Inner House decides interpretation appeal

The Inner House has decided the case of Aberdeen City Council v Stewart Milne Group Ltd in favour of the Council.  The opinion of the Court, delivered by Lord Drummond Young, can be found here:

This case involves the interpretation of commercial missives in terms of which the Stewart Milne Group had purchased land for development from Aberdeen City Council.  The dispute centred around whether the sellers were entitled to an uplift on the purchase price in terms of clause 9 of the missives. Clause 9 of the missives contained the provisions establishing payment of the uplift:

"9. In addition to the purchase price detailed in Clause 2 hereof, the Purchasers and the Sellers have agreed that the Sellers shall be entitled to a further payment ("the Profit Share") upon the Purchasers purifying the suspensive conditions contained in Clause 4 hereof and issuing a notice to the Sellers intimating to the Sellers that the Purchasers wish to purchase the relevant part of the profit-share as defined in the Schedule to which the Sellers are entitled. The Sellers' entitlement to the relevant part of the profit-share will also be triggered by the Purchasers disposing either by selling or by granting a lease of the whole or any part of the subjects."

The definition of the Profit Share is particular significant: 

Sale of the subjects triggered a profit share, payable to the Council.  The Profit Share was defined as follows:  

“the Profit Share … means 40% of 80% of the estimated profit or gross sale proceeds or lease value lest [sic] the Allowable Costs as herein defined.”

The subjects were indeed sold by Stewart Milne, but, perhaps somewhat unexpectedly, they were sold to a company within the Stewart Milne Group.  This being the case, the sale price was not a market price, amounting to only £483,020.  Stewart Milne argued that the profit share payable to the Council should be calculated by reference to this relatively low, non-market price.  The Council argued that, had the subjects been sold on the open market, the price would have been £5,670,000, i.e. more than 11 times the price at which the Subjects were actually sold.  Not surprisingly, the Council argued that the profit share should be calculated by reference to the open market price at the time of sale.

At the hearing in the Outer House, Lord Glennie clearly did not see this is a difficult case.  He explained:

“It is clear, in my opinion, that the parties to the contract anticipated that the Subjects would be developed, as they were, and that in addition to the initial sale price the Sellers would be entitled to a share in the profit resulting from that development. They have endeavoured in clause 9, clauses 9.1-9.6 and in the definitions in the Schedule to the relevant missive letter, to set out how this is to be calculated.”

In finding in favour of the Council’s interpretation, i.e. that the profit share should be calculated by reference to open market values, he explained:

“It seems to me to be plain that the parties, in approaching the calculation of the Profit Share in the event of a sale, must have contemplated a sale at arms length and at open market value. Otherwise it would be within the power of the Purchasers in every case to defeat the Sellers' entitlement to receive any amount by way of profit share. This is something which, so it seems to me, the parties cannot have intended.” 

As a final comment he reminded us that:

“The test, of course, is not subjective. Expressed objectively, neither party can, in my opinion, be taken to have understood that the contract would work in this way.”

In the Inner House, upholding Lord Glennie's approach, Lord Drummond Young commented (at para 10):

"In our opinion it is clear that the parties must have intended, on an objective basis, that in the event of a sale of the subjects the profit share payable by the defenders should only be based on the actual price paid in the event that the sale is at arms length and at open market value.  If the sale is not of that nature, the profit share should be based on an open market valuation.  The commercial purpose of clause 9 seems to us to be very clear; if, as was obviously likely, the subjects of sale turned out to have a value in excess of the £365,000 paid at the time of the contract, the pursuers were to take a share of the increase in value.  That share was to amount to 32% (defined as 40% of 80% in the definition of profit share) of the increase in value.  If the defenders' construction of clause 9 is correct, it would be open to them to sell the property at an artificially low price to an associated company, and in that way to defeat the pursuers' entitlement to share in the increase in value.  That in our opinion does not make commercial sense; clause 9 is plainly an important part of the parties' bargain, and such a provision should not be capable of being defeated at the whim of one of the parties."  

What is notable about this approach is the emphasis placed on the idea of a commercially sensible construction as an interpretative tool.  It seemed abundantly clear that the parties could not have intended that payment of profit share could so easily be defeated by a sale to a related company.  The importance of a commercially sensible construction was emphasised by Lord Drummond Young (at para 11):

"In recent years the importance of construing contractual provisions in context, and in such a way as to give effect to the parties' commercial objectives, has been emphasized in a large number of cases; the principal authorities are well known and scarcely require discussion.  We note in passing, however, that at least in Scotland this approch is not new; it appears clearly from cases such as Mackenzie v Liddell (1881) 10 R. 705, Bank of Scotland v Stewart (1891) 18 R. 957, and Jacobs v Scott (1899) 2 F. (HL) 70." 

Both this decision and the approach of the Inner House are to be welcomed. 

For those interested in Scottish cases on interpretation of contract, the Supreme Court judgment in Multilink Developments Limited v North Lanarkshire Council was heard on 12 October, and the judgment should shortly be available.  This is a case involving a commercial lease, and the potential applicability of the Hoffmann approach (and my thanks to David Cabrelli for drawing my attention to this link), see: