Thomas Joseph Gallagher v Stuart Alan Fraser & Anor

A contractual entitlement to a payment calculated by reference to net proceeds is governed by the precise contractual definitions and anti-avoidance machinery agreed by the parties. A provision extending proceeds to amounts diverted by transfer or assignment captures diverted proceeds of the relevant sale, not proceeds of earlier transactions.

An express good-faith obligation must be construed in the context of the particular contractual payment obligation. It may require timely disclosure of the relevant sale, honest responses to reasonable inquiries and payment of the amount due, but it does not create a general duty to disclose every earlier transaction.

A share transfer motivated by tax planning is not a sham merely because the donor continues to manage the shares or the intended tax relief is not obtained.

The claimant had sold his interest in a business and entered into a Deed of Undertaking with the defendants. The deed provided for staged payments and a further payment equal to 7% of the net proceeds received by the first defendant following a sale resulting in the purchaser acquiring a controlling interest.

The claimant alleged that the first defendant had transferred shares to his wife as a sham, that earlier share transactions reduced the contractual payment, and that an email constituted a misrepresentation that the payment would be calculated by reference to a 40% shareholding. The defendants denied liability.

The court determined the construction of the deed, the validity of the spouse transfer, the scope of the good-faith and anti-avoidance provisions, and the misrepresentation claim. Some consequential issues concerning interest and compensation remained for further argument.

1. Misrepresentation and collateral warranty. The entire agreement clauses excluded contractual force for earlier promises and warranties. The attempted exclusion of misrepresentation liability was subject to Misrepresentation Act 1967 section 3 and Unfair Contract Terms Act 1977 section 11(1), but the misrepresentation claim failed independently. The email was explanatory and preliminary, was sent to an intermediary who did not convey it to the claimant, and was not relied on by the claimant. The claim for breach of collateral warranty also failed.
2. Sham transfer. Applying the principles in Snook v London and West Riding Investments Ltd and Hitch v Stone (Inspector of Taxes), a sham requires a common intention to create apparent rights and obligations different from those actually intended. The transfer to the first defendant’s wife was intended to transfer beneficial ownership, although tax relief was the principal motivation and the husband continued to manage the family’s affairs. The transfer was therefore valid and was not a sham.
3. SF Payment. The final sale satisfied the contractual definition of a Share Sale because the purchaser acquired a Controlling Interest. The payment was 7% of the first defendant’s Net Proceeds. The extended definition covered proceeds which would have been paid to him but for a transfer or assignment of the proceeds of that sale. It did not extend to proceeds of the earlier spouse transfer, management scheme, minority sale or trust dispositions.
4. Clause 5.3. The good-faith obligation was confined to the obligation to make the SF Payment. It required prompt notification of a qualifying sale, open and honest responses to reasonable inquiries and payment of the sum due. The anti-avoidance provision concerned the first defendant’s actual intention, directed to avoiding or reducing the payment, and did not impose liability for every foreseeable reduction in the eventual amount. The claimant failed to establish material breaches, although issues concerning delayed payment and the transfer of the first defendant’s own shares to the trust remained.
5. The principal claims failed. No declaration that the spouse transfer was void or held on trust was granted. Consequential directions and costs were reserved.

This was a first-instance trial in the High Court (Commercial Court). The judgment records earlier injunction proceedings and a consent order, but no appeal from the present proceedings.