Papanicola v Sandhu

An entire agreement clause may preclude reliance on a collateral contract or warranty where, properly construed, it supersedes previous arrangements and records the parties’ entire understanding. A promise concerning contractual consideration is distinct from a representation of existing fact and is ordinarily analysed as a collateral contract or warranty. The clause must be construed according to its wording and context, including the parties to the agreement. Payments made for a separate contractual liability, such as accrued employee wages, do not automatically reduce consideration payable under the agreement. A creditor using the statutory demand procedure does so at its own risk as to costs. A later action should not ordinarily be used to reverse an earlier competent court’s costs order.

The claimant, the liquidator of Atlantic Fashions Ltd, sued the defendant under a personal guarantee given in connection with the sale of Atlantic’s business and assets to Acton Farm Ltd. The claimant sought payment of £148,895.76 with interest, a declaration concerning rent arrears and a declaration that he was not liable for costs awarded to the defendant when an earlier statutory demand was withdrawn.

The defendant alleged a collateral agreement for a £120,000 discount, sought credit for a £162,000 payment used to pay staff wages, disputed liability for rent arrears and relied on the earlier costs order. The court determined the construction and effect of the guarantee and entire agreement clause, the character of the £162,000 payment, the rent declaration and whether the earlier costs order could effectively be reopened.

1. Guarantee. Clause 20.1 of the SPA clearly guaranteed Acton’s obligations owed to Atlantic and the office-holder under the specified provisions. The reference to “the obligations of the Company” was construed as referring to obligations owed to the Company, since the surrounding wording, recital C and clause 20.2 made that meaning clear.

2. £120,000 discount. The alleged promise was not made on the evidence. In any event, the promise was contractual in character rather than a representation of fact. Consistently with Axa Sun Life Services PLC v Campbell Martin Ltd & Others [2011] EWCA Civ 133, it therefore raised a collateral contract or warranty issue.

   Clause 12.6 applied to all parties to the SPA, including the defendant. Its language that the agreement superseded any previous arrangement and represented the parties’ entire understanding was sufficient to preclude reliance on the alleged collateral contract or warranty. The court applied the reasoning in Deepak v Imperial Chemical Industries [1999] 1 Lloyd’s Rep 387, Inntrepreneur Pub Co Ltd v East Crown Ltd [2000] 2 Lloyd’s Rep 611, SERE Holdings Ltd v Volkswagen Group UK Ltd [2004] EWHC 1551 (Ch), BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC) and Axa Sun Life Services PLC v Campbell Martin Ltd & Others [2011] EWCA Civ 133.

3. £162,000 payment. The payment was made to enable staff wages to be paid under Acton’s separate obligations in clause 14.1. It was not part of the agreed consideration and gave no credit against the guaranteed debt.

4. Rent arrears. Clause 6.1 of Schedule 7 required Acton either to pay and discharge rent arising after the completion date or to indemnify Atlantic and the office-holder. The defendant was consequently liable under the guarantee. A declaration was appropriate even though the amount of arrears remained to be determined.

5. Statutory-demand costs. The court declined to make the requested declaration. The earlier costs order made by the Bankruptcy Registrar could not properly be disturbed through this claim. The matter was alternatively res judicata or an abuse of process. The claimant had used the statutory demand procedure at his own risk as to costs, consistent with Re Cannon Screen Entertainment Ltd [1989] BCLC 660. The reference to independent consequences in Liveras v A Debtor (No 620 of 1997) [1999] BPIR 89 was understood as referring to possible contempt or perjury proceedings, not reversal of the costs order.

6. Judgment was entered for £148,895.76 with interest. The rent-arrears declaration was granted, with its precise terms to be agreed or determined after further submissions. The claim concerning the statutory-demand costs was dismissed.