The Court of Appeal considered whether the wording of a contract precluded reliance on that contract by a disclosed and identified principal.

Factual background

In 2001, C, a Russian state official, learnt of the possibility of acquiring a controlling interest in a textile company (TGM) and approached OD as a potential partner in the venture because C wanted a prominent businessman to be the public face of the project. C and OD agreed that each would contribute equally towards the purchase. The parties' intention was to develop the site and move TGM's business outside Moscow. LD (with whom C had a long lasting relationship) would be involved in running TGM.

Although acquisition of the controlling interest in TGM began in 2002, the parties only recorded their agreement in a binding shareholder agreement (the SHA) in May 2005. C’s explanation for this was that he needed to be discreet in relation to an investment of this sort as at that time he was a Russian state official.

Under the SHA, OD and his company were referred to as beneficial owner 1 and shareholder 1 and together as party 1. LD and her company were referred to as beneficial owner 2 and shareholder 2 and together as party 2.

A supplemental agreement signed on the same date had the same parties as those in the SHA. Clause 1 was intended to make clear that any transfer by LD to C would not amount to a ‘change of control’ for the purposes of clause 10 of the SHA.

By February 2007, the relationship between C and LD was at end. During 2009, differences arose as to how the business of TGM was to be run with OD wanting to replace the general director.

In December 2010, there was a forcible takeover of TGM's site and business, which brought about a claim by C and his company against OD and his company under the arbitration clause in the SHA. OD contended that C was not a party to the SHA and that only LD could bring an arbitration claim as beneficial owner 2.

The constituted tribunal dismissed OD’s challenge and concluded that it had jurisdiction to determine C's claims. OD subsequently brought proceedings under s.67(1)(a) of the Arbitration Act 1996 challenging the tribunal's determination as to its jurisdiction.

Shortly after issuing the s.67 proceedings in the Commercial Court, OD entered into an agreement with LD (the ‘option agreement’) under which LD agreed to provide ‘oral and/or written testimony’ in the arbitration and to commence ‘such other litigation as might relate to or affect the arbitration’. In consideration of these contractual promises, LD was to be paid the sum of US$2 million, with a further payment of US$10 million if she were able to obtain ‘confirmation of her title’. LD advanced a claim in the Commercial Court that she and not C was a party to the SHA and entitled to exercise the rights of beneficial owner 2. Since that claim raised common issues with OD’s jurisdiction challenge, an order was made that they be tried together.

The first instance judge found that C was the disclosed and identified principal although he was not named as a party to the SHA and that he was entitled to rely on its terms.

Legal analysis

In light of the judge’s factual findings, it was common ground on appeal that the terms of the contract and the surrounding circumstances might demonstrate an intention, expressly or by necessary implication, to exclude a disclosed party from the contract.

At first instance the judge had observed that, in the light of the long-established right of a principal, whether disclosed or undisclosed, to enforce a contract made by his agent, clear words were required to show that only the named party rather than his principal were intended to have the right to perform the contract.

Lord Justice Simon, delivering the leading judgment in the Court of Appeal, held that the judge was right to ask whether there were clear and unambiguous words or indications of an intent to exclude the known and identified principal. Parties would not normally give up valuable rights without making it clear that they intended to do so.

The appellants sought to rely on a number of features of the SHA as demonstrating a common intention that LD was to be treated as beneficial owner 2, to the exclusion of C. The Court of Appeal did not find these to be sufficient. In particular:

  • In the preamble to the SHA, where the parties were named, there was no reference to C. However, the naming of the parties in a contract did not unequivocally and exhaustively define the parties to it, otherwise (undisclosed) principals would rarely have the right to enforce a contract made by their agent.
  • Clause 2.2 demonstrated that the intention of the SHA was to bind not only the corporate bodies, but also their respective beneficial owners to the terms of the SHA. The appellants submitted that both parties proceeded on the basis that LD was to be treated as the party with the contractual rights and duties under the SHA given her particular skills to make the business succeed. However, the words of the preamble and clause 2.2 did not come close to constituting clear and unequivocal words or indications demonstrating a common intention that C was excluded from performing, and being able to enforce, the obligations set out in the SHA. The proper approach to construing these provisions was to treat him, and not LD, as the actual principal of the SHA and therefore the person described as beneficial owner 2.
  • The warranties of each of the parties could be read perfectly coherently as the warranties of a disclosed and identified principal party to the SHA.
  • As to the entire agreement clause, Lord Justice Simon accepted that the phrase ‘the complete and exhaustive agreement’ in clause 14.5 was an indication that the parties intended only to contract with each other. However, it did not say as it might, that the only persons who might sue upon it were the named parties and the clause certainly did not unequivocally exclude a disclosed principal from suing on it. Although a clause would have been easy enough to draft so as to achieve the effect argued for on behalf of the appellants, it would not have been an appropriate contractual provision since the commercial interests in the SHA were only viable if C was a party, providing half of the funding for the TGM acquisition.
  • Clause 10.1 provided a right of redemption by the counterparty in the event of a change of control. However, this was subject to the supplemental agreement that was signed on the same day and with the same named parties as in the SHA and provided that a transfer of the rights of beneficial owner 2 to C would not constitute a change of control triggering the operation of clause 10.

In conclusion, whether a contract unequivocally and exhaustively defined the parties or whether the rights of a disclosed and identified principal had been clearly excluded by the terms of the contract, might be regarded as two ways of asking the same question: either way there was a heavy burden of persuasion on a party who sought to argue that a known and identified principal was to be excluded from a contract. There was nothing in the background or the contractual terms sufficient to demonstrate a clear intent to exclude C from exercising his rights or incurring obligations under the SHA. To put it another way, the parties were not unequivocally and exhaustively defined by the terms of the SHA.

In the circumstances, the arbitration proceedings were validly constituted; OD's section 67 claim failed and his claim against C also failed.

Further, the respondents submitted that the judge should have struck out the claims of OD and LD in the light of the ‘option agreement’, given the ‘improper agreement’ by LD to provide evidence which both she and OD knew was false in exchange of a large sum of money.

The difficulty with that argument was that although references were made at the trial to the impropriety of the transaction, no application notice was issued and no oral application was made that the appellants' claims should be struck out on that basis. If a party wished the court to take the exceptional course of striking out a claim during or post trial, there had to be a degree of formality to the process, so that the judge could consider the competing arguments. The judge’s approach in making an order for costs in C’s favour on an indemnity basis was a sensible and proportionate response to the appellants' misconduct.

This was an unusual case with the appellants trying to argue that the disclosed and identified principal of an agreement could not rely on its terms. Unsurprisingly, the parties were unable to cite any case where a contract was concluded by an agent known to be acting on behalf of an identified principal, but where the contract contained language making it clear that it was the agent and not the principal who was to be bound. Also unsurprisingly, the Court of Appeal held that a heavy burden of persuasion would be required on a party who seeks to argue that a known and identified principal is to be excluded from a contract, and that any such intention must appear clearly and unequivocally from the terms of the parties' contract.