BAILII is celebrating 24 years of free online access to the law! Would you consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it will have a significant impact on BAILII's ability to continue providing free access to the law.
Thank you very much for your support!
 |
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] | |
England and Wales High Court (Commercial Court) Decisions |
||
|
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Rolls-Royce Holdings Plc v Goodrich Corporation [2022] EWHC 745 (Comm) (30 March 2022) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2022/745.html Cite as: [2022] EWHC 745 (Comm) |
||
[New search] [Printable PDF version] [Help]
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
||
B e f o r e :
SITTING AS A JUDGE OF THE HIGH COURT
____________________
| (1) ROLLS-ROYCE HOLDINGS PLC |
Claimant/ Applicant |
|
| - and - |
||
| (2) GOODRICH CORPORATION |
Defendant/ Respondent |
|
- and - |
||
| (3) ROLLS-ROYCE PLC (4) ROLLS-ROYCE TOTAL CARE SERVICES LIMITED (5) ROLLS-ROYCE CORPORATION (6) ROLLS-ROYCE DEFENSE SERVICES INC. (7) ROLLS-ROYCE DEUTSCHLAND LTD. & CO. KG (8) ROLLS-ROYCE BRASIL LIMITADA (9) ROLLS-ROYCE CANADA LIMITED (10) ROLLS-ROYCE CONTROLS AND DATA SERVICES LIMITED (FORMERLY ROLLS-ROYCE GOODRICH ENGINE CONTROL SYSTEMS LIMITED) |
Third to Tenth Parties |
____________________
Simon Croall QC and Stewart Chirnside (instructed by Bristows LLP) for the Defendant
Hearing dates: December 7, 9, 2021
____________________
Crown Copyright ©
Christopher Hancock QC :
Introduction and factual background.
(i) A Joint Venture Agreement between, inter alia, Goodrich, RR Group plc ("RR Group") and JVC setting out the terms governing the JV ("JVA"). The JVA included at clause 7.7 an option for RR Group to purchase Goodrich's shares in JVC in the event of a Change of Control (as defined) ("the JVA Call Option").
(ii) An Aftermarket Services Agreement ("ASA") and an Agreement for the Supply of Goods and Work for Engine Repair Services ("ECSURS") between inter alia Goodrich and the Third to Tenth Parties [1]which set out the arrangements for the provision and/or supply by Goodrich of Aftermarket Services (as defined).
(iii) A Put and Call Option Agreement ("PCOA") between Goodrich and RR Group pursuant to which Goodrich granted a call option ("the Call Option") to RR Group to allow it to acquire Goodrich's engine control systems aftermarket business or "AM Package" (as explained further below) to RR Group. It is RR Holdings' attempt to exercise the Call Option on 9 October 2018 by service of a notice dated 8 October 2018 which gives rise to its claim in the present proceedings.
"1. Extension of the PCOA and automatic expiry of the PCOA and this Letter Agreement:
(a) Notwithstanding any terms to the contrary in the PCOA… [as amended], the parties agree that the Call Option Period … shall automatically expire on the first business day following the day upon which the parties either obtain any necessary Governmental Approval (as defined in the RTP Agreement) or determine no Governmental Approval is required and the RTP Agreement … thereby becomes unconditional in accordance with its terms.
(b) If the parties determine that Government (sic) Approval (as defined in the RTP Agreement) is required but are unable to obtain the same on or before the Longstop Date (as defined in the RTP Agreement), this Letter Agreement will automatically expire and the Right to Purchase, as provided for in [the RTP Offer Letter], shall then form the only basis upon which Rolls-Royce or its Affiliates shall be entitled to purchase the AM Package from Goodrich or its Affiliates (including UTC, its ultimate parent).
2. Revised right to purchase the AM Package:
(a) The parties acknowledge that pursuant to the PCOA and the Right to Purchase Letter, Rolls-Royce has two separate and partially concurrent rights to purchase the AM Package from Goodrich. To provide certainty, the parties have agreed that the PCOA, as amended by paragraph (1) of this Letter Agreement, should expire in accordance with its terms so that, subject to paragraph 2(b) below, only… [the Modified RTP] remains in place until 31 December 2023.
(b) In consideration of, among other things, Rolls-Royce agreeing not to exercise the Modified RTP in accordance with the RTP Agreement, which, for the avoidance of doubt, means Rolls-Royce shall not serve the 12 months' RTP Notice on Goodrich earlier than 1 January 2020, Goodrich will, on or around the date of this Letter Agreement, enter into the… [the RTP agreement] which provides all terms and conditions pertaining to the Modified RTP. Consequently, the parties agree, and Rolls-Royce hereby waives any claim to the contrary, that the RTP Agreement (together with any documents referred to therein), shall form the only basis upon which Rolls-Royce or its Affiliates shall be entitled to purchase the AM Package from Goodrich or its Affiliates (including UTC, its ultimate parent), unless the parties agree otherwise or the provisions of paragraph 1(b) above apply."
The test for summary judgment.
"15. As Ms Anderson QC rightly reminded me, the court must be careful before giving summary judgment on a claim. The correct approach on applications by defendants is, in my judgment, as follows:
i) The court must consider whether the claimant has a "realistic" as opposed to a "fanciful" prospect of success: Swain v Hillman [2001] 2 All ER 91 ;
ii) A "realistic" claim is one that carries some degree of conviction. This means a claim that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8]
iii) In reaching its conclusion the court must not conduct a "mini-trial": Swain v Hillman
iv) This does not mean that the court must take at face value and without analysis everything that a claimant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10]
v) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550 ;
vi) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63 ;
vii) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent's case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant's case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725."
(i) the Court must consider whether the defence has a "realistic" as opposed to a "fanciful" prospect of success;
(ii) a "realistic" defence is one that carries some degree of conviction, i.e. it is more than merely arguable;
(iii) in reaching its conclusion, the Court must not conduct a "mini- trial";
(iv) the Court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial;
(v) the Court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts would add to or alter the evidence available to the trial judge and so affect the outcome of the case;
(vi) short points of law or construction, in respect of which the Court has before it all the evidence necessary for the proper determination of the question, may be determined.
The issues on this application.
(i) Novation.
34.i.1. Is Goodrich contractually estopped from denying that there was a novation of the Call Option to RR Holdings?
34.i.2. Was there a novation of the Call Option to RR Holdings, or is there a triable issue that there was not?
34.i.3. Was any novation, or contractual estoppel, induced by misrepresentation or common mistake?
(ii) As a matter of the construction of the December 2017 Letter Agreement, did RR Holdings have the right to exercise the Call Option when it purported to do so? This issue involves two sub-issues, as follows:
34.ii.1. Was there any right to exercise the Call Option after 31 December 2017?
34.ii.2. Did any such right expire when the parties determined that Governmental Approval would not be forthcoming?
Issue 1: Novation, and contractual estoppel as to such.
"Novation takes place where:
"… there being a contract in existence, some new contract is substituted for it, either between the same parties… or between different parties; the consideration mutually being the discharge of the old contract."
The second kind of novation ("three-party novation") is the more common, consisting of an agreement or agreements between A, B and C pursuant to which B's rights and obligations under an existing contract with A are assumed by C under a new contract with A. There is a new contract and it is therefore essential that the consent of all parties shall be obtained. Consent may be express (whether oral or written) or may be inferred from conduct. The "proper approach" to deciding whether a novation can be inferred from conduct is
"to decide whether that inference is necessary to give business efficacy to what actually happened … The inference is necessary for this purpose if the implication is required to provide a lawful explanation or basis for the parties' conduct."
For instance, in Evans v SMG Television Ltd a novation was inferred from conduct where one of the original contracting parties (B) was a company that became effectively dormant and did not perform its contractual obligations, while the new party (C) stepped in, performed those obligations (including the payment of fees), and entered agreements varying the original obligations with A. Whether there has been consent is assessed objectively. It follows that the parties may not appreciate that their dealings have had the effect of novation, but this does not prevent the novation from being effective."
Contractual estoppel.
"56. There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not. For example, it may be desirable to settle a disagreement as to an existing state of affairs in order to establish a clear basis for the contract itself and its subsequent performance. Where parties express an agreement of that kind in a contractual document neither can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerns those aspects of their relationship to which the agreement was directed. The contract itself gives rise to an estoppel: see Colchester Borough Council v Smith [1991] Ch. 448, affirmed on appeal [1992] Ch 421.
57. It is common to include in certain kinds of contracts an express acknowledgment by each of the parties that they have not been induced to enter the contract by any representations other than those contained in the contract itself. The effectiveness of a clause of that kind may be challenged on the grounds that the contract as a whole, including the clause in question, can be avoided if in fact one or other party was induced to enter into it by misrepresentation. However, I can see no reason in principle why it should not be possible for parties to an agreement to give up any right to assert that they were induced to enter into it by misrepresentation, provided that they make their intention clear, or why a clause of that kind, if properly drafted, should not give rise to a contractual estoppel of the kind recognised in Colchester Borough Council v Smith . However, that particular question does not arise in this case. A clause of that kind may (depending on its terms) also be capable of giving rise to an estoppel by representation if the necessary elements can be established: see E.A. Grimstead & Son Ltd v McGarrigan (C.A.) (unreported, 27th October 1999)."
and Springwell at [143]-[144], [156] and [177]:
"143. Before I examine Lowe v. Lombank and subsequent cases on this issue, I will try and analyse the matter from principle. If A and B enter into a contract then, unless there is some principle of law or statute to the contrary, they are entitled to agree what they like. Unless Lowe v Lombank is authority to the contrary, there is no legal principle that states that parties cannot agree to assume that a certain state of affairs is the case at the time the contract is concluded or has been so in the past, even if that is not the case, so that the contract is made upon the basis that the present or past facts are as stated and agreed by the parties. It is, after all, common in marine insurance contracts for an assured to "warrant" that a certain state of affairs has existed in the past and is still existing at the time the insurance contract is concluded or will continue, e.g. that the nationality of a ship was and is British; or that a ship was and is "in Class" with her Classification Society. The shipowner may know that those things are not the case; the insurer may have his suspicions that they are not the case. The parties agree that for the purposes of the insurance contract, the facts as "warranted" by the assured are as he has stated them to be. A "conclusive evidence" clause in a sale contract, viz. that a report on e.g. the amount or condition of a commodity sold under a contract between A and B shall be "conclusive evidence" of the matters stated in the report is to the same effect. The parties are agreeing that the statements in the report shall be the case for the purposes of the contract of sale and the parties cannot go behind that agreement.
144. So, in principle and always depending on the precise construction of the contractual wording, I would say that A and B can agree that A has made no pre-contract representations to B about the quality or nature of a financial instrument that A is selling to B. Should it make any difference that both A and B know at and before making the contract, that A did, in fact, make representations, so that the statement that A had not is contrary to what each side knows is the case? Apart from the remarks of Diplock J in Lowe v Lombank, Mr Brindle did not show us any case that might support the proposition that parties cannot agree that X is the case even if both know that is not so. I am unaware of any legal principle to that effect. The only possible exception might be if the particular agreement between A and B on the certain state of affairs concerned contradicts some other specific or more general rule of English public policy. Like Moore-Bick LJ in Peekay I see commercial utility in such clauses being enforceable, so that parties know precisely the basis on which they are entering into their contractual relationship…
… 156. In contrast to Lowe v Lombank, there is a series of cases which support the proposition that parties can agree that a state of affairs will be the basis of their contractual dealings with one another, even if they know that it is not the case. First there is the decision of the Court of Appeal in Burrough's Adding Machines Limited v Aspinall. The case concerned a dispute about whether the salesman was entitled to commission on the sale of adding machines to banks. The company had, wrongly but without deceit, prepared its accounts of the sales of the machines on the basis that sales to banks were excluded. The salesman knew that sales of adding machines had been made to banks, but did not dispute the accounts at the time they were sent to him. He only raised the issue when he left the company's service some years later. The court held that a term in the contract between the company and its salesman that all statements of account sent by the company to him " shall be deemed to be accepted by the salesman as correct " unless he gave written notice that they were not within 30 days of receiving the account, bound both parties. Therefore the salesman was bound by the agreed statement of facts even if they were not accurate….
… 177. I have, effectively, rejected Mr Brindle's argument that there is no juristic concept of "contractual estoppel" which is distinct from the doctrine of "estoppel by convention". To my mind, once it is accepted that there is a separate doctrine of "contractual estoppel" then there is no room for a requirement that the party which wishes to rely on that estoppel must demonstrate that it would be unconscionable for the other party to resile from the conventional state of affairs that the parties have assumed. The reason why that is a requirement in the case of "estoppel by convention" is precisely because there is no contract between the parties. Therefore some other mechanism has to come into play to make the non-contractual "convention" enforceable."
RR Holdings' contentions.
(i) The parties recited (twice) that the PCOA was an agreement between RR Holdings and Goodrich;
(ii) RR Holdings served a Buyout Notice, effective upon the closing of the UTC Merger (which was, in the event, 26 July 2012), thus triggering the commencement of the Call Option Period under the PCOA (§1(b));
(iii) It was agreed that the Call Option Period would last for two years rather than one (i.e. until 26 July 2014) (§3); and
(iv) The PCOA was amended in a number of other respects (§§4-5).
(i) The parties again recited that the PCOA was an agreement between RR Holdings and Goodrich; and
(ii) It was agreed that the Call Option Period would be extended until 26 July 2017 (§1).
(i) The parties again recited that the PCOA was an agreement between RR Holdings and Goodrich; and
(ii) It was agreed that the Call Option Period would be extended further until 31 December 2017 (§1).
(i) Recited that "[p]ursuant to the [PCOA], [RR Holdings] was granted a right to acquire [Goodrich's] engine control systems aftermarket business …" (recital D) and defined the PCOA as "the agreement between the parties …" (clause 1.1) (emphases added);
(ii) Recited that the US Court had ordered Goodrich to grant the RTP to "[RR Holdings] and its affiliates" (recital E) (emphasis added) and recorded that Goodrich had granted the RTP to RR Holdings and was modifying the same pursuant to the terms of the RTP Agreement (clause 2.1);
(iii) Accordingly granted RR Holdings a modified form of RTP under certain specified conditions (the "Modified RTP"), which, pursuant to clause 2.1 and the definition of "RTP Period" in clause 1.1, could only be exercised between 1 January 2020 and 31 December 2023; and
(iv) Provided that:
49.iv.1. "The parties … wish to allow the [Call Option under the PCOA] to automatically expire on the Unconditional Date (as defined below), leaving only the RTP, as modified by this Agreement. For avoidance of doubt, following expiry of the [Call Option], [RR Holdings] and its affiliates shall only have a single right or option to buy the AM Package, which is the RTP as set forth herein" (recital F);
49.iv.2. "The Right to Purchase shall be conditional on either the Governmental Approval [i.e. approval by the US Court and/or the DoJ] having been obtained or the parties determining no Governmental Approval is required ("Condition")" (clause 2.2);
49.iv.3. "The first Business Day immediately following satisfaction of the Condition or determination that no Condition is required is the Unconditional Date" (clause 2.5); and
49.iv.4. "If the Condition is not satisfied within six (6) months of the date of this Agreement, or such other date as mutually agreed in writing between the parties (the "Longstop Date") this Agreement shall automatically expire" (clause 2.6).
(i) Recited (again) that the PCOA was an agreement between RR Holdings and Goodrich;
(ii) Provided, under the heading "Extension of the PCOA and automatic expiry of the PCOA and this Letter Agreement", that:
50.ii.1. "Notwithstanding any terms to the contrary in the PCOA [as amended], the parties agree that the Call Option Period … shall automatically expire on the first business day following the day upon which the parties either obtain any necessary Governmental Approval (as defined in the RTP Agreement) or determine that no Governmental Approval is required and the RTP Agreement … thereby becomes unconditional in accordance with its terms" (§1(a)); and
50.ii.2. "If the parties determine that Government[al] Approval (as defined in the RTP Agreement) is required but are unable to obtain the same on or before the Longstop Date (as defined in the RTP Agreement), this Letter Agreement will automatically expire and the Right to Purchase, as provided for in [the RTP Offer Letter], shall then form the only basis upon which Rolls-Royce or its Affiliates shall be entitled to purchase the AM Package from Goodrich or its Affiliates (including UTC, its ultimate parent)" (§1(b)); and
50.ii.3. Provided, under the heading "Revised right to purchase the AM Package", that:
50.ii.3.1. "The parties acknowledge that pursuant to the PCOA and [the RTP Offer Letter], Rolls-Royce has two separate and partially concurrent rights to purchase the AM Package from Goodrich. To provide certainty, the parties have agreed that the PCOA, as amended by paragraph (1) of this Letter Agreement, should expire in accordance with its terms so that, subject to paragraph 2(b) below, only the Right to Purchase, as modified by the RTP Agreement ("Modified RTP") remains in place until 31 December 2023" (§2(a)); and
50.ii.3.2. "In consideration of, among other things, Rolls-Royce agreeing not to exercise the Modified RTP in accordance with the RTP Agreement, which, for the avoidance of doubt, means Rolls-Royce shall not serve the 12 months' RTP Notice on Goodrich earlier than 1 January 2020, Goodrich will … enter into the [RTP Agreement] … Consequently, the parties agree, and Rolls-Royce hereby waives any claim to the contrary, that the RTP Agreement (together with any documents referred to therein), shall form the only basis upon which Rolls-Royce or its Affiliates shall be entitled to purchase the AM Package … unless the parties agree otherwise or the provisions of paragraph 1(b) above apply" (§2(b)).
Goodrich's contentions.
(i) the mere fact that an agreement recites a certain fact or state of affairs does not necessarily mean that all parties to the agreement are estopped from denying its truth. Where the recital is properly construed as a statement by one party only and is not attributable to the party alleged to be estopped, it has no contractual force and does not create an estoppel: Greer v. Kettle [1938] AC 156 (HL) at 167 and 170; Prime Sight at [32];
(ii) an estoppel based on a recital will only arise based on the express terms of the recital and not by implication: Re Distributors and Warehousing Ltd [1986] BCLC 129 at 139-140; First National Bank plc v. Thompson [1996] Ch 231 at 237A, 243E; PW & Co v Milton Gate Investments Ltd [2004] Ch 142 at [150]-[151];
(iii) a recital will not create an estoppel where it is based on a common mistake of fact or where one party induced an untrue recital by his own representation to the other party: Greer v. Kettle at 171; Prime Sight at [41].
(i) they were "mere representations", and not contractual warranties;
(ii) on their true construction, they were statements by RR Holdings only which were not agreed by Goodrich;
(iii) they did not include any express statement that a novation had taken place and a recital could not give rise to an estoppel based on inference; and
(iv) they were based on a common mistake and/or were induced by a misrepresentation by RR Holdings.
Discussion and conclusions.
(i) It is in my judgment clear from the various contractual documents identified above that both parties were proceeding on the basis that the PCOA had been extended, and that the rights under that extended agreement were vested in RR Holdings. Neither party was of the view that the rights under the PCOA had lapsed, or that those rights were still vested in RR Group. The only viable alternative to these two possibilities, as the parties accepted before me, is that the rights were now vested in RR Holdings, and all the documentary material to which RR Holdings made reference, as set out above, is consistent with this conclusion.
(ii) On the face of the documentation, this was agreed between the parties and was not simply a representation by one party (RR Holdings) to the other. I consider the separate misrepresentation argument below.
(iii) Whilst I agree that there is no express statement that a novation has taken place, the contents of the agreements are only consistent with this conclusion. This is apparent both from the recitals and from the operative terms of the agreements. I consider that this case is very different from the cases relied on by Goodrich and referred to in paragraph 52(ii) above, which were cases concerned only with recitals and not with operative terms.
(iv) Indeed, in my view, the correct analysis is that both parties had agreed that RR Holdings was to be treated as Goodrich's counterparty to the PCOA. Whilst it is correct that the legal analysis that would explain this agreement would be that there had been a novation of the contract from RR Group to RR Holdings, the important fact is that there was an agreement that the two parties to the PCOA were now RR Holdings and Goodrich. The legal mechanism that would lead to this being the case is of secondary importance.
Misrepresentation.
Goodrich's contentions.
RR Holdings' response.
(i) No case had been pleaded to this effect, despite the fact that Mr Hudson's statement had been produced several months before the hearing.
(ii) The argument focuses exclusively on the December 2017 Letter Agreement and the RTP Agreement, and a representation that is said to have been made in relation to those agreements, in circumstances in which the parties had already been treating RR Holdings as Goodrich's counterparty under the PCOA for over five years.
(iii) In light of the fact that the parties had already been treating RR Holdings as Goodrich's counterparty under the PCOA for over five years, any representation in 2017 that RR Holdings was Goodrich's counterparty under the PCOA, and therefore the correct party to name as such in the December 2017 Letter Agreement and RTP Agreement, would have been true.
(iv) The gravamen of Goodrich's point seems be that Mr Horsley gave an erroneous explanation as to the reason why RR Holdings was a party to the PCOA (citing a Deed of Adherence which did not apply to the PCOA rather than an inferred novation or a contractual estoppel). However, that apparent error (which must be assumed for present purposes) cannot assist Goodrich in establishing its Novation Defence, even leaving aside the matter of its obvious immateriality, because both the 2017 Letter Agreement and the RTP Agreement contain "no representation"/"non-reliance" clauses, at §7 and clause 23.1 respectively. Such clauses are effective in accordance with their terms: see Peekay and Springwell, refs supra and Chitty on Contracts, 34th ed at 9-154.
(v) As to the suggested inference that such a misrepresentation might have been made at the time of the earlier agreements, there was no evidence in support of this suggestion. Mr Hudson's evidence was that he had consulted his predecessors and this had produced no positive evidence to support a plea of misrepresentation.
(vi) The suggested case was not only not pleaded, but was inconsistent with Goodrich's case as currently pleaded. Goodrich did not plead that the agreements were voidable; they positively accepted that the various agreements were valid.
Discussion and conclusions.
(i) The first is the presence of the non-reliance clauses. These clauses are well recognised and serve a sensible commercial purpose: see the authorities cited above. They would in my judgment deprive Goodrich of the right to rely on the misrepresentation alleged.
(ii) The second is the fact that Goodrich has not exercised the right to rescind the agreement but has instead affirmed it in its pleaded case. Absent rescission, the agreement remains in full force and effect, along with the Call Option contained in it.
Novation by conduct.
Goodrich's contentions.
(i) the alleged novation by conduct is precluded by clause 15.1 of the PCOA; and
(ii) whether there was a novation by conduct is a fact sensitive issue. RR Holdings advances no evidence to support this conclusion, the available material does not support it and it is an issue which can only be properly determined at trial, there being good reason to believe that further evidence will be available at trial which would affect the outcome of the issue.
Clause 15.1 of the PCOA.
"No party (the "Assignor") shall, nor shall it purport to, assign, transfer, charge or otherwise deal with all or any of its rights and/or obligations (in whole or in part) under this Agreement, nor grant, declare, create or dispose of any right or interest in it (in whole or in part), without the prior written consent of the other party. If the proposed dealing is an assignment and if the proposed assignee (the "Assignee") is a party's Affiliate, such prior written consent shall not be unreasonably withheld or delayed. Any such purported assignment, transfer, charge or other dealing without the prior written consent of the other party shall be null and void."
"No assignment or novation pursuant to clause 15.1 or clause 15.2 shall be effective until:
(A) In the case of an assignment pursuant to clause 15.1 the Assignor procures that the Assignee executes and delivers a deed of adherence in the form set out in Schedule 6;
(B) In the case of an assignment pursuant to clause 15.1, the Assignor executes and delivers a guarantee of the performance of the Assignee's obligations under this Agreement in the form set out in Schedule 6; and…"
"16.1 Any release, delay or waiver by any party in favour of the other party of any (or any part of) its rights under this Agreement shall only be binding if it is given in writing. Any binding release, delay or waiver shall:
(A) Be confined to the specific circumstances in which it is given; and
(B) Not affect any other enforcement of the same right or the enforcement of any other right by or against any of the parties."
(i) The conduct relied upon by RR Holdings in support of the alleged novation by conduct is Goodrich's conduct in entering into the Letter Agreements and the RTP Agreement. However, this was insufficient to establish a novation.
(ii) None of those agreements refer to the alleged or any novation (by conduct or otherwise) or provide Goodrich's consent to it. In any event, they all post-date the alleged novation and so cannot amount to Goodrich's prior written consent as required under clause 15.1.
75.ii.1. First, Goodrich's unchallenged evidence is that there was never any request for a novation (or indeed any discussion at all between the parties about a novation) prior to the purported exercise of the Call Option by RR Holdings on 9 October 2018. A novation by conduct will not ordinarily be inferred in the absence of a distinct request: see Chitty on Contracts, 34th ed, at 22-090.
75.ii.2. Second, the Letter Agreements and the RTP Agreement do not clearly establish the consent of all 3 parties to the alleged novation and they are not consistent only with an intention to achieve a novation. RR Group was not a party to any of the agreements relied on; the agreements do not contain any express reference to any novation; and none of the agreements purport to transfer any rights or obligations under the PCOA from RR Group to RR Holdings. This absence of written consent from RR Group is fatal to an argument that the parties had given written consent so as to comply with Clause 15.1.
75.ii.3. Thirdly, Goodrich relied on the anti-waiver clause to support an argument that the requirements of clause 15.1 could not be waived by conduct.
RR Holdings' contentions on clause 15.1.
(i) It has given prior written consent to RR Holdings being its counterparty; and in any event
(ii) It is estopped from denying that RR Holdings is its counterparty under the PCOA, cutting its argument off at the root.
"16. The enforcement of No Oral Modification clauses carries with it the risk that a party may act on the contract as varied, for example by performing it, and then find itself unable to enforce it. It will be recalled that both the Vienna Convention and the UNIDROIT model code qualify the principle that effect is given to No Oral Modification clauses, by stating that a party may be precluded by his conduct from relying on such a provision to the extent that the other party has relied (or reasonably relied) on that conduct. In some legal systems this result would follow from the concepts of contractual good faith or abuse of rights. In England, the safeguard against injustice lies in the various doctrines of estoppel. This is not the place to explore the circumstances in which a person can be estopped from relying on a contractual provision laying down conditions for the formal validity of a variation. The courts below rightly held that the minimal steps taken by Rock Advertising were not enough to support any estoppel defences. I would merely point out that the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering IN.GL.EN SpA [2003] 2 AC 541, paras 9, 51, per Lord Bingham of Cornhill and Lord Walker of Gestingthorpe."
"74. What emerges is that there is little difference between the UNIDROIT approach and the English approach through the doctrines of estoppel. This is borne out by the example of the exception in the second sentence of Article 2.1.18 given in the Comment on the UNIDROIT Principles:
"Yet there is an exception to the general rule. In application of the general principle prohibiting inconsistent behaviour (see Article 1.8), this Article specifies that a party may be precluded by its conduct from invoking the clause requiring any modification or termination to be in a particular form to the extent that the other party has reasonably acted in reliance on that conduct.
Illustration 2.
A, a contractor, contracts with B, a school board, for the construction of a new school building. The contract provides that the second floor of the building is to have sufficient bearing capacity to support the school library. Notwithstanding a "no oral modification" clause in the same contract, the parties orally agree that the second floor of the building should be of non-bearing construction. A completes construction according to the modification and B, who has observed the progress of the construction without making any objections, only at this point objects to how the second floor has been constructed. A court may decide that B is not entitled to invoke the "no oral modification" clause as A reasonably relied on the oral modification, and is therefore not liable for non-performance."
75. As I pointed out during the course of argument, the oral agreement postulated involves an unequivocal representation that the second floor does not have to be of load-bearing capacity, upon which the contractor relies by building according to that oral modification. In those circumstances, the school board could not rely upon the No Oral Modification clause. The illustration is a classic example of what Lord Sumption JSC said at [16] of his judgment was required by way of estoppel. In other words, Lord Sumption JSC is setting out how English law interprets this UNIDROIT principle and is not saying anything different from UNIDROIT."
Discussion and conclusions.
(i) Whereas contractual estoppel focusses on the conduct of the two parties to the contract – here Goodrich and RR Holdings – and holds those two parties bound by an agreement to assume that a state of affairs exists even where it does not, novation by conduct involves a consideration of whether there has in fact been a novation.
(ii) In this regard, where the novation is said to be inferred from conduct, then it must, in my view, be the case that the conduct of all three parties to what must be a tripartite arrangement has to be considered.
(iii) Where there are in addition formal requirements that must be satisfied in order that a novation be found to exist, then those must be satisfied unless a party is debarred by representation, agreement or conduct, from relying on the failure to rely on the relevant formal requirement.
Goodrich's contentions in relation to this issue.
(i) It is not necessary to infer a novation by conduct to provide a lawful explanation or basis for the parties' conduct. This is not a case where RR Group has ceased to exist and so a novation is necessary for that reason. Further, the recitals and terms of the agreements, which purport to amend the terms of the PCOA, are equally consistent with a mistaken belief that a novation had already taken place. If the parties were labouring under a mistaken belief that a novation had already taken place, that would provide an obvious and complete explanation for the parties' dealings between 2012 and 2018.
(ii) Mr Hudson's unchallenged evidence, which is consistent with the contemporaneous documents, is that when Goodrich queried which RR entity was the correct contracting party during the negotiations for the December 2017 Letter Agreement and RTP Agreement, it was told that RR Holdings was the correct party based on a Deed of Adherence dated 31 December 2011 ("the Deed of Adherence"). Similarly, when Goodrich changed the reference to RR Holdings in the recital relating to the PCOA in a draft of the December 2017 Letter Agreement to RR Group, it was provided with a further copy of the Deed of Adherence, which RR Holdings stated in terms evidenced "the replacement of RR Group by RR Holdings to the JV Agreement (which includes the PCOA and CASPA)". Mr Hudson also confirms that Goodrich did not question RR Holdings' assertions based on the Deed of Adherence at the time.
(iii) However, it is clear (and accepted for the purposes of the hearing before me) that RR Holdings' assertions were incorrect. The Deed of Adherence only related to the JVA and did not purport to novate RR Group's rights and obligations under the PCOA to RR Holdings. The evidence therefore shows that in 2017 when the parties were negotiating the December 2017 Letter Agreement and the RTP Agreement they were working on the basis of a mistaken belief that the Deed of Adherence somehow constituted a novation of RR Group's rights and obligations under the PCOA to RR Holdings. Moreover, given the Deed of Adherence relied on by RR Holdings was dated 31 December 2011, it is submitted there is a strong inference that the parties were working on the basis of a similar mistaken belief when the earlier Letter Agreements were agreed and RR Holdings has produced no evidence to rebut that inference.
(iv) At any rate, the Court cannot be sufficiently sure that was not the case so as to be able to grant summary judgment in the absence of a fuller investigation of the facts and proper disclosure. At present, there is no evidence before the Court in relation to precisely how the 2012, 2014 and June 2017 Letter Agreements came to be agreed in the terms in which they did. However, it is submitted that such evidence is likely to exist and can reasonably be expected to be available at trial.
(v) Alternatively, and without prejudice to Goodrich's primary position as set out above, it is submitted that the terms of the various agreements purporting to amend the PCOA (e.g. to extend the Call Option Period) are arguably equally consistent with RR Holdings agreeing such amendments on behalf of RR Group. There are numerous other terms in the Letter Agreements relied on by RR Holdings which suggest that RR Holdings was purporting to act on behalf of both itself and the other members of the Rolls-Royce Group and there are no clauses in those agreements excluding the effect of the Contracts (Rights of Third Parties) Act 1999.
(vi) The parties' subsequent conduct is also inconsistent with the alleged novation. Goodrich's conduct in (i) querying which RR entity was the correct contracting party and (ii) changing the reference to RR Holdings in the recital relating to the PCOA to RR Group in the draft of the 2017 Letter Agreement, and (iii) RR Holdings' conduct in relying on the Deed of Adherence to justify the references to RR Holdings in the agreements are all inconsistent with a novation having taken place.
RR Holdings' arguments'
Discussion and conclusions.
Misrepresentation?
Did the December 2017 Letter Agreement and RTP Agreement permit the exercise of the call option in October 2018?
(i) Was the Call Option exercisable at all after 31 December 2017?
(ii) Was the Call Option exercisable if the parties had determined that Governmental Approval would not be forthcoming?
Relevant Principles as to construction.
(i) The Court construes the relevant words of a contract in its documentary, factual and commercial context, assessed in the light of: (a) the natural and ordinary meaning of the provision being construed; (b) any other relevant provisions of the contract being construed; (c) the overall purpose of the provision being construed and the contract in which it is contained; (d) facts and circumstances known or assumed by the parties at the time that the document was executed; and (e) commercial common sense; but (f) disregarding subjective evidence of any party's intentions: see Arnold v Britton per Lord Neuberger PSC at [15].
(ii) In arriving at the true meaning and effect of a contract, the departure point in most cases will be the language used by the parties because (a) the parties have control over the language they use in a contract; and (b) the parties must have been specifically focussing on the issues covered by the disputed clause or clauses when agreeing the wording of that provision: Arnold v Britton at [17].
(iii) Where the parties have used unambiguous language, the Court must apply it: Rainy Sky per Lord Clarke JSC at [23].
(iv) Where the language used by the parties is unclear, the Court can properly depart from its natural meaning where the context suggests that an alternative meaning more accurately reflects what a reasonable person with the parties' actual and presumed knowledge would conclude the parties had meant by the language they used but that does not justify the Court searching for drafting infelicities in order to facilitate a departure from the natural meaning of the language used: Arnold v Britton at [18].
(v) In striking a balance between the indications given by the language and those arising contextually, the Court must consider the quality of the drafting of the clause and the agreement in which it appears: Wood v Capita Insurance Services per Lord Hodge JSC at [11]. Sophisticated, complex agreements drafted by skilled professionals are likely to be interpreted principally by textual analysis unless a provision lacks clarity or is apparently illogical or incoherent: Wood v Capita Insurance Services at [13].
(vi) A Court should not reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight, because it is not the function of a Court when interpreting an agreement to relieve a party from a bad bargain: Arnold v Britton at [20] and Wood v Capita Insurance Services at [11].
(vii) A Court can only consider facts or circumstances known or reasonably available to both parties at the time that the contract was made: Arnold v Britton at [21].
Goodrich's contentions.
(i) In the event that Governmental Approval was not required, the Call Option and the PCOA would expire leaving the Modified RTP as the only option to purchase the AM Package (see clause 2(a) of the December 2017 Letter Agreement);
(ii) In the event the parties obtained any necessary Governmental Approval, the Call Option and the PCOA would expire leaving the Modified RTP as the only option to purchase the AM Package (see clause 2(a) of the December 2017 Letter Agreement);
(iii) In the event that, either the parties determined that Governmental Approval was required but could not be obtained on or before the Longstop Date, or that Governmental Approval could not in fact be obtained (sub-issue 2 below) the December 2017 Letter Agreement would automatically expire (and with it the Call Option and PCOA) and the original RTP "shall then form the only basis upon which Rolls-Royce or its Affiliates shall be entitled to purchase the AM Package…" (clause 1(b)).
RR Holdings' contentions.
(i) First, as a matter of language, it was submitted that it was not possible to read the proviso that Goodrich needs into §§1(a)-(b) of the December 2017 Letter Agreement. Those paragraphs do not say that only some parts of the PCOA are to survive, nor do they change the PCOA's nature. They simply extend the Call Option Period. It generally requires clear words for a party to be taken to have relinquished a contractual right: see Lewison, The Interpretation of Contracts (7th Ed) at §7.173. There are no words here removing RR Holdings' right to exercise the Call Option during the extended Call Option Period.
(ii) Second, Goodrich's construction made a nonsense of §§1(a)-(b) of the December 2017 Letter Agreement, and the very concept of an extension of the Call Option Period. If the parties had wanted the Call Option to no longer be exercisable, they would have either let it expire on 31 December 2017 (when it was due to expire but for the December 2017 Letter Agreement), which was only ten days away, or truncated it. They certainly would not have extended it.
(iii) Third, it is trite law that the Court is reluctant to hold that parts of a contract are inconsistent with each other, and will give effect to any reasonable construction which harmonises the relevant clauses: see Lewison at §§9.101-9.111. Yet Goodrich's argument, which appears to rest on the language of §2 of the December 2017 Letter Agreement, requires the December 2017 Letter Agreement to be read in a way that creates a rank inconsistency between §1 and §2, as §1 would extend the Call Option Period and §2 would negate that extension. On Goodrich's interpretation, §1 would not only be completely nullified by §2, but would be positively misleading. Goodrich's construction is also inconsistent with (i) the express acknowledgement in §2(a) of the December 2017 Letter Agreement that, pursuant to the PCOA and the RTP Offer Letter, RR Holdings "has two separate and partially concurrent rights to purchase the AM Package", and (ii) recital F of the RTP Agreement, which provides that "following expiry of the [Call Option], [RR Holdings] and its affiliates shall only have a single right or option to buy the AM Package, which is the RTP as set forth herein" (emphases added).
(i) First, they made reference to the potential reliance Goodrich might place on the words "the RTP Agreement … shall form the only basis on which Rolls-Royce or its Affiliates shall be entitled to purchase the AM Package from Goodrich" in §2(b) of the December 2017 Letter Agreement. However, RR Holdings responded, the sentence in which those words appear is plainly forward-looking – hence the use of the words "shall form". It is concerned with the position as and when the RTP Agreement becomes unconditional, and not before.
(ii) Second, reference was made to a potential argument that as Goodrich's aim was, objectively, to retain the AM Package until at least 2021, and as the parties agreed to it doing so in the event that the RTP Agreement became unconditional, it would have been commercially irrational for the parties to have left open the possibility of RR Holdings exercising the Call Option under the PCOA before the RTP Agreement became unconditional. However, RR Holdings argued, any such argument confuses commercial irrationality on the one hand with compromise on the other.
(iii) RR Holdings then made reference to potential arguments based on Goodrich's subjective intentions and the possibility of further relevant evidence emerging before trial. In fact, I did not understand Goodrich to place any reliance on any such arguments.
Discussion and conclusions.
The second sub-issue.
Goodrich's contentions.
(i) Clause 1(b) provides for expiry at the time of determination, not on the Longstop Date. RR Holdings' construction requires a rewriting of the clause and the addition of the words "on the Longstop Date" to be added after the words "automatically expire";
(ii) RR Holdings' construction is that the Call Option was extended until the Longstop Date and was exercisable at any point up to that date. If this had been agreed, simple language could and would have been used: "This Letter Agreement shall expire on the Longstop Date." The elaborate scheme in clauses 1(a) and 1(b) would have been unnecessary. In particular, this construction gives no real meaning or purpose to the words which were in fact used "if the parties determine that Government [sic] Approval… is required but are unable to obtain the same on or before the Longstop Date".
(iii) Goodrich's construction of clause 1(b) is also consistent with the identical mechanisms agreed in clause 1(a) of the December 2017 Letter Agreement and in the RTP Agreement (clauses 2.2 and 2.5). Both provided that the Call Option Period would expire when the parties determined that no Governmental Approval was required and the Modified RTP therefore became unconditional. In the circumstances, Goodrich's interpretation is to be preferred.
(iv) The parties had agreed to cooperate to obtain Governmental Approval. To allow the Call Option to be exercised whilst this process of cooperation was ongoing would be to cut across the provisions as to cooperation. It was only when both parties concluded that such cooperation would be fruitless that it would make sense for the option to be exercisable.
RR Holdings' contentions.
Discussion and conclusions.
(i) RR Holdings' construction is in my view more consonant with the actual words used in the December 2017 Letter Agreement. The literal meaning of the words draws a distinction between the expiry of the period without Government Approval where that is necessary, by reference to the Longstop Date (an objective fact) and the determination that such approval is not necessary.
(ii) This construction is also more consonant with the wording of the RTP Agreement, which also draws a distinction between, on the one hand, the determination that Governmental Approval is not necessary, and, on the other, the expiry of the period without the obtaining of such approval.
(iii) This construction is also more workable, since it involves less subjectivity, and is in my judgment therefore more likely to be the correct one.
Some other reason for trial?
Summary of conclusions and disposition.
(i) I am not prepared to conclude, on the present evidence, that there was in fact a novation by conduct from RR Group to RR Holdings. That is because I do not have sufficient evidence of RR Group's conduct.
(ii) However, I would conclude that Goodrich are estopped from contending that there was no such novation, whether or not such a novation in fact took place.
(iii) It follows that I would have held that the Call Option was vested in RR Holdings. Nevertheless, since, for the reasons I set out below, I am not prepared to give summary judgment, this issue must remain formally open.
(iv) I am not prepared to hold that Goodrich's case to the effect that there was no right to exercise the option after December 31 2017 has no real prospect of success. For this reason, I am not prepared to grant summary judgment.
(v) On balance I would prefer RR Holdings' construction on the second contractual sub-issue, i.e. whether the question raised by the December 2017 Letter Agreement is whether the parties have determined that Governmental Approval will not be forthcoming. However, I make no final finding in this regard.
(vi) The issue of whether a trial should be ordered even if summary judgment is ordered does not arise.
Note 1 To clarify, JVC (the Tenth Party) was not a party to the ECSURS. [Back]
