General Trading Company (Holdings) Ltd v Richmond Corporation Ltd

A contractual notice requiring performance of an obligation must provide the information and cooperation necessary to enable performance within the contractual period. Where a guarantee is to be procured from a bank, the beneficiary must identify the required security and authorise the bank to communicate with the party procuring it. A party cannot ordinarily rely on delay caused by its own failure to do so.

A clause cancelling payment obligations upon failure to procure security may fall within the rule against penalties. The relevant question is whether, viewed at the time of contracting, its predominant function was deterrence or compensation. A commercially justifiable clause freely agreed between parties of comparable bargaining power may be enforceable despite a substantial difference between the stipulated consequence and likely loss.

The claimant acquired 95 per cent of the shares in a retail company from the defendant. The consideration included £540,000 loan notes. The agreement required the defendant to procure security or guarantees enabling the company to obtain a £200,000 facility from a major high-street bank. If the defendant failed to do so, the loan notes were to be cancelled.

The claimant served notice, but did not initially identify the required form of security or authorise the nominated bank to communicate with the defendant and proposed guarantor. After several extensions, the claimant cancelled the loan notes. The issues included contractual incorporation of an email, the parties’ obligations concerning the guarantee, and whether the cancellation clause was an unenforceable penalty.

1. Incorporation and construction. The reference in clause 17.10 to the outline in the email incorporated the relevant contractual principles in that email. The references to a new stock company and security for the guarantor were too uncertain to have contractual effect. The loan was to enable GTC Mayfair to purchase stock, and the obligation was not confined to a personal guarantee. It included a bank guarantee and potentially other security falling within clause 17.10. The incorporated email could not prevail over inconsistent express wording.
2. Implied cooperation. Reading clauses 17.10 and 17.11 together, the claimant was required to inform the defendant of the type of security required and to authorise the nominated bank to communicate with the defendant, the proposed guarantor or his representative. This followed the principle in Mackay v Dick (1881) 6 App Cas 251 that each party must do what is necessary on its part to enable agreed performance.
3. Notice and time. The contractual notice period did not begin until 1 August 2006, when the defendant was provided with the draft standby letter of credit required by RBS. The claimant’s earlier failures meant that time did not run against the defendant. The defendant therefore had until 31 August to procure the required security. The claimant was not entitled to cancel the loan notes on 23 August. The non-provision resulted from the claimant’s failures, not breach by the defendant.
4. The claimant was not required to negotiate both the loan and guarantee terms before serving notice. It was, however, required to put the bank in a position to understand the agreement so that it could specify the security required. It was unnecessary to decide whether the defendant was entitled to inspect loan documentation before procuring the guarantee. The court considered that draft loan documents need not be supplied when notice was given, provided the transaction terms were sufficiently clear.
5. Penalty clause. The rule against penalties applied in principle to clause 17.15, notwithstanding that it provided for cancellation or withholding of payment rather than payment of a specified sum. However, the clause was not penal. At the date of contracting it was commercially justifiable, freely negotiated between parties of comparable bargaining power, and was not predominantly intended to deter breach. It would have been enforceable had valid contractual notice been served before the relevant deadline.
6. Disposition. The claimant was not entitled to cancel the loan notes. Judgment was entered for the defendant.