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Case No: A3/1999/0645
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE CHANCERY DIVISION
(MR GEORGE LAURENCE QC)
Royal Courts of Justice
Strand, London, WC2A 2LL
Monday 31 July 2000
B e f o r e :
LORD JUSTICE PILL
LORD JUSTICE ROBERT WALKER
and
SIR MURRAY STUART SMITH
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|
ON
DEMAND INFORMATION PLC & ANR
|
Appellants
|
|
-
and -
|
|
|
MICHAEL
GERSON (FINANCE) PLC & ANR
|
Respondents
|
- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Dr Fidelis Oditah (instructed by Walker Morris, Leeds for the
appellants)
Sir Roy Goode QC and Mr H Tomlinson (instructed by Royds Treadwell for
the respondents)
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE ROBERT WALKER:
Introductory
This appeal is concerned with the court's jurisdiction to grant relief from
forfeiture of a lease of tangible moveable property, and the circumstances in
which that jurisdiction can or should be exercised. It is an appeal from an
order made on 5 March 1999 by Mr George Laurence QC sitting as a deputy judge
of the Chancery Division of the High Court. His judgment is reported at [1999]
2 AER 811. The deputy judge dismissed an action by the claimants On Demand
Information PLC ("ODI") and On Demand Information International PLC ("ODII")
against the defendants Michael Gerson (Finance) PLC ("MGF") and Michael Gerson
(Investments) Ltd ("MGI"). ODII is a wholly-owned subsidiary of ODI. Both
companies are now in administrative receivership and for most purposes they can
be referred to together as "On Demand". Similarly MGF and MGI can for most
purposes be referred to together as "Michael Gerson".
The finance leases
The case is concerned with four finance leases of equipment (used for purposes
such as making and editing videos) granted by Michael Gerson to On Demand. The
deputy judge quoted a passage from a statement published by the Institute of
Chartered Accountants, SSAP 21, which provides a convenient explanation of how
a finance lease differs from an operating lease:
"BACKGROUND
Leases and hire purchase contracts are means by which companies obtain the
right to use or purchase assets. In the UK there is normally no provision in a
lease contract for legal title to the leased asset to pass to the lessee.
A hire purchase contract has similar features to a lease except that under a
hire purchase contract the hirer may acquire legal title by exercising an
option to purchase the asset upon fulfilment of certain conditions (normally
the payment of an agreed number of instalments).
Current tax legislation provides that in the normal situation capital
allowances can be claimed by the lessor under a lease contract but by the hirer
under a hire purchase contract.
.....
FORMS OF LEASE
Leases can appropriately be classified into finance leases and operating
leases. The distinction between a finance lease and an operating lease will
usually be evident from the terms of the contract between the lessor and the
lessee.
An operating lease involves the lessee paying a rental for the hire of an asset
for a period of time which is normally substantially less than its useful
economic life. The lessor retains most of the risks and rewards of ownership
of an asset in the case of an operating lease.
A finance lease usually involves payment by a lessee to a lessor of the full
cost of the asset together with a return on the finance provided by the lessor.
The lessee has substantially all the risks and rewards associated with the
ownership of the asset, other than the legal title. In practice all leases
transfer some of the risks and rewards of ownership to the lessee, and the
distinction between a finance lease and an operating lease is essentially one
of degree."
The deputy judge also referred to a passage in Chitty on Contracts
(27th ed para 32-056) which has reappeared in substantially the same
form in the latest edition (28th ed para.33-078).
The four finance leases were in the same terms, except for the details of the
equipment and the financial terms. The form of lease is set out in an appendix
to the deputy judge's judgment ([1999] 2 AER at pp.827-32). The terms can
therefore be summarised fairly briefly. Each lease was for an initial period
(the primary period) of 36 months. During the primary period the lessee paid a
substantial rent which by the end of the primary period (as Mr Michael Gerson
accepted in his affidavit evidence) recouped Michael Gerson for the cost of the
equipment (which was specified in a schedule to the agreement) with interest,
costs and profit. This rent was payable monthly but with an initial payment of
three months' rent so that during the primary period rent was in effect being
paid three months in advance. Thereafter the lessee could continue the lease
for one or more periods of twelve months (a secondary period) for a single
modest payment made on the first day of the secondary period. The lease could
be determined by not less than 60 days notice to expire on the last day of the
primary period or any secondary period.
Schedule 2 to the agreement contained a variety of conditions, of which the
most important for present purposes were in paragraph 9 (headed `default') and
paragraph 12 (headed `sales agency appointment'). Paragraph 9(A) provided that
on a repudiatory breach by the lessee, Michael Gerson might accept the breach
as a repudiation of the agreement and, at its option, all or any other lease
agreements between the same parties. By paragraph 9(B)(iv) the appointment of
a receiver of the lessee's undertaking or assets constituted a repudiatory
breach. Paragraph 9(C) provided that on acceptance of a repudiatory breach the
lessee should pay an amount (the termination sum) including any arrears of
rent, any rent to become due during any unexpired part of the primary period,
and compounded interest on arrears, but with a possible credit (the terms of
which are obscure, and can be ignored for present purposes).
Paragraph 12(A) was in the following terms (with one obvious error
corrected):
"SALES AGENCY APPOINTMENT
(A) Subject to the Lessee having duly performed its obligations under this
Agreement and any other Lease Agreement upon termination of the leasing of the
Equipment at the end of the Primary Period or at any time thereafter by notice
from the Lessee in accordance with the provisions of this Agreement, the Lessee
is appointed the Sales Agent of the Owner to negotiate a sale of the Equipment
to a third party (not being a parent, subsidiary or associated company of the
Lessee) at the best price available, such price to be communicated to and
approved by the Owner prior to the sale."
Subparagraphs (B) and (C) dealt with the terms of sale, and provided that the
agency appointment should continue for six months after the termination or
expiry of the lease. Subparagraphs (D) and (E) were in the following terms:
"(D) In the event of any breach by the Lessee of the terms of this appointment
or of this Agreement (including without limitation the occurrence of any of the
events specified in paragraph 9 above) or any other Lease Agreement then the
authority of the Lessee to act as agent in relation to any Equipment shall
cease forthwith.
(E) In the event that the Lessee is successful in negotiating a sale of the
Equipment the Owner agrees to allow the Lessee by way of rebate of rental a sum
equal to 95 per cent of the sale proceeds in respect of the Equipment after
deducting any Value Added Tax thereon and any reasonable expenses incurred by
the Lessee in negotiating the sale."
The general effect of the conditions (especially paragraphs 2, 4 and 6) was to
allocate all risks and responsibilities in respect of the equipment (including
its selection, use, maintenance and insurance) to the lessee. The four leases
were entered into on dates between September 1994 and May 1995, so that the
four primary periods were to expire between September 1997 and May 1998. The
equipment comprised in the leases was all installed at On Demand's premises at
2 Burley Road, Leeds.
On Demand goes into receivership
On 12 February 1998 On Demand went into administrative receivership under
debentures in favour of Lloyds Bank entered into on 16 October 1995. On 19
February 1998 Michael Gerson gave notice to On Demand terminating all four
lease agreements on the ground that receivers had been appointed. The position
under the four leases at that date was summarised by the deputy judge as
follows:
(1) The first and second leases (dated 5 September 1994 and 20 October 1994
respectively) had continued beyond the primary period and were in the first
secondary period. Michael Gerson had received primary rentals totalling about
£295,000 (plus VAT) and secondary rentals totalling about £2,500
(plus VAT) in respect of equipment which had cost about £242,000 (plus
VAT).
(2) The third lease (dated 31 March 1995) was very close to the end of its
primary period and all the primary rentals had been paid (about £377,000
plus VAT in respect of equipment which had cost about £310,000 plus VAT).
It was not clear whether the secondary rent had been paid in advance.
(3) The fourth lease dated 17 May 1995 had about three months of its primary
period still to run. On Demand had paid primary rentals totalling about
£120,000 (plus VAT) in respect of equipment which had cost about
£100,000 (plus VAT) but about £3000 (plus VAT) for future primary
rental became due under paragraph 9(C) of the conditions.
On Demand's business was organised in two divisions, called Creative
Convergence (which used the leased equipment) and New Media Publishing. The
receivers sold New Media Publishing very quickly, the sale being made on 20
February 1998. The other division, Creative Convergence, had 78 employees.
The receivers were faced with the dilemma that its business was (as Mr Edward
Klempka, one of the receivers, deposed) "heavily reliant on its people, their
contacts and their expertise", so that it had very little value except as a
going concern; but the continuing liability for salaries and wages was very
heavy. In his affidavit sworn on 4 March 1998 Mr Klempka stated,
"As the position presently stands, unless a sale can be concluded within the
next 24 hours and at the very latest by Friday this week [6 March 1998], it is
highly likely that the business will have to close."
The receivers had only one serious offer for the business of Creative
Convergence. That offer was not only approved by the employees but involved
the participation of a number of senior employees. It would be feasible only
if the proposed purchaser could take over the premises and the leased equipment
which was installed there. In these circumstances the receivers decided to
make an application to the Chancery Division. The application was prepared at
very short notice. Michael Gerson and its lawyers were informed of the
application but had even less time to consider it. Decisions were taken in
haste, possibly without sufficient time for all their implications to be
considered.
On 2 March 1998 the receivers' solicitors, Walker Morris, wrote to Michael
Gerson referring to the termination of the leases and pointing out that but for
the appointment of receivers
"the economic benefit which [MGF] could expect to derive from the lease
agreements would amount to the unpaid [primary rent under the fourth lease],
together with 5 per cent of the net sale proceeds upon a sale being negotiated
by [On Demand]."
The letter stated that the equipment had a material value, possibly exceeding
£130,000. It referred to the Transag case (Transag Haulage v
Leyland DAF Finance [1994] 2 BCLC 88) and to paragraph 12(A) and (E) of the
conditions. It indicated that the receivers were considering an urgent
application to the court. A second letter on the same day recorded that
Michael Gerson's valuers had inspected the equipment and valued it, on a going
concern basis, at about £300,000. The letter made an open offer of
£30,000 out of the sale proceeds, in full and final settlement, if Michael
Gerson would agree to an immediate sale. However a third letter, also on the
same day, indicated that the parties had been unable to reach agreement.
That was the background to a letter from Mr Gerson to Mr Klempka which was
written on 2 March but not received by fax until just after 8 am on 3 March.
Apart from a paragraph referring to some missing items of equipment, Mr
Gerson's letter was as follows:
"I confirm our conversation of this morning when I put forward the suggestion
that Without Prejudice to the terms and conditions of our four leases and the
rights existing under those leases, that in order to enable the best realisable
price to be negotiated, in the interest of saving jobs at the Company, and to
preserve any goodwill, you should negotiate a sale to any interested party with
which we will cooperate as owner (but without our conferring any warranty as to
condition or use of the goods) subject to agreement on price with our valuer
and that the proceeds of sale should be paid into an escrow account giving you
the option to apply to the Court in accordance with the principles set out in
the Transag Haulage case to which you referred, within a period of 60 days and
with you bearing all the costs of the action in order to obtain clarification
of the law.
As I advised you, our own legal advice is that the circumstances are not
comparable in any way and particularly because under the terms of our finance
lease agreement, at no time whatsoever would a lessee obtain rights of
ownership or have a proprietary interest capable of being protected by a claim
for relief from forfeiture.
We have spoken subsequently and the figures to which you refer fall so far
short of the expert valuation which we have, that I see no alternative but for
us to endeavour to dispose of the goods as best we can. I am however willing
to hear from you with any further proposal you have to make.
.....
I reserve our Company's rights generally under the leases. I have instructed
Royds Treadwell to accept service of any writ."
The judge did not refer to this correspondence in his judgment, probably
because it did not at the hearing before him receive as much attention as it
has in this court, where Dr Fidelis Oditah (for On Demand) has gone through it
in detail.
The hearing before Harman J
The outcome was that On Demand issued a writ on 4 March 1998 claiming relief
from forfeiture (and other relief) and issued two notices of motion, one ex
parte and the other on notice. The former sought an order for sale of the
equipment free from any claim of Michael Gerson on terms that the net proceeds
were to be held in an escrow account. The latter sought relief from forfeiture
of the finance leases, and other relief. In the event the ex parte
motion was heard by Harman J on notice on 5 March 1998 and was for practical
purposes disposed of by consent, although the order was not formally a consent
order. The other motion was heard by Mr Laurence and was by consent treated as
the trial of the action. This was possible only because On Demand conceded a
number of factual issues which could not have been resolved without oral
evidence (see [1999] 2 AER at pp.818-2).
In an affidavit sworn on 5 March 1998 Mr Gerson deposed,
"[Michael Gerson] do not accept that [On Demand] have any right to "relief from
forfeiture" of the Leases. However, solely for the purpose of [On Demand's]
application for interlocutory relief being made on 5 March 1998, [Michael
Gerson] will accept that there is an arguable case on this point. I understand
that the Receivers wish to sell [On Demand's] business as a matter of extreme
urgency and that they believe that the Equipment is a vital part of that
sale.
In these circumstances, [Michael Gerson] are prepared to consent to an order
for the sale of the Equipment and will agree that good title shall pass to the
purchaser. In order to hold the position pending a full hearing of the motion,
the proceeds of sale should be paid into an escrow account as contemplated by
the Notice of Motion. However, [Michael Gerson] wish to reserve their rights
in relation to such sales. In my respectful submission, it should be clear on
the face of the order that it is made without prejudice to [Michael Gerson's]
contention that it is entitled to the full value of the goods at the date of
sale."
He went on to make clear that Michael Gerson did not accept that the part of
the total sale proceeds apportioned by the receivers to the equipment
(£131,500 if some upgraded equipment was excluded) would necessarily
reflect the true sale value of the equipment. That was one of the points which
On Demand later conceded.
That was the background to Harman J's order of 5 March 1998, the substantive
part of which was as follows:
"The Plaintiffs and each of them be at liberty to sell or otherwise dispose of
the equipment the subject of the finance lease agreements specified in the
schedule hereto and give a good and valid title to the purchaser or disponee
free from any claim by the Defendants or either of them upon the terms that the
net proceeds of the said sale or disposition be held in an escrow account
pending the hearing of the inter partes motion on notice in this action,
PROVIDED that the Defendants shall be at liberty hereafter to contend that the
break-up value of the said equipment was more than £130,500."
As already noted, much more attention was directed to these events on the
hearing of the appeal than had been directed to them before the deputy judge.
Indeed in this court Dr Oditah began to formulate a very late amendment so as
to plead that these events amounted to an estoppel preventing Michael Gerson
from contending that the sale prejudiced On Demand's claim to relief from
forfeiture, if such a claim existed before the sale. Dr Oditah rightly did not
press his application for an amendment. It had no solid foundation in any
findings of fact made by the deputy judge. On Demand's advisors seem to have
thought (or hoped) that an immediate sale would not prejudice its claim for
relief, and to have taken this view as a matter of law (rather than because of
any agreement or estoppel). Michael Gerson's advisers seem to have formed no
view on the point, while aware (as was accepted by Mr Tomlinson, who appeared
for Michael Gerson before Harman J) that Harman J's order was not the end of
the matter, and that the claim for relief from forfeiture was going to be
pursued. That is reflected in the deputy judge's summary of the position
before him ([1999] 2 AER at p.817):
"It was common ground before me that Harman J's order did not prevent the
defendants from contending that there was no jurisdiction in the court to grant
relief from forfeiture of the leases of the equipment or from contending, when
the plaintiffs' motion came on substantively, that if there was such
jurisdiction it ought not to be exercised in this case."
The deputy judge therefore proceeded to consider the general question of the
court's jurisdiction to grant relief from forfeiture in the case of a lease of
this sort, where the equipment remained unsold. He then went on to consider
the effect of the sale. On the general issue he concluded that the court had
jurisdiction to grant relief from forfeiture, but on the narrower issue he
concluded that just as he had no jurisdiction to rewrite the finance leases so
as to remould condition 12, so ([1999] 2 AER at p.826)
"there can be no jurisdiction, in the events which have happened, to make an
order granting relief which would have precisely that same effect. [On Demand]
took their chance when asking the court in March 1998 to sanction a sale, that
it would later turn out to be impossible to persuade the court to validate such
a sale by recourse to the equitable doctrine of relief from forfeiture."
In this court Dr Oditah has challenged the narrower conclusion and Sir Roy
Goode QC (appearing with Mr Tomlinson for Michael Gerson) has by a respondent's
notice challenged the wider conclusion. Both raise issues of some general
interest and some difficulty.
Relief from forfeiture
The principles of the modern law as to non-statutory relief from forfeiture
(that is, relief under the court's inherent equitable jurisdiction) are to be
found principally in three decisions of the House of Lords made between 1972
and 1984, that is Shiloh Spinners v Harding [1973] AC 691,
Scandinavian Trading Tanker v Flota Petrolena Ecuatoriana (The
Scaptrade) [1983] 2 AC 694 and Sport Internationaal Bussum v
Inter-Footwear [1984] 1 WLR 776, and in the decision of this court in
BICC v Burndy Corporation [1985] Ch 232. Those and other authorities
were closely examined in the course of argument. But before embarking on these
authorities it will be useful to identify briefly some basic themes to which
counsel drew attention in their reviews of the authorities and in the
submissions which they based on them. These are the commercial nature of the
finance leases; the fact that the subject-matter of the leases was not a
permanent asset (land) but chattels which were depreciating rapidly and whose
useful life was expected to be short; and the nature of the economic interests
under the leases of the lessor and the lessee respectively, including the
likely effect of the agency created by condition 12.
Dr Oditah urged that the lessor's real interest in the equipment was a purely
financial interest. Its `reversion' to the equipment on termination of the
leases was unlikely to be of any value and might simply be a nuisance, as was
demonstrated by the low level of the secondary rents and the terms of condition
12. Possession and control of the equipment, and all the risks which attended
it, were the lessee's from the inception of the transaction. The lessor was
owner of the equipment only because that was essential to its claim to capital
allowances for tax purposes. Because the lessor's interest was purely
financial, the leases were in the nature of a security. The deputy judge took
too narrow a view of the remedial flexibility of the jurisdiction, and in
granting relief it was not necessary for the court to reconstitute precisely
the lessor-lessee relationship.
Sir Roy Goode addressed the same points, but with very different aims in view.
He relied on the commercial character of the finance leases and on the
importance of certainty in commercial transactions. He submitted that although
the finance leases were referred to as leases, the rights (in respect of
chattels, not land) which they conferred on On Demand were purely contractual,
and so outside the scope of relief for forfeiture, which is concerned with
proprietary rights. Moreover chattels of this type are precarious and wasting
assets and the court should not interfere with the terms of a commercial
bargain for their hire. As to Dr Oditah's submissions about the parties'
economic interests and the substance of the transaction, Sir Roy referred to
the decisions of the House of Lords in McEntire v Crossley Brothers
[1895] AC 457 and Helby v Matthews [1895] AC 471 (he might also have
referred to IRC v Duke of Westminster [1936] AC 1, 20, where Lord Tomlin
cited Helby v Matthews). Finally Sir Roy submitted that what Dr Oditah
termed remedial flexibility would amount to an impermissible rewriting of the
parties' contracts.
With those themes and submissions in mind I turn to the authorities.
Shiloh Spinners v Harding is of outstanding importance for Lord
Wilberforce's survey of the development of the law and his statement of the
principles to be derived from it (on which the House of Lords had heard from
eminent leading counsel submissions which occupy over twenty pages of the
report). The case was unusual in that although it concerned a leasehold
interest, it did not concern relief from forfeiture by exercise of a landlord's
right of re-entry. The right of re-entry had been reserved on the assignment
(and not on the initial grant) of a term of years in order to reinforce
covenants (to support, fence and repair) which were taken for the benefit of
other retained land of the assignor. That gave rise to conveyancing issues not
connected with relief from forfeiture. It also meant that relief from
forfeiture had to be considered in relation to the inherent equitable
jurisdiction, without modifications and extensions effected by statutes
applying as between landlord and tenant.
Lord Wilberforce made a broad statement of principle ([1973] AC at p.722):
"There cannot be any doubt that from the earliest times courts of equity have
asserted the right to relieve against the forfeiture of property. The
jurisdiction has not been confined to any particular type of case. The
commonest instances concerned mortgages, giving rise to the equity of
redemption, and leases, which commonly contained re-entry clauses; but other
instances are found in relation to copyholds, or where the forfeiture was in
the nature of a penalty. Although the principle is well established, there has
undoubtedly been some fluctuation of authority as to the self-limitation to be
imposed or accepted on this power."
He then identified two well-recognised heads of the jurisdiction. The first is
"where it is possible to state that the object of the transaction and of the
insertion of the right to forfeit is essentially to secure the payment of
money". The second is a case of fraud, accident, mistake or surprise.
"Outside of these" (Lord Wilberforce continued) "there remained a debatable
area in which were included obligations in leases such as to repair and
analogous obligations concerning the condition of property, and covenants to
insure and not to assign." Covenants of that sort cannot be viewed as being
essentially a security for the payment of money, because they are concerned
with the condition of the leased property and its value to the landlord when
his reversion falls into possession. (That is why Dr Oditah has made a virtue
of the impermanence of the subject-matter of the finance leases, arguing that
the lessor's reversion is illusory and its only substantial interest is
financial.)
After discussing a number of old authorities (including the well-known
judgment of Lord Eldon L.C. in Hill v Barclay (1811) 18 Ves.Jun. 56 and
also Barrow v Isaacs & Son [1891] 1 QB 417, which he described as "a
high water mark of the strict doctrine" Lord Wilberforce said ([1973] AC at
p.723),
" ... it remains true today that equity expects men to carry out their
bargains and will not let them buy their way out by uncovenanted payment. But
it is consistent with these principles that we should reaffirm the right of
courts of equity in appropriate and limited cases to relieve against forfeiture
for breach of covenant or condition where the primary object of the bargain is
to secure a stated result which can effectively be attained when the matter
comes before the court, and where the forfeiture provision is added by way of
security for the production of that result."
So to find that a forfeiture provision is security for the production of "a
stated result which can effectively be attained" on the hearing of an
application for relief is a third head under which the jurisdiction may be
exercised. The rest of the House of Lords agreed with Lord Wilberforce, Lord
Simon of Glaisdale (at pp.726-7) showing some inclination towards a more
liberal view of the jurisdiction (as he had done in The Laconia [1977]
AC 850, 873-4).
In The Scaptrade [1983] 2 AC 694 the House of Lords unanimously
rejected the proposition that relief from forfeiture was available when a
shipowner exercised a contractual right to withdraw a vessel hired under a time
charterparty. It was critically important to the decision that the hiring was
by time charter and was not a demise charter or a lease (see the argument of
the shipowners' counsel, at the invitation of their lordships, at p.698 and the
speech of Lord Diplock at pp.700-2 and again at p.704). Lord Diplock quoted
Lord Wilberforce's general statement of principle in Shiloh Spinners and
said (at p.702) that it was clear
"that this mainly historical statement was never meant to apply generally to
contracts not involving any transfer of proprietary or possessory rights, but
providing for a right to determine the contract in default of punctual payment
of a sum of money payable under it."
This reflected Lord Diplock's earlier observation (at p.700) that a time
charter confers on the charterer no interest in or right of possession of the
vessel, but is a contract for services to be rendered to the charterer by the
shipowner through the shipowner's employees (that is the master and crew).
Lord Diplock also quoted with approval a fairly lengthy passage from the
judgment of Robert Goff LJ in this court ([1983] QB 529, 540-1) as to the
importance of certainty to the parties to a commercial contract.
The third decision of the House of Lords, Sport Internationaal Bussum v
Inter- Footwear [1984] 1 WLR 776 was concerned with a contractual licence
to use names and trademarks for sports shoes. An earlier action between the
parties had been stayed on the terms scheduled to a Tomlin order, which
provided for Inter-Footwear to pay £105,000 in three instalments and to
have a licence (partly exclusive and partly non-exclusive) to use the names and
marks. If any instalment was not paid on the due date, the whole unpaid
balance became due at once and the licensor could determine the licence. There
was a delay in payment of the second instalment and the licensor terminated the
licence. Staughton J, this court and the House of Lords all held that the
court had no jurisdiction to grant relief from forfeiture.
Oliver LJ, delivering the judgment of this court, said (at p.786) that taken
at its narrowest The Scaptrade
"may be said to establish no more than this: that the equitable jurisdiction
to relieve against forfeiture does not extend to a time charter not being a
charter by demise. There is, however, the more general proposition to be
derived from it, that, even where the primary object of the insertion of a
forfeiture clause may be said to be to secure the payment of money or the
performance of some other obligation, the equitable jurisdiction does not
extend to contracts which do not involve the transfer or creation of
proprietary or possessory rights."
Oliver LJ referred to the need for certainty in commercial contracts and
expressed doubt as to whether the licensor's right to terminate the licence in
the event of default could be regarded as being primarily a security for the
payment of money. Oliver LJ went on (at p.789),
"This is sufficient to dispose of the appeal, but, in fact, there appears to
us to be another reason why the equitable jurisdiction to grant relief could
not apply to a case such as this. The case is one of contract only and, in so
far as there were any rights created or transferred which could be described
as "proprietary", they were rights which rested only in contract and to that
extent distinguishable from the legal estate created by the grant of a lease or
a mortgage. Assuming that relief were capable of being granted, effectively it
could be granted only by compelling the plaintiffs to re-grant the permission
which had been revoked. An exclusive licence to use a trade mark creates no
estate, although it enables the licensee to obtain an injunction if the
licensor, in breach of contract, seeks to use the mark in competition with him.
Thus, effectively, the licensee applying for relief from forfeiture is in
exactly the same position as the charterer in [The Scaptrade]."
In the House of Lords the leading speech was given by Lord Templeman. After
referring to what Lord Diplock said in Scaptrade about proprietary or
possessory rights Lord Templeman continued (at p.794):
"Mr Wilson submitted that in the present case the licences to use the trade
marks and names created proprietary and possessory rights in intellectual
property. He admits, however, that so to hold would be to extend the
boundaries of the authorities dealing with relief against forfeiture. I do not
believe that the present is a suitable case in which to define the boundaries
of the equitable doctrine of relief against forfeiture. It is sufficient that
the appellants cannot bring themselves within the recognised boundaries and
cannot establish an arguable case for the intervention of equity. The
recognised boundaries do not include mere contractual licences and I can see no
reason for the intervention of equity."
A few days after the decision of the House of Lords in Sport
Internationaal this court heard an appeal in BICC v Burndy
Corporation [1985] Ch 233. BICC and Burndy had been co-owners of a joint
venture company, BICC-Burndy, to exploit know-how and other intellectual
property rights. In 1979 they entered into a complex series of agreements
intended to wind up the joint venture and disentangle their commercial
association. There was a particular problem about new patent rights which were
vested in BICC-Burndy. There was no obvious way of unscrambling these rights
and so (as Dillon LJ explained at pp.241-2) the part of the contractual
arrangements referred to as the assignment provided for the continued
exploitation of what were called the joint rights, with a provision (in clause
10(iii) of the assignment) for either party (if in default as to its financial
obligations) to be required to assign the relevant rights to the other party.
It is not necessary to go further into the rather complicated facts; the case
is important for what Dillon LJ (with the concurrence of Kerr and Ackner LJJ)
said about relief from forfeiture. Falconer J had held that he had no
jurisdiction to grant relief from forfeiture because clause 10(iii) was part of
a commercial arrangement between parties bargaining at arm's length.
Dillon LJ said (at pp.251-2),
"The judge decided, in reliance especially on the judgment of the Court of
Appeal in Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana
(The Scaptrade) [1983] QB 529, that the court had no such jurisdiction,
because the assignment was a commercial agreement between commercial parties.
The decision of the Court of Appeal in The Scaptrade was, as the judge
noted, affirmed by the House of Lords [1983] 2 AC 694. As I understand the
decision of the House of Lords, however, and the decision of the House of Lords
in the subsequent case of Sport Internationaal Bussum BV v Inter-Footwear
Ltd [1984] 1 WLR 776, their effect was to confine the court's jurisdiction
to grant relief against forfeiture to contracts concerning the transfer of
proprietary or possessory rights: see the speech of Lord Templeman in the
latter case at p.794. The present case, however, is distinguishable from those
cases in that clause 10(iii) of the assignment is concerned with a transfer of
property rights.
In Shiloh Spinners Ltd v Harding [1973] AC 691, the House of Lords held
that the court had jurisdiction to grant relief against forfeiture of
proprietary rights in circumstances outside the ordinary landlord and tenant
relationship; but the case was concerned with a claim for relief against a
right of re-entry on land, and the speeches do not cast light on the extent to
which jurisdiction exists to grant relief against forfeiture of property other
than an interest in land. In Barton Thompson & Co Ltd v Stapling
Machines Co [1966] Ch 499, 509, Pennycuick J considered it to be arguable
that relief could be granted against forfeiture of a lease of chattels. That
view seems to have been approved by Edmund Davies LJ in Starside Properties
Ltd v Mustapha [1974] 1 WLR 816, 822; and in Stockloser v Johnson
[1954] 1 QB 476, 502, Romer LJ apparently considered that the court would have
power in an appropriate case to grant relief by way of extension of time to a
purchaser of a diamond necklace who had failed to pay the final instalment of
the price in due time.
There is no clear authority, but for my part I find it difficult to see why
the jurisdiction of equity to grant relief against forfeiture should only be
available where what is liable to forfeiture is an interest in land and not an
interest in personal property. Relief is only available where what is in
question is forfeiture of proprietary or possessory rights, but I see no reason
in principle for drawing a distinction as to the type of property in which the
rights subsist. The fact that the right to forfeiture arises under a
commercial agreement is highly relevant to the question whether relief against
forfeiture should be granted, but I do not see that it can preclude the
existence of the jurisdiction to grant relief, if forfeiture of proprietary or
possessory rights, as opposed to merely contractual rights, is in question. I
hold, therefore, that the court has jurisdiction to grant Burndy relief."
Moreover the court would if necessary have exercised its discretion to grant
relief (differing from Falconer J on that point also). It was not necessary
because Burndy succeeded on another point as to equitable set-off.
In Jobson v Johnson [1989] 1 WLR 1026 this court was concerned
primarily with the issue of whether an unusual provision in a contract for the
sale of shares in a private company, the purchase price being payable by
instalments, amounted to a penalty clause. Nicholls LJ (at p.1043) observed,
and Kerr LJ (at p.1047) agreed, that the provision in question was something of
a hybrid, in that although having the essential characteristics of a penalty
clause, it also resembled a forfeiture clause. That influenced the relief
which this court decided to furnish, after considering various alternatives to
meet the unusual circumstances of the case (see Dillon LJ at pp.1037-8,
Nicholls LJ at pp.1045-6, and Kerr LJ, who took a different view on this point,
at pp.1048-50).
The next case to be decided (although only recently reported) is Goker v
NWS Bank (1990) [1999] GCCR 1507. The claimant had entered into a deferred
purchase agreement to buy a Mercedes convertible for a total of £45,690
payable over three years. He repeatedly defaulted in his obligations but, when
the car was repossessed, he claimed relief from forfeiture. Eminent counsel
for the defendant conceded that there was jurisdiction to grant relief, but it
was refused as a matter of discretion. The case of interest mainly for the
observations of Lloyd LJ and Nicholls LJ as to the different considerations
which apply depending on whether the subject-matter is land or chattels. Lloyd
LJ said (at p.1510):
"In the case of land the underlying security remains intact and is not
impaired; in the case of a chattel the underlying security is likely to be much
more vulnerable. Thus, in the case of a car, it may be sold; it may be taken
abroad; it may be damaged as a result of a road accident, or it may be stolen.
Furthermore, it requires continuing expenditure on insurance and on maintenance
and above all it will continue to depreciate. None of those factors applies to
land, or if they do apply only to a limited extent. If authority is needed for
the proposition that different results may flow in different types of case, it
is to be found in the judgment of Lord Justice Dillon in the case of BICC
plc v Burndy Corpn {[1985] Ch 232, [1985] 1 All ER 417), where, at p.252 of
the former report, he said:
`The fact that the right to forfeiture arises under a commercial agreement is
highly relevant to the question whether relief against forfeiture should be
granted.' "
Nicholls LJ made similar observations at p.1512.
The next case is the Transag case, Transag Haulage v Leyland DAF
Finance [1994] 2 BCLC 88, a decision of Knox J. Indeed the deputy judge
started his discussion of the law with Knox J's citation of a passage from
Snell's Equity (29th edition pp.541-2; the corresponding passage in
the 30th edition is at para 36-14 and is in identical terms except
for some additions to the footnotes).
Sir Roy has submitted that the Transag case was wrongly decided and
should be overruled. It was concerned with hire-purchase agreements for the
hire of three lorries entered into by Transag, a haulier, between January and
May 1991. The total purchase price for the three lorries was £177,333,
with down payments totalling £69,333 and the balance (for each vehicle)
due by 36 monthly payments of £1000. Transag went into administrative
receivership in November 1993, when only about £14,000 remained to be paid
and the lorries were worth about £67,000. The agreements were in standard
form and contained (clause 13) provision for termination by the owner after an
event of default, which included receivership; provisions (clause 14) spelling
out the consequence of termination, including return of the vehicles to the
owner and an immediate liability for outstanding instalments; and (clause 24)
-
"If the hirer (having duly observed and performed all the terms and conditions
of this agreement whether expressed or implied, and having paid all sums due
under this agreement) shall pay to the owner the sum of £5 the hiring
thereby constituted shall determine and the hirer shall become the absolute
owner of the goods but until such time the goods shall remain the sole property
of the owner and the hirer shall be a mere bailee thereof."
Transag sought a declaration that the relevant provision of clause 13 was a
penalty (a claim which failed) and alternatively relief from forfeiture. Knox
J held that he had jurisdiction to grant relief, and that the case was "one of
those rare cases" where it would be right for the court to exercise its
discretion and grant relief on terms that the outstanding instalments were to
be paid within seven days. It does not appear from the report (or from another
report at [1994] BCC 356) whether the order accelerated (or otherwise referred
to) the clause 24 option.
Sir Roy's attack on Transag was directed mainly to Knox J's observation
([1994] 2 BCLC at p.99) that Transag's contingent right to exercise its option
under clause 24 (and buy each lorry for £5) could properly be described as
a proprietary right. Sir Roy submitted that it was a purely contractual right,
and referred on that point to the decision of this court in Whiteley v
Hilt [1918] 2 KB 808 (and especially to what Warrington LJ said at
pp.819-20). Sir Roy went on from there to point out that On Demand's rights
under the agency provision in condition 12 were even less proprietary in
character, being simply a right to 95 per cent of the net proceeds after an
approved sale (which necessarily vested ownership of the equipment in a third
party).
I have to say that I do have difficulty with the part of Knox J's judgment to
which criticism is directed. But my difficulty is not so much with Knox J's
conclusion as with the narrow terms in which he seems to have seen the issue
when he said, (at p.99 immediately after his citation of Snell):
"The only forfeiture that I can discern in the case before me where no claim
is being made in respect of past payments by the company is the loss of the
contingent right to buy the goods for £5 under clause 24."
I find this puzzling because Knox J had already referred in detail (at pp.92-3)
to the receivers' evidence that continued possession and use of the three
lorries was essential to the conduct of Transag's business, which the receivers
hoped to sell as a going concern. I think that Knox J could have based his
decision on Transag's possessory rights during the currency of each of the
hire-purchase agreements, as well as on its option to purchase under clause 24
once the agreement had run its course.
Those possessory rights arose under contracts but I cannot accept the
submission that those rights, or the rights of On Demand under the finance
leases, were purely contractual rights if that intensitive implies that they
had insufficient possessory character to meet the principles which emerge from
the authorities considered above.
What was said in Whiteley v Hilt seems to me to be well in line with
those principles. Whiteleys and Miss Nolan entered into a hire-purchase
agreement for the hire of a piano, which Miss Nolan purported to sell to the
defendant. Whiteleys sued the defendant for detinue or conversion, and the
real issue was as to the measure of damages. Warrington LJ said (at
pp.819-20):
"The nature of the interest taken by the hirer under the agreement appears to
me to be this: First, a right to retain possession of the chattel so long as
she performed the conditions of the agreement. Secondly, an option to purchase
the chattel exercisable by payment of the instalments provided for by the
contract. [The third right was a right of reinstatement after default under a
special provision of the contract.] That, in my opinion, was the interest of
the hirer. The general property in the chattel no doubt remained in the
plaintiffs, but that general property in it was qualified and limited by the
contractual interest conferred by the agreement upon the hirer. Now, was that
interest assignable? In my opinion it clearly was."
Contractual rights which entitle the hirer to indefinite possession of chattels
so long as the hire payments are duly made, and which qualify and limit the
owner's general property in the chattels, cannot aptly be described as purely
contractual rights.
For these reasons I consider that Transag was correctly decided
(although I respectfully think that Knox J might have based his decision on
broader grounds) and that a finance lease is in principle capable of attracting
relief from forfeiture provided that the provision occasioning forfeiture
satisfies one or other of the two relevant conditions stated by Lord
Wilberforce in Shiloh Spinners (security for payment of money, or
security for attaining a specific and attainable result). The fact that a
finance lease is a commercial contract of a very familiar sort, and the fact
that its subject-matter is chattels (not land) may be very material to the
question whether relief should be granted (as this court recognised in BICC
v Burndy Corporation and Goker v NWS, and as Knox J recognised in
Transag) but that goes to the exercise of discretion, not to
jurisdiction. (It may also be noted, as Lord Millett has pointed out in his
lecture Equity's Place in the Law of Commerce (1998) 114 LQR 214, that land is
also a subject of commerce and leases of land and buildings are commercial
transactions.) Moreover the impermanence of chattels such as video equipment
and motor vehicles (as compared with land and buildings) does not to my mind go
all one way. I recognise the points made in Goker v NWS, but the
absence (in most likely circumstances) of any `reversion' of significant value,
after the termination of On Demand's finance leases, gives force to Dr Oditah's
submission that Michael Gerson's real interest in the finance leases was a
financial interest. To say that is not to disregard legal rights and
obligations in favour of economic substance (as to which see Robert Goff LJ in
Bank of Tokyo v Karoon (1984) [1987] AC 45, 64, note). It is a
legitimate consideration if On Demand is to satisfy one or other of the
conditions stated by Lord Wilberforce in Shiloh Spinners.
For these reasons I consider that the deputy judge was right in his first
general conclusion on jurisdiction ([1999] 2 AER at p.822). Indeed, but for
Sir Roy's spirited attack on Transag (which the deputy judge took as his
point of departure) I would have dealt with the point much more shortly by
saying that I agree with the deputy judge for the reasons which he gave.
I consider that he was also right in his conclusion that the `security'
requirements were satisfied. I can give my reasons quite shortly, since most
of the ground has been covered already. It is not to disregard the legal
substance of the finance leases to accept (as I do) the submission that Michael
Gerson's real interest in the leases was a financial one. The terms of the
leases demonstrate that and it is confirmed by Michael Gerson's reaction to the
receivership, which was that the equipment should be sold (there may have been
in this some element of altruism and wanting to save jobs, but at the lowest it
cannot be said that Michael Gerson was pressing to have the equipment removed
from the Burley Road premises in order to put it on the market). Mr Gerson's
second affidavit did not cast doubt on this conclusion, for the reasons stated
by the deputy judge ([1999] 2 AER at p.824).
Sir Roy has submitted that the deputy judge went wrong on this point because
he confused the "stated result" (in Lord Wilberforce's phrase) with the purpose
of the whole transaction, and so emptied the requirement of all content. That
submission calls for serious consideration, but I cannot accept it. I can see
its force in a lease of land and buildings, where the landlord is interested
not only in the rent but also in the condition and use of the premises both
during the term and on the reversion falling into possession. But if the
lessor's only real interest is in securing the prompt and regular payment of
rentals under a finance lease, any provision for forfeiture on any act of
default (including the appointment of receivers) can readily be seen as a
security to attain that end. The fact that relief against forfeiture cannot
undo the appointment of the receivers is not decisive or even material provided
that the terms on which relief is granted provide full protection for the
lessor's financial interest. If the lessee is insolvent, it will generally be
impossible to provide full protection for the lessor, and so relief will not be
granted. But the facts of this case, and those of Transag, show that
the amount of the outstanding instalments due to the lessee when receivers are
appointed may be quite modest, and the windfall to the lessor (if relief is not
granted) correspondingly large. My feeling that equity should be able to give
relief in such circumstances does not depend on Dr Oditah's wider submissions
(on which I express no view) as to the need to promote a `rescue culture' in
insolvency law.
The effect of the sale
Here at last I come to the subject-matter of On Demand's notice of appeal (as
opposed to Michael Gerson's respondent's notice). The court's conclusion (in
relation to a finance lease of the type now under consideration) that relief
from forfeiture can in principle be granted leads on to the question, what form
can that relief take? In particular can the court in any way accelerate the
time, or modify the conditions, at or on which the lessee can exercise an
option to acquire ownership of the hired goods (as in Transag) or to
become contractually entitled to a sum little less than their sale proceeds (as
in this case)? And on the unusual facts of this case, could the court grant
any relief after the sale under the order of Harman J?
The deputy judge addressed these questions at two points in his judgment,
[1999] 2 AER at pp.819-20 and at pp.826-7. In the first passage he stated the
terms on which On Demand was seeking relief:
"... there should be paid to [Michael Gerson] such a sum as [Michael Gerson]
would have been entitled to if sale of the equipment under condition 12 (A) had
taken place, assuming for this purpose a sale at £251,617 and tax
advantages totalling £15,897."
(Those figures were agreed by On Demand in order to have the motion treated as
the trial of the action. The deputy judge must also have had in mind that any
outstanding sums for primary or secondary rentals would be paid.)
The practical effect of granting relief on those terms would have been, as I
understand it, that the actual sale proceeds of the equipment (about
£132,000) would have been divisible (very roughly) as to one quarter to
Michael Gerson and as to three quarters to On Demand. Sir Roy described that
as On Demand obtaining relief by paying Michael Gerson some of its (Michael
Gerson's) own money.
The deputy judge then went on (under the heading "Alleged jurisdiction to
amend terms of agreement") to consider the implications of the terms of the
finance leases: that the sale agency under condition 12 arose only after the
termination of the lease (and "subject to the lessee having duly performed its
obligations under this agreement and any other lease agreement"), and that the
lease could be terminated only by at least 60 days' notice expiring at the end
of the primary period, or on a later anniversary. He said ([1999] 2 AER at
pp.812-20),
"If no receivership had arisen (and if there had been no other breaches of the
agreements), I cannot see that there would have been any right to ask the court
to intervene to authorise a sale of the equipment while the leases were still
on foot in circumstances where the defendants had acquired no right, and might
never have acquired the right, to sell under condition 12. Such an
intervention could be justified only on the basis that the court possesses a
general jurisdiction to rewrite contracts. I have no doubt that there is no
such general jurisdiction."
The deputy judge then considered what he called an example, that is a
hypothetical situation in which a lessee on the same terms as the finance
leases was simply seeking reinstatement of the lease, so that the lessee could
proceed to give a 60-day notice to terminate the lease, sell under the agency
in condition 12, and claim a sum equal to 95 per cent of the net proceeds.
After considering the law, including Transag, the deputy judge concluded
that, had the equipment not been sold, he would have granted relief. In view
of his observations about not rewriting contracts it seems clear that that
would have meant no more than the reinstatement of the finance leases, not the
acceleration of the opportunity to sell the equipment and obtain the financial
advantage of the sale.
That is confirmed by what the deputy judge said when he returned ([1999] 2 AER
at p.826) from the hypothetical example to the actual facts. He said:
"In the present case, the equipment is no longer in the possession of the
plaintiff lessees. It has been sold. Relief from forfeiture would therefore
not make sense: first, a lease of equipment cannot meaningfully be restored if
the equipment is gone; second, the possession of the lessee of the equipment
cannot be restored to the lessee if there is no longer any equipment to
possess. If the plaintiffs had confined themselves before Harman J to asking
for the finance leases to be restored as if they had never been forfeited, the
court might well have been prepared to grant relief, perhaps on terms. They
asked instead for leave to sell the equipment, all the defendants' rights being
reserved. One of the defendants' rights in my judgment is to argue that as the
grant of relief could not now restore the status quo, there cannot be
jurisdiction to grant it. Restoration of the status quo includes restoration
of a state of affairs whereby the lessee has either: (i) to pay the secondary
rentals and abide by the other terms of the agreement if it wishes to continue
to use and possess the equipment; or (ii) to comply strictly with the 60-day
notice provision and the terms of condition 12 if it wishes to be entitled to
sell as the owner's agent. Neither of those possibilities would any longer
exist if relief from forfeiture were now purportedly granted. Accordingly, in
my view, there can be no jurisdiction to grant it."
Dr Oditah has submitted that the deputy judge was wrong in that conclusion.
There were three main strands in his argument: that the jurisdiction to relieve
from forfeiture is very wide and did not depend on the precise reconstruction
of the relationship of lessor and lessee; that the acceleration of the
opportunity for sale under condition 12 did not amount to rewriting the
contract; and that the sale under the order of Harman J should be seen as
purely facultative and `merits-neutral'. On the first of these points Dr
Oditah referred to the observations of Steyn LJ in Securities and
Investments Board v Pantell [1993] Ch 256, 283, citing Birks, An
Introduction to the Law of Restitution (1985) p.423. On the second point he
cited the decision of this court in Lancashire Waggon Co v Nuttall
(1878) 42 LT 465 and that of Judge Rich QC in Alf Vaughan & Co v Royscot
Trust [1999] 1AER (Comm) 856. On the third point he cited Larner v
Fawcett [1950] 2 AER 727.
As to the first point, I readily accept that (as Professor Birks puts it)
equity does not insist on exact counter-restitution but is willing to make
adjustments in money, so long as the results are practical and just. The Court
of Chancery, unlike common law courts, had the machinery for taking accounts on
which such adjustments could be based. But Dr Oditah's beguiling formulation
of `precise reconstitution' not being required tends to obscure the fact that
(as Sir Roy Goode put it) there would be nothing left of the finance leases
except for a few lines of condition 12(A). The decisions of the House of Lords
discussed at length earlier in this judgment all insist that the equitable
jurisdiction is to relieve against the forfeiture of property, not to
rewrite bargains (especially commercial bargains). The money paid into the
escrow account might be regarded as a clean substitution for the equipment
(though that is open to argument, since Michael Gerson contended for a sale at
an undervalue, and On Demand accepted that contention). But I cannot see how
the court could then grant relief from forfeiture in relation to a sum of
money, after the equipment had gone. As Dillon LJ said in Fuller v Judy
Properties (1991) 64 P & E C R 176, 184 the object of relief against
forfeiture is the continuation of a lease, not its extinction.
As to the Lancashire Waggon case, it establishes that the court will
permit accelerated payment by the hirer (or deferred purchaser) if the
provision for periodical payments was solely for the hirer's (or purchaser's)
benefit. In view of the importance of the tax element in finance leases, and
in the absence of any finding on this point by the judge (who did not, I think,
hear argument on it) I would not assume that the relevant provisions of the
finance leases were inserted solely for the benefit of On Demand.
In Larner v Fawcett the owner (F) of a thoroughbred filly agreed to
lease the filly to D, who placed her with a trainer (L). D failed to pay for
the filly's keep and L obtained judgment against him. The issue was whether,
as between L and F, L was entitled to a common law lien (which gave no right of
sale). This court upheld an order for sale of the filly (under what became RSC
0.29 r.4 and is now CPR Part 25.1(c)(v)) on the footing that the lien, if
established, would attach to the proceeds of sale. That order was
`merits-neutral'. In this case, by contrast, the sale inevitably altered the
court's power to grant relief.
I reach this conclusion with some regret, but I am not convinced that the
result is as deplorable as some commentators have suggested. The finance
leases were familiar commercial transactions between substantial companies in
which the court would not assume transactional inequality. Michael Gerson may
have obtained a windfall but the receivers achieved their larger objective,
that is the sale of On Demand's Creative Convergence division as a going
concern. The deputy judge (who was closer to the economic and tactical
realities of the matter than this court can be, although not so close as Harman
J was on 5 March 1998) said ([1999] 2 AER at p.826) that On Demand "took their
chance" in asking the court to sanction a sale. Dr Oditah is correct in
pointing out that the risk was not that the court might not `validate' the
sale, but that relief from forfeiture (so as to enable On Demand to benefit
from condition 12) would no longer be possible.
In my judgment that risk has proved fatal to On Demand's case. To hold
otherwise would to my mind require the court to extend the doctrine of
equitable relief from forfeiture in an unprecedented way, and moreover in a way
which would introduce unacceptable uncertainty into commercial transactions. I
would therefore dismiss this appeal.
Sir Murray Stuart Smith:
I gratefully adopt the statement of facts set out in the judgment of Robert
Walker LJ. The judge held that but for the sale of the equipment the Court
would have had jurisdiction to grant relief from forfeiture and in the exercise
of its discretion, would have done so on payment of the outstanding primary
rental on lease No 4 namely £3,892.54, 5% of the sale price which was
taken to be £251,617 (£12,580) and any sum to which the Respondents
were entitled by way of tax relief, which seems to have been taken at
£15,897 (but as to which there is some dispute between the parties as to
the correct figure). In this appeal the Appellants contend that the judge was
wrong in holding that the sale defeated the claim for relief from
forfeiture.
But the Respondents in their Respondents' notice contend that the judge was
wrong in holding that but for the sale, the Court had jurisdiction to grant
relief from forfeiture. Two principal arguments have been advanced by Sir Roy
Goode QC on their behalf:
(i) that the Court has no jurisdiction to grant relief from forfeiture in
ordinary commercial contracts, unconnected with interests in land.
(ii) that if the Court does have jurisdiction in relation to contracts other
than those involving interests in land, it is confined to cases where there is
a grant of a proprietary interest; a possessory interest is not sufficient.
I propose to deal with these points shortly because I am in agreement with the
views of the learned judge on them: I have also had the advantage of reading in
draft the judgments of Robert Walker and Pill LJJ and I agree with them on
these issues. In my view the first submission is not open to the Respondents
in this Court. In BICC plc v Burndy Corporation [1985] Ch 232 it was
held by this Court that the jurisdiction to grant relief from forfeiture arose
in relation to a proprietary or possessory right in personal property, in that
case intellectual property. Secondly, while it may be true, as Sir Roy
asserts, that there is no case where a purely possessory right has been held to
be sufficient, there are now a number of statements of authority that either a
proprietary or possessory interest is enough. (See Scandinavian
Trading Tanker Co. AB. v Flota Petrolera Ecuatoriana [1983] AC 694 per Lord
Diplock at p 702 and the Court of Appeal in the BICC case per Dillon LJ
at p 252A, the other members of the Court agreeing with his judgment).
In my judgment the real question in this appeal is whether the judge was right
to hold that the sale of the equipment defeated the Claimants' claim for relief
from forfeiture, because the Claimants could not be restored to the position
before the leases were terminated. In my opinion the answer to the question
depends on the proper construction and effect of the order of Harman J made on
5 March 1998. This has to be determined in the light of the facts and
circumstances known to the parties and the judge at the time. By their writ
the Claimants sought relief from forfeiture and an order for sale; the same
relief was sought on the notice of motion; the order for sale being sought was
an interim order pursuant to the provisions of RSC Order 29 R4.
That rule provides:
"The Court may, on application of any party to a cause or matter, make an order
for sale by such person, in such manner and on such terms (if any) as may be
specified in the order of any property which is the subject matter of the cause
or matter or as to which any question arises therein and which is of a
perishable nature or likely to deteriorate if kept or which for any other good
reason it is desirable to sell forthwith."
It was never in dispute that there was good reason why it was desirable to sell
the equipment forthwith. Both Claimants and Defendants were anxious to sell to
the Management Buy-out, since the price thereby obtained was substantially
higher than that obtainable on a breakup.
It seems to me to be plain that the object of the rule is to substitute for
the property itself the proceeds of sale so that the parties can argue their
rights as they existed at the time of the application on the basis of what the
position would then have been. It is certainly to my mind a bizarre result
that the very sale itself defeats one of these parties' rights. But this is
what the judge held.
That this never occurred to the parties or the judge at the time of the making
of the order seems to me to be equally plain. In his letter of 2 March 1998 Mr
Gerson wrote on behalf of the Defendants (p 336):
"I confirm our conversation of this morning when I put forward the suggestion
that Without Prejudice to the terms and conditions of our four leases and the
rights existing under those leases, that in order to enable the best realisable
price to be negotiated, in the interest of saving jobs at the Company, and to
preserve any goodwill, you should negotiate a sale to any interested party with
which we will cooperate as owner (but without our conferring any warranty as to
condition or use of the goods) subject to agreement on price with our valuer
and that the proceeds of sale should be paid into an escrow account giving you
the option to apply to the Court in accordance with the principles set out in
the Transag Haulage case to which you referred, within a period of 60 days and
with you bearing all the costs of the action in order to obtain clarification
of the law."
In his affidavit sworn on 5th March 1998 Mr Gerson made it
clear:
(i) "that the Defendants wished to sell the equipment at the best achievable
price." (para 3)
(ii) "that while the Defendants did not accept that the Claimants had any right
to relief from forfeiture. They accepted that there was an arguable case that
they did." (para 4)
(iii) "that in order to hold the position pending a full hearing of the motion,
the proceeds of sale should be put into an escrow account as contemplated by
the Notice of Motion. However the Defendants wish to reserve their right in
relation to such sales. ... It should be clear on the face of the order that
it is made without prejudice to the Defendants' contention that it is entitled
to the full value of the goods at the date of sale". (para 5)
The Defendants consented to an order for sale which "did not prejudice their
rights to raise arguments as to the true value of the equipment in due
course".
The dispute between the parties was whether the sale price, on which the 5%
was to be calculated was that attributed to it in the proposed management
buy-out namely £130,500 (or 132,839.96) or £251,617 - the value
attributed on a going-concern basis by the Defendants' valuers. The order of
Harman J reflected that; it was in these terms: (p 105)
`The Plaintiffs and each of them be at liberty to sell or otherwise dispose of
the equipment the subject of the finance lease agreements specified in the
schedule hereto and give a good and valid title to the purchaser or disponee
free from any claim by the Defendants or either of them upon the terms that the
net proceeds of the said sale or disposition be held in an escrow account
pending the hearing of the inter partes motion on notice in this action,
PROVIDED that the Defendants shall be at liberty hereafter to contend that the
breakup value of the said equipment was more than £130,500.'
The order is not expressed to be without prejudice to the Defendants' right to
contend that there was no right to relief from forfeiture at that time. But Dr
Oditah on behalf of the Appellants accepts, rightly in my view, that this is
implicit in the order. Both Dr Oditah and Mr Tomlinson have made it plain that
neither of them ever contemplated at that time that the sale of itself could
defeat the application for relief from forfeiture. There is nothing to suggest
that the judge contemplated the possibility. Such a result was wholly
antithetical to what was sought, what was consented to and what was ordered.
Had the point been raised, the judge would have had to determine the
application for relief from forfeiture before making any order for sale.
Assuming that Harman J would have decided the matter at that time in the way Mr
Laurence QC said he would have done but for the sale, relief would have been
granted on terms. In my judgment it is amply borne out by what happened before
Harman J, the transcript of which we have now seen. In his short judgment
Harman J makes it plain that in his view "relief from forfeiture is obviously
available". Had he in fact granted relief there and then, there would have been
no problem. Had that been done, it is apparent, it seems to me, that the
Respondents would have consented to the sale on the same terms that they in
fact did. They obviously they would not have insisted on a 60 day notice,
since they too were anxious to sell to the only purchasers in the market. In
the unlikely event that the Respondents had insisted on a 60 day notice, it
would I think have been possible to agree a sale with the purchaser, contingent
on the giving of the notice and payment of the price on expiry of the notice.
But that was not what either party wanted.
The order is wholly silent on the question of the parties' rights in relation
to relief from forfeiture. But in the same way that I accept that it is
implicit in the order that the Respondents could maintain on the final hearing
of the motion, that as at the date of the application there was no right to
relief - because for example relief only related to interests in land and not
to possessory interests in personal property - so it seems to me to be implicit
in the order that the rights of the parties were to be considered as at that
date and not be affected by the order for sale itself. In the light of
hindsight, it would have been better had this been spelt out in the order
itself. But I see no reason why the Court should not so construe the order
that this is implicit in it. At the time, had the matter been raised, it seems
to me both parties and the judge would have said `of course that is what we
mean'.
That this is the purpose and intent of Order 29 R4 is I think born out by the
case of Larner v Fawcett [1950] 2 All ER 727. The facts of the case are
that F agreed with D that D should take F's filly on lease for a certain period
on terms that money won on racing should be shared between them. D was
responsible for the up-keep and he should have a right to buy at any moment. D
agreed with L that L should train the horse. F learned that L had the horse
and that D owed money for its upkeep for which L was suing D. F wrote to L
asking him to `hold the filly on behalf of' F and that he would be responsible
for my expenses in connection therewith. But F later withdrew this. L started
an action against F for a declaration that he was entitled to a lien on the
filly in respect of her upkeep. He also sought an order for sale of the filly
pending determination of his right to a lien against F. The order was sought
under RSC Order 50 R2, which is in substantially the same terms as Order 29 R4.
The Court of Appeal upheld the judge's order for sale. L had only a possessory
lien; once he lost possession of the horse, he could no longer exercise his
lien. It would have been absurd and defeated the whole object of the order, if
it had had the effect of putting an end to the lien so that he could not
maintain his claim when the case came to trial. It is clear that when the
Court came to consider whether L had a lien, it was to do so as at the time of
the application and not at the time of the trial hearing.
Sir Roy Goode submitted that this argument was in the nature of a plea of
estoppel, and there was no such plea in the reply and defence to counterclaim.
I do not think there is any question of estoppel. Rather it is a question of
construing the order of the Court in the light of the facts known to the
parties and the Court at the time it was made. The judge's decision seems to
me to be very unjust to the Claimants. It is common ground that the rentals
payable over 36 months cover the cost of the equipment, interest and profit, so
that apart from the final instalment on the fourth lease of £3,892.54
(which would be payable if relief is granted) the Respondents had already
recovered their full outlay plus profit. Once the primary period is over, the
lessee has a valuable right, albeit a contractual and not a proprietary right,
to continue leasing at a nominal rental or to sell as agent for the lessor and
retain 95% of the purchase price. If relief is granted on the terms proposed
by the judge, the Respondents get everything they are entitled to under the
leasing agreements. Indeed they get accelerated payment, but provided no
attempt is made to obtain a discount for accelerated payment, that does not
prevent relief. The Respondents cannot insist on the letter of the agreement
if they suffer no detriment. Lancashire Waggon Company Ind v Nuttall and
others (1878) 42 LT 465.
If the law requires the Court to reach a conclusion which confers a
substantial windfall on the Respondents and this injustice on the Claimants, so
be it. But for the reasons which I have endeavoured to explain, I do not think
it does.
Lord Justice Pill:
I agree with the conclusion of Robert Walker LJ on the first issue and for the
reasons he gives. That there is jurisdiction to grant relief from forfeiture in
the case of finance leases emerges from the speech of Lord Wilberforce in
Shiloh Spinners v Harding [1973] AC 691 at 723, cited by Robert Walker
LJ:
"... it remains true today that equity expects men to carry out their bargains
and will not let them buy their way out by uncovenanted payment. But it is
consistent with these principles that we should reaffirm the right of courts of
equity in appropriate and limited cases to relieve against forfeiture for
breach of covenant or condition where the primary object of the bargain is to
secure a stated result which can effectively be attained when the matter comes
before the court, and where the forfeiture provision is added by way of
security for the production of that result."
A finance lease is in principle capable of attracting relief from forfeiture.
Michael Gerson's real interest in these leases was a financial one and the
forfeiture provision was added by way of security for the production of that
result.
That conclusion gives rise to a series of questions as to the circumstances in
which relief can arise and as to the form that relief can take. Submissions
have also been made upon the different but related question as to the rights of
the lessee during the currency of the lease. Dr Oditah relies upon the flexible
approach adopted by the courts when the interest of the vendor or lessor is
only financial. In Lancashire Waggon Company v Nuttall (1878) 42 LT 465
it was held that a contract on what was described as the "sale on hire system"
was in effect one of sale and the provision for payment by instalments was a
provision solely in favour of the purchaser. In these circumstances, the
purchaser was entitled to anticipate the time fixed for the transfer of the
property in the waggons by anticipating the time for payment. In the case of a
finance lease on the present terms, it is submitted, the court should permit
the lessee to terminate the agreement and, upon a forfeiture, to grant relief
and permit sale, provided the financial interests of the lessor are protected.
The somewhat elaborate provisions for termination in the agreement including
Clause 12 (A to E) should not be used to curtail or obstruct the exercise of
the lessees' rights. The lease makes detailed provision for the sale of the
equipment upon termination of the lease. It is sufficient for present purposes
to set out Clause 12(A):
"Subject to the Lessee having duly performed its obligations under this
Agreement and any other Lease Agreement upon termination of the leasing of the
Equipment at the end of the Primary Period or at any time thereafter by notice
from the Lessee in accordance with the provisions of this Agreement, the Lessee
is appointed the Sales Agent of the Owner to negotiate a sale of the Equipment
to a third party (not being a parent, subsidiary or associated company of the
Lessee) at the best price available, such price to be negotiated to and
approved by the Owner prior to the sale".
The lease also requires, as Robert Walker LJ has pointed out, 60 days notice of
termination by the lessee.
Sir Roy Goode QC relies on the principle that equity expects men to carry out
their bargains. The terms of the contract, including Clause 12, are framed to
meet the interests of both parties which include that of achieving the most
favourable treatment for the purposes of tax. The lessee is not entitled to buy
out the interest of the lessor as and when it sees fit. Nor, upon obtaining
relief against forfeiture, if the court has power and does grant relief, can
the lessee as a matter of course circumvent the provisions of the lease to
achieve a sale.
It is not necessary for the determination of this appeal to resolve the more
general questions which arise. That is because a sale of the equipment to a
third party was proposed by On Demand. Their solicitors' letter of 2 March 1998
referred to the "purported" forfeiture and stated:
"In those circumstances, but for the appointment of Joint Administrative
Receivers to the Company, the economic benefit which Michael Gerson (Finance)
plc could expect to derive from the Lease Agreements would amount to the unpaid
rent referred to above, together with 5% of the net sale proceeds upon a sale
being negotiated by the Company. We understand that the assets the subject of
the Lease Agreements have a material value, possibly exceeding
£130,000.
In those circumstances, we have advised our clients that, on the basis of the
equitable principles outlined in the recent case of Transag Haulage Limited
v Leyland DAF Finance plc, our client is entitled to make application to
the court for relief from the forfeiture of the Lease Agreements and an order
that the Company may exercise its rights as your agent to sell the assets the
subject of the Lease Agreements in accordance with the provisions of clause
12(A) and 12(E) of the Lease Agreements, thereby preserving the Company's clear
interest in the proceeds of sale of the leased equipment.
As you are aware, our client is seeking purchasers of the Company's business as
a going concern and would seek to include the assets the subject of the Leased
Agreements within any such transaction. Could you please confirm by return of
fax and in any event by 3.00 pm this afternoon that our clients may proceed to
negotiate such a sale as envisaged by Clause 12 of the Lease Agreements,
failing which our clients will make application to the court for the relief
referred to above and an order that you pay the costs of such application,
without any further notice to you whatsoever."
The proposed sale had the urgent and larger object of keeping the business
going. Michael Gerson agreed to the sale and Harman J made an order authorising
the sale. A proviso to the order left Michael Gerson free to contend that the
value of the equipment was more than the £130,500 for which it was to be
sold.
That sale having occurred, I agree with Robert Walker LJ that the court cannot
grant relief from forfeiture in relation to the sum of money obtained on the
sale. On Demand are no longer lessees claiming relief. Whatever flexibility may
be shown by the courts in granting a lessee relief from forfeiture, it does not
in my judgment extend to a claim upon a sum of money obtained on sale of the
leased equipment following a resolution of the matter by sale of the equipment
at the request of the lessee.
The argument which, as I understand it, has commended itself to Sir Murray
Stuart-Smith is that the order for sale in this particular case reserved to On
Demand the right to apply for relief against forfeiture, notwithstanding the
sale, as if they were still lessees. It was an implied term of the order, it is
suggested, that the rights of the parties were, upon a subsequent application
for relief against forfeiture, to be considered as at the date of and
unaffected by the order for sale.
To the extent that the argument turns upon the construction of the order made
by Harman J, I agree with Sir Murray Stuart-Smith. It would be open to parties
to agree that, notwithstanding a sale, their rights should be determined as if
a sale had not occurred. I do not exclude the possibility that the
circumstances might be such that an agreement to that effect could be implied.
I am, however, unpersuaded that such an agreement can be implied in present
circumstances. It would have been open to On Demand to seek from Harman J
relief against forfeiture. Questions could then have arisen, for example, as to
whether the contractual requirement of 60 days notice to terminate was a bar to
immediate sale. On Demand took an alternative course for what appeared to them
to be good commercial reasons. In the absence of agreement by Michael Gerson,
they could not have both the sale they sought and the right to claim relief
against forfeiture as if they had not taken that course.
On Demand argue, and Dr Oditah has done so forcefully on their behalf, that
sale is not as a matter of law a bar to their money claim but that is quite
different from the argument that relief can be sought as if there had not been
a sale. I find nothing to justify a finding that Michael Gerson agreed to the
latter arrangement.
By agreeing that On Demand retained the "option to apply to the court in
accordance with the principle set out in the Transag Haulage case"
Michael Gerson was not agreeing that the point could be argued as if no sale
had occurred. Had that suggestion been made at the hearing before Harman J,
which it was not, Michael Gerson would have been startled. Consideration of the
transcript of the hearing before Harman J in my view supports the conclusion
that there was no such agreement. There is no record of a suggestion by Dr
Oditah at that hearing that there was any such agreement. The submissions to
the judge were directed mainly to whether the proviso to the proposed order
which Michael Gerson was seeking ("provided that the defendants shall be at
liberty hereafter to contend that the break-up value of the said equipment was
more than £130,500") was necessary or appropriate. Mr Tomlinson, for
Michael Gerson, initially submitted that:
"... the position is this that on the face of the matters, we are the owners of
the equipment, entitled to possession, subject to an arguable right to relief
from forfeiture. The effect of this order is to transfer, against our will, the
ownership of goods that is presently vested in us. My Lord, we can see the
common sense of that in the circumstances that have arisen, but what we say is
simply this -- that no order should be made which has the effect of
definitively depriving us of our rights in relation to those goods."
He added that: "what it [the order for sale] would have the effect of doing is
transferring our rights from the goods to the proceeds of sale that they say
they have". He went on to argue for the proviso. Dr Oditah's submissions were
directed to the same point. In the course of argument, the judge stated:
"How does that prejudice you Dr Oditah? You will have in your hands, as
receivers, the whole of this fund, you will be able to seize the running loss
of the wages and loss in the business which is one of the things you will
urgently need to do, I understand that. You will be entitled to retain the fund
until this was determined as against your appointing back the debenture
holder."
Dr Oditah opposed the insertion of the proviso.
In his judgment, the judge stated:
"This is an ex-parte application on notice in an action which I think has now
been started but was an intended action when brought before me yesterday. The
intended defendants [Michael Gerson] have appeared. They say that the matter is
coming on with extreme speed and that they are not in a position to
definitively establish their position. That seems to me a perfectly reasonable
attitude.
The order sought by the ex-parte application is that the plaintiffs [On
Demand], who are two companies in administrative receivership, be at liberty to
sell equipment, the subject of financial disagreements which are specified and
to give a good and valuable title to the purchaser or disponee, free from any
claim by the defendants or either of them. So far, no opposition is made to the
follow-up from the order upon the terms that the net proceeds of the said sale
be held in an escrow account pending the hearing of the inter-partes
motion."
In the course of considering the differing evidence as to value, and
concluding that the difference was very small, the judge did say that "relief
from forfeiture is obviously available". I read his comment as indicating that
in his view relief was at that stage available and not as indicating a view,
still less an agreement, that it would survive the sale.
Finding that it was appropriate to make the order, Harman J stated:
"It seems to me the order will enable the plaintiffs to sell and to give good
title, to put an end to the running liability for wages which is causing loss
to the debenture holder, eventually, the creditors eventually of the companies
and will effectively discharge the difficulty which they are facing at the
moment. On the other hand, the defendants will be protected by the insertion of
the proviso and it seems to me the plaintiffs are not caused any substantial
prejudice thereby."
Agreement by Michael Gerson that On Demand could sell but must be treated as
if they were still lessees would have involved a substantial concession. It
would have been a most unexpected concession in circumstances in which it was
On Demand who were making the running towards achieving a sale. I have found
nothing to suggest that Michael Gerson entered into any such agreement or that
such an agreement can be implied in the circumstances.
On Demand had recourse to the court and invited the court to exercise its
power, as an interim remedy, to order the sale of relevant property. The
existence of that power is not doubted but its exercise does not in my judgment
bear upon the question whether, in subsequent proceedings, the parties are to
be treated as if their relationship was as it existed at the date of the
interim order and as if the order had not been made.
For these reasons, as well as those stated by Robert Walker LJ, I would
dismiss this appeal.
Order: Overall order that respondent receives 60% of their costs.
Interim order for costs made in the sum of £12,000, subject to a detailed
assessment, to be paid within 7 days. Submission to be given in writing as to
grounds to appeal.
(Order does not form part of approved judgment.)
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