Davinder Bal v Parveen Attri

The appeal concerned the proper construction of an option agreement which granted the buyer an option to acquire 80% of the company for £1 and contained a "Further Assurance" clause (clause 7.5) that the parties would enter into a shareholders' agreement and new articles prior to exercise. The single issue was whether failure to agree that shareholders' agreement before the buyer served notice rendered the exercise invalid.

The court applied ordinary principles of contractual interpretation, including objective assessment of the parties' intention and business efficacy. It held that clauses 2 to 4 constituted a self-contained code for exercise and completion: the option was exercised by written notice under clause 2.3 and completion was governed by clause 4. Clause 7.5, found in a "Further Assurances" section, created a contractual promise to agree protective machinery but did not contain express consequences for non‑agreement and was not shown to be so essential that it must be treated as a condition precedent to exercise.

The court rejected the contention that clause 7.5 was an unenforceable agreement to agree or that its alleged unenforceability should be severed under clause 12.6; instead clause 7.5 provided the primary contractual protection against dilution which could be enforced by the courts. The appeal was therefore allowed and the matter remitted for trial on the remaining issues.

Background and procedural posture

• The claimant, Mr Bal, brought proceedings for breach of contract seeking specific performance of an option agreement and, in the alternative, damages. The defendant, Ms Attri, counterclaimed for harassment (dismissed by the judge and not pursued on appeal).
• The first instance judge (HHJ Williams) decided, on five preliminary issues heard without evidence, that the option had not been validly exercised because clause 7.5 had not been complied with and dismissed the claimant's claim. Permission to appeal was granted by Zacaroli J limited to whether clause 7.5 made agreement of a shareholders' agreement prior to exercise a pre-condition to valid exercise.

Facts

• PKA Legal Ltd was incorporated and Mrs Attri was sole shareholder and director. The option agreement (professionally drafted) granted Mr Bal an option to acquire 80% of PKA for £1. The option was exercisable by written notice (clause 2.3) and completion mechanics were set out in clause 4. Clause 6 contained interim undertakings by the seller and clause 7.5 required the parties to enter into a shareholders' agreement and new articles prior to the date of exercise.
• After PKA purchased the assets of DBS, relations soured and on 24 September 2020 Mr Bal purported to exercise the option by written notice. The judge below held the exercise invalid for non‑compliance with clause 7.5.

Issues framed by the court

1. Whether, upon true construction, clause 7.5 required that a shareholders' agreement and new articles had to be agreed before exercise such that failure to do so rendered the exercise invalid (i.e. whether clause 7.5 was a condition precedent to exercise).
2. Whether clause 7.5 was an unenforceable agreement to agree and, if so, whether clause 12.6 (severance/modification) operated to remove it from the agreement.

Court’s reasoning and decision

• The court reaffirmed that contractual interpretation is objective and looks to the agreement as a whole in its commercial and factual context. Clauses 2 to 4 formed a clear code for exercise and completion, and the option was exercisable by written notice under clause 2.3 with completion under clause 4.
• Clause 7.5 was in a "Further Assurances" section and, although it required agreement to enter into a shareholders' agreement and new articles prior to exercise, it contained no express consequence for non‑agreement. The clause conferred the primary contractual protection against dilution rather than being the machinery by which a protection was to be created; any shareholders' agreement would merely replicate that primary contractual obligation.
• It was neither necessary to imply that clause 7.5 was a pre‑condition to give business efficacy nor so obvious that it went without saying. The judge below had been wrong to treat clause 7.5 as a condition precedent. Clause 7.5 was therefore not a bar to the valid exercise of the option by written notice.
• The court allowed the appeal, remitted the remaining issues for trial, and made a costs order reflecting the appellant's success on this appeal but noting the proceedings were not concluded.

Appeal allowed. The court held that clause 7.5, in the "Further Assurances" part of a professionally drafted option deed, did not operate as a condition precedent to the exercise of the option. The option was exercisable by written notice under clause 2.3 and clauses 2–4 provided a self-contained code for exercise and completion; clause 7.5 created a contractual undertaking to enter into protective documentation but contained no express consequence for non‑agreement and was not essential such that it must be treated as preventing exercise. The matter was remitted for trial on the remaining issues.

Appeal from the County Court at Birmingham, Order of His Honour Judge Williams dated 25 January 2023 (Case No CH-2022-BHM-000009). Permission to appeal limited to one issue was granted by Zacaroli J. This judgment of Rajah J allows the appeal and remits the remaining issues for trial. Neutral citation: [2023] EWHC 3103 (Ch).