ON APPEAL FROM CHANCERY DIVISION
MR JUSTICE LAWRENCE COLLINS
Royal Courts of Justice
Strand,
London, WC2A 2LL
Before :
LORD JUSTICE SIMON BROWN
LORD JUSTICE BUXTON
and
LORD JUSTICE CARNWATH
Between :
|
iSOFT GROUP PLC |
Appellant |
|
- and - |
|
|
(1) MISYS HOLDINGS LIMITED (2) MISYS PLC |
Respondent |
(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Lawrence Cohen QC and Mr Stephen Moverley Smith QC (instructed by Pinsent Curtis Biddle) for the Appellant
Mr Andrew Onslow QC and Mr Orlando Fraser (instructed by Allen and Overy) for the Respondent
Judgment
As Approved by the Court
Crown Copyright ©
Lord Justice Carnwath :
Introduction
This appeal raises a short issue of construction under an agreement, by which the claimant, iSOFT, acquired a company (“ACT”) from the Misys group (which expression I shall use to include both defendants). ACT is the leading laboratory information systems provider in the United Kingdom.
The judge’s account of the facts and the applicable law have not been in dispute before us. Furthermore, as will be seen, I agree almost wholly with his conclusions. I hope therefore I will be forgiven for quoting substantially from the essential parts of his judgment, without attempting my own restatement. His judgment was lengthened by the need to cover the extensive evidence called before him, most of which in the end proved immaterial to the issue before him.
The background facts can be stated shortly. The claimant, iSOFT, was founded in 1994. It is a publicly-quoted, Manchester-based, software group, with a turnover of approximately £31m, specialising in the provision of information technology systems to the UK healthcare industry, particularly laboratory systems and patient information management systems. Misys is an international software applications group, with a turnover of approximately £850m. Its core business is the development and licensing of specialist computer software for the banking, financial services and healthcare industries. The business was started in 1980, and has grown substantially since, mainly by corporate acquisitions. Its healthcare division, which now operates under the brand Misys Healthcare Systems, is based in Raleigh, North Carolina, and chiefly operates in the United States.
In 1995 Misys had acquired ACT Group plc, an UK information technology company which included ACT among its subsidiaries. In 2000 the UK healthcare business was expanded when ACT acquired CDS Group Ltd. (“CDS”), a leading laboratory information systems provider. ACT and CDS sold their systems primarily to the UK and Ireland.
Subsequently, Misys became disenchanted with the UK healthcare market. On the other hand, iSOFT had a substantial business in supplying patient information systems to NHS and private hospitals, but did not have a competitive laboratory information system. As a result, after negotiations which commenced in September 2000, Misys sold ACT to iSOFT for £24 million in December 2000. The ACT Sale Agreement (“the Agreement”) was signed on December 14, 2000 and completed on February 5, 2001. It was drafted with the help of experienced city solicitors on both sides.
Clause 11
The only part of the agreement which is material for present purposes is Clause 11, which is headed “Protection of Goodwill”, although Clause 1.4 provides that the headings are not to affect interpretation. The Judge summarised the material parts of Clause 11 as follows:
“(10) Clause 11.1 defines the expression “Restricted Person” to include any member of the “Seller’s Group,” which means Holdings, any subsidiary undertaking or parent undertaking of Holdings and any subsidiary for the time being of a parent undertaking of Holdings (clause 1.1) (i.e. it included after acquired subsidiaries).
(11) By clause 11.2.1 Holdings undertook to iSOFT that without the latter’s written consent:
“... for a period of 3 years from Completion it will not and will procure that no other Restricted Person will in any capacity whatsoever directly or indirectly carry on or assist in carrying on or be engaged, concerned or interested in any activity or undertaking which is the same as, or substantially similar to, the business of the Company or any Group Company as carried on at the date of this Agreement or at Completion (‘Restricted Business’) within the Restricted Area ...”
(12) The “Company” and “Group Company” meant ACT and its subsidiaries (clause 1.1). The Restricted Area was the UK, South Africa, Poland, Ireland, Kenya, Switzerland and Zimbabwe (clause 11.1).
(13) Clauses 11.2.2, 11.2.3, and 11.2.4 contained provisions prohibiting for three years the solicitation by the Misys group of customers, suppliers and employees. Clause 11.2.5 prohibited the future use by any Restricted Person of the trade names associated with the business carried on by ACT.
(14). By Clause 11.4 nothing in clauses 11.2.1 (three year restrictive covenant) and 11.2.2 (three year non-solicitation of customers) was to prevent any Restricted Person from acquiring any interest in any entity “which carries on a Restricted Business in the UK” provided that the number of employees employed in the UK in the Restricted Business did not exceed 20 per cent of the total number of employees employed in the entity acquired, and by clause 11.4.2
“... the Seller shall procure that relevant Restricted Person shall within 3 months of the completion of the acquisition of the entity offer to sell to the Buyer that part of the acquired entity which carries on a Restricted Business (‘Target Business’) for a consideration equal to the then fair market value of such business and otherwise on such detailed terms and conditions which are fair and reasonable to both the relevant Restricted Person and the Buyer. The Buyer shall and the Seller shall procure that the relevant Restricted Person shall negotiate in good faith to agree and complete such sale and purchase as soon as is practicable if the Buyer indicates that it wishes to acquire the Target Business. The Seller shall procure that all information and documents reasonably necessary to enable the Buyer to consider the offer and the business and assets the subject of the offer are made available to the Buyer and that all reasonable requests for further access to information, property or personnel are complied with. If the Buyer declines to buy the Target Business, the Restricted Person shall be free to dispose of it on no worse terms to it than it proposed or negotiated with the Buyer (or in relation to the consideration, in the absence of a proposal by the Restricted Person relating thereto, on terms no worse than the fair market value thereof).”
Sunquest and Europa
The events with which we are directly concerned stem from the acquisition by Misys of a company called Sunquest Information Systems Inc. (“Sunquest”). Sunquest was a US corporation specialising in laboratory, radiology and pharmacy information systems, based in Tucson, Arizona. In June 2001 Misys made an offer for the share capital of Sunquest, valuing Sunquest at $404 million, and the acquisition was completed on August 1, 2001. The judge described Sunquest’s business:
“(19) The main products of Sunquest were FlexiLab (an integrated pathology system), FlexiRad (a radiology information system) and FlexiMed (a pharmacy information service). The Sunquest acquisition expanded Misys' US healthcare activities from physician and home healthcare systems into hospitals.
(20) Since 1994 Sunquest had a subsidiary, Sunquest Europa Limited (“Europa”). Europa promoted, sold and supported Sunquest IT products in the UK, Ireland and Denmark, and was seeking contracts elsewhere in Europe and also in the Middle East, where it had had some success.
(21) The UK business was a very small part of Sunquest (fewer than 10 employees out of a total of about 800). It occupied serviced offices in West Sussex. It relied entirely on Sunquest for the supply of product, and was dependent on Sunquest for administrative support and customer service functions….
(23) As a wholly-owned subsidiary of Sunquest, Europa did not have any formal licensing, distribution, customer support and service or royalty arrangements with Sunquest. Europa distributed the three product lines, and Sunquest had to approve all sales orders.
(24) Europa was established to compete in Europe, but it had no defined territory for its operation, and it was also soliciting customers in the Middle East. It had substantial laboratory and radiology contracts for hospitals and health services in Ireland and Denmark, and one of its employees was based in Denmark to provide support for Europa’s Danish clients. It had also been appointed vendor of choice for a substantial contract with the Department of Health in Dubai.
(25) It paid its parent company the equivalent of a 50% royalty on the licence fees it received from customers….
According to a “company overview” supplied by Misys to iSOFT -
“Europa is essentially a frontline sales and support entity in Europe.”
Another important part of the background was the competition between Europa and iSOFT in relation to the award of the West London Pathology Consortium contract (“the WLPC contract”). This was a project for a pathology laboratory system and continuing support and service to a consortium of five major London hospitals. At the time of the acquisition of Sunquest by Misys, Europa was the front-runner for the award of the contract. It was appointed vendor of choice in August 2001 and was awarded the contract in March 2002.
Negotiations for acquisition of Europa
Following the announcement of the acquisition of Sunquest in June 2001, there were discussions between iSOFT and Misys as to the operation in the circumstances of Clause 11.4. The Judge describes the course of these discussions in detail. It is sufficient for present purposes to start from a meeting on August 10th between Misys and iSOFT, where the parties’ positions were made clear:
“(37) At the meeting it is clear that it was recognised that in commercial terms the most significant aspect of the acquisition of Europa or its business was the continuation of the arrangements between Sunquest and Europa…. Mr Batra (Misys) confirms that iSOFT indicated at the meeting that they preferred that the bulk of the consideration be reflected in royalty payments from Europa to Sunquest rather than in a price for the shares. At the meeting iSOFT indicated that it was looking for a deal similar to that which it had concluded with a US healthcare company, Eclipsys (which involved the acquisition of a licence to use intellectual property belonging to a US corporation).”
Subsequent negotiations revealed substantial differences between the parties, in particular as to the terms of the proposed licence to be granted by Sunquest to an iSOFT-owned Europa.
No agreement having been reached by November, there were exchanges as to the effect of the agreement in legal terms. On November 14th iSOFT referred to their solicitor’s advice that the offer to be made by Misys must be “one which is capable of being accepted and thereby giving rise to a binding contract”, and commented that in the view of their solicitors no such offer had yet been made: –
“(54)…What had to be offered was that part of the acquired entity which carried on a restricted business, and that was Europa. So that what ought to be sold was the issued shares of that company and putting in place new licensing arrangements was not permissible, and they should be informed what licensing arrangements were in place between Sunquest and Europa at the time when Misys had acquired Sunquest.”
This view was not accepted by Misys’ solicitors, who wrote on December 10th to explain their client’s position–
“that it had complied with the process set out in the agreement, that iSOFT had declined to purchase Europa, and that the process was terminated.”
Notwithstanding that letter, discussions continued until March when negotiations finally broke down. The Judge recorded the position at that stage as follows:
“(61) By the time the negotiations broke down, the position of the parties on the main points at issue (most of which related to the proposed licence) may be summarised as follows:
(a) there was agreement on the products to be licensed: FlexiLab, FlexiRad and FlexiMed;
(b) the territory: the negotiations extended beyond the Restricted Area as defined in the Agreement: they encompassed exclusive rights in the Restricted Area, and non-exclusive rights in other areas: for the latter, Misys proposed Europe and iSOFT suggested Australia, Hong Kong, Singapore and New Zealand; on December 20 Misys proposed that the non-exclusive territories be Europe (other than those in the Restricted Area) and the Middle East. iSOFT’s February 20 proposal was exclusive rights in the Restricted Area plus the Scandinavian countries, and non-exclusive rights for the rest of Europe, and that was agreed;
(c) consideration for the share capital of Europa: iSOFT’s offer on October 15 was £2.5 million in cash for the share capital and the licence; on December 20 Misys suggested £5 million in cash at completion, and that iSOFT would be able to off-set against this the first £2.5 million of any royalties; on February 20 iSOFT suggested a consideration equal to the net assets of the business, and that became the agreed position;
(d) advance royalty payments: Misys’ opening position was that there should be £10 million at the outset and £6 million on the third anniversary, and on each subsequent anniversary of the licence, the preceding year’s advance royalty payment plus 15%; iSOFT’s opening position was that £2.5 million should represent the consideration for the share capital as well as an advance payment for the first 3 years. Ultimately iSOFT offered a guaranteed minimum payment of £5 million covering the first 3 years (but without any provision for an advance payment); Misys agreed, subject to it being paid in cash on completion, but iSOFT wanted to leave the precise timing to be discussed, and that remained open;
(e) term of licence: 7 years was agreed
(f) royalty rates: Misys’ position was that the appropriate royalty was 50% of the licence fees received by Europa; iSOFT initially proposed lower rates, but 50% was later agreed;
(g) obligation to promote Sunquest products as the only like products: initially this was required by Misys and not agreed by iSOFT; on December 20 Misys proposed that from March 1, 2004 for the remainder of the 7 year term, Europa’s rights in the exclusive territories would remain exclusive for such time as Europa promoted the products as its primary like products for new business, but ultimately it was agreed that iSOFT’s retention of exclusivity in that period would be dependent on maintaining an agreed minimum royalty.”
The present dispute seems to have been triggered mainly by two events. The first was the signing of the WLPC contract on March 12th 2002, which was announced by Misys in a press release referring to its own role as “Britain’s largest independent applications software provider”. The other matter was the “re-branding” of the companies in the Misys group, including Sunquest and Europa:
“(28) Following a policy first adopted in 1999, in late January 2002 all companies in Misys’ Healthcare division participated in the worldwide re-branding exercise by which they were brought under Misys Healthcare Systems brand name, and now use the Misys logo. Misys’ webpage says that what were once Medic, Sunquest and Homecare Information Systems are now Misys Healthcare Systems, which is a division of Misys.
(29) Sunquest has changed its name to Misys Hospital Systems Inc, and Medic Computer Systems LLC has changed its name to Misys Physicians Systems LLC, but I shall use former names to avoid confusion. In March and April 2002 Europa solicited business for Sunquest products at trade fairs in Harrogate and Dublin under the Misys Healthcare Systems brand-name and logo, and referred to Misys Healthcare Systems as “formerly Sunquest Information Systems.” It also accepts that Sunquest and Europa (as Misys Healthcare Systems) placed an advertisement for a UK based employee for Europa.”
Solicitors on behalf of iSOFT claimed that these events involved a breach of clause 11.2. Proceedings were commenced in April 2002, and eventually came before Lawrence Collins J on July 21st.
He identified two issues for determination:-
Whether there had been a failure by Misys to comply with Clause 11.4.2 and if so whether specific performance should be awarded (“the specific performance issue”).
Whether Misys was in breach of clause 11.2 and if so whether an injunction should be awarded (“the injunction issue”).
The Specific Performance Issue
As the Judge explained, the main areas of dispute were:
“(68) ….the meaning of the first sentence of clause 11.4.2, and in particular whether it requires that the offer should be capable of acceptance so as to give rise to a contract for the sale of the Target Business; whether it is sufficiently certain to be specifically enforced, and whether the court can now supply the machinery to determine the fair market value and other terms and, if so, what that machinery should be.”
He summarised the relevant authorities relating to “uncertainty of terms”, in terms which have not been criticised, and which it is unnecessary to repeat. As he rightly recognised:
“(76) The starting point is the rule that in each case it is a question of the true construction of the agreement, and the relevant terms will be construed, if at all possible, to give them the necessary certainty: Hillas & Co Ltd v. Arcos Ltd (1932) 147 LT 503, 512, 514, 517. Particularly where a contract has been partially executed (especially in a commercial contract over a long period) there is a very strong tendency for the courts to imply any reasonable term so as to give effect to their intentions.”
He then dealt with the various elements of Clause 11.4.2. He noted that nothing turned on the question whether the relevant Restricted Person which is to make the offer under the first sentence was Holdings or Misys or Sunquest (or Europa). Each of them was comprised within the definition of Restricted Person in clause 11.1. Further, both parties agreed that the “Target Business” was that of Europa, although there was “a fundamental disagreement on the role of the Sunquest licence in that process”.
As to iSOFT’s contention that the first step by Misys needed to be a fully-fledged offer, he said:
“(112) I do not consider that the parties to the Agreement could reasonably be taken to have envisaged that the clause 11.4.2 process would have begun with the presentation to the buyer of a full grown offer capable of acceptance so as to create an immediately binding contract (i.e. with nothing other than the buyer's signature required to conclude an agreement), and it would not occur to a businessman that it should…”
That conclusion was based, first, “on the wording of the clause as a whole in the context of the Agreement as a whole”:
“(113) I am satisfied that the structure of clause 11.4.2 confirms that the word “offer” in the first sentence does not mean “offer capable of acceptance.” In my judgment it means an indication by Misys of a willingness to sell at a fair market value and on terms and conditions which are fair and reasonable to both parties. If it means offer in the sense of indication of willingness to sell, then the rest of the clause hangs together and makes sense. After an offer in this sense, iSOFT may indicate that “it wishes to acquire” the Target Business.
(114) This is the natural reaction to an indication of a willingness to sell, and contrary to the idea that it was envisaged that prior to this process iSOFT might accept the offer so as to create a concluded contract. All that is envisaged is that iSOFT and the relevant Restricted Person shall negotiate in good faith to agree and complete the sale. In the course of that process Holdings procures that all documents and information necessary to enable iSOFT to consider “the offer and the business and assets the subject of the offer” are made available. There is no reason to conclude that the word “offer” is used in a different sense here from that in the first sentence. The third sentence makes complete sense in the context of a negotiation. It makes little commercial sense in the context of iSOFT considering a full offer capable of acceptance. The fourth sentence speaks of freedom to dispose of the Target Business on no worse terms than those “proposed” or “negotiated” with iSOFT. The word “proposed” is consistent with proposals made in the context of a negotiation and does not fit with a process beginning with a firm offer capable of acceptance. This is also strikingly supported by the fact that the fourth sentence envisages that the final stage may have been reached without a proposal by the Restricted Person in relation to the consideration.”
This view was confirmed by the background, which included the fact that both Misys and iSOFT had considerable experience of the acquisition of companies, and were advised by experienced and prominent solicitors and accountants, who also would have been familiar with the process. They would have known of the potential complexities of the sale of a business or part of a business:
“(116) They would have known that a sale transaction typically involved the seller offering the business, the provision of information, negotiation to reach provisional agreements on basic terms, due diligence, the preparation of a detailed draft contract, negotiations over the details, the conclusion of a sale contract, often at a meeting at which remaining disagreements are resolved, and completion. It is only necessary to glance at the ACT Agreement (including 30 pages of warranties) to see how complex a sale of shares in a technology company can be.”
They would also have known of the variety of forms that the “Target Business” might take:
(121) In the present case Europa had only about 1 per cent of the combined employee strength of the Sunquest group, but the Agreement envisaged that the Target Business might be employing up to 20% of the total work force of the acquired entity. Accordingly, the Target Business might be very substantial. The Target Business might be a separate UK company owned by the acquired entity, or it might be a branch of a Belgian or Australian company. Some of its employees, including senior staff, might be working both in the Restricted Area and outside it. Its head office functions might be separately centred in the Restricted Area, or they might be inextricably linked with those of the acquired entity. Even if the Target Business were carried on by a separate entity substantially centred in the Restricted Area, part of its business might be outside the Restricted Area.
(122) The Target Business would be likely to have continuing obligations to the National Health Service or to the private sector, and their equivalents in other parts of the Restricted Area. If it were a subsidiary of a foreign company, the parent company might have given guarantees. The purchaser of the Target Business would need to be satisfied of continuity of supply from the acquired entity. The vendor would need to be satisfied that it would be indemnified by the purchaser for any guarantees it might have given. If the Target Business depended on its overseas parent or overseas head office for the long-term supply of its products, then that relationship would need a formal contractual structure in the event of a sale.”
He concluded:
“(123) Against that background, in my judgment it is a wholly uncommercial reading of clause 11.4.2 to interpret it to mean that the relevant Restricted Person is to make an offer which is immediately capable of acceptance. Commercial common sense dictates that the vendor will indicate a willingness to sell, and perhaps also set out some basic terms, but it is absolutely inherent in the process that the detail, sometimes involving important questions of principle (such a cap on warranty liability, or a contractual time-limit for claims) will have to be reserved for the negotiation process. Consequently, my conclusion is that the first two sentences of clause 11.4.2 have to be read together, and that what they amount to is that “the parties agree to negotiate in the hope of effecting a … contract” (Hillas & Co Ltd v. Arcos Ltd (1932) 147 LT 503, 515).”
Having reached that conclusion on the first issue, he noted that iSOFT had conceded that, in that event:
“… then no further question arises on this part of the case since iSOFT accepts that if offer does not mean offer capable of acceptance, then the first two sentences of clause 11.4.2 are simply an unenforceable agreement to negotiate and agree.”
However, on the footing that he was wrong on that issue, and that “offer” did mean offer capable of acceptance, he was satisfied that it was “so uncertain that it cannot be enforced, whether by specific performance or otherwise”. He accepted Misys’ submission that the court was being asked, not simply to give certainty to an existing term of an existing contract, but to “write an entire draft contract in a complex field”. In particular, he noted that :
(129)…the court would have to establish the “fair market value” of a company which is the exclusive distributor of products and services in a situation where its distribution agreement/licence has no fixed term, where the royalty it will pay is not determined, and where the quantities it may order are not agreed….”
Furthermore, the task could not be simply the valuation of the shares of Europa:
“(132)… The court would have to construct a complete contract from scratch, working out on a term by term basis what term is fair and reasonable to both parties. There is no manageable standard by which the fairness and reasonableness “to both the relevant Restricted Person and the Buyer” can be set or measured other than what is actually acceptable to both parties.”
Accordingly, he rejected the case for specific performance. He made clear, however, later in the judgment, that this conclusion did not mean that clause 11.4.2 had no practical meaning and effect:
“(135)…the first two sentences of clause 11.4.2 can be (and probably were) complied with; and… in any event clause 11.4.2 is not wholly devoid of legal effect, since the obligation to supply information in the third sentence and conditions on disposal in the fourth sentence to third parties are enforceable.”
As I have indicated, I gratefully adopt these conclusions as my own, as well as the reasoning supporting them. (In the interests of brevity I have quoted only the main points.)
The only qualification I would make is in relation to the concession that his conclusion on the first point was in itself fatal to iSOFT’s case. I see no reason in principle why such a procedure should not start, as commercial sense would suggest, with something more in the nature of an invitation to treat, than an offer; or why this need necessarily result in “an unenforceable agreement to negotiate” (see Walford v Miles [1992] 2AC 128, 137-8). This would depend on whether what followed was entirely open-ended; or whether there was some suitable machinery for settling disputes as to the terms, or some objective criteria by which the Court could do so. Before us Mr Cohen, notwithstanding his earlier concession, accepted that this was a possible way of looking at the matter. However, in view of my agreement with the Judge’s conclusions on the second point, it is unnecessary to consider this matter further.
Mr Cohen sought to derive assistance from a more detailed analysis of Hillas v Arcos itself, and also of Didymi Corporation v Atlantic Lines and Navigation Co Inc. [1998] 2 Lloyd’s Rep 108. Those cases helped him to the extent that they show how little straw the Court may need, in particular commercial contexts, to make the bricks necessary for an enforceable contract. For example, in Hillas v Arcos it was held by the House of Lords, differing from the Court of Appeal, that the expression “of fair specification over the season, 1930”, in a contract for the sale of timber, defined the terms with sufficient certainty for an enforceable contract. As Lord Tomlin (giving the majority speech) explained, on the facts of that case, reading the contract as a whole, and “having regard to the admissible evidence as to the course of the trade”, the words provided an objective test which “if the parties fail to agree can be ascertained just as much as a fair value of a property.” (p 512). Lord Thankerton put the question thus:
“Do (the words) provide a standard by which the Court is enabled to ascertain the subject matter of the contract, or do they involve an adjustment between the conflicting interests of the parties, which the parties have left unsettled and on which the Court is not entitled to adjudicate?” (p513).
On balance he agreed with the majority that they fell into the former category.
In my view, those cases turned on their own facts. They provide no assistance to the appellants in a case such as this, where, as the Judge said, the Court would have to “construct a complete contract from scratch”. Furthermore, the requirement that the terms be “fair and reasonable to both the relevant restricted person and the buyer” seem to me to fall clearly into Lord Thankerton’s second category, involving “an adjustment between the conflicting interests of the parties, which the parties have left unsettled.”
On this issue therefore the appeal must fail.
The injunction issue
The facts relevant to this issue are not in dispute. The Judge summarised Misys’ view of the matter:
“(96)…. Misys accepts that the group’s activities amount to assisting Europa in carrying out its business. It points out that on at least two occasions (September 18, and December 12) Mr Batra told Mr Whiston (iSOFT) that Misys would continue to manage the business actively, including the pursuit of sales leads) and that Mr Whiston took no objection. Misys and Sunquest personnel assisted Europa in securing the WLPC contract, and Sunquest guaranteed Europa’s obligations under the contract. Europa solicited business for Sunquest products at trade fairs in Harrogate and Dublin under the Misys Healthcare Systems brand-name and logo. Europa is now part of Misys Healthcare Systems and is required and entitled to present and promote itself as such. Sunquest directors were appointed to the board of Europa.”
If sub-clause 11.2 is taken as it stands, there has clearly been a breach of the covenant not to “carry on or assist in carrying on” a business substantially similar to that of ACT. That is not in dispute.
The problem is the relationship of that sub-clause with 11.4 which allowed Misys to acquire Sunquest and Europa, notwithstanding that they were competing businesses, subject only to the proviso which has already been discussed. Both parties accept that the clause cannot be read literally as preventing any competing business. The right to acquire a business of the kind referred to in clause 11.4 pre-supposes that, having been acquired, the business will be allowed to continue, albeit in competition with iSOFT and ACT. On a literal reading, Misys as the ultimate owner would inevitably be “interested in” that business. Furthermore, Sunquest and Europa themselves, by virtue of the acquisition by Misys, would come within the definition of “restricted person” and therefore, theoretically, would be unable to carry on even their own businesses.
iSOFT’s submission as recorded by the Judge was as follows:
“(100) iSOFT accepts therefore that Europa as the Target Business was to be free to carry on its business in the ordinary way. This is implicit in clause 11.4.2. But this does not lead to the conclusion that there is any wider permission for any other Restricted Person to assist Europa in carrying on its business. Such a conclusion would conflict with the opening words of clause 11.4 and is not in any sense necessary to give efficacy to the Agreement.”
Before us Mr Cohen accepts that this formulation needs to be modified to the extent that not only Europa, but also Sunquest as the “acquired entity”, must be free to carry on its business in the ordinary way, and to that extent assist Europa. Accordingly, his proposed injunction includes an additional proviso as follows:-
“Provided that this order shall not prevent…
(iv) any company which immediately before completion of the acquisition of (Sunquest) by (Misys) was the parent or ultimate parent of Europa from giving any assistance of the type which it gave at or prior to that time.”
Misys’s submission was that the business of Europa had been “continued in the ordinary way of business”, and that the Misys Group members had “done nothing more than is normal for a parent and other group companies to do”, that being implicitly permitted by clause 11.4.
The Judge accepted that submission. He said:
“(139) I consider that for present purposes the key word in the opening expression of clause 11.4 is “nothing”. In my judgment, it goes further than simply allowing the acquisition of an interest in an entity part of which carries on a Restricted Business. If iSOFT is right, the UK branch will be “that part of the acquired entity which carries on a Restricted Business,” but the acquired entity will be a Restricted Person and will not be able to assist or be engaged in the carrying on of the business. A local subsidiary may need credit from a bank and the bank may require a parent company guarantee or letter of comfort; it may need supplies from its parent; it may need head office function. If iSOFT is right the parent company would not be able to assist. To read clause 11 as preventing that assistance in the case of branches and subsidiaries would be uncommercial and unrealistic, and I do not consider that it can reasonably be interpreted in that sense.
(140) Accordingly, my conclusion is that since clause 11.4.2 (as is agreed) allows the business to be carried on, it envisages that the Target Business and the relevant Restricted Person would maintain the ordinary relationship of a business and its owner, and (where applicable) of parent and subsidiary, and accordingly the business could be carried on in the ordinary course. That conclusion is reached either by a process of interpretation of the opening words of clause 11.4.2 or by necessary implication.”
He held on the facts that none of the events relied on could be regarded as anything but “a part of Europa’s ordinary business and its ordinary relationship with its parent.”
“(141) … Europa’s business as at the time of acquisition by Misys was the promotion and supply of Sunquest’s products to existing and future clients in Europe. That business necessarily involved competing with iSOFT, adopting its parent branding, and depending almost entirely on its parent to carry on its business (by way of technical, marketing, product, and administrative support). Sunquest executives assisted Europa to obtain the WLPC contract by meeting and discussing it and its products; and executives of Misys and the new management of Sunquest endeavoured to give comfort to WLPC about the takeover by Misys and the possible sale to iSOFT.
He added that, even if this conclusion had been wrong, he would have refused an injunction as matter of discretion, on the grounds it would not have been possible to fashion an order effectively distinguishing between what iSOFT accepts is permitted and what is not.
Before us, Mr Cohen submitted that the Judge’s conclusion went beyond what was justified by the ordinary principles of interpretation. He accepts that, in order to give “business efficacy” to the contract, it is necessary to imply that the acquired entity and the target business can carry on business after acquisition by Misys in the ordinary way, and that Misys can procure them to do so as an exception to sub-clause 11.2. However, that is the limit of what is necessary to secure business efficacy. Sub-clause 11.2 imposes separate restrictions on “doing”, and “procuring” the doing, of a prohibited act. Mr Cohen accepts that, to the extent that Sunquest and Europa are carrying on competing activities, even if Misys is procuring them to do so, that is implicitly permitted; but this does not permit Misys itself to do those acts. Thus, the clause does not permit Misys to provide funding for Europa’s activities. More importantly, the re-branding of Sunquest products to bear the Misys name is a form of direct assistance by Misys, which goes far beyond what is required under the contract.
On the other side, Mr Onslow for Misys supports the Judge’s reasoning, as the only one which makes commercial sense. He attaches importance to the fact that sub-clause 11.4 distinguishes paragraphs 11.2.1 and 11.2.2 from the other parts of 11.2. There is no exception allowed to the other restrictions, relating to solicitation of suppliers and employees, and the use of trade names associated with the ACT business. On the other hand, 11.4 specifically excludes 11.2.1 and 2 (dealing with business competition and customers), for the very reason that it was recognised that those activities would be essential parts of the activity of the acquired entity. Like the Judge he emphasises the word “nothing” in 11.4, as indicating that there will be no inhibition, by virtue of those two sub-clauses, on the activities of the acquired entity and the target business.
I see the theoretical force of Mr Cohen’s arguments. Where words need to be read into a contract the test is what is necessary, not what might be convenient. However, the distinction he seeks to draw in the context of this contract, between the permitted involvement of Sunquest and the prohibited involvement of Misys, seems to me unrealistic. The parties to this agreement were aware of the nature of the Misys group as a trading group, operating through subsidiaries and with a history of expansion by corporate acquisitions. The purpose of Clause11.4 was to enable it to make acquisitions in this field, subject to limited and defined protection for iSOFT. It was clearly contemplated that those acquisitions would be of trading subsidiaries, who would thenceforth continue and develop their trading activities, as part of the Misys group.
Although it is unnecessary for the purpose of this case to draw a precise dividing line, I agree with the Judge that the clause must be seen as implicitly permitting the carrying on of Europa’s “ordinary business and its ordinary relationship with its parent”. If that is correct, then I can see no basis for challenging his view, as a matter of fact, that the activities of which iSOFT complains in this case fell within that implied permission.
Finally on this point, I note that there was in fact very little evidence as to the extent of the benefit to Europa from the assistance provided by Misys, or the detriment to iSOFT. On the Misys side it was accepted in evidence that Misys was able to provide its new subsidiaries with some “real resources” to assist in the development of products, and that its name “may have added some value” in relation to their ability to attract contracts. On the other side, Mr Whiston, for iSOFT, thought that Misys’ involvement had “undoubtedly enhanced Europa’s reputation and financial standing” and had thereby “seriously enhanced the ability of Europa to compete against iSOFT”. However, beyond these general statements there is no evidence to enable the Court to judge the precise effect of this change.
In any event, for the reasons I have given, I would uphold the judge’s refusal of any injunction. Accordingly, I would dismiss this appeal.
Lord Justice Buxton :
Like my Lord, I would dismiss this appeal. Like him, I am entirely persuaded by the admirable judgment of Lawrence Collins J. It is only because of the extensive arguments that we heard in this court that I venture to add some brief words of my own.
First, I consider that the concession recorded by the judge in §127 of his judgment, and the conclusion that the judge drew from that concession, were on the terms of this agreement both correct. The appellants’ argument was that the first sentence of clause 11.4.2 envisaged an offer in the classic contractual sense of offer and acceptance, as the judge said in his §123 (echoing the classic statement in the first sentence of §2-002 of Chitty on Contracts 28th edition) immediately capable of acceptance. The appellants had so to argue (despite the unlikeliness of the argument both in regard to the terms of the first sentence of clause 11.4.2. and, even more, in view of the further negotiation envisaged by the second sentence of the clause) precisely in order to avoid the difficulty arising from the jurisprudence of Walford v Miles to which my Lord draws attention in §25 of his judgment. Unless the first sentence required the making of an offer in the technical sense, all that the parties were agreeing to do was to negotiate. It is that agreement, not the subsequent fruits of any such negotiation, that is contained in the first two sentences of clause 11.4.2, and it is that agreement that is unenforceable because it lacks the necessary certainty: see per Lord Ackner, [1992] 2 AC at p138C. The negotiation envisaged in this case, if undertaken, might or might not have in due course resulted in an enforceable agreement: but the parties were under no obligation to enter upon the negotiations at all.
Second, it is worth underlining that many of the cases relied on by the appellant for the contention that the court will go a long way to identify an enforceable contract out of general or incomplete words used by the parties are cases arising from mutual dealings in a specialist trade. The relevance of that consideration is apparent in the speeches in Hillas v Arcos, most notably in that of Lord Tomlin; and it was the trade background that enabled Lord Wright to emphasise in the same case, 147 LT at p516, that issues of measurement, quantity and type could be submitted to an expert tribunal or to a judge of fact assisted by expert witnesses. The significance of the contested agreement having been reached “in commercial dealings between parties who are familiar with the trade in question” was also emphasised by Rix LJ in Mamidoil v Okta [2001] 2 Lloyds Rep 76 at p 89[69], a passage much relied on by the appellants.
In the present case, although the parties are in the same industry this transaction is a “one-off” deal in relation to the sale of a business, and not one that could be informed by the ordinary course of dealing in the trade. As the judge, with all his commercial experience, pointed out, in such a transaction the omitted terms do not follow as of course or by custom, but are negotiated closely and in detail. It would be quite impossible for the court here to perform the role envisaged for it in the different circumstances of Hillas v Arcos and Mamidoil.
Third, in relation to the injunction Mr Cohen advanced an argument that had not, I think, been before the judge in quite this form, that the exempting words at the start of clause 11.4 were to be read as only exempting from liability for acts that were necessary to enable acquisitions of the sort envisaged in clause 11.4 to be made. The activities particularly complained of, as summarised in §35 of my Lord’s judgment, plainly did not fall within that category.
I consider, however, that the answer to this argument is that already provided by the judge in §139 of his judgment: that in the recital at the start of clause 11.4, that “Nothing in Clause 11.2.1 and 11.2.2” shall prevent an acquisition, nothing really does mean nothing. All parts of those clauses, and all of the inhibitions contained in them, are accordingly withheld from the activities envisaged by clause 11.4. As my Lord says in his §38, there is no ground for differing from the judge’s judgement that the activities complained of fall within the latter category. That conclusion is, in my view, to be reached not by the implication of terms into the clause in order to give it business efficacy, but by interpreting its actual, not its implied, terms in a commercially realistic way.
Lord Justice Simon Brown
For the reasons given by my Lords, Lord Justice Carnwath and Lord Justice Buxton, I too agree that this appeal should be dismissed.
Order: As per agreed draft.
(Order does not form part of the approved judgment)