T & L Sugars Ltd v Tate & Lyle Industries Ltd

A contractual indemnity for losses incurred in taking reasonable action to avoid an excluded liability may apply before a contingent liability becomes due and payable. Whether action was reasonable is assessed prospectively, by reference to what was known or should have been known at the time, recognising that more than one course may be reasonable.

In commercial contracts, an implied term must spell out what the contract, read in context, would reasonably be understood to mean and must be necessary. Where a contractual mechanism assumes that a certificate will be issued, the court may construe the provision to operate where the relevant failure makes testing impossible and the specified deficiency is clear.

The claimant acquired a European sugar business from the defendant under a Share and Business Sale Agreement. It brought three claims concerning an inward processing relief balance, transferred sugar futures contracts and a biomass plant.

The inward processing relief claim concerned the cost of purchasing Preference Sugar and exporting it to avoid import duty attributable to the pre-closing balance. The futures claim alleged that certain transferred contracts were not genuine hedges and that payments had been made under a mistake or pursuant to an implied contractual term. The biomass claim concerned the failure of the plant to complete performance testing.

1. IPR claim. The pre-closing liability for import duty was an Excluded Liability. Clause 8.1.2(ii), however, covered losses reasonably incurred in avoiding a contingent Excluded Liability becoming an actual liability. Clauses 10.5 and 10.10.1 did not prevent that construction, since clause 8.1.2(ii) addressed reasonable steps taken to avoid liability, rather than payment of an actual liability.
2. Reasonableness was assessed at the time, without hindsight, by reference to what the claimant knew or should have known. The court recognised that paying duty, purchasing Preference Sugar for export, and rolling the balance forward were each potentially reasonable options. In the prevailing market conditions, choosing to extinguish the balance was reasonable. The claimant recovered €24,918,811.
3. Futures claim. On the facts, the disputed futures were contracts directly related to hedging the risks of the business. The restitution claim failed because the contractual adjustment left the defendant with no more than the agreed purchase price, and the change of position defence also applied. No term required the defendant to avoid every honest and reasonable mistake in the complex transfer process. The claim therefore failed.
4. Biomass claim. Clause 3.5 was construed to require the £1 million price reduction where the plant was so defective that it could not undergo the stipulated performance test and was plainly incapable of achieving the required efficiency. A certificate was not an absolute condition precedent in those circumstances.
5. Judgment was entered for the claimant on the IPR and Biomass claims and for the defendant on the Futures claim.