Akzo Nobel UK Ltd v Arista Tubes Ltd

This action is brought by Akzo Nobel UK Limited (Akzo), as seller, against Arista Tubes Limited (Arista), as buyer, for specific performance of an agreement to take underleases of five units totalling 75,000 square feet of factory premises at Units 3-7 Gunnels Wood Industrial Estate, Stevenage (the Premises). On 30 March 2009 Floyd J dismissed the action. He gave permission for an appeal, which turns on a short point of construction of a notice provision in the Business Purchase Agreement (BPA) made between the parties on 31 December 1998.

Arista, a company newly formed for the purposes of a management buy-out, purchased from Akzo (formerly Courtaulds PLC) the “Plastic Tubes Europe” business carried on at the Premises through a subsidiary, Courtaulds Packaging Limited. Akzo, which had purchased the business and the Premises under a Business Transfer Agreement dated 5 November 1998 (BTA) in order to sell them on to Arista, agreed to arrange for the lease of the Premises to be assigned to it and for it then to grant underleases of the Premises to Arista for the residue of the term, less 5 days. The Premises were all leasehold being subject to a head lease for a term of 25 years from 25 March 1987. The leasehold interest in the Premises could only be assigned to Akzo and the Premises could only be underlet to Arista with the landlord’s consent. Akzo agreed to use all reasonable endeavours to procure consents to the transactions (the Property Consents). Pending the obtaining of the Property Consents, the completion of the assignment and the execution of the underleases Akzo and persons authorised by it were permitted to have the unrestricted use and occupation of the Premises and Arista was in its turn allowed into occupation of the Premises on the same terms. Arista in fact paid the licence fee for its occupation of the Premises direct to the landlord, not to Akzo. Azko was not intended to profit from the assignment or from the underleases of the Premises. Its role in relation to the Premises was to facilitate the sale of the business to Arista.

Arista remained in occupation under the licence arrangement for another 8 years. During that period Akzo made efforts to obtain the Property Consents and to obtain a transfer of the lease into its own name but, due to various problems, the assignment of the lease and agreement for the grant of the Property Consents were not obtained by Akzo until 13 December 2007. Akzo then called upon Arista to complete the underleases of the Premises in accordance with its obligations under the BPA. Arista refused, saying that it was too late for Akzo to require it to take the underleases. As Akzo well knew, Arista had already taken steps to terminate the parties’ obligations under the BPA, having decided that it no longer required the Premises for the purposes of its manufacturing operations in the UK and that it would vacate them at the end of January 2008. Arista had accordingly served on Akzo on 30 October 2007 a notice to terminate the obligations of the parties in respect of the Premises on 31 January 2009. Arista purported to do so in exercise of its rights under the BPA. Its notice to Akzo and the landlords was in the following terms-

“Those Agreements require us to give three months’ notice to terminate and we accordingly therefore give notice to terminate our Licence Agreement on 31 January 2008, when all five units will be vacated.”

The notice was given under paragraph 11 of Part B of Schedule 7 to the BPA-

“If by [31 December 1999] all Property Consents shall not have been obtained in respect of any Business Property then either the Seller or the Purchaser may, by three months notice in writing to the other, terminate on the date of expiry of that notice, the obligations of the parties hereto in respect of that Business Property under this Schedule 7 (Properties) (but without prejudice to antecedent breach) in which event the Purchaser shall vacate the Business Property in question by the end of such notice period.”

Important points to remember are that Akzo did not obtain a transfer of the lease or the Property Consents until after Arista had served the notice to terminate; that it was a notice, which could have been given by either side, to terminate the obligations of the parties in respect of the Premises; that it was not a notice to complete the BPA in relation to the Premises; and that in the specified event (as to which there is a dispute whether it was the giving of the notice as the judge held, or the expiry of the notice, as Akzo contends) Arista had to vacate the Premises by the end of the notice period.

Arista’s case is that its obligation to take the underleases did not arise before the service of the notice, that it was entitled to serve the notice, because Akzo had not obtained the Property Consents before the specified date, and that the obligation to take the underleases could not arise after service of the notice, because the notice had terminated the parties’ obligations under the BPA. According to the terms of paragraph 11 the effect of giving notice is to terminate each party’s obligations under Schedule 7 and to require Arista to vacate the premises by the expiry of the date of the notice (31 January 2008). On service of the notice Arista was under an obligation to vacate the premises at or before the end of the 3 months, which would give it time to move its plant out before its licence to occupy and its obligation to pay the licence fee actually expired: the notice period also gave Akzo 3 months in which to find someone else to occupy the Premises.

Arista contends that the notice was legally valid and that it effectively terminated the parties’ obligations, including Arista’s obligation to take the underleases. Akzo’s outstanding obligations to obtain the lease and the Property Consents fell away on the service of the notice to terminate. There was no point in them any more. After notice to terminate was given it was too late for Akzo to perform its obligation to obtain the lease or the Property Consents. To allow it to do so would be inconsistent with the termination of the parties’ obligations by the notice and with Arista’s unqualified obligation to vacate the premises on the expiry of the notice. In other words it was legally impossible for Akzo to disapply a notice validly given by obtaining the lease and the Property Consents during the running of the notice period.

Akzo’s case is that, if the lease and the Property Consents are obtained during the running of the notice period, Arista is under an obligation to take the underleases. The express obligation on Arista to vacate the premises is overridden by the obligation to take up the underleases, which arose on the obtaining of the Property Consents. This is a continuing obligation which is expressly saved by the words in parenthesis. The obligation to vacate cannot take effect if the Property Consents have been obtained before the expiry of the notice. The service of the notice had no legal effect until it expired.

The judge preferred Arista’s construction. He held that Arista was justified in not completing the underleases. It had served a valid notice under paragraph 11 to terminate the obligations of the parties. An obligation to complete the underleases could not arise after that notice was served. The specific performance action failed.

The judge gave 4 reasons for his conclusion. They are expressed so clearly and concisely that they should be set out in full -

“31.

Firstly, I think that this construction gives effect to the purpose of the paragraph, which is to enable the parties to bring an end to the relationship if one of them chooses to do so and if the Property Consents have not been obtained at the expiry of 12 months from the date of the BPA. It is inconsistent with this purpose to allow an obligation to complete to arise after the notice has been served. The whole point of the notice is that time for completion has passed.

32.

Secondly, service of a notice leads automatically to the defendant vacating the premises precisely because there has been no completion. It is not consistent to give the notice these automatic and final consequences and at the same time allow an obligation to complete to be created after service of the notice.

33.

Thirdly, the claimant’s construction produces business uncertainty. If the claimant were able to trigger completion at any time during the notice period, the defendant could be placed in a position where it would not know where it stood until shortly before the expiry of the period. I think Mr Gaunt is right that the clause contemplates a period of certainty where the claimant can seek another tenant and the defendant can make preparations to vacate. Given the factual background of the use of the premises for industrial purposes, where giving vacant possession involves moving out of a manufacturing facility, it is not surprising that such a period is provided for. The ability to require completion within the notice is destructive of reasonable commercial certainty.

34.

Fourthly, if the purpose of the paragraph were, as the claimant contends, to allow the failure to complete to be remedied within the notice period, I would expect this to have been effected by clear words. One would also have expected that the obligation to vacate at the end of the notice period to have been qualified expressly to allow for this possibility. None of this was done.”

As is evident from the judge’s summary, the competing arguments about the intentions of the parties rest on familiar facets of legal interpretation: the circumstances surrounding the BPA, the purpose of the notice provision in paragraph 11, the words chosen to express the wishes of the parties and the commercial consequences of differing interpretations.

Mr Pymont QC appearing for Akzo took the court through the detailed evidence of the circumstances surrounding the BPA in support of his contention that the judge construed paragraph 11 on a narrow and mistaken basis. Mr Pymont highlighted the fact that Akzo’s interest in the Premises was not to profit from being the mesne landlord: its role was only to facilitate the acquisition of the plastic tubes business and the Premises on which it was to be carried on by the newly formed company Arista. In his reliance on the interests of commercial certainty and convenience the judge had considered Arista’s point of view, but ignored the nature of Akzo’s interest in the Premises. There was nothing commercially absurd in Akzo being allowed a last chance to achieve the Property Consents before the expiry of the notice served by Arista. The fact that the Property Consents were obtained after the giving of the notice did not mean that Arista was free from the commercial risks involved in agreeing to take the underleases of the Premises.

The judge was also criticised for not following the draftsman’s language. His construction of paragraph 11 actually contradicted clear express provisions about the effect of a notice on the obligations of the parties in respect of the Premises under Schedule 7, whether they are Arista’s obligations relating to the occupation of the Premises, or Akzo’s obligations to use reasonable endeavours to procure the Property Consents or Arista’s obligations to execute underleases: the notice terminates all the parties’ obligations “on the date of expiry of that notice.” That meant that they all remained in full force and effect until then and were not affected by the mere service of the notice. The words in parenthesis – “(without prejudice to antecedent breach)” – made it clear that the notice did not extinguish the right to sue for breaches of obligation occurring before the giving of the notice or for any obligations which fell to be performed during the notice period, but which remained unperformed at the expiry of the notice. Remedies for breach of the parties’ obligations continued to be available during and after the expiry of the notice period.

Mr Pymont QC also submitted that the judge was wrong to hold that the service of the notice was the “event” referred to in paragraph 11 which brought about the obligation to vacate the Premises by the end of the notice period. Paragraph 11 made no reference to “service.” The only “event” referred to in the paragraph was the termination of the parties’ obligations on the expiry of the notice, other than those arising from antecedent breach. In this case there was, before the expiry of the notice, an antecedent breach by Arista in refusing to execute the counterpart underleases. The obligation to vacate the Premises took effect subject to and without prejudice to that prior obligation. The obligation to vacate did not take effect, as Arista would, on performance of its obligation to execute the underleases, have had the right to remain in the Premises.

On Mr Pymont’s approach to the construction of paragraph 11 it followed that the judge’s decision defeated the clear language of the provision and that the reasons that he gave for his construction of it were insupportable: the purpose on which he replied was derived from his flawed construction of the provision, not from an objective source; he wrongly identified the “event” which gave rise to Arista’s obligation to vacate the Premises; and the commercial uncertainty mentioned by him only arose if the matter was considered from one side’s point of view (Arista’s).

As I said at the outset this is a short point of construction of a single paragraph in a Schedule to a commercial agreement. It ought to be capable of decision without an extensive analysis of its circumstances, consequences or composition.

Beginning with the nature of the notice itself, it is not disputed that Arista was entitled to serve the notice on Akzo on 30 October 2008. It was a valid notice. But the crucial question is what sort of notice was it? It was not a notice to complete the parties’ transaction by giving Akzo a last chance and by setting a deadline for it to take a transfer of the lease and to obtain the Property Consents. It was a notice to terminate the parties’ contractual obligations, a provison which enabled either party to escape from obligations in relation to the Premises. Such a notice could be served by either party if Azko had not obtained the Property Consents by the stipulated date. The obligations which could be terminated included Arista’s obligation to pay a fee for its licence to occupy the Premises. One would not normally or reasonably expect that, in the absence of express provisions in the BPA or fresh agreement between the parties, a notice terminating the parties’ obligations, once given, could be unilaterally revoked or reversed or that, as Mr Pymont strongly contends, it has no legal effect on the parties’ obligations before the notice has expired. In my view, the immediate effect of the notice was that there was no longer any obligation on Akzo to use reasonable endeavours to obtain Property Consents or an assignment of the lease, or on Arista to take underleases of the Premises.

Turning next to the practical consequences of Akzo’s construction, its effect is that, subsequent to the notice and at any time while the notice period is running, Azko may nullify the valid notice of termination by obtaining the Property Consents. That means that, right down to the very last moment of the notice period, neither side could be sure whether Arista would have to vacate the Premises, or would have to go on paying the licence fee, or be obliged to take up the underleases. It would be surprising to say the least if the uncertainties of such an uncommercial arrangement accurately reflected the parties’ commercial intentions.

It is common ground that the notice provision must be construed as a whole, in its context and in its ordinary and natural meaning. As I read paragraph 11 the parties clearly agreed that, if the Property Consents had not been obtained by 12 months after the date of the BPA, they were entitled to serve notice in writing terminating the parties’ obligations in respect of the Premises. Arista’s obligations included the obligation to take the underleases, as well as its obligation to pay the fee under the Licence Agreement. On service of the notice the position of the parties was that Arista would have to vacate the Premises by the end of the notice period and it would cease to be under an obligation to pay the licence fee, or to be under an obligation to take the underleases of the Premises. The language of the paragraph does not allow Akzo to reverse or vary that position on Arista’s obligations, such as by obtaining the Property Consents at any point down to the expiration of the notice. The obligation to take the underleases did not arise before the notice was given and the purpose of giving the notice was to prevent it from ever arising subsequently, given that Arista would be bound to vacate the Premises by the expiry of the notice period.

On particular points I agree with the judge that the words “in which event” in the paragraph refer back more naturally to the giving of the notice as being the date when the obligation to vacate the premises arose than, as Mr Pymont argues, to the date of the expiry of the notice. The obligation is to vacate “by the end of such notice period.” That may include before, as well as at, the end of the notice period. The obligation that arose when the notice was given had to be performed by the end of the notice period.

I also agree with the judge that the words in parenthesis more naturally refer to the preservation of Akzo’s right to claim arrears of licence fee, or to claim damages for breach of Arista’s promise to indemnify Akzo against non-compliance by Arista with the terms on which Akzo held from the landlord than, as Mr Pymont argues, to the preservation of a continuing and overriding obligation to take up the underleases notwithstanding the service of the notice to terminate the obligations. The wording of the paragraph does not indicate that Arista’s obligation to vacate the premises by the expiry date of the notice only arises if it is not in breach of an outstanding obligation.

I would dismiss the appeal. Akzo has not shown that the judge’s construction of paragraph 11 was wrong. In my judgment, it is the construction that makes most sense of the way in which the paragraph was legally drafted and of the legal and practical situation that the parties were in after the service of a valid notice of termination.

I agree.

I also agree.