Knatchbull -Hugessen & Ors v SISU Capital Ltd (No 2)

A contractual provision underwriting negotiation costs is construed objectively, by reference to the language used, the transaction’s background and its commercial purpose. Recovery depends on whether the transaction was aborted for a reason falling within an express contractual limb. Where negotiations cease by mutual consent or acquiescence because of irreconcilable differences, that event does not necessarily amount to withdrawal by one party or failure of a condition precedent. In the absence of a contractual trigger, the ordinary rule applies that a party cannot recover costs incurred in unsuccessful negotiations.

The claimant trustees sought up to £29,000 from SISU Capital Ltd under an indicative term sheet. The term sheet made only the costs and exclusivity provisions contractually binding. SISU had agreed to underwrite the Charity’s reasonable costs if SISU withdrew its offer, if the Charity withdrew because SISU sought a price reduction or unreasonable terms, or if the conditions precedent could not be met.

The proposed acquisition of the Charity’s interest in ACL did not proceed. The trustees argued that the transaction became impossible when ACL, the Council and the Bank agreed an alternative transaction in January 2013. The central issue was whether the transaction had failed for a reason within one of the contractual limbs.

1. Claim dismissed. The trustees were not entitled to recover their wasted costs under the costs provision.
2. The provision had to be interpreted objectively. The relevant question was how a reasonable person, informed by the transaction’s background and commercial purpose, would understand the words. The parties’ private views or hopes were irrelevant to that task.
3. The provision contemplated an aborted share transaction. It allocated costs where the transaction failed because SISU withdrew, because the Charity withdrew in response to SISU’s unreasonable bargaining position or price reduction, or because specified conditions precedent could not be met.
4. On the facts, the transaction had effectively failed by the end of August 2012. SISU no longer wished to offer the price contemplated by the term sheet; the trustees would not proceed without adequate security for deferred consideration; SISU did not offer such security; and the Council was pursuing an alternative strategy and would not consent to a SISU transaction.
5. The January 2013 transaction did not cause the failure. Nor could the reference to “Clydesdale Bank trading as Yorkshire Bank” be interpreted as referring to whoever might later become ACL’s lender, including the Council.
6. The negotiations ceased by mutual consent or acquiescence because of irreconcilable differences. That circumstance did not fall within any of the three contractual limbs. The court therefore did not need to decide whether conduct by the trustees had independently prevented satisfaction of a condition precedent.