Outer House judge rules administrators of papermill companies were in breach of good faith obligation in agreement with potential purchaser

ATE Farms Ltd, which entered negotiations with the administrators of AW Estates Scotland Ltd and Arjowiggins Scotland Ltd for purchase of the site, argued that the defenders were not entitled to insist on a broad indemnification clause which it refused to modify in any way during negotiations. The first defenders sought to argue that the clause was not truly non-negotiable.

The case was heard by Lord Sandison in the Outer House of the Court of Session. The Dean of Faculty, Dunlop KC, appeared for the pursuer and Lindsay KC for the first defenders. The second defender, Addleshaw Goddard LLP, agreed to repay to the pursuers a deposit of £300,000 it held on trust for the pursuers and took no further part in the action.

Deal breaker

The first defenders were the operators of Stoneywood Mill, a former papermill on the banks of the River Don near Aberdeen. After they fell into administration in September 2022, an approach was made to the administrators by Huntley Wood Investments Ltd for the purchase of the site with an aim to redevelop it. It was subsequently agreed that the pursuer, a company with which Huntley Wood was in a joint venture arrangement in connection with the purchase of the mill site, would be the entity with which any sale and purchase contract would be entered into.

On 28 March 2023, the pursuer and administrators of the defenders entered into a DEA regarding the purchase of the site and all machinery and assets on site. A deposit of £300,000 was duly paid to the second defender, and the administrators bound themselves to discontinue any other negotiations with any other party in relation to the sale of the subjects until 19 May 2023, which failing 16 June 2023.

During negotiations, difficulties arose regarding a clause the administrators put into their first draft of the intended contract under which they would be indemnified for any liability under the Environmental Protection Act 1990, which the pursuer’s solicitors labelled a “deal breaker”. No concessions were made on this clause, which led to the pursuer taking the view that the first defenders breached a term of the DEA requiring them to act towards the pursuer in good faith.

It was submitted for the pursuer that the clause required by the administrators was not based on anything in the Heads of Terms agreed in the DEA. It was therefore impossible to regard the insistence, on a non-negotiable basis, on such an indemnity as a discharge of the good faith obligation. While it was open to the administrators to ask for such indemnities, they could not be insisted upon as “non-negotiable” throughout the negotiations until the point at which the sale and purchase transaction was expected to settle.

Expeditious progress

In his decision, Lord Sandison said of the material clause: “Rather than placing upon the administrators a single duty to act in good faith in the negotiation of the contemplated contract for the sale and purchase of the property, it places on the administrators firstly a general duty to act towards the pursuer in good faith and separately a specific duty diligently and expeditiously to progress the negotiation and conclusion of an unconditional contract for the sale of the property on the terms set out in the Heads of Terms.”

He continued: “The actions of the administrators in advancing a demand for the grant of such an indemnity, for a sustained period and on an ex facie non-negotiable basis, did not represent the diligent and expeditious progress of the negotiation and conclusion of an unconditional contract for the sale of the property on the terms set out in the Heads of Terms, and represented a material breach of contract on their part.”

Addressing whether the breach entitled the pursuer to bring the contract to an end, Lord Sandison said: “It is important to bear in mind that the administrators were at the relevant times undoubtedly in material breach of contract, as a result of their failure diligently and expeditiously to progress the negotiation and conclusion of the Transaction Documents from 4 April to 15 May. That breach must fall to be regarded as a counterpart of the pursuer’s apparent obligation to further prime the pump of the negotiations.”

He concluded: “Despite the suggestion that this was in truth merely a robustly-stated negotiating position which was open to change, the pursuer was entitled, at least after the passage of five weeks during which that position had been maintained, to take it at face value. That position amounted to a statement, as the remaining negotiation time came to be numbered in days only, that the administrators were not prepared to progress the negotiations towards the end that had been agreed from the outset. That amounted to a repudiatory breach of contract which the pursuer was entitled to accept as bringing the DEA to an end.”

Lord Sandison therefore granted declarator as sought by the pursuer that the defenders were in breach of their contractual obligations.