COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
Mrs Justice Proudman
Strand, London, WC2A 2LL
B e f o r e :
PRESIDENT OF THE COURT OF APPEAL
LORD JUSTICE THOMAS
LORD JUSTICE ETHERTON
| Franbar Holdings Limited
|- and -
|Casualty Plus Limited & Anr
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr David Matthias QC (instructed by Richard Howard & Co) for the Respondent
Hearing dates : 25th January 2011
Crown Copyright ©
LORD JUSTICE ETHERTON :
(1) The Board of the Company was to have responsibility for the overall supervision and management of the Company, but had to obtain shareholder approval before undertaking or adopting any act or proposal that involved any "Reserved Shareholder Matter" (clause 2.1).
(2) Casualty was entitled and obliged to make and maintain the appointment of two directors of the Company; and was entitled to appoint a third as chairman (clauses 2.2 and 2.8).
(3) Franbar was required to appoint Mr Karim Lalani as a director, and was entitled to appoint one other director of the Company (clauses 2.3, 2.6). Franbar was required to maintain the appointment of Mr Lalani, prior to the sale of all the option shares, until he died or became incapacitated (clause 2.4).
(4) Casualty (and Franbar) would procure that all dealings between the Company and Casualty would be carried out on an arm's length basis (clause 2.10).
(5) Casualty and Franbar were to procure that the Company produced its own audited accounts (clause 2.10).
(6) The parties to the Agreement would procure that audited accounts for the Company were available for inspection by the parties and formally adopted not later than 10 weeks following the financial year end of the Company (clause 2.11).
(7) In consideration of £1 paid by Casualty, Franbar granted to Casualty the right, exercisable on 31 March in the years 2008, 2009, 2010, 2011 and 2012, to purchase all of the ordinary shares of the Company held by and registered in the name of Franbar "for a price per share of the Option Price upon the terms and subject to the conditions contained in Schedule 2" to the Agreement (clause 4.3).
(8) Clause 5, headed "Reserved Shareholder Matters", provided that Franbar and Casualty would exercise their powers in relation to the Company so as to procure that its nominated directors, the Board and the Company would not, except with the prior unanimous consent in writing of Franbar and Casualty, do certain specified things, including (clause 5.9) holding any meeting of the shareholders or purporting to transact any business at such meeting, unless authorised representatives or proxies were present for each of the shareholders; and (clause 5.12) making or permitting any material change in the accounting policies and principles adopted by the Company in the preparation of its audited accounts and management accounts except as might be required to ensure compliance with the relevant accounting standards under Part VII of the Companies Act 1985 ("CA 1985") and GAAP, consistently applied.
(9) Clause 14.4 said that the Agreement was the entire agreement between the parties, superseding all other agreements or arrangements between the parties, whether written or oral, express or implied; and that no variations of the Agreement were effective unless made in writing signed by both parties or their authorised agents.
(10) Paragraph 3 of Schedule 2 to the Agreement contained provisions for the exercise of the call option by Casualty in similar terms to clause 4.3.
(11) Schedule 3 to the Agreement contained the provisions for determining the option price. Paragraph 2 of Schedule 3 provided:
"The Option Price will be determined by reference to the EBITDA set out in or determined by reference to the Company's most recent audited annual accounts as have been formally adopted by the Company immediately prior to the exercise date."
(12) Paragraph 3 of Schedule 3 provided:
"The amount of the Option Price per share will be the Company's Adjusted EBITDA, multiplied by nine and finally divided [by] the total number of Shares in issue at the exercise date specified in the relevant Option Notice."
(13) 'EBITDA' was defined (in Schedule 3 paragraph 1) as follows:
"Earnings before interest charges, taxation, depreciation and amortisation as determined by GAAP as amended or updated from time to time".
'GAAP' was defined (in Schedule 1 paragraph 2) to mean:
"accounting principles, concepts, bases and policies generally adopted and accepted in the United Kingdom in the preparation of accounts for limited liability companies."
'Earnings' was defined (in Schedule 3 paragraph 1) to mean:
"The total profit generated by the Company in the ordinary course of business, excluding exceptional and extraordinary revenues and costs."
'Adjusted EBITDA' was defined (in Schedule 3 paragraph 1) to mean:
"the EBITDA adjusted to take account of the factors in paragraphs 4, 5 and 6 of this Schedule 3."
(14) It is common ground that the factors in paragraphs 5 and 6 of Schedule 3 did not apply. The only relevant adjustment was that mentioned in paragraph 4, which provided:
"A management fee for providing head office functions and services is to be charged by Casualty to the Company and deducted from the EBITDA for the relevant financial year. Such management fee will be in respect of such periods and such amounts as set out in the Business Plan".
The judgment and her findings
"The defendant took the view that the dispute and ongoing proceedings between the claimant and the defendant precluded the possibility of the claimant's involvement. Further, as the defendant could have carried any vote put to the Board within the Company, a vote on the 2006 accounts seems to have been considered by the defendant as unnecessary."
"I do not accept that 'adopted' simply means that the Company had treated the 2006 accounts as its accounts by filing them at Companies House, thereby relieving the claimant's nominated directors of their duty to file accounts. In this context I note the requirement of clause 2.11 of the Agreement that audited accounts for the Company be made available for inspection "by the parties or their representatives" and formally adopted within a set time period. The use of the word "adoption" involves (a) formal approval or some conduct by the claimant demonstrating either (b) that it had accepted the accounts informally in such circumstances that it could not be heard to say that it was not bound because formal procedures had not been followed, or (c) that approval of the accounts had been delegated to the directors who in fact signed them. Unilateral adoption by one part of the membership and one half of the directors cannot in my judgment be adoption for the purposes of the Agreement."
"I do not believe that it would have been open to the defendant to adopt accounts for the purposes of Sched 3 of the Agreement which had not been certified by the auditors as representing a true and fair picture of the Company's financial statements. It cannot be right that the defendant's representatives could force the accounts through on any basis they liked. Mr Moverley Smith [Casualty's counsel] pointed out that the directors would always owe a duty to the Company (see s. 393 Companies Act 2006) only to approve accounts which they believed to be fair and true. However it seems to me that the Agreement is predicated on the basis that accounts will be binding because they have been independently audited. Under the terms of the Agreement the auditors are the final arbiters of what is a true and fair view of the company's affairs. That cannot apply where the auditors have certified that they are unable to give their opinion on the issue. The position is very far in my judgment from some minor qualification on a discrete issue which could be resolved to the auditors' satisfaction. I do not consider that the entire agreement clause derogates from this conclusion."
"What is required is certainty and fairness between the members. I cannot accept that it is certain or fair to use as the basis for determining the option price accounts which were never agreed by the shareholders or the board of the Company and which were disclaimed by the Company's auditors."
" The proposition that the implication of a term is an exercise in the construction of the instrument as a whole is not only a matter of logic (since a court has no power to alter what the instrument means) but also well supported by authority. In Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board  1 WLR 601, 609 Lord Pearson, with whom Lord Guest and Lord Diplock agreed, said:
'[T]he court does not make a contract for the parties. The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be. The court's function is to interpret and apply the contract which the parties have made for themselves. If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable. An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves.'
20. More recently, in Equitable Life Assurance Society v Hyman  1 AC 408, 459, Lord Steyn said: 'If a term is to be implied, it could only be a term implied from the language of [the instrument] read in its commercial setting.'
21. It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson's speech that this question can be reformulated in various ways which a court may find helpful in providing an answer – the implied term must "go without saying", it must be "necessary to give business efficacy to the contract" and so on – but these are not in the Board's opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?"
LORD JUSTICE THOMAS
LORD JUSTICE MAURICE KAY