Fortman Holdings Limited v Modem Holdings Limited

An acceleration clause in an unsecured instalment debt must be construed objectively in its commercial setting. The complete non-payment of a due instalment may be a material breach, even where the instalment is a relatively small part of the outstanding principal.

A contractual requirement that the debtor become aware of its breach requires awareness of the factual non-payment. It does not excuse deliberate non-payment because the debtor genuinely, but wrongly, believes that it has a contractual defence or set-off.

Where a set-off clause permits deduction only of an amount due under the underlying agreement, an uncrystallised and unasserted warranty claim does not reduce the instalment payable.

Fortman sold the shares in Tele Links Holdings Ltd to Modem for £30 million. £10 million of the price was deferred and secured by unsecured loan notes payable in four instalments. The first instalment, varied by agreement to fall due on 2 May 2000, was not paid.

Modem withheld payment while investigating possible warranty claims arising from the share sale. It contended that it could set those claims off against the loan notes. Fortman relied on clause 4.5 of the loan notes, which accelerated the whole principal sum if Modem was in material or persistent breach and failed to remedy it within 14 days after becoming aware of the breach.

A Deputy Judge in the Queen's Bench Division gave summary judgment for the overdue instalment and interest, but rejected acceleration of the remaining principal. Fortman appealed; Modem cross-appealed on the contractual set-off issue.

1. Appeal allowed; cross-appeal dismissed. Judge LJ held, with whom Pill LJ and Rimer J agreed, that Fortman was entitled to immediate repayment of the full principal sum.

2. The set-off provisions in the loan notes had to be read with clause 3.2 and Schedule 6 of the sale agreement. They imposed preconditions before an instalment could be reduced. On 2 May 2000 no amount was due to Modem: no crystallised liability had arisen and Modem had not asserted a claim or set-off. The full £1 million instalment was therefore payable without deduction.

3. The failure to pay that entire instalment was a material breach for clause 4.5. Materiality was assessed in the commercial context of an unsecured agreement for payment of a deferred purchase price. The breach was total non-compliance with a separate payment obligation, without a contemporaneous contractual justification. Its significance was not diminished because it represented one tenth of the outstanding principal.

4. The requirement that Modem become aware of the breach introduced a subjective safeguard only against factual failures of which it did not know, such as a failure in banking or postal procedures. Modem deliberately withheld payment despite having available funds and was aware that the instalment had not been paid. Its genuine but erroneous belief that a set-off justified non-payment did not prevent clause 4.5 from operating.

5. The court did not finally determine whether the single non-payment was also a persistent breach. It was sufficient that the breach was material. The order included costs in Fortman's favour, with an interim detailed assessment of £27,000.

• Court of Appeal (Civil Division) — Fortman's appeal was allowed and Modem's cross-appeal was dismissed: [2001] EWCA Civ 1235.
• Queen's Bench Division — a Deputy Judge gave Fortman summary judgment for the first unpaid instalment and interest, but rejected its claim that the whole loan-note principal had accelerated.