Earlier today the Supreme Court issued its judgment in the Aberdeen City Council v Stewart Milne Group Limited appeal ( UKSC 56). The Court had little difficult in reaching a unanimous decision in favour of the Council, upholding the decisions of both Lord Glennie in the Outer House ( CSOH 80) and of the Inner House ( CSIH 21, and see blog at http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8414).
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 overage payment on the purchase price in terms of clause 9 of the missives, and the extent of that overage payment (this is referred to as a “Profit Share” in the missives and an “uplift” in the Supreme Court judgment). Clause 9 of the missives reads: 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 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.”
Stewart Milne sold the subjects to a company within the Stewart Milne Group at a price that appears to have been well below market price, namely £483,020. They argued that the profit share payable to the Council should be calculated by reference to this low, non-market price. As this amount was less than the allowable costs that were to be deducted from the sale price in terms of the missives, they argued that no uplift was payable.
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.
Lord Hope, after identifying the relevant contractual drafting, began his substantive discussion by noting that the drafting of the provisions was not without defects (para 9). Outlining several minor errors he noted (at paras 9 and 10):
“These infelicities appear to be due more to untidy drafting rather than to differences in matters of substance. I mention these drafting points because they may make it easier to attribute the problem that we have to deal with to oversight rather than to a deliberate choice when the agreement was being drafted.”
The appellants (Stewart Milne) sought to rely on the literal meaning of the clauses in question, whilst the respondents made reference to the commercial purpose of the agreement, which was, they argued:
“…to enable the respondents to participate in a share of the development value of the subjects. This was to be arrived at by assuming an open market transaction carried out at arms length, whatever the event was that gave rise to the respondents’ right to a share of the uplift. Effect should be given to that purpose when construing the words of agreement.”
Lord Hope then carefully sought to identify what the agreement appeared to have in mind (para 15). Clause 9 provided that the profit share was triggered in different ways. He continued (para 16):
“But the context tends to indicate that they have one thing in common. This is that the base figure is to be taken to be the amount which the subjects would fetch in a transaction that was conducted at arms length in the open market. This is expressly provided for in the case of a buy out, in which event a valuation of the subjects must be undertaken. This is also provided for expressly in the case of a lease. No mention is made of a valuation exercise in the case of a sale. But a sale at arms length is usually taken to be the best evidence of the value of the subjects in the open market. On this view there was nothing more to be said about the base figure in the event of a sale, other than that it was to be the gross sale proceeds.”
Continuing his analysis of the type of commercial deal which was envisaged by the parties he explained (para 17):
“As the choice between these three methods lay entirely in the hands of the appellants and clause 9.7 precludes the respondents’ entitlement to any further Profit Share in the future, it is a reasonable assumption that these methods were expected to produce the same base figure, albeit by different routes or methods of calculation. Otherwise it would be open to the appellants to avoid the basis for the calculation in the case of a disposal by lease by disposing of the subjects to an associated company at an undervalue and arranging for the lease to be entered into by that company. Basing the calculation on the open market value was, on a fair reading of the agreement, the commercial purpose that these various methods were intended to serve.”
Thus Lord Hope considered the contract as a whole, seeking to place the events which actually took place (i.e. a sale) in the scheme provided by the contract as a whole for the different types of event which would trigger an uplift (i.e. a buy-out, a sale or a lease).
Nowhere in the contract was it stated that the gross sale proceeds were only to be used in the event of a sale at arms’ length in the open market (para 18). He posed the question: “Was this a deliberate choice, or was it simply an oversight?” (para 18). The answer to this question was to be found “…by examining how the agreement can be given effect on the assumption that it was an oversight” (para 18). The problem for the Council was that the “…wording of the definition does not, in terms, confine the method to be used in the case of a sale to the gross sale proceeds” (para 19). Drawing on the definitions contained in the contract, he concluded (para 20):
“It seems to me therefore that there would be no difficulty in implying a term to the effect that, in the event of a sale which was not at arms length in the open market, an open market valuation should be used to arrive at the base figure for the calculation of the profit share.”
Although this resembles the test for implication of terms, Lord Hope does not seem to actually a imply a term. This view is borne out by his opening sentence where he indicates that the issue is one of construction (rather than implication). He differs on this point from the rest of the Court who clearly preferred implication of terms as a solution.
At this stage the work of our own Dr Martin Hogg formed a point of reference for Lord Hope. Described as a “much respected senior lecturer”, Lord Hope summarised (at para 21) Dr Hogg’s criticisms of the Inner House decision in the case ((2011) Edin L R 406 at 420):
“Why, he asks, where a party has been feckless in allowing a clause susceptible of a commercial disadvantageous sense to form part of the contract, should it be protected by the court giving the contract a commercially sensible interpretation rather than allowing the party simply to suffer the results of its commercial fecklessness? Why should commercial good sense be attributed to a party which has not shown it in the drafting of the contract? At pp. 421-421 he recommends a departure from what he refers to as a naïve focus on subjective intention in favour of an objective approach to the interpretation of contracts. That would minimise the temptation which some courts have shown to improve upon the bargain reached by the parties in the name of commercial good sense.”
Lord Hope, however, did not agree that this was such a case (para 22). It is worth pausing here to consider this argument. None of us, of course, knows what the actual agreement on this point was. This being the case, we must balance various policies. On the one hand we have what, objectively, the parties are likely to have agreed. A test of commercial good sense is likely to help us reach that goal. On the other, and this may be where Dr Hogg is coming from, a party who uses imperfect drafting should, arguably, suffer the loss. But is the latter policy so significant that it should outweigh the former? Is it not more important, objectively, to reach what is most likely to have been the actual agreement of the parties? Drafting is not an exact science. After all, we already use the contract as a whole to understand the meaning of particular clauses. Surely any other approach is an overly technical one to apply to a less than scientific exercise?
Lord Hope indicated that the context should be used to understand the intention of the parties, which was that the base figure for the calculation of the uplift was to be the open market value of the subjects at the date of the event that triggered the obligation (para 22):
“In other words, it can be assumed that this is what the parties would have said if they had been asked about it at the time when the missives were entered into. The fact that this makes good commercial sense is simply a makeweight….The only question is whether effect can be given to this unspoken intention without undue violence to the words they actually used in their agreement. For the reasons I have given, I would hold that the words which they used do not prevent its being given effect in the way I have indicated.”
Again the language is redolent of implied terms without actually going as far as implying a term. The language in this paragraph is nuanced. The major issue is the intention of the parties, objectively measured. The test of good commercial sense is available, and in this case it matches the objective intention of the parties. It is available, but relatively unimportant in the context of this case. This is reflected in the use of the word “makeweight” (of the possible definitions of ‘makeweight’ in the Paperback Oxford English Dictionary, “an unimportant person or thing that is only included to complete something” seems the most apt). This case can therefore be contrasted with the recent English appeal to the Supreme Court, Rainy Sky SA v Kookmin Bank ( UKSC 50)case. In that case the commercial good sense test was used in order to decide between two competing interpretations. The commercial good sense test has not had as significant a role to play in this appeal.
Lord Hope’s reference to “undue violence” is reminiscent of Lord Glennie’s reference in Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc ( CSIH 105, and see blog at http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8710, the appeal in this case has been heard by the Inner House but no judgment has, as yet been issued).
The legal team acting for the appellants sought to raise an argument which they had attempted to raise at a late stage in the Inner House but had been refused leave by that court to do so. Although the respondents’ objected to this further attempt, Lord Hope nevertheless identified “the overriding aim” as “to do substantial justice as between the parties” rather than to become involved in “niceties of procedure” (para 14). This argument (set out in para 25) was that the uplift had not been triggered at all on these facts, being triggered only by a sale by the related company in due course at an open market value. Lord Hope stated that this alternative argument “created more problems than it solves” (para 24) and in actual fact supported the respondents’ case.
Lord Clarke in a short speech (with which Lady Hale, Lord Mance and Lord Kerr agreed) identified the nub of the issue, namely that a literal reading of Clause 9.4 suggested that that the uplift was calculated by reference to the actual sale proceeds. He characterised this case not as one in which “there are two alternative available constructions” but rather as one in which “notwithstanding the language used, the parties must have intended that, in the event of an on sale, the appellants would pay the respondents the appropriate share of the proceeds of sale on the assumption that the on sale was at a market price” (para 31).
Lord Clarke agreed with Lord Hope as regards the relevance of the context, which showed that the parties intended the open market value as a base figure for calculation of the profit share (para 32). He, however, favoured implied terms as a solution rather than construction (paras 32 and 33):
“…it can be assumed that this is what the parties would have said if they had been asked about it at the time when the missives were entered into…If the officious bystander had been asked whether such a term should be implied, he or she would have said “of course.” Put another way, such a term is necessary to make the contract work or to give it business efficacy. I would prefer to resolve this appeal by holding that such a term should be implied rather than by a process of interpretation. The result is, of course, the same.”
Lord Clarke was clearly in no doubt as to outcome, indicating that counsel for the appellants was (para 32): “…not able to advance any commercially sensible argument as to why the parties would have agreed a different approach in the event of an on sale.”
A few brief comments can be made summarising the impact of this case as a whole. Most significantly, the case is a victory for common sense and, indeed, justice. To give to clause 9 the interpretation argued by the appellants makes no sense in the context of the contract as a whole. It gives a highly unusual effect to sale, understood as one of three events triggering the profit share. No explanation was offered by the appellants as to why computation of uplift on sale should be so radically different from the other methods. This illustrates how important it is for us to have a good grasp of the way in which contracts of this type are drafted. Lord Hope provided us with a model in this respect, being at pains to interpret the clauses of the contract as a whole. Secondly, it reminds us that other parts of the law of contract offer a solution to cases of this type, in this case, the implication of terms. The use of a different solution is perhaps not surprising given that this case differed from many of the cases decided recently. Here the problem was not the “classic” one of an ambiguity giving rise to alternative interpretations. Thirdly, Lord Hope’s characterisation of commercial good sense as a “makeweight” is interesting. Clearly it was not the most significant interpretative method used in the case. Rather, it is the fact that a specific clause must be understood in the context of the contract as a whole which informed the interpretative exercise here. Dr Hogg is indeed correct – we should guard against courts substituting their own ideas of commercial good sense for that of the parties. That is not what occurred here. Finally, prompted by Dr Hogg’s arguments, we should reflect on the extent to which the rules of interpretation should be “shaped” by the policy of punishment of the “feckless” drafter (if at all).