Non-admissibility of pre-contract negotiations
28/06/2007
The High Court has re-affirmed the general position established in Prenn v Simonds that pre-contract negotiations cannot be admitted in evidence as an aid to the construction of a written contract. Pre-contract negotiations will only be admissible where it is contended on proper grounds that the parties negotiated on an agreed basis, that there was an estoppel by convention, or that the contract should be rectified (the "exceptions to the rule").
In Great Hill Equity Partners II LLP v Novator One LP & Ors two investors, GHP and FLS, submitted competing bids for QXL, an internet company listed on the London Stock Exchange. Following an announcement by the Takeover Panel that the bids were to be subject to an auction process, GHP proposed to the FLS investors that it would withdraw its bid in exchange for a 50% stake in FLS. An option deed was duly agreed and executed, after intensive negotiations. GHP was granted an option to require each of the FLS investors to sell to GHP a specified number of preferred shares, amounting to 23% of each seller's holding in FLS, at a set price. The option period began when the FLS bid went unconditional and expired four business days before payment was due to the QXL shareholders under the bid. The option deed gave GHP pre-emption rights over (i) new issues of shares for cash by FLS and (ii) new shareholder loans, so that GHP could obtain and maintain a 23% interest in the issued preferred shares upon exercise of the option.
At the time of executing the option deed, both parties expected FLS's bid for QXL to succeed and the deed was silent as to what should happen should the bid fail. By the time the bid failed, FLS had acquired 28% of QXL's issued share capital at below the FLS offer price using a loan from KTN, a company owned by one of the FLS investors. FLS refused GHP's request to participate in its pro rata share of the KTL loan and subsequently repaid KTN with monies raised from the FLS investors subscribing for preferred shares. By this time, the value of FLS's holding in QXL had risen substantially above the FLS offer price. GHP brought a claim against FLS arguing, in particular, that the deed entitled it to participate in the loan, or issue of shares, such that GHP would have held a proportionate stake in the preferred shares of FLS. The value of such stake was £14 million, the sum GHP sought in damages.
GHP argued that the construction of the relevant clause in the option deed depended on certain pre-contract statements made during the course of negotiations and draft Heads of Terms. It submitted that its interest in participating in any shareholder loan to FLS to fund share purchases in QXL was only relevant in the event that FLS's bid failed, and this would have been apparent to any reasonable observer. The claim was dismissed: as contended by FLS, the sole purpose of the relevant provision was to protect against the dilution of GHP's 23% stake in FLS's preferred shares which GHP would have acquired had it exercised the option. The rights were conditional on GHP exercising the option, which, in turn, was conditional on the FLS bid succeeding. The High Court referred to the Court of Appeal's comments in Proforce Recruit Ltd v The Rugby Group Ltd whereby the court recognised that the boundaries of the principle prohibiting admission of pre-contract negotiations might be withdrawn in the future. However, in this case the High Court held the law remained unchanged: GHP had not brought itself within any of the exceptions to the rule and so the evidence of pre-contract negotiations was inadmissible.
(Great Hill Equity partners II LP v Novator one LP & Ors [2007] EWHC 1210 (Comm), 22 May 2007)
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