Johnson v Spooner and another

Contract – Construction – Implied term – Appellant seeking rectification of second respondent company share register – First respondent counterclaiming alleging agreement with appellant to purchase her share in second respondent – ICC judge dismissing claim and allowing counterclaim – Appellant appealing – Whether judge erring in law – Appeal dismissed The second respondent company was incorporated in November 2018 as a vehicle for taking a short extendable lease on the George Hotel, Quay Street, Yarmouth, Isle of Wight. In 2019, the appellant agreed to invest £150,000 in return for a half-share in the business but relations soon fell apart. The first respondent had been a director and the holder of one share in the company throughout. The appellant became the holder of one share on 4 March 2019. There was a hiatus in March 2020, but after re-registration her share was transferred to the first respondent on 7 August 2020. In March 2021, the appellant applied under section 125 of the Companies Act 2006 to rectify the share register of the second respondent to record her as the holder of 1 fully paid-up ordinary share, and the first respondent as holder of the other. The first respondent counterclaimed, contending that, on 2 July 2020, by an alleged oral agreement, she had agreed to sell him her share; or by a varied agreement on 8 July 2020 by an exchange of e-mails headed “subject to contract”. The claim was dismissed and the counterclaim was allowed: [2022] EWHC 735 (Ch); [2022] PLSCS 60. The appellant appealed contending that the judge was wrong in law to imply into the 2 July agreement, varied on 8 July, terms relating to the transfer of the appellant’s shares in the second respondent. Further, in light of the findings that the first respondent had agreed to provide a personal guarantee for payments to be made by the second respondent, which had to be drawn up formally, the judge should have found that the parties had not reached a conclusive agreement. Held: The appeal was dismissed. 1) A term was to be implied only if it was necessary to make the contract work, as being so obvious that it went without saying and/or necessary to give the contract business efficacy. The concept of necessity was not to be watered down and was not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term was an essential but not sufficient precondition for inclusion. And if there was an express term in the contract which was inconsistent with the proposed implied term, the latter could not, by definition, meet those tests, since the parties had demonstrated that it was not their agreement: Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] EGLR 8; [2016] AC 742 applied. The starting point when implying terms was to identify what was expressly agreed insofar as it might have a bearing on timing, because until one had worked out what the parties had expressly agreed, it was difficult to see how one could decide whether a term should be implied: Duval v 11-13 Randolph Crescent Ltd [2020] UKSC 18; [2020] EGLR 17 applied. (2) The judge’s key primary finding, on which the conclusion as to the implied term was based, was that the purpose of the agreement was to bring to an end the appellant’s involvement with the second respondent.  Since the actual transfer of the share required formal steps to be undertaken, it could not literally be achieved then and there. In the absence of a precise date being agreed upon, this was nevertheless a clear case for implying a term that the share would be transferred within a reasonable time. If the notional officious bystander had been asked, the response would have been that the parties’ intention of putting an end to their business relationship would be achieved in practice by the appellant transferring her share to the first respondent within a reasonable time of agreement being reached on 2 July 2020. (3) There was an implied term that the transfer would take place within a reasonable time. On the basis of the judge’s primary findings of fact, that required the appellant to transfer her share by the time of the first payment from the first respondent, which was over a month later. On any view, that reasonable time had passed long before the proceedings commenced, so that the appellant was undoubtedly by then under an obligation to transfer her share to the first respondent, such that she held her share on trust for him. The key finding of the judge was that, although the appellant stated in her e-mail of 8 July 2020 that her agreement was “subject to contract”, a binding agreement was reached on her accepting the first respondent’s terms, in the same way that the 2 July agreement had been immediately binding. While the terms were to be written up afterwards, that did not detract from the conclusion that the parties had reached a final agreement on 8 July 2020. It necessarily followed, since the express term was that the share would be transferred on signing, that the appellant was obliged to transfer the share as soon as reasonably possible. (4) Whether there was a binding contract between the parties and, if so, upon what terms, depended upon what they had agreed. It depended upon a consideration of what was communicated between them by words or conduct, and whether that led objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law required as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties had not been finalised, an objective appraisal of their words and conduct led to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement: RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH [2010] UKSC 14; [2010] 1 WLR 753 applied.  The test was objective in the sense that the intention of the parties was to be gleaned from a consideration of what passed between, whether by words or conduct as opposed to being based on their subjective intentions. That was the exercise the judge carried out, and against which no appeal lay. Jeffrey Chapman KC (instructed by Keystone Law) appeared for the appellant; Tina Kyriakides (instructed by Greenwoods Legal LLP, of Peterborough) appeared for the first respondent; defendant; the second respondent did not appear and was not represented. Eileen O’Grady, barrister Click here to read a transcript of Johnson v Spooner and another