Summary

The buyer of a business had not been entitled to cancel certain loan notes on the ground of the seller's failure to procure the provision of loan guarantees because the non-provision was the result of the buyer's own failure to serve a contractual notice and not the result of the seller's breach of contract.

Facts

The claimant (H) claimed that the defendant (R) had failed to procure the provision of a guarantee within the 30-day period following notice specified in a sale and purchase agreement, and that H was consequently no longer obliged to make payments under certain loan notes.

H had acquired 95 per cent of the share capital of R's subsidiary (M) which ran a retail business. The purchase price was £60,000 in cash and the provision by H to R of loan notes to a value of £540,000. By clause 17.10 of the sale and purchase agreement R undertook to H to procure, when so required by M pursuant to clause 17.11, the provision of such security and/or guarantees in accordance with the outline provided in an email, annexed to the agreement as schedule 8, to enable M to obtain from a major high street bank a loan or loan facility of £200,000 for two years. Clause 17.11 required R to procure the provision of the loan guarantees within 30 days of receiving notice in writing from M. H claimed that R had failed to procure the provision of the guarantee within the 30-day period following notice specified in the sale and purchase agreement, and that H was consequently no longer obliged to make payments under the loan notes.

R argued that it had not failed to comply with the terms of the sale agreement as to the provision of the loan guarantee, but that, if it had, such failure was the result of breaches of the agreement by H and M. It also argued that clause 17.15 of the sale and purchase agreement, which specified that if R failed to procure the provision of the guarantee as required under the contract the loan notes would be cancelled, was a contractual penalty and therefore unenforceable. H submitted that the email was not incorporated into the agreement in its entirety.

Held

(1) Subject to the reference to "the outline provided in the email", the terms of the sale and purchase agreement were apt to incorporate the email into it. The language of clause 17.10, that the defendant undertook to procure the provision of such security and/or guarantees "in accordance with" the outline in the email, was the language of incorporation, Tradigrain SA v King Diamond Marine Ltd (The Spiros C) [2000] 2 All E.R. (Comm) 542 applied. (2) The use of the word "outline" reflected the understanding of the parties that what was set out in the email was not a worked out set of rights and obligations. The email added a number of matters to the provisions of clause 17.10. The question, applying The Spiros C, was whether there were conflicts or inconsistencies between clause 17.10 and the email. The word "guarantee" in the email was not confined to a personal guarantee but included a bank guarantee. (3) Clause 17.10 was subject to implied obligations on H and M to enable R to carry out its undertaking to procure the provision of the security and/or guarantees, Mackay v Dick (1881) 6 App. Cas. 251 applied. On the proper construction of clause 17.11, contractual notice was not given to R of the requirement that it procure a loan guarantee until it was provided with the draft of a standby letter of credit and the 30-day period only began to run from that date. H had also been under an implied obligation to authorise the nominated bank to communicate with R, W or his representative in connection with the guarantee. The non-provision of the loan guarantee by the date when H cancelled the loan notes was the result of the failure by M and H to serve a contractual notice and to authorise the bank to communicate with R, W or his representative in connection with the guarantee. Accordingly, the non-provision of the loan guarantee was the result of failures by M or H, or both, and not the result of the breach by R of clauses 17.10 and 17.11. (4) On the objective construction of clauses 17.10 and 17.11, it was not reasonably to be expected that M would have negotiated both the terms of the loan and the terms of the guarantee required by its chosen bank before giving notice to R. However, H or M should have put the bank in a position where it knew the terms of the agreement with R so that the bank could specify to R what security it required, and they had not done so. (5) Clause 17.15 would not have been unenforceable as a penalty clause, Murray v Leisureplay Plc [2005] EWCA Civ 963, [2005] I.R.L.R. 946 considered.

Judgment for defendant