Dissolution of partnership – Sale of assets – Sale mechanism – Appellant seeking declarations that second respondent successful bid for assets of dissolved partnership not invalid and deposit forfeit – Judge dismissing application since second respondent failed to exchange contracts within time limit – Appellant appealing – Whether judge erring in law – Appeal allowed
The second respondent was the successful bidder, pursuant to a court-ordered sale mechanism, for the assets of a dissolved partnership between the appellant and the first respondent.
The bid was £4,300,000 for the partnership’s freehold interest in the Royal Nawaab Manchester restaurant, at 1008, Stockport Road, Levenshulme, Manchester and 50% of the issued shares in the company that ran the business.
On 27 September 2021, the second respondent paid a 10% deposit (£430,000), whereupon he became required to exchange contracts with the appellant and the first respondent within seven days pursuant to clause 5.4 of the sale mechanism, failing which the deposit would be forfeit and the first respondent would be entitled to purchase the partnership assets at the specified reserve price of £3,250,000.
Just before the deadline for exchange of contracts, drafts of the property sale contract and the sale and purchase contract agreed between the partners were sent to the second respondent but contracts were not exchanged by the contractual deadline. The first respondent asserted that the time for exchange had gone and no extension of time would be granted.
The appellant applied for declarations that the bid was not invalid and the deposit forfeit, as no contracts in a form which it was possible to exchange had been provided to the bidder; and/or a successful bidder was to be afforded a reasonable time following the provision of contracts in a form which it was possible to exchange to effect such exchange.
The High Court dismissed the application holding that the burden was on the second respondent to make sure that he did everything to get the contracts exchanged within seven days, but he had failed to do so. The appellant appealed.
Held: The appeal was allowed.
(1) The appropriate course was first to interpret clause 5.4, carrying out the unitary exercise and adopting the iterative approach identified and explained in Wood v Capita Insurance Service Ltd [2017] UKSC 24; [2017] AC 1181.
Starting with an analysis of the text of clause 5.4, the bidder was required to exchange within seven days and that there was no “gloss” on those words. However, that left open the question of what, on a proper construction, that obligation entailed.
The concept of an exchange of contracts was well understood. Each party executed the contract (often each party signing their own part, the two parts then being “exchanged” in person or by telephone). In that context, “required to exchange” naturally referred to an obligation to execute and exchange a contract tendered by the other party in a form capable of being executed and exchanged by the bidder.
The concept of completion required under clause 5.4 was similarly a mutual exercise: the seller’s solicitor would release transfer documentation and/or keys on the purchaser’s solicitor confirming that the balance of the purchase price was being transferred.
(2) If the parties had intended to make the bidder responsible if there was no exchange of contracts, they would have required the bidder to “procure” an exchange of contracts. They did not do so. Further, the sale mechanism contained no other provisions to enable the bidder to procure such exchange.
Further, the sale mechanism contained draconian provisions if the buyer was in default of the obligations to exchange or complete. It would be bizarre if those provisions became operative when the bidder had been unable to procure exchange (or completion) through no fault of their own.
The expectation would be that the partners, as sellers, would produce draft contracts for consideration by a successful bidder. That would be the usual course in a sale of property or of a business, but was more obviously the case where the sellers had been in dispute, but now had to act jointly in dealing with the bidder.
(3) By the time the second respondent paid the deposit and became party to the contract constituted by the sale mechanism, the partners had had over three months to negotiate and agree the form of contract to be presented to the bidder, and over two weeks since they had initiated the sale mechanism process.
The reasonable expectation would be that draft contracts (agreed between the partners) would be provided to the successful bidder on payment of the deposit or shortly thereafter. Contrary to the judge’s view, the onus of progressing towards exchange of contracts was on the partners, at least in the first instance.
The first respondent had a clear potential motive for frustrating a sale to any successful bidder, the result of the failure to exchange being that the first respondent would have the right to acquire the partnership assets at the reserve price, achieving the outcome he sought.
(4) Both the text and the factual matrix of the sale mechanism pointed clearly to the requirement for the bidder to exchange contracts once presented with a contract in a form capable of being executed and exchanged: the words “within seven days” in clause 5.4 had to be read as meaning within seven days of such presentation. Otherwise, a term had to be implied that the bidder had a reasonable time after such presentation in which to exchange.
Accordingly, the second respondent was not in breach of any obligation under clause 5.4, his deposit was not forfeit and the contract to sell the partnership assets to him had not become invalid.
(5) There was an implied duty of mutual co-operation, no matter which interpretation of clause 5.4 was preferred. The partners and the third respondent, as the sale conductor, did not provide agreed drafts until the deadline for exchange was imminent. That was egregious and an inexcusable delay.
The second respondent was entitled to wait until a draft agreed between the partners was supplied before providing comments. Had it been necessary to do so, the court would have allowed the appeal on the basis that the failure of the parties to exchange contracts by the deadline was due to the partners’ failure to co-operate with the second respondent, requiring an appropriate extension of time for such exchange: Elvanite Full Circle Ltd v AMEC Earth and Environmental (UK) Ltd [2013] EWHC 1191 TCC; [2013] PLSCS 130 considered.
James Mather and Mark Wraith (instructed by Viceroy Law Ltd, of Rusholme) appeared for the appellant; Lesley Anderson KC and Tina Ranales-Cotos (instructed by Clarion, of Leeds) appeared for the first respondent; Patrick Lawrence KC (instructed by Needle Partners Ltd, of Leeds) appeared for the second respondent; The third respondent did not appear and was not represented
Eileen O’Grady, barrister
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