Case No: A3/2001/0488
Neutral Citation: [2002] EWCA Civ 128
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN’S BENCH DIVISION 
LEEDS DISTRICT REGISTRY, MERCANTILE COURT
His Honour Judge McGonigal
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Tuesday 19th February 2002
Before :

LORD JUSTICE WALLER
LORD JUSTICE RIX
and 
MR JUSTICE WILSON
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Between :

	Stinnes Logistics AG 	Defendant/
Appellant	
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	Palgrave Brown (UK) Limited	Claimant
Respondent	

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(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)
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David Cavender (instructed by Theodore Goddard 150 Aldersgate Street, London EC1A 4EJ) for the Appellant 
Michael Booth QC and Louis Doyle (instructed by DLA Solicitors Princes Exchange, Princes Square, Leeds LS1 4BY) for the Respondent 
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Judgment
As Approved by the Court
Crown Copyright ©

Lord Justice Waller: 
Introduction 
1.	This is an appeal from the judgment of HH Judge McGonigal delivered on 23 February 2001.  He gave judgment for £50,000 plus interest in favour of the claimants (and in this court, the respondents, Palgrave Brown (UK) Limited, (“PB”).  There was and is no issue that under a contract made in March 1999, the appellants Stinnes Logistics AG (“Stinnes”) had agreed to pay PB £50,000 if PB incurred at least that amount in due diligence costs in bidding for the shares of a company owned by Stinnes, RK Timber Limited, (“RKT”).  The issue both before the judge and before us related to the meaning of the word “bid” and/or to the question whether there were conditions of the contract which precluded PB from succeeding on their claim that a “bid” had been made.  
2.	There is no appeal against any findings of fact, and it is thus possible to take certain of the history and relevant background from the judgment. 
Bckground 
3.	In late 1998 “PB” was looking for possible acquisitions and became interested in “RKT” which was owned by (“Stinnes”).  PB’s then advisors PricewaterhouseCoopers contacted Stinnes but were told that Stinnnes had given another potential buyer of RKT a period of exclusivity so they could not enter into negotiations with PB.  
4.	In February 1999 Herr Haastert, the in-house lawyer for Stinnes, contacted PricewaterhouseCoopers to say that the period of exclusivity had ended and they were able to enter into negotiations.  Herr Haastert wanted to encourage PB to show interest in RKT because he thought that it would be a good idea to have a potential second purchaser for the business, if only to see whether the price that Stinnes was being offered for RKT by the other buyer was a reasonable one.  That other buyer was a company called J.P. Corry Group Limited (“Corry”) although its identity was not disclosed to PB until a bit later.  PricewaterhouseCoopers were also advising Corry so PB switched to using KPMG as their corporate finance advisers.  The corporate finance partner dealing with the matter in KPMG Leeds was Mr Tony Sharp and he was assisted by Mr Jonathan Shipton.  
5.	RKT had two sides to its business.  PB was interested in the part of RKT which manufactured roof trusses and dowels.  RKT also had a merchanting business.  PB is the result of a management buyout of part of the Jewson Group and was precluded by the terms of the buyout from owning a distribution business for more than a year.  Accordingly the idea was that the distribution side of RKT would either be bought by a third party or sold on to a third party by PB.  
6.	On 1 March 1999 Mr Sharp of KPMG and Mr Fawcett the Managing Director of PB went to Germany to meet Herr Haastert.  He gave them information about RKT and disclosed that Corry was the other bidder.  He also agreed to put them in touch with Mr Hughes, the Managing Director of RKT, so that they could get further information about the business.  There was a meeting with Mr Hughes on 4 March 1999 at which more information was given about RKT.  
7.	On 9 March 1999 Mr Sharp rang Herr Haastert to tell him that PB continued to be genuinely interested in acquiring RKT and that PB would hope to have a conditional offer submitted to him by the end of that week.  Herr Haastert said that Corry were aiming to complete the purchase of RKT by 25 March but that he thought that was unrealistic.  Both in the meeting on 1 March 1999 and from this telephone conversation Mr Sharp got the clear impression that Herr Haastert was frustrated at the way Corry were going about the proposed acquisition.  Herr Haastert encouraged Mr Sharp to get PB to submit an offer to Stinnes for RKT “no matter how heavily caveated”.  Accordingly on 12 March 1999 KPMG wrote to Stinnes setting out an indicative offer by PB for RKT.  This was an offer to pay £15.5 million to discharge the debts of RKT to other members of the Stinnes Group and to its bankers.  So far as PB and its advisors were concerned this offer was pitched at a level which they thought, from such indications as they had picked up about the Corry offer, would be attractive to Stinnes.  It was subject to contract and to various conditions.  
8.	On 15 March Herr Haastert rang Mr Shipton of KPMG and told him that the indicative offer was too low and that he thought that the Stinnes Board would reject it.  In the indicative offer PB had asked for a period of exclusivity; Herr Haastert told Mr Shipton that he thought it unlikely that Stinnes would agree to give exclusivity to PB because of the effect on Corry.  Following that telephone conversation Mr Shipton reported it to Mr Sharp.  They discussed it and then contacted Mr Fawcett, the Managing Director of PB.  Mr Fawcett agreed with KPMG that to proceed with the possible acquisition of RKT would involve PB in substantial costs and that it was unwise to incur such costs when Corry were apparently very much further advanced in the acquisition process unless PB could either get a period of exclusivity or persuade Stinnes to underwrite PB’s costs in putting together a further bid.  Mr Sharp (with Mr Shipton listening in) rang Herr Haastert back on 15 March 1999 and told him that PB were not willing to continue with the possible acquisition of RKT unless they got a period of exclusivity or Stinnes underwrote part of PB’s costs.  
9.	What the judge in the above paragraph did not refer to was a factor on which Mr Cavender places some reliance.  During the above conversation it seems that the phrase ‘contract race’ was used, that phrase appearing in the notes of both parties to the conversation, and in Herr Haastert’s note appears in the following way: 
“PB would basically be prepared to accept a contract race but, in the event that PB loses, they would want a certain proportion of the costs of this to be refunded (approx £50,000).  Although this amount seems negligible in relation to an increase in the purchase price which could possibly be achieved, I have already rejected this unreasonable request once.” 
I will return in paragraph 18 to the significance of the use of that phrase.  
10.	Herr Haastert said he was unfamiliar with the idea of a vendor underwriting a part of a potential buyer’s costs and Mr Sharp explained what he perceived to be the advantages to Stinnes by doing so.  He explained that it could be to Stinnes’ advantage to underwrite the costs and keep PB as a potential bidder for RKT for two reasons.  First, PB might make a better offer for RKT than Corry, and secondly, the presence of another potential buyer could encourage Corry to be more interested and deter Corry from trying to negotiate a better deal for itself.  Herr Haastert said that he did not think that the Stinnes Board would agree to such an arrangement but that he would discuss it with them.  It appeared to Mr Sharp at the end of that conversation that it was unlikely that the negotiations would continue.  
11.	On 17 March 1999 Herr Haastert rang Mr Shipton and told him that the Board of Stinnes had agreed to PB being allowed to do limited due diligence on RKT (PB was a competitor of RKT) but that he had no agreement from the Board of Stinnes on the proposal that Stinnes should underwrtite part of PB’s costs.  Mr Shipton rang Mr Fawcett to report this and advised Mr Fawcett that PB should not go ahead with the due diligence unless and until Stinnes agreed to underwrite part of the costs.  
18th March 1999 
12.	.On 18th March 1999 Herr Haaster rang Mr Shipton, and the judge found the relevant terms of that conversation were accurately recorded in Mr Shipton’s note which stated as follows: 
“Further to yesterday’s teleconversation with H. Haastert he called me to confirm the following; 
He has received approval from the Board that we can conduct a full due diligence exercise. 
The due diligence exercise should end by April 22. 
The Board have offered to make a contribution to our cost up to a maximum of £50,000. 
They would wish at 22 April to be at a point where they can take a decision to go with Corry or Palgrave Brown. 
They do not want to be haggling over contract details at 22 April [therefore] they wish to commence this process now. 
I asked Herr Haastert how he anticipated drafting the contract – he suggested the speediest way would be for Stinnes’ lawyers to draft it – however he recognised that UK purchasers liked to take control of the draft. 
He said he would formally respond in writing although this is not from the Board.  The Board will respond via Haastert.” 
13.	As indicated in the conversation Mr Haastert then confirmed the offer that was being made by Stinnes in a letter faxed to KPMG on the same day.  There was some suggestion at the trial and before us, that the conversation may itself have been partly contractual with the fax then overriding that conversation where the fax was inconsistent.  It may not matter but it would seem to me that the confirmation in writing was intended to be the formal offer suggested in the conversation.  On any view the fax is the key document and it is the construction of the terms of this document on which the case turned below and on which this appeal turns.  The document provided: 
“We take pleasure to confirm to you that 
Palgrave Brown are invited to submit to us a bid for all the shares of RK Timber no later than Thursday April 22 1999 
Should Palgrave Brown’s bid not be awarded the contract we will reimburse Palgrave Brown for costs incurred during their Due Diligence exercise up to a maximum amount of £50,000 
You are invited to submit to us your draft of a share purchase agreement so that our respective lawyers can start working on it as soon as possible and have all the necessary documents ready for signature on April 22 or earlier 
We extend this invitation to bid to Palgrave Brown on the premise that after learning more about RK Timber during their Due Diligence exercise they will materially improve the bid submitted by you on their behalf on March 12 especially in regard to the total amount of consideration offered and the purposed instalments for paying this consideration. 
We have informed Mr Hughes accordingly and can assure you that you will receive the same unmitigated co-operation from him that you can expect from us. 
Your draft should be sent to our lawyer Mrs Julie Stanbrook of Theodore Goddard, 150 Aldersgate Street, London EC1A 4EJ.  Tel: 0171-880-5757. 
In your investigations into the RK Timber Pension Fund you will be assisted by Mr Mark Catchpole of Theodore Goddard (Tel: 0171-880-5777).” 
14.	It was the contention of Stinnes before the judge and before us that what Stinnes were doing was inviting PB to make a bid by 22nd April in such a form that it was capable of acceptance by Stinnes, and offering to pay £50,000 towards the costs of the expenses of due diligence if Stinnes chose not to accept the same.  They further contended that the obligation to pay was conditional on all necessary documents in writing being available to be signed on 22nd April, and on the bid exceeding the indicative bid already made on 12th March 1999.  
15.	The contention of PB was that they were being invited to incur the cost of carrying out the due diligence, to make a bid which could still be subject to contract and no more capable of acceptance than the indicative bid made previously, and be reimbursed £50,000 of their costs if that bid was unsuccessful.  They suggested that by the third and fourth paragraphs they were simply being invited to take steps to see that contractual documents were ready on 22nd April or earlier, and to make a bid which exceeded the 12th March terms in order to have the best chance of succeeding against the rival buyer; and that compliance with those invitations was not a pre-condition of the payment of £50,000.  
16.	On 19th March a note of Herr Haastert suggests that PB through Mr Sharp accepted the offer.  The note records Mr Sharp as saying that 22nd April seemed short, and as Herr Haastert saying there would be no extension.  It further records Mr Sharp as saying that £50,000 was low, and thus asking for “the draft” to come from Stinnes’ lawyers rather than from them, contrary to the suggestion in the third paragraph of the letter of 18th March.  
17.	It is not in issue that whatever the offer meant, PB accepted it and began the due diligence process.  They ultimately incurred costs of over £100,000.  
18.	The history thereafter can be taken reasonably shortly.  Both sides would rely on different parts of that history as supporting their construction of the offer.  Whether or not the events or the language used during this period were strictly admissible as an aid to construction, I do not think any help is to be gained because they are in fact consistent with either alternative.  I say that because it is important to recognise that on PB’s favoured construction, even though a “bid” incapable of acceptance for contractual purposes would secure £50,000 if Corry were chosen, a bid which was not capable of acceptance as at 22nd April stood less chance of beating Corry, and indeed would only stand that chance if Stinnes were convinced that PB were so close to making a bid capable of acceptance that Stinnes were prepared to choose them.  On Stinnes’ favoured construction a bid capable of acceptance as at 22nd April was a pre-condition to payment of £50,000, but even if it was clear as it became that PB could not produce such a bid, it was still in Stinnes’ interest to see whether PB could be persuaded to increase their “subject to contract bid” both to persuade Corry to agree terms favourable to Stinnes, and/or to provide Stinnes with the option at the last moment of rejecting Corry and taking the risk that PB would ultimately make a bid capable of acceptance.  In this context it is I think right to stress two things.  First, in relation to the concept “contract race”, a phrase undoubtedly used in conversation between Herr Haastert and Mr Sharp on 15th March and a matter on which reliance is placed by Mr Cavender, even on the construction favoured by Stinnes, this was not a “contract race” as that term is usually understood in the property world.  A “contract race” involves parties racing to have available a formal contract available for signing, whereas in the instant case, even on Stinnes’ construction, the concept was of parties competing to have available as at a certain date best offers capable of acceptance.  In addition, although what was happening could be said, as Mr Cavender suggested, to be akin to a sealed bid situation, it did not have an element which is sometimes present when that procedure is used.  In a sealed bid situation it is often the case, as I would understand it, that there is an agreement between the persons who enter the competition, and the owner of the property being sought, that the owner will open the bids on the day allotted and will be bound to accept the highest bid.  Stinnes set a deadline of 22nd April, but did not bind themselves either with PB or with Corry, to consider the bids as at 22nd April and accept the higher bid as at that date.  They left themselves completely free to extend the time if persuaded to do so; to reject one party as at 22nd April and negotiate with the other; or to reject both offers and try and do better thereafter.  
19.	The history from 18th March was as follows.  On 31st March at a meeting between representatives of Corry and Stinnes, Corry and Stinnes got a long way down the track of agreeing the contractual documentation that would apply as between them if Corry were accepted as the purchasers.  The note of that meeting demonstrates that Stinnes were not prepared to give preference to Corry over PB and were maintaining the position that 22nd April would be the day when a decision would be taken.  
20.	By 15th April PB appreciated that they were not going to be in a position to make a formal offer capable of acceptance by 22nd April.  This was made clear at a meeting with Herr Haastert on 15th April.  The notes of that meeting from both sides indicate (1) that PB had still not completed certain aspects of the due diligence in particular in relation to that part of the business they would have to sell; (2) that PB was still anxious to acquire RKT, and Stinnes were anxious to have PB continue to try and buy RKT albeit if Stinnes were ultimately persuaded to go with PB that would mean postponing the completion date; and (3) Herr Haastert was making clear to PB there would need to be a very good reason for rescheduling.  
21.	It was in that context that PB made what the judge held was a bid by orally submitting, as Herr Haastert put it in his internal note, “a new offer of £12 million, payable in its full amount on completion of the contract; in addition 50% of the net proceeds from the sale of the assets of the RK Timber trading activities, as long as these are in excess of £4 million.”  That offer enabled Herr Haastert to do a comparison of the Corry and PB offers for the benefit of the Stinnes’ board albeit he made clear in the comparison that he could not know where PB were on certain aspects.  He recorded in relation to pensions for example that PB’s position was “still not clear; approximately £1million in 2 to 3 years time”.  
22.	On 16th April Herr Haastert rang Mr Sharp seeking to explore ways in which he could represent PB’s proposal to the Board which gave the Board a real choice as between Corry and PB.  What he was seeking was more certainty that PB would complete if they were the preferred buyer.  That led to PB continuing to get their lawyers to deal with points on the drafting of the contract which would be the contract if a deal was done; it led to PB getting their bankers to write a comfort letter relating to their ability to put up the money (see the letter from Murray Johnstone to KPMG of 16th April 1999).  
23.	As between Corry and Stinnes things moved forward to the extent that Cory could write on 21st April 1999 in the following terms: 
“I write to confirm that, subject to a few minor drafting points, we have now agreed all the legal documentation with Mr Haastert and your lawyers and the final copies of the transaction documents are with Theodore Goddard.  In addition, I would also like to confirm that we have received all necessary consents and approvals from our shareholders including the institutions and our banks and that the required finance to fund the acquisition has been agreed and is in place. ...”  
24.	As between PB and Stinnes things also moved forward.  Negotiations took place in relation to the pension fund, and the capping of warranties which did not reach finality.  A letter of 22nd April from Stinnes to Mr Sharp and to Mr Fawcett of PB spelt out the position that had been reached.  It spelt out roughly the suggestions in relation to pension schemes.  It noted that no agreement could be reached on a cap on the warranties.  In the penultimate paragraph it said: 
“Presumably there is not going to be a sharing of the proceeds from the sale of the merchandising activities any longer, and in exchange for that you will try to up your cash bid.  In this regard, we would like to caution that whilst the amount of your bid is – of course – totally at your discretion, a purely cosmetical increase to the £12 million currently discussed could possibly not be sufficient to give your bid the necessary advantage over its competitor.”  
25.	That allowed Herr Haastert to prepare a further comparison as between Corry and what was thought to be the position with PB as at 22nd April.  It is right to emphasise that at no time did PB put forward any proposal that was not subject to contract.  Indeed, Mr Sharp’s response to the above letter of 22nd April is headed “Without prejudice and Subject to contract”, is dated 23rd April and said:
“you have correctly recorded our understanding of how best to deal with the surplus in the pension schemes. ...; 
the cap remains a major issue for us but, in principle, we would seek to set a cap at a level of £8 million; 
with regard to the consideration, our offer of £12 million cash ...  However, we are prepared, subject to the conditions pertaining to our former offer, to add £100,000 to this figure as a contribution towards your costs ...; 
we are mindful of your comment that our offer does not give us an advantage over our competitor.  We had hoped that £12.1 million in cash at completion did give us an advantage.  It represents a clean deal and, as such, involves no uncertainty about what may be or may not be delivered at a future date especially one that extends over a number of years.  
We look forward to your decision in the near future.”  
26.	That offer from PB, although more reliable in one sense as time had moved on and some due diligence had been done, was worth no more than the original indicative offer both in worth and because it was incapable of acceptance by Stinnes.  Furthermore, although drafts of contract documents were passing between the lawyers, there were still points on detail which were unresolved as at 22nd April.  
27.	In the event Stinnes accepted the Corry bid.  It also negotiated a slight variance in relation to the formal contract offer made by Corry.  
28.	BP then made a claim for £50,000 but that was refused by a letter dated 10th May from Herr Haastert spelling out the reasons.  
29.	As I have said I do not think that any assistance can be gained by either party in aid of their suggested construction from what happened after acceptance of the offer contained in the 18th March letter.  The position is that the offer must be construed in the context of what was happening as at 18th March.  Both sides when seeking to paint the relevant picture emphasised what “commercial men” would be seeking to achieve.  For Stinnes, the emphasis was on the unlikelihood that Stinnes would be willing to pay £50,000 in order to obtain an offer no more capable of acceptance than, and no better than, the indicative offer they already had.  What they desired naturally was two offers capable of acceptance, or at the least so close to being so that the last wrinkles could be ironed out immediately acceptance was announced.  
30.	On the PB side the emphasis was on the unlikelihood of PB, knowing they were a long way behind Corry, being prepared to continue spending money in a competition which they had only a small chance of winning without some compensation, and on the commercial advantages to Stinnes of having PB in the competition both because of the possibility that PB might actually come up with an offer which Stinnes would prefer to accept, and because of the fact that the presence of a competitor might help increase the price that Corry were prepared to pay by something more than the £50,000.  
31.	Again one sees the force of the points made on both sides.  It is when there is force in the points made as to what two contracting parties would be likely to be seeking from a bargain that it becomes important simply to concentrate on what they in fact agreed.  Contracts often result from each side seeking to achieve a commercial objective, but agreement is only ultimately reached because the words used are not plain beyond argument.  
32.	I come back therefore to the wording of the letter of 18th March.  Stinnes will succeed on two possible bases.  They will succeed if the word “bid” in the first paragraph means “offer capable of acceptance”; and they will win even if the word “bid” includes an offer subject to contract, provided that the offer to pay £50,000 was subject either to the condition that PB would have all the necessary documents ready for signature on April 22nd or earlier, or that PB would materially improve the bid made on 12th March.  
33.	It seems to me that bid would be unlikely to mean different things in different parts of the letter.  If Stinnes are right on their first argument, then when the word bid is used in the first paragraph and indeed in the first line of the fourth paragraph, it means something different from when it is used in the fourth line of the same fourth paragraph.  It is only the wording of the third paragraph and the reference to having “all the necessary documents ready for signature” which enable any argument to be put forward that the word bid in the first paragraph has the meaning of offer capable of acceptance.  But for those words to alter the meaning of the word bid, that third paragraph must be part of the terms on which the £50,000 is offered.  In my view they are not, for reasons on which I shall expand in considering whether the offer was subject to conditions.  
34.	It is I think convenient to start consideration of the question whether the third and/or fourth paragraphs are conditions subject to which the £50,000 was offered with the consideration of the fourth paragraph.  That paragraph is not in the language of condition.  It “invites” and it invites “on the premise”.  It is a warning in the context of negotiations that if PB do not improve their bid, they are unlikely to succeed.  The whole idea of allowing PB to do due diligence as Stinnes knew, was for PB to check whether things were better than they assumed or worse than they assumed.  For Stinnes to tie PB to having to put in a higher bid whatever due diligence showed in order to qualify for the £50,000 would have required much clearer language than that contained in the fourth paragraph.
35.	The third paragraph is also in the language of invitation.  On its ordinary meaning it either means that PB were being invited to “have all necessary documents ready for signature on 22nd April or earlier,” or, and this seems to me the more natural meaning, were being invited to submit their draft of the share purchase agreement so that the respective lawyers could start work as soon as possible so that the “respective lawyers … have all the necessary documents ready for signature on 22nd April or earlier.”  Again the language is not one of condition; the invitation is made to enable lawyers to get the documents ready; it is not said that if the lawyers fail there will be no liability to pay the £50,000; and the words “or earlier” seem to me to confirm that it is not intended that the third paragraph should impose a condition of there being on 22nd April an offer in writing capable of acceptance.  
36.	I think it is possible to see that the offer of 18th March fulfilled two functions, the first being addressed in the first two paragraphs and the second being addressed in the second two paragraphs.  The first two paragraphs offer £50,000 if PB carry out due diligence and make a bid no later than 22nd April.  The second two paragraphs invite PB to act in a certain way if they are to stand a better chance of being accepted as the purchasers.  In other words I favour the construction advocated by PB and accepted by the judge.  
37.	There is no challenge to the judge’s finding that a bid was made if his construction was the right one, and thus in my view this appeal must be dismissed.  
Lord Justice Rix: 
38.	I agree.  
Mr Justice Wilson: 
39.	I also agree.  

Order: The Appeal be dismissed; That the Appellant do pay the Respondent’s costs of and caused by the Appeal by 4.00 pm on 5th March 2002 such costs having been agreed by the parties in the inclusive sum £20,289.00.
(Order does not form part of approved judgment)