Criterion Properties Plc v Stratford UK Properties LLC and Others

I have had the advantage of reading in draft the speech of my noble and learned friend Lord Scott of Foscote. I agree that for the reasons he gives this appeal should be dismissed.

As explained by Lord Scott, the issues arising on this application for summary judgment were clouded in the courts below by a faulty elision of two different issues to which different principles apply. The only relevant issue on this application is whether the second supplementary agreement was a valid and binding agreement. It is accepted by Criterion, for the purposes of this application, that Oaktree's directors acted honestly. Thus this issue of validity turns solely on whether the directors who signed the agreement on behalf of Criterion did so within the actual or apparent scope of their authority. This issue, in turn, depends upon an application of ordinary agency principles, having due regard to the rule in Royal British Bank v Turquand (1856) 6 E & B 327 and sections 35A and 35B of the Companies Act 1985.

Unfortunately, in the courts below this 'want of authority' issue was approached on the basis that the outcome turned on whether Oaktree's conduct was unconscionable. This seems to have been the test applied by the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 both to questions of 'want of authority' and to liability for what traditionally has been labelled 'knowing receipt'.

I respectfully consider the Court of Appeal in Akindele's case fell into error on this point. If a company (A) enters into an agreement with B under which B acquires benefits from A, A's ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A's ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of 'knowing receipt' by B do not arise. So far as B is concerned there can be no question of A's assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. A will have a proprietary claim, if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject always to a defence of change of position. B's personal accountability will not be dependent upon proof of fault or 'unconscionable' conduct on his part. B's accountability, in this regard, will be 'strict'.

Either way, therefore, whether the second supplementary agreement is set aside or not, questions of unconscionability do not arise on Criterion's application for summary judgment.

Introduction

This appeal arises out of an application for summary judgment made in an action in which the appellant, Criterion Properties plc (Criterion), is seeking to establish that an agreement into which it had apparently entered is not binding upon it and should be set aside. The respondent, Stratford UK Properties LLC (which I will refer to as "Oaktree" for reasons I will later explain) contends, on the contrary, that there is nothing the matter with the agreement and has counterclaimed for specific performance.

Criterion's summary judgment application was made, of course, on the footing that the pleadings and other written evidence before the court disclosed sufficient undisputed, or indisputable, facts to make a trial unnecessary. It is obvious, according to Criterion, that the agreement cannot be enforced against it. The summary judgment application came before Hart J who agreed and, accordingly, made a declaration that the agreement was unenforceable against Criterion. Oaktree appealed. Its stance before the Court of Appeal, as it has been before your Lordships, was that a trial was necessary. The Court of Appeal (Brooke LJ and Carnwath LJ) agreed and set aside the declaration that Hart J had made. The issue is now before this House and remains, as it was before Hart J, whether it is sufficiently clear, on the facts at present in evidence, that Oaktree cannot enforce the agreement against Criterion, or whether there is any other reason why the declaration sought by Criterion should not be made at this stage. In order to deal with these questions I must outline the story which has led to this litigation. I can do so in fairly summary fashion because a comprehensive statement of the facts can be found in the judgment of Hart J.

The Facts

Criterion is a public limited company. It carries on the business of investment in commercial properties. At the relevant time Mr Rolf Nordström was, and still is, the chairman of Criterion. Mr Aubrey Glaser was, until his summary dismissal in April 2001, the managing director. Mr Glaser is the second defendant in the action (Oaktree is the first defendant) but took no part in the appeal to the Court of Appeal and has taken none in the appeal to this House.

Oaktree is a company incorporated under the laws of Delaware, U. S. A. It was formed in January 1998 for the purpose of the joint venture with Criterion to which I will refer. It is managed by Oaktree Capital Management LLC, an institutional money manager and investment adviser. Oaktree was the vehicle by which Oaktree Capital Management LLC applied funds to participate in the joint venture with Criterion. It is no doubt for that reason that the respondent company has throughout this litigation been referred to as Oaktree. I have found it convenient to continue so to refer to it. It is not necessary to distinguish between Oaktree, the respondent company, and its Oaktree parent.

In January 1998 Criterion and Oaktree agreed to form a limited partnership together for the purpose of investing in real property in the United Kingdom. It was contemplated that the bulk of the funding would be provided by Oaktree and that Criterion, besides contributing a certain amount of finance, would act as managing agent of the properties that were acquired. A partnership agreement was accordingly signed on 26 January 1998. This was the so-called Investment and Shareholders' Agreement (the ISA). The parties to the ISA were Criterion, Oaktree and a new company, Criterion-Stratford Umbrella GP Ltd (the General Partner) whose responsibility it would be to manage, administer and operate the partnership business. Criterion held 150 shares in the General Partner. Oaktree held 850. The intention was that capital needed by the General Partner to fund the partnership business would be provided by Criterion and Oaktree in broadly those proportions.

The ISA is not the agreement under challenge in this litigation. The ISA is accepted to be a valid and enforceable agreement. The agreement under challenge is an agreement which purports to be an amendment of the ISA. It is referred to as the Second Supplementary Agreement (the SSA). In order to understand some of Criterion's objections to the SSA it is necessary to understand, in broad terms, the respective rights of Criterion and Oaktree under clause 7 of the ISA.

Clause 7 provided a mechanism for the termination of the partnership. The mechanism could be invoked, according to clause 7. 1, in the event of

"(a) Impasse;

(b)Bankruptcy of a Shareholder; or

(c)Breach of [the ISA or of an associated agreement] by a Shareholder which is not remedied to the satisfaction of the other Shareholder within 14 Business Days of its occurrence".

The mechanism took the form of alternative offers that the party desirous of terminating the partnership could make to the other party. Two simultaneous offers had to be made. One was to be an offer to buy the other party's interest in the General Partner (ie the offeree's shares in the General Partner and the debt owed by the General Partner to the offeree); the other offer was to be an offer to sell to the other party the offeror's interest (ie shares and debt) in the General Partner. The price for the shares to be sold or purchased would be

"such price as the offeror shall in its absolute discretion think fit"

but would have to be the same price per share in each alternative offer; the price for the debt to be sold or purchased had to be 100p. in the pound (see clause 7. 2(a)) If the offeree should fail to accept either of the alternative offers within 90 days, the offeror was given the right to purchase the offeree's interest in the General Partner at the offer price (clauses 7. 3 and 7. 4).

The partnership business appears to have commenced satisfactorily. Four investment properties were purchased during the course of 1998. The bulk of the necessary finance was provided by Oaktree. The properties were, after the purchase, managed by Criterion.

On 30 March 2000 the SSA was signed. The parties were, or purported to be, Criterion, Oaktree and the General Partner. Mr Glaser, the managing director of Criterion, and a Mr Palmer, Criterion's company secretary and also a director, signed on Criterion's behalf. The SSA purported to add to the ISA a new clause, clause 7A, which conferred on Oaktree a put option to...