Red River UK Ltd & Anor v Sheikh & Anor

Parties to a settlement agreement may owe mutual obligations to co-operate in carrying it into effect and not deliberately undermine its performance without good cause. Where a settlement provides for payment and security as parts of a composite refinancing transaction, the payment obligation may depend upon completion of that transaction. Deliberately preventing completion may constitute a repudiatory breach going to the root of the contract. Acceptance of that breach discharges unperformed primary obligations, including contingent payment obligations, and leaves the innocent party to a claim for damages. Protective restrictions registered against property may cease to serve any purpose once the underlying contractual rights have been terminated.

The claimants had acquired development property with financial assistance from the first defendant, their former solicitor. The defendants were protected by shares in the claimant company and restrictions on the property title.

In June 2007 the parties entered into a settlement agreement. It contemplated refinancing by the Bank of Ireland, payment of £1.2 million to the defendants, removal of the restrictions, and a second charge securing the defendants’ entitlement. Following interlocutory orders and a consent order, the refinancing was ready to complete in October 2007. The first defendant presented and served a winding-up petition against the claimant company and sent correspondence to the proposed lender. The lender withdrew its facilities.

The central issues were whether the defendants had breached an implied obligation to co-operate in the composite transaction, whether the breach was repudiatory, whether the claimants validly accepted it, and whether the defendants remained entitled to payment under the settlement.

1. Mutual obligations. The settlement agreement and the subsequent consent order, arising from a mediation intended to resolve all outstanding disputes, carried an implied term that the parties would not deliberately undermine the agreement without good cause and would co-operate to give effect to it.
2. Composite transaction. The consent order made clear that the proposed refinancing was to provide the sums payable to the defendants. The £300,000 initial payment, as well as the remaining payments, was dependent upon completion of the refinancing with the Bank of Ireland or a substitute lender. The issue had also been determined in earlier interlocutory decisions and could not be reopened.
3. Breach. The first defendant deliberately presented and served a winding-up petition and sent letters to the proposed lender asserting priority and fraud allegations. Those steps were intended to prevent completion and predictably caused the Bank of Ireland to withdraw. The first defendant’s conduct was therefore a breach of the implied obligation. The second defendant was equally responsible because she had entrusted the conduct of the matter to her daughter.
4. Consequences. The breach was fundamental and entitled the claimants to treat the settlement as repudiated. Their acceptance by letter of 6 March 2009 was valid. Applying the ordinary rule on acceptance of repudiatory breach, the claimants’ unperformed primary obligation to pay the £1.2 million and interest was discharged. The defendants were no longer entitled to those payments, while the claimants were entitled to damages subject to proof of causation and loss.
5. Restrictions. The restrictions had been transitional protection pending completion of the refinancing and provision of the second charge. Following valid termination of the settlement, they no longer protected a subsisting interest and should be removed forthwith. The court reserved consequential questions concerning the precise form of order and the release of the claimants’ solicitors from their undertaking.

The judgment records earlier interlocutory decisions in the same proceedings, including [2007] EWHC 1038 (Ch), [2008] EWHC 1380 (Ch) and [2009] EWHC 431 (Ch). It also records an appeal concerning an interlocutory finding, disposed of by consent with costs ordered against the claimants: [2009] EWCA Civ 643.