Liberty Investing Ltd v Sydow & Ors [2015] EWHC 608 (Comm)

Case No. 2014 Folio 990[2015] EWHC 608 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
Venue The Rolls Building, 7 Rolls Buildings, Fetter LaneDate Friday, 13 th February 2015
London EC4A 1NL
Before
MR. JUSTICE LEGGATT
LIBERTY INVESTING LIMITED Claimant
Between
KARL GORDON SYDOWDANCE WITH MR. D LIMITEDFREEDOM RIDERS TOPCO LIMITEDFREEDOM RIDERS LIMITED Defendants
Mr. A Hunter QC and Mr. J Pobjoy (instructed by Quinn Emanuel Urquhart & Sullivan LLP) appeared for Claimant.Mr. R Anderson QC and Mr. Daniel Burgess (instructed by King & Wood Mallesons) appeared for Defendants.
Judgment
[1]These applications have been argued by Mr. Hunter QC on behalf of the claimant, and Mr. Anderson QC on behalf of the defendants, with their customary skill.[2]The claimant is a company which invested in the exploitation of rights to arrange theatrical productions of the musical called “Dirty Dancing”. A network of contracts was negotiated to govern the claimant’s investment and the manner in which the rights in that production were to be exploited. Those contracts included a Subscription and Shareholders’ Agreement dated 18th June 2011, which is at the centre of the current dispute. Under that Shareholders’ Agreement, the claimant subscribed for shares in a company called Freedom Riders Topco Limited, which I will refer to as “Topco”. Topco was the holding company for Freedom Riders Limited, which I will refer to as “FRL”, a wholly-owned subsidiary of Topco which was the operating company for the exploitation of the relevant commercial rights. Apart from the claimant, the other shareholder in Topco was Dance with Mr. D Limited, which I will refer to as “DWMD”, a company owned and controlled by Mr. Karl Sydow. Mr. Sydow was and is also a director of Topco and of FRL.[3]The parties to the Shareholders’ Agreement are the claimant, Topco, FRL, DWMD and Mr. Sydow. In this action, the claimant is suing the other four parties to the Shareholders’ Agreement. Several claims are made in the Particulars of Claim, but the key claim for present purposes is a claim that the defendants have acted in breach of clause 10 of the Shareholders’ Agreement by causing or permitting Topco or its subsidiary, FRL, to incur capital expenditure exceeding £100,000 without the written consent of the claimant.[4]Clause 10 of the Shareholders’ Agreement is headed “Matters requiring consent” and comprises two relevant obligations. Clause 10.1 provides:
“Each of the Shareholders shall exercise all voting rights and powers of control available to him in relation to the Company” [i.e. Topco] “to procure that, save with the prior written consent of the Investor” [i.e. the claimant], “the Company shall not” - subject to certain exceptions not relevant for present purposes - “effect or propose any of the matters referred to in Schedule 6.”
[5]Schedule 6 specifies eight matters falling within the scope of that clause for which the consent of the claimant is required. Those matters include at para 4 of Schedule 6 the incurring of any capital expenditure or debt exceeding £100,000.[6]The term “Shareholders” is a defined term in clause 1 of the Agreement. It is defined to mean, essentially, the shareholders of Topco. The precise wording of the definition is:
“Each of DWMD and the Investor and any other members” - it says “of any Company”, which I take to be a typographical error for “the Company” - “from time to time.”
[7]The second relevant obligation comprised in clause 10 is contained in clause 10.2, which states: “As a separate obligation severable from the obligations in clause 10.1, the Company agrees that, save with the prior written consent of the Investor, it shall not [subject to the same exceptions] effect or propose any of the matters referred to in Schedule 6.[8]In the Particulars of Claim the claimant has alleged, incorrectly, that Mr. Sydow is a shareholder of Topco and therefore owes an obligation pursuant to clause10.1 of the Agreement to procure that the Company shall not effect or propose any of the matters referred to in Schedule 6 without the prior written consent of the claimant. That is now acknowledged to have been a clerical error and the claimant accepts that the Particulars of Claim should be amended to delete the statement that Mr. Sydow is a shareholder of Topco. Unsurprisingly, the defendants do not oppose the deletion of that statement. They submit, however, that the consequence of its deletion is that the claimant has no cause of action against Mr. Sydow. On that basis Mr. Sydow is applying to have the claim against him struck out or summary judgment entered in his favour. His case is simply that, since he is not and never has been a Shareholder, he owes no obligation under clause 10.1 of the Shareholders’ Agreement; nor, plainly, does clause10.2 apply to him as it is an obligation resting solely on Topco itself. Accordingly, on Mr. Sydow’s case there is no obligation on him personally to procure that the Company will not effect or propose any of the matters referred to in Schedule 6 without the claimant’s consent.[9]In response to that objection, the claimant has applied to amend the Particulars of Claim to allege that, even if Mr. Sydow does not fall within the express obligations contained in clause10, there is, nevertheless, an implied term of the Agreement of which he is in breach. The implied term alleged is set out in paragraph 15A of the draft Amended Particulars of Claim that are before the court. That paragraph reads as follows:
“Further, it was an implied term of the SSA [i.e. the Shareholders’ Agreement], implied as obvious and/or inherent in the nature of the Agreement, that Mr. Sydow, as a party to the SSA who was also the controlling director and sole shareholder of DWMD and a director of FRL and Topco, would cooperate in and/or not prevent compliance by DWMD, FRL and Topco with their obligations under the SSA.”
[10]The defendants oppose the application to amend on the ground that it has no real prospect of success. On their behalf, Mr. Anderson QC reminded me of what was said by Lord Hoffmann in the case of Attorney-General of Belize vBelize Telecom Ltd [2009] 1WLR 1988, which is now the leading case on the implication of terms. In particular, he drew attention to the passage at para 17 where Lord Hoffmann said:
“The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.”
[11]In other words, the default position, as it is now commonly expressed, is that nothing is to be implied into a contract. If the parties had intended to impose an obligation on one or other of them, the ordinary expectation is that they would have said so. That expectation is all the stronger in a case where, as here, the parties have expressed their bargain in a detailed written contract which has been prepared with the assistance of high-powered City solicitors.[12]Mr. Anderson goes further and submits that the term which the claimant seeks to imply as a term of the Shareholders’ Agreement is, in fact, inconsistent with the intention that is to be collected from the express terms of the Agreement. He submits that in the wording of clause 10 the parties have specifically addressed the question of which of them is to have a contractual obligation to ensure that the matters referred to in Schedule 6 do not occur without the claimant’s consent. It is clear, he says, that they have made a deliberate choice to impose such obligations on Topco itself and on the Shareholders, and not on Mr. Sydow. The term which the claimant seeks to imply would, in substance, place exactly the same obligation on Mr. Sydow as the parties have chosen to impose on the Shareholders but, by clear implication, have chosen not to impose on Mr. Sydow personally. Therefore, submits Mr. Anderson, the claimant is seeking by the implication of this term to achieve something which is not merely a matter on which the Agreement is completely silent, but which is the opposite of the inference reasonably to be drawn from the express terms of the Agreement.[13]In advancing arguments in support of the claimant’s case that the term set out in paragraph 15A of the draft Amended Particulars of Claim is to be implied, Mr. Hunter QC reminded me on several occasions of the fact that this is an amendment application, and not the trial of the action, and that the court must therefore proceed with caution and refuse the amendment only if it can be seen clearly, on the basis of the Agreement itself and the other material before the court, that the argument has no real prospect of success. In particular, if there are matters of fact on which evidence will be needed that could only properly be explored at a trial, it is, on well-known principles, inappropriate for the court to grant summary judgment and right to give permission to amend.[14]Mr. Hunter submitted that in this case a consideration of the relevant background or factual matrix will be very important and can only properly be undertaken at a trial. In particular, he submitted that it is necessary to consider the suite of contracts of which the Shareholders’ Agreement forms part and other surrounding circumstances, which may shed light on the reasonable expectations of the parties.[15]There are, of course, some cases in which that approach is undoubtedly correct and where the court cannot form a clear view on a question of construction without the sort of consideration of evidence that can only properly be undertaken at a trial. The case cited by Mr. Hunter of AL Challis -v- British Gas Trading Ltd [2015] EWHC 141 (Comm), a recent decision of Mr Justice Popplewell, was a case of that kind. Equally, it is important that, where such claims are made, they are scrutinised and that invoking the factual matrix does not become what Mr. Anderson described as a “get out of jail free card” for any party which wishes to defer consideration of a question of construction until trial. It often is the case that questions of construction can properly and appropriately be decided by the court on a summary basis.[16]It is necessary to consider, therefore, what matters of background or factual matrix are potentially relevant in this case. There is now in the Commercial Court Guide an obligation on a party who wishes to contend, in relation to the construction of a document, that there is relevant factual matrix to set out specifically in his pleading each feature of the matrix which is alleged to be of relevance. It seems to me that there really are no relevant features of the factual matrix identified in the Particulars of Claim, relevant that is to the present issue, apart from those which are mentioned in paragraph 15A itself – namely, that Mr. Sydow, as well as being a party to the Agreement, was also the controlling director and shareholder of DWMD and a director of FRL and Topco.[17]There is no dispute about those facts. Nor is there any dispute about the fact that Mr. Sydow was, in Mr. Hunter’s expression, the “lynchpin” of the arrangements to exploit the rights in the musical, who had control over all the relevant operational decisions and actions. I can therefore approach the Agreement on the basis that that relevant background is common ground between the parties. No other features or potential features of the background are mentioned in the evidence served in support of the amendment application and in opposition to the defendants’ application for summary judgment.[18]Mr. Hunter has referred in argument to the Articles of Association of Topco, which show that Mr. Sydow had control over decisions made at meetings of the board of directors of Topco. That is all part and parcel of the same point. Beyond that, he has suggested that it might be necessary, in order to form a proper appreciation of the background to clause 10, to delve in more detail into the powers of the Shareholders than is readily or immediately apparent from the Articles of Association. I have not been able to see, however, what light on the question of construction could reasonably be shed by further investigation of that topic.[19]This does, therefore, seem to me to be a case in which the court can examine the meaning of the Agreement without it being necessary to defer that consideration until disputed matters of background fact have been decided at a trial.[20]The crux of Mr. Hunter’s argument in favour of the implication of a term is that, in circumstances where Mr. Sydow has control over the affairs of the Company in particular through his control of the board of directors, the protections given to the claimant to veto certain decisions, being those on matters referred to in Schedule 6 of the Agreement, would not in practice be effective unless there is an obligation, not just on the corporate entities, but on Mr. Sydow himself as the controlling individual, to obtain or at least not seek to obstruct the actions of the Company in relation to those matters.[21]It seems to me that this argument confuses, or potentially confuses, what is practically or factually necessary with what is legally necessary in order for the Company to perform its obligations under the Shareholders’ Agreement. It is of course true that, as a company is a creation of the law, a company can never perform any contractual obligation unless an actual human being who is a director or stands in some other relevant relationship to the company takes the requisite action. But that does not mean that a company cannot perform a contract unless such relevant individuals also undertake contractual obligations themselves, personally. Contracts are concerned with the allocation of legal liability and a contract can work perfectly well and effectively from a legal point of view if the relevant legal liabilities are imposed on corporate entities and not on individuals.[22]The real question, as it seems to me, is whether it is necessary in order to make the Agreement workable or is so obvious that it went without saying or is otherwise implicit in the wording of the Agreement that, if the claimant’s consent was not sought to one of the matters referred to in Schedule 6, Mr. Sydow would have a personal legal liability rather than the legal liability resting solely on the companies concerned including DWMD, which was the company he owned and controlled. I can see nothing inherently unworkable or objectionable in an arrangement which imposes legal liability only on the relevant corporate entity and not on the person who controls that corporate entity. For understandable reasons, individuals usually prefer to avoid undertaking personal liabilities in commercial dealings, though sometimes they are persuaded or impelled to do so as, for example, where a director of a company agrees to give a personal guarantee of some of its obligations. It is all a matter of commercial negotiation in every case. There is no assumption or presumption that the court can make, a priori, about whether it was intended that such a personal liability should be undertaken.[23]Mr. Hunter then says that this case is different from the ordinary case because here Mr. Sydow has been made a party to the Agreement. What, he asks rhetorically, could the purpose of that be unless it was to bring about a situation in which the person who had practical control of the company – namely, Mr. Sydow – would be personally responsible if the company fails to perform relevant obligations under the Agreement? To that Mr. Anderson answers that there was a perfectly good reason to make Mr. Sydow a party other than to impose such personal liability: namely, to give him various protections and benefits.[24]In Mr. Anderson’s submission, joining Mr. Sydow as a party was all about ensuring that he had personal rights and protection for his ability to control operational matters and not about subjecting him to any obligations. Mr. Anderson points out that nowhere in the clauses of the Agreement is there any express obligation imposed on the “Producer”, which is the term used to describe Mr. Sydow, other than in clause 13 which imposes an obligation of confidentiality on each of the parties to the Agreement including, therefore, Mr. Sydow.[25]To that Mr. Hunter replies that there was no need to make Mr. Sydow a party to the Agreement in order to give him procedural protections and rights and that the Agreement would work perfectly well without joining him for that purpose. Therefore, he submits, the court should infer that it was indeed only in order to ensure that Mr. Sydow was under certain obligations that he was joined as a party.[26]So far as I can see, the clauses of the Agreement do not demonstrate a clear and obvious purpose for making Mr. Sydow a contracting party; but the burden is very much on the claimant to show that it was intended that he should be under an obligation which is not expressly stated. Standing back from this Agreement and looking at it as a whole, it seems to me that its overall purpose or essential purpose is to determine the balance of power and control by allocating rights and obligations as between Mr. Sydow and his company, who had majority ownership of Topco, on the one hand, and on the other hand the claimant, which was a minority shareholder but was providing a major part of the funding for the joint venture. The major purpose of the Agreement, as I say, was to strike that balance of power and responsibility giving, on the one hand, control and rights to Mr. Sydow and his companies and, on the other, certain protections to the claimant.[27]Where that balance was struck was pre-eminently a matter of negotiation between these commercial parties, advised and assisted as they were by skilled legal advisors. I can see nothing to displace the assumption that the allocation of responsibility and protection which they agreed is that appearing on the face of the contract. There is no reason that has been put forward which seems to me to be a persuasive reason for displacing the clear wording of clause 10 which does, as I construe it, embody a deliberate choice to impose responsibility for obtaining consent of the claimant to any matter falling within Schedule 6 on the Company and its Shareholders and not on the Producer. I therefore do not consider that the argument for implying a term imposing such responsibility on the Producer has a real prospect of success. Accordingly, I refuse permission to make that amendment.[28]Mr. Hunter had a fallback argument that it is unnecessary for the claimant to rely on the alleged implied term, because the same result can be arrived at as a matter of construction of clause 10.2 of the Agreement. As I have mentioned, under clause 10.2 the Company has agreed that it will not, without the claimant’s consent, effect or propose any of the matters referred to in Schedule 6.[29]Mr. Hunter points out that the agreement embodied in clause 10.2 was made by the Company with the other parties to the Shareholders’ Agreement including, therefore, Mr. Sydow. It follows, he submits, that, if any of the matters referred to in Schedule 6 is effected without the claimant’s prior written consent, that involves a breach of the agreement contained in this clause not only by the Company, but by the parties with whom the company has made that agreement.[30]I may not in that exposition have done justice to how Mr. Hunter would express the argument, but I find it difficult to express it in any way which presents it as a coherent interpretation of clause 10.2 because, in my view, this interpretation of the clause is quite hopeless. Clause 10.2 very clearly imposes an obligation on the Company and only on the Company. It is quite impossible, in my view, to construe that clause as somehow imposing an obligation on the other parties to whom the Company’s obligation is owed. Rejecting, as I do, that fallback argument, it follows that summary judgment must be given in favour of the defendants.[31]The only remaining question is whether Mr. Sydow should remain as a party to the action in order to ensure that he is personally bound by the outcome, including matters on which the claimant is seeking a declaration, and does not have open to him the possibility, should it ever arise in some later proceeding, of seeking to reargue matters which have been decided in this action. That concern is properly addressed by the undertaking which Mr. Sydow has offered to the court to be bound by any judgment or decision given in these proceedings. Provided that such an undertaking is embodied in an order, I do not see that it is necessary for Mr. Sydow to remain a party to the proceedings. No other reason why he should do so, given the decisions that I have made on the applications, has been suggested which will not be addressed by that undertaking. I accordingly consider that Mr Sydow should be removed as a party on those terms.

Cited in 2 later judgments