Abbey Catering Ltd v Saunders

LORD JUSTICE LONGMORE: This appeal raises a short point of construction on the terms of a sale of a domestic catering business. Ms Saunders, the defendant in the action, built up and ran a business called Elegant Cuisine in Oxfordshire, but after nine years or so of industrious work she decided to sell the business. She met a Mr Michael Ashton of Abbey Catering Limited ("ACL"), and an agreement was reached on 24 April 2001 for the sale by her to ACL of plant, equipment, contracts and goodwill. £50,000 was payable and paid immediately. ACL agreed further (expressly in return for the goodwill of the business) to discharge £30,000 worth of Ms Saunders' debts, and it was also agreed that there would be an additional payment of £50,000 if the Gross Sale Turnover for the period between April 2001 and April 2002 exceeded £350,000. This was to be paid and was paid in quarterly instalments, and by the time the dispute occurred, three of the quarterly payments (viz £37,500) had been paid.

At trial, ACL claimed that the Gross Sales Turnover had not exceeded £350,000 and that the £37,500 should be returned. Ms Saunders defended that claim and counter-claimed for the balance of £12,500. One of the matters which the judge had to determine therefore was whether the Gross Sales Turnover did indeed exceed £350,000. This depended on the definition of that phrase contained in clause 1-2 of Schedule 7 of the Agreement. That clause is in the following terms:

Besides other usual terms of the sort ordinarily found in business sales agreements, Ms Saunders made a separate employment agreement of the same date, whereby she agreed to work for ACL for a year and was thus able to bring considerable continuity to the business after the sale.

The judge held that, in order for Ms Saunders to be able to include the sums received or receivable for the purposes of the definition of Gross Sales Transfer, she had to prove that she was the effective cause of the introduction of the customer to ACL, not that she was the effective cause of the contract actually made between the client and ACL. He then proceeded to hold that, by way of example, Ms Saunders was entitled to include in the Gross Turnover figure:

On that basis, the judge then held (inter alia) that Ms Saunders was entitled to include sums invoiced to National Instruments Ltd (£1,302) and the Aston Martin Owners' Club (£6,536), but not a sum invoiced to a Mr Caldwell for his Blitz Theme 60th birthday party (£3,049.50). The judge decided many other matters not the subject of appeal and I need therefore only consider these three invoices. The facts leading up to the contracts evidenced by the invoices are exiguous but appear to be as follows.

The occasion was the opening of a new office on 28 March 2002. Ms Justine Barnett of the company gave evidence at the trial and said in her written evidence in chief that she found the name Elegant Cuisine by doing a Google search on the internet. The search called up the name Elegant Cuisine by virtue of a website that appeared to have been paid for by ACL. Moreover, a document was produced at trial which showed that Ms Barnett's enquiry on behalf of National Instruments appears to have been to an Abbey website belonging to ACL. The judge, however, must have accepted Ms Barnett's evidence in chief that she found the name Elegant Cuisine on the website. That is a finding of fact and, in my view, cannot now be challenged even if the factual determination was to be decisive.

The occasion for which Elegant Cuisine were contracted occurred on 5 April 2002. It was a Royal opening to be attended by HRH the Duke of Kent, although he was sadly unable to appear as a result of the untimely death of Her Majesty Queen Elizabeth, the Queen Mother. Some time in January, a Mr Crook of the Aston Martin Owners' Club looked at Yellow Pages and selected Elegant Cuisine from an advertisement in those pages, and on 29 January 2002 made an enquiry about catering for the occasion. That was on a date when Ms Saunders was not in the office, and in due course the enquiry crystallised into a contract made by some other member of ACL's staff. It does not appear who placed the advertisement in Yellow Pages, but it is common ground (a) that the most up-to-date entry had been paid for by ACL, and (b) that Elegant Cuisine had had an advertisement in Yellow Pages for some time before the contract was made.

Mr Caldwell and Ms Saunders had a mutual friend in a Mr Robin Picket, who caused Mr Caldwell to contact Ms Saunders, but it was in dispute whether the business with Elegant Cuisine could be said to have been "introduced" by Ms Saunders when it was made in January 2002. In her oral evidence, Ms Caroline Trevers, ACL's sales director, said that Ms Saunders took her (Ms Trevers) to see Mr Caldwell, but that she (Ms Trevers) dealt with the rest of the contract. Ms Saunders said that Mr Caldwell's initial contact was made with her after her employment with ACL had begun. The judge held that there was no evidence that Mr Pickett, let alone Mr Caldwell, had been an old customer of Elegant Cuisine (viz a customer before April 2001), and that therefore since he did not fit into any of the examples which I have set out above, Ms Saunders could not include Mr Caldwell's invoice in the Gross Sales Turnover.

This shows that the judge appears to have thought it critical that the business introduced by Ms Saunders had a pre-April 2001 origin. It would follow from this that he must have concluded (although he does not expressly say so) that it was sufficient for the website and the Yellow Pages advertisements to have been initiated before April 2001. The fact that they were consulted after April 2001 would not apparently make the consequent business any the less "introduced" by Ms Saunders. With respect, there is here a seed of inconsistency. Mr Pickett was, in effect, the equivalent of a human website or repository of information waiting to be asked for relevant information. If he knew of Ms Saunders and her business before April 2001, even if he had not used her services, he would be in no different position from a website or Yellow Pages advertisement initiated by Ms Saunders before April 2001, but activated after that date. A possible difficulty is that there appears to be no evidence about the time when Mr Pickett first knew of Ms Saunders and her business.

This absence is not, however, essential because, to my mind, if one asks what is meant by "introducing business" in the context of the sale of this business by a vendor such as Ms Saunders, who thereafter works for the company, the correct conclusion is that any business brought by her must be introduced even if contact with her is made only after the transfer date in April 2001. There is, in my view, nothing which requires the contact only to have been made before April 2001. Still less is there any requirement that the contact should have been an actual customer before that date. The phrase "in respect of the business as carried out by the Purchaser after the transfer date" contemplates introductions originating after the transfer date just as much as introductions originating before that date. That brings me conveniently to the parties' submissions.

Mr MacCabe for ACL took no express issue with the first two of the judge's categories which I have set out above because, as he said, he did not need to since the Yellow Pages case would effectively determine the appeal one way or the other. He submitted that, in order for Ms Saunders to earn her commission, she must have been the effective cause of the contract ultimately made by ACL in the name of Elegant Cuisine with the customer. He relied in his skeleton argument on paragraph 31-142 of Chitty on Contracts, 29th Edition, in the chapter entitled "Agency":

Secondly, Mr MacCabe submitted with a little encouragement from the bench that his clients had bought the goodwill of the company as well as its intellectual property, that that for example included the Yellow Pages advertisement, which whether or not it was originally placed by ACL, was certainly paid for by them in its up-to-date form, and that they would be paying twice over if the money from the Aston Martin Owners' club, for example, was included in the term "Gross Sales Turnover".

The difficulty with the first submission is that the contract with which this case is concerned is not an agency contract, but a contract for the sale of a business. More importantly, the terms of the sale contract do not say that the additional payment is due to Ms Saunders upon the "bringing about of any transaction" to use Chitty's words, but that it is due if the Gross Sales Turnover exceeds £350,000. The Gross Sales Turnover is defined to be:

The payment is thus due not on the bringing about of an event, but on the existence of ACL's entitlement to or receipt of sums relating to business introduced by Ms Saunders. Provided that she introduces business which brings in more than £350,000, she is entitled to the additional payment. She does not as such have to bring about any transaction, although if she introduces customers and business results, she will no doubt rightly be regarded as a cause, even if not the cause of the transaction.

It is, therefore, in each case a question of fact whether Ms Saunders did introduce the business. The judge has held that business obtained by the internet or through Yellow Pages was introduced by her. He does not elaborate his reasoning, but he must have assumed what one would, in any event, have expected to be the case, that Elegant Cuisine had organised its website and placed an advertisement in Yellow Pages for the relevant area at least one year before transfer and perhaps many years before the business was sold to ACL. The result of that is that, in my judgment, Mr MacCabe's first argument must fail.

As to Mr MacCabe's second argument, there is no doubt that ACL did purchase the goodwill and a not insubstantial sum (viz £30,000 or so) was apportioned in the contract for that acquisition. Nevertheless, a part of the price of the acquisition was the additional payment which depended on Gross Sales Turnover reaching £350,000. It is true that the definition of that term includes the phrase "relating to business introduced by the Vendor" and that those words must be intended to be words of limitation if, as one would expect, they are to have any meaning at all. Despite Mr MacCabe's valiant attempt to portray the defendant's argument as having to accept that these words had no effective meaning, I agree with Ms O'Sullivan, who appears for Ms Saunders, that the words do have a meaning, and therefore, for my part, I would accept her submission that what they have regard to by reference to the word "introduction" is, as she put it, "the first or preliminary step in a sequence of events culminating in the performance of a relevant contract.

That concept of introduction of business of what could truly be regarded as Elegant Cuisine business is, in my view, used in apposition to the words in brackets at the end of the definition clause, which I have set out, which make it clear, at any rate by example, what business is not to be regarded as having been introduced by the Vendor, namely business that could truly be regarded as Abbey Catering's original business. That is not, in my judgment, a surprising conclusion. This is a small business that was being transferred to an operator that was itself in a comparatively small way of business. It is not unusual in such circumstances that part of the price to be paid is to be paid out of the earnings of the business after the transfer date. I would therefore, not exactly for the same reasons as the judge, reject Mr MacCabe's argument.

That leaves the cross-appeal, and since that may matter on the figures, I will deal shortly with the cross-appeal. It seems to me that, on any view, Mr Caldwell was indeed introduced to ACL by Ms Saunders. Had it not been for the fact that there was the mutual friend in the form of Mr Pickett, it is improbable in the extreme that the business would ever have come to ACL at all. For the reasons I have given in my description of the facts leading up to the Blitz Theme party, I would hold that that party was indeed an introduction of Ms Saunders.

In conclusion, I would say that the appeal should be dismissed and the cross-appeal should be allowed.

LORD JUSTICE CHADWICK: I agree. The short question on this appeal is the meaning to be given to the expression "the Gross Sales Turnover" in the context of the Seventh Schedule of the Sale and Purchase Agreement of 24 April 2001. The answer to that question is of importance to the parties because it will determine whether, as the appellant contends, it is entitled to be repaid £37,500 already paid on account of the additional payment of £50,000 for which clause 2.2.2 of the agreement provides; or whether, as the respondent contends and as the judge found, she is entitled to payment of the balance of £12,500 of that additional sum of £50,000.

Gross Sales Turnover is defined in paragraph 1-2 of the Seventh Schedule to the Sale and Purchase Agreement. It means:

The question of contribution reduces to what is meant in that context by the phrase "business introduced by the Vendor". Two points are reasonably clear. First, business introduced by the Vendor includes, at the least business, which is the subject of contracts already made before the transfer date defined in the Sale and Purchase Agreement (9 April 2001) for the sale of goods or the performance of services to be sold or performed after the transfer date.

That is clear because Gross Sales Turnover must include turnover derived from "Contracts" as defined in clause 1.1.9 of the Sale and Purchase Agreement -- see clause 2.1.3 of the Agreement. That clause provides that the assets subject to the sale and purchase of the business as a going concern is to include assets in a list of assets of the Vendor used in the conduct of the business for the sums specified. That list includes:

So whatever else the Additional Payment is intended to cover, it is clearly intended to cover the benefit of the pre-transfer Contracts. In measuring Gross Sales Turnover the income or revenue derived from those contracts must be included. "Contracts" means "the current contracts, pre-bookings and engagements of the Vendor in relation to the business, including those listed in the First Schedule and those referred to in paragraph 1-6.2 of the Seventh Schedule".

The point is reinforced, first, by the list of pre-transfer contracts in the First Schedule; and, second, by the terms of paragraph 1-6.2 in the Seventh Schedule. That paragraph refers to two particular pre-transfer contracts -- those made with clients named "Complete Events" and "Maidenhead Steamers" -- in relation to which a projected Gross Sales Turnover for the period of 12 months commencing on the transfer date is set out and, in effect, guaranteed.

The second point that is also reasonably clear is that the phrase "business introduced by the Vendor" in paragraph 1-2 of the Seventh Schedule is not confined to business which is the subject of pre-transfer contracts or bookings. It must include some post-transfer date contracts or bookings. That appears from the terms of paragraph 1-6.1 in the Seventh Schedule:

Paragraph 1-6.1 goes on in these terms:

The Vendor's obligations under the service agreement -- or as it is described internally, the employment agreement -- into which she entered on 24 April, are set out at Clause 3. They include, at 3.1 2, the obligations to do all in her power to promote, develop and extend the business of Elegant Cuisine and of the purchaser company; and at all times and in all respects to conform to and comply with the proper and reasonable directions and regulations of the board and the managing director of the company.

So understood, it seems to me clear that what the parties had in mind when they used the phrase "business introduced by the Vendor" was not only the business which derived from the pre-transfer contracts and bookings, but also business that was generated by the activities of the Vendor as employee under her service agreement in fulfilling her obligation to promote, develop and extend the business of Elegant Cuisine. The phrase "business introduced by the Vendor" has to be construed in that context. It means Elegant Cuisine business in the sense which I have just described. The distinction which the parties intended under paragraph 1-2 in the Seventh Schedule was between business which was, in effect, Abbey business -- that is to say catering functions carried out by Abbey in its own name -- and business which was Elegant Cuisine business -- that is to say, the business formerly carried on by the Vendor which had been purchased by Abbey, but which she was to promote, develop and extend in accordance with obligations under the service agreement.

Understood in that sense, the question of fact for the judge was whether the three contracts to which my Lord, Longmore LJ, has referred are contacts which fall within the scope of business introduced by the Vendor. To my mind they clearly are contracts which fall within that scope. They all derive from her efforts in promoting, developing and extending the business of Elegant Cuisine. Insofar as the judge found that to be the case in respect of two of the them, he was right. Insofar as he failed to find that in respect of the third contract, the Agridry contract, which is the subject of a cross-appeal, he was wrong.

Accordingly, I too would dismiss the appeal and allow the cross-appeal.

LORD JUSTICE PILL: I also agree. Other points were in issue before the judge. The remaining point relates to a provision in the Seventh Schedule of the Sale Agreement by which an additional payment was in certain circumstances to be paid to the Vendor. I agree with the judge that the relevant clause, which is clause 1-2 of the Seventh Schedule, should be read as an earn-out clause. I also agree with the distinction he drew between an approach to commission where the word "introduced" is normally of crucial importance and the circumstances in the Seventh Schedule.

The appellants, ACL, ran interior catering such as canteens. They had only a small turnover in outside catering, and their motivation, as appears clear from the statement of Mr Ashton, their managing director, in purchasing Elegant Cuisine was to extend their business in outside catering. Their motivation clearly emerges from the statement of Mr Ashton. The Elegant Cuisine business was on the market with an advertised turnover of £416,420 in the year to 31 January 2000. At that time the ACL turnover in that field was about £100,000 a year. He wished to purchase the respondent's business in order to build up outside catering, and that was the attraction of Elegant Cuisine to ACL. Confirmation of that was in the service agreement which ACL made with the respondent, and imposed duties upon the respondent, as Chadwick LJ has indicated, to promote, develop and extend the business of Elegant Cuisine. It is not suggested that, with her dual responsibilities, the respondent was in any way in breach of her duties.

I would construe the disputed expression "introduced by the vendor" in paragraph 1-2 against that background. Viewed in context, it appears to me to be an expression intended to cover ACL's wish for assurance that the turnover of Elegant Cuisine would be maintained during the year after purchase. ACL could achieve that partly through the duties they had required of the respondent in the contract of employment. They also gave the inducement of the substantial additional payment for which the Seventh Schedule to the Agreement in certain circumstances provided.

In my judgment, what was intended by the expression "introduced by the Vendor", somewhat inappropriate though the word "introduced", with its commission context and the considerations which apply in that context may be, was that anything which came under the label of Elegant Cuisine should be included within the sum to be achieved if the additional payment was to be made. In his statement Mr Ashton stated in relation to discussions with his solicitor:

In reaching that conclusion I bear in mind the words in parenthesis at the end of clause 1-2:

Moreover, in my judgment, consistent both with the intentions of the parties and with that reading of the clause, is Clause 1-6 of the contract. Chadwick LJ has recited a part of it. ACL entered into an obligation to use all reasonable endeavours to ensure that it successfully staffs, manages and operates all events and bookings introduced by the Vendor and accepted as such by the purchaser. There plainly was an intention to maintain the name Elegant Cuisine and the business which that company formerly had. As part of that clause, ACL acknowledged by reference to the turnover figure of £350,000 on which the additional payment of £50,000 depended, that:

For those reasons, I too come to the conclusion that this appeal should be dismissed. I also agree that the cross-appeal should be allowed. In the circumstances I agree with Longmore LJ, and the circumstances of that business do come within the expression "introduced" even in a more conventional sense.