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A notice purportedly exercising a put option was not valid

14 July 2011

Case summary: Awal Bank BSC (In Administration) v Maan Abdulwahed Abdulmajeed Al-Sanea [2011] EWHC 1354 (Comm), 27 May 2011

In Awal Bank BSC (In Administration) v Maan Abdulwahed Abdulmajeed Al-Sanea, under a put option agreement, the claimant served the defendant with what purported to be a notice exercising the option in a similar format to notices that had been issued and accepted by the same parties before.

However, Burton J held that the errors contained in the notice could not be ignored or overridden when construed in light of the terms of the agreement, and that the purported notice was invalid.

The claimant is Awal Bank BSC, a Bahrain company, which went into administration in 2009. The defendant, Mr Maan Al-Sanea, was the Chairman and controlling mind and owner of 47% of the shares in the claimant prior to its administration. The defendant, as seller, and the claimant, as buyer, had entered into a Put Option Agreement (the Agreement), in relation to 44 million shares in a publicly quoted bank, listed on the London Stock Exchange. The Agreement was governed by English law and included an English jurisdiction clause.

Under the Agreement, the defendant had granted the claimant an option to sell the shares to it at a strike price of GBP 9.2775 per share (the Strike Price). The option could be exercised by the claimant serving a notice. The Agreement specified that such a notice should identify (i) the number of shares being sold; (ii) the amount payable on the put option closing date; and (iii) the put option closing date, which was to be 14 days after service of the notice, unless otherwise agreed.

The claimant served what purported to be a Put Option Exercise notice (the Notice) on the defendant; the defendant acknowledged receipt but made no payment of the settlement amount. Subsequently, the claimant made a claim for payment of the settlement amount plus interest, and judgment was subsequently entered in default against the defendant. The key issue before Burton J was the validity of the Notice.

Pursuant to the terms of the Agreement, on the put option closing date, the claimant should receive from the defendant the difference between the Strike Price and the price listed on the London Stock Exchange on that date. However, the claimant purported to give notice exercising the option “at yesterday’s closing price of GBP 5.149713” per share, and requested payment of the option settlement amount, specified to be the difference between that price and the Strike Price.

The defendant argued that the Notice failed to comply with the terms of the Agreement and was invalid, as it specified the incorrect closing price, date of exercising the option and calculation method for the settlement amount. As such, the defendant contended that there was no serious issue to be tried. In response, the claimant argued that the Notice did comply with the Agreement to a sufficiently satisfactory extent to render it valid. Of course, any requirements for the service of notices, whether contractual or statutory, should ideally be strictly complied with. However, in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC, the House of Lords developed a principle under which, in certain circumstances, defects in a notice will not always invalidate that notice and it was this case that both parties referred to in their arguments.

In Mannai, Lord Hoffmann held that notices given under a contract may be valid, even if they contain errors, if those notices are “sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate”. Further, a notice containing errors could be valid if and when “construed against the background of the terms [of the agreement]”, but to be so it must comply with the notice requirements of the agreement.

Burton J applied the decision in Mannai to the circumstances in this case.

He held that the Notice was invalid, and it failed on two aspects in particular. First, it stated that the put option had already impermissibly occurred (“yesterday”) instead of occurring at the put option closing date (that is, 14 days after the date of the Notice); and secondly it calculated the settlement amount by reference to “yesterday’s closing price”, rather than by reference to the price on the London Stock Exchange at the put option closing date.

Burton J found that it was immaterial that notices set out in similar terms and in relation to other, previous agreements had, on previous occasions, been accepted by the defendant as valid notices under those agreements. Indeed, the claimant’s Counsel had not attempted to use the success of these other notices as an implied variation or waiver of the notice provisions this time. The Notice did not contain errors that could be ignored or overridden when considered in light of the Agreement; it was not a notice pursuant to the Agreement at all. As such, there was no serious issue to be tried; and the judgment in default was set aside.

Comment: The decision in Mannai and the subsequent case law, including this recent judgment, serve as a reminder of the importance of ensuring that any notice given is valid and enforceable.

Since Mannai, a two-stage process for dealing with the validity of notices has evolved. In Trafford Metropolitan Borough Council v Total Fitness UK Ltd [2002] EWCA Civ 1513, it was held that the process of deciding whether a notice complied with the relevant provisions (whether statutory or contractual) involved, at first, consideration of what the notice says on its true construction, and secondly, consideration of how the notice matches up against the relevant provisions, to determine whether it meets the requirements. In Trafford, the Court of Appeal held that Mannai is not relevant at the second stage of this process, as an attempt to rectify any errors or omissions in the notice and to render it valid.

Importantly, and as this case demonstrates, Mannai will not save all defective notices. For example, it will not be of assistance where information in a statutory notice is missing or incorrect, where statutory notices are in a form other than that prescribed by the documentation, or, generally, where notices have been served by or on the wrong person. Further, it is not relevant to the requirements of when and where a notice is to be served. In light of these restrictions, and as the case law on this point is largely fact dependent, it is imperative that notices are issued in accordance with the relevant requirements.

Practically speaking, when issuing a notice under an agreement, check that it is in express accordance with all relevant contractual provisions, including dates, settlement amounts, terms of reference and names and addresses of those being notified, and it should be served in the correct way. If possible, be aware of deadlines imposed by contractual provisions to give notice and try to serve a notice early and press the recipient to acknowledge it as a valid notice.

Further informtaion

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legisation in commerical dispute resolution.  For more information please contact Sarah Garvey, or tel +44 (0)20 3088 3710.