English law good faith prevents reliance on pre-emption rights

The dispute in this case arose out of the struggle for control of a company (EFI) and involved the question of whether a right of pre-emption was valid and enforceable on a particular transfer of shares.

At first instance, Ms Lesley Anderson QC (sitting as Deputy Judge of the High Court) held that the appellant (Mr Dixon) could not rely on a right of pre-emption to prevent the transfer of certain shares in EFI to the claimant (BHIL). This was because of an estoppel by convention. Mr Dixon had himself previously received shares in EFI without regard to that same right of pre-emption. Mr Dixon appealed, arguing that there could be no common assumption (giving rise to an estoppel) about the validity of certain rights where the party alleged to be estopped (ie Mr Dixon) was ignorant of those rights (or had forgotten they existed) and/or where the assumption was not sufficiently clear and unambiguous. The Court of Appeal dismissed both grounds of appeal.

Pre-emption rights under shareholders' loan

The terms of a shareholders' loan agreement (used to fund a business acquisition in 2001) included a restriction on the transfer of shares and a right of pre-emption for existing shareholders (the 2001 rights of pre-emption), also referred to in what were called the February 2001 Letter and November 2001 Letter.

In 2009 and 2010, Mr Dixon and a fellow shareholder, Mr Wells, acquired 400 of the 600 shares in EFI through a series of transactions (the 2009/2010 transactions). The 2009/2010 transactions were all concluded without regard to the 2001 rights of pre-emption.

Take-over attempt

Thereafter, Mr Dixon tried to acquire the remaining shares in EFI (held by a Mr Bass and a Mr Mingay) through a campaign of intimidation. However, Messrs Bass and Mingay agreed to sell their shares to a Mr Boam, to be held by BHIL. Mr Bass and Mr Mingay confirmed to the solicitor acting for Mr Boam in relation to this sale (the BHIL sale) that the shares were unencumbered.

The judge at first instance was satisfied that the BHIL sale was unanimously approved at a meeting of the Board in October 2011, subject only to presentation of the stock transfer form and share certificates (the October Board meeting).

Shortly after the October Board meeting, Mr Dixon discovered the February and November 2001 Letters referring to the 2001 rights of pre-emption, which he then tried to use to block the BHIL sale. While the detail is not important, the judge at first instance found that the manner in which he proposed to do this amounted to a lie.

In November 2011, the Board declined to register the transfer of shares to BHIL and returned the stock transfer forms (the November Board meeting). Their refusal to do so gave rise to the dispute in which BHIL claimed that the 2001 rights of pre-emption were not valid or enforceable and sought an order amending the register of members of EFI to include BHIL as shareholder.

First instance: estoppel prevents use of pre-emption rights

Ms Anderson QC held (inter alia) that the 2001 rights of pre-emption were valid and binding, but that Mr Dixon (among others) was estopped from enforcing those rights because (a) the relevant parties shared an assumption that they were not valid (and had conducted themselves on that basis), and (b) it would be unconscionable and inequitable for Mr Dixon (among others) to rely on those rights in refusing to register the transfer of shares from Messrs Bass and Mingay to BHIL in circumstances where he had acquired shares and other benefits pursuant to the 2009/2010 transactions regardless of the 2001 rights of pre-emption and at the expense of Messrs Bass and Mingay.

The issue on appeal – no common assumption arising out of "forgetfulness"

On appeal, Mr Dixon argued (inter alia) that there could be no common assumption as to the existence of rights where (a) the parties to the assumption did not know of those rights in the first place (or had forgotten they existed), and (b) where the assumption was not sufficiently clear and unequivocal.

Court of Appeal – reason for common assumption irrelevant

The Court of Appeal rejected these arguments, concluding on the two issues raised on appeal:

1. Regardless of whether a common assumption arises as a result of ignorance, a mistake, forgetfulness or on any other basis "should make no difference" because the "essence of the principle is that the parties have conducted themselves on a conventional basis that is, wittingly or unwittingly, different from the true basis". The only requirement (which is an evidential one) is that the party said to be estopped must have assumed some responsibility for the shared (albeit mistaken) understanding.
2. Whether the common assumption existed was largely a question of fact. In this case, the judge at first instance's conclusion – namely, that the 2009/2010 transactions (inter alia) made clear that the parties conducted themselves on the basis of a positive assumption that no valid rights of pre-emption existed – was "amply justified".

COMMENT

This decision is noteworthy for a number of reasons.

First, in the author's experience, estoppel by convention is a claim which arises not infrequently either where there is a dispute about contractual interpretation or in relationships where the parties have conducted themselves on a basis other than that provided for in the contract. This decision is therefore a useful reminder of the general principles that apply to an estoppel by convention (as first articulated in Amalgamated Investment & Property Co Ltd (in Liquidation) v Texas Commerce International Bank Ltd [1982] 1 QB 84 and The Vistafjord [1988] 2 Lloyd's Rep 343):

(a)    A common assumption is a belief as to fact or law contrary to the true state of affairs and it must be shared by the two parties (it must have "crossed the line" between them). The assumption may be shared as a result of conduct on the party relying on the estoppel and acquiesced in by the party sought to be estopped. It may also arise out of silence (as in the The Indian Grace [1996] 2 Lloyd's Rep 12, at 20), if special circumstances exist giving rise to a duty to speak (as discussed by Rix LJ in ING v Ros Roca [2011] EWCA Civ 353).

(b)   Where such a common assumption exists, the party sought to be estopped will be prevented from denying the assumption if it would be unjust and inequitable to do so. In this regard, the Court of Appeal confirmed that it will "seldom if ever be fair to allow a party who has benefitted from the assumption to repudiate it in order to prevent the other party obtaining a like benefit".

Second, an estoppel by convention is not confined to cases where an assumption arises out of a mistake. As this case clarifies, the manner in which the assumption arises is not relevant – whether through mistake, ignorance or forgetfulness. What matters is that the parties have conducted themselves on the basis of the shared assumption and that the party sought to be estopped assumed some responsibility for the assumption. This is an evidential question, not a legal one.

Third, the decision must be read alongside that of the Court of Appeal in ING v Ros Roca in terms of whether the assumption must be "unambiguous", "sufficiently certain" or "clear and unequivocal". In addressing this second ground of appeal in Dixon v BHIL, the Court of Appeal simply confirmed that the assumption in this case was evident from the mutually manifest conduct of the parties. It did not appear to consider whether this is in fact a requirement of an estoppel by convention. However, in ING v Ros Roca, the Court of Appeal rejected an argument that the assumption had to be "sufficiently certain", which is a requirement for an estoppel by representation only. By contrast, the existence of an assumption giving rise to an estoppel by convention "must be interpreted by the court and the only true meaning is that decided upon by the court".

Finally, it is often said that there is no general principle of good faith in English law. This is true insofar as there is no general term of good faith automatically implied into all contractual dealings. However, English law has developed a number of different principles whose ultimate aim is, broadly speaking, to preserve good faith dealings between contracting parties.

Estoppel by convention is one such principle – as the Court of Appeal in this case said, "the origins of the modern (and developing) principles [of estoppel by convention] … are self-evidently a matter of good faith and fair dealing". Clearly relevant in this case was the fact that Mr Dixon (as a solicitor) was prepared to lie about the manner in which the 2001 rights of pre-emption were allegedly re-discovered – a fact which went to the weight of his evidence as well as to whether it would be inequitable for him to repudiate the assumption.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.