Surreptitious dealing

The Court of Appeal has confirmed that where there has been surreptitious dealing by an agent with the other party in a contractual arrangement during the contract period, the innocent principal should be entitled to terminate the contract from the point of discovering the fact of the bribe. However, the contract will be avoided for the future only and not from the outset.

Tigris was a joint venture company formed by two individuals, Mr Koolhaas (K) and Mr Pakdaman (P), who essentially ‘fell out’ during the course of their business venture. Tigris’ plan was to buy aircraft from China Southern Airlines Company Limited (CSN) and sell them in Iran, a delicate commercial transaction given the UN sanctions at the time and the company’s lack of experience – Tigris had no market history, assets or published accounts.

Tigris’ agent, Mr Ventner, was appointed to represent the company in all technical matters relating to the sale and purchase of the aircraft in return for 20 per cent of the net profits.

In July 2009, Tigris and CSN entered into a sale and purchase agreement for the purchase of six aircraft, with the first three to be delivered by July 31, 2009 and the remaining three to be delivered by August 27, 2009. Payment was to be made in three stages: a deposit of approximately US$10.8 million (paid prior to entering into the purchase agreement), the first instalment of approximately US$57.2 million before July 31, 2009 and the second instalment of approximately US$55.8 million before August 27, 2009.

Tigris had difficulty obtaining financing and was unable to pay the full amount of the first instalment by 31 July 2009. The relationship between P and K began to deteriorate. Given that P had the business contacts to secure the back-to-back contracts to sell the aircraft in Iran, which is how Tigris would fund the purchases from CSN, the venture was dependent on P’s ongoing involvement.

In August 2009, P began making arrangements to take over Tigris’ responsibility to purchase the aircraft. Several emails were exchanged between P and K in which K stated that P was not authorised to act on behalf of the company as P was a shareholder and not a director (whereas K was a director of the company).

Eventually, the first aircraft was delivered on September 1, 2009. However, the relationship between P and K finally broke down and, in late September 2009, P and Mr Ventner took steps to incorporate another company, Thesa, to replace Tigris.

K alleged that P had entered into a secret agreement with CSN to divert the sale contract.

In October 2009 CSN gave notice to Tigris that it would terminate the purchase contract unless payment was made for delivery of the remaining five aircraft and Tigris took delivery at the rate of one aircraft per week.

In November 2009, Tigris asserted that CSN was in repudiatory breach on the basis that CSN’s conduct demonstrated that it did not intend to be bound to perform the terms of the purchase agreement. On December 4, 2009 Tigris sent a letter confirming that it accepted CSN’s repudiatory conduct as having brought the contract to an end. CSN purported to terminate the purchase agreement on December 19, 2009.

In 2010 CSN entered into aircraft sale agreements with another company, GALink, to sell two of the aircraft that had been the subject of the arrangement with Tigris. Ultimately, only one was sold to GALink and the remaining aircraft were eventually sold back to the manufacturer, Airbus SAS.

Tigris started proceedings claiming the return of its deposit (as well as other costs such as parking charges for the aircraft) amounting to approximately US$10.5 million. CSN’s counterclaim was for the amounts due but not paid to it by Tigris pursuant to the purchase contract less the amounts it had received following the sales to GALink and Airbus.

At first instance, the judge held that Tigris was in breach of the purchase agreement as it had only paid part of the first instalment due on July 31, 2009 and therefore CSN was entitled to terminate the purchase agreement from as early as August 2009 (but had delayed in exercising this right).

The judge did not consider there to be any evidence that a secret agreement had been reached by CSN, P and Mr Ventner, and recognised that CSN had not been acting in bad faith during the prolonged period in which it had been caught between wanting to sell the aircraft whilst knowing that Tigris could not fund the purchase without P.

The judge decided that Tigris would not have been entitled to treat CSN’s dealings with P as a repudiation of the purchase agreement. Therefore, Tigris was not entitled to bring the purchase agreement to an end and it had itself committed a repudiatory breach on December 4, 2009 when asserting that CSN had repudiated the contract by virtue of its surreptitious dealing. The judge decided that the purchase agreement was ultimately brought to an end by CSN on December 19, 2009. Tigris appealed.

The Court of Appeal recognised that the fundamental basis of Tigris’ claim was an allegation of ‘surreptitious dealing’ which derives from Panama and South Pacific Telegraph Co v India Gutta Percha Telphone Works Co [1875] 10 Ch App 515.

The court did not define what exactly is meant by the phrase ‘surreptitious dealing’. In the Panama case, the surreptitious dealing took the form of a bribe and the court held that the innocent principal could rescind the contract, thereby avoiding it from the beginning. Surreptitious dealing was therefore identified in light of the fraudulent and dishonest conduct amounting to a bribe.

In the appeal brought by Tigris, the Court of Appeal agreed with the trial judge. It did not consider there to have been any conduct amounting to surreptitious dealing nor a secret agreement between CSN and P. CSN had not acted in bad faith and had instead dealt with P on the basis that K would be involved if the agreement was to be transferred from Tigris.

The Court of Appeal went on to consider whether CSN would have been entitled to damages for Tigris’ breaches (i.e. its failure to pay and perform the terms of the purchase contract) even if CSN had repudiated the purchase agreement in November 2009 and been guilty of surreptitious conduct.

In those circumstances the Court considered that Tigris would only have been entitled to accept a repudiation or rescission from that moment; it would not have been able to treat the contract as void from the beginning. Tigris would have had to give credit to CSN for damages that had accrued before the contract was terminated.

This decision confirms that the Panama case remains authority for the proposition that a principal whose agent has been bribed to enter in a contract may rescind the contract when the principal party discovers the fact of the bribe. In this regard, rescission is an equitable remedy which is available provided that counter restitution may be made. The case is also authority for the proposition that if a contract is terminated by a party due to surreptitious dealing between its agent and a counterparty during the course of performing the contract, the contract may only be rescinded for the future and the terminating party will remain liable to the counterparty for any obligations, including damages, which have already accrued.