GENERAL TRADING CO (HOLDINGS) LTD V RICHMOND CORPORATION LTD

[2008] EWHC 1479 (Comm), Queen’s Bench Division, Commercial Court, Mr Justice Beatson, 3 July 2008

Guarantee – Defendant undertaking to obtain loan guarantee to enable claimant to obtain loan facility for subsidiary – Whether defendant in breach of agreement – Whether clause permitting defendant to cancel loan notes if defendant failed to obtain a guarantee was a penalty clause

GTC acquired 95% of GTCM from RC on 4 May 2006. The price was £60,000 in cash and the provision by GTC to RC of loan notes to a value of £540,000. RC also undertook to procure a loan guarantee to enable GTCM to obtain a loan or loan facility of £200,000 from a major high street bank for two years failing which the loan notes would be cancelled. GTC asserted that RC failed to procure the guarantee and the loan notes were cancelled. RC’s defence was that if there was no compliance then that was the fault of GTC’s breaches, and in any event the provision as to the cancellation of the loan notes was a penalty and void. Beatson J held that RC was not liable: (1) the non-provision of the loan guarantee was the result of failure by GTCM and GTC to serve a contractual notice authorising the bank to contact RC; (2) although the point did not arise, a clause which entitled the innocent party to a breach of contract to withhold a payment otherwise due was a penalty clause, the present clause was a genuine pre-estimate of loss and would not have been void under the rule against penalties.