Case No: A3/2001/0996
Neutral Citation Number:  [2002] EWCA Civ 176
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN’S BENCH DIVISION
COMMERCIAL COURT
(Mr Justice Toulson)
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Thursday 21 February 2002
Before :

THE VICE-CHANCELLOR
LORD JUSTICE ROBERT WALKER
and 
LORD JUSTICE RIX
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Between :

	CORAL GROUP TRADING PLC
	Claimant/
Appellant	
	- and -
		
	HILTON GROUP PLC 
(FORMERLY LADBROKE GROUP PLC)	
Defendant/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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Edward Bannister QC and Andrew Onslow (instructed by Messrs Allen & Overy) for the Appellant
David Chivers (instructed by Messrs S J Berwin & Co) for the Respondent
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Judgment
As Approved by the Court
Crown Copyright ©

Lord Justice Rix: 

1.	Tote Direct Limited (“Tote Direct”) began to operate in 1992 as the subject of a joint venture agreement between its original 50/50 shareholders, the Horserace Totalisator Board (“the Tote”) and Bass Leisure Group Limited (“Bass”). Its business is to operate a computerised service by which betting on the Tote can be done off-course through licensed betting offices. Bass owned a significant betting business which operated under the name of Coral.

2.	In 1997 a third joint venture participant appeared on the scene in the form of Ladbroke Racing Limited (“Ladbroke”), which also owned a significant betting business. The original joint venture agreement between Tote and Bass (the “1992 JVA” dated 25 February 1992) gave way to a new joint venture agreement between Tote, Bass and Ladbroke (the “1997 JVA” dated 29 August 1997). Tote Direct’s shares were now held equally between the three joint venture participants. 

3.	On 31 December 1997 Bass plc sold its Coral betting business to the defendant, then called Ladbrokes Limited. The effect of that sale and of ancillary agreements between Tote and Ladbroke was to turn the three-party joint venture constituted by Tote Direct back into a two party joint venture, but this time between the Tote and Ladbroke. Although the defendant received Bass’s one-third shareholding in Tote Direct as part of the sale of the Coral business to it, it ceded by agreement with the Tote half of that holding to the Tote so as to preserve an equal shareholding in the hands of the two surviving participants, the Tote and Ladbroke. I shall call the agreement of 31 December 1997 the “Bass sale agreement”.

4.	Unfortunately for the defendant, the Monopolies and Mergers Commission (the “MMC”) was then asked by the Secretary of State for Trade and Industry to investigate the merger of the Coral and Ladbroke betting businesses from the point of view of its implications for the public interest, and in its report (“Ladbroke Group plc and the Coral betting business”) of 23 September 1998 it recommended that the defendant should be required “to divest the Coral betting business which it acquired from Bass” (at para 2.212 of the report) within six months. The Secretary of State on the same day announced that he accepted that recommendation. The defendant was therefore required to complete the resale of the Coral betting business by 23 December 1998.   

5.	On 22 December 1998, one day within the deadline, the defendant completed a sale to the claimant, then called Accumulator Acquisitions Limited and now called Coral Group Trading Ltd (“new Coral”). I shall call this agreement the “Coral sale agreement”. This appeal is concerned with preliminary issues of construction which arise under a clause of this agreement which deals with the using by the defendant of reasonable endeavours to procure the acquisition by new Coral of an interest in Tote Direct equivalent to the interest which Bass had had immediately before the Bass sale agreement. 

6.	The relevant clause is clause 4.14.2, which provides as follows:
“In relation to Tote Direct:
(a)	the Vendor agrees to use its reasonable endeavours to procure that the Purchaser or a Coral Company acquires an interest in Tote Direct equivalent to the interest held by Bass immediately prior to 31 December 1997 subject to the consent of the Horserace Totalisator Board (the other participant in Tote Direct) whose consent the Vendor agrees to use its reasonable endeavours to obtain; and
(b)	it is agreed as between the Purchaser and the Vendor that The Purchaser or a Coral Company shall acquire its interest in Tote Direct equally from the two existing participants and that the acquisition of the interest shall not require a further payment by the Purchaser to the Vendor or a member of the Vendor’s Group or any payment by a Coral Company.”
The reference in sub-clause (a) to 31 December 1997 is of course a reference to the date of the Bass sale agreement.

7.	If the only possible relevant “interest” which Bass had held in Tote Direct immediately before the Bass sale agreement was its one-third shareholding, then the present dispute between the parties to this litigation would not have occurred; for the Tote, which had received half of Bass’s shareholding from the defendant (for nothing) as part of the agreement by which it consented to the transfer of Bass’s shares in Tote Direct to the defendant at that time, was willing to transfer a similar number of shares to new Coral in the light of the Coral sale agreement. We were told that the Tote had been willing to cede for nothing what it had acquired for nothing. The other half of Bass’s shares which the defendant had bought on 31 December 1997 was also transferred, with the Tote’s consent, to new Coral. So Tote Direct had re-emerged as a joint venture vehicle with three equal shareholders – the Tote, Ladbroke and new Coral.

8.	However, the situation was complicated by the fact that Tote Direct’s loan capital, unlike its share capital, had not been structured so as to maintain equality as between its participants at the time when the joint venture had expanded to incorporate Ladbroke as the third shareholder. Originally, under the 1992 JVA, the Tote and Bass had each subscribed for 25,000 £1 shares and had each provided £300,000 loan capital secured by non-interest bearing promissory notes issued by Tote Direct. Between 1992 and 1997 the two participants each provided an additional £800,000 in loan capital, against the issue by Tote Direct of further promissory notes, so that each held £1.1 million of such notes. That was the situation when Ladbroke was admitted to the joint venture under the 1997 JVA. Pursuant to the provisions of that agreement Ladbroke subscribed in cash for 125,000 £1 shares and the Tote and Bass each subscribed for an additional 100,000 £1 shares using a return of cash through the repayment of £100,000 of their promissory notes. So each of the three shareholders had subscribed for 125,000 shares and in addition the Tote and Bass had provided £1 million each in loan capital. But Ladbroke did not match the other two shareholders by providing  £1 million of further loan capital. Instead, the participants agreed that on 30 June 1998 they would each subscribe for a further 625,000 £1 shares, for which the Tote and Bass would pay by capitalising their promissory notes pro tanto, whereas Ladbroke would pay in cash; and that on 30 June 1999 the Tote and Bass would capitalise the remaining £375,000 of their promissory notes and Ladbroke would pay in cash for a further subscription of 375,000 shares. The anticipated result would be that each of the joint venture participants would end up with 1,125,000 shares, for which they would have subscribed in cash, and all the promissory notes would be repaid. On this basis, share capital would have entirely replaced loan capital. To take account of the fact that only the Tote and Bass had provided £1 million of loan capital, new interest bearing promissory notes were issued in place of the old notes. The Tote and Bass were each issued with two such notes, one for £625,000 and the other for £375,000. The new notes carried interest at the LIBOR rate. Although the notes were expressed to be repayable on demand, the parties had agreed that in fact they would remain uncashed until capitalised under the terms of the JVA. They could not be transferred without the prior consent of Tote Direct. 

9.	As at 31 December 1997, the date of the Bass sale agreement, that was the position obtaining between the participants to the Tote Direct joint venture. Pursuant to that agreement Bass assigned its interest in the two promissory notes totalling £1 million to Ladbroke. On 25 March 1998 the reduction of the joint venture from three to two was regularised by Tote Direct’s shareholders and directors. The transfers of Bass’s 125,000 shares to Ladbroke and of 62,500 of those shares from Ladbroke to the Tote were approved; Tote Direct’s obligation to repay Bass’s promissory notes was transferred to Ladbroke; and the provisions in the 1997 JVA (clause 3.2) which dealt with the subscription of further shares on 30 June 1998 and 1999 and the capitalisation of the notes was deleted. Since the joint venture had now been reduced to only two participants again, and since each of those participants had contributed or was treated as having contributed loan capital in equal amounts, in Ladbroke’s case by standing in the shoes of Bass, the inequality in the loan capital structure had been removed.
10.	 In these circumstances new Coral and the defendant have been unable to agree as to the nature of “the interest held by Bass immediately prior to 31 December 1997” pursuant to clause 4.14.2(a) of the Coral sale agreement. The defendant submits that the interest in question is limited to Bass’s shareholding at that time; new Coral submits that it extends to the complete bundle of rights and obligations which embraced both Bass’s shareholding and its promissory notes. That dispute has led to the trial of the following two preliminary issues:
“(a) What was the interest in Tote Direct held by Bass immediately prior to 31 December 1997 within the meaning of clause 4.14.2 of the agreement dated 22 December 1998 between the claimant and the defendant?
“(b) What equivalent interest in Tote Direct, as at 22 December 1998, did the defendant agree to use reasonable endeavours to procure for the claimant?”

11.	By his order dated 28 March 2001 Toulson J answered these issues in favour of the defendant as follows: 

“(a) the “interest” in Tote Direct Limited held by Bass immediately prior to 31st December 1997 was Bass’s 125,000 “B” shares in Tote Direct Limited; and
“(b) the equivalent interest which the Defendant agreed to use reasonable endeavours to procure for the Claimant was 125,000 shares in Tote Direct Limited.”

12.	The essence of the judge’s reasoning in his judgment below [2001] 2 Lloyd’s Rep 373 is contained in this passage at 377:
“But for sub-cl. (b), I would have considered that the word “interest” was wide enough to include the promissory notes but, reading the clause as a whole, the only interest sensibly capable of falling within both parts of the clause without adopting a very strained interpretation of sub-cl. (b) is Bass’ shareholding. That result may or may not be what the claimants subjectively intended, but it is not so absurd or unreasonable as to justify me in rewriting sub-cl. (b).”

13.	The points which led the judge to this conclusion can be stated as follows. He regarded it as common ground that sub-clause (b) was premised on an existing equality of interest as at 31 December 1997 which needed to be maintained under the Coral sale agreement: but since there was no equality as at 31 December 1997 with regard to the promissory notes, it followed that such notes could not be within the contemplation of the clause. In any event, the mechanism of sub-clause (b) could not be followed without either giving to new Coral more than an equality (if it is to be supposed that new Coral would receive £1 million of promissory notes in equal amounts of £0.5 million from each of the Tote and Ladbroke), or adopting some unrealistic contrivance. One such contrivance which had been canvassed by new Coral was that it would receive not £0.5 million in promissory notes from each of the other two participants, but only £0.333 million, so as to ensure future equality between the three participants, each of which would thereafter hold one third of the total value of the £2 million notes. As to the drafting of the clause, he made the point that if the parties had intended to cover the promissory notes as well as the shareholdings it would have been simple enough to have provided for their assignment to new Coral.

14.	Before turning to the submissions on this appeal, I should set out some further facts concerning the background to the Coral sale agreement which, together with the facts already stated, the parties are agreed were known or reasonably available to both of them at the time of making their contract. 

15.	Under the Bass sale agreement the “Sale Property” was defined as including Bass’s Tote Direct shareholding and promissory notes, and the consideration was apportioned (in Appendix 7) to include £2 million in respect of the shareholding and £1 million in respect of the notes.

16.	I have already said above that in its report the MMC recommended that the defendant be required to divest “the Coral betting business which it acquired from Bass” (para 2.212). The “Coral betting business” was scheduled in Appendix 3.1 to the report as including –

“10. Bass’s shares in Tote Direct and two promissory notes issued by Tote Direct…”

17.	The “Coral betting business” is referred to elsewhere in the report. In para 1.12, as part of the report’s summary, the MMC, having concluded that the merger was against the public interest and that an industry structure should be restored which was conducive to the development of competition, stated –

“This would best be achieved by Ladbroke divesting, as a single business, the entirety of Coral’s UK business which it acquired from Bass…”
In para 2.208, under the heading “Recommendations”, the MMC again stated that the adverse effects of the merger 

“can only effectively be remedied by requiring Ladbroke to divest the entirety of Coral’s UK business which it acquired from Bass…In particular we believe the various other elements of the business besides the core LBO [licensed betting office] estate – the telephone betting business, on-course betting facilities, greyhound tracks and shareholdings in SIS, Tote Direct, Lucky Choice Limited and 49’s Limited – should be divested with it with a view to making the new entity, so far as possible, as strong a competitor (actual and potential) as Coral was when owned by Bass. (We make no comment, however, as to whether Coral Leisure (Ireland) Limited, the holding company for Coral’s interests in the Republic of Ireland, should be included in the sale.)”

18.	On behalf of the defendant Mr Chivers draws attention to the reference to “shareholdings” in para 2.208 and submits that what the MMC was interested in was control as represented by such shareholdings. He also draws attention to the separate consideration given to the defendant’s Irish betting business, albeit that was included (at para 7) in the Appendix 3.1 schedule of assets making up the Coral betting business. 

19.	Under a specific section of the report dealing with the Tote, the MMC refers to Tote Direct in these terms (at para 3.42):

“(b) Tote Direct: a business launched in 1992 as a 50:50 joint venture with Bass…Ladbroke took a one-third share in the company in 1997 and following the merger with Coral has agreed to be the joint owner, 50:50, with the Tote (see Appendix 3.1, paragraph 10)…”

20.	There is also a reference to the shareholdings in Tote Direct in a footnote to para 2.208 –

“The Articles of Association of Tote Direct contain a provision preventing the transfer of shares without the consent of all other members (see paragraph 10 of Appendix 3.1). We would hope that in the case of SIS, Lucky Choice Limited and Tote Direct, the other shareholders would, as the case may be, either arrange for shares to be transferred, or permit Ladbroke to transfer the shares in those companies in accordance with our recommendations.”
21.	In the event the Coral sale agreement does not seem to have embraced the Irish business, nor the defendant’s shares in Lucky Choice Limited or 49’s Limited. The “sale property” is defined as consisting only in shares in the core Coral companies mentioned in Appendix 3.1 of the MMC report and in identified properties. The sole reference to Tote Direct was, as stated, in clause 4.14.2, and the only reference to SIS was in clause 4.14.1, under which the defendant undertook to keep new Coral informed about discussions with the OFT in relation to SIS and to “use its reasonable endeavours to assist the Purchaser in any attempt by it to acquire, or procure that any subsidiary of it acquires, a shareholding in SIS”. Thus if new Coral was to acquire any shares in SIS, it would do so for itself, albeit with the defendant’s assistance.   

22.	The question might therefore arise as to what consideration new Coral gave to the defendant in return for the defendant’s undertaking in clause 4.14.2 in relation to Tote Direct. The answer appears to be that it gave no separately apportioned consideration (see clause 3.1 and schedule 3). Nevertheless sub-clause (b) made clear that the acquisition by new Coral of the equivalent to Bass’s pre 31 December 1997 interest should not require any further payment by new Coral to the defendant. The consideration for the undertaking must therefore have been subsumed in the overall consideration for the agreement. 

The submissions

23.	On behalf of new Coral Mr Edward Bannister QC submitted that the first matter was to identify what was the “interest” which Bass had held in Tote Direct before the Bass sale agreement. He submitted, as had been done below, that Bass’s interest was that bundle of rights made up of its shareholding, its promissory notes and the agreements made in relation to them. The judge set them out (at 375) as follows:

“(i) Bass’s existing holding of 125,000 B shares in Tote Direct and its rights thereunder;
(ii) Bass’s £1 million holding of its new promissory notes and its rights thereunder;
(iii) Bass’s rights to the issue of further shares in Tote Direct on capitalisation of the new promissory notes and its rights under such further shares;
(iv) Bass’s rights in the management and control of Tote Direct, including the right to prevent Ladbroke Racing remaining an equal shareholder in Tote Direct without subscribing for the further…£1 million shares under clause 3.2 of the 1997 JVA.”

24.	Mr Bannister pointed out that the judge had, at an earlier point in his judgment, correctly and succinctly summarised the position immediately prior to 31 December 1997 in this passage (at 374):

“So, the effect was that there would be parity of shareholdings between the Tote, Bass and Ladbrokes but the arrangements made allowance for the fact that the Tote and Bass had each advanced £1 m. worth of working capital to Tote Direct by way of loans.”

25.	Mr Bannister submitted that the second question was to ask what as at 22 December 1998 was “equivalent to” that interest. He stressed that the words “equivalent to” were not the same as “identical to”, and that the clause had deliberately used the vaguer word “interest”, when it could have used the specific word “shareholding”. While it was true that sub-clause (b)’s requirement that new Coral’s equivalent interest should be acquired “equally from the two existing participants” meant that what was contemplated was that all three participants would end up with the same interest, it was important to bear in mind that sub-clause (b) was only dealing with machinery and that it was sub-clause (a) which was the determinative part of the clause as a whole. Before Toulson J new Coral had canvassed as one of its alternatives that it should receive £1 million worth of promissory notes, but on appeal it was restricting its submission to the acquisition of only one-third of the total value of the notes, namely £0.667 million. That would best represent the twin considerations that (a) as at 31 December 1997 the three then participants had planned to have an entirely equal interest once clause 3.2 had been put into effect, and (b) as at 22 December 1998 clause 3.2 had been abrogated, Ladbroke had stepped into Bass’s shoes by payment of £1 million for Bass’s notes, and the three current participants would in this way go forward with entirely equal interests. 

26.	On behalf of the defendant Mr Chivers submitted that the judge was right for the reasons he had given. The only candidate for the “interest” whose subject-matter was under investigation was shares: for only shares fulfilled (1) the function of sub-clause (a) dealing with an interest in Tote Direct which Bass had held before the Bass sale agreement, (2) the premise of sub-clause (b) which, by providing for the equivalent interest to be acquired equally from the two existing participants, presupposed that the interest to be acquired by new Coral was one presently held equally by the Tote and Ladbroke, (3) the underlying function of the whole clause accepted by Mr Bannister which was to ensure that the three participants would henceforth go forward with equal interests; and (4) the achievement of that function by a straightforward transfer from the other two participants. In these circumstances any attempt to involve the notes would fail. If the suggestion was that new Coral alone of the participants should hold £1 million of such notes, in any event a suggestion now abandoned, the underlying function of the clause would be compromised. If, on the other hand, the suggestion was that new Coral should acquire only £0.667 million of such notes, then new Coral would not be acquiring an equivalent interest to what Bass had sold. In any event, any transfer of notes by the Tote to new Coral would involve a transfer by the defendant to the Tote, which was not contemplated by the clause. Moreover, the language of the clause was inappropriate if “interest” was given the wider meaning: the reason why the defendant’s obligation was only to use reasonable endeavours was because it was recognised that the clock could not be put back to a three way joint venture without the Tote’s cooperation. 

27.	This is a nice problem of construction in an unusual situation. It is not always that such points of construction are argued without citation of a single authority (cf Reardon Smith Line Ltd v. Ministry of Agriculture, Fisheries and Food [1962] 1 QB 42 at 131 per Donovan LJ), but such was this. It was common ground that “interest”, a chameleon word which takes its meaning from its context, could fit with either party’s construction. The judge himself thought that, but for sub-clause (b), it could appropriately include the promissory notes. It is a fair point that if the parties had intended to refer only to Bass’s shareholding, then they used a dangerously wide word to do so. It is therefore surprising that they chose to do so when the immediately preceding clause, that dealing with SIS, spoke plainly in terms of a shareholding. Therefore it may reasonably be inferred that they had something wider in mind than purely shareholdings.

28.	In truth, the interest that Bass held in Tote Direct immediately before the Bass sale agreement went wider than its one-third shareholding. Not only did the promissory notes held by it represent essential working capital provided to the joint venture company, but those notes entitled Bass to an additional 1 million shares in due course. They were by reason of the provisions of clause 3.2 of the 1997 JVA in a sense “convertible” notes, save that Bass was not only entitled but bound to convert. The Tote was in the same position, but Ladbroke was not. It may be that Ladbroke was a sound enough partner to ensure that its obligation to subscribe in cash for its 1 million shares was perfectly secure: but of course if it failed to subscribe, it would not continue to share a one-third holding with the other participants. As at 31 December 1997 the shareholdings were equal and in due course all being well they would remain equal, but as long as Ladbroke had not put up its £1 million, its interest in the joint venture was not equal to that of the other two, as the judge in effect accepted subject to his decision to give “interest” a narrower meaning. In a very real sense, a one third shareholding in a company which owes that shareholder half of its working capital is a different interest from a one third shareholding in a company which owes that shareholder nothing, and such an interest gives that shareholder more effective control than if it was merely a shareholder. Moreover, to look to the future contemplated as at 31 December 1997, a one third shareholding in a company to which a fellow-participant has subscribed £1 million for shares in cash is something different from a one-third shareholding in a company without that £1 million.  

29.	Mr Chivers sought to rely on a passage in Mr Bannister’s skeleton argument to make the submission that Mr Bannister was accepting that Bass’s interest, in the wider sense, was already as at 31 December 1997 equal to that of the other two participants. But in my view Mr Bannister was not saying that. His point was that in prospect the participants would all end up with the same interest; in the meantime, however, their position was unequal, for only two of them had advanced £1 million of loan capital: as the judge’s comment referred to at para 24 above to which Mr Bannister himself more than once referred made clear. Even Mr Chivers asserted that although as at 31 December 1997 there was equality as to shareholdings, there was not equality as to notes.

30.	Prima facie therefore the word “interest” in sub-clause (a) ought, in my judgment, to include Bass’s notes. The historical context accepted as being known or reasonably available to the parties at the time of the Coral sale agreement supports this prima facie view. The Bass sale agreement covered both Bass’s shareholding and its notes. If therefore new Coral was, so far as the reasonable endeavours of the defendant could procure it, to acquire the equivalent of what Bass had held before the sale of its betting business to Ladbroke, then the notes should come within the scope of that obligation. This is also supported by the MMC report which, in the most definitive section dealing with the “Coral betting business” which had to be divested, namely Appendix 3.1 at para 10, specifically cited both shares and notes in Tote Direct as being part of that business. 

31.	The question therefore becomes: does the language of sub-clause (b) require a different result? Does sub-clause (b) make new Coral’s construction of “interest” in sub-clause (a) an impossible one, or even unattractive or difficult? 

32.	The first thing to note is that sub-clause (b) is concerned not with “the interest held by Bass immediately prior to 31 December 1997”, but with the equivalent interest which the defendant is obliged to use its reasonable endeavours to procure for new Coral. Therefore, Mr Bannister is right in my judgment to emphasise that sub-clause (a) should have primacy for the purpose of the issue before the court. Mr Bannister puts this point in terms of saying that, compared with sub-clause (a), sub-clause (b) is only concerned with mechanics. I agree with that, but for the reason just stated I think the point goes further. The language of “equivalent interest” is, as Mr Bannister also correctly submits, not the same as “identical interest” but seems to acknowledge a more impressionistic or at any rate less precise approach to turning the clock back. It follows that I am sceptical of a construction of Bass’s interest, such as that promoted by the defendant and adopted by the judge, which would use the terms of sub-clause (b) to subvert the prima facie meaning of sub-clause (a). Of course, I take it for granted that the process of construction involves taking account of the whole of a clause, and indeed, where relevant, the whole of a contract and its context: but one should be cautious about allowing the tail to wag the dog, so to speak.     

33.	So I ask myself whether there are problems about the construction of sub-clause (b) which arise if Bass’s interest is given a broader meaning to embrace the notes, but which do not arise if it is given a narrower meaning confined to shares. In my judgment there are not. It seems to me that the difficulties of the clause are essentially there, whatever “interest” means. If the notes are included, I agree that the concept that an equivalent interest is to be acquired equally from the two existing participants presents problems. First, it seems odd that half of the equivalent interest, whatever its amount, should come from the Tote: why should the Tote contribute any part of its own notes? Presumably, it would only do so if it was indemnified. If the Tote had to be indemnified, new Coral could not be called on to indemnify the defendant in turn because of the last part of sub-clause (b). Therefore the Tote would have to be indemnified by the defendant. But the identical problem arises with respect to shares. Half of the shares are to come from Ladbroke, half from the Tote. Why should the Tote give up one-sixth of its holding? One possible answer suggested is that the Tote was in fact willing to do so because following the Bass sale agreement it received half of Bass’s shareholding from the defendant without cost. But the Tote was under no compulsion of yielding one-sixth of its holding. 
34.	Secondly, Mr Chivers suggests that the language of reasonable endeavours is odd language to apply to a straightforward transfer of notes, the equivalence of cash. Why not simply assign the notes? But the answer is that just as the shares could not be transferred without the consent of the other shareholders, so the notes could not be transferred without the consent of Tote Direct. Therefore reasonable endeavours had to be exercised to procure such consent. 

35.	Thirdly, there is the question of finding the “equivalent” interest to be acquired by new Coral and it might be said that this is a relevant difference, for the reasons debated before Toulson J and canvassed again in this court: if new Coral is to acquire £1 million of notes and half of that is to come equally from the other two participants, can it be right that new Coral should end up with an unequal interest? If, on the other hand, new Coral is to acquire only £0.667 million of the notes, why is that said to be an “equivalent” interest to that previously held by Bass? However, the fact that an unequal interest in the notes held by the old three participants creates a question-mark in the new circumstances caused by an attempt to reconstruct a three-party joint venture should not blind the parties or in their place the court to the possibilities of a solution. If there is a solution which “reasonable endeavours” might find, why should it not be adopted? The fact that the case of the notes is less straightforward than that of the shares (but even the latter case is not straightforward, see para 33 above) may be a distinction without a difference.

36.	In my judgment there are in theory two possible solutions. The first is to focus primarily on Bass’s pre-sale interest, £1 million in notes. The defendant has to use reasonable endeavours to procure that new Coral acquires an equivalent interest. It could achieve that by procuring Tote Direct’s consent to its transfer of the Ladbroke notes to new Coral. But sub-clause (b) says that new Coral should acquire its interest equally from the Tote and Ladbroke: therefore the £1 million of notes is not contemplated as simply coming directly from Ladbroke. I see no reason, however, why the defendant cannot use reasonable endeavours to procure the Tote’s consent by offering to transfer the other £0.5 million of the Ladbroke notes to the Tote. Although this is a round-about mechanism, it is common ground that in any event the defendant has to use reasonable endeavours to persuade the Tote to transfer one-sixth of its shares to new Coral. And although no separate consideration is allocated to the defendant’s undertaking in respect of Tote Direct, it has to be accepted both that the consideration for the defendant’s undertaking is included in the overall consideration passing under the new Coral sale agreement (£255,320,000), and that sub-clause (b) contains a specific promise that the acquisition of new Coral’s equivalent interest should not require any further payment by new Coral to the defendant. The latter promise leads to the clear inference that a further payment may well be involved on the part of that party which is left with the undertaking to use reasonable endeavours to procure that acquisition, namely the defendant. Moreover, since the provision for the acquisition to come equally from the two existing participants is in any event necessary in the case of the shares, that language may well have been thought as sufficing to deal with any other interest. This solution respects the primary demands of sub-clause (a) and fits within the mechanism of sub-clause (b). The fact that there is an inequality of outcome, with new Coral and the Tote each left holding £1 million of the notes and the defendant holding none, is by no means surprising seeing that it merely reflects the situation prior to the Bass sale agreement.  

37.	The other possible solution is that promoted by new Coral, which is that new Coral should acquire one-third of the outstanding £2 million of notes, equally from Ladbroke and the Tote. Thus the defendant would have to use its reasonable endeavours to persuade the Tote to transfer one-third of the Tote’s holding of £1 million of notes to new Coral, would have to transfer one-third of the Ladbroke holding, and would have to use reasonable endeavours to obtain Tote Direct’s consent for the relevant transfers. This solution focuses not so much on the fact of Bass’s pre sale holding of £1 million of notes, as on its existence as part of a broader scheme whereby each of the then three participants would end up, after Ladbroke’s subscription of £1 million for shares, with an identical one third interest in the company. Mr Bannister’s submission is that in the light of the events since 31 December 1997 the equivalent interest sought by the clause is best expressed by a situation where all three current participants shared an equal interest in the company for the future. By paying £1 million for Bass’s notes the defendant had bought the right to be regarded as having fulfilled its obligation to contribute £1 million to the company’s finances. Now that clause 3.2 had been abrogated and there was to be a new attempt to recreate a joint venture between three participants, the way forward indicated by the obligation of reasonable endeavours and the concept of new Coral’s interest coming from each of the other two participants equally was for there to be equality between all three. Indeed, Mr Bannister regarded subclause (b) as requiring equality between all three participants for the future. Moreover, it was common ground between the parties that the clause required such equality of outcome.

38.	In my judgment there is much to be said for either alternative. The first stresses the logic of the attempt to recreate in favour of new Coral the interest which Bass had once held. The clock is as it were to be put back to the time immediately before the Bass sale agreement, together with any inequality then existing. The second stresses a need to recognise the water that had flowed under the bridge since that earlier time and a desire for the participants to face the future on a footing of equality. But both alternatives are premised on three ideas common to each: that Bass’s £1 million holding has to be recognised; that the solution cannot be reached without the Tote’s cooperation; and that the defendant is likely, in the use of reasonable endeavours to find that solution, to have to dig into its pocket.

39.	Subject to the structure of the submissions put before the court, I think I would have expressed my personal preference for the first alternative. Although the defendant’s payment of £1 million for Bass’s notes entitled Ladbroke to stand in Bass’s shoes where those notes were concerned, that did not mean that Ladbroke had subscribed a further £1 million to the capital of Tote Direct, and in any event under the new Coral sale agreement the defendant had undertaken to use its reasonable endeavours as it were to reverse the effect of the Bass sale agreement. Moreover, sub-clause (b) does not to my mind mean that there must be total equality of interest between the three participants, only that new Coral’s equivalent interest should come equally from the other two participants. However, new Coral has clearly expressed its position that it no longer pursues that first alternative and confines itself to the more limited claim that the defendant’s obligation was to use reasonable endeavours to procure the acquisition by new Coral of only a one-third interest in the £2 million of notes outstanding at the time of the new Coral sale agreement. And the need for equality of outcome is common ground. It follows that new Coral is limited to that claim.  

40.	In any event, it may well be that new Coral’s alternative is more intuitive and wiser. Even though sub-clause (b) does not in terms, or even by necessary implication, require that any inequality of interest in the past should be eliminated for the future, there was clearly a need, if a three-way joint venture was to be recreated, for the three participants to find a means of facing the future on the footing of equality. As of the time of the 1997 JVA, clause 3.2 was the then participants’ solution for achieving a situation of equality. The Coral sale agreement, however, was only between the two parties to it and so could not bind the Tote, and the future of a reconstructed three-way joint venture would have to be determined outside the four corners of that contract. That is at least one reason why clause 4.14.2 had to be drafted in terms of “reasonable endeavours” and an “equivalent” interest. How the new participants would work out their joint venture would be for them, but clearly it was likely to require equality. In the meantime there were £1 million of notes held by the Tote and another £1 million held by Ladbroke, but subject to the defendant’s obligations under clause 4.14.2. Since it is common ground that the clause requires equality of outcome, new Coral is entitled to say that pursuant to those obligations it only requires the defendant to use its reasonable endeavours to procure new Coral’s acquisition of £0.667 million of such notes rather than £1 million. New Coral’s submission also has the advantage that there is no need for any transfer of notes between Ladbroke and the Tote.

41.	I would therefore conclude by holding that Bass’s “interest” for the purposes of sub-clause (a) includes its notes as well as its shares. That is the natural construction of sub-clause (a). I see no sufficient reason in the wording of sub-clause (b) to use that sub-clause as a reason for subverting the natural meaning and effect of sub-clause (a). The judge considered that he ought to limit Bass’s “interest” to its shareholding alone, because otherwise he was forced to adopt a strained meaning of sub-clause (b) or even to rewrite it. Sub-clause (b) may be obscure, but that is not a reason for giving it the lead in the interpretation of the clause as a whole. That would indeed mean that the tail would wag the dog. Whatever the difficulties of sub-clause (b), they remain to a greater or lesser degree on any interpretation, and therefore do not necessitate one meaning rather than another for the concept of Bass’s interest in sub-clause (a). Moreover, the important provisions relating to payment which make up the last part of sub-clause (b), which were given no weight in the judgment below, have to be taken into account.  

Conclusion

42.	These of course are only preliminary issues of construction. It is not for this court, as it was not for Toulson J, to say whether or not the defendant has used its reasonable endeavours under sub-clause (a) or to determine any remedy if it has not. What I would indicate, however, is that I would for my part consider that the defendant could not say that it has exercised its reasonable endeavours without having being prepared to use the Ladbroke holding of notes as at 22 December 1998 for the purpose of procuring the acquisition contemplated by the clause. In the light of what is common ground between the parties, the defendant’s obligations to use reasonable endeavours are probably to be measured only in relation to £666,667 of that holding. That, however, is for the future. In any event, the fact that in March 1999 the Tote and Ladbroke procured the repayment to each of them of £750,000 of their £1 million holdings, and the issue to them of new notes for the £250,000 balance, is in no way relevant to the question of what reasonable endeavours would have achieved as at the time of the Coral sale agreement – other than to indicate the reality and importance of the question whether Bass’s interest included its notes or not. 

43.	I would therefore allow the appeal and answer the two preliminary issues posed as follows:

(a)	The “interest” in Tote Direct held by Bass immediately prior to 31 December 1997 included Bass’s shareholding (of 125,000 shares) and its £1 million holding of new promissory notes.
(b)	The “equivalent” interest in Tote Direct which the defendant agreed to use its reasonable endeavours to procure for the claimant was 125,000 shares and £666,666.66 of the new promissory notes.   
Lord Justice Robert Walker:
44.	I agree.
The Vice-Chancellor:
45.	I also agree.
 
Order: Appeal allowed with a minute of order to be lodged.
(Order does not form part of the approved judgment)