Mercantile Court

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
BIRMINGHAM DISTRICT REGISTRY
MERCANTILE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		03/04/2014

Mr Justice Leggatt :

1. In the judgment which I gave yesterday morning, I summarised the background, both factual and legal, to the proposed transaction by which it was contemplated that SISU would purchase from the Charity Trustees their 50 per cent interest in ACL. I will not repeat that background now, but will take it as read.
2. The negotiations which took place principally between Mr Harris on behalf of the Trustees and Ms Seppala on behalf of SISU between March and June 2012 led to an outline agreement in principle, which was recorded in the indicative term sheet dated 18 June 2012. All the terms set out in that document were agreed not to be contractually binding with the exception of the two provisions concerning costs and exclusivity.
3. The claim by the Trustees to recover various professional fees and expenses is based on the costs provision. In that provision, SISU acknowledged that the Charity would incur significant costs, fees and expenses in evaluating SISU's offer to purchase the shares and in negotiating the transaction with SISU and its advisers. It was then agreed that:

"In the event that SISU withdraws its offer to purchase the shares, or the Charity withdraws from negotiations as a result of SISU seeking a reduction in the purchase price or seeking unreasonable terms, or the Conditions Precedent cannot be met ('Aborted Transaction'), SISU agrees to underwrite and be responsible for all the Charity's reasonable costs and expenses … incurred up to the point of a transaction with Clydesdale Bank plc to a maximum of £29,000."

4. It is under that provision that the Charity Trustees make their claim in this action for costs in the maximum amount of £29,000. It is not in dispute that the Charity incurred such costs in evaluating SISU's offer and in negotiating the transaction, nor has it been disputed that those costs were reasonable. The sole issue is whether SISU is liable to pay the costs. That depends upon, in the first place, how the costs provision which I have just read is properly to be interpreted and, secondly, on the facts of what happened after the contract was made and whether, in the events which happened, a liability has arisen.
5. In interpreting the document, it is important to keep in mind, as was not always done in the course of argument and cross-examination in this case, that the task of the court when interpreting a contract is an objective task. What the parties who made the contract thought it meant or hoped it meant is not a consideration which is relevant to the court's exercise. Evidence about that is accordingly not admissible in court proceedings.
6. What the court must do is to seek to read the language as a reasonable person would understand the words who has in mind the background to the transaction and an understanding of its commercial purpose. It is important in that regard to seek to understand what is the rationale or purpose which underlies the costs provision. It seems to me that an important part of the provision is the term "Aborted Transaction", which appears in the middle of the clause. As I construe the costs provision, what was being looked at were the circumstances in which negotiations might fall through and a share purchase agreement might fail to be successfully concluded or completed.
7. In that event, the intention was, in substance, that the Charity Trustees should be entitled to recover their costs if the reason why the transaction was aborted was either that SISU had withdrawn from negotiations or that the Charity had done so as a result of SISU taking an unreasonable bargaining position or seeking a reduction in the purchase price or, thirdly, that it had become impossible for the transaction to be completed because of various matters which were outside the control of the parties. All four of the conditions precedent refer to such matters.
8. The first involved the conclusion of a transaction between Yorkshire Bank and SISU, which depended not only on SISU, but on the attitude taken by the bank. The second condition depended on favourable advice being given by the Charity's advisers, which again was outside the parties' control. The third condition depended on approval from the Charity Commission, and the fourth condition on approval of the transaction by Coventry City Council – again in each case the action of a third party which was not within the control of either of the two parties to the proposed share purchase agreement.
9. On that basis it seems to me that I need to consider the reasons why this transaction did in fact prove abortive, as everybody agrees it ultimately did, and then ask myself whether that reason or reasons falls within any of the three conditions under which the Charity Trustees are entitled to recover their costs.
10. As I explained in my judgment yesterday, the legal background to the contract is that ordinarily a party is not entitled to recover their costs from the other party incurred in the course of a negotiation which failed. There is an exception to that where the parties have made – as they have here - an express agreement which provides for the recovery of costs. But unless the Trustees can demonstrate that they fall within one of the three limbs of this express agreement, the ordinary position must prevail that they cannot recover their costs.
11. As the evidence at this trial progressed, it became increasingly clear that this transaction, by which I mean the proposed purchase of the Charity's shares on the terms or substantially the terms set out in the term sheet, effectively became aborted, probably in August 2012, and certainly well before the end of that year.
12. At the time when the term sheet was agreed, both parties were plainly contemplating, highly optimistically as it turned out, that the transaction might be completed within a very short timescale. That is apparent from the fact that the due diligence investigation was expected to last 30 days, the Exclusivity Period was a period of six weeks and the expected closing date was "as soon as possible". It is also implicit in the final sentence of the costs provision - which contemplated that further costs might be underwritten once the transaction had progressed beyond discussions with Clydesdale Bank - that it was anticipated that a transaction might be agreed between Clydesdale Bank and SISU in the near future.
13. In fact, none of those things proved to be the case. Due diligence was not completed within the 30 days, nor indeed within the Exclusivity Period. During the Exclusivity Period no negotiations, or none of any significance, took place to develop the outline agreement contained in the term sheet into something which could constitute a legally binding document.
14. It is apparent, moreover, that the due diligence which was undertaken by SISU led it to believe that the company, ACL, and hence the Charity's shareholding in ACL, was of even less value than it had previously recognised.
15. Mrs Knatchbull-Hugessen, in her witness statement, quoted a statement made by Mr Timothy Fisher, the Chief Executive Officer of the Club, on BBC Radio on 6 June 2013, referring back to the due diligence undertaken by SISU and the Club the previous year. He said:

"Now, when we started the due diligence, ie we got into the numbers and we drilled down, we realised the business was nothing short of appalling, so actually there is no real business there. Half of something very small is very, very small and if you think the football club is struggling, I will tell you ACL is likely struggling and this is the point: two turkeys don't an eagle make. We would not strap ourselves to an ailing business and that is why we have to create our own."

16. In August 2012, a number of relevant communications took place. On 7 August, Mr Knatchbull-Hugessen sent an e-mail to Laura Deering of SISU, responding to a request by SISU to extend the Exclusivity Period. In that e-mail, he said:

"The Trustees have seen no progress towards a transaction with SISU. For the transaction to move forward, you will recall, there was work needed to provide better security for any annuity stream that might be agreed. The Trustees have seen no evidence that any thought has been given to this fundamental matter. Had they had any proposal to overcome this hurdle, they would now consider an extension of the period of exclusivity. The Trustees wish to remain open to other approaches, should they be made, as there is little evidence that the period of exclusivity has been used to any effect."

17. Then on 15 August 2012, Mr Harris sent an e-mail to Ms Seppala and Ms Deering of SISU, in which he asked:

"Did you respond to Coventry City Council re the debt? What is your game plan, as any deal is looking increasingly fragile unless structure is revisited?"

18. Ms Seppala replied by asking, amongst other things, what the Trustees' issues with the structure were. In response to that, Mr Harris sent another e-mail on 16 August 2012, in which he said:

"It is also important to recognise that the Charity will not dispose of its shareholding without a bulletproof guarantee. Therefore, unless this is a 100 per cent cash transaction, the deal is unlikely to progress."

19. On the next day, the Trustees were sent an internal memorandum from Mr West, the head of Legal and Finance at Coventry City Council, to Mr Reeves, the Chief Executive. In that memorandum, it was made clear that there was opposition within the Council to any deal being done with SISU and that, in those circumstances, the Council officers had given thought to an alternative scheme. That would involve the Council buying out the loan from Yorkshire Bank to ACL and refinancing ACL.
20. It was envisaged in the communications at that time that the Charity Trustees would approach the Bank, together with the Council and ACL, to negotiate terms for redemption of the loan from the Bank. In the event, according to the evidence of Mr Knatchbull-Hugessen, which I accept, the negotiations took place between the Council, ACL and the Bank, without any participation by the Trustees. It is nevertheless apparent that the Trustees were kept informed of those negotiations and were aware that, as from late August onwards, the Council was no longer interested in seeking to come to an arrangement with SISU or to give their agreement, as would be necessary, to a purchase by SISU of the Charity's shares, and was instead seeking to pursue an alternative strategy.
21. There were two subsequent communications between Mr Harris and SISU (or the Club on SISU's behalf) in October and November 2012. In October, Mr Harris had a breakfast meeting with Ms Seppala, when she stated that SISU remained interested in acquiring the Charity's interest in ACL, but given the due diligence on ACL which SISU had obtained, she said that the figure was likely to be closer to 2 million rather than the 5.5 million figure in the indicative term sheet. Mr Harris responded that he was sure the Trustees would not be interested in such a transaction, even if the offer was in cash.
22. From that point on, he had no further direct discussion with Ms Seppala. He did, however, on 10 November 2012, receive three text messages from Mr Fisher, asking him whether he had spoken further to Ms Seppala. In the third of those messages, Mr Fisher said:

"I was clear that you would sit on the position if the price was not right. Equally, Joy is clear that although equity is worth zero, there is a price to pay. Horse trading now."

23. Mr Harris did not respond to that text message. When I asked Mr Harris about the position at that time at the end of his evidence yesterday, he confirmed that from his point of view and that of the Trustees there was at this stage no longer any reasonable prospect of a deal being done.
24. Putting those matters together, the position as I see it is that the prospect of the transaction outlined in the term sheet taking place effectively disappeared, probably by the end of August 2012. On the one hand, SISU, in the light of the due diligence, no longer wished to offer a price as high as £5.5 million for the shares. On the other hand, the Trustees were not interested in proceeding without cast-iron arrangements to ensure that the amount to be paid by way of deferred consideration was going to be received. SISU, again for their part, made no proposals and, as I infer, had no desire to make proposals to offer such arrangements. Furthermore, from the later part of August onwards, the Trustees knew that the Council was not willing to consent to a transaction with SISU and that the Council was actively pursuing an alternative arrangement for dealing with the problem of the indebtedness of ACL to the Bank.
25. The reality therefore, as I see it, is that the transaction described in the term sheet had failed by the end of August 2012. From that time on, the reality was that there was no real prospect of a deal on those terms being done and neither party had any appetite to seek to pursue any negotiations based on the term sheet to attempt to conclude such a deal.
26. I must then return to the costs provision and consider whether, in the light of those factual findings, the Charity is entitled to recover its costs.
27. The way in which the claim is advanced on behalf of the Trustees is to rely on the third limb of the costs provision, that "the Conditions Precedent cannot be met". It is said that that was so because of the fact that, in January 2013, a transaction was agreed between ACL, the Council and the Bank, and from that point on it became impossible for the first of the conditions precedent to be met.
28. An argument was made by Mr Thompson on behalf of SISU that the first condition precedent could still be met even after the transaction had been agreed between ACL, the Council and the Bank in January 2013 because, although it was no longer possible then for SISU to agree a transaction with the Bank, the condition precedent should be interpreted as referring to a transaction between SISU and whoever was the lender to ACL for the time being.
29. However creatively the words are interpreted, it is in my view impossible to interpret the reference to "Clydesdale Bank trading as Yorkshire Bank" as a reference to whoever the lender might be so that it would include the Council, which became the lender to ACL when ACL discharged the bank loan in January. In any event, it is quite clear from the findings that I have made that there was no realistic prospect by January of the transaction taking place and no possibility of the Council being willing to agree a transaction with SISU.
30. As I consider the position, however, the transaction did not fail because of the fact that the conditions precedent could not be met in January; the transaction had already failed well before that in August 2012. An argument might have been that SISU had withdrawn its offer to purchase the shares. However, that was not the way in which the case has been advanced by the Trustees, and in any event it does not seem to me accurately to describe the circumstances in which the transaction was aborted. I consider that a reasonable description is that contained in the Defence at paragraph 9 that:

"The negotiations ceased by mutual consent or acquiescence as a result of a number of irreconcilable differences."

31. Those irreconcilable differences, as I see it, were: that SISU no longer wished to offer a price of the kind set out in the indicative term sheet; the Trustees for their part did not wish to go ahead without guarantees of security for the deferred consideration, which SISU was not prepared to offer; nor, from late August onwards, were the Trustees seriously interested in pursuing the offer in the term sheet at all because they knew that the Council was not prepared to consent to it and was pursuing an alternative strategy which they supported.
32. In those circumstances, I have come to the conclusion that the transaction failed for reasons which do not fall within any of the three limbs which would entitle the Trustees to recover their costs.
33. In view of that conclusion, it is unnecessary for me to consider the interesting but difficult question as to whether, if I had found that the share purchase transaction outlined in the term sheet failed because of the impossibility of meeting the first condition precedent, it would have been a bar to recovery that the Trustees did an act to bring that situation about. On the facts, as I have found them, by the time the Trustees entered into an agreement to vary the joint venture agreement on 14 January 2013 thereby enabling the Council to conclude an agreement with Yorkshire Bank, the transaction contemplated by the term sheet had already "fallen apart" or "fallen away", to use Ms Deering's expressions this morning, long before that.
34. It follows that the criticisms made of the Trustees by SISU as to the propriety of their conduct in December and January and the arguments made about them undermining the bargain by their actions at that time are misplaced, and it is unfortunate that allegations were made in some of the pejorative terms which have been used by SISU in these proceedings. There was no warrant for those allegations.
35. I conclude, however, that in circumstances where the transaction fell apart or fell away in August 2012, effectively because neither party wished to pursue the transaction contained in the term sheet, that is not an event in which the Trustees are entitled to recover their wasted costs.