England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CHANF 1997/1070/3

COURT OF APPEAL (CIVIL DIVISION)

(HIS HONOUR JUDGE WEEKS QC )

Royal Courts of Justice

The Strand

London

Wednesday 24 March 1999

B e f o r e:

LORD JUSTICE MORRITT

LORD JUSTICE AULD

and

LORD JUSTICE CLARKE

B E T W E E N:

WYNN REALISATION LTD

(In Administration) Appellant/Plaintiff

- v -

VOGUE HOLDINGS INC Respondent/Defendant

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(Computer Aided Transcription by

Smith Bernal, 180 Fleet Street, London EC4A 2HD

Telephone 0171 421 4040

Official Shorthand Writers to the Court)

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MR JONATHAN PEACOCK (instructed by Messrs Wragge & Co, Birmingham

B3 2AS) appeared on behalf of THE APPELLANT

MR RICHARD BRAMWELL QC (instructed by Messrs Enoch Evans, Walsall

WS1 1XS) appeared on behalf of THE RESPONDENT

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J U D G M E N T

(As Approved by the Court )

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LORD JUSTICE MORRITT: This is the appeal of Wynn Realisations Ltd from the order of His Honour Judge Weeks QC, dated 16 July 1997, whereby he dismissed the claim of Wynn to £107,250 as being part of the price due but unpaid on the sale of certain land by Wynn to the defendant Vogue Holdings Incorporated.

The issue depends upon the liability for and the incidence of VAT. The claim in the action is in respect of VAT on the sale of freehold land.

It is convenient at the outset to summarise certain propositions relating to VAT by reference to the VAT Act 1994 which, we are told, is in identical form to the provisions in force in the period with which we are concerned. When VAT was originally introduced in 1972 the sale of land was not treated as a supply which was taxable. That change came in 1989 in the Finance Act of that year and gave rise to a number of very complicated provisions. The three propositions central to this case are the following. First, VAT, where payable, is charged by reference to the value of the supply which, when in money, is to be taken to be such amount as with the addition of the VAT is equal to the consideration: the price is VAT inclusive. This is apparent from section 19(2) of the 1994 Act. It is for that reason that where VAT is not to be included, the parties normally makes express reference to the fact that the price does not include VAT by reference to a number of formulae, of which "exclusive of VAT" is perhaps the most common.

Second, the provisions of Schedule 9 to the 1994 Act contain a number of exceptions to the exemption for the grant of an interest in land. The broad exemption exempts the grant of an interest in land, but there are a number of exceptions from that in respect of which therefore VAT is payable. One of those exceptions is the grant of a fee simple in respect of a "new building", and the Act defines a new building as one which was completed less than three years before the grant. This is apparent from Schedule 9, paragraph 1(a)(ii), and Note (4).

The third general proposition is that because of the system whereby VAT input tax may be offset against VAT output tax, a registered person may be the net recipient and not the net payer of VAT. Thus it was that when the sale of land became capable of being a taxable supply for VAT purposes, there would be cases in which the person liable to pay the tax would in fact wish to be taxable so that he could reclaim the input tax against the output tax. Thus provision is made in Schedule 10, paragraph 2(i), for those who would otherwise be exempt from paying the tax, to pay tax, by waiving the exemption. These are commonly called cases where the person potentially liable takes the option to tax.

The circumstances in which those principles are applicable in this case are briefly as follows. Wynn was the owner of the Ketley Business Park at Telford and was registered for VAT. The park consisted of two phases, Phase 1 and Phase 2, to which by subsequent agreement between Wynn and the Commissioners of Customs and Excise, the values attributed to them were £2.2 million for Phase 1 and £715,000 for Phase 2. The aggregate of those amounts was the consideration payable under the agreement dated 22 February 1991. That was the contract between Wynn and Vogue for the sale of the Ketley Business Park at Telford by the former to latter.

The material provisions are clauses 2(a) and 17. (2)(a) provides:

"The Purchase Price for the Freehold Property shall be the sum of two million nine hundred and thirty five thousand pounds (£2,935,000) exclusive of Value Added Tax. The Vendor undertakes and warrants that no election to charge Value Added Tax has been or will (prior to completion) be made by it in respect of the Freehold Property and accordingly no Value Added Tax will be payable by the Purchaser on completion."

The other provision in clause 17 deals with the inclusion in the sale of certain fixtures and fittings. In the middle of that clause it is provided:

"The price for the chattels specified in part 2 of such Schedule is £3,000, plus VAT."

The sale was completed on 8 March 1991 when the balance of £2,935,000, after payment of the deposit, was duly paid by Vogue to Wynn, and Wynn executed a conveyance of the land in favour of Vogue. It transpired subsequently that the sale of Phase 2 was the sale of a new building because it had been completed within three years of the sale by Wynn to Vogue. In consequence VAT at the rate of 15% was payable in respect of the price for Phase 2 which, as I have indicated earlier, was subsequently agreed with the Customs and Excise as having been £715,000. That gave rise, prima facie, to a liability for VAT of £107,250.

Thereafter, on 1 October 1991, Vogue was registered for VAT purposes and was thereby enabled to set off the tax payable (if any) on the sale of Phase 2 against the tax it charged the tenants for the rent payable in respect of the various parts of the estate.

The matter in due course came to the attention of the Customs and Excise. On 7 March 1992 they sought to recover VAT from Wynn, and on 30 March of that year Wynn paid the VAT demanded in the sum of £107,250, on the footing that the price that it had received was exclusive of VAT. It sought to recover the VAT from Vogue. Vogue refused to pay. In consequence the Customs and Excise re-assessed the liability of Wynn for VAT on the footing that the price of £2,935,000, on which £715,000 was attributable to Phase 2, was a VAT inclusive price rather than a VAT exclusive price.

In February 1993 the writ in this action was issued, claiming the sum of £107,250 as being part of the purchase price due by Vogue to Wynn, which had not been paid.

In due course the matter came before Judge Weeks in July 1997. The two material conclusions at which he arrived for the purpose of this appeal are: first, that the solicitor for the purchaser had been concerned about the VAT position and had been told by the vendor's solicitors that they believed that there was no intention to charge VAT. The judge concluded that both solicitors overlooked the possibility of VAT being payable because Phase 2 was a new building.

With regard to the words "exclusive of VAT" used in clause 2(a) of the agreement, the judge found that those words meant that there was no VAT payable, not that Vogue would pay any which was in fact found to be due. His judgment in this respect is in these terms:

"I accept that in certain circumstances and certain contexts 'exclusive of VAT' can mean 'plus VAT if payable' or 'plus so much VAT as is properly payable'. In the present context, however, I do not think that that is the correct construction of 'exclusive of VAT' in the first sentence of Clause 2(a). It is necessary to construe the whole of Clause 2(a) which goes on 'The Vendor undertakes and warrants that no election to charge Value Added Tax has been or will (prior to completion) be made by it in respect of the Freehold Property and accordingly no Value Added Tax will be payable by the Purchaser on completion.' Although that relates only to the election to charge VAT it would make nonsense of the first part of Clause 2(a) to construe it to mean that the purchaser might have to pay VAT. Although limited to elections, the parties' contemplation was that no VAT was payable on completion. It would be remarkable if the parties had contracted that the purchaser should pay VAT. When the parties wanted to make clear that VAT was payable they used the words 'plus VAT' in Clause 17. Such a formulation could have been used in Clause 2 but was not."

Later he returned to the point:

"Against a background where both parties assumed no VAT was payable, it would be perverse to construe 'exclusive of VAT' as meaning 'plus VAT'. Such a construction would oblige the purchaser to accept a risk it was totally unaware of and would oblige a purchaser to pay an unknown and unquantifiable amount. In my judgment this is not a construction which makes commercial sense. The words 'exclusive of VAT' can be explained as meaning both parties believed no VAT was payable on the sale and fixed the consideration with that in mind. The consideration did not include VAT."

The case for Wynn in simply put. The submission is made that, as it turned out, contrary to what the parties at the time believed, VAT was indeed payable; that the provisions of clause 2(a), dealing with the absence of any option to tax or waiver of the exemption, were an agreement dealing with the position which would arise in relation to such an option to tax; and that the judge was wrong to give effect to the agreement over a wider field than that to which the agreement in fact related. Mr Peacock submitted on behalf of Wynn that "exclusive of VAT" in the circumstances can only be given its ordinary meaning: that the liability to VAT (if any) falls on the purchaser and not on the vendor.

Mr Bramwell QC, on behalf Vogue, seeking to uphold the decision of the judge, referred us to the principles of construction to which the judge had referred, quoting from Virgin Management v De Morgan (CA 24.1.96, unreported). The passage in question from the judgment of Leggatt LJ is as follows:

"In construing a written contract, the Court's task is to ascertain from the document the intention of the parties. Individual words and phrases are not to be construed in isolation but in the context of the agreement as a whole. If the ordinary meaning of the word is clear, the Court will refuse to look beyond the document itself. A contract must always be construed by reference to the factual background against which it was made. Events subsequent to its execution may not be used as aids to its construction. The Court has no power to re-write the terms of the parties' contract simply because the Court regards the terms as unreasonable."

Mr Bramwell submitted that the task of the court in this case is to ascertain the intention of the parties; that the individual parts of the agreement must be construed in the context of the agreement as a whole; and that the court has no power to re-write the contract. I accept each of those principles, and I did not understand Mr Peacock to challenge any of them.

In seeking to apply them, Mr Bramwell submitted that it was evident from the contract that the parties considered that no VAT would be payable or that it could only be payable if the option to tax were taken, and it was only that with which the provisions of clause 2 were dealing. He said that in those circumstances to ascribe the usual meaning to the words "exclusive of VAT" would run counter to the concluding provisions of clause 2(a) to the effect that, unless the option to tax were taken, no VAT would be payable. He pointed to the absence of any machinery for ascertaining on the completion of the sale what the total purchase price would be by any form of allocation of part of the purchase price to Phase 2 in order that the 15% VAT could be calculated on it. He relied on the provisions of clause 17 as demonstrating that where the parties meant "plus VAT", they said so and they knew how to express that clear intention.

At the end of the day, the point is a short one and depends upon the proper construction of clause 2(a) of the agreement in the light of the agreement as a whole. It is clear from that clause that the provision in question -- that is to say what was referred to as the tailpiece to clause 2(a) -- was primarily a warranty that Wynn would not opt to tax. It goes on by the use of the word "accordingly" to express the conclusion of the parties as to the consequence, namely that no VAT would be payable by Vogue. But the provision is based on a mistaken assumption. The reason VAT is payable has nothing do with whether or not Wynn opted to tax. The proposition may be tested in this way. If there is a liability on Vogue for VAT, does it have a claim under the warranty in clause 2(a) to recover the amount of that tax as damages from Wynn for breach of contract? In my view it is plain that it does not. The liability to VAT does not arise at all from an option to tax, and is therefore not subject to the express agreement contained in the tailpiece to clause 2(a). Indeed, if Mr Bramwell's argument were correct, there would be no need for the words "exclusive of VAT" to be put in at all; if the only circumstance in which VAT could be payable were the circumstances dealt with in the tailpiece to clause 2(a), then these words were redundant. It seems to me therefore that the words must have been put in for some other purpose than dealing with the circumstances in which the tailpiece was operative.

Looked at in isolation, it appears to me that the words "exclusive of VAT" in fact assume that VAT is or may be payable in some unspecified circumstances other than the exercise of the option to tax. If that were not the case, there is little purpose in putting the words in at all. Thus the phrase appears to proceed on the assumption that there is or may be VAT payable and in those circumstances it makes it plain that if the VAT is payable, the price for the land is not VAT inclusive but must be grossed up for VAT purposes. It seems to me therefore that both parts of clause 2(a) can be reconciled and a proper meaning be given to the words used in each of them. The tailpiece deals with the circumstances expressly covered by it, namely the exercise of the option to tax, and includes an agreement that it will not be exercised. The first part deals with the circumstance which was not in fact contemplated, but was regarded as a possibility, namely that if VAT was payable then the price provided by the contract was exclusive of it.

It was suggested that the words "exclusive of VAT" might have been accounted for by the profession prophesying the point taken in Jaymarke Development Ltd v Elinacre Ltd [1992] STC 575. For my part I think that suggestion, ingenious though it is, is too speculative to be reliable. I rest my conclusion on the need to reconcile both parts of clause 2(a).

Finally, there is the reference in clause 17 to a different expression "plus VAT". I do not see that much turns on that. That provision was dealing with chattels specified in the schedule and a round sum was indicated 'plus VAT' in a conventional way, dealing with the sale of goods.

I reach the conclusion that the judge was wrong to ascribe an unusual meaning to the expression "exclusive of value added tax". I would therefore allow the appeal and give judgment for Wynn.

LORD JUSTICE AULD: I agree.

LORD JUSTICE CLARKE: During the course of the argument I have had considerable doubt as to the correct construction of the contact. For the reasons given by Mr Bramwell there seems to me to be much to be said for the view taken by the judge. However, the difficulty which Mr Bramwell's argument faces is that it gives no meaning to the words "exclusive of VAT" in clause 2(a). On his argument it means the same as if those words had been omitted or indeed if they read "inclusive of VAT" and not "exclusive of VAT". The only suggestion which Mr Bramwell has been able to make for the use of the words "exclusive of VAT" is that they avoided a possible argument that if the contract provided for payment of the price inclusive of VAT, it might be arguable that if VAT proved not to be chargeable, the purchaser could recover back what would have been the VAT element in the price. That argument was advanced but rejected in Jaymarke Development Ltd v Elinacre Ltd [1992] STC 575. That is an ingenious suggestion, but it does not explain why the first part of clause 2(a) referred to VAT at all. Some meaning must, I think, be given to the words "exclusive of VAT".

On balance, and not without some hesitation, I agree with Morritt LJ that they must have been included to cater for the situation just in case VAT was payable. On that basis I agree that the words must mean that if VAT is payable, the purchaser will pay the VAT in addition to the purchase price. For those reasons I agree that the appeal should be allowed.

ORDER: Appeal allowed with costs here and below: £107,250 to be paid, plus interest from 8 March 1991 at the rate prescribed in the contract.

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