Point to note

If a contract not only contains conditions, on the fulfilment of which completion is dependent, but also sets out a procedure for ascertaining that the conditions have been satisfied, then it may not be sufficient just to fulfil the conditions – it may also be essential to follow the procedure in order to verify that the conditions have been fulfilled.

Background

Sometimes reported cases seem to change law, sometimes they simply explain what the law is – not necessarily how you thought it was! On other occasions, a reported case will simply illustrate how things can go wrong. The case of HHR Pascal BV v 2005 Puppet II BV [2009] EWHC 2771 is an example of the latter.

The problem

The case involves a dispute between the claimant, the seller of shares under a Share Sale Purchase Agreement (SPA) and the defendant, the buyer of such shares. Completion of the SPA was conditional, in essence, on the completion of refurbishment work to a number of hotels. As is common in conditional contracts there was a 'drop dead' date by which the conditions had to be fulfilled or the parties could withdraw from the contract. In this case, the defendant – possibly wishing to pull out of the contract for reasons not directly connected with the timing of the fulfilment of the conditions – maintained that the claimant had failed to fulfil the conditions so that the defendant was entitled to withdraw from the contract and reclaim his deposit. The claimant, of course, maintained that the conditions had been fulfilled and completion was due and the defendant's failure to complete entitled the claimant to rescind the contract and forfeit the deposit. The dispute revolved around the claimant's obligation to give notice of the likely completion date of the refurbishment works and the process which was to follow. The court was asked to decide whether the actual completion of the refurbishment works before the 'drop dead' date was sufficient or whether the claimant also had to follow the contractual notice procedures.

The decision

Mr Justice Simon concluded that the claimant was required to follow the notice procedure and having failed to do it had failed to comply with the conditions of completion of the SPA and so the defendant was entitled to the return of his deposit - €25,000,000. Mr Justice Simon said:

"The parties proceeded on the basis that the completion of the building works was to be assessed by a carefully drafted code, which involved proper notice of Projected Substantial Completion [a term defined in the SPA to mean the date when the claimant expected the work to be finished] by the seller, a right to inspect by the buyer and a clearly prescribed method of dispute resolution if the buyer disputed that substantial completion had occurred. [The claimant's] submission that there was an alternative means of demonstrating substantial completion which avoids this process is entirely uncommercial, in the overall context of this complex Share Purchase Agreement....

 

"Although it contained a few minor typographical errors which even the most visually acute proof reader might have missed, the SPA was a carefully drafted document in which both language and legal principles were deployed logically and with care. There is no proper basis for inviting the court to impose one party's conception of what is sensible and reasonable. In this agreement, the mandatory completion provisions were less concerned with the fact of completion, than with the process by which completion was deemed to occur."

Conclusion

While it may have been somewhat encouraging for the lawyers who drafted the SPA to be complemented by the judge on the drafting it was, in practice, probably of no real comfort at all either to the lawyers or the parties because litigation ensued. A number of lessons including these can be learned from the case:

  • However carefully a contract is drafted there is always the possibility of litigation if a transaction does not go the way one party wanted.
  • If a contract contains conditions then it may not be sufficient to fulfil them; it may be necessary to follow carefully the contractual procedures relating to verifying fulfilment.