Palmer & Harvey McLane Ltd v Garrad & Anor

A signed settlement agreement is enforceable where the evidence shows that the parties intended it to have legal effect. A party alleging that an express written agreement is a sham bears a heavy burden, even though the standard remains the balance of probabilities. The court must assess the agreement, the surrounding negotiations, the parties’ subsequent conduct and the documentary evidence as a whole. Allegations that the agreement served an improper tax or valuation purpose add nothing where the agreement is genuine and valid. Allegations of dishonest purpose require evidence commensurate with their seriousness.

Palmer & Harvey McLane Limited supplied products to businesses associated with Clive and Susan Garrad. Following earlier trading arrangements and disputed claims concerning unsold stock, the parties executed a settlement agreement under which Mr Garrad assumed personal responsibility for specified company liabilities and loans. Mrs Garrad gave a guarantee and security.

P&H sought enforcement after the agreed repayments ceased. The Garrads alleged that the settlement agreement was a sham, was intended to serve tax-loss or valuation purposes, and counterclaimed for sums said to arise from the earlier trading arrangements and storage of unsold stock. The central issues were whether the agreement was genuine and enforceable, whether the pleaded improper purposes affected its validity, and whether the counterclaims were proved.

1. The claim succeeded. The Settlement Agreement was valid and enforceable. The court dismissed the Garrads’ defences and counterclaims.

2. The evidence established a genuine commercial transaction. P&H released claims against Maritime and Sweet Cred, while Mr Garrad assumed personal liability for £1,274,405 and received further loans. Mrs Garrad gave a guarantee and charge. The negotiations, execution formalities, independent legal advice, subsequent trading arrangement and later conduct were inconsistent with an intention that the documents should be disregarded.

3. The allegation of sham failed. It depended on an underlying liability owed by P&H for undelivered stock and on a supposed need to conceal that liability during the management buy-out. Neither was established. The earlier agreements and the companies’ accounting records contradicted the alleged underlying liability. The evidence also showed that the alleged liability would not have materially affected the buy-out or its financing.

4. The party alleging a sham bears a heavy evidential burden where the impugned instrument is an express written agreement. The requirements identified in Stone v Hitch [2001] EWCA Civ 1224 were not met.

5. The tax-loss and valuation arguments added nothing. If the Settlement Agreement were a sham, P&H could not enforce it; if it were genuine, the liabilities had been compromised and the sums owed to P&H were real. The allegation of dishonest purpose also required evidence commensurate with its gravity, as recognised in Parker v NFU Mutual Insurance Society [2012] EWHC 2156 (Comm), but no such evidence existed.

6. The remaining counterclaim for storage and related costs was wholly unparticularised and unsupported by documentary or other reliable evidence.