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31 July 2018
In Doherty v Fannigan Holdings Limited the Court of Appeal held that agreements for the transfer and purchase of shares give rise to dependent obligations and that one party does not therefore become a debtor to the counterparty immediately as a result of their failure to pay. This judgment has implications for the forms of redress available to the wronged party in analogous situations and makes clear the commercial approach to contractual disputes encouraged by the courts.
In 2009 Patrick Doherty and Fannigan Holdings Limited (FHL) established a joint venture in order to develop a 62-acre site in Gosport, Hampshire. Following a disagreement between the parties, it was agreed that Doherty would acquire 100% of shares in Our Enterprise Haslar Limited (OEHL), the special purpose vehicle operated by the joint venture. The parties entered into a share purchase agreement which provided that the first 90% of the shares in OEHL would be transferred directly from FHL to Doherty. The shares were to be paid for by Doherty in eight tranches over six years at a total price of £14 million, with payments to be made on specified dates as set out in the schedule to the contract. The remaining 10% of shares were to be transferred by assignment of FHL's right to acquire the shares from minority shareholders following the completion of the purchase of the initial 90%.
The fifth tranche fell due on 1 July 2015 and Doherty failed to pay. He had been late in paying the third and fourth tranches and FHL had secured payment by issuing a bankruptcy petition and statutory demand. FHL again issued a statutory demand in relation to the fifth tranche. As a significant proportion of the purchase price remained unpaid, none of the shares in OEHL was transferred in accordance with the terms of the contract.
Doherty applied to have the second statutory demand set aside on the basis that his breach had not resulted in a liability to the respondent in "debt for a liquidated sum" which was payable on demand. The question for the courts was therefore whether the parties' respective obligations under the contract stood alone or were dependent on each other.
At first instance, the registrar held that on proper construction of the contract, the obligation to pay and the obligation to transfer the shares were dependent obligations:
Mr Doherty must pay and FHL must deliver executed share transfers to him. The two are not and cannot be disconnected… The [contract] does not create a debt to be claimed irrespective of compliance with the obligation to transfer the shares.
Although the registrar did not reference the text, the decision was a clear application of the 'relation of the promises' test set out in Chitty on Contracts, which states that "promises are said to be dependent when the obligation of one party depends on the performance, or the readiness and willingness to perform, of the other".
On appeal to the High Court, the deputy judge focused on:
The court was particularly swayed by the concurrency of the obligations and held that the requirements to pay and transfer were independent of each other. FHL was therefore entitled to issue a statutory demand and – in the event that Doherty failed to comply with the terms of the demand and was deemed unable to pay his debt – a bankruptcy petition.
Doherty appealed this decision, which was permitted on the grounds that the appellant's grounds of appeal "raised an important point of principle".
Court of Appeal
The Court of Appeal noted that a strict reading of the contractual wording, along with the fact that specific payment dates had been provided, implied that the duty to transfer the shares was a separate obligation which arose only after the condition precedent of payment being made. However, the judge found the High Court's decision in this regard to be a "surprising outcome" which relied too heavily on the fact that FHL's obligation arose later than Doherty's. Despite the issues of timing, it was noted that the suggestion that Doherty had signed a contract requiring him to pay large sums of money to FHL without FHL being mutually obligated to transfer shares in return was unreasonable, unlikely and uncommercial: "The critical question is as to the sense and intention of the operative parts read in the context of the whole agreement."
The judgment stated that where mutual obligations are the whole or substantial part of the parties' consideration under a contract (as was the case here), they are more likely to be dependent. In this regard, the contract for the transfer of shares was likened to a domestic house sale and purchase governed by the Standard Conditions of Sale (Fifth Edition) and found to be no different in principle. Common consensus in the analogous house sale scenario is that, although the obligations to pay and hand over title documents at completion may arise sequentially, they are nevertheless dependent obligations. It was noted that – as set out in Johnson v Agnew(1) – in circumstances where a buyer fails to pay the price on the completion date, the vendor cannot sue for a debt while it retains the house; instead, its opportunities for redress are to seek specific performance or, in the alternative, damages.
The appeal was therefore upheld and FHL's statutory demand set aside. The fact that Doherty's obligation to pay was dependent on FHL's obligation to transfer the shares meant that in the event of Doherty's default, rather than automatically becoming a debtor with the right to serve a statutory demand, FHL was presented with the same options as in Johnson – to sue for specific performance or damages.
This case helpfully sets out the circumstances in which contractual obligations might be found to be dependent and the remedies consequentially available following a breach. The Court of Appeal emphasises a pragmatic approach which considers the commercial reality of the relationship between parties, focusing on the sense and intention of the operative obligations in the contract when read in the context of the whole agreement.
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