General Trading Company (Holdings) Ltd v Richmond Corporation Ltd

This case arises out of the sale of the business of the well-known retailer, The General Trading Company. The claimant, the General Trading Company (Holdings) Limited, (“GTC Holdings”), was incorporated in December 2005 during the course of negotiations for the purchase of the General Trading Company (Mayfair) Limited (“GTC Mayfair”), which owned the retail business. GTC Mayfair was a wholly owned subsidiary of the defendant, Richmond Corporation Limited (“Richmond”).

On 4 May 2006 the claimant acquired 95% of GTC Mayfair’s share capital from Richmond. The purchase price was £60,000 in cash and the provision by GTC Holdings to Richmond of loan notes to a value of £540,000. The agreement also contained an undertaking by Richmond to procure a loan guarantee to enable GTC Mayfair to obtain a loan or loan facility of £200,000 from a major high street bank for two years. By the date of the hearing the dispute was confined to this undertaking. Shortly before the hearing disputes as to the amount of the shortfall in GTC Mayfair’s net asset value as against the figure warranted in the sale agreement and concerning the costs of decoupling GTC Mayfair’s IT system from Richmond’s were settled.

GTC Holdings claims that Richmond failed to procure the provision of the guarantee within the 30 day period following notice specified in the sale and purchase agreement, and that GTC Holdings is consequently no longer obliged to make payments under the loan notes. Richmond’s defence is that it has not failed to comply with the terms of the sale agreement as to the provision of the loan guarantee, but that, if it has, such failure was the result of breaches of the agreement by GTC Holdings and GTC Mayfair. It also argues that clause 17.15, which specifies that if Richmond fails to procure the provision of the guarantee as required under the contract the loan notes shall be cancelled, is a contractual penalty and therefore unenforceable.

The negotiations on behalf of GTC Holdings were principally conducted by Paul Middlemiss and Jeffery Gould. The third member of the management buy-in team was Matthew Curzon. Mr Middlemiss was at that time the Retail Director of the House of Fraser and had previously worked for Habitat. Mr Gould’s experience included restructuring retail groups on behalf of debenture holders. Mr Curzon had been Habitat’s finance director. Richmond was effectively controlled by Mr Galvin Weston, whose family had substantial commercial interests and resources. He was Richmond’s Chairman, and prior to the sale and for some time afterwards was also a Director and Non-Executive Chairman of GTC Mayfair. The management buy-in team had some dealings with him, but they primarily dealt with Ben Rodriguez, a Texan consultant who was one of his advisors.

At some stage Mr David Barnett, another Texan business advisor who acted on behalf of members of the Weston family including Galvin Weston’s brother Graham and Galvin himself, became involved. His evidence was that he got involved in April 2006 and Galvin Weston’s was that Mr Barnett had been involved for some time before the agreement was made. However, the documentation suggests Mr Barnett became an active participant in this transaction after Graham Weston became involved at the beginning of May 2006.

Mr Middlemiss and Mr Gould wanted to complete the deal by the end of April. On Friday 28 April, however, they decided that, in the light of information about GTC Mayfair’s financial position, they could not proceed with the sale without an additional £200,000. Neither Richmond nor Galvin Weston were in a position to advance or to guarantee a loan of such a sum. On about 3 May Graham Weston agreed to help his brother by providing a guarantee. As a result of this, last minute changes were made to the draft sale and purchase agreement. Because of the pressure of time the claimant’s then solicitors drafted amendments to clause 17. Clause 17.10 inter alia referred to an email from David Barnett to Jeffery Gould dated 4 May 2006 which was annexed to the agreement. They considered they could not draft the clause in any more detail in the time available. The defendant’s solicitors, Morgan Cole, agreed to this and marked up and returned the clean contract. The dispute arises as a result of these last minute changes to clause 17 and the conduct of both parties after GTC Mayfair served notice on 3 July requiring Richmond to procure the loan guarantees.

The parties to the agreement were Richmond, “the seller”; GTC Holdings, “the buyer”; Galvin Weston, “the covenantor”; and GTC Mayfair, “the company”. Completion was, by clause 4, to take place immediately after the agreement was signed. I first set out the material part of clause 17 and Schedule 8:

“17.10

The Seller undertakes to the Buyer, as trustee for the Company to procure, when required by the Company pursuant to clause 17.11, the provision of such security and/or guarantees in accordance with the outline provided in the email from David Barnett to Jeffery Gould dated 4^th May 2006 and timed at 12.20pm (a copy of which is annexed at schedule 8) (namely the Loan Guarantees) to enable the Company to obtain from a major high street bank of the Company’s choosing a loan or loan facility (without any additional security or guarantees being provided by the Company or the Buyer or any person connected with either of them) of £200,000 for two years. Provided always that nothing in this clause shall oblige the Seller to do or procure to be done anything by either the Company, the Buyer or such high-street bank or to procure the provision of such a loan or loan facility by such bank beyond the provision by the Seller of the Loan Guarantees.

17.11

The Seller shall procure the provision of the Loan Guarantees within 30 days of receiving notice in writing from the Company to such effect which the Company may give to the Seller (in accordance with the notice provisions in clause 15) at any time from 60 days after the Completion Date.

17.12

The Seller shall procure that the Loan Guarantees remain in place for a period of two years following their provision and the Buyer shall procure that the Loan Guarantees are released at the end of that period.

17.13

The Buyer shall indemnify the Seller as trustee for any person providing the Loan Guarantees in respect of any claims made against such person under any of the Loan Guarantees.

17.14

The Buyer may, at its option, request that the Seller procures the provision of guarantees to suppliers of the Company in place of part of the Loan Guarantees, in which case the amount of the Loan Guarantees shall be reduced by the amount of the guarantees to suppliers. The provisions of clauses 17.13 and 17.14 shall apply equally to any guarantees to suppliers.

17.15

If the Seller fails to procure the provision the Loan Guarantees as required under clauses 17.10 and 17.11 (time being of the essence), the Loan Notes shall be cancelled with immediate effect and the Buyer shall be under no obligation to make any payments of any kind under the Loan Notes.”

“Schedule 8

Email from David Barnett to Jeffery Gould dated 4^th May 2006

Dear Mr. Jeffery Gould,

Your email is correct. I have added some detail with the hope we share the same understanding. As follows:

The [principals] of TGTC would get a line-of-credit for the purchase of stock with a UK bank of their choice and Graham Weston would guarantee the loan. Since it is a line-of-credit, it would [be for] interest payments only.

The interest payment would be a pass through expense from the bank paid by TGTC.

The line-of-credit would extended to a new company with a similar name (such as The General Trading Company Stock Limited). This new company would then allow the stock to be in the TGTC stores/warehouses on consignment bases while this new company still retains title. In the event TGTC defaults on the loan and/or files Administration, Graham Weston through this new company has the right to recapture this inventory to satisfy his guarantee.

If Graham Weston refuses to and/or is financially unable to guarantee the loan, then the Richmond note would be cancelled.

The inventory purchased through this loan would on a monthly basis be balanced with the loan. Items sold through TGTC would mean money is going back to the bank. Meanwhile TGTC can purchase additional items with this line of credit provide there is an available balance within the 200,000 pounds. This will require a monthly update to keep inventory balanced with draw from line-of-credit. Graham would have the right to pay for an inventory audit.

If I am unclear, confusing or you find any detail at issue, please do not hesitate to call.

Best,

David Barnett”

Clause 1 of the agreement sets out the definitions and rules of interpretation which apply to the agreement. “Loan guarantees” are “the security or guarantees to be procured by the seller for the benefit of the company pursuant to clauses 17.10 and 17.11”. “Option agreement” is “the put option agreement entered into on the date [of the sale and purchase agreement] between the seller, the buyer and the company pursuant to which the buyer and the company grant to the seller a put option over the shares retained by the seller in the capital of the company”.

Clause 3 concerns the purchase price. By clause 3.1 this was £60,000 payable in cash and the issue of the loan notes by the buyer to the seller on completion. The loan notes are defined in clause 1 as “£540,000 secured 8% loan notes 2010 of £1 each of the buyer in the agreed form”. The loan notes were the subject of a separate loan stock instrument created by GTC Holdings on 4 May 2006. On that date GTC Holdings also entered into a charge over its shares in GTC Mayfair in favour of Richmond as security for its obligations. Clause 8 of the loan stock instrument provided that the loan notes were to be redeemed by specified monthly payments from May 2007 until April 2010 provided the seller complied with its obligations under clauses 17.10 and 17.11. Clause 3 of the sale and purchase agreement made provision for deducting amounts in respect of “relevant” claims notified by the buyer to the seller from the amount otherwise payable under the loan notes, and for postponing payments otherwise due to a maximum in respect of any single relevant claim of £25,000. The interpretation clause defines “relevant claim” as “a claim or a substantiated claim or a claim by the buyer under the indemnities or a tax claim”.

By clause 3.8, to the extent that the net asset value (the aggregate value of the shareholders funds of the company as at 30 April 2006 derived from the April accounts) was less than £223,000, the seller was obliged within 5 days of the later of the April accounts having been certified as agreed by the buyer and seller or certified by an expert, both in accordance with Schedule 7, pay in cash to the buyer the amount of any such shortfall. The dispute that was compromised related to this provision.

Clause 12 of the agreement is a “whole agreement” clause. By clause 12.1 “this agreement, and any documents referred to in it, constitute the whole agreement between the parties and supersede any arrangements understanding or previous agreement between them relating to the subject matter they cover.” Clause 12.2 provides that nothing in clause 12 limits or excludes any liability for fraud.

By clause 13.1, any variation of the sale and purchase agreement “shall be in writing and signed by or on behalf of each party”. By clause 13.2 any waiver of any right under the agreement “is only effective if it is in writing and signed by the waiving or consenting party and it applies only in the circumstances for which it is given and shall not prevent the party who has given the waiver from subsequently relying on the provision” waived. By clause 15 of the agreement notices given under the agreement shall be in writing, sent for the attention of the persons specified at the addresses or fax numbers specified, and delivered personally, or sent by fax, prepaid first class post, or if sent from abroad, by air mail. By clause 1.7 “writing or written includes faxes but not email”.

The first issue is the status of David Barnett’s email that was annexed to the agreement, and the nature of the guarantee Graham Weston had agreed to provide. Was the email incorporated into the agreement, and if so, to what extent? Was the guarantee limited to a personal guarantee or did it extend to such other security as the nominated bank required?

The second issue is what GTC Holdings and GTC Mayfair were required to do under clause 17. It involves two sub-issues: (a) did GTC Mayfair have to specify the precise form of security required, and/or provide the loan documents in an unexecuted form or draft when it gave notice, and (b) was GTC Mayfair or GTC Holdings under a duty to do all that was reasonably necessary to enable Richmond to comply with its obligation to procure the provision of the loan guarantee? Did GTC Mayfair or GTC Holdings’ duty include procuring that the nominated bank to co-operate with Richmond and the intended guarantor, or using reasonable endeavours to ensure the bank gave the necessary co-operation?

The third and fourth issues are whether Richmond was required to procure the loan guarantee prior to GTC Mayfair securing the loan, and whether GTC Mayfair or GTC Holdings was required to show Richmond or Graham Weston, the proposed guarantor, or his representative, the relevant loan and stock security documentation before Richmond procured the guarantee?

The fifth issue is whether the non-provision of the loan guarantee between 3 July and 23 August was the result of breach by Richmond of clauses 17.10 and 17.11 or the result of breach by GTC Holdings and/or GTC Mayfair of any of the express or implied terms of the sale and purchase agreement.

The sixth issue is whether clause 17.15 is a penalty clause and unenforceable.

Evidence in support of the claim was given by Paul Middlemiss and Jeffery Gould. Evidence on behalf of the defendant was given by Galvin Weston, David Barnett, and Sara Dysart, a Texas attorney who acted for Graham Weston in relation to the guarantee. The court also had before it the statement of Andrew Batson, Richmond’s Company Secretary and Accountant who, before May 2006, was also Director and Company Secretary of GTC Mayfair. The claimant did not require him for cross-examination.

It was accepted by both Mr Collings QC, on behalf of the claimant, and Mr Choo-Choy, on behalf of the defendant, that all the witnesses were doing their best to assist the court. Mr Choo-Choy did not challenge the evidence of Mr Middlemiss and Mr Gould that they were not in a position to proceed with the purchase without the loan arrangement with Richmond and that, in the light of the difficulties they had had in raising money from their investors, they were not in a position to go back to them. He also did not challenge the genuineness of their belief that clause 17.15 was fair and reasonable in the circumstances, would protect them if the guarantee was not forthcoming by improving the company’s balance sheet position, and would thus enhance the company’s ability to get a loan and help protect their substantial investment in the company.

Galvin Weston’s oral evidence was that he was not closely involved in the negotiations. He did not attend many meetings or read the various drafts in detail. He left it to Ben Rodriguez, who conducted negotiations on behalf of Richmond. With respect to Mr David Barrett, although his evidence and that of Galvin Weston was that he represented the interests of both Galvin and Graham Weston, from the point at which it became clear that it was Graham Weston who would be providing the guarantee, I find he was primarily looking after Graham’s interests. His evidence that he thought of GTC as a group and did not distinguish between Mayfair and Holdings was not wholly consistent with his focus on the need for security over stock to be provided in respect of any guarantee given by Graham.

I record the remainder of my findings in a broadly chronological way.

After the General Trading Company moved to premises in Symons Street near Sloane Square in 2001 its business suffered. Following a loss of about £600,000 in 2004/5, Richmond decided to sell the business. Paul Middlemiss, learned of this from Galvin Weston in early 2005 and was interested in acquiring the business. Negotiations started in May 2005. Initially, because of the losses and the approximately £2.2 million price sought, Mr Middlemiss and Mr Curzon had difficulty finding financial backers but AREV, an investment business, agreed to provide funds and negotiations continued through the summer. GTC Holdings was incorporated as a vehicle for the purchase in order to secure Enterprise Incentive Scheme tax benefits for the investors. At some stage the negotiations collapsed but they resumed in the early part of 2006. Over the course of the negotiations the shape of the deal contemplated changed a lot of times.

At the beginning of March 2006 AREV pulled out. Jeffery Gould, one of those approached in 2005, was approached again and agreed to become an active investor in the project. Messers Middlemiss and Gould were provided with the February management accounts. The negotiations led to provisional heads of terms on 29 March. At that time, GTC Mayfair was losing approximately £100,000 a month. Messers Middlemiss and Gould considered it was critical to complete the deal by the end of April to give them time to get ready for the important Christmas trading period.

On Wednesday 19 April the parties met at the Millennium Hotel in Mayfair. Ben Rodriguez represented Richmond. Messers Gould and Middlemiss proposed that GTC Holdings acquire 95% of the shares in GTC Mayfair. GTC Holdings was to pay £50,000 on completion and to issue Richmond with loan notes for £550,000 to be repaid within 4 years.

There were provisions for GTC Holdings to pay Richmond a bonus if the loan notes were redeemed early, and for Richmond to have a 25% share holding in GTC Mayfair if the loan notes were not redeemed. Richmond was also to have a put option in respect of its 5% interest in GTC Mayfair at an agreed value. GTC Holdings was to take on all GTC Mayfair’s assets (not to be reduced by more than £125,000 from the February balance sheet) and, apart from an inter-company debt, its liabilities. Galvin Weston was to be appointed the non-executive chairman of GTC Mayfair. They proposed that the completion date should be 28 April.

Richmond’s retention of a 5% share holding in GTC Mayfair and Galvin Weston’s appointment as its non-executive chairman were important terms of the deal for Galvin Weston. Mr Rodriguez agreed the basis of the revised deal. The parties met again at the Millennium Hotel on 22 April and made a number of amendments to the agreement, including increasing the cash element of the deal by £10,000 and reducing the loan note element by the same amount.

Richmond provided two versions of the March management accounts to the management buy-in team. The first appears to have been provided on 25 April, the day after the management buy-in team sent a summary business plan to the Royal Bank of Scotland. The final version of the March management accounts was provided on 26 April 2006.

Prior to the second meeting at the Millennium Hotel on 20 and 21 April Mr Gould met Andrew Batson. He was given information about the draft March management accounts which he was soon to receive. An email from Mr Gould to the management buy-in team’s solicitors and to BDO Stoy Hayward shows they were concerned that Richmond was letting business deteriorate and did not want to take the risk of a decrease in the assets. On 21 April Mr Gould emailed Mr Rodriguez. The email said changes, including the increase in the cash element on completion sought by Richmond, the quarterly rent, and the losses for March and April meant that the equity injection would have to be increased by £200,000. Mr Gould and Mr Middlemiss were aware of the state of GTC Mayfair’s business and considered they would need more funding to make a go of it.

Following the receipt of the final version of the March management accounts Matthew Curzon met Andrew Batson on 27 and 28 April and obtained further information about the matters in and underlying the accounts. After those meetings, on Friday 28 April Messers Curzon, Gould and Middlemiss met at the Paddington Hilton. They all considered that the cash flow was too tight and agreed they could not proceed to buy the business without an additional £200,000. Mr Middlemiss was to email Ben Rodriguez on 4 May stating that a £200,000 loan or facility was essential because information had come to hand recently which confirmed that the business was in a far worse state than they were aware of and they required the extra capital to proceed.

Their key concerns were the volume of sales and the level of stock. Mr Middlemiss’s email of 4 May refers to pressure from HM Revenue and Customs, unpaid suppliers, reduced stock levels, and unserviced lifts, alarms and air-conditioning. In view of his statement about significant late disclosure, Mr Middlemiss was asked about the difference between the February and the March management accounts. The differences between the two March versions related to net monthly and yearly profit, bank balance, and net assets; the figures in the later version were in fact better than in the earlier one.

The management buy-in team were aware of the VAT and PAYE liability outstanding from the February figures and before the receipt of the March final accounts, but by the end of April they were aware of how overdue these sums were and when they had to be paid. I accept Mr Middlemiss’s evidence that their concerns about the deteriorating position intensified not because of the figures themselves but because of what they were informed when discussing the figures with Mr Batson at their meetings with him on 21 and 22 and 27 and 28 April. Additionally, the difference in the figures for purchase ledger in February and March showed a great increase of £364,218 in sums owed in respect of supplies bought. It was these factors that led them to conclude they needed £200,000 to safeguard their stock position in particular in the run-up to the important Christmas season.

Mr Middlemiss’s statement gives three reasons for wanting the loan notes cancelled if the loan or facility was not made available. First, this was a way of protecting their £800,000 equity investment. Secondly, if the loan notes were cancelled the company’s balance sheet position would be improved and this would assist them in securing alternative funding. Thirdly, stock purchased for £200,000 would be worth over £500,000 in sales, although he did not consciously make the link at the time. In his oral evidence, Mr Middlemiss accepted that this did not mean profit which he said would be roughly £240,000. Mr Middlemiss accepts he did not at the time have regard to the last of these reasons, which has an element of hindsight about it. He was, however, very conscious at the time of the need for the stock and of the effect of an inability to obtain stock on the business. I accept his evidence, and that of Mr Gould, that the motivation for wanting the loan notes cancelled if the guarantee was not forthcoming was to assist the company obtaining alternative funding with which to purchase stock and thus to have a mechanism in place to enable the company to survive.

During the meeting at the Paddington Hilton Mr Gould telephoned Ben Rodriguez. He informed him of their concerns, and asked whether Richmond would agree to provide £200,000 cash on completion as a working capital loan for 2 years. Galvin Weston’s responses were to propose an introduction to a catalogue expert who would enter into a licensing agreement worth a minimum of £100,000 or a 30 day line of credit for £50,000 provided by Richmond to be used as contingency funding. The management buy-in team did not consider these to be viable. The following day, Saturday 29 April, Messers Gould and Middlemiss met Galvin Weston, and he agreed to provide a personal guarantee for £200,000 to enable them to obtain a loan from the bank. Neither Richmond nor Galvin Weston were at that time in a position to provide a loan although neither Mr Rodriguez nor Galvin Weston said this to the management buy-in team.

On the basis of Galvin Weston’s agreement to provide a guarantee, the management buy-in team considered it would be safe to proceed with the deal. For them, the provision of the £200,000 was required for the deal to proceed and its absence would be a “deal breaker”. They did not contemplate approaching their investors for the extra £200,000 because they had struggled to raise £800,000 from them. I accept Messers Middlemiss and Gould’s evidence that, if Richmond had refused to assist with the loan, they would have walked away from the deal.

Galvin Weston was kept informed of what was transpiring, but left the details to Ben Rodriguez. The management buy-in team and Ben Rodriguez agreed that GTC Mayfair would obtain a £200,000 loan available for 24 months which would be guaranteed by Galvin Weston. In an email dated 1 May 2006 to Ben Rodriguez, Mr Middlemiss referred to this guarantee. He stated that both parties needed to brief their solicitors to get the matter sorted out by close of business on 2 May, with a view to completing on 3 May. Ben Rodriguez replied that he looked forward to completion on 3 May. On 3 May Mr Middlemiss told Galvin Weston that, unless the deal was completed by 3pm on 4 May, the management buy-out team would withdraw from further negotiations.

I have referred in paragraph [29] above to Paul Middleton’s 4 May email to Ben Rodriquez. Timed at 0122, he expressed frustration that no progress had been made on the loan and stated why the £200,000 loan or facility was so essential to them. He also said they were not comfortable with a proposal for a stock fund which they thought was cumbersome but would go along with it. The email states:

“you have not unreasonably negotiated considerable penalties on GTC if we default on repayments on the loan note, RBS term loan and the put option, we must insist on having our own protections which will enable GTC to raise new funds quickly if the stock agreement breaks down”.

The email set out the terms proposed. These included provisions for a stock holding company to be set up and controlled by the Weston family which would acquire normal trading stock for GTC Mayfair on a consignment basis and which would have a loan facility of £200,000. Failure to have the facility in place by the due date would trigger cancellation in full of GTC Holdings’ loan notes. This email reiterates that, unless completion took place before 3pm on 4 May, the management buy-in team would withdraw from further negotiations. A stock holding company was in fact set up on 11 May.

It was at about this time that David Barnett became more actively involved in the transaction. He and Graham Weston were in the United States. Ben Rodriquez was there for part of the time. Mr Barnett thought that the management buy-in team was bluffing about the £200,000 loan, but said Galvin was under pressure to sell GTC Mayfair because obligations would soon fall due and serious cash would be required to meet them. On 3 May he met Graham Weston and Ben Rodriguez for a strategy meeting at Graham Weston’s office in Texas. Because Galvin Weston was not in a position to provide a loan or to guarantee one, Graham was asked to lend Galvin £200,000, and agreed to help. David Barnett suggested that Graham should furnish a guarantee rather than make a loan.

The proposal that Graham Weston be the guarantor was communicated to the management buy-in team by Ben Rodriguez in his email dated 4 May (timed 04:18) to Mr Middlemiss and copied to David Barnett and Galvin and Graham Weston. This said “Graham has excellent and outstanding credit and would be willing to serve as a guarantor at a bank of your choice for up to 200,000 pounds”. It stated that, as an alternative Graham Weston would be willing to serve as a guarantor with suppliers of the purchasers’ choice, but that the Westons’ preference was for the first option “because of its simplicity”.

After that email Mr Gould, in London, had a conversation with Mr Barnett, in Texas. Mr Barnett said this was late at night, at about 2 am Texas time. Mr Gould said that, unless the guarantee and the agreement were finalised that day, they would not buy GTC Mayfair because of Enterprise Incentive Scheme tax deadlines for their investors. Mr Gould wanted to work out the details of the guarantee. They agreed that the money would only be used to buy stock. Mr Barnett’s concern was to protect Graham Weston and make sure that in case of default he was entitled to have recourse to the unsold stock. They agreed to record their conversation in an email so the lawyers would have a basis for drafting amendments to the agreement, that Mr Gould would email Mr Barnett with his understanding of what they agreed, and Mr Barnett would reply with changes or additions.

Mr Gould emailed Mr Barnett soon after the conversation. His email stated that there should be a provision indicating that Graham Weston would provide a guarantee acceptable to a major UK bank to enable a £200,000 loan to be made available to GTC Mayfair and that if the loan was not made the loan notes for £540,000 would be cancelled. Mr Barnett’s response to Mr Gould was in an email timed at 6.20am on 4 May. This email is the one annexed to the sale and purchase agreement (see paragraph [7] above). Mr Barnett said he did not intend his email written in the middle of the night to be part of the sale and purchase contract. It was meant to clarify his interpretation for the lawyers, to be general in nature, and not to be inclusive of necessary details. His idea was to hit the high points in the email and for details to be worked out afterwards. He was not bothered by Mr Gould’s insistence that the loan note would be cancelled because he knew that Graham Weston was financially able to help his brother and would do so. Mr Gould agreed that Mr Barnett’s response spelled out some matters which were so plain to him that he had not included them in his email. These included that the loan was to be used to purchase stock and the need for security over the stock.

The exchange of emails was copied to the parties’ legal advisers. The claimant’s former solicitors, as I have explained, then drafted amendments to clause 17 (including the reference in clause 17.10 to “the provision of such security and/or guarantees”) and proposed that the email be annexed to the agreement. The defendant’s solicitors agreed to this. The documentation was prepared and the agreement was finally signed later that day, a further delay being caused because Galvin Weston was not available until later due to a family function. Mr Gould said that Graham Weston’s guarantee was to be one acceptable to a United Kingdom bank. At the time of the agreement they had no reason to believe a personal guarantee would not suffice but their lawyers advised them that the wording of the agreement was more open.

After the sale and the injection of capital by the management buy-in team and their backers, sales rose. However, as a result of GTC Mayfair’s poor credit history with suppliers, no or little credit was allowed when purchasing stock. The strategy for a successful Christmas period was predicated by the company having the funds to purchase stock and the position was that they were running out of money to do so. Without credit or the means of buying stock they would end up having a higher proportion of stock that was not particularly suitable for the Christmas trade, for example furniture obtainable on sale or return terms. Mr Gould said that, for this reason, 60 days after the completion date, in a letter dated 3 July 2006, GTC Mayfair asked Richmond to procure the loan guarantee. The letter, drafted by the lawyers and signed by Mr Gould, states:

“In accordance with the provisions of clauses 15 and 17 of the agreement, this letter constitutes formal notice requesting that Richmond Corporation Limited procures the provision of the loan guarantees on the terms stated in the email from David Barnett to Jeffery Gould dated 4 May 2006 at 12.20pm, a copy of which is annexed to the agreement at schedule 8.

Please acknowledge receipt of this letter. In the meantime, a Director of the General Trading Company (Mayfair) Limited will be in contact with you to make the necessary arrangements.

If you have any queries, please feel free to contact Jeffery Gould…”

Galvin Weston informed David Barnett that notice requiring the provision of a guarantee had been served. On 11 July Mr Barnett emailed Graham Weston saying they needed to discuss the loan guarantee, to which Mr Weston replied “ugh”. Mr Barnett told him that it was not so bad because the management buy-in team had wanted a loan of £200,000 in cash but they had negotiated it to a loan guarantee. In mid-July Mr Barnett contacted Sara Dysart to tell her she would have an opportunity to work on a guarantee Graham Weston was providing in relation to his brother but she did not have any real involvement until mid-August.

Although Mr Gould and Mr Middlemiss always intended to approach the Royal Bank of Scotland (“RBS”) for the loan, neither had informed Richmond which bank was to provide it. Mr Gould’s evidence was that, notwithstanding the statement that a director of GTC Mayfair would be in touch, they expected a response from Richmond as to how to proceed. On 17 July Galvin Weston telephoned Mr Middlemiss to ask him the name of the bank. On 18 July Mr Gould wrote confirming that the bank nominated was RBS at its Fenchurch Street branch. On 20 July Galvin Weston called again to ask who at the bank they should deal with. On 21 July Mr Middlemiss replied informing him that the contact was Edward Charters, who happened to be the banker Richmond dealt with. Mr Middlemiss also said the bank would need to know how the loan facility would be secured, and that Mr Charters’ assumption was it would be underwritten by a US bank. Mr Gould said they considered that GTC Holdings had done its job by putting Richmond in touch with the bank.

Mr Barnett followed up Mr Middlemiss’s email by telephoning Mr Charters on 25 July. On 26 July he emailed Mr Charters asking what information the RBS needed regarding Graham Weston’s guarantee of the loan. He anticipated that all that RBS would need, given Graham Weston’s excellent credit rating, was his signature as the guarantor. That day Mr Barnett also ascertained that the UK bank Graham Weston dealt with was the Butterfield bank and Galvin Weston wrote to Mr Gould thanking him for his letter dated 18 July. Galvin Weston asked Mr Gould to apply for the loan with the Royal Bank of Scotland, and stated “we will provide support for the facility”.

On 28 July Mr Charters emailed Mr Middlemiss about the email he had received from David Barnett. He said that RBS had not agreed to any additional funding, that if GTC wished to put a formal request to the bank he would need a revised business plan and projections showing why increased facilities were needed and how they would be repaid. This email also states that as far as any guarantee is concerned the bank would either want some form of tangible security or a bank guarantee. He accepted that Graham Weston was worth a substantial amount but stated that, if he was to rely on a guarantee, Graham Weston needed to be supported. He asked Mr Middlemiss to discuss the matter with his directors and to liaise with David Barnett to whom he had not responded. Mr Middlemiss replied on 29 July stating that they had not formally requested the £200,000 loan and would only do so when the bank had a full picture of their progress to date. This email states:

“As you know we have the contractual right to request a £200k loan from Richmond and they have to provide it to our nominated bank and satisfy whatever your security criteria are.”

“I therefore see the process as slightly two step. They must within the 30 days (closes Wednesday night) provide you with a satisfactory guarantee for the loan, failing that you are aware of the penalties they will incur. Once you are satisfied, we will then apply for the loan and clearly this may take some period of time and we will of course provide the information you require.”

“At this stage we have of course not assumed you would support or approve the loan. We are contractually exercising our right for Richmond to provide you sufficient guarantee of security as a first step.”

There is no reference to the terms of the agreement with Richmond. Nor is the bank authorised to communicate with Richmond or Mr Barnett or asked to do so.

On 31 July Mr Gould informed Galvin Weston and Mr Barnett that RBS required a bank guarantee to support the facility. Mr Barnett had previously emailed him stating he had had no response from RBS as to what the bank required of Graham Weston and assuring Mr Gould that there was no delay on their part. Mr Gould’s reply stated he had spoken to Mr Charters, that the bank had not approved a facility to the General Trading Company (Stock) Limited at that time and that Mr Charters would submit a proposal to his credit committee “only if the proposed facility is supported by a bank guarantee from a bank which is acceptable to RBS”. The email states that Mr Charters did not wish to be involved in the negotiation for such a guarantee because it was an agreement between GTC (Holdings) and Richmond, and that Mr Charters was seeking draft guarantee wording in an acceptable form which would be the form of a standard guarantee by one bank to another. Mr Gould’s understanding was that Mr Weston’s guarantee should therefore be to Butterfield bank and not to RBS. It was, thus, only on 31 July that Richmond was informed that a personal guarantee would not suffice. Mr Gould considered the change was not significant from Graham Weston’s point of view.

Mr Barnett replied to this email stating he would discuss the matter with Graham Weston, and that he was very concerned about the 30 day deadline. He asked what the deadline date was. Mr Gould replied stating that the deadline was close of business on Wednesday 2 August.

Later that day Mr Barnett wrote stating that, while it was their desire to accomplish the arrangements by 2 August, he requested a one week extension of the deadline. He said the request was being made due to the delay in response from RBS and because, if he had his facts correct, the loan had not been applied for until a week or two after the commencement date of the 30 days.

On 1 August Mr Gould responded stating that Mr Barnett’s correspondence provided them “with the comfort that you are working to fulfil the guarantee obligations”. He agreed to extend the period to 9 August as requested although he noted that the clear requirement in the contract was for the guarantee to be in place by 2 August. At that time GTC (Holdings) had also made a claim against Richmond under the completion accounts warranty (the claim that was ultimately settled shortly before the hearing) and Mr Gould’s email also stated that the extension to the guarantee deadline should not be considered to relate to any other claim.

On 1 August Mr Barnett received a draft form of wording of a standby letter of credit which could be used to support the facilities sought by GTC from Mr Charters. This was the first reference to a standby letter of credit as opposed to a bank guarantee. The pro-forma sent did not include the name of the applicant, the amount, or the type of facilities. That day Mr Barnett informed Graham Weston that RBS would not accept a signature guarantee. When told that the email annexed to the sale and purchase agreement said that he would provide a guarantee to enable the loan, Graham Weston responded “this is what we will give them then”. Mr Barnett asked him whether that meant that he would sign a line of credit at Butterfield bank that would not be accessed unless the GTC loan defaulted with any fees being paid by GTC. There was no evidence of a specific response to this question but Mr Barnett and Ms Dysart’s evidence, which I accept, was that Graham Weston would provide what RBS required.

On 7 August Mr Gould asked Mr Charters where RBS was with the required documentation. Mr Barnett’s understanding, in the light of Mr Gould’s 31 July email to him, was that Mr Charters would not take an application by GTC for a loan to the loan committee until he had Graham Weston’s guarantee. On 9 August he emailed Mr Gould stating that the Butterfield bank required Graham Weston to set up a personal bank account as part of the process of giving him a signature line of credit. Due to money laundering requirements, the bank estimated the process would take approximately three weeks. Mr Gould saw this email as a delaying tactic to avoid providing the loan. He responded saying that he was becoming increasingly concerned about the delay in providing the loan guarantee, that a further three week extension was not acceptable, but he would grant a further period on the condition that the Butterfield bank confirmed that they were agreeable in principle to providing the guarantee in the manner outlined by RBS’s email of 31 July and the guarantee was in place to the satisfaction of RBS by Friday 18 August.

At about this time Graham Weston went on a family holiday to a remote part of Canada and communicating with him there was difficult. On 10 August (in an email timed at 8.04 am pdt) Mr Barnett informed him that GTC was demanding a letter from Butterfield for some assurance that the guarantee was going to happen and asked whether he could make that happen with a phone call or an email. Graham Weston’s response to Mr Barnett stated “we were just being realistic since they have yet to give us their bank docs. We will not be dragging it out”. Mr Barnett thought Mr Gould was being difficult because Galvin Weston owed GTC Holdings £100,000 due to the balance sheet error. He urged Graham Weston to get the Butterfield bank to email a letter the next day showing approval and a time period to completion. Graham Weston said he needed a number for their banker and would get his bank to call RBS. Galvin Weston, who had been copied in on Mr Barnett’s 8.04 am email, sent an email to him saying “remember that Jeffery would love to find an excuse to cancel the loan obligation. You will recall that if the facility is not available the higher loan repayments starting in 2007 of £500k is cancelled”. Mr Barnett’s reply to Galvin was that Mr Gould had assured him on the telephone that they really needed the guarantee and that so long as they were making efforts there should not be a problem.

In an email to Mr Gould timed at 16:30 on 10 August, Mr Barnett said they fully understood the urgency and necessity for the loan guarantee, that he had emailed Graham Weston to acquire the Butterfield letter of assurance, that Graham was the only one who could give Butterfield the permission to send the letter, and that Graham was on vacation. He explained that the time the Butterfield bank took to process a loan was not in their control but that they would make sure Butterfield understood the urgency. The email states:

“I don’t know if you are aware that it took three weeks from the official 30 day notice before we received RBS’s guarantee requirement. This gave us three days to be within deadline of compliance. I do not know if this delay was caused by RBS or if GTC delayed in following the SPA attachment guidelines and did not immediately apply for the loan with RBS. Regardless we have not withheld or delayed any effort on our part to accomplish this guarantee.”

Mr Barnett also suggested it might be quicker for GTC to move its loan application to Butterfield. Mr Gould’s response (timed at 19:10) was that he found it difficult to accept the points about timing because notice was given on 3 July and notification of the nominated bank on 18 July but they were willing to give a further extension to 18 August subject to receiving confirmation from the Butterfield bank. His email also stated that “the agreement was specifically agreed as a “drop dead” clause and I believe the resources of Mr Weston and the revised date of 18 August is more than generous”. Mr Barnett thought that Mr Gould was being difficult because Galvin Weston owed £100,000 due to the balance sheet error and was avoiding them and he believed that Graham Weston and David Barnett were doing the same.

On 14 August Mark Stephens, Head of Lending Services at the Butterfield bank, Guernsey, emailed Mr Gould confirming that they were arranging to put in place a bank guarantee in favour of RBS for facilities in favour of GTC and were working to do so by Friday 18 August. He also emailed Mr Charters at RBS to this effect, noting that RBS had forwarded a standby letter of credit but stating that his bank’s preference was for a guarantee. He attached a copy of the Butterfield bank’s standard wording for a bank guarantee. Mr Charters responded stating that RBS preferred a standby letter of credit in the format they had provided to Mr Barnett, that Butterfield’s guarantee did not cover the points RBS would expect, and that RBS would normally expect a guarantee to be for an amount plus interest and charges, and to be governed by English law. The Butterfield bank’s draft was from its Guernsey branch and governed by Guernsey law. All but the first of these issues appear to have been sorted out on 15 August. By then Mr Charters was on holiday and Mr Fox of RBS was dealing with the matter. The first issue was sorted out on 17 August.

Mr Barnett considered that, since Graham Weston was to guarantee the loan to GTC, he (and Graham Weston’s legal advisers) needed to review the language of the loan documents. On 14 August he had asked Mr Charters for a copy of loan documents typical of what GTC would eventually be signing. Mr Charters said that, due to confidentiality issues, he could not discuss GTC’s banking arrangements. He suggested they seek any information required from the directors of GTC. Mr Barnett said that he was asking for a blank copy. On 15 August Mr Fox emailed Mr Barnett stating that Mr Gould had agreed that RBS could discuss the current position with Mr Barnett. Mr Fox told Mr Barnett that GTC had not requested the £200,000 loan from RBS, the commercial terms of such a loan had not been addressed, and the documentation had not been prepared and would not be prepared before the Friday deadline.

Mr Barnett then asked for blank loan documents so he could get his lawyers to review them rather than waiting and delaying the loan. Mr Fox responded on 16 August saying that the bank had not been put into a position where it could determine the most appropriate structure for the facility let alone any of the commercial terms. He did not consider it appropriate to send Mr Barnett blank documents that might not reflect the underlying structure ultimately adopted. He stated that since the negotiation of the loan facility was a matter between the bank and GTC, whether or not GTC allowed Mr Barnett to review draft documents would not, from the bank’s point of view, delay the facility to GTC. Mr Gould also emailed Mr Barnett stating that, in the light of Mr Barnett’s correspondence with RBS, he was concerned they were going round in circles. The sale and purchase agreement stated that the “guarantee” had to be provided “to enable” GTC to arrange a facility with a bank of GTC’s choice, RBS made it clear that the loan could not be negotiated without the guarantee being in place to the bank’s satisfaction, and he understood that RBS had been very clear as to what the guarantee requirements were.

On Thursday 17 August Mr Gould confirmed to RBS that GTC would be responsible for all facility charges and interest. Mr Fox informed Mr Barnett, and Sara Dysart revised the standby letter of credit to limit the amount to principal only and also to provide that the presenter must certify that all notices of default have been given and cure periods expired. The Butterfield Bank forwarded the guarantee to RBS that day and asked for confirmation that RBS was happy with the wording so they could issue the letter of credit. Mr Fox responded stating that the entity to which the facilities would be made available and the nature of the facilities had not been determined. Also the primary customer was GTC Mayfair and not GTC Limited, which did not exist. He therefore altered the wording of the letter of credit so that it covered loans to the “General Trading Company (Mayfair) Limited or other related company”. The draft was also not confined to debts relating to stock purchased.

On Friday 18 August Mr Barnett emailed Graham Weston stating that they were waiting for approval of the changes Ms Dysart made to the standby letter. He also said that before the guarantee became official Ms Dysart and he wanted; (a) to work out a way of repossessing stock in case of default, (b) to review the loan documents to make sure RBS’s first recourse in case of default was to GTC, and (c) to make sure GTC did not use the money for anything but inventory. Ms Dysart emailed Mr Fox about the changes and indicating that they wanted the security to be given to be in place before the letter of credit was finalised.

On Monday 21 August Mr Fox emailed Mr Barnett stating that the Butterfield bank had not sought the changes put forward by Ms Dysart and asking him to clarify matters with that bank. Mr Barnett informed Mr Gould of this and Mr Gould responded that he had understood that the letter of credit had been agreed on the Friday. Although they could not see reason for a further extension, they would allow until close of business on 22 August. If the guarantee to RBS’s satisfaction was not in place by then they would exercise their remedy under the sale and purchase agreement to cancel the loan notes. As far as the request for sight of the facility letter, Mr Gould stated that there was no provision in the agreement for Graham Weston to approve the loan documentation before providing the guarantee. The matter would be negotiated between the directors of GTC and RBS, the facility was expected to be in line with standard UK banking loan terms, and a completed and signed copy would be forwarded to Graham Weston for his records.

On 21 August Ms Dysart emailed the revised letter of credit to Mr Barnett and Mr Stevens of the Butterfield Bank. She stated that she had approved it on behalf of Graham Weston provided she had the opportunity to review the loan documents between RBS and GTC creating the debt which was to be secured. She also emailed Mr Gould stating that the agreement was for Graham Weston to provide a guarantee, the standby letter of credit he was asked to produce was far superior to a contractual guarantee, and its terms would not be approved until the loan was in place based on loan documents reviewed by Graham Weston’s counsel. She stated that in the United States no credit enhancer of any form is given without knowing what is being guaranteed.

On 22 August Mr Barnett sent an email to Mr Stevens stating he would request the swift code from RBS, expressing concern that RBS had not shown them the loan documents, and asking whether it would be proper for Butterfield to demand to see them before releasing the letter of credit. Mr Stevens responded that it was not normal for Butterfield Bank to request this type of information, and that RBS would not be prepared to give it. Mr Barnett sent an email to Mr Fox asking for the swift number and Mr Fox replied that he needed a response to an email before he could agree that the letter was ready to be sent. While this is not entirely clear from the chain of emails, this appears to be a reference to RBS’s wish that the letter of credit should cover GTC Mayfair and related companies to give it some flexibility in the event that the ultimate borrower was a different entity in the GTC group.

At about 5.20 pm London time on 22 August Ms Dysart telephoned Mr Gould. He was on his way back to London from GTC’s shop in Cirencester. At that stage, while Ms Dysart had seen the sale and purchase agreement, she had not studied its terms. She said she did not do so until after her conversation with Mr Gould. She was not concerned by this. She said the situation was a dynamic one, Graham Weston wanted to do what was necessary to comply with the agreement, and her job was to deliver a standby letter of credit.

Mr Gould’s evidence is that the conversation lasted for about 40 minutes. He thought it was quite a long conversation because he pulled into the Heston service station. Ms Dysart said the conversation was relatively short. There is, however, no conflict as to the substance of the conversation. Ms Dysart told Mr Gould that Graham Weston was ready to deliver the letter of credit. However, he wanted her to review it and the loan documents to make sure that it did not create more liability that he undertook when he agreed to provide a guarantee for a loan to enable GTC Mayfair to purchase stock. Mr Gould was not receptive to the points she put to him, including limiting the borrower to GTC Mayfair and being given an opportunity to review the documents. Mr Gould said Mr Weston had been given two extensions to deliver the guarantee or letter of credit and if he did not do so GTC would take action based on the default.

Asked about his position, Mr Gould said he considered that at that late stage, after Mr Barnett had told him the letter of credit was ready, it was unreasonable for Ms Dysart to express doubt about the level of security. The conversation was turning into a review of the level of security. He thought it showed Graham Weston was not happy with the document and this was another attempt to prevaricate. After the conversation, Mr Gould consulted his colleagues and sent an email (timed at 1831) to Ms Dysart and Mr Barnett saying that unless he received a lawyers’ undertaking that night that the guarantee would be in place by 10.00 am London time on the next day they would exercise their right to cancel the loan notes.

Mr Barnett and Ms Dysart were unable to contact Graham Weston to confirm the delivery of the standby letter of credit because he was unwell and had left his office early due to an allergy reaction. Mr Barnett sent Mr Gould an email (he states it was then almost 10.00 at night) saying they would attempt to contact Graham Weston in the morning which meant that the earliest the Butterfield Bank would be able to send the letter of credit was opening of business UK time. At 10:40 am on 23 August GTC Holdings served notice on Richmond cancelling the loan notes pursuant to clause 17 of the agreement. The letter stated that the 30 day deadline expired on 3 August, which Richmond had had extended four times; to 9, 18, 22, and 10 am on 23 August.

In an email timed at 15:23 on 23 August Sara Dysart informed Mr Gould that Graham Weston had authorised the release of the Standby Letter of Credit. Notwithstanding Ms Dysart’s email, GTC Holdings maintained its decision to cancel the loan notes. In the light of what had occurred, the extensions granted, and his telephone conversation with Ms Dysart, Mr Gould did not believe they would receive the letter of credit. They were under pressure to purchase stock and felt they had to draw the line.

The first issue is the status of David Barnett’s email annexed as Schedule 8 to the agreement. This issue is linked to the question whether the required guarantee was limited to a personal guarantee or extended to such other security as the nominated bank required. It is therefore convenient to consider them together.

At the outset, the claimant’s case was that the email was not incorporated into the agreement in its entirety. It relied on Mr Barnett’s evidence that he did not mean it to be part of the agreement, and their then solicitors’ statement that they should not try to cover his points. The solicitors stated that, if that was what the parties wanted to agree, that was fine, but “the backstop from our point of view is as stated in [the] draft”. The defendant’s case was that there was a clear intention disclosed in the express language of clause 17.10 to give effect to the principles in the email.

There was no dispute as to the relevant principles. Both parties relied on the statement of Rix LJ in Tradigrain SA v King Diamond Shipping SA (The “Spiros C”) [2000] 2 Lloyds Reports 319 at [78]. His Lordship referred to two rules relating to the incorporation of one document’s terms into another document. The first is to construe the incorporating clause in order to decide on the width of the incorporation. The second “is to read the incorporated wording into the host document in extenso to see if, in that setting, some parts of the incorporated wording nevertheless have to be rejected as inconsistent or insensible when read in their new context”. This second rule broadly reflects the judgment of Buckley LJ in Modern Building Wales Ltd v Limmer and Trinidad Co Ltd [1975] 1 WLR 1281 at 1289. His Lordship stated:

“Where parties by an agreement import the terms of some other document as part of their agreement those terms must be imported in their entirety, in my judgment, but subject to this: that if any of the imported terms in any way conflict with the expressly agreed terms, the latter must prevail over what would otherwise be imported”.

In the case of such conflict the provisions of the incorporating document prevail and parts of the incorporated document are rejected.

Ultimately, there was no issue between the parties about the references in the email to a new stock company to provide security for Graham Weston. On behalf of the defendant, Mr Choo-Choy recognised those parts of the email were uncertain and difficult to incorporate into the agreement. I accept Mr Collings’ submission that they were no more than an agreement to agree. Accordingly, regardless of the application of the second rule in The “Spiros C”, i.e. whether or not there is any inconsistency or conflict between that part of the email and clause 17, that part of the email has no contractual effect.

I am satisfied, applying the first rule in The “Spiros C”, that, subject to the reference to “the outline provided in the email”, the terms of the sale and purchase agreement are apt to incorporate the email into it. The language of clause 17.10 that the defendant undertakes to procure the provision of such security and or guarantees “in accordance with” the outline in the email is the language of incorporation or, as Mr Choo-Choy put it, the language of contractual compliance. Secondly, elsewhere in the sale and purchase agreement, “in accordance with” is used to denote a contractual requirement: see for example clauses 1.10, 3.2, 3.4, 3.8, 15.1, and 17.11. Thirdly, clause 12.1, the “whole agreement” clause, states that “this agreement, and any documents referred to in it, constitute the whole agreement between the parties…” (emphasis added).

What then is the significance of the use of the word “outline”? It reflects the understanding of the parties that what is set out in the email is not a worked out set of rights and obligations. Mr Choo-Choy accepted that it shows the parties did not intend the entirety of the contents of the email to be treated as if it was set out in the body of the agreement. He submitted that the general principles set out in the email should be incorporated so far as the court is able to give effect to the parties’ general intention to do so. Thus, the parties must have intended to incorporate into the agreement that GTC Mayfair would get a loan, described as a “line of credit”, for the purchase of stock with a UK bank of its choice and that Graham Weston would guarantee that loan. It is, however, not necessary to have recourse to the email for the first of these propositions. Clause 17.10 provides that what Richmond is to procure is “such security and or guarantees in the outline provided in the email” to enable GTC Mayfair to obtain from a major high street bank of the company’s choosing a loan or a loan facility”. The email adds the following matters. First, that it is Graham Weston who is to guarantee the loan. Secondly, it is expressly stated that the loan is for the purpose of purchasing stock. The third matter is what is said about security for Graham Weston in respect of that guarantee, which is no more than an agreement to agree.

Turning to the second rule in The “Spiros C”, the question is whether there are conflicts or inconsistencies between the incorporating document (clause 17.10) and the document it incorporates (the email). The matters for consideration are whether the agreement is that: (a) Graham Weston would provide only a personal guarantee, (b) the loan was to be for the purchase of stock, and (c) the loan is to be made to GTC Mayfair. I deal with (b) and (c) first.

As far as (b) is concerned, clause 17 does not expressly limit Richmond’s obligation by reference to the purpose of the loan. The email, however, states that the loan is to enable the purchase of stock. There is no conflict or inconsistency between the two, and, accordingly no impediment to the incorporation of the purpose. In view of the evidence on behalf of both the claimant and the defendant, even without the e-mail, applying the well known tests as to the interpretation of contracts in the speeches of Lord Hoffmann in ICS Ltd v West Bromwich BS [1998] 1WLR 896 at 912 and Mannai Investment Co. v. Eagle Star Life Assurance [1997] AC 749, 774-775, I find that the parties only intended the obligation to provide a guarantee to enable the claimant to obtain a loan for the purpose of purchasing stock.

As far as (c) is concerned, clause 17.10 of the sale and purchase agreement refers to security or guarantee “to enable the company” to obtain a loan facility and that agreement states that “the company” is GTC Mayfair. Mr Barnett’s evidence in relation to the reference in the e-mail to “TGTC” was that he was not concerned with the particular company but with the GTC group. During the period after the letter of 3 July seeking the guarantee, issues arose as to whom the loan to be guaranteed was to be made, whether to “GTC Mayfair” or to “GTC Mayfair and related companies.” Mr Barnett’s e-mail in Annex 8, however, was a reply to Mr Gould’s e-mail, and in it he stated that Mr Gould’s e-mail was “correct.” Mr Gould’s e-mail stated that the guarantee was to enable the loan facility to be made available to GTC Mayfair. Mr Barnett’s evidence on this particular point was, as Mr Collings submitted, not wholly satisfactory and did not fit with Ms Dysart’s resistance to the inclusion of companies ‘related to’ GTC Mayfair. However, as Mr Collings also submitted, in the event this did not matter. The sale and purchase agreement referred to GTC Mayfair.

I return to (a), whether the agreement is only that Graham Weston would provide a personal guarantee. Clause 17.10 expressly requires the “security and /or guarantees” to be procured “in accordance with the outline provided in the e-mail.” Absent the reference to “in accordance with the outline provided in the e-mail”, the words “security and /or guarantees” must be wider than “guarantee” as there are all sorts of arrangements, including letters of credit, which are forms of “security” but do not fall within the term “guarantee.” So the first question is whether the latter phrase restricts what is to be provided to a guarantee, and indeed to a personal guarantee. The second question arises if it does so restrict what is required. Mr Collings submitted that, if it does, the email is inconsistent with 17.10 but Mr Choo-Choy submitted that it gives effect to the provisions of clause 17.10. He submitted that it is not possible to see the form of security or guarantee required from clause 17.10: it accordingly is necessary to refer to the email to ascertain what is required. He also relied on the proviso to clause 17.10 that the defendant did not undertake to procure the provision of the loan beyond providing the loan guarantee.

The third paragraph of Mr Barnett’s email refers to Graham Weston (through the new stock company) having the right to recapture inventory in the event of a default on the loan to satisfy “his guarantee” (emphasis added). The fourth paragraph refers to Graham Weston refusing to, or being financially unable to, “guarantee the loan.” There is some force in Mr Choo-Choy’s submission that these references, construed in the light of the negotiations between Mr Rodriguez and Mr Middlemiss, and Mr Gould’s understanding at the time, mean that the e-mail showed that Graham Weston was to provide a personal guarantee. He relied on the well known statement in Lord Hoffmann’s speech ICS Ltd v West Bromwich BS [1998] 1WLR 896 at 912 that the court must ascertain the meaning which a document “would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

There remains the difference between “security” and “guarantee”. I have concluded that the word “guarantee” in the e-mail is not confined to a personal guarantee but includes a bank guarantee. In the light of this and the focus of the management buy-in team on obtaining a guarantee sufficient to enable them to obtain a loan from a major UK bank, and ascertaining the meaning of the email in accordance with Lord Hoffmann’s statement, it is not altogether clear that a standby letter of credit is excluded from what is contemplated in it. It is not, however, necessary for me to determine this question. This is because, if a standby letter of credit falls outside the scope of what the email contemplated, there is, in my judgment, an inconsistency and conflict between the email (the incorporated document) and clause 17.10 (the incorporating provision), so that, under the second rule in The “Spiros C”, the former has to be rejected. The purpose of adding the word “security” to the word “guarantee” was, according to Mr Gould, to broaden what was to be covered. The management buy-in team’s legal advisers so drafted the document to include these words which the defendant’s legal advisers accepted. If the e-mail covers only those forms of security which fall within the term “guarantee”, it does narrow the scope of what is contemplated in the agreement and, in this sense, is not consistent with it and conflicts with it. It is to be recalled that in the passage from Buckley LJs judgment in Modern Building Wales Ltd v Limmer and Trinidad Co Ltd quoted above, his Lordship stated that if any of the imported terms “in any way” conflict with the expressly agreed terms, the latter must prevail over what would otherwise be imported. This does not suggest a narrow or technical approach to this issue.

I have considered this matter without regard to the fact that, after the Weston Brothers and Mr Barnett were informed that what the bank required was, first a bank guarantee, and then a standby letter of credit, no objection was raised as to the form of security required on the ground that the undertaking was only to provide a personal guarantee or a guarantee of some other kind. Had I concluded that, on the true interpretation of the agreement, the obligation was only to provide such a guarantee, the claimant would not have been assisted by this. First, subsequent conduct may not be used as an aid to the construction of a contract: James Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd. [1970] AC 572, 603. Secondly, there was no variation or waiver of this requirement within the terms of clause 13 of the sale and purchase agreement.

The second issue is whether GTC Mayfair (or GTC Holdings) was required to inform Richmond of the type of security required when serving notice that it required Richmond to procure the provision of the loan guarantees and what implied obligations it was under.

Clause 17 of the agreement does not expressly impose any obligations on GTC Mayfair. The only express obligation on GTC is that in clause 17.13 obliging GTC Holdings to indemnify Richmond as trustee for any person providing the loan guarantees in respect of any claims made against that person under the loan guarantees. What, if any, obligations are to be implied? GTC Holdings’ primary pleaded case is that it was not under an obligation to ensure that its nominated bank, RBS, gave the necessary cooperation to Richmond (or to Graham Weston) to enable Graham Weston to put in place the loan guarantee in accordance with the agreement.

Mr Collings accepted that clause 17.10 was subject to implied obligations but he did not formulate these in terms of co-operation by GTC Holdings. He submitted that they were confined to an obligation to act reasonably and that the claimant, when serving notice requiring the defendant to procure the loan guarantee, give the name of the nominated bank. As Mr Collings framed the obligation to act reasonably, it only concerned the nominated bank. Thus, the examples he gave were of the bank requiring Graham Weston to deposit his passport as security or to provide £500,000 security in respect of a £200,000 loan. He accepted those requirements would be unreasonable and that a consequent failure to procure the loan would not be a breach of clause 17.10. He did not, however, accept that the claimant was required to specify the kind of security required when serving notice, either as a specific implied term or as part of the requirement that it act reasonably.

In considering what duties are to be implied, the nature of the relationship between the GTC companies and Richmond, the GTC companies and the Royal Bank of Scotland, and between Richmond and the Royal Bank of Scotland has to be considered. What was contemplated were a series of contracts; between RBS as lender and GTC Mayfair as borrower, between Richmond and GTC Holdings in relation to the procurement of the guarantee, and between Graham Weston as guarantor and RBS. Richmond and Graham Weston depended on either one of the GTC companies or the Bank, with whom they were not in a relevant contractual relationship, for information as to what the bank’s requirements were. The bank’s duty of confidentiality to the GTC companies as its clients meant that, without authorisation by one of the GTC companies, it could not provide Richmond or Graham Weston with the information they needed to put in place the required guarantee.

Against this background Lord Blackburn’s observations in Mackay v Dick (1881) 6 App Cas 251 at 263 are apt. His Lordship stated:

“… as a general rule, … where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances.”

See also the discussion in Chitty on Contracts 29th ed.,13-011.

The question is what was it “necessary” for GTC Holdings or GTC Mayfair to do for the carrying out by Richmond of its undertaking to procure the provision of the security and/or guarantees? It is common ground that it was necessary to inform Richmond or Graham Weston or his representative of the name of the nominated bank and the relevant representative with whom GTC Mayfair was dealing.

The claimant did not, however, give the defendant notice of the name of the nominated bank on 3 July. It only did so on 17 July. Notice of the person to contact was only given to the defendant on 21 July. Mr Collings accepted that the claimant had “fallen down” on this, but submitted that, in the circumstances, the defendant effectively waived the requirement because it did not take the point at the time and all parties proceeded on the basis that the notice was valid. He also submitted that, in any event, the point was not determinative because the loan guarantee was not procured within 30 days of either 17 or 21 July.

I have referred to Mr Gould’s evidence that, once the defendant had been given the name of the nominated bank, he considered the claimant had done its job and fulfilled its obligation. This is not what was envisaged in the claimant’s letter of 3 July. That stated that a director of GTC Mayfair would get in touch “to make the necessary arrangements”. But the claimant’s position appears to be that all that was required in the notice was the name of the nominated bank and that when it provided this, the notice was valid and the 30 day period started to run. Mr Gould and Mr Middlemiss certainly acted on this basis; see Mr Middlemiss’s 29 July email to Mr Barnett (paragraph [47] above) and Mr Gould’s emails to Mr Barnett on 31 July and 1 August (paragraphs [48] and [51] above).

It was thus the claimant’s position that there was no obligation when giving notice to notify Richmond of the type of security required. It was up to Richmond (or Graham Weston or his representative) to ascertain this from the nominated bank. On the claimant’s primary case there was also no need to authorise the nominated bank to communicate with Richmond. But the alternative pleaded case (Reply and Defence to Counterclaim, paragraphs 16 and 19.2) accepted that GTC Holdings and/or GTC Mayfair was under an implied obligation to use reasonable endeavours to ensure that their bankers, RBS, gave the necessary co-operation to Richmond and Graham Weston to enable the loan guarantees to be put in place.

It appears that no authority was given to RBS to communicate with Richmond and Graham Weston or his representative until after Mr Charters’ 28 July email to Mr Middlemiss. The claimant’s position (see Mr Gould’s evidence, paragraphs [45] and [86] above) that it was up to the defendant (and Graham Weston or his representative) to sort things out with RBS does not take account of the fact that, unless the bank was authorised to give information to them, it would not do so. So, Mr Charters did not respond to Mr Barnett’s email dated 26 July asking what the bank’s requirements were. He referred the matter to Mr Middlemiss. Mr Middlemiss’s response to RBS on 29 July did not authorise the bank to inform Mr Barnett of its requirements but set out his understanding of Richmond’s obligation and stated that GTC would apply for the loan after the bank had been provided with a satisfactory guarantee for it.

So, as at 28 July (less than 30 days before the loan notes were cancelled on 23 August) neither Richmond nor Graham Weston’s representative knew what type of security was required and the bank had not responded to Mr Barnett’s request seeking this information. Mr Middlemiss’s 29 July email to Mr Charters did not give the bank authority to communicate this information to Mr Barnett. It was Mr Gould who, on 31 July, informed Galvin Weston and Mr Barnett that RBS required a bank guarantee. Moreover, the bank’s position was that it did not want to be involved in the negotiations for the guarantee.

I have concluded that clause 17.11, read together with clause 17.10, is to be construed as requiring the claimant to inform the defendant of the type of security required and to authorise their chosen bank to communicate with Richmond. The chosen bank could refuse to communicate until authorised and make the provision of a guarantee impossible. Once authorised to communicate, the bank could, while remaining within the boundaries of reasonableness, have imposed onerous requirements for security, such as a full cash deposit or a charge over tangible assets, and these could take time to put in place. If time was running before the defendant was informed of these requirements, it might be impossible to put them in place before time ran out.

Secondly, the claimant’s position (see Mr Gould’s evidence) that it was up to the defendant (and Graham Weston) to sort things out with RBS does not take account of the fact that, unless GTC Mayfair or GTC Holdings authorised RBS to give information to them, the bank would not do so. I have noted that GTC Mayfair or GTC Holdings did not give RBS such authority until after Mr Charters’ 28 July email to Mr Middlemiss.

Thirdly, (in clause 17.15) time is stated to be of the essence so that any delay beyond the 30 day period would mean that the loan notes were cancelled with immediate effect. If GTC Mayfair was not required to specify the form of security required at the time of the notice, the defendant would be exposed to the risk of having the 30 day period reduced, possibly substantially, by delays or failures on the part of GTC Mayfair, GTC Holdings or the bank, with whom it was not in a contractual relationship. Mr Collings’ submission that this was, in his words, just “tough cheddar” for the defendant and Graham Weston, does not sit comfortably with his reliance on Steyn LJ’s well-known statement in First Energy (UK) Ltd v Hungarian International Bank Ltd. [1993] 2 Lloyd’s Rep 194 that “a theme that runs through our law of contract is that the reasonable expectations of honest men must be protected”.

The facts of this case, moreover, vividly illustrate the effects of delay. The defendant and Graham Weston were not told that a bank guarantee was needed until 31 July and were not told that a stand-by letter of credit was required until 1 August. This was 29 days after the letter dated 3 July giving notice and, (if that notice was valid) a day before the expiry of the 30 day period. Until 31 July, the defendant and Graham Weston believed (see Mr Barnett’s evidence and his email dated 26 July to Mr Charters at RBS) that, in the light of Graham Weston’s financial position, his signature would suffice. It appears that Mr Gould and Mr Middlemiss may also have believed this until 28 July when Mr Charters informed Mr Middlemiss that RBS would require a bank guarantee. It was only on 31 July that the defendant and Graham Weston (or his representative) appreciated that they needed to get the support of a bank. There was very little time for arrangements to be made with another bank, and for that bank and RBS to sort out what the arrangement between them was to be (for example whether their instrument had to be governed by English law).

The contract gave Richmond 30 days from the time it received notice in writing to procure the provision on the loan guarantees. Until 31 July neither GTC Holdings, GTC Mayfair nor the bank (whether authorised to do so or not) told Richmond, Graham Weston, or Mr Barnett that a bank guarantee was required. It was only on 1 August that they were told that a stand-by letter of credit was required. I do not consider that in these circumstances time ran against Richmond. If the GTC companies had not authorised the bank to provide the information it was not using reasonable endeavours. If it had authorised the bank to give the information, the bank had failed to do so.

I have concluded (paragraph [94] above) that, on the proper construction of clause 17.11, contractual notice was not given to the defendant of the requirement that it procure a loan guarantee until the defendant was provided with the draft of the standby letter of credit on 1^st August 2006. The claimant was also under an implied obligation to authorise RBS to communicate with the defendant, Graham Weston or his representative in connection with the guarantee and that this was not done until (at the earliest) 29 July. On the construction of clause 17.11, the defendant had until 31 August to procure the standby letter of credit required by RBS. After GTC Holdings served notice cancelling the loan notes at 10.40am on 23 August, Mr Barnett and Ms Dysart indicated that the standby letter of credit would be tendered but GTC Holdings stated that it was too late. For the reasons I have given, it was not too late.

I do not consider that the attempts by Richmond and Graham Weston, acting through Mr Barnett and Ms Dysart, to meet the various deadlines set by Mr Gould amounted to a variation of what was required or a waiver of the defendant’s rights under clauses 17.10 and 17.11. Although Mr Barnett was principally acting on behalf of Graham Weston, he was acting with the knowledge and authority of Galvin Weston and thus Richmond. But there was no compliance with clauses 13.1, 13.2 and 1.7 of the agreement which required any waiver to be in writing (which did not include email) and signed by the waiving party and any variation to be signed by or on behalf of both parties. Moreover, Mr Barnett’s request on 1 August for an extension was made in the mistaken belief that GTC Mayfair had applied for the loan and without awareness that, until after Mr Charters’ 28 July email to Mr Middlemiss, RBS had not been authorised to communicate with Richmond or Mr Barnett about its requirements for a guarantee of a loan by it to GTC Mayfair.

The consequence of these conclusions is that the non-provision of the loan guarantee by 23 August when GTC Holdings cancelled the loan notes was the result of the failure by GTC Mayfair and GTC Holdings to serve a contractual notice and to authorise RBS to communicate with the defendant, Graham Weston or his representative in connection with the guarantee before 28 July. Accordingly, as far as the fifth issue is concerned, the non-provision of the loan guarantee was the result of failures by GTC Mayfair or GTC Holdings, or both, and not the result of breach by Richmond of clauses 17.10 and 17.11.

This is the third issue. The exchange of e-mails between Mr Charters and Mr Middlemiss on 28 and 29 July shows that RBS required a full application if GTC Mayfair wished to make a formal request for additional funding. Mr Middledmiss stated that only after the defendant provided RBS with a satisfactory guarantee for a £200,000 loan would GTC Mayfair apply for the loan. It was initially submitted on behalf of the claimant that, in stating that the provision of the security and/or guarantees is “to enable” GTC Mayfair to obtain the specified loan facility, the agreement requires the security or guarantee to be in place first. This construction would not leave the guarantor unprotected because, as a general rule (see the discussion in Chitty on Contracts, 29^th ed., 44-065) if a guarantee predates the loan it is revocable until the loan is given. Moreover, the guarantor will not be liable if the loan transaction is different in terms from that guaranteed.

On behalf of the defendant it was initially submitted that the email indicated the loan would be negotiated prior to or at least at the same time as the guarantee. This was because of the statement that “TGTC [GTC Mayfair] would get a line of credit … and Graham Weston would guarantee the loan”. By the end of the hearing it was common ground that the loan did not have to have been granted before the guarantee was given. It also appears that the defendant accepted that it was not necessary for a formal application to have been made.

Mr Choo-Choy, however, submitted that GTC Mayfair should have discussed the terms of the loan with RBS as well as the terms of the security or guarantee that the bank would require before serving notice. This was because there is a relationship between the terms of the guarantee and the terms of the loan it is securing, for instance the time or circumstances which trigger the guarantee will depend on the terms of the loan. The consequence is that it is difficult for the guarantee to be in place if there is no knowledge of the structure of the proposed loan. The stance taken by the claimant through Messrs Gould and Middlemiss may have meant RBS was not sufficiently aware of the scope of the security or guarantee Richmond had undertaken to procure. Although Mr Gould said he thought RBS was aware of this the documentary evidence suggests otherwise.

RBS was aware that the loan envisaged was for £200,000. The correspondence suggests, however, that it did not know of other terms of the agreement, in particular that the guarantee would exclude interest and charges, that it would it be for a loan for the purchase of stock and not for any other purpose, and that the borrower was to be GTC Mayfair. Pointers to the bank’s lack of knowledge of these matters are that the draft standby letter of credit originally included interest and charges, was not limited to a loan to purchase stock, and was later amended to include loans to “related companies”. As late as 17 August RBS stated that the entity to which the facilities were to be made available had not been determined. The bank sought amendments to maintain flexibility in its favour, and did so without regard to the terms of the agreement between Richmond and GTC Holdings. It was only when the points were raised by Mr Barnett that the bank went back to Mr Gould and Mr Middlemiss for instructions. I do not accept the submission that, on the objective construction of clauses 17.10 and 17.11, it was reasonably to be expected that GTC Mayfair would have negotiated both the terms of the loan and the terms of the guarantee required by their chosen bank before giving notice to Richmond. The claimant or GTC Mayfair should, however, have put the bank in a position where it knew the terms of the agreement with Richmond so that the bank could specify to Richmond what security it required. They do not appear to have done this.

In view of my conclusion it is not necessary for me to decide the fourth issue, whether Richmond is entitled under clauses 17.10 and 17.11 to see the relevant loan and stock security documentation before having to procure the loan guarantee. The defendant’s skeleton argument (paragraph 32) invited me to give guidance as to this, stating that this could be useful if I decided, as I have, that the claimant was not entitled to cancel the loan notes on 23 August and GTC Mayfair serves a fresh and effective notice under clause 17.11 requiring Richmond to procure the loan guarantee. Mr Choo-Choy’s closing submissions, however, suggested that notice could only be given once under clause 17.11. The question whether the claimant is entitled to serve more than one notice was not before me. Mr Collings did not make submissions on this point and there is no need for me to rule on it. The question of what the prospective guarantor was entitled to see was, however, before me.

It is clearly desirable for a person who is to be a guarantor to see the terms of the loan in an unexecuted form or in draft. However, in the circumstances of this case I do not consider that it is necessary to imply a term into the agreement to this effect. Mr Choo-Choy accepted that the loan did not have to have been granted before the guarantee was given. He appeared to accept that it was not necessary for a formal application to have been made. In these circumstances, there are unlikely to be loan documents in unexecuted form or even in draft beyond the pro-forma drafts which the bank ultimately provided to Mr Barnett and Ms Dysart in the present case. What is needed is for the terms of the transaction to be sufficiently clear for the bank to know what it requires and for the guarantor to ascertain whether what is required falls within the obligation undertaken. In this case, the knowledge that the guarantee was not confined to a loan to enable stock to be purchased or to the indebtedness of GTC Mayfair appeared from the draft standby letter of credit. It was accepted on behalf of the defendant that the loan documents did not have to be supplied at the time notice was given. Since Mr Choo-Choy recognised that the references in the email to a new stock company to provide security for Graham Weston were uncertain and difficult to incorporate into the agreement, the suggestion (skeleton argument, paragraph 34) that it is implicit in the process contemplated under clauses 17.10, 17.11 and the Schedule 8 email that GTC Mayfair or GTC Holdings would provide Richmond and Graham Weston with the stock security documentation is untenable.

I also do not have to consider whether the differences between the draft standby letter of credit and what Richmond had agreed to meant that the bank’s requirements were unreasonable. The differences were that the draft furnished on 1 August 2006 was not limited to £200,000 and included bank interest and charges, was not restricted to a period of 2 years, the intended duration of the loan, and was not confined to debts relating to stock purchased. The first two issues were sorted out by 17 August. However, on that date Mr Fox of RBS amended the wording so that it covered loans to GTC Mayfair “or other related company”. Had the claimant and GTC Mayfair reached agreement with the defendant about the arrangement to put in place security to protect the proposed guarantor it might well have been reasonable for the guarantee to cover a loan to the stocking company. But there was no such agreement. In the context of an undertaking to procure a guarantee to enable GTC Mayfair to obtain a loan to enable that company to acquire stock, in the absence of such an agreement I doubt that it was reasonable for a bank to require the guarantor to guarantee the indebtedness of unspecified related companies as well that of as GTC Mayfair, and for that indebtedness to be unrelated to the purchase of stock. While it is open to a bank to make this requirement, I incline to the view that a guarantor who declined to enter into a guarantee on these terms relying on the terms of Richmond’s undertaking would not put Richmond in breach of clause 17.10.

In view of my conclusion that contractual notice pursuant to clause 17 was not given until 1 August 2006 so that Richmond was not in breach of clause 17.10, the penalty clause issue does not arise. It was, however, the subject of evidence and full argument and therefore I deal with it. Mr Collings submitted that clause 17.15 does not fall within the rule against penalties for two reasons. First, it did not require the payment of money. Secondly, his principal submission was that the effect of clause 17 including 17.15 was to make the procurement of the guarantee a condition precedent to entitlement to payment under the loan notes so that the law on penalties does not apply.

Mr Collings recognised that Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 provides support for regarding the rule on penalties as applicable to a clause entitling one party to a contract, on the breach of the other, to withhold a payment otherwise due: see the statements of Lord Reid, Lord Morris, Vicount Dilhorne, and Lord Salmon at 698, 703, 711 and 723. He, however, submitted that I should approach these statements with caution in the light of Bingham LJ’s observation in The”Fanti” and the “Padre Island” (No. 2) [1989] 1 Lloyd’s Rep 239, 255 that he doubted that what was said in the Gilbert Ash case on this issue was part of the ratio because no authority on penalty clauses was cited or referred to at any stage. The trial judge, Saville J (as he then was) had also concluded the penalty rule did not apply to the clause in that case.

In the Gilbert Ash case, counsel appear to have conceded that the clause was a penalty: see [1974] AC 689, 693G. Moreover, the textbooks do not provide unqualified support for the statements in that case that clauses entitling a party to withhold a payment otherwise due are subject to the rule. Thus, Treitel, The Law of Contract, 11^th ed, 2003, 1006, states “it has been suggested” that a provision entitling the victim to withhold a payment can be penal, and Chitty on Contracts, 29^th ed, 26-120, states that the law on penalties “may” apply to such a clause. There are, moreover, fine lines between such a clause and clauses to which the penalty rule has been held not to apply: see Trietel, Law of Contract, op cit.

It must, however, be remembered that Bingham LJ was dissenting on this point in the “The Fanti” and The “Padre Island”. Stuart-Smith LJ, with whom O’Connor LJ agreed, held that the clause in that case, providing for retrospective cesser of cover (and thus liability to pay on the policy) where a member of a P & I club, inter alia, in breach of contract failed to pay a call by the club, was a penalty. Stuart-Smith LJ stated (at 262) that the statements on this point in the Gilbert Ash case were part of the ratio, but in any event were clear and powerful. When that case reached the House of Lords, this issue was not considered: [1992] AC 1. Moreover, in relation to the “fine lines” point, equally fine lines will have to be drawn if the rule does not apply to a clause entitling the victim of a breach of contract to withhold a payment. For example, had GTC Holdings paid the entire £600,000 purchase price for GTC Mayfair to Richmond or been required to do so and the contract stated that, on Richmond’s failure to procure the guarantee, Richmond would pay GTC Holdings £540,000, that clause would undoubtedly be subject to the penalty rule.

The penalty rule has been seen to have application beyond the paradigm situation of a provision that requires the payment of a sum of money in the event of breach. It has been held to apply to a clause entitling the innocent party to the retransfer of property which had previously been transferred to the contract breaker (Jobson v Johnson [1989] 1 WLR 1026), and (see Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573) to a clause which requires a contract breaker to forfeit a deposit or sum of money due or to become due to the other party in the event of breach. These considerations have led me to conclude that Mr Collings’ first reason for stating the penalty rue does not apply is to be rejected. Whatever the position may be in a higher court, the decision in The “Fanti” and The “Padre Island” that a clause entitling the innocent party to a breach of contract by the other party to withhold a payment otherwise due is subject to the penalty rule binds me.

I turn to Mr Collings’ principal submission: if Richmond procured the security or guarantee, the loan notes were payable, but, if it did not, they were not payable. He submitted that the contract should be construed as creating a condition precedent to the payment of the loan notes, in effect providing for alternative modes of performance, as in Alder v Moore [1961] 2 QB 57, or that clauses 17.10 and 17.15 were to be seen as analogous to a provision for an incentive payment. The law on penalties does not apply to any of those.

Mr Collings relied, in particular, on the decision of the Court of Appeal in Euro London Appointments Ltd v Claessens International Ltd [2006] 2 Lloyds Rep 436. In that case the contract provided (in clause 3.1) that the introduction fee payable to an employment agency for finding suitable applicants was to be paid within 7 days from the invoice date, and (in clause 4) that a proportion of the fee was refundable on a sliding scale if the applicant’s employment terminated within 12 weeks and (clause 4.1) the client had paid the introduction fee within 7 days of the invoice date. It was held that requiring the introduction fee to be paid within 7 days to be entitled to the reduction was not an unenforceable penalty because clause 4.1 was no more than a condition precedent. It did not impose an obligation on the defendant and required no payment of money.

The sale and purchase agreement in this case cannot be construed as a contract for the sale of GTC Mayfair at two alternative prices; £600,000 where the required guarantee has been procured, and £60,000 where it has not been procured. Such a construction is wholly inconsistent with the structure of clause 3 and, in particular, clause 3.1. Mr Collings is not assisted by the timetable for redemption of the loan stock set out in clause 8 of the loan stock instrument entered into at the time of the sale and purchase agreement which states “provided that the seller complies with its obligations under clauses 17.10 and 17.11 in the agreement…” the principal amount of the stock shall be redeemed as specified in the remainder of the clause. That provision is concerned with the timing of repayments of the principal and does not assist in the determination of the nature of the obligation under the sale and purchase agreement. Secondly, clause 17.10 imposes an obligation on Richmond to procure the guarantee and it is failure to do so “as required under clauses 17.10 and 17.11” which triggers the cancellation in clause 17.15. That the loan notes are to be “cancelled” also points away from the “alternative modes of performance” construction urged by Mr Collings.

The decision in the Euro London case is, moreover, clearly distinguishable. It was accepted in that case that if the condition precedent to the refund provision stood alone, it would not be regarded as within the rule against penalties. The court held that, although the condition precedent and the payment obligation in clause 3.1 both mentioned the same 7 day time period, they were not inter-dependent. Chadwick LJ, (with whom Moore-Bick LJ and Lawrence Collins J agreed,) stated (at [21]):

“The condition precedent in the first limb of clause 4.1 and the payment obligation imposed by 3.1(c) are not inter-dependent. The point can be illustrated by supposing a case where the agreement provided, in clause 3.1(c), that the agency’s fee be paid within, say, 14 days; but that, to qualify for refund under clause 4.1, the fee must be paid within 7 days. The commercial effect of the agreement would be unaltered – save that the agency could not sue for its fee until the 14 days had elapsed. But, in that case, because failure to pay within the time limited by clause 4.1 would involve no breach of obligation on the part of the client, the rule against penalties, as summarised in the Philip Bernstein case [Sterling Industrial Facilites v Lydiate Textiles Ltd (1962) 106 SJ 669] would have no application. I can see no reason in principle why the position should not be the same in a case (such as the present) where the time limited by clause 4.1 happens to be the same as that imposed by the payment obligation in clause 3.1(c). Although there may be practical considerations – and some obvious convenience – in having the same time limit in both clauses 4.1 and 3.1(c), the fact that the time limit is the same in the two clauses is of no legal relevance.”

In the present case the provisions of clause 17.15 are expressly dependent on the requirements and obligations in clauses 17.10 and 17.11. For these reasons I reject Mr Collings’ submission that the penalty rule does not apply.

The question thus is whether clause 17.15 is a penalty for non-performance of the contract and unenforceable or a pre-estimate of GTC Holdings’ loss and an enforceable liquidated damages clause. Any consideration of this matter must proceed in the light of the classic summary of the principles in Lord Dunedin’s four propositions in Dunlop Pneumatic Tyre Co v New Garage [1915] AC 79 at 86-88. They are relied on in all the cases I cite, and set out in many of them. I shall, however, not lengthen this judgment by setting them out here. Instead I start with Colman J’s statement in Lordsvale Finance plc v Bank of Zambia [1996] QB 752, at 762G, that:

“Whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred.”

In Cine Bes Film Cilik ve Yapimcilik v United International Pictures [2003] EWCA Civ 1669 at [13] Mance LJ described this as a more accessible paraphrase of the concept of penalty than older statements which rely on the phrase “in terrorem”.

While the distinction between a pre-estimate of damages and a penalty is at the core of this area of the law, it has been stated that it does not necessarily cover all the possibilities. In Lordsvale Finance plc v Bank of Zambia, at 763-764, Colman J, considering a clause providing for an increase of 1% in the rate of interest on late payment of a debt, stated:

“There would … seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach.”

In the Cine Bes Film Cilck case, Mance LJ also found this valuable. He stated of the distinction between a genuine pre-estimate and a penalty that:

“There are clauses which may operate on breach, but which fall into neither category, and they may be commercially perfectly justifiable.” (ibid, at [15].)

Because the power to strike down a penalty clause is an interference with freedom of contract, the burden of showing that a contractual provision is an unlawful penalty lies on the party claiming that it is: see Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, at 1447F; Jeancharm Ltd v Barnett Football Club [2003] EWCA Civ 58 at [9]; Murray v Leisureplay plc [2005] EWCA Civ. 963, at [106]. In the former case Diplock LJ stated that “the terms of the clause may themselves be sufficient to give rise to the inference that it is not a genuine estimate of damage likely to be suffered but is a penalty”, as is the case in the terms listed in the fourth of Lord Dunedin’s propositions in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd. In the Jeancharm case Keene LJ stated (at [22]) that “on its face an interest rate of 260% per annum would seem to be penal in nature, and that the evidence at the trial did not establish that it was a genuine pre-estimate of loss”. However, as Lord Diplock observed in the Robophone case ([1966] 1WLR 1428 at 1447) in relation to terms which give rise to such an inference, “it is an inference only and may be rebutted”.

In determining the question, the court is not confined to the terms of the agreement and may look at the inherent circumstances of the contract judged at the time: see Murray v Leisureplay [2005] EWCA Civ 963 at [52] per Arden LJ, referring to Lord Dunedin’s speech in Dunlop Pneumatic Tyre v New Garage.

What of the amount of the specified sum and its relationship to the likely damages? In Alfred MacAlpine Capital Projects Ltd v Tilebox Ltd [2005] BLR 271 at [48] Jackson J stated:

“There seem to be two strands in the authorities. In some cases judges consider whether there is an unconscionable or extravagant disproportion between the damages stipulated in the contract and the true amount of damages likely to be suffered. In other case the courts consider whether the level of damages stipulated was reasonable.”

His Lordship stated that the two strands can be reconciled and that “there must be a substantial discrepancy between the level of damages stipulated in the contract and the level of damages which is likely to be suffered before it can be said that the agreed pre-estimate is unreasonable”. He also observed that only four of the cases cited to him struck down the relevant clause as a penalty and in each of those there was a very wide gulf between the level of damages likely to be suffered and the level of damages stipulated in the contract.

In Murray v Leisureplay plc [2005] EWCA Civ 963 the Court of Appeal was divided about the approach to a discrepancy between the liquidated and the common law damages. Arden LJ (at [42]) stated that the reasoning of the court in the Cine Bes Film Clilik case turned on a comparison between the overall amount payable under an agreement in the event of a breach with the overall amount that would have been payable if a claim for damages for breach of contract had been brought at common law. She stated that “the court proceeded on the basis that, if such a comparison discloses a discrepancy, which can be shown not to be a genuine pre-estimate of damage or to be unjustified, the agreement provides for a penalty”. She considered that a five step process should be used in such cases, with steps two and three respectively concerned with what amount is payable on breach under the liquidated damages clause, and what amount would be payable if a claim for damages for breach of contract was brought under common law. Only after going through those stages should the court ask what the parties’ reasons were for agreeing to the relevant clause.

Buxton and Clarke LJJ, however, favoured a broader approach which concentrated less on the factual difference between the liquidated and the contractual damages: see [2005] EWCA Civ 963 at [105-106] and [114-116]. Clarke LJ stated that the comparison is relevant, but no more than a guide to the answer to the question whether the clause is penal. Buxton LJ stated that requiring a discrepancy to be justified as a genuine pre-estimate of damages “introduces a rigid and inflexible element into what should be a broad and general question”.

In Alfred MacAlpine Capital Projects Ltd v Tilebox Ltd [2005] BLR 271 at [48.3], having referred to the authorities, including Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd; Robophone Facilities Ltd v Blank; and Philips v Attorney General of Hong Kong [1993] 61 BLR 41, Jackson J also stated:

“Because the rule about penalties is an anomaly within the law of contract, the courts are predisposed, where possible, to uphold contractual terms which fix the level of damages for breach. This predisposition is even stronger the case of commercial contracts freely entered into between parties of comparable bargaining power.”

See also Murray v Leisureplay plc [2005] EWCA Civ 963 at [114] per Buxton LJ. The care that the courts show when the parties are of equal bargaining power before deciding that a clause is a penalty does not, however, displace the rule that the clause must be a pre-estimate of damage: see Jeancharm Ltd v Barnett Football Club Ltd [2003] EWCA Civ 58 at [15] per Jacob J (as he then was).

The courts have also long recognised the particular advantages of such clauses where the true amount of damages are uncertain and difficult to assess. Paragraph (d) of Lord Dunedin’s fourth proposition states this “is just the situation when it is probable that pre-estimated damage was the true bargain between the parties”: [1915] AC 79, at 88. See also Clydebank Engineering and Ship Building Co Ltd v Don Jose Ramos Yzquierdo Y Castaneda [1905] AC 6 at 11; Robophone Facilities Ltd v Blank [1966] 1 WLR 428 at 1447B-D.

Although Lord Dunedin contrasted a penalty with a “genuine pre-estimate of damage”(emphasis added), as stated by Jackson J in Alfred MacAlpine Capital Projects Ltd v Tilebox Ltd (ibid. at [48.2]), “the test does not turn upon the genuineness or honesty of the party or parties who made the pre-estimate. The test is primarily an objective one, even though the court has some regard to the thought processes of the parties at the time of contracting.”

Having thus stated the principles in the authorities that are relevant to the present case, I turn to clause 17.15 and the circumstances of this contract. Here, the consequence of failing to procure a guarantee of £200,000 is the loss of the payment of £540,000 under the loan notes. This is a substantial discrepancy. The purpose of the guarantee was to enable the purchase of stock and the evidence is that the loss because of the inability to purchase stock would be in the region of £240,000. The loss to Richmond pursuant to the clause is over 100% greater and it is this which led Mr Choo-Choy to submit that the clause was penal. There was, however, also a risk that the business would run out of cash and be unable to continue trading.

At the outset of the hearing I inclined to the view that this clause inserted, at the very end of the negotiations, was penal because of the size of the difference between the amount of the loan to be guaranteed and the amount of the loan notes that would be cancelled. In the light of the evidence, however, and the broader approach of Buxton and Clarke LJJ in Murray v Leisureplay plc, I am satisfied that it is not. In the circumstances of the contract, judged on 4 May when it was made, the clause was commercially justifiable, did not amount to oppression, and was negotiated and freely entered into between parties who were of comparable bargaining power. Most significantly, on the evidence the clause did not have the predominant purpose of deterring a breach of contract and did not thus amount to what in the older cases is referred to as a provision in terrorem. The evidence shows the following. First, as to the bargaining power of each side, although Richmond at that time was in a poor financial position, it was supported by offshore companies and trusts controlled by the Weston family and the financial, commercial and professional resources available to them, including two experienced business consultants, Messers Rodriguez and Barnett. Messers Gould and Middlemiss also had significant commercial experience in the retail business: see paragraph [4] above.

At the time of the negotiations, the business being sold, GTC Mayfair, was sustaining losses of about £100,000 per month. Significant liabilities, in particular the rent of the Symons Street premises, were due to accrue. Richmond, and its controller, Galvin Weston, wanted to sell the business before those obligations fell due and, in Mr Barnett’s words, serious cash would be required to meet them. Throughout the negotiations the management buy-in team had been concerned about having sufficient cash to enable them to manage the business and, in particular, to buy stock for the important Christmas period. On 28 April their analysis of the state of GTC Mayfair’s business in the light of what they had been informed when discussing the March management accounts with Mr Batson led them to conclude that, without an extra £200,000, the transaction could not proceed. They had had difficulties in raising the £800,000 from their backers and did not feel able to approach them for more. They asked Richmond to provide them with a working capital loan of this sum for 2 years. The subsequent negotiations led to an agreement that, at first Gavlin Weston, and then Graham Weston, would guarantee a loan to GTC Mayfair.

The significant evidence is that of Messers Middlemiss and Gould that they had in mind the protection of the investment made by them and their backers, and they were concerned about risking losing all the equity they had put into the company. They wanted a mechanism in place to enable the company to survive, and considered that the cancellation of the note loans would improve its balance sheet position and make it easier to obtain funding elsewhere. Mr Barnett, acting on behalf of the Weston interests, was not bothered by Mr Gould’s insistence that the note would be cancelled, he said, because he knew that Graham Weston was financially able to help his brother and would do so.

In the light of the state of the business, the risk to the purchasers’ £800,000 equity investment was real if they did not have sufficient funds to purchase stock. At that time, although real, the extent of that risk and the amount of loss that would be sustained if no guarantee and no loan was forthcoming was difficult to assess. For these reasons, I am satisfied that, on the assumption the rule against penalties applies to a provision entitling the victim of a breach of contract to withhold the payment, clause 17.15 does not offend against the rule so that, had contractual notice been served before 23 July, the clause would have been enforceable.

I have, however, concluded that contractual notice was not given to the defendant of the claimant’s requirement that the defendant procure a loan guarantee until the defendant was provided with the draft of the standby letter of credit on 1 August. Accordingly, the defendant had until 31 August to procure the standby letter of credit required by RBS. For this reason the claimant was not entitled to cancel the loan notes on 23 August, and the defendant is entitled to judgment.