Kiko UK Limited v Jamino Limited & Anor

The relevant principles of contractual interpretation were not in dispute. As explained by Lord Hamblen and Lord Leggatt JJSC in FCA v Arch Insurance (UK) Ltd [2021] UKSC 1 at [47], the core principle is that a contract:

Section 178 of IA 1986 gives the liquidator of a company a power to “disclaim any onerous property”. Section 178 sets out the effect of such a disclaimer:

In Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 (“Hindcastle”), the House of Lords considered the effect of section 178(4) on the guarantor of an insolvent tenant. As Lord Nicholls said at p. 93C-D:

Lord Nicholls went on to explain the commercial rationale for that principle at pp. 93H-94A:

In the course of argument, Ms Cheng submitted that the effect of the parties’ agreement was that Pianoforte’s liability as guarantor terminated on disclaimer. It was, of course, open to the parties to make such an agreement. However, clear words would be required to persuade the court that they had in fact done so. Thus in Ex parte Walton; In re Levy (1881) 17 Ch D 746 at pp. 755-756, cited in Hindcastle at p. 91A, James LJ asked the following rhetorical question: “Take the case of a lease with a surety for the payment of rent. Could it ever be intended that the bankruptcy of the lessee was to release the surety?”.

The same principle was explained and applied by the Court of Appeal in Shaw v Doleman [2009] EWCA Civ 283, [2009] BCC 730. At p. 740F, Elias LJ accepted the submission (made at p. 739H) that “very clear words are necessary” to limit the guarantor’s liability as terminating on disclaimer because “[i]nsolvency or bankruptcy are precisely the circumstances when the guarantee is likely to become operative”.

The central issue in this appeal was whether the Disclaimer was a “failure” under clause 3.2 of the PCG (Grounds 1, 2 and 4). Mr Robb made four main points on this issue: (i) that the Judge’s interpretation ran contrary to the commercial purpose of the PCG, which was to protect Kiko from the risk of Jamino’s insolvency, as explained in Hindcastle; (ii) that clause 4.1.8 of the PCG made clear that the parties intended that the Disclaimer would not discharge Pianoforte’s liability as guarantor; (iii) that the natural and ordinary meaning of “failure” included a situation where Jamino disclaimed the Lease; and (iv) that the effect of section 178(4) of IA 1986 and Hindcastle was that Jamino was in breach of its obligations under the subsisting lease in the period up to 14th November 2024.

In response, Ms Cheng submitted (i) that the Judge’s interpretation was consistent with the commercial purpose of the PCG; (ii) that clause 4.1.8 needed to be construed in light of clause 2.2 of the PCG, which provided that the PCG “shall continue until the end of the term of the Lease (however it may end)”; (iii) that the Judge’s view that “failure” in clause 3.2 did not encompass the Disclaimer reflected the natural meaning of the word, the sense in which it was used in the AGA and the choice of the parties’ experienced legal teams; and (iv) that, despite section 178(4) IA 1986, it was open to the parties to agree that Pianoforte’s liability would end on disclaimer, which is what they had done.

When pressed in argument, however, Ms Cheng was unable to identify any sensible explanation as to why the parties would have agreed that Jamino’s disclaimer of the Lease would release Pianoforte from its obligations as guarantor. As Ms Cheng accepted, the result of her proposed interpretation would be that Pianoforte could agree to act as guarantor under the PCG one day, but put Jamino into liquidation and disclaim the Lease the next day, leaving Kiko without a remedy. Ms Cheng’s answer was that this arrangement might simply have been the best Kiko had managed to negotiate while attempting to assign the Lease, but that does not explain why the parties would have agreed that Pianoforte would provide the PCG, but structure it so that it would be unavailable to Kiko in precisely the situation (Jamino’s insolvency) where it was most likely to be needed.

Nor was Ms Cheng able to explain how her proposed interpretation could be reconciled with clause 4.1.8 of the PCG, which expressly provides that the liability of Pianoforte as guarantor would be unaffected by disclaimer of the Lease. Ms Cheng argued that clause 4.1.8 needed to be read in the context of clause 2.2, which provided that the PCG “shall continue until the end of the term of the Lease (however it may end) …”, contending that that entailed that the PCG ceased to have effect when the Lease was terminated by being disclaimed. But that ignores that clause 2.2 continued: “… and during any statutory continuation of it”, which would include a deemed continuation under section 178(4) IA 1986, and in any event further provided that the PCG would continue for so long as Kiko was liable under the AGA.

Mr Robb’s other points support that conclusion. Although we were taken to authorities on the meaning of “failure”, the crucial question remains its meaning within clause 3.2 and within the PCG as a whole. Against the commercial background, it is clear that Jamino’s disclaimer of the Lease constituted a “failure” because it would render Kiko liable under the AGA as a result of the actions or inactions of Jamino in relation to the Lease. That is precisely what clause 3.2 was designed to indemnify Kiko against.

It follows that the provisions of the PCG do not contain the “very clear words” that are required for a finding that the parties agreed that a guarantee should terminate on disclaimer. The provisions considered in Shaw v Doleman did not meet that threshold, and those terms did not contain anything equivalent to clause 4.1.8 in the PCG. The wording in the present case is, if anything, even further away from constituting the “very clear words” required to terminate liability on disclaimer.

It follows that Jamino’s disclaimer of the Lease constituted a “failure” within the meaning of clause 3.2.

The question of whether Kiko’s obligations under the New Lease “arose from” Jamino’s “failure” under clause 3.2 (Ground 3) can be dealt with relatively shortly. Mr Robb argued that the Judge had construed “arising from” too narrowly. Ms Cheng contended that the obligations did not “arise from” Jamino’s “failure” because Pontegadea could have sued Jamino, rather than requiring Kiko to enter into a New Lease.

In my judgment, Kiko’s obligations under the New Lease did “arise from” Jamino’s “failure” under clause 3.2. Ms Cheng was right to say that the Disclaimer (and consequent breach of clause 3.2) was not the immediate cause of Kiko entering into the New Lease. And it is true that the Disclaimer was the act of Jamino’s liquidator, rather than Jamino itself. However, in substance, the Disclaimer, Jamino’s failure to pay rents, the breach of clause 3.2 and Kiko being required to enter into the New Lease were all closely linked. Not only was the Disclaimer the reason why Pontegadea required Kiko to enter into the New Lease; it was also the sole basis of Pontegadea’s right to do so under clause 4 of the AGA.

Consequently, Kiko’s obligations under the New Lease did “arise from” Jamino’s “failure” under clause 3.2 of the PCG.

The final issue was whether clause 3.2 provided an indemnity for any costs and liabilities arising under the AGA, regardless of whether those costs and liabilities had arisen from a “failure” by Jamino (Ground 5). Given my conclusions (i) that Jamino’s disclaimer constituted a “failure” under Clause 3.2 and (ii) that Kiko’s obligations under the New Lease “arose from” Jamino’s “failure”, Kiko’s appeal succeeds in any event and it is not necessary to determine Ground 5.

If Newey and Cobb LJJ agree with my conclusion that the appeal should be allowed, I propose we invite the parties to agree the terms of an order, including the sums which should be included by way of judgment sums (as prefaced in paragraphs 15 and 16 above) and interest. To the extent that there are issues as to those sums (or as to the appropriate orders for the costs below and of this appeal), the parties should provide written submissions in the usual way.