In Christopher Charles Dixon and EFI (Loughton) Ltd v Blindley Heath Investments Ltd and others, the Court of Appeal examined the scope and applicability of the doctrine of estoppel by convention to cases of mistaken assumption and forgetfulness, in a matter where both parties had ‘forgotten’ about the existence of pre-emption rights attached to shares in a company.
It held that there was no relevant difference between a claim founded on a mistaken assumption and a claim based on forgetfulness. If the elements of the test for estoppel by convention could be met, the estoppel would still apply.
EFI and Mr Dixon appealed against a High Court decision upholding a transfer of shares in EFI to Blindley Heath, the respondent company. The transfer, initiated by the other respondents, was alleged to be in breach of certain pre-emption rights held by Mr Dixon and other shareholders.
EFI was set-up in 2000 to acquire a lease of land and buildings to provide business accommodation and various services on licence to small and start-up businesses. During 2001, the founding shareholders (which included Mr Dixon) agreed and signed a number of documents in relation to the transfer of shares in the company. Those documents provided, amongst other things, that no shares were to be transferred unless they were first offered pro rata to the existing shareholders.
The company operated smoothly until early 2009, when one of the founding shareholders died. After his death, Mr Dixon and another shareholder planned to take control of the company, and in pursuit of that plan they acquired some of the shares of the other members. The shares were then purchased, in breach of the pre-emption rights, by a new company which they had formed.
Sale of shares to Blindley Heath
Two of the founding members, Mr Bass and Mr Mingay, did not sell their shares to Mr Dixon. However, relations gradually turned sour and in 2011 a separate investor, the ultimate controller of Blindley Heath, offered to purchase Mr Bass and Mr Mingay’s shares. They agreed, and purported to sell their shares to Blindley Heath pursuant to a sale and purchase agreement. The other shareholders were informed of this sale at a Board meeting in October 2011, at which no objections were raised. However, shortly after the meeting, Mr Dixon “re-discovered” (on his own evidence) the pre-emption documents when looking through the company’s records. On the basis of these documents, the company blocked the sale to Blindley Heath, which then sought damages for deceit and/or breach of warranty of the sale and purchase agreement against Mr Dixon, EFI and the other shareholders.
High Court decision
At first instance, the Judge found that there were valid pre-emption rights in place, but Mr Dixon and EFI were estopped by convention from relying on those rights to prevent the transfer of the shares. That was because the relevant parties shared a common assumption that there were no valid rights of pre-emption and had conducted themselves on that basis. It would also have been unconscionable and inequitable for Mr Dixon to rely on the pre-emption rights as a ground for blocking the sale, having himself acquired shares via his new company in 2009 without reference to those pre-emption rights. It is noteworthy that the Judge considered Mr Dixon an unreliable witness in light of certain actions and false statements he had made during the relevant period of the events in question.
Court of Appeal decision
Undertaking a full examination of the doctrine of estoppel by convention, the Court of Appeal refused Mr Dixon and EFI’s appeal. The Court held that there were obvious examples in both parties’ behaviour which supported the Judge’s decision that the parties had proceeded on a common assumption that there were no pre-emption rights over the shares.
Mr Dixon and EFI argued that the doctrine of estoppel by convention could not apply when the parties had simply forgotten that rights existed, rather than operating on a mistaken belief that they did not exist. The Court of Appeal did not agree, stating that a mistaken recollection “is not, to our minds, legally different from a state of forgetfulness”. Whether the truth had been misremembered or forgotten made no difference as to whether the parties had in any event adopted a common assumption.
What was relevant was the manner in which the assumption had been induced. Before anyone could be estopped, they must play such part in the assumption that it would be unjust to allow them to ignore it. Such conduct must ‘cross the line’ enough to show their acceptance of the assumption (a question of fact which the Judge must decide). At first instance, the Judge was convinced that the parties’ conduct crossed the line sufficiently to show assent to the assumption. The parties actively conducted themselves on the basis that no valid rights of pre-emption existed; this was not a case of mere silence, inactivity or failure to take the point. The Court of Appeal saw no reason to depart from that view.
There was similarly no reason to disturb the Judge’s conclusion that it was unconscionable and inequitable for Mr Dixon to rely on pre-emption rights as a ground for blocking the sale – it would be unfair to allow a party who had benefited from the assumption to then reject it to prevent the other party obtaining a like benefit.
The Court of Appeal’s decision is a helpful summary and clarification of the principles, application and scope of the doctrine of estoppel by convention. For the principle to apply, there must be mutual conduct by the parties, based on a common (mistaken) assumption of law or fact, which operates to bind the parties to their shared (mistaken) understanding. But there is still a fact-specific assessment to be carried out by the Judge. The Court of Appeal did not hesitate to confirm the need for there to be clear conduct by the parties which unambiguously demonstrated their common assumption and demonstrated that the party estopped propagated the common assumption. Whether the parties’ conduct crosses that line is largely a question of fact to be demonstrated by evidence on a case by case basis.