Jafari-Fini v Skillglass Ltd & Ors

A contractual default notice may be valid even where the relevant contractual protection has not otherwise been satisfied, if a continuing and unwaived major default activates the lender’s rights. An estoppel by convention may arise where parties act on a shared or acquiesced assumption about the operation of their agreement, even if the assumption resulted from a mistake. The ordinary meaning of “withdrawn” in an offer period does not include an offer that simply closes when its acceptance period expires. An invalid default notice has no contractual effect and is not, without more, a repudiation. Repudiation must be accepted by the contracting party, and acceptance cannot be deemed merely from inaction.

The claimant financed the acquisition of Chesterton through Phoenix Acquisitions Ltd. Skillglass Ltd provided the acquisition finance, secured by guarantees, charges and nominee arrangements. Following alleged breaches of the facility agreement, Skillglass served a default notice in October 2003 and a demand in December 2003.

The Court of Appeal ordered the trial of preliminary issues concerning the validity and consequences of those notices and joined Phoenix so that it would be bound by the outcome. The claimant also pursued declarations concerning the enforceability of the financing and security documents, the ownership of shares and later demands. The central issues were whether Skillglass was entitled to serve the October notice during the Certain Funds Period, whether a major default had occurred, and what consequences would follow if the notice were invalid.

1. The court held that PAL was in breach of clause 20.1 of the Facility Agreement because its financial performance varied adversely from the applicable revised forecasts by more than the permitted amount. Although the revised forecasts had not been formally agreed in the manner contemplated by the Side Letter, the parties had acted on the shared assumption that a single set of forecasts supplied by 6 August 2003 satisfied the contractual procedure. PAL was therefore estopped by convention from denying that the forecasts had been agreed. The principle was applied from Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84.

2. The Certain Funds Period had not ended when the October notice was served. The offer had closed on 29 August 2003, but it had not thereby been “withdrawn” within the ordinary meaning of the contractual definition. The period therefore continued until 6 December 2003 under the alternative time limit.

3. The breach of clause 20.1 was not itself a Major Default. However, the claimant had bribed Mr Constable, and that payment was information material to Skillglass’s decision whether to waive the 90 per cent acceptance condition. Knowledge acquired by Mr Webster as a PAL director was imputable to PAL. The fraud exception did not apply because Mr Webster was not acting in fraud of PAL. PAL had therefore breached clause 21.8.2, creating a continuing and unwaived Major Default.

4. That Major Default enabled Skillglass to exercise its rights under clause 23.2 notwithstanding the unexpired Certain Funds Period. Skillglass was entitled to serve the October notice of default and, consequently, the December notice of demand.

5. In the alternative, an invalid default notice would have had no contractual effect and would not have amounted to repudiation of the Facility Agreement: Concord Trust v The Law Debenture Trust Corporation plc [2004] 2 All ER (Com) 737, upheld at [2005] UKHL 27. Any acceptance of repudiation would have had to be by PAL, not the claimant. There was no doctrine of deemed acceptance, and PAL’s subsequent repayments affirmed the Facility Agreement. The claimant’s liabilities under the Guarantee consequently remained.

6. The claimant was not entitled to any of the declarations or orders sought. The court would also have held that the later demands of 20 May and 17 September 2004 were valid. Costs were to be determined separately.

• Court of Appeal: On 16 March 2005, the claimant’s appeal against the decision of His Honour Judge Rich QC was dismissed: [2005] EWCA Civ 356. The action was directed to proceed on defined preliminary issues, with PAL joined for the purpose of being bound by the result.
• High Court (Chancery Division): The preliminary issues were determined against the claimant. The claimant was not entitled to the declarations or orders sought.