Sentinel International Ltd v. Cordes (The Bahamas)  UKPC 60 (08 December 2008)
Privy Council Appeals No 34 and 54 of 2007
Sentinel International Limited Appellant
Robert E. Cordes Respondent
Robert E. Cordes Appellant
Sentinel International Limited Respondent
THE COURT OF APPEAL OF
- - - - - - - - - - - - - - - - -
JUDGMENT OF THE LORDS OF THE JUDICIAL
COMMITTEE OF THE PRIVY COUNCIL
Delivered the 8th December 2008
- - - - - - - - - - - - - - - - -
Present at the hearing:-
Lord Scott of Foscote
Lord Walker of Gestingthorpe
Lord Neuberger of Abbotsbury
Sir Jonathan Parker
- - - - - - - - - - - - - - - -
[Delivered by Lord Walker of Gestingthorpe]
The issues in outline
The facts: down to 11 April 2000
"3. Completion of the purchase and the sale of the MASCO Shares shall take place in the City of Freeport, Grand Bahama on or before the 31st day of March, AD 2000 (hereinafter referred to as 'the Completion Date') and time shall be deemed to be of the essence.
4. Upon the Completion Date the Vendor shall deliver to the Purchaser the Certificates for all the MASCO Shares together with duly executed transfers thereof in favour of the Purchaser or as the Purchaser shall direct. The Purchaser will then hypothecate back to the Vendor an appropriate amount of shares to secure the balance of the purchase price and the Vendor agrees to release shares back to the Purchaser from under the hypothecation as and when and in such amounts as represent payments that have been made by the Purchaser to the Vendor at that time."
Clauses 5 and 6 contained further subsidiary obligations to be performed by Mr Cordes on completion.
"11. If this Agreement is not completed on or before the Completion Date it shall nevertheless continue in full force and effect unless one of the parties hereto shall serve upon the other a Twenty-one (21) day written notice to complete (as to which time shall be deemed to be of the essence) and the party served shall at the end of the Twenty-one (21) days after receipt of such notice have failed to complete in accordance with this Agreement."
The clause also contained a provision for service of notices. Clauses 13 and 14 provided for the normal consequences of non-compliance with a notice under Clause 11.
"16. Upon the execution of this Agreement the Vendor shall give to the Purchaser and the Purchaser's authorised representatives all facilities for inspecting MASCO's account books, records, contracts, commitments and any and all other documents and will furnish the Purchaser with all such information concerning MASCO's affairs as the Purchaser may reasonably request."
Apart from the provisions as to directorships already mentioned, no other clause provided for the way in which MASCO's business was to be run after completion. That was, it seems, to be left to the control which SIL as majority shareholder, and its nominees as the majority of the directors, would exercise in the normal way under MASCO's articles of association.
The facts: April 2000 to August 2001
"Since we didn't have a formal Closing we need to clean up the Share issuance, change of Officers and Directors, new banking resolutions, and so on. We could work on it as time permits, (which it rarely seems to), but don't know if anything is apt to change because of anything else pending in Freeport?"
There was no recorded response to this comment. But Mr Cordes and his wife did sign a resolution "effective 31 March 2000" appointing as directors of MASCO Mr Alexiou, Mr James Campbell and Mr Anthony Ferguson (all part of Sentinel group's management team) together with himself and Ms Sanchez. His evidence was that this was signed two or three months after the contract was signed. But, according to his unchallenged evidence, he simply overlooked the need to transfer the shares to SIL and issue new certificates. Both he and the management of SIL acted as if those steps had been taken. Mr Cordes, as already noted, regarded Mr Alexiou as his boss. Mr Alexiou took the same view: he regarded SIL as being the 90% shareholder, for instance in the answers that he gave in cross-examination about his letter of 29 January 2001, in which he sought to renegotiate Mr Cordes's remuneration.
"When you first raised the matter in November I was reluctant to agree to a reduction for several reasons. First, I felt little or no progress was being made in having me replaced and a reduction in cost certainly wouldn't add incentive. Then, due to several unrelated factors, I was spending more hours than ever at work and considering the remuneration was substantially less than when I owned the company it didn't make much sense. By October the Swiss fund [EIL] had felt the toll of the market decline and our management group reluctantly forgave a performance fee earned, but not collected, which for my portion was in the seven digit range. This didn't help my retirement fund but to show good faith I reduced my MASCO monthly draw by $5,000 retroactive to April 1, 2000 and to say the least was somewhat surprised and disappointed to find it wasn't well received.
It probably doesn't matter but I don't agree $72,000 is a reasonable wage for an experienced manager. I know salaries here are considerably lower than Nassau but when I last reviewed this several years ago I found the only appropriate persons here, in other jobs, were earning closer to $100,000. In any event, it seems rather irrelevant as in my opinion I see no justification for staying on at what Sentinel may have to pay for a replacement officer because I don't want the job, and only agreed to stay on long enough to have an orderly transition.
I can roughly follow your calculations endeavouring to realise a 20% return but I think it is unreasonable to consider that I should make it possible at my personal expense because Sentinel are behind in plans for my replacement.
I really hope you will be able to see this from my point of view. I would also like to mention that since our move to Chancery Court last month it has become easier to commence integration and David Mackie has been particularly helpful in this respect. We nevertheless have a long way to go."
"Bob, I do see it from your view, and I must say, that it seems, to me, that one would like to have his cake and eat it too, type of view."
From then on relations between the two sides continued to deteriorate.
"I therefore find it very hard to believe that in your email of the 26th, you requested that I forward the information to you by email so that you could assume the running of it when my father goes on a reduced time basis. Not having heard from you about Pathfinder's portfolio for a long time and then suddenly you wish to go over everything by email, not even in person, was to say the least very unsatisfactory.
I would have hoped that we could have discussed this, and several other matters, in person."
Ms Sanchez gave details of why some accounts with STBC had been closed and continued:
"I find it very unfortunate that you appear to think that MASCO has nothing complimentary to say about SBT. We have, as you admit, hit several roadblocks with SBT and as far as we are concerned they all seem to stem from communication problems. We have constantly requested information and advice and even though you seem to write it down in your book while you are here and say you will get back to us with an answer, we don't get an answer and if we do, it's because we've had to follow it up again and again.
It is not only MASCO that struggles with this lack of communication and until it is resolved, we will continue to be concerned. An example of some of the outstanding matters include interest rates, statements to be emailed and SBT financial statements that have been repeatedly requested for almost a year.
Furthermore, I find it very upsetting that you find it necessary to state that MASCO, as part of SBT, should be directing business to SBT. We have certainly done this and continue to do so, in spite of some of our concerns. We are making every effort to try to make the transition a smooth and friendly one but I obviously appear to be running into more problems than I am aware."
She then complained (in a paragraph that is not wholly legible in the record) about an unannounced visit by two STBC employees to review confidential files of MASCO clients, and continued:
"I hope that you can understand some of my concerns and since we are a team now, I would have thought we could have discussed these things in person, or even over the telephone for that matter, before sending such self-serving emails.
By the way, we too work towards satisfying our clients and in that regard try to provide the best quality service possible.
Hoping we can resolve these issues."
"I asked when I was going to be paid what was due under my contract and Grelecki said I had not adhered to the terms of the contract and implied when I did I would be paid.
He stated that I had defaulted by not transferring more client bank accounts to Sentinel. I responded that he couldn't expect me to do that without financial statements of SBT to produce to prospective clients, which statements I emphasised I had been asking for for over a year without any results. The matter was dropped.
He then stated that I hadn't taken sufficient steps to replace myself resulting in the cash drain of my compensation having an adverse effect on the accounts. I stated there was nothing in the contract regarding this but that I had always considered it Sentinel's responsibility. He then said something about not cooperating with Chancery to integrate with them and thereby eliminate the need of me.
He complained about the cash flow not being up to Sentinel's wishes and said I had removed $100,000 from MASCO at Closing. I assume he was referring to the elimination of the retained earnings at March 31, 2000, to which Sentinel was not entitled but which in any event was utilised mainly to create a reserve for unearned fee income, not previously kept due to the former cash basis of accounting.
Grelecki was extremely aggressive and Mani [Mr Alexiou] was trying to temper matters, so much so that I couldn't help wonder if it was a put up "good guy/bad guy" routine. At one stage Grelecki said—Well let's unwind the deal and you give us our money back, at which point Mani quickly said that I didn't want to do that."
The last paragraph of the memorandum is concerned with matters of detail on MASCO's accounts.
"I am still puzzled and amazed to have been told that Sentinel think they can pressure me into doing something that has surely been their responsibility since acquiring control by withholding funds that are unquestionably due and owing. As it took over two months for me to be told this is the strategy it makes me wonder if this is the whole story. A review of our contract confirms my belief that there is no conceivable way that I have violated the terms. Agreed there is the one drafting error regarding the payment of the ESL$17,500 but the intent is clearly shown in correspondence. I really find the accusations outrageous in the light of the enormous effort I have made to keep the business from suffering in spite of all the difficulties."
The second paragraph was concerned with accounting matters, especially the accusation of Mr Cordes having removed $100,000. The letter concluded:
"At this stage, with the terms of the agreement having been challenged, I am very concerned with a need to protect my position. I am very reluctant to have to go to independent counsel but unless the matter is resolved I seem to have little choice. I do hope you will consider having the decision reversed and would be very grateful to receive payment by the end of this month."
The judge's findings
"14. Not long after the execution of the agreement tensions developed between the parties. The plaintiff had claimed that it wanted to purchase the shares of the defendant so that it could gain access to the client list of MASCO, and more specifically the bank accounts of the clients of MASCO.
15. Therefore shortly after the agreement was signed the plaintiff required the defendant to transfer 75% of the bank accounts of MASCO to the Bank.
16. The defendant resisted this. He contended that that would not have been prudent in the light of the blacklisting of the Bahamas in 2000, and without first obtaining the permission of the clients together with some information on the Bank, neither of which he said were forthcoming. One particular source of controversy was a bond account with several million dollars that the plaintiff wanted transferred. The defendant, notwithstanding that after the closing he claimed to have regarded Mr Alexiou as his boss, rejected that.
17. The plaintiff's position was that the defendant was a signatory on the accounts and therefore needed no further authorisation to carry out its instructions to transfer the accounts. That remained a bone of contention. Mr Sweeting accepted the plaintiff's contention that the defendant could have transferred the accounts without further authorisation.
18. As it transpired, by the time the agreement was terminated in August of 2001 only roughly 20 of the total company accounts—200 accounts according to the defendant and 400 plus according to the plaintiff—were transferred to the Bank. The aggregate amount of those accounts according to the defendant was more than $9m.
19. On the evidence, having seen and heard these witnesses it seems quite clear to me that the defendant wanted to ensure that his preferred clients, were kept under his control and he was not prepared to follow instructions from the principals of the plaintiff, even from one who he claimed was the president of the plaintiff.
20. According to Mr Alexiou, the plaintiff did not wish to strong-arm the defendant because the nature of the business was such that personality played a significant role. The clients knew the defendant at MASCO and if they were not handled properly they might leave. But it was not helping their objective to grow their business and so this remained a constant source of aggravation to the principals of the plaintiff and the Bank.
21. Therefore, when the first anniversary payment became due the plaintiffs refused to pay the amount owed, as the controversy remained unresolved.
22. That culminated in a meeting in June 2001 at which the defendant was told that unless he performed his part of the bargain, the plaintiff would make no further payments.
23. At this stage the shares of MASCO had still not been transferred."
"32. On the evidence I am satisfied that the plaintiff repeatedly called for the defendant to perform his part of the bargain and I am further satisfied that they did not waive their rights to shares of MASCO that they had paid for. What they did waive was the right to call for them at closing but not the right to the shares. The right to the shares was never abandoned or waived and the obligation of transfer remained up until the termination of the agreement.
33. I would therefore find as a matter of fact that the plaintiff did not waive or abandoned their entitlement to the shares of MASCO or their right to claim damages for breach of contract for failure to deliver them. And I would also hold that the defendant was in breach of the agreement by failing to deliver the shares of MASCO. Mr Sweeting accepted this and was satisfied that in the circumstances the damages, which would have flowed naturally from the defendant's breach, would have been $750,000."
The letters of 2 and 3 August 2001
"Notice of breach & non-completion
April 11 2000 Agreement for sale between Robert Cordes and Sentinel International Limited ("the agreement")
It is with regret that we have to write to you as set out below.
Per the terms of the subject Agreement, please be advised that the Agreement is still not completed fifteen (15) months after the execution date and we consider you to be in material breach of said Agreement. It is our view that you have deliberately frustrated the completion of this transaction by not assisting with the transferring of the business to the control and custody of the purchaser.
Many attempts and requests were made to you to introduce the purchaser to the client base and this was never done. Attempts were made to gain control of the companies under your care and management by having you resign as a director and signatory of the many companies managed by MASCO. None of this has happened.
The intended acquisition has not transpired. The Agreement has not been fulfilled. What has occurred is the purchaser, who paid their money to you, has not received what it paid for. Further, it seems that the vendor does not want to part with that which he has agreed to sell.
The Agreement has been totally frustrated by you. After much correspondence and several face to face discussions, Sentinel International has concluded that it will be impossible for the parties to complete the Agreement according to the original terms and conditions.
During our meeting in June, I informed you that we would make no further payments to you under the terms of the Agreement until you had made significant progress towards completing the transaction. Since that time nothing has been accomplished.
Accordingly, we hereby demand repayment of all consideration paid to you by Sentinel International and/or its affiliates. We expect the repayment to include an interest amount calculated on the amount advanced using a market rate commensurate with commercial transactions of this type.
We sincerely hope that we can resolve this issue amicably and would suggest that we meet in Nassau at a mutually convenient time next week. You may reach me in Nassau at 242-502-7106 or in Orlando at 407-514-2411."
"We act on behalf of Robert E Cordes in respect of the above captioned matter.
Time being of the essence in the contract, we have advised our client that yourselves are in repudiatory breach of Clause 2(b) thereof. We hereby put you on notice that our client accepts your repudiation and considers that the contract is now at an end. In the circumstances, the shareholders have held an extraordinary meeting and removed your representatives from the Board of Directors of MASCO.
We will contact you in the near future to discuss resolution of the issues outstanding between our client and yourselves."
The Court of Appeal's reasoning and conclusions
"It seems to us therefore in the circumstances that the respondent's refusal to pay the instalment of the purchase price for the shares which was due on the first anniversary of the completion date—31 March, 2000—is in fact a repudiation of its obligations under the contract and amounts to an anticipatory breach of the contract which entitled the appellant to treat the contract as discharged."
SIL's appeal: conclusions
Mr Cordes's cross-appeal on damages
"Further it seems to me any downturn in the business of MASCO has not been shown to be the fault of the plaintiff or due to the plaintiff's failure to make the first anniversary payment. Indeed it seemed to have been generally accepted that after the blacklisting of the Bahamas in 2000, coupled with the new legislative regulatory regime that came into being with the package of financial legislation at the end of 2000, the business of most financial services companies was adversely affected and many suffered severe losses. MASCO was no exception, and on the evidence no attempt was made to show otherwise."
But a contractual claim for damages for loss of a bargain is not of course subject to the SAAMCO principle (see South Australia Asset Management Corp v York Montague Ltd  AC 191).