#6723 - The General Trading V. Richmond Corporation - Commercial Remedies BCL

The General Trading v. Richmond Corporation

Facts

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 relevant clause:

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 4th 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.

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.

17.15 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.”

Holding

Rule against penalties applies to an obligation otherwise than to pay money

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.

The obligation is triggered by breach of Clauses 17.10 and 17.11 – hence penalty rule applies

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.

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.

Is the cancellation of loan notes a penalty?

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 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.”

There is a substantial discrepancy between loss and amount payable under the clause

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.

Commercially Justifiable

At the outset of the hearing I inclined to the view...