England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR RICHARD SHELDON QC sitting as a Deputy High Court Judge
HC11CO2196

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/02/2013

Lord Justice Mummery:

Introductory

1. This case was brought to determine inter alia whether, on its true construction, a clause in an agreement for the sale of shares in a company conferred on the defendant purchaser the power to terminate the claimant vendors' non-executive directorships of the company.
2. The company in question, which was established to run an estate agency for the sale of properties in Chelsea Harbour, is called Harbour Estates Limited (HEL). The share sale agreement was dated 6 June 2003. The claimants, Jennifer Bonham-Carter and Antoinette Horn, were vendors along with Antoinette's husband, Adam. The defendant Situ Ventures Limited, a company set up by a Mr Jeremy Hammond for that purpose, purchased the shares and remains the ultimate holder of them. The purchase price was £800,000. An initial payment of £100,000 was made on completion. As the balance was to be paid by instalments over 5 years the agreement included provision for the claimants to provide assistance, if reasonably required, to the defendant purchaser and for them to become non-executive directors of HEL.
3. The defendant did not pay the balance in accordance with the agreed terms. In this action, which was tried by Mr Richard Sheldon QC in January last year, the claimants contended that, as the balance of the purchase price was outstanding, they were entitled to remain and they wished to remain, non-executive directors of HEL under the terms of clause 4.2 of the agreement. The defendant's case was that they had ceased to be directors, either by reason of an informal agreement for their removal or as the result of a written request for their resignation made by the defendant in accordance with clause 4.2. The judge had to decide whether, in those circumstances, the claimants remained non-executive directors of HEL.
4. On 13 February 2012 the judge made a declaration that they were non-executive directors and had been at all material times since 6 June 2003 and that they may not be required to resign from office pursuant to a request by the defendant under clause 4.2.
5. One ground of the defendant's appeal was that the judge misinterpreted clause 4.2 as not giving it the right to require the resignation of the claimants as non-executive directors. The claimants served a respondents' notice contending, as an additional ground, that they not only had an obligation to remain as directors until the occurrence of the specified event (i.e. payment in full of the sale price), but they also had a right to do so.
6. It was not until this appeal was opened that the court was told that, as a result of other proceedings, the defendant had paid the balance and that the claimants had resigned as non-executive directors the week before the hearing. The dispute now is about who should pay the costs of the hearing below, which had been ordered against the defendant, and the costs of this appeal. Costs are the only reason left for the court to hear and decide this appeal.
7. When granting the defendant permission to appeal on a renewed application on 11 July 2012 Arden LJ limited the grounds of appeal to the construction point. The deputy judge had rejected the defendant's contention that there was an effective unanimous informal agreement to remove the claimants as directors. Arden LJ refused permission to appeal on that point.

The agreement

8. Clause 4.2 is in the section of the agreement headed "Vendors' Assistance". Under clause 4.1 the claimants agreed to continue to make themselves available to HEL "as and when reasonably required by the Purchaser in order to instruct, advise and assist the Purchaser in respect of the day-to-day operation, sales and marketing and management of the Company's business."
9. Clause 4.2 provided that:

"Until all of the Purchase Price has been paid to the Vendors, the Director Vendors shall remain as Directors of the Company in a Non-Executive capacity unless otherwise agreed and/or requested by the Purchaser…"

[There follows an indemnity by the Purchaser to the Vendors against any personal liability in respect of acts or omissions on the part of the Company]

10. The question is whether the terms of clause 4.2 gave the defendant the power to request that the claimants should not remain as directors and so put them under an obligation to resign and to cease to be directors; or whether, as the claimants contend, the effect of a request by the defendant was to terminate the obligation of the claimants to remain as directors of HEL, but without in any way detracting from their option to remain, if they so wished.
11. The defendant had served on each of the claimants a "Request Notice" dated 27 May 2011 under clause 4.2 purporting to terminate immediately their non-executive directorships of HEL. A similar notice dated 12 July 2011 was in the form of a request that they resign as directors immediately. Mr Hammond purported to appoint two additional directors, which appointment was challenged by the claimants as invalid.
12. The judge rejected the defendant's contention that the claimants' directorships were terminated by the request notices. He held that clause 4.2 did not give the defendant the right to require the claimants to cease to be directors. It imposed an obligation on the claimants to remain as directors until payment in full was made, unless, in the meantime, the defendant released them from that obligation. While the request notices terminated the contractual obligation on the claimants to remain as directors, they did not operate to require them to resign and cease to be directors.

Other provisions in agreement

13. In the judgment below and in the course of submissions on the appeal reference was made, as one would expect, to other parts of the agreement for the light that they might possibly shed on the purpose of clause 4.2 and, in particular, what the parties meant by "requested." Various possibilities were debated without adding much of value on the construction of clause 4.2.
14. Clause 5 was a restraint of trade clause. It restricted the competitive activities of the claimants until the purchase price was paid. There was a proviso that, if the "Vendors are removed from office a Directors of the Company prior to final payment", the restraint should apply to the earlier date of either 18 months from the date of removal or the final payment date. Submissions were made about the effect on that proviso to the competing constructions of clause 4.2.
15. Clause 6 governed the "Instalment Payments." It provided in 6.8 "continuing security for the payment and discharge of the Purchaser's obligations" by means of a charge on the shares in favour of the claimants with provision for the transfer of the charged shares "upon demand" in the event of specified default by the defendant. Clause 6.9 also provided that, in a case of specified default, the defendant would "at the Vendor's request" give up 50% of the voting rights attaching to all of the shares in the Company. In the event of a demand by the claimants under clause 6.8 or a request by the claimants under clause 6.9, there was provision in clause 6.10 for restricting the activities of the defendant in the business of an estate agent in the area of Chelsea Harbour. The submissions discussed the relationship of the competing constructions of clause 4.2 with those provisions.

The Judgment

16. In a clear and carefully reasoned judgment the judge decided that the requests served on the claimants did not oblige them to resign as directors of HEL. The termination of their directorships was a matter to be governed by the operation of the relevant provisions in the Companies Act 2006 and in the company's articles of association.
17. The judge based that conclusion on his construction of clause 4.2. After setting out the relevant parts of the agreement and summarising the rival contentions of the parties, he said:-

"46. I consider that the natural meaning of the words used in clause 4.2 is that it places the Claimants under an obligation to remain as directors of HEL in a non-executive capacity unless otherwise agreed or requested by the Defendant. It seems to me that it was included for the benefit of the Purchaser and that its principal purpose was to ensure that the Claimants retained a visible role in the business for as long as the Purchaser required (or until the purchase price had been paid in full.)"

18. The judge explained that that construction was supported when regard was had to the other terms of the agreement and its context. Having found that clause 4.2 placed the claimants under an obligation to remain as directors after the sale, he looked to the consequences of a request by the defendant falling within the phrase "unless otherwise…requested by the Purchaser" in clause 4.2. He said that, on any view, where such a request was made, the claimants were no longer under any obligation to remain as directors of HEL. The crucial question was what was the position if, contrary to the wishes of the defendant, the claimants wished to remain as directors.
19. I agree with the judge that the starting point has to be the words used in the clause. He rejected the defendant's submission that the use of "requested" meant something more than "notified." In his view it was not possible to read into the words used an obligation on the part of the claimants to resign once the request is made. He said:-

"56. …As a matter of the natural meaning of the words used, the Claimants' obligation to remain as directors comes to an end when a request is made by the Purchaser that they do not remain as directors. The language does not in my view of itself require the Claimants to cease to be directors by resigning. Had it been the parties' intention that the Claimants would be under an obligation to accede to that request I would have expected this to have been spelt out in clear language in the [agreement] itself."

20. The judge considered that his view was reinforced by the factual background and other terms of the agreement.

Discussion and conclusions

21. I will not repeat the arguments of the parties on construction, which are set out in the judgment below. I proceed directly to the key question for this court, which is whether the judge's construction was wrong. If it was, his order was wrong and the appeal from it should be allowed. If it was not, the appeal should be dismissed.
22. It is common ground that the wording of clause 4.2 must be construed in the context of its purpose and the relevant surrounding circumstances. Starting, as one should, with the language used by the legal draftsman in clause 4.2 I make three comments.
23. The first comment is on the tripartite structure of the clause. It first states the outstanding balance. That is the peg on which the clause hangs. The clause then proceeds to identify what hangs on the peg: the substantive provision for the vendors to be non-executive directors of HEL. It concludes with the means by which that state of affairs may be made "otherwise": as either agreed and/or requested by the purchaser. What was hanging on the peg is taken off it.
24. The second comment is that it is not correct to treat clause 4.2 as only for the benefit of the purchaser, as the judge did, or as only for the benefit of the vendors, as the claimants contended. It is true that only the purchaser can make the request referred to, but the clause as a whole is inserted for the benefit of both of them: for the vendors by providing for a presence in HEL, potentially until they have been paid in full; for the purchaser in furtherance of the assistance promised by the vendors, if reasonably required, under clause 4.1.
25. The third comment is that neither clause 4.2 nor the agreement as a whole can be construed as the product of particularly careful drafting. For example, the same words do not, when they are used in the agreement, always have the same precise meaning. One of the claimants' objections to the construction proposed by the defendant is that it treats "requested" as having the same meaning as "required". But, as pointed out in argument, in clause 4.1 the draftsman's use of "required" is, in that context, interchangeable with "requested": that provision would have the same meaning and effect whether it says "requested" or "required."
26. That this document is not the product of skilful drafting is also evidenced by the presence of the expression "and/or." Its use in this clause is unnecessary and confusing. In this case "and/or" in clause 4.2 can only mean "or". If the vendors agree with the purchaser not to remain as directors, then the occasion for a request by the purchaser to that effect would not arise. It would only arise as an alternative to a failure to agree on whether the vendors stay or go. I would add that the use of the expression "and/or" in any legal document is in any case open to numerous more fundamental objections of inaccuracy, obscurity, uncertainty or even as being just plain meaningless, as explained by Sir Robert Megarry in his erudite philological discussion of "and/or" in "Andorandororand" to "Law at the Centre" (1999) at pp 71 to 78).
27. Proceeding beyond the draftsman's choice of words and the structure of the clause to the overall context and surrounding circumstances, I have not been able to find any helpful indicators of what significance should be attached to the use of "requested" in clause 4.2. I am thrown one back onto the wording of the clause and the questions posed by its imperfect drafting.
28. Difficulties exist because the draftsman has omitted (a) to spell out clearly the nature of the request by the purchaser contemplated by the clause or (b) the consequences of the vendors not acceding to a request made by the purchaser. The difficulty that I have with the judge's construction is in envisaging the circumstances in which the purchaser would request the vendors simply to cease to be under an obligation to remain as non-executive directors. The situation that the draftsman is far more likely to have in mind is that of the purchaser wanting the vendors to resign from their directorships. Unless the provision gives the purchaser the power to remove the vendors as directors by such a request, I do not see the point of giving the purchaser the right to make a request for the vendors to be "otherwise" than non-executive directors.
29. If the vendors agree to resign, it would be unnecessary for the purchaser to make a request to do so in the alternative. But if they have not agreed to resign, it would be pointless for them to be "requested" by the purchaser to resign, unless that request by the purchaser carried with it an obligation on the part of the vendors to act as "requested" by the purchaser.
30. The primary question here is this: what is the nature of the request contemplated in the case of the purchaser? The contemplated request by the purchaser is one directed to a state of affairs "otherwise" than that stated in the clause. The state of affairs stated in the clause is that in which the vendors remain as directors of HEL. The "otherwise" state of affairs is, as a matter of ordinary English, one in which they do not remain as non-executive directors: so they cease to be directors; they do not just cease to be under an obligation to remain directors.
31. The question about the request contemplates that the claimants have not agreed to resign. If they had, the situation would be covered by the earlier words "unless otherwise agreed" and the need for the purchaser to make a request for the position to be "otherwise" than remaining on the board of HEL would not arise.
32. If, as here, a request is made by the purchaser, a secondary question arises: what is the consequence of the vendors refusing to do what the purchaser has requested them to do? The clause does not go on to spell out the consequences of their refusal to do what is requested. It is, however, implicit that the consequence of the request will be a state of affairs "otherwise" than that which exists and which the purchaser wishes to change. The existing state of affairs is that of the vendors remaining as directors: a state of affairs "otherwise" is their ceasing to be directors. In my view, the request contemplated by clause 4.2 in the case of the purchaser is more naturally directed to the consequence of resignation of the vendors as directors than to relieving them from a contractual obligation to remain directors.
33. I would accept that there are respectable arguments for the construction placed on clause 4.2 by the judge. His conclusion is clear, well reasoned and, indeed, quite subtle. Initially I did not think that his construction was wrong. However, after hearing argument, in particular on points put to counsel by Aikens LJ during the hearing, I think that, on balance, the defendant's construction of clause 4.2 is more consistent with the structure and language of clause 4.2 than the claimants' construction accepted by the judge.
34. I make it clear that I am more influenced by the actual wording of clause 4.2 as a guide to ascertaining the probable intentions of the parties than by the competing arguments on which construction makes more commercial sense.

Result

35. I would allow the appeal.
36. In brief, I accept that the judge's construction of clause 4.2 is a possible one: it is surprising that the defendant could, on its construction, unilaterally remove the claimants from office as soon as the agreement has been made and before the balance of the purchase price was paid. I am now satisfied, as a result of further probing of the rival arguments, that in this case the actual wording is a more reliable guide to construction than anything else is and that that points to the defendant's construction as the one that should prevail. Neither the overall context of clause 4.2 nor the commercial consequences of the differing constructions are such as to justify a departure from the natural meaning of the input of the draftsman to the structuring of the clause and the words used. The function of the courts is to construe what is said in the written formal agreement legally drafted for the parties, with its imperfections and infelicities, not to construct for the parties another legal agreement that eliminates some of the imperfections and infelicities.

Lord Justice Aikens

37. I agree. The judgment of Mummery LJ so completely expresses my own conclusion and reasons that there is no point in my adding anything more.

Lord Justice Lewison:

38. I have found this a difficult case. The drafting of the contract is such that there is no completely satisfying answer to the question raised on this appeal. Like Mummery LJ I originally thought that the judge had chosen the least worst solution. There is obvious force in the point that a request made by the buyer under clause 4.2 must have been intended to have some effect over and above an agreement by the sellers to resign. But I agree with Mummery LJ that clause 4.2 was for the benefit of both the sellers and the buyer. I was impressed by the point that if clause 4.2 is at least in part for the benefit of the sellers it would be surprising if that benefit could be unilaterally removed by the buyer. I do not however, push my doubts to a dissent. I agree that the appeal should be allowed.