England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
(HIS HONOUR JUDGE ROSE)

		Royal Courts of Justice Strand London, WC2
		16th February 2006

1. LORD JUSTICE MAY: This is an appeal by defendants, a company called F Parham Ltd, against part of the decision and order of HHJ Rose sitting as a judge in the High Court given on 30 June 2005. The deputy judge ordered the defendants to pay the claimant, Eric Parham, £410,005.88 subject to the deduction of income tax as damages for breach of contract. Laws LJ gave permission to appeal. The judge had dismissed the larger part of Eric Parham's claim against the defendants. The issue on this appeal is confined to the construction of an agreement made in 1973 between Eric Parham and a company called Autoyachts Limited, of which I think at the time he was managing director.
2. Autoyachts was an associate company of the defendant company, of which I think at the time his elder brother Leonard was managing director. Autoyachts is now in liquidation but the defendant company became responsible under transfer of employment legislation for its contracts of employment, including that of Eric Parham, and no problem in this appeal arises out of that.
3. The judge had to deal with a factual dispute of some detail, which may be briefly summarised as follows. The defendant company is a Parham family company. It was incorporated before the war in 1930 by Eric and Leonard Parham's father, whose name was Francis Parham. Eric Parham is now aged about 84 and Leonard Parham is his elder brother. When their father died in 1971, the entire share capital of the defendant company was inherited by these two brothers, as it happens, in unequal shares.
4. Autoyachts was an associated company of the defendants. It was incorporated in 1950. Its share capital was held also between the two brothers, Leonard and Eric. The judge found, to put it very briefly, that the driving force behind the defendant company was Leonard Parham. He, according to the judge, had run the company in what was described in an autocratic manner. On 21 July 1973, Eric Parham entered into two agreements. There was the agreement which is the subject of this appeal with Autoyachts and another agreement with the defendant company itself. These were in substantially the same terms, except that what was referred to in Clause 7 of the agreement as basic salary in first year of operation was £6,000 in the agreement with the defendants, whereas it is £10,000 in the agreement with Autoyachts, for which the defendants are now responsible.
5. On the same day, 21 July 1973, Leonard Parham entered into an agreement with Autoyachts in terms which were in substance identical with the terms of his brother's agreements. The two brothers made these agreements with their companies in July 1973 because they were thinking of transferring most of the shareholdings in the two companies to one or other of their children in order to have some tax advantages, and the intention of the two brothers in entering into these agreements and procuring their companies to do so was, broadly speaking, to ensure that, although they were disposing of all or most of their shares, they would still be entitled to an income from those family companies at a level to give them financial security for the rest of their lives.
6. The agreement between Eric Parham and Autoyachts provides that he should be a technical adviser. It provides that the agreement should continue in force during his lifetime and that the company should not be entitled to determine it except on the grounds of wilful misconduct in relation to the company's affairs. It provided no great definition of what his duties would be; Clause 5 providing that he would undertake such duties and exercise such powers in relation to the company and its business as the board of directors in the company should from time to time assign to or vest in him, or as shall be agreed between the board of directors and him. At a later date Eric Parham transferred all his shares in the defendant company to his children, and Leonard Parham transferred most of his shares in the defendant company to his children.
7. Autoyachts ceased trading and went into liquidation some time around September 2003. By contrast the defendant company has been successful. It has a present value which, according to the judge, certainly runs into several million pounds; it sounds to me as if that may be something of an understatement but it does not matter. Among other things, it owns or is concerned with a shopping centre, a large marina, a leisure club, a clubhouse and a restaurant.
8. The critical clause of the agreement, whose construction is the only issue in this appeal, is Clause 7. It provides as follows:


"The technical adviser shall be entitled by way of remuneration for his services to an annual salary of a sum to be agreed in each year by the technical adviser and the company and in default of agreement, his annual salary (such salary being hereinafter called 'the basic salary') shall be calculated as follows: 1) for the first year of the operation of this agreement the sum of £10,000; 2) thereafter the basic salary shall at the end of each year of operation of this agreement be increased by 10% which increased salary shall be the basic salary for the following year and shall be increased by 10% at the end of each such following year as hereinafter provided."

9. The main first argument advanced by Eric Parham at the trial before the judge was in the context of this clause of this agreement, that the amount of the annual payments that he had received under the agreement had never been agreed between him and Autoyachts, or the defendants, and that therefore he was entitled to receive as damages the difference between the sums he had actually received and the amount that he should have received under the default provisions under Clause 7 of the agreement. He had been paid a variety of sums each year from 1973 through to 2002. They varied from year to year and they are to be found in a schedule to the particulars of claim in these proceedings.
10. Eric Parham's argument that those sums which had been paid had not been agreed under the agreement failed. The judge found that the amounts paid in the years up to and including 2002 had been agreed between him and one or other of the companies, whichever was relevant at the time. The judge also held that Eric Parham's agreement with the defendants had been terminated in 1989 and he rejected his claim that Leonard Parham had deliberately misled him by representing that one or other of the companies could not afford to pay him more than he was receiving. However, the judge found that there had been no agreement between Eric Parham and the defendants as to the amount under the agreement for the financial years 2003, 2004 and 2005 up to 30 June of that year. So the issue which remained, and which is the sole issue in this appeal, is the correct construction of Clause 7 of the agreement with reference to its consequences for Eric Parham's entitlement of salary for the years 2003, 2004 and 2005 up to 30 June.
11. The issue between the parties is in broad terms as follows: the claimant Eric Parham says that the amount to be determined under the agreement for the periods in question is to be calculated by taking a notional starting salary in the first year of the agreement's operation, that is to say 1973, of £10,000 and increasing it by 10% on a compound basis for each year since. The judge upheld this construction. The mathematical consequences of that were that Eric Parham's salary entitlement for 2003 was held to be £174,494 and for 2004 £191,943, with an equivalent part payment uplifted by 10% for the part of the year 2005. The competing construction advanced on behalf of the defendants before the judge and in this court is to the effect that Eric Parham's salary entitlement for the two years and the part year in question are to be determined in default of agreement, which was not achieved, by calculating what was 10% more than whatever had been agreed in the previous year. The mathematical consequences of that were that his entitlement to salary in 2003 would be of the order of £33,000 because the amount of his agreed salary in 2002 had been £30,000.
12. The judge held that the first part of Clause 7 up to the words "agreed in each year by the technical adviser and the company" provided for the agreement of an annual salary, if indeed agreement was reached, and that the rest of the clause from the words "and in default of agreement" provided a formula for calculating, in default of agreement, what his salary should be. He held that the clause meant that in the first year of operation of the agreement the default sum should be £10,000 and that thereafter the default amount of the salary should be increased upon a compounding addition of 10% each year. On this appeal, the ground of appeal and the submissions made by Mr Andrew Stafford QC on behalf of the defendant are that that construction was wrong.
13. Mr Stafford points to the fact that Clause 7 gives priority to the concept of agreement of Eric Parham's salary and that it contemplates in its latter part the possibility that there may be no agreement. He submits that it was not commercially sensible, in the known circumstances in which this agreement was entered into, to have a formula which goes back to the economic circumstances of 1973. He submits that the judge looked at the black letters of Clause 7 without regard to the factual matrix and that in doing so, the judge produced a construction which Mr Stafford describes as "economic roulette" or "the equivalent of a lottery ticket". He submits that the judge's construction was without relation to the commercial reality. The commercial and factual reality, he submits, was that in 1973 this was a family company and that the agreement had been entered into at a time of family peace. It was, as is correct, a lifetime contract incapable of being terminated by the company unilaterally except for wilful misconduct in relation to the affairs of the company. And, submits Mr Stafford, coming down to the detail that the judge's construction is inconsistent with what the words of Clause 7 mean.
14. I have to say that I disagree with that proposition, for reasons which I shall explain when I have explained my understanding of how Mr Stafford suggests that the defendant's construction should be arrived at. Mr Stafford submits that the commercial purpose of this agreement was to confer on Eric Parham a measure of protection if he could not secure by agreement the salary he thought he wanted, but upon the claimant's construction it is submitted that the clause only provided him with protection in some circumstances. It seems to me that the effect of this clause is largely neutral, since each construction – that advanced by the claimant, and that advanced by the defendant – gives a measure of protection to Eric Parham and each construction is capable of producing superficially surprising results.
15. Coming to the words of Clause 7, if I have understood him correctly Mr Stafford makes essentially two points. He submits that the defined words "basic salary" do not appear in sub-clause (1) in the part dealing with the default position but do appear in sub-clause (2), and secondly -- and I think essentially -- he submits that the expression "basic salary" is to be interpreted in the circumstances where there was agreement in an earlier year as to the annual salary as equivalent to that agreed annual salary, and he expressed his submission in these words: "basic salary" is a badge which has been attached to the annual salary for the purposes of the default salary.
16. I think that his construction would require one or other of these two modifications to the actual wording of Clause 7. Either, I think, he would have it that in sub-clause (2) the expression "thereafter the basic salary shall at the end of each year of operation of this agreement" be changed so that it should be read as "thereafter the annual salary shall at the end of each year of operation of the agreement be increased by 10%", by that substitution achieving the position where it is the annual salary that had been agreed in a previous year which would be the object of the 10% increase in the subsequent year. Alternatively, his submission perhaps could be achieved by modifying sub-clause (2) so that it would read "thereafter the basic salary shall be the annual salary at the end of each year of operation of the agreement" – take out the word "be" – "increased by 10%".
17. In my judgment these submissions are without warrant. In particular in my judgment there is no warrant for effectively lifting the expression "basic salary" from the second part, the default part of this clause, and putting it or attaching it to the expression "annual salary" in the first part of the clause. Before coming to an explanation in my own words of what I think this clause means and how it should be construed, I record that Mr Stafford referred us to a short passage from the judgment of Lord Hoffman, now the well-known case of ICS Ltd v West Bromwich Building Society, [1998] 1 WLR 896. On page 913 Lord Hoffmann said:


"The rule that words should be given their natural and ordinary meaning reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compagnie Naviera SA v Salan Redeviana AB [1985] AC 191, 201: 'If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.'"

18. I do not accept, for reasons which I shall in a moment briefly explain, that something must have gone wrong with the language of this clause, nor that the claimant's construction flouts business common sense. It was not in my judgment a senseless default position; as I have said, each party's construction is capable with the passage of time of producing examples which may at first glance seem surprising. In my judgment, Clause 7 simply does not mean what the appellants submit it means. The judge in my view correctly construed the clause.
19. The clause divides into two parts. By the first part Eric Parham is to be paid "an annual salary of a sum to be agreed" between him and the company. In any year in which his salary is agreed, that is naturally to be his salary. The second part is a default provision which provides a formula for calculating his salary in any year in which there is no agreement. The formula is, I think, clear and relatively simple. His annual salary in default of agreement is, for the purpose of the formula, called "the basic salary". The basic salary for the first year of operation of the agreement is £10,000. Thereafter the basic salary is to be increased each year by 10% of what it was the previous year. The basic salary so increased becomes that year's basic salary, which in default of agreement is to be increased by 10% next year, and so on. Thus the default basic salary is there in the background for calculation to be the salary in any year in which agreement is not reached. The appellant's construction is, in my judgment, wrong because the words of the clause simply do not mean that an agreed salary becomes the basic default salary for the next year. There is no connection in sense between the first agreed salary part of the clause and the second default part of the clause.
20. What I regard as the clear meaning of the clause has produced a superficially mildly surprising result. Eric Parham's longevity has meant that the agreement has operated now for 32 years; 32 years at 10% compounded increases of £10,000 produces quite a large amount. It does not seem to me that the structure of the clause is such that the court should regard it as absurd, so as to be tempted to look for a less absurd meaning. The agreement provided for the salary of the part-owner of a family business. He, or indeed his brother Leonard, who had an equivalent agreement, might expect to benefit from good years and draw in their horns in bad years. There was thus the flexibility to agree larger or smaller salaries. The larger salaries might be more than £10,000 increased annually by 10%, the smaller salaries might be less.
21. But a default provision would not be surprising and there were times in the 1970s when inflation and interest rates were more than 10% a year. The appellants may complain that Eric Parham's present entitlement to salary in default of agreement is disproportionate to his material contribution to the company, but their preferred construction is, I think, opportunistic. If in 1974 Eric Parham's agreed salary from Autoyachts had been £20,000, as it might have been, and if there had been no agreed salary since, the appellants' construction would produce a default salary for 2005 of something approaching £400,000. Equally Eric Parham's actual agreed salary from Autoyachts in 1989 was £60,000. If there had been no subsequent agreed salary, his 2005 default annual salary on the appellants' construction would be in the order of £250,000. I would dismiss this appeal.
22. SIR PETER GIBSON: I also agree that this appeal should be dismissed. The construction of the clause, Clause 7, seems to me to be clear. Mr Stafford's construction seems to me to fail because it requires that a proviso should be written into sub-clause (2) of Clause 7 so as to require that if in any year the annual salary is agreed, that agreed salary should be the basic salary to which the provisions of sub-clause (2) would thereafter apply. Mr Stafford's problem is that that is not to be found in the sub-clause; indeed the sub-clause spells out in my judgment precisely how the calculation is to be made. I can see no justification for the submission made by Mr Stafford that this would produce an uncommercial result. I fully accept that primacy is given to agreement but in default of any agreement in any particular year, a simple mechanism is provided for the calculation. To my mind that plainly offers a measure of protection to Mr Parham and it cannot be said in any way to flout common sense. For these, as well as the reasons given by my Lord, I too would dismiss this appeal.
23. THE PRESIDENT OF THE QUEEN'S BENCH DIVISION: I agree with both judgments.

Order: Appeal dismissed.