Ross River Ltd and another v Cambridge City Football Club Ltd [2007] All ER (D) 113 (Sep), [2007] EWHC 2115 (Ch)
Chancery Division
Briggs J
19 September 2007
Disclosure of a payment to a company’s representative in the course of negotiations to one board member will not be sufficient to bring the existence of the payment to the knowledge of the company; disclosure to the chief executive officer or the company’s solicitors might be.
Jonathan Seitler QC and Andrew Mold (instructed by Field Fisher Waterhouse) for the claimants.
Nicholas Davidson QC and Alexander Hall-Taylor (instructed by Ince & Co) for the club.
The proceedings concerned the sale and lease-back of the defendant club’s football ground and stadium in Cambridge. Three related transactions were involved. The first concerned the sale of the club’s freehold interest in the ground to the claimants for £1.3m plus a share in the overage attributable to the obtaining of residential planning permission (the overage), pursuant to a conditional agreement of February 2005, which completed in April 2005.
The second consisted of a sale by the club to the claimant of its share in the overage for £900,000 in October 2005 (the overage agreement). The third was a contracted-out lease of the ground by the claimant to the club of June 2006, for a term expiring in May 2007. The club continued in occupation after that date pending the outcome of the litigation. The club sought to set aside the transactions on two distinct grounds.
The first arose from payments made in June and November 2005 and January 2006 on behalf of the claimant to the club’s then chief executive, E, who had taken the lead in negotiating the three transactions on behalf of the club. The club asserted that those payments amounted to bribes. The second basis was that the club claimed to have been induced to enter the second and predecessor of the third of those transactions by reason of fraudulent misrepresentations made on behalf of the claimant to the club’s surveyors in a letter of May 2005.
The claimants admitted the payments but argued that the first amounted to the discharge of the club’s liability for consultancy fees to E, known to and requested by the club at a time when it lacked the funds to make the payment itself. The remaining payments were said to have been for work done by E for the claimant after the sale of the club’s share in the overage. As to representations, the claimants argued that they were honest and accurate expressions of belief, and that the club did not rely on them in any event.
MR JUSTICE BRIGGS:
His lordship considered the evidence and held that none of the payments, which the directors purported to agree should be paid at the club’s expense to E, were duly authorised by the club, either at the time they were made, or subsequently, save in so far as the shareholders might have ratified them by approving the accounts. Authority would have required either unanimous shareholder approval or an amendment to the articles by a resolution at an appropriately constituted general meeting.
He further concluded that, as completion of the sale agreements approached in April 2005, and the directors came to appreciate that the club would have insufficient funds from the completion monies with which to make a substantial additional payment to E, all that had been agreed between them was the principle that he should receive a substantial payment as soon as the club was in a position to make it, out of monies flowing to the club from the claimant companies in connection with the project, but that no specific amount had been agreed, nor any requests made to the claimants that they should bear the burden, either in terms of cash flow or expense sharing.
E had, however, disclosed his receipt of the £10,000 to a member of the club’s board. The claimants had simply not cared whether the payment had been disclosed to or approved by the club. However, his lordship did not conclude that the payment was made with the intent of procuring an improperly favourable attitude towards the claimants in E’s further conduct of the overage negotiations.
He turned to the law regarding rescission for misrepresentation. He was invited to take note of the following passage in Paul Finn’s essay “Fiduciary Law in the Modern Commercial World” collected in McKendrick on Commercial Aspects of Fiduciary Obligation (1992):
“An appraisal (i) of the manner in which, and the apparent purpose for which rights, powers, duties and discretions are allocated by the contract; (ii) of the contract’s particular commercial or business setting, and (iii): of the self-serving actions lawfully open to a party both under, and not withstanding the contract will, as a rule, indicate decisively whether the role and reason of a party in the contract (or in a discrete part of it) can properly be said to be to serve his own interests, the parties’ joint interests, or the interests of the other party.”
His lordship adopted that guidance. As to bribery, the real bone of legal contention lay in the analysis of what, in the context of a limited company such as the club, constituted knowledge and, separately, consent. In particular, whether any disclosure to directors other than to the whole board, and consent by directors other than the whole board, would be sufficient given that E had failed to disclose his receipt of £10,000 in June 2005 to all his colleagues on the board, and did not receive the consent of all of them. His lordship considered that it was the directors, rather than the shareholders, whose knowledge and consent mattered.
It was conceded by the club that disclosure to the solicitors would have sufficed. His lordship held, however, that where the only disclosure made by the payee director was to one of his colleagues on the board, that was insufficient to bring the existence of the payment to the knowledge of the company. It might also be that where the payee was not the managing director or (as with E) the chief executive, the payee might make sufficient disclosure by telling that officer.
His lordship turned to the facts and concluded that there had been misrepresentations entitling the club to rescind the overage agreement. As to the bribery, if the payer left it to the agent to inform the principal of the payment, he did so at his own risk.
The claimants, therefore, had to submit to the rescission of the overage agreement on that basis.
