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Session 2003 - 04
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Judgments

Judgments - Criterion Properties plc (Appellants) v. Stratford UK Properties LLC (Respondents) and others

HOUSE OF LORDS

SESSION 2003-04
[2004] UKHL 28
on appeal from: [2002] EWCA Civ 1783

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Criterion Properties plc (Appellants)

v.

Stratford UK Properties LLC and Others (Respondents)

ON

THURSDAY 17 JUNE 2004

The Appellate Committee comprised:

Lord Nicholls of Birkenhead

Lord Scott of Foscote

Lord Rodger of Earlsferry

Lord Walker of Gestingthorpe

Lord Carswell


HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Criterion Properties plc (Appellants) v.Stratford UK

Properties LLC (Respondents) and others

[2004] UKHL 28

LORD NICHOLLS OF BIRKENHEAD

My Lords,

    1.  I have had the advantage of reading in draft the speech of my noble and learned friend Lord Scott of Foscote. I agree that for the reasons he gives this appeal should be dismissed.

    2.  As explained by Lord Scott, the issues arising on this application for summary judgment were clouded in the courts below by a faulty elision of two different issues to which different principles apply. The only relevant issue on this application is whether the second supplementary agreement was a valid and binding agreement. It is accepted by Criterion, for the purposes of this application, that Oaktree's directors acted honestly. Thus this issue of validity turns solely on whether the directors who signed the agreement on behalf of Criterion did so within the actual or apparent scope of their authority. This issue, in turn, depends upon an application of ordinary agency principles, having due regard to the rule in Royal British Bank v Turquand (1856) 6 E & B 327 and sections 35A and 35B of the Companies Act 1985.

    3.  Unfortunately, in the courts below this 'want of authority' issue was approached on the basis that the outcome turned on whether Oaktree's conduct was unconscionable. This seems to have been the test applied by the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 both to questions of 'want of authority' and to liability for what traditionally has been labelled 'knowing receipt'.

    4.  I respectfully consider the Court of Appeal in Akindele's case fell into error on this point. If a company (A) enters into an agreement with B under which B acquires benefits from A, A's ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, A's ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of 'knowing receipt' by B do not arise. So far as B is concerned there can be no question of A's assets having been misapplied. B acquired the assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A. If, however, the agreement is set aside, B will be accountable for any benefits he may have received from A under the agreement. A will have a proprietary claim, if B still has the assets. Additionally, and irrespective of whether B still has the assets in question, A will have a personal claim against B for unjust enrichment, subject always to a defence of change of position. B's personal accountability will not be dependent upon proof of fault or 'unconscionable' conduct on his part. B's accountability, in this regard, will be 'strict'.

    5.  Either way, therefore, whether the second supplementary agreement is set aside or not, questions of unconscionability do not arise on Criterion's application for summary judgment.

LORD SCOTT OF FOSCOTE

My Lords,

Introduction

    6.  This appeal arises out of an application for summary judgment made in an action in which the appellant, Criterion Properties plc (Criterion), is seeking to establish that an agreement into which it had apparently entered is not binding upon it and should be set aside. The respondent, Stratford UK Properties LLC (which I will refer to as "Oaktree" for reasons I will later explain) contends, on the contrary, that there is nothing the matter with the agreement and has counterclaimed for specific performance.

    7.  Criterion's summary judgment application was made, of course, on the footing that the pleadings and other written evidence before the court disclosed sufficient undisputed, or indisputable, facts to make a trial unnecessary. It is obvious, according to Criterion, that the agreement cannot be enforced against it. The summary judgment application came before Hart J who agreed and, accordingly, made a declaration that the agreement was unenforceable against Criterion. Oaktree appealed. Its stance before the Court of Appeal, as it has been before your Lordships, was that a trial was necessary. The Court of Appeal (Brooke LJ and Carnwath LJ) agreed and set aside the declaration that Hart J had made. The issue is now before this House and remains, as it was before Hart J, whether it is sufficiently clear, on the facts at present in evidence, that Oaktree cannot enforce the agreement against Criterion, or whether there is any other reason why the declaration sought by Criterion should not be made at this stage. In order to deal with these questions I must outline the story which has led to this litigation. I can do so in fairly summary fashion because a comprehensive statement of the facts can be found in the judgment of Hart J.

The Facts

    8.  Criterion is a public limited company. It carries on the business of investment in commercial properties. At the relevant time Mr Rolf Nordström was, and still is, the chairman of Criterion. Mr Aubrey Glaser was, until his summary dismissal in April 2001, the managing director. Mr Glaser is the second defendant in the action (Oaktree is the first defendant) but took no part in the appeal to the Court of Appeal and has taken none in the appeal to this House.

    9.  Oaktree is a company incorporated under the laws of Delaware, U.S.A. It was formed in January 1998 for the purpose of the joint venture with Criterion to which I will refer. It is managed by Oaktree Capital Management LLC, an institutional money manager and investment adviser. Oaktree was the vehicle by which Oaktree Capital Management LLC applied funds to participate in the joint venture with Criterion. It is no doubt for that reason that the respondent company has throughout this litigation been referred to as Oaktree. I have found it convenient to continue so to refer to it. It is not necessary to distinguish between Oaktree, the respondent company, and its Oaktree parent.

    10.  In January 1998 Criterion and Oaktree agreed to form a limited partnership together for the purpose of investing in real property in the United Kingdom. It was contemplated that the bulk of the funding would be provided by Oaktree and that Criterion, besides contributing a certain amount of finance, would act as managing agent of the properties that were acquired. A partnership agreement was accordingly signed on 26 January 1998. This was the so-called Investment and Shareholders' Agreement (the ISA). The parties to the ISA were Criterion, Oaktree and a new company, Criterion-Stratford Umbrella GP Ltd (the General Partner) whose responsibility it would be to manage, administer and operate the partnership business. Criterion held 150 shares in the General Partner. Oaktree held 850. The intention was that capital needed by the General Partner to fund the partnership business would be provided by Criterion and Oaktree in broadly those proportions.

    11.  The ISA is not the agreement under challenge in this litigation. The ISA is accepted to be a valid and enforceable agreement. The agreement under challenge is an agreement which purports to be an amendment of the ISA. It is referred to as the Second Supplementary Agreement (the SSA). In order to understand some of Criterion's objections to the SSA it is necessary to understand, in broad terms, the respective rights of Criterion and Oaktree under clause 7 of the ISA.

    12.  Clause 7 provided a mechanism for the termination of the partnership. The mechanism could be invoked, according to clause 7.1, in the event of

    "(a) Impasse;

    (b)  Bankruptcy of a Shareholder; or

    (c)  Breach of [the ISA or of an associated agreement] by a Shareholder which is not remedied to the satisfaction of the other Shareholder within 14 Business Days of its occurrence".

The mechanism took the form of alternative offers that the party desirous of terminating the partnership could make to the other party. Two simultaneous offers had to be made. One was to be an offer to buy the other party's interest in the General Partner (ie the offeree's shares in the General Partner and the debt owed by the General Partner to the offeree); the other offer was to be an offer to sell to the other party the offeror's interest (ie shares and debt) in the General Partner. The price for the shares to be sold or purchased would be

    "such price as the offeror shall in its absolute discretion think fit"

but would have to be the same price per share in each alternative offer; the price for the debt to be sold or purchased had to be 100p. in the pound (see clause 7.2(a)) If the offeree should fail to accept either of the alternative offers within 90 days, the offeror was given the right to purchase the offeree's interest in the General Partner at the offer price (clauses 7.3 and 7.4).

    13.  The partnership business appears to have commenced satisfactorily. Four investment properties were purchased during the course of 1998. The bulk of the necessary finance was provided by Oaktree. The properties were, after the purchase, managed by Criterion.

    14.  On 30 March 2000 the SSA was signed. The parties were, or purported to be, Criterion, Oaktree and the General Partner. Mr Glaser, the managing director of Criterion, and a Mr Palmer, Criterion's company secretary and also a director, signed on Criterion's behalf. The SSA purported to add to the ISA a new clause, clause 7A, which conferred on Oaktree a put option to require Criterion to purchase Oaktree's interest in the General Partner (ie shares and debt) upon the happening of any of certain specified events and at a price calculated in accordance with a specified formula. The specified events which would cause the put option to be exercisable were expressed as follows:-

    "If:

    (a)  any person gains control … of Criterion; or

    (b)  Rolf Leonard Nordström or Aubrey Glaser ceases to be a director or employee of Criterion or involved in the management of Criterion" (see clause 7A.1)".

The price at which the shares and debt of Oaktree were to be purchased by Criterion, if the put option were exercised, was dealt with by clause 7A.2. Broadly speaking, the provisions of clause 7A.2, which are fairly complex, would result in the price being either market value (clause 7A.2(a)) or the amount of Oaktree's capital invested in the partnership plus 25 per cent per annum on the invested capital, compounded monthly (clause 7A.2(b)), whichever should be the greater.

    15.  The Statement of Facts and Issues, agreed on behalf both of Criterion and of Oaktree for the purposes of this appeal, sets out under the sub-heading "Circumstances leading up to the SSA", the following :-

    "17. It was Mr Glaser who suggested to Oaktree that the parties enter into the SSA. He told Oaktree that its purpose was to prevent a particular unwelcome third party gaining control of Criterion. In other words, to thwart a hostile takeover from that party. The means by which it sought to do this was by subjecting Criterion, once any of the triggering events (which included a change of control) had occurred, to adverse financial consequences such that the prospective bidder would be deterred from proceeding with its bid. The financial consequences consisted of the conferring on Oaktree of the put option, the terms of which were purposely calculated and intended to be very unfavourable to Criterion, to the corresponding benefit of Oaktree. The intended financial consequences of the SSA to Criterion were such that it was referred to by both parties as a "poison pill" device or agreement.

    18. Mr Nordström says that the board of Criterion knew nothing of the SSA until he discovered its existence in November 2000, and that Mr Glaser was acting on his own in agreeing and executing the SSA. Mr Glaser (whose evidence is relied on by Oaktree) says that Mr Nordström was the one who actually proposed the agreement and knew of the SSA when it was entered into.

    19. For the purposes of this appeal, and as was the case below, the evidence of Mr Glaser as to Criterion's motivation for, and the circumstances surrounding, the entering into the SSA, is accepted by Criterion. The relevant parts of Mr Glaser's evidence appears in paragraphs (1) to (6) of paragraph 11.1 of his defence and cross claim in these proceedings. These paragraphs were cited in the judgment of Mr Justice Hart as part of the background facts, and were subsequently incorporated as part of the Appendix to its judgment by the Court of Appeal. In summary, Mr Glaser said that:

        (1) Mr Nordström had told him in the period leading up to March 2000 that he considered that a particular minority shareholder in Criterion [the predator], which had already built up a significant minority holding in Criterion of just over 20%, wished to gain control of Criterion. Mr Nordström considered that [the predator] was controlled by "disreputable people", that it was not in the interests of Criterion to be associated with them, and that he thought that [the predator] would wind up Criterion's business and liquidate the company if it gained control.

        (2) As a result of his fears over [the predator], Mr Nordström suggested to Mr Glaser that he contact Oaktree to see if they would agree to the introduction of a poison pill device, in the terms of the SSA, so as to act as a deterrent to [the predator].

    Accordingly, Mr Glaser contacted Mr Sean Armstrong ("Mr Armstrong"), a managing director of Oaktree Capital Management, LLC, and a director of Oaktree, explained to him the wish to implement a poison pill device to deter an unwelcome predator, and discussed and agreed its terms with him.

    20. As far as Mr Nordström was concerned, he had ascertained that one of the individuals behind [the predator] had been involved in criminal acts of alleged bribery and tax evasion, and was concerned the reputation of [the predator] should not "rub off on Criterion".

    21. Oaktree accepts that it understood at the time the SSA was entered into that its purpose was to thwart an unwelcome predator from acquiring a majority interest in Criterion, and that its method of achieving this was by the imposition of a poison pill device, the terms being agreed with Mr Glaser accordingly (see the statement of Mr Armstrong dated 15 November 2001 at paragraphs 23 to 29, referred to in Mr Justice Hart's judgment, and subsequently incorporated as part of the Appendix to the Court of Appeal's judgment).

    22. It is accepted by Criterion for the purposes of this appeal, as it was below, that Oaktree did not appreciate the proposed poison pill to be improper (Mr Armstrong considered them commonplace in the United States), that it acted in good faith in agreeing to the SSA, and that it acted for its own good commercial reasons in so doing. Oaktree was content with the terms of the SSA as they were calculated to protect the close personal working relationship it had with Mr Nordström and Mr Glaser whom it regarded as key individuals in Criterion, and upon whom Oaktree relied. Further, as Criterion managed the properties in the partnership, and Criterion had the right to nominate two directors to the board of the General Partner, Oaktree did not want disreputable individuals controlling Criterion, given that Oaktree had a substantial investment in the joint venture.

    23. Oaktree instructed its solicitors, Ashurst Morris Crisp ("AMC"), to draft the SSA, which they did. They did not advise that the SSA was an abuse of the powers of the board of Criterion, though they did point out to Oaktree that the SSA may be a breach of Rule 21 of the City Code on Mergers and Takeovers which prohibits a "frustrating action" whilst an offer for shares is pending, but then advised that this was a matter for Criterion. Other than this no matters occurred to AMC to give rise to concern (see paragraph 28 of Mr Andrew Clyne's statement of 14 November 2001).

    24. The draft SSA was sent to Criterion's solicitors, Brough Skerrett, on 29 March 2000 by AMC. On the same day Brough Skerrett approved the draft as drawn and informed AMC that the SSA had to be executed by 30 March 2000, although no reason was given for this urgency. No objections were raised by Brough Skerrett as to the lawfulness of the SSA. The members of Criterion were never notified of the SSA and accordingly were neither asked to nor did they approve it (assuming it was in law a transaction capable of being approved otherwise than by unanimous resolution of the shareholders)."

    16.  In the event, following the signing of the SSA there was no further threat of a take-over of Criterion by the predator. The predator had agreed on 29 March 2000, the day before the date of the SSA, to dispose of its shares in Criterion. There is no evidence as to whether or not this decision was a consequence of the predator becoming aware of the intended "poison pill", but an inference that it was a consequence might perhaps be drawn.

    17.  In Autumn 2000 three of the properties that had been acquired by the partnership were sold and, in the spring of 2001, the advances towards the cost of their purchase made by Criterion and Oaktree were repaid.

    18.  Mr Glaser's dismissal by the board of Criterion on 3 April 2001 was, according to Mr Nordström, because the board had learnt for the first time of the existence of the SSA. Whatever the reason for the dismissal, however, the dismissal was, according to the terms of the SSA, an event entitling Oaktree to exercise the clause 7A put option and require Criterion to purchase its interest in the General Partner. On 20 June 2001, Oaktree purported to exercise the put option. It (Oaktree) has calculated that the price due to it pursuant to clause 7A.2(b) had reached, by March 2002, over £4 million and that interest increasing the price was accruing at the rate of £2700 odd daily. It may be assumed that that price exceeds the market value that would have been attributed to Oaktree's interest under clause 7A.2(a), but the amount of the excess is not revealed by the material before the House.

Criterion's case

    19.  In its pleaded case Criterion contends that the SSA was entered into by Mr Glaser in breach of his duties to Criterion. It contends (inter alia) that the clause 7A buy-out right conferred on Oaktree, and in particular the sale price provisions, were not and could not be in the commercial interests of Criterion (see para. 21 of the Amended Particulars of Claim. It is worth setting out in full paragraph 21A of the Amended Particulars:

    "…Oaktree was on notice at the time when it entered into the [SSA] that Mr Glaser was acting for an improper purpose, not in the legitimate interests of Criterion, which was in excess of his actual and ostensible authority as a director of Criterion. As a result, Oaktree cannot rely on the authority of Mr Glaser to bind Criterion to the [SSA] and it is unenforceable against Criterion".

    20.  The Amended Particulars of Claim go on to allege that Oaktree knowingly and dishonestly assisted Mr Glaser in the breach of his duty to Criterion (see para. 22)

The judgments in the courts below

    21.  Both before Hart J and before the Court of Appeal attention appears to have been concentrated on whether this case should be categorised as one of "knowing receipt" by Oaktree of assets derived from Criterion or as one of "knowing assistance" given by Oaktree to Mr Glaser in his breach of duty, if that is how his signing of the SSA should be regarded. Hart J, correctly in my respectful opinion, identified as the critical issue

    "whether Oaktree has any realistic prospect of succeeding at trial on the apparent authority point" (para. 15 of his judgment).

He then said that for Criterion to succeed on this issue it had to show, first, that the entry by Criterion into the SSA constituted an improper use by the Criterion board of its power to contract on behalf of Criterion, and, second, "that Oaktree knew sufficient about the motivation of the Criterion board to disable it from relying on that board's apparent authority to commit Criterion to the contract" (see para 16 of the judgment).

    22.  There seem to me to be two problems about Hart J's approach. First there is no evidence at present to show whether or not the SSA was ever approved by Criterion's board. It was signed by Mr Glaser and Mr Palmer, both of them directors of Criterion. It is said by Oaktree (and Mr Glaser) that Mr Nordström knew and approved of the SSA, but Mr Nordström has denied this. So, as the matter stands at present, there are a number of possibilities. It is possible that Mr Glaser and Mr Palmer were the only two directors involved. It is possible that Mr Nordström as well as Mr Glaser and Mr Palmer had indicated to Oaktree his approval of the SSA. It is possible that the SSA was approved by the Criterion board but equally possible, on the present state of the evidence, that it was not. The ground given for the dismissal of Mr Glaser in April 2001 suggests that it was not but the genuineness of the ground is in dispute. In short, it is not clear who, on the Criterion side, was responsible for approving the SSA. It is, consequently, not clear whose authority, or lack of authority, or apparent authority, or impropriety should be under scrutiny.

    23.  Second, the question as to Oaktree's knowledge about the motivation of Criterion's board, or of Mr Glaser, so as "to disable it from relying on that board's [or Mr Glaser's] apparent authority…" assumes that the board, or Mr Glaser, did have apparent authority to enter into the SSA on Criterion's behalf. But the critical issue identified by Hart J in his paragraph 15 requires, as an essential preliminary, a decision as to whether the board, or Mr Glaser, did have apparent authority. This is a point to which I must return.

    24.  Hart J went on to analyse the effect of the SSA on the commercial interests of Criterion and to conclude that the grant to Oaktree of the put option could not

    "begin to be justified as a proper exercise by the Criterion board of its powers" (para. 23 of the judgment).

He then turned to the second question he had identified in his paragraph 16, namely, whether Oaktree knew or must be taken to have known that the board of Criterion was acting without authority. He referred in paragraph 28 to the submission made by counsel for Oaktree that

    "Oaktree's ability to rely on the apparent authority of the Criterion board depended not on a test of whether or not it had notice of the facts which constituted the breach of duty …. but whether it was unconscionable in all the circumstances for Criterion to have relied on that authority".

The judge rejected this submission. He did so after analysing such "knowing receipt" or "knowing assistance" cases as BCCI v Akindele [2001] Ch 437, Royal Brunei Airlines v Tan [1995] 2 AC 378 and Belmont Finance Corporation v Williams Furniture Ltd (No. 2) [1980] 1 AER 393 and concluded that

    "what Belmont and Akindele decide for present purposes is that actual knowledge of circumstances which make the payment a misapplication is sufficient to bind the conscience of the recipient" (para 38 of his judgment)

He held that the clear intention of the SSA was to subject Criterion to a contingent crippling of its commercial interests in order to deter the unwanted predator and that such an intention could not constitute a legitimate exercise by the Criterion board of its powers. He concluded that since Oaktree knew very well what was the motivation behind and the intention of the SSA, Oaktree could not enforce the SSA against Criterion. The learned judge appears to have been attracted by an analysis that treated the facts as involving the "knowing receipt" by Oaktree of assets, in the form of contractual rights under the put option conferred by the SSA, that Oaktree had derived from Criterion via a breach of duty by Criterion's board (see para. 40).

    25.  The Court of Appeal, too, treated the case as one in which the critical issue was whether it was unconscionable for Oaktree to hold Criterion to the SSA. Carnwath LJ, with whose judgment Brooke LJ agreed, discussed the same line of "knowing receipt" or "knowing assistance" cases as had been considered by Hart J. He concluded that Hart J had been correct to hold that the SSA was outside the powers of the directors of Criterion but he disagreed with the judge's view that it was enough for Criterion to show that Oaktree had the knowledge of the relevant facts. He said

    "I do not see how one can consider the 'conscionability' of the actions of one party to the agreement without considering the position of the other. It is wholly artificial, in the context of this case, to consider the actions and motivations of the directors of Oaktree, and to ignore those of the directors of Criterion …" (para. 38)

    26.  Carnwath LJ concluded that the "conscionability" of the SSA could only be decided at trial. So the appeal was allowed.

    27.  My Lords, I must express my respectful disagreement with the approach both of Hart J and of the Court of Appeal to the critical issue in this case. This is neither a case of "knowing receipt" nor one of "knowing assistance". The word "receipt" in the expression "knowing receipt" refers to the receipt by one person from another of assets. A person who enters into a binding contract acquires contractual rights that are created by the contract. There may be a "receipt" of assets when the contract is completed and the question whether there is "knowing receipt" may become a relevant question at that stage. But until then there is simply an executory contract which may or may not be enforceable. The creation by the contract of contractual rights does not constitute a "receipt" of assets in the sense that a "knowing receipt" involves a receipt of assets. The question whether an executory contract is enforceable is quite different from the question whether assets of which there has been a "knowing receipt" are recoverable from the recipient. To confuse these two questions is likely to lead, and in the present case has, in my opinion, led, to further confusion. It is fair to say, however, that it appears to me that the courts below dealt with the case on the basis on which it was presented to them by counsel. It was indeed presented to your Lordships as being a case to which the principles of "knowing receipt" ought to be applied.

 
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