CNM Estates (Tolworth Tower) Ltd v Vecref I Sarl
| Jurisdiction | England & Wales |
| Judge | Mr Justice Foxton |
| Judgment Date | 22 June 2020 |
| Neutral Citation | [2020] EWHC 1605 (Comm) |
| Date | 22 June 2020 |
| Docket Number | Case No: CL-2017-000744 |
| Court | Queen's Bench Division (Commercial Court) |
and
[2020] EWHC 1605 (Comm)
Mr Justice Foxton
Case No: CL-2017-000744
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
COMMERCIAL COURT (QB)
Royal Courts of Justice
Strand, London, WC2A 2LL
Jeremy Cousins QC and Peter Dodge (instructed by HFW LLP) for the Claimant
Mark Simpson QC and Niamh Cleary (instructed by Kennedys Law LLP) for the Third and Fourth Defendants
Hearing dates: 8 and 9 June 2020 Draft judgment circulated: 16 June 2020
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is the trial of a number of preliminary issues in proceedings commenced by the Claimant (“CNM”) against various parties, including the Third and Fourth Defendants (“the Receivers”) arising from a property development undertaken by CNM, and the loan and security agreements entered into in connection with that development.
CNM was represented by Mr Cousins QC and Mr Dodge instructed by HFW LLP, and the Receivers by Mr Simpson QC and Ms Cleary instructed by Kennedys Law LLP. I would like to record my gratitude to both legal teams for the excellence of the written and oral presentations, which has made my job both easier, and more difficult.
CNM contends that various breaches of contract and duty were committed by the Defendants in the exercise of rights arising under the loan and security agreements, including breaches by the Receivers of their equitable duty to exercise reasonable skill and care in obtaining the best price reasonably obtainable on the sale of the security.
The Receivers deny those breaches on the facts, but they also pleaded that CNM's claims against them are precluded by various terms of the security documents. On 9 July 2019, Christopher Hancock QC, sitting as a deputy Judge of the Commercial Court, ordered that the ambit and effect of the clauses relied upon should be determined between CNM and the Receivers by way of a trial of preliminary issues. By the time of that trial, two contractual provisions were relied upon by the Receivers as defences to CNM's claim:
i) Clause 19.1 of a Debenture dated 1 October 2015 (“the Debenture”); and
ii) Clause 16.10(a)(i) of the Intercreditor Agreement dated 1 October 2015 (“the ICA”).
An issue was also raised as to whether clause 19.1 of the ICA gave the Receivers a basis, if they succeeded at trial, for recovering costs which could not be recovered under CPR 44 (or, perhaps, a basis for seeking any such costs order on an indemnity basis). However, the Receivers did not contend that clause 19.1 provided a defence to CNM's claims. In these circumstances, I have decided that any issues as to the effect of clause 19.1 in a costs context are best left for decision as and when any order for costs is sought. However, the construction of clause 19.1 is relevant to the argument as to the effect of clause 16.10(a)(i). For that purpose I have assumed, without deciding the point, that CNM's argument that clause 19.1 only extends to claims by third parties, and not by parties to the ICA is correct.
The Background
CNM is a property developer which wanted to finance the acquisition and development of a property in Surbiton known as Tolworth Tower (“the Development Site”). To that end, it raised development financing in the form of:
i) a senior facility agreement (“the SFA”) entered into between CNM as borrower and the First Defendant (“VeCREF”) as lender on 1 October 2015; and
ii) a mezzanine facility agreement (“the MFA”), entered into between a company called CNM Estates (Tolworth Tower MB) Limited (“CNM MB”) as borrower, and Tolworth Tower Limited as lender, also on 1 October 2015.
A company called Situs Asset Management Limited (“the Security Agent”) was appointed as the security agent under both the SFA and the MFA. The Development Site was charged as security for both loans by the Debenture (to which CNM was a party) and by a mortgage dated 2 October 2015. In addition, on 1 October 2015 the parties to the SFA and the MFA (including CNM) entered into the ICA. I accept that the Debenture and the ICA are likely to have been drafted at the instigation of the lenders. However, this was a significant commercial development, and I do not accept the suggestion that I should approach the interpretation of the Debenture and the ICA on the basis that the contracts were concluded between parties of unequal bargaining power. In any event, it is clear that the relevant provisions of the ICA were essentially on market terms.
On 28 April 2017, an instalment payable under the MFA was not paid, leading the Security Agent to notify CNM and CNM MB of what were said to be Events of Default under the SFA and MFA. On 24 July 2017, VeCREF sold its rights under the SFA to a company called Tolworth Loan Limited, which was connected to Meadow Capital Management Limited (“Meadow”).
On 10 August 2017, the Security Agent appointed the Receivers as joint Law of Property Act receivers of the Development Site. On 11 October 2017, the Receivers appointed the Third Party (“Knight Frank”) to act in relation to the disposal of the Development Site. By a contract dated 8 December 2017, the Receivers agreed to sell the Development Site to Tolworth Tower Investment Limited, a company connected with Meadow, in consideration of the release of all liabilities owed by CNM and CNM MB under the SFA and the MFA.
CNM brings various claims arising out of these events. CNM's claims against the Receivers allege that the Receivers failed to comply with their duty to exercise reasonable skill and care in exercising their functions, and in particular to obtain the best price reasonably available on the sale of the Development Site. For their part, the Receivers contend that they made all reasonable and proper arrangements to market the property, and obtained the best price available in the market following an appropriate sales process, having regard to price and transactional risk. They also contend that they are not liable for any of the losses claimed in any event, due to exclusion clauses in the Debenture and the ICA.
It is not disputed that, although the Receivers are not parties to the Debenture and the ICA, they are entitled to enforce the provisions they rely upon by reason of the Contracts (Rights of Third Parties) Act 1999, as both contracts specifically provided that the Receivers could rely on any clauses of those agreements which expressly conferred a benefit on them. However, the legal effect of those provisions is very much in dispute.
The duty owed by the Receivers to CNM as a matter of general law
There was no dispute between the parties that as a matter of general law, the Receivers owed CNM as mortgagor an equitable duty to take reasonable skill and care to achieve the best price reasonably obtainable for the Development Site (“the Equitable Duty of Care”). Whether or not that duty is properly called a fiduciary duty (in the light of Millett LJ's observations as to the characteristics of such duties in Bristol & West Building Society v Mothew [1998] Ch 1, 16–17), it is clearly a duty imposed by equity for the protection of the mortgagor, subsequent encumbrancers and sureties, rather than one which arises under common law or by way of an implied contractual term ( Yorkshire Bank plc v Hall [1999] 1 WLR 1713, 1728).
Nonetheless, as was also common ground, the Equitable Duty of Care is capable of being modified or excluded by an appropriate contractual term. The issue in this case is whether the two contractual terms relied upon by the Receivers achieved this effect.
The proper approach to the construction of exemption clauses
The legal principles applicable when construing contracts generally, and those specifically invoked when it is alleged that the terms of a contract exclude a primary duty which would otherwise arise under general law or by reason of terms to be implied in law, or exclude or restrict the secondary obligations which arise on the breaches of those primary obligations (“ exemption clauses”), have not always marched hand-in-hand. There have been various recent judicial statements which suggest that the construction of exemption clauses involves the same approach as that used for the construction of other contractual terms (e.g. Tradigrain SA v Intertek Testing Services (ITS) Canada Ltd [1997] EWCA Civ 154, [46] and Fujitsu Services Ltd v IBM United Kingdom Ltd [2014] EWHC 752 (TCC), [24]–[26]).
Some commentators (e.g. Stelios Tofaris, “Commercial Construction of Exemption Clauses” [2019] LMCLQ 270–296) have argued that the logical outcome of this progressive assimilation of the applicable principles is the discarding of all of the special principles of construction traditionally deployed when addressing exemption clauses. However, it is clear that that those special principles remain relevant to the court's construction of exemption clauses, not least because, appropriately applied, they assist the court in achieving the outcome at which the general principles of contractual construction are aimed: of ascertaining the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them by using the language in the...
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