20:20 London Ltd v Peter Vincent Riley
| Jurisdiction | England & Wales |
| Judgment Date | 12 July 2012 |
| Neutral Citation | [2012] EWHC 1912 (Ch) |
| Docket Number | Claim No: HC11C3087 |
| Court | Chancery Division |
| Date | 12 July 2012 |
[2012] EWHC 1912 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
David Donaldson Q.C. Sitting as a Deputy High Court Judge
Claim No: HC11C3087
In 2009 the defendant carried on a substantial digital marketing business under the name of 20:20 London. The business was unincorporated and the defendant was its chief operator and key man. By 2008 he was concerned that size was preventing him from obtaining much lucrative business servicing important contracts and wanted a tie up with a larger agency which would permit this. Eventually he was introduced to Digital Marketing Group (ADMG@) and began negotiations for the sale of 20:20 to DMG. These culminated in a Sale and Purchase Agreement dated 11 December 2009 (Athe SPA@) under which the defendant sold the business (and some associated assets) to the claimant, a subsidiary of DMG.
The consideration for the sale consisted of a Cash Consideration of, 1,500,000 and Consideration Shares which were to be allocated at 31 December 2012 (or prior termination). The claim is concerned solely with the Cash Consideration which under Clause 3.2 was paid into an Escrow Account and made subject to the provisions of Schedule 10. In essence, the monies were only to be released from that account to satisfy a liability of the defendant to a creditor or under a warranty in the SPA. Paragraphs 1 and 2 of Schedule 10 provided for repayment of all or part of the Cash Consideration in certain circumstances where the contract did not last for more than 3 years. I set out those paragraphs followed by the relevant parts of the definitions of the key terms of art which they contain:
A1. On the Payment Date, if Peter Riley is or becomes a Good Leaver and the Payment Date
(i) falls during the First Period, Peter Riley will repay all of the Cash Consideration to the Buyer in full;
(ii) falls during the Second Period, Peter Riley will repay all of the Cash Consideration less the Re-Adjustment Reduction Amount; or
(iii) falls during the Third Period, Peter Riley will repay 80% of the Cash Consideration to the Buyer less the Re-Adjustment Reduction Amount.
2. If Peter Riley is or becomes a Bad Leaver at any time on or before the Payment Date, Peter Riley will repay all of the Cash Consideration in full on the Payment Date …@
ALeaver@ is defined as Aceasing to be an employee … for any reason…@
AGood Leaver@ is defined as Abeing a Leaver because of any of the following reasons@, which are, put shortly, incapacity to work, death, change of role, or unfair dismissal.
ABad Leaver@ is defined as A … becoming a Leaver for any reason which does not cause Peter Riley to be classified as a Good Leaver …@
ARe-Adjustment Reduction Amount@ is the subject of an elaborate formula, but would in the present case be a modest sum, either, 822 or, 8,220, effectively, 822 per day after the commencement of Athe Second Period@ on 1 August 2011.
APayment Date@ is defined, in summary, as 31 st December 2012 or an earlier ARe-Adjustment Event@, which includes (by reference to the definition of ALeaver@) the cessation of employment for any reason.
Simultaneously with the SPA the parties entered into a Service Agreement by which the defendant was employed by the claimant as Executive Creator Director at an annual salary of, 120,000, the employment being terminable on either side on six months notice. In early August 2011 the defendant was summarily dismissed from that employment on the grounds of redundancy. A claim for unfair dismissal is pending before an employment tribunal.
On 12 September 2011, the claimant commenced the present action seeking repayment of the, 1.5 million under paragraph 10(2) of Schedule 10 of the SPA (as a ABad Leaver@), alternatively of the same sum with a small reduction under paragraph 10(1) (as a AGood Leaver@). For the purpose of the hearing before me the claimant is content that I should assume that paragraph 10(1) is the applicable provision 1 and that the deduction would be, 8,220. On 8 November 2011 a Defence and Counterclaim was served, and following a Reply and Defence of Counterclaim the claimant issued a notice on 13 March 2012 with an application for summary judgment, which came before me for determination on 29 June 2012. While I have not burdened this judgment by setting out the now extensive case-law on the principles governing summary judgment (much of which was cited to me) with which I am, like most courts, amply acquainted, I have borne it well in mind and guided myself by reference to it.
The Defence, signed by leading and junior counsel, sets out four defences, based on (a) construction (b) implied term (c) rectification for common mistake (d) unlawful restraint of trade. At the hearing before me counsel also argued, though without any application to amend the Defence, that (i) the SPA should in the alternative be rectified for unilateral mistake and (ii) paragraph 10(1) and/or (2) was in breach of Article 8 of the European Convention on Human Rights.
The defendant=s case on construction and rectification for common mistake is set out clearly and concisely in the Defence and based solely on three short extracts from two emails on 10 November 2009 to the defendant from Mr Ben Langdon
on behalf of the claimant (or perhaps more accurately DMG) in the course of the negotiations which resulted in the signature of the SPA. These are set out verbatim in paragraphs 10 and 11 of the Defence as follows:First Email:
A [the proposed terms of the Agreement] still leave us very exposed if you decide to leave the business A
@In terms of >reciprocity= I think that the way to look at this is that yes, we=re protecting ourselves, but we paid off your personal debts and provided you with a big springboard and platform via the formation of 20:20 group. We=ve also through the granting of shares at today=s prices given you the opportunity to earn good money with the potential for significant upside. All we are asking in return is that you don=t leave us in the lurch for the next three years.@
Second Email:
AI do understand your nervousness about a scenario in which you lose your job through no fault of your own, and end up with a, 1.5 million loan repayment and no shares. Not great, eh? This was never the intention.@
The Defence then proceeds to aver that Athe factual matrix in which the Agreement falls to be construed@ includes those extracts, and that Athe aim and genesis@ of the Agreement was that if the defendant lost his job through no fault of his own he would be entitled to, and retain, the Cash Consideration. On this basis, it is contended—both in the Defence and in argument before me—that the SPA should be construed as including at the end of paragraphs 10(1) and (2) of Schedule 10 the words
A… provided always that, on the Payment Date, should the Seller lose or have lost his job through no fault of his own, he shall be entitled to retain the Cash Consideration@,
alternatively that the SPA should be rectified on the ground of common mistake to insert those words.
To understand the two emails, it is necessary to go back a little in time. Originally (as appears from non-binding Heads of Agreement dated 22 September 2009) it was intended that the cash element of the price should be an immediate, 1m. However, when DMG=s accountants (Grant Thornton) investigated for the purpose of due diligence, it was found that the defendant had very large actual and potential liabilities. DMG explained in an email dated 21 October 2009 from Mr Ben Langdon to the defendant that
Agiven the scale of some of these outstanding liabilities, the concern is that unsettled, these would distract you (the main asset we are buying) in the future from running the business. The healthiest thing therefore for all parties is to ensure that your personal debt relating to 20:20 London is clean from Day One.@
In a further email the next day to the defendant Mr Langdon asked
Aare you sure that you can cope with this level of debt which … could be approaching, 900k?@
On 22 October 2009 the defendant replied:
AI saw the state of this shortly before you did. I take responsibility but still blame my accountant. I now realise any acquisition is not going to provide for any spare cash, but I can live with that. An opportunity to clear these arrears and a focussed effort in the new business is a good motivation for me.@
This led to a Revised Proposal from DMG to the defendant dated 5 November 2009. The cash payment was increased to, 1.5m but made subject to the following provisions:
A1. Initial consideration of, 1.5m cash will be provided at Completion by way of personal loan to Peter Riley. The loan will be held in Escrow by DMG and be used to pay off Peter=s liabilities and provide working capital, executed at our direction. DMG will take a first ranking charge over the Bethnal Green property in respect of the loan. The loan will be considered >paid= by Pete Riley only if he is in continuous employment with DMG plc on December 31st, 2012 …
…
11. At the end of 3 years= continuous employment we will pay Peter Riley, 1.5m … as part of the consideration for him selling the business to us. This payment will be made by us setting off the, 1.5m deferred consideration against the then outstanding balance on the loan.@
It can be noted that subject to the later introduction of a deduction in the case of the defendant being a AGood Leaver@ this is similar, if not identical, in practical effect to the ultimate provisions of Schedule 10(1) and (2) of the SPA. The purely formal change away from the mechanism of a loan was made very shortly before signature of the SPA because of accountancy advice as to negative tax consequences for the defendant.
An email of 6 November 2009 followed the further discovery that there was a large commercial loan...
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