Opinion

Obligation to pay dependent on obligation to transfer title

Published Date
Jul 23 2018
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In Doherty v Fannigan Holdings the court held that the obligation to pay in a share sale agreement was a dependent one. The seller could only enforce this obligation if it had performed its part of the bargain: to transfer title in the shares.

Mr Doherty and Fannagin Holdings established a joint venture to develop land in Hampshire. After a dispute, Fannagin Holdings agreed to transfer its stake in the joint venture to Mr Doherty in eight tranches, on specific dates, in exchange for payment. Following Mr Doherty’s refusal to pay for the fifth share tranche, Fannigan Holdings claimed the outstanding sum as a debt by issuing a statutory declaration under the Insolvency Act 1986.

The question for the Court of Appeal was whether Mr Doherty’s obligation to pay was a dependent obligation – so that it only arose if Fannigan Holdings also transferred title over the shares – or an independent obligation, so that Mr Doherty was obliged to pay in any event.

The court unanimously held that both parties’ obligations were dependent: Mr Doherty’s obligation to pay £2 million for each share tranche was triggered if and when Fannagin Holdings transferred title in the shares. The material terms of the agreement indicated that the parties intended the obligations would be performed “on the same day, at the same time”. It would be “uncommercial” to read the contract in any other way.

Notably, the Court relied on the practice in transactions for the sale of land, in which payment of the purchase price and transfer of title are dependent obligations that are performed simultaneously. The court said this provided “compelling guidance” for understanding the equivalent obligations in share sale transactions.

In the circumstances, the court noted that Fannagin Holdings could rely on a number of other remedies: damages for breach of contract or specific performance. It could not, however, convert a dependent obligation to pay into an independent obligation by seeking to recover the unpaid sum as a debt.

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