CitizenM v Chil (2016)
In relation to a joint venture concerning a hotel development, the court ruled on the validity of a notice purporting to waive certain conditions relating to the funding of the development and the obtaining of consents and approvals.
The appellant appealed against a decision concerning the validity of a waiver notice.
The appellant and the respondent were parties to a joint venture whose purpose was the acquisition of a property and its development as a hotel. The structure of the joint venture was a limited partnership (P), in which the appellant and the respondent were the partners. The respondent contributed its expertise in developing hotels, while the appellant provided the site. Three agreements setting out the parties' final agreement were executed. Under a conditional sale and purchase agreement, the appellant agreed to sell the property to P. Next there was a limited partnership agreement (the LPA). It recited that the parties had established P as a limited partnership for the purpose of acquiring, developing, letting and holding the property. It further recited that, once the property was developed, P would grant a lease of it to an associated company of the respondent, which would run it as a hotel with the profits being divided between it and the appellant. Clause 16 stated that the appellant and respondent had agreed to comply with the obligations set out in schedules 2 and 3. Schedule 2 provided that the respondent would use its reasonable endeavours to satisfy "the Funding Condition", which was defined as a satisfactory offer to finance the cost of the development. Schedule 2 para.5 entitled the respondent to waive that condition on certain terms. Essentially, it had to put in place satisfactory intra-group funding. The appellant had the right to give or withhold its consent to that on reasonable grounds. Schedule 3 imposed an obligation on the appellant and respondent to take all reasonable endeavours to satisfy the "TfL Conditions", which meant essentially obtaining 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 para.4 provided that "if the parties agree[d] (each in their absolute discretion) then the TfL Conditions [could] be waived". However, the parties would continue to be bound to use reasonable endeavours to satisfy the TfL Conditions. Finally, there was a shareholders' agreement (the SHA). It set out the parties' agreement on the internal running of P and therefore dealt with matters such as directors' and shareholders' meetings. The appellant and respondent could appoint two "A" directors and two "B" directors each. Clause 6.8 provided that the "B" directors appointed by the respondent "shall have absolute discretion in respect of any waiver of any conditions to the Headlease Completion". The respondent's "B" directors gave a notice under cl.6.8 seeking to waive the conditions in Schedules 2 and 3 of the LPA. The appellant objected. The validity of the waiver notice was determined as a preliminary issue. The judge found that it was valid.
The most significant principles of interpretation for the purposes of the dispute were, first, that agreements should be interpreted so that some weight was given to each provision and none of the provisions was read so as to be ineffective, either in whole or in substance. Second, a construction which avoided commercial absurdity was to be preferred to one which produced a commercial absurdity. The appellant was right in its interpretation: the funding and TfL Conditions had to be waived under the schedules to the LPA before the "B" directors' power under cl.6.8 of the SHA arose. The judge had been wrong to conclude that cl.6.8 gave the "B" directors a separate power of waiver. The appellant's interpretation was right for three reasons. First, it involved the natural process of reading the agreements in sequence. Second, in relation to the funding and TfL Conditions, cl.6.8 was a ministerial power to implement a decision taken by the appellant and respondent to waive those conditions in conformity with schedules 2 and 3 of the LPA. Third, the appellant's interpretation was reinforced by textual points. Clause 6.8 of the SHA conferred powers on the "B" directors, and not the respondent, which was consistent with cl.6.8 being concerned with the allocation of powers that P had and not the creation of some new power. Moreover, cl.6.8 referred to a decision "in respect of any waiver", suggesting that the waiver preceded the decision by P. Finally, schedules 2 and 3 of the LPA were very detailed: one had to assume that they had some purpose and were not there simply to be pre-empted by the actions of P. Accordingly, as regards the funding and TfL Conditions, P could only exercise its right to waive under cl.6.8 of the SHA if a waiver had already taken place under schedules 2 and 3. The waiver notice was therefore invalid (see paras 30-36 of judgment).
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21 Jul 2016
Court of Appeal (Civil Division)
Arden LJ, Black LJ, King LJ
John McGhee QC