Von Essen Hotels 5 Ltd v Vaughan & Anor

This appeal is from a declaration made by Etherton J. The declaration is set out in the court order dated 15 December 2006. The judge ruled by way of a preliminary issue of law on the construction of a written contract for the sale of shares. The disputed provisions set the procedure for serving notice by the purchaser of the shares on the vendors claiming breach of warranty. The notice was a pre-condition for making a claim.

The declaration in favour of the respondent vendors, Roy and Daphne Vaughan (the Vaughans), was that the appellant purchaser company (Von Essen) failed to give valid notice of a “Relevant Claim” for breach of warranty within time set in the Share Purchase and Asset Agreement dated 15 September 2003 (the Agreement). Under Schedule 3 of the Agreement a number of warranties were given by the Vaughans to Von Essen in relation to the company in which the shares were held, its accounts and its assets.

The sale was of the Vaughans’ shares in Courtlands Country House Hotels Limited (the Company), which owns a small chain of luxury hotels in the Cotswolds. The initial consideration for the sale was £9m (less bank borrowing and subject to adjustment after preparation of completion accounts by an independent accountant), plus a Loan Note in the sum of £4m issued by an associated company of Von Essen. An option was given to the principal of Von Essen (Mr Andrew Davis) to redeem the Loan Note by making payment of £2m within the period of 2 years. There were provisions in clause 4 of the Agreement for giving notice to exercise the option and for making payment.

Consequent on his declaration the judge dismissed Von Essen’s Part 20 claim for a contrary declaration and for damages and ordered it to pay the Vaughans’ costs. He granted permission to appeal.

The preliminary point taken by the Vaughans in answer to Von Essen’s allegations of breach of warranty by them is that, on the true construction of the Agreement as applied to the uncontested facts, there was neither actual nor deemed service of notice of a “Relevant Claim” within the time limit set by the Agreement. Written notice of a relevant claim for breach of warranty had to be given not later than 30 September 2005.

The Vaughans also deny that there has been any breach of warranty.

Part 3 of the First Schedule provided that

TIME LIMITS

Notice to Vendors

The Vendors shall have no liability in respect of any Relevant Claim [where “Relevant Claim” was defined as “any claim under the indemnity set out in clause 6.7, the Warranties, the Tax Deed or the Disclosure Letter”] unless the Purchaser shall have given notice in writing to the Vendors of such Relevant Claim specifying (in reasonable detail) the matter which gives rise to the Relevant Claim, the nature of the Relevant Claim and the amount Relevant Claimed [sic] in respect thereof not later than

Clause 11.9 of the Agreement provided for the deemed service of notices.

if delivered, at the time of delivery;or

if posted, at 10a.m. on the second business day after it was put in the post;or

if sent by facsimile process (in the case of the Purchaser only ….

The definitions in clause 1.1 of the Agreement provide that “Vendors’ Solicitors” , where the context admits, means

As the facts affecting service of notice were uncontested, there was no oral evidence at the trial of the preliminary issue.

The salient facts are that the solicitors acting for the Vaughans in the making of the Agreement and the Option were Kendall & Davies (Mr RL Davies). As an actual or potential conflict of interest involving that firm subsequently arose, the Vaughans instructed another firm Paul Davidson Taylor (PDT) in about September 2004. Thereafter in 2004 and 2005 Von Essen’s solicitors, Goodman Derrick, corresponded with PDT, not with Kendall & Davies, about the Agreement, the completion of accounts and the exercise of an option contained in the Agreement.

As regards the exercise of the option by Mr Davis, payment of £2m under the Agreement was to be made to Kendall & Davies, but it was later expressly agreed in August 2005 that the notice exercising the option granted to Mr Davis should be given and that the payment should be made to PDT. However, no such express agreement was made that notice of claim for breach of warranty should be served on PDT.

On 14 September 2005 Goodman Derrick sent a 4 page letter by first class post to the Vaughans at the home address stated in the Agreement. The letter gave formal notice of the Relevant Claims under the Agreement. Copies of the letter and enclosures running to 51 pages were sent with a compliment slip to PDT, who received them on 15 September. No copies of the letter or the enclosures were sent to Kendall & Davies marked “for the attention of Mr RL Davies” or at all until 26 October 2005. Those copies were received by Kendall & Davies, but by then the contractual deadline of 30 September 2005 had passed.

The Vaughans were away on holiday from 14 September until 8 October 2005. They informed PDT of their holiday plans. They never actually received the letter sent to them by Goodman Derrick on 14 September. Thus there was no actual service of the notice on them.

The issue is whether there was deemed service of the notice on the Vaughans before the contractual deadline. The Vaughans’ preliminary point is that service of a copy of the notice on Kendall & Davies was required for deemed service. This was not done before 30 September 2005. Von Essen failed to comply with the requirements for deemed service. It is not entitled to pursue its claims for breach of warranty.

In the proceedings that followed the Vaughans were the claimants, seeking a declaration that no Warranty notice was given to them prior to the contractual deadline. Von Essen was the defendant counterclaiming for a declaration that such notice was given to the Vaughans in time and damages for breach of warranty.

The careful judgment given by Etherton J deals with the notice point in two parts.

First, on the question of actual notice (paragraphs 54 to 61 of the judgment) it was held that Von Essen failed to establish that actual written notice of a relevant claim was given to the Vaughans. They had not received a copy of the notice under clause 11.9.1. Service of the notice on the solicitors PDT was not actual notice. It was not pleaded that PDT had apparent or ostensible authority to receive the notice as the Vaughans’ agents. It was not established that PDT had express or implied authority to receive a copy of the notice.

Secondly, on the question of deemed notice (paragraphs 62 to 74 of the judgment) Etherton J held that Von Essen had not complied with the mandatory requirement of the Agreement under clause 11.9.1 for sending a copy of the notice to the respondents’ named solicitors “Kendall & Davies for the attention of RL Davies.” The solicitors to whom it was sent on 14 September 2005 (PDT) were not the solicitors specified in the deemed notice clause.

On the deemed notice point the judge gave these reasons.

Mr Gregory Mitchell QC (who did not appear in the court below) introduced his detailed submissions on clause 11.9.1 by citing some authorities on the general policy of deemed service provisions and the approach of the courts to such provisions commonly found in professionally drafted leases and contracts. He also quoted statutory provisions, such as section 196 of the Law of Property Act 1925 and section 23 of the Landlord and Tenant Act 1927. Deemed service provisions are, he explained, designed to achieve certainty by eliminating the difficulties involved in proving actual receipt of a notice or other document. Certainty is achieved by the device of an agreed irrebutable presumption of service placing the risk of non-receipt of the document on the intended recipient. He then developed his submissions under 4 headings.

Mr Mitchell accepted that his primary argument on the appeal regarding deemed service of the notice on the Vaughans was not put to the judge, but argued that it was open to him on the pleadings. It was pleaded that Von Essen served notice of a relevant claim upon the Vaughans by sending by first class post the original of the 14 September 2005 letter to the Vaughans at their address at Larch Hill House in accordance with clause 11.9.1. and that the notice was deemed to have been served on them at 10 a.m on Friday 16 September 2005.

On this point it is, of course, irrelevant to the deeming provision that the Vaughans did not actually receive the notice. It is also irrelevant that no copy of the notice was sent to Kendall & Davies. On Mr Mitchell’s primary construction of clause 11.9.1 it is unnecessary to consider whether the service of a copy of the notice on the Vaughans’ solicitors before the deadline was prescriptive or permissive.

The contention is simply this: under clause 11.9.1 “any notice” to be served under the Agreement and sent by first class delivery post to the party to be served shall be deemed to have been served, if posted, at 10 a.m. on the second business day after it was put in the post. Von Essen’s evidence as to the addressing and posting of the letter of 14 September was not contested. In those circumstances the contractual process of deemed service applied to the notice sent in the post to the Vaughans. On its own that notice was sufficient for deemed service of the notice on them. Mr Mitchell submitted that this construction brought clause 11.9.1 in line with the option notice requirements in clause 4 and achieved a sensible result, which made it unnecessary to consider the nature and effect of the provisions for sending a copy of the notice to Kendall & Davies.

In my view, this way of putting the deemed service point is open to Mr Mitchell on the pleadings. Mr Mitchell’s problem is not that the point was made explicit for the first time in his submissions to this court. His real problem is that this construction of clause 11.9.1 can only be achieved by cutting up clause 11.9.1 up into separate pieces, instead of reading it as a whole, and then by cutting out the provision for sending a copy of the notice to “the Vendors’ solicitors.”

Mr Mitchell’s construction involves detaching the later part of the clause “Any notice …”, which deals with the deemed timing of service effected by different methods, from the earlier part of the clause, which provides for service of any notice or other document to be served under the Agreement on the parties: first, on the Vaughans as vendors and, secondly, on Von Essen as the purchaser. This construction does not pay due respect to the drafting of clause 11.9.1.

Read as a whole, as it should be, the clause is drafted in a logical sequence and in a coherent fashion. It provides, first, for service by delivery or by post; secondly, it identifies with contact details the persons to be served; and, thirdly, it spells out the deemed time of service according to the method of service employed (delivery, post or fax). When the clause is read in this way Mr Mitchell cannot escape from the difficulty, which he tackles in his second submission, of having to cut out from clause 11.9.1 the provision for sending a copy of the notice to the “Vendors’ solicitors.”

My general comment at this stage is that the words beginning “With a copy to the Vendors’ solicitors …” in the Agreement, which was negotiated with the professional assistance of lawyers and drafted by them, must have been inserted for a reason. It covers, for example, the situation in which the Vaughans move from the Larch Hill House address stated in clause 11.9.1 of the Agreement contract without giving notice of a change of address under clause 11.9.3. This is a possible additional route by which notice of claim may be brought to the Vaughans’ attention.

Simply posting the notice to the Vaughans at their Larch Hill House address is insufficient to satisfy the deemed notice provisions in clause 11.9.1 In the current judicial jargon for the interpretation of legal instruments it is not for this court to “read out” of this Agreement an express provision agreed by the parties for sending a copy of the notice to “the Vendors’ solicitors.”

The fact is that we were not there when the parties and their legal advisers were discussing, negotiating and drafting the terms of the Agreement. In the face of what they drafted for inclusion in the Agreement it would be a strong thing for the court to do what Mr Mitchell argues for. He is asking the court to interpret the Agreement in a way which totally ignores part of the contractual provision for deemed service under clause 11.9.1.

Mr Mitchell then sought to meet this point by the submission, to which I now turn, that the sending of a copy of the notice to the “Vendors’ solicitors” was not mandatory for achieving deemed service.

Mr Mitchell’s second submission was that, if he was wrong on his primary argument, and it was necessary to consider the provision for sending a copy of the notice to the Vendors’ Solicitors, this was a permissive (or directory) step rather than a prescriptive (mandatory) one. Thus, the failure of Goodman Derrick to send a copy of the notice to Kendall & Davies did not invalidate the deemed service of the notice achieved by sending the notice in the post to the Vaughans.

Mr Mitchell contended that the provision was permissive as its purpose was to deal with possible problems caused by any future change of address by the Vaughans without the knowledge of Von Essen and without having given notice of change of address under 11.9.3. Even if the Vaughans had moved from the specified address, the notice could still be validly given to them at that “deemed address” in clause 11.9.1. Sending the copy of the notice to the solicitors would be a way of bringing the notice to their attention in such a case, but it was not something that had to be done to invoke the deemed service provision. On the facts of this case the sending of the copy to PDT was as likely, if not more likely, to bring the matter to the attention of the Vaughans in a timely way than sending the copy to Kendall & Davies. Insisting on literal compliance with the sending of a copy was uncommercial. The parties would have intended to allow for some deviation from the strict letter of clause 11.9.1

This construction should also be rejected. Clause 11.9 provides for sending the notice by post “to be served as follows.” What follows is not just sending the notice to the Vaughans at their home address. There is also “to be served” a copy of the notice to their solicitors. Both are required for the notice “to be served” under the Agreement, whether by delivery or by post. By labelling the sending of a copy to the Vendors’ solicitors as “permissive” Mr Mitchell seeks to downgrade the sending of the copy from a document “to be served” to a document which “may be served” at Von Essen’s discretion. The requirements for documents “to be served” under this Agreement are not framed in that fashion.

Mr Mitchell’s third submission related to the identity of “the Vendors’ solicitors.” He said that, if he was wrong on the permissive point, and the service of a copy on solicitors was required by the provisions for deemed service of the notice, the definition of “Vendors’ Solicitors” was wide enough to include PDT, to which firm the notice of 14 September 2005 was sent by Goodman Derrick. PDT were, he argued, “a firm of lawyers subsequently instructed as their agents” i.e. as the Vaughans’ agents. After the conflict of interest affecting Kendall & Davies led to the Vaughans instructing PDT in September 2005, PDT were their agents in dealing with the Agreement and breach of warranty issues. This explained why Von Essen’s solicitors sent the notice and enclosures to them, as they did the option notice and payment. PDT communicated the notice of claim and enclosures to the Vaughans.

This construction must be rejected. The expression “Vendor’s Solicitors” is defined in clause 1.1 to mean Kendall & Davies “where the context admits.” The context in clause 11.9 not only admits the meaning as Kendall & Davies, as distinct from any other firm of lawyers instructed to act as the Vaughans’ agents: it positively points to that firm in its reference to marking the copy for the attention of RL Davies, the solicitor in the firm who acted for the Vaughans in negotiating and concluding the Agreement which contained the warranties

Mr Mitchell’s fourth and final point was that actual notice was given to the Vaughans by sending the copy to PDT, because that firm had the implied actual authority of the Vaughans to receive the copy of the notice on their behalf.

Mr Mitchell accepted that this point was not open to him on the pleadings which contained a denial by his client that the copy letter to PDT purported to give the Vaughans notice of a relevant claim. He sought leave to amend to change the plea from a denial to an admission. He then cited Westway Homes Limited v. Moores [1991] 2 EGLR 193 (a Court of Appeal case in which a purchaser gave notice of exercise of an option to the vendor’s solicitors who were held to have had implied authority to accept the notice) in support of the proposition that, on the particular facts of this case, PDT had implied authority to accept receipt of the copy of the notice and that was actual notice to the Vaughans. PDT were instructed by the Vaughans in September 2004 and were acting for them in relation to a dispute concerning the completion accounts, which overlapped the possible claims for breach of warranty. The claims were a live issue in September 2005.

I would not rule this point out for lack of pleading or by refusing leave to amend the pleading as indicated by Mr Mitchell. An amendment to the pleading would, however, be pointless as this submission fails for lack of evidence establishing express or implied actual authority on the part of PDT to receive the copy of the notice under clause 11.9.1.

The judge’s conclusion on the implied authority point was clear and comprehensive. Mr Mitchell contended that it was wrong. Etherton J said-

Mr Mitchell focussed on the actual receipt of the copy notice by PDT on 15 September 2005, emphasising that PDT were solicitors currently instructed by the Vaughans in relation to the preparation of completion accounts, a matter that was ongoing in September 2005. PDT had also been instructed in relation to the associated exercise of the Option at least until 8 September 2005.The receipt of notice was, he said, within the implied authority of PDT in the circumstances of this case. The purpose of the notice was to crystallise the claims made and to bring them to the Vaughans’ attention. This purpose is sufficiently achieved if the copy of the notice is sent to solicitors who are currently instructed by the Vaughans in relation to the very transaction and Agreement in issue.

Mr Mitchell submitted that the judge took the wrong approach in asking whether PDT had authority to accept the notice. He should have asked whether PDT were an agent of the Vaughans with a duty to pass on the notice they received to their principals. He cited Tanham v. Nicholson (1872) 5 App Cas 561, a case on the implied authority of a farm manager to receive at the farm, on behalf of her tenant father, a notice to quit the farm. The daughter manager had a duty to pass the notice to the tenant.

In my judgment, the judge’s conclusions on the implied agency point were sound. On several occasions in his written and oral submissions Mr Mitchell said that PDT were instructed “in place of” Kendall & Davies. This is incorrect. The Vaughans retained Kendall & Davies as solicitors who had their express authority to accept service of the notice of claim under the Agreement. As long as this was the case, it was bound to be very difficult for Von Essen to establish that another firm of solicitors, who did not have the Vaughans’ express authority to do so, nevertheless had their implied authority. No case for the implied authority of PDT to accept the notice of claim was made out on the uncontested facts before the judge.

It is no doubt true that once PDT received the letter purporting to give notice, its limited retainer by the Vaughans created a duty to pass the letter onto them. But if that were enough to establish implied authority to accept service, every person acting for a limited purpose for a principal on any issue would have implied authority to accept service of any document on any topic. For the reasons explained in the decisions cited by the judge, and as is (or should be) well understood by business men and solicitors both, that is not the law.

For the above reasons Von Essen have not demonstrated that the judge’s construction of the notice provisions in the Agreement was wrong. I would dismiss the appeal.

I agree.

I also agree.