even the respondent accepts that clause 8.2 does provide for some provisions to continue. That does not of itself mean that the appellant must win but it does mean that there is a question to answer whether the relevant provisions continue or not.
42. The respondent also submitted that a right only comes into existence under clause 2.2 on the occurrence of the two conditions. The argument is in effect that an option is not a right. I have difficulty with that submission for two reasons. The first reason is linguistic. As a matter of language an option is a kind of right. It is a different kind of right from the right one has after an option has been exercised but that does not mean they are not both forms of right. In any case as a matter of language I agree with the appellant that clause 2.2 does provide each shareholder with a right. It is a right to exercise an option in the event certain things happen. The fact the party with the option is not obliged to exercise it, does not mean it is not a right.
43. A different point, also made by the respondent, is that whatever the nature of any right created by the option clause might be, it is not an unconditional right (cf Bank of Boston) and so cannot survive termination. That solves the linguistic problem but it founders on my second reason, which is the real difficulty I have with the respondent's submission. The answer to the problem in this case is not to be found in the authorities, it has to be found in the true interpretation of the contract. Whether or not an "option" is an "unconditional right" (or a "right" at all) only matters if that categorisation assists in answering the question about the true construction of clause 8.2. I do not believe it does.
44. The respondent also asked rhetorically what would happen if the shares were encumbered. I do not see why that assists. The shares have to be transferred unencumbered but that does not present any difficulty. Moreover in this case the parties have accepted that no actual transfer is necessary.
45. So I will allow the appeal.