Vendor and purchaser — Collateral agreement — Misrepresentation — Sale of business consisting of property and shares — Competition between potential purchasers — Whether collateral oral agreement between the defendant vendors and the plaintiffs, one of the competitors for the purchase of the business, was enforceable at law — Whether defendants’ failure to break off negotiations with the other competitor a breach of the collateral agreement — Plaintiffs held entitled to damages for loss of opportunity to purchase
litigation arose from the decision of the defendants to sell a photographic
processing business which they had built up at a property in south-east London
— The business had been transferred to a company of which all the shares were
owned by the two defendants — After some abortive negotiations the plaintiffs
(a solicitor and a chartered accountant) and a rival bidder became interested
in a possible purchase of the business — The rival was, in fact, the first in
the field with a proposal to purchase and in the end was the successful
purchaser — The judge, however, held that an
and the defendants
analysis, based on the evidence, was that there had been an oral agreement,
which was subject to contract, for the plaintiffs to purchase the defendants’
property and shares for a total price of £2m — This was supported by a
collateral agreement which was not subject to contract and which demonstrated
the plaintiffs’ intention to enter into binding legal relations — The
consideration moving from the plaintiffs was an undertaking to provide a
‘comfort letter’ from their bankers and not to withdraw — The defendants’
undertakings were to terminate negotiations with any third party then
proceeding and not to give consideration to any alternative proposal — The
defendants, in breach of this undertaking, did not terminate negotiations with
the rival bidder and, in fact, eventually agreed to sell to him at the price of
£2m which the plaintiffs had offered subject to contract
took the view that the promises made by the defendants under the collateral
agreement were representations, which turned out to be misrepresentations — The
plaintiffs relied on such misrepresentations to their detriment — By not
terminating negotiations with the rival bidder the defendants were in breach of
the collateral agreement — If the defendants had not breached the agreement it
was probable that the plaintiffs would have purchased the shares and the
property — They had lost this opportunity — They were therefore entitled to
damages, which would be assessed by another court
The following
case is referred to in this report.
Credit
Suisse White Weld Ltd v Hyman Davis
unreported, December 20 1977
In this action
the plaintiffs, Martin K Walford, Charles Walford and Macar Properties Ltd,
sought damages against the defendants, Peter Miles and Valerie Miles, for the
breach of a collateral agreement, whereby the plaintiffs had lost the
opportunity of purchasing the defendants’ business, consisting of a property at
18 Blackfriars Road, London SE1, and the shares owned by the defendants in PNM
Laboratories Ltd, which carried on a photographic enterprise at that address.
Philip
Naughton QC and Angus Moon (instructed by Wedlake Bell) appeared on behalf of
the plaintiffs; Stanley Brodie QC and Edward Cohen (instructed by Tarlo Lyons
Randall Rose) represented the defendants.
Giving
judgment, JUDGE BATES QC said: The first plaintiff in this case is a
solicitor in private practice in the firm of Wedlake Bell in Covent Garden,
London. The second plaintiff is a chartered accountant and is the twin brother
of the first plaintiff. Having qualified in 1970, the second plaintiff worked
with a number of public companies, including a period of some two and a half
years up to March 1987 when he was a senior vice-president of the Dunhill
Corporation in the United States. The third plaintiff is a company owned by the
first two plaintiffs and of which they are both directors.
The first and
second defendants are husband and wife. In 1969 the first defendant started his
own photographic processing business. In the beginning the business was
conducted from home, and the first defendant kept his full-time employment. The
business succeeded and in 1972 was transferred to PNM Laboratories Ltd (to
which I shall refer as ‘the company’), all of the shares in which were owned by
the first and second defendants. The place where the business was carried on
was a property at 18 Blackfriars Road, London SE1. This property was purchased
by the first and second defendants jointly for £90,000 in 1984. It was let by
them to the company.
In January
1985 the first defendant became very ill. He was at home for three months and
was incapacitated for about a year altogether. During this period, the business
was run by the second defendant and, as she said in evidence, a very loyal
staff which by then may have numbered as many as 20.
Possibly
because of the illness there were discussions about the sale of the business,
together with the property in which it was carried on. These assets were
advertised; but, apparently, there were few inquiries.
The
advertisement had been inserted by Mr Vinodray Khanderia, who at all material
times was the accountant to, and financial adviser of, the first and second
defendants. The second defendant told me that there was an inquiry from a Mr
Chandra Patel and that she had met him once at his solicitors’ office. There
were negotiations in October and November 1985.
As a matter of
fact, Mr Chandra Patel and Mr Vinodray Khanderia were at all material times
partners in a firm of chartered accountants carrying on business in the Harrow
Road, London W9. This firm were the auditors to the company.
The dual role,
so to speak, of Mr Khanderia appears to have been accepted by the first and
second defendants. That he was personally interested in the purchase of the
company and the property in 1985 is clear, for example, in a letter written on
October 21 1985 by the solicitors for Mr Patel and Mr Khanderia, Campbell
Hooper Wright & Supperstone, to the then solicitors for the first and
second defendants.
The proposed
purchaser was Statusguard Ltd, as appears in a letter to Messrs Campbell Hooper
dated January 3 1986, and in that company Mr Patel and Mr Khanderia had 30%
interests, according to a letter written to the Inland Revenue on November 18
1985. These 1985 negotiations, however, proved abortive.
But by the end
of 1986 the second defendant told me that they had again decided to sell the
business. The reason, she said, was that she and her husband wanted to spend
more time together socially. In a letter dated January 30 1987, Mr Khanderia on
his firm’s notepaper sets out what he says are Mr Patel’s proposals for the
acquisition of the company and the property. Mr Patel was therefore first in
the field.
Then came the
plaintiffs. They had become aware of the decision of the defendants to sell.
The first plaintiff and the first defendant met on February 23 1987 and, by a
letter dated February 24, the plaintiffs made a formal offer to the defendants,
subject to contract. The defendants consulted Mr Derek Randall of Tarlo Lyons
Randall Rose, solicitors in High Holborn House, London, and he replied on March
10 1987 setting out the terms on which the defendants would be prepared to
proceed.
On the same
day, Mr Randall wrote to the solicitor for Mr Patel saying that his clients
had:
. . . another
offer which they are considering which in monetary terms is slightly better
than your clients’ offer.
Mr Randall
went on:
I do not rule
out the possibility that my clients will wish to proceed with your clients’
offer but in this event I would want to have some information as to how the
purchase would be financed backed up by some concrete evidence that the finance
is available.
On March 12
there was a meeting at the first plaintiff’s offices which was attended by the
first plaintiff, the first defendant, Mr Randall (the defendants’ solicitor)
and Mr Khanderia. On March 16 the first plaintiff wrote two letters to Mr
Randall, referring to their recent discussions, acknowledging that the matter
remained subject to contract and, with a view to clarifying the proposal made on
the 12th, setting out his understanding of it.
On March 17 Mr
Randall noted in his diary that:
Telephone
attendances upon Mr Walford and Mr Miles at considerable length so far as Mr
Walford was concerned. He insisted on telephoning Mr Miles personally although
I had requested that all communications should be passed through me. I advised
Mr Miles that he would have to decide whether to proceed with Mr Walford or
with Mr Patel and he said he would speak to Mr Walford.
The first
defendant did speak on the telephone to the first plaintiff. It was a vitally
important conversation. The first plaintiff accepts that a letter he wrote
dated March 18 accurately reflects the telephone conversation on the 17th. And
this would appear to be accepted, too, in para 7(xi)(xii)(xiii) of the
defendants’ amended defence. The first plaintiff gave oral evidence about the
telephone conversation on March 17 and put it in a context. I shall have to
refer to this in some detail. The first defendant did not give any oral
evidence at all. Neither did Mr Randall.
The first
plaintiff said in evidence that he phoned Mr Randall at about three o’clock on
March 17. He asked Mr Randall if he had received the two letters dated March 16
which he had faxed to Mr Randall. Mr Randall said he had, and the first
plaintiff then asked what was the position. Mr Randall replied that he had
received no instructions to answer. This was also what Mr Randall said in his
letter dated March 17 to the first plaintiff. The first plaintiff said he
was most concerned by what Mr Randall told him. He could not understand it
because he said the first defendant had told him he would be in touch with Mr
Randall. The first plaintiff said he would speak to the first defendant direct,
and Mr Randall said that he preferred that he did not, because ‘you are a
solicitor’ and the first defendant was feeling pressurised. The first plaintiff
said that may be, but he was also a principal and it was of the utmost
importance that he spoke to the first defendant direct. He also said that he
was not putting the first defendant under pressure. The business was for sale
for £2m and he would buy for £2m.
The first
plaintiff said he had a meeting on the 17th with the solicitors Harbottle &
Lewis at 4.15 pm and he had waited in his office until four o’clock and had not
heard from the first defendant. He therefore phoned him. The first defendant
said he was in the middle of supervising a difficult order and could be phoned
back between 6 pm and 6.30 pm. The first plaintiff did this at 6.15 pm from the
offices of Harbottle & Lewis.
The first
plaintiff said he told the first defendant of his conversation with Mr Randall
and that he found it perturbing that nothing was happening after their previous
conversations and his letters to Mr Randall. He asked if the first defendant
had a problem, to which the answer was ‘No’. He asked: ‘Do you have a problem
with me or not?’ ‘No,’ said the first
defendant, according to the first plaintiff’s evidence, ‘nothing personal but I
have some reservations’. These related to the payments to be made for the
business, and the first plaintiff agreed with what the first defendant
required.
The first
defendant also said that he did not know that the plaintiffs definitely had the
financial ability to do the deal. The first plaintiff explained that he would
ask his bank to write what he described, accurately as it seems to me, as a
‘comfort letter’ indicating that the plaintiffs had resources to pay £2m.
The first
plaintiff then told the first defendant that he was worried by his recent
experience and that he was not going to proceed further and get the comfort
letter unless he was satisfied that the first defendant was not dealing with
anyone else. The first plaintiff said he was not buying a sweetie shop; it was
a £2m deal. Both plaintiffs were committing everything, including their houses,
to the deal. The first plaintiff asked if the auditors were involved and,
according to the first plaintiff, the first defendant said: ‘I promise you they
are not.’ But the first defendant also
said ‘there is another alternative purchaser’. They had not inspected the
property and they would have to have a credit committee meeting to consider
reports.
The first
plaintiff said that that was not good enough for him. He was not prepared to be
in a contract race or to act as anyone’s midwife. He said he would not proceed
with the comfort letter and would withdraw completely unless he had a specific
agreement with the first defendant. That agreement was that the first plaintiff
would produce a comfort letter by Friday March 20 and carry on and not
withdraw. This he did. The first defendant was to break off negotiations with
any third party and would not consider any other alternative and would not
accept a better offer but would deal exclusively with the plaintiffs, with a
view to concluding the deal as soon as possible after April 6. If the first
defendant would not agree to that, the first plaintiff said ‘count me out’.
The
significance of April 6 was, apparently, that it took the disposal of the
business by the defendants into a new fiscal year.
The first
plaintiff said that he was incensed at what he thought was going on. He said he
was very plain and specific to the first defendant. There was no chance of him
misunderstanding. If there was no agreement, he would withdraw. There was an
agreement.
So far as it
goes, the documentary evidence supports the oral evidence given by the first
plaintiff. And, as I have already indicated, the first defendant did not give
any evidence. I accept the evidence of the first plaintiff.
As I have
already noted, in a letter dated January 30 1987 to the first defendant, Mr
Khanderia on Patel Khanderia & Co’s notepaper had ‘put on paper Mr Patel’s
proposals which we discussed personally earlier this week’. This was followed
up in a letter to the defendants’ solicitors from Mr Patel’s solicitors, dated
February 26. The defendants’ solicitors replied on March 10 in terms to which I
have already referred.
In a letter
dated March 16 to Mr Patel, Mr P W Goodwin, of Investors in Industry plc, said
that, following his meetings with Mr Patel, Mr Khanderia and the first
defendant, he was writing to record his company’s in-principle agreement for
the acquisition of the company. He understood that the acquiring company would be
Statusguard Ltd. That was of course the name of the company which in 1985 was
to acquire the company in which Mr Patel, Mr Khanderia and a third individual
each had a 30% interest.
There is no
evidence to show that Statusguard in 1987 was the same company as Statusguard
in 1985 or who were the shareholders in 1987. But Mr Patel gave evidence that
after the company was acquired by Statusguard in 1987 Mr Khanderia became the
secretary of the company. Mr Khanderia was therefore in at the end, so to
speak, as he had been in at the beginning, both in the 1985 abortive
negotiations and in the 1987 negotiations.
Mr Patel said
in evidence that Mr Khanderia wrote the letter of January 30 on his behalf and
that he had prepared the terms set out in the letter. Further, he said, he did
not discuss the terms with Mr Khanderia. I am unable to accept this evidence of
Mr Patel, who appeared to me to be unconvincing and unreliable.
About the
ubiquitous Mr Khanderia, however, I am unable to express a first-hand view. He
was not called upon to give evidence.
The solicitors
for Mr Patel had been on holiday and, on their return, wrote to Mr Randall on
March 23. In that letter it was said, inter alia:
I spoke to Mr
Patel this morning who has told me that he had been given to understand by your
clients that my clients’ offer was being genuinely considered and that they
were not simply being left as ‘second string’ which your letter seems to infer.
Also on March
23 Mr Goodwin for Investors in Industry plc wrote to the first defendant
formally confirming that a special meeting of his board on that day approved
financial facilities to enable Mr Patel to acquire the shares in the company
and the property. This approval was forthcoming consequent upon a visit of Mr
Goodwin’s adviser, a Mr Noble, to the premises on March 18.
On March 25 Mr
Randall wrote to the first plaintiff acknowledging receipt of his letter of
March 18 enclosing the comfort letter from Lloyds Bank, also dated March 18,
and confirming that, subject to contract, his clients agreed to the sale of the
property and the shares at a total price of £2m. On the same date, Mr Randall
wrote to Mr Patel’s solicitors informing them that his clients had concluded
terms for the sale of the property and the shares to another party. He also
said in that letter that his clients had explained to Mr Patel that:
Everything is
still subject to contract and he obviously cannot rule out the possibility that
the presently negotiated transaction may not go through. If this were to be the
case then my clients would naturally be interested in pursuing discussions with
your clients but meanwhile we cannot deal with more than one interested party
and for the time being we are dealing with the other interested party.
The first
plaintiff says he spoke to the first defendant again on March 27 and told him
that he had sent a draft agreement for the purchase of the shares. The first
plaintiff expressed the view that they should have a meeting as soon as the
defendant got back from his weekend sailing on a navigational course; but the
first defendant said that the company’s busiest trading period, the Cannes Film
Festival, was approaching, and that it was unlikely that he would be available
for two weeks.
The first
defendant was in fact not available to the first plaintiff for two weeks or at
all; but he was available for Mr Patel. Mr Randall in a letter of March 30 to
the first plaintiff, said that the first defendant had phoned him to advise him
that the defendants had given the matter further thought and had decided to
sell to a company associated with the auditors. That sale was at the same
price, £2m, as was agreed between the plaintiffs and the defendants; and this
represented a £100,000 increase in the price that they had been offered by the
auditors’ company.
Mr Patel said
in evidence that he was disappointed when he received Mr Randall’s letter of
March 25 but that, so far as he was concerned, the matter was then finished
until a telephone call late on the Friday evening from the defendants, asking
him if he was still interested. He said he had no further discussions with the
first defendant after he received Mr Randall’s letter of the 25th until the
late telephone call from the first defendant on the Friday night. I do not
believe the evidence of Mr Patel.
The second
defendant said that, on Friday March 27, at the request of her husband, she
went to the company’s offices and was there all afternoon. Her husband wanted
her to examine the plaintiffs’ draft agreement with him. By the end of the
afternoon, she said they had decided not to sell to the plaintiffs. That was
because, she said, the first plaintiff was not easy: he did not have a relaxed
attitude towards
company’s profitability and particularly any warranty as to the company’s
profits. And, as the first defendant would still be employed by the company for
a year after its sale, it could be detrimental to her husband’s health. She
said that, on the journey home, they decided that they would either continue in
business or ask Mr Patel if he was still interested.
Mr Patel was
still interested and, even if the second defendant did not know this, my
conclusion on the evidence that is before me is that the first defendant did. I
find that the first defendant and Mr Patel continued to be in touch,
notwithstanding the March 17 oral agreement and Mr Randall’s letter of March
25.
It may be that
the first and second defendants came to the conclusion that the first plaintiff
was not easy and would not get on well with the staff; but there had been no
indication of this in the first plaintiff’s evidence of the telephone
conversation on March 17 or in Mr Randall’s letter of March 25 confirming his
clients’ agreement, subject to contract, to sell to the plaintiffs.
It is against
this evidential background that I have to decide the principal issue in this
case, that is to say, whether the admitted oral agreement between the first
plaintiff and the first defendant is enforceable in law. Mr S E Brodie QC,
counsel for the defendants, says it was not so enforceable for a number of
reasons. First, the agreement, he submits, was like the agreement to sell the
shares in the company and the property, that is to say, it was subject to
contract; and there was no evidence, he maintains, to displace the
subject-to-contract negotiations. I do not agree. On the evidence of the first
plaintiff as to what was said in the telephone conversation on March 17, my
view is that the parties intended to be bound and enter into legal relations
when they made their oral agreement. They were both principals. They were both
men of business. The first plaintiff was not prepared to continue unless he got
undertakings from the first defendant. These undertakings were, provided that
the plaintiffs’ bankers’ comfort letter was in the defendants’ hands by the
Friday of that week, the defendants would terminate negotiations with any third
party or consideration of any alternative, and even if they received a
satisfactory proposal from any third party before close of business on Friday
night they would not deal with that party nor give further consideration to any
alternative. The consideration moving from the plaintiffs was that they would
provide a comfort letter from their bankers and would not withdraw, and would
continue negotiations. This constituted, in my judgment, a separate, collateral
contract which was not subject to contract. On the particular facts of this
case the unreported decision of the Court of Appeal on December 20 1977 in Credit
Suisse White Weld Ltd v Hyman Davis and Harold Morris, upon which Mr
Brodie relied, does not appear to me to assist.
Mr Brodie said
that the bankers’ letter of comfort was not legally binding. That is true, but
this does not of itself, in my judgment, prevent the comfort letter from
constituting adequate consideration from the promises of the first defendant.
The promises of the first defendant under the collateral agreement were
representations. On the evidence before me they were in fact
misrepresentations. The first defendant did not, as I have already indicated,
terminate negotiations with Mr Patel. The first defendant intended, in my
judgment, that the plaintiffs would rely on his representations. The plaintiffs
did rely on them and they acted to their detriment.
By not
terminating negotiations with Mr Patel, the defendants were in breach of the
collateral agreement with the plaintiffs.
If the
defendants had not breached their collateral agreement or made
misrepresentations, it is probable, in my judgment, that the plaintiffs would
have purchased the shares in the company and the property. This was an
opportunity which they lost.
What damages
flow from this is a matter which it is agreed, as I understand it, will have to
be considered by another court.
