GDS Gardner Design Services Limited v Basic Partition Systems Limited

Where a company has undertaken to withdraw from active management and appoint another as managing director, those obligations may continue and constrain powers otherwise available under its articles. Reappointing the former controller and allowing him to resume active management, particularly by taking over the business and displacing the appointed managing director, may amount to repudiatory breach. A separate service agreement governs the appointee’s service, so its breach does not automatically breach the wider management agreement. The same conduct may, however, repudiate both agreements. Where the wider agreement makes a bonus conditional on continued service, termination by repudiatory breach may trigger the bonus provision, even if the benefit has a windfall element.

GDS Gardner Design Services Limited appealed from the decision of His Honour Judge Price QC dated 19 October 2001. The High Court held that Basic Partition Systems Limited had repudiated the contractual arrangements governing the company’s management and Mr Gardner’s services, and awarded damages and a £300,000 bonus.

The appeal concerned whether the reappointment of Mr and Mrs Jones, Mr Jones’s return to active management, and his assumption of control over the company breached the heads of agreement and the service agreement. The central financial issue was whether termination of the heads of agreement triggered the second paragraph of clause 16.

1. Appeal dismissed. The Court of Appeal upheld the finding that Basic was in repudiatory breach. GDS had accepted the repudiation by its letter of 7 December 1999.
2. The admitted contractual terms required Mr and Mrs Jones to withdraw from active management and provided for Mr Gardner’s appointment as managing director. Those obligations were treated as continuing. A company may contract not to exercise a power otherwise available under Table A of its articles.
3. On the judge’s findings, Mr Jones did not merely return as a director. He resumed active management and took over the running of the company, thereby displacing Mr Gardner from the management role contemplated by the agreements. That conduct was a clear repudiation of the management scheme at the core of the heads of agreement.
4. The service agreement separately regulated the duration and terms of Mr Gardner’s services. A breach of that agreement did not, per se, constitute a breach of the heads of agreement. Nevertheless, the effective ousting of Mr Gardner from his role was itself a repudiatory breach of the service agreement. The resulting damages were properly calculated by reference to the three-month notice period, producing an award of £27,494.76.
5. The heads of agreement were also repudiated and terminated. In the circumstances, clause 16 applied so that GDS was entitled to £300,000, calculated as if the company had been sold for £6 million or more during Mr Gardner’s service. The court recognised the opacity of the drafting and the windfall element of the benefit, but concluded that this was the parties’ contemplated consequence of repudiatory termination. Penalty and mitigation arguments were not considered because they had not been argued.
6. The appeal was dismissed with costs assessed at £6,312.11 including VAT.

• Court of Appeal (Civil Division): On 30 May 2002, unanimously dismissed Basic’s appeal and upheld the High Court’s decision.
• High Court of Justice, Queen’s Bench Division: His Honour Judge Price QC, on 19 October 2001, held that Basic was in repudiatory breach of the contractual arrangements and awarded damages including £300,000 under clause 16.