COURT OF APPEAL
Judgment reserved: 15 July 1999
Reserved Judgment delivered: 22 September 1999
Before: Sir John Nutting, QC (President);
P D Smith, QC, and M G Clarke, QC
In The Matter of an agreement
Between:Colin Alexander HarrisRepresentor/Appellant
And:Andrew David Denzil CrichtonRespondent
Appeal by the Representor/Appellant against the Order of the Royal Court of 24 July 1998, whereby the Court dismissed the Representation of the Representor/Appellant, seeking a Declaration in such terms as are just concerning the proper construction of an Agreement to dissolve a partnership between the parties and any variation thereto.
Advocate M St J O’Connell for the Representor/Appellant
Advocate P C Sinel for the Respondent
JUDGMENT
SMITH, JA: By an Agreement in writing made on 23 August 1988 ("the Agreement") the Appellant and the Respondent set out the terms of the dissolution of their partnership as from 31 May 1988. Until that date they had practised together as certified accountants and had participated with each other in related business interests which were also catered for in the Agreement.
By virtue of the Agreement the partnership business was effectively vested in the Respondent subject to certain obligations therein described. Of these obligations it is necessary to quote the following:
"4BY way of compensation for goodwill Crichton shall pay to Harris with effect from 1st June, 1989, a capital amount ("the Goodwill Payment") by equal monthly payments as follows:
(a)with effect from 1st June, 1989, and for the year ending 31" May, 1990, the Goodwill Payment shall be £60,000 (Sixty thousand pounds) plus such percentage of £60,000 as shall be equal to the difference between the Jersey Cost of Living Index on 1st June, 1998, and such Index on 1st June, 1989.
(b)After 31st May, 1990, the annual Goodwill Payment shall be equal to the last preceding annual Goodwill Payment plus a percentage increase equal to the percentage increase in the Jersey Cost of Living Index for the preceding period.
(c)The Goodwill Payments shall be made to Harris during the joint lifetime of Harris and Crichton and on the death of either of them by way of finality Crichton or his Estate will pay to Harris or his Estate a sum ("the Death Payment") equal to ten times the Goodwill Payment paid to Harris for the year preceding his death or in the event of his death after 1st June, 1995, the multiple of ten times shall be reduced to eight times. On payment of the Death Payment Crichton or his Estate shall be released from all obligations towards Harris or his Estate ….
5.IN the event that Crichton shall dispose of his interest in the Harris Crichton Business or any successor business to such Business within one year of such disposal he shall pay to Harris ("the Business Sale Payment") a capital sum which shall be the greater of
(a)£96,000 plus the amount payable under 3(b) above multiplied by the effective net multiple of net earnings that Crichton receives for the business; or
(b)the annual Goodwill Payment currently being made to Harris multiplied by ten (but after 1st June, 1995, by eight).
In the event that Crichton sells a proportion of the business to outside parties then he shall pay to Harris the appropriate proportion of the amount due under this clause. Consequently he shall proportionately reduce the annual Goodwill Payment."
Clause 3(b) reads as follows:
"HARRIS shall be employed and named as a Consultant to Harris, Crichton & Co. at a remuneration of:
(b)An additional consultancy fee to be agreed between Crichton and Harris by 31st July, 1989, and payable sven (sic) days thereafter. Such fee, in the absence of agreement, shall be £14,000 …"
By a Representation dated 17th January, 1997, the Appellant sought (inter alia):
(a)a declaration that subparagraphs 4(a) and (b) of the Agreement were varied so that:
(i)the Annual Goodwill Payment would be increased by 6%;
(ii)the liability of the Respondent to make the Annual Goodwill Payment could be extinguished if the Respondent paid (the Appellant] ten times the Annual Goodwill Payment before 1st June, 1995, or eight times thereafter;
(iii)the Respondent could also make a partial capital repayment on 31st May of any year and the Annual Goodwill Payment would be proportionately reduced.
(b)a declaration that subparagraph 4(c) and paragraph 5 of the Agreement were varied so that:
(i)(in relation to subparagraph 4(c)) the variations referred to in (a) above resulted in a consequential amendment to paragraph 4(c) of the Agreement;
(ii)in relation to paragraph 5, the variations referred to in (a) above resulted in a consequential amendment to that paragraph;
(c)in the alternative, a declaration "in such terms as are just concerning the proper construction" of the Agreement and any variation thereto;
(d)an order that the Respondent pay to the Appellant all sums due under the Agreement and the variation as and when they become due.
In his amended Answer of 2 June 1998 the Respondent admitted that the Agreement had been varied but averred that the effect of the variation was that a payment made by the Respondent to the Appellant on 31st March, 1996, extinguished the Respondent's obligations under the agreement save that the Respondent accepted an obligation to make a bonus payment to the Appellant in the event of "a profitable sale of the business" and he sought a declaration to this effect. By way of counterclaim the Respondent sought rectification of the Agreement.
The trial before the Royal Court (Sir Peter Crill, KBE, Commissioner, presiding) took place on 8, 9 and 12 June 1998, and judgment was delivered on 24 July 1998. [1998.162] The Royal Court heard oral evidence and we have been provided with a transcript of it. The Royal Court concluded that there was no obligation on the Respondent to make further payments to the Appellant apart from the "bonus payment" however calculated and declined to grant the Appellant any of the relief he sought. From this decision he now appeals. Before us Advocate O'Connell appeared for the Appellant and Advocate Sinel appeared for the Respondent. We are indebted to them both for their submissions. This is the judgment of the Court.
Before turning to the issues in this appeal we remind ourselves that the Royal Court had the great advantage of seeing and hearing the witnesses and that we must therefore be extremely circumspect in terms of considering substituting our view of the evidence of a witness for that of the tribunal with that advantage.
The crux of this appeal is whether the parties agreed by way of variation that certain capital payments made by the Respondent extinguished not only the Respondent's obligation to make the Annual Goodwill Payments provided for in the Agreement but also the obligation to make "the Death Payment" under subparagraph 4(c) and the obligation to make "the Business Sale Payment" provided for in paragraph 5 (with a qualification, in relation to the latter, that the Respondent would make a "bonus payment").
The Royal Court had before it, as we have, a number of documents which went to the heart of the variation issue. The first mention of variation is to be found in a letter of 16 March 1989 from the Appellant to the Respondent. In it the Appellant said:
"You have said that you wish to have the option of settling some or all of the Business Sale Payment even though you may not have entered into sale arrangements yourself. I understand this, because of your concern over the inflation effect on the Goodwill Payment, and therefore your wish to reduce that payment. As I have said, I have no objection to this in principle, and if you wish to make a firm proposal, I am sure it will be fair and I will go along with it."
It will be noted that this letter refers not to capitalising the Annual Goodwill Payments but to accelerating the discharge of the Business Sale Payment.
Just over a year later the Respondent wrote to the Appellant. In a letter dated 27 March 1990, he wrote:
"I mentioned to you at the Capital Hotel last year that I did wish to seek your agreement to a modification of the Goodwill Payments to you as a result in the rise of inflation which was unforeseen, certainly by me, when we were deciding upon our dissolution arrangements. The JCOLI annual increase at March, 1988, was in fact 5.4% and at June that year 6.7%.
I would therefore like to amend the Dissolution Agreement so that the annual increase in the Goodwill Payment is fixed at 6% each year effective from 1st June, 1990.
When we were drafting the Agreement, you wished to include the failsafe multiples that the enterprise could not be sold at an under-value. The best way to achieve some capital buy-out without reference to the sale of the enterprise is for this multiple principle (as per 5b) to be applied at my option. Such reductions would only take place on 31st May each year and would be subject to one month's notice to yourself. Naturally the reduction would also affect the annual goodwill payment.
Therefore if the multiple was 10 and the annual goodwill payment was £60,000 a repayment of £100,000 on the relevant date would lead to a goodwill -payment for the following year of £50,000 (increased by 6%)."
It will be observed that in nether of these excerpts is there any explicit reference to the Death Payment. However, in the latter, the Respondent stated (immediately after the paragraphs quoted): "It is my intention to discharge my obligation to you within the next five to eight years."
Not long afterwards on, it would appear, 3 May 1990 the parties met. The following day the Respondent wrote to the Appellant. The material part of this letter reads:
"Further to our meeting yesterday I confirm our discussions as follows:
b.With effect from 1990 (i.e., the next revision) your annual goodwill payment will be increased by a fixed amount of 6%.
c.I will advise you by 30th April of each year of any capital reductions I wish to make from the capitalised goodwill amount.
d.Any such capital reductions will reduce the annual goodwill payment proportionately. Until 1995 the capitalised goodwill will be by a factor 10 and after 1995 by a factor of 8 - to which the capital repayment will be proportionately applied.
e.I will devise a method to calculate a bonus payable to you in the event of a profitable sale of the business. As we agreed, it is important to note that this will not involve any share ownership but will just be by way of an extra capital payment.
f.I confirm it is my intention to discharge all contractual obligations to you within the next five to eight years."
There are two points of particular note in this letter. First, it purports to record what had been agreed. Secondly, paragraph f. expressly refers to "all contractual obligations."
On 9th May, 1990, the Appellant wrote in reply and confirmed his "agreement to all the points in your letter." In relation to paragraph e. of the Respondent's letter the Appellant proposed that " … the sums paid to me previously in full satisfaction of ‘the Business Sale Payment’ shall be deducted from a figure (which shall be £110,000 multiplied by the effective net multiple of net earnings that you receive for the business) and the balance if any shall be paid to me. I'll assume that's OK with you unless I hear to the contrary."
We shall return to the fate of this proposal at a later stage but in the meantime we record that in a letter of 15th January, 1998, Bailhache Labesse on behalf of the Appellant stated that there was an error in the formula as drafted by the Appellant in that letter and that it should refer to "Annual Goodwill Payments" and not to the "Business Sale Payment". The Respondent's Advocates responded on 9th March, 1998, in the following terms:
"If that is in fact what your client meant, then it is your client's case that the payments made by our client were in full satisfaction of the Annual Goodwill Payments. If our client has satisfied his obligation to make Goodwill Payments, then obviously the Death Payment (which is calculated by reference to the current Goodwill Payment being paid) no longer falls to be paid. And if our client has fully satisfied his obligations to make Annual Goodwill Payments, then it must also follow that clause 5(b) must have been satisfied since that too falls to be calculated by reference to the Annual Goodwill Payment currently being paid."
They might have added that, if Bailhache Labesse were right, the Appellant appears to have made a similar error in the passage from his letter of 16th March, 1989, quoted above. Yet the Appellant has never suggested (and did not suggest at the trial) that he was mistaken in his use of terminology in that letter.
At the trial there was little in the way of explicit evidence as to what was actually said at the crucial meeting on 3rd May, 1990. Certainly it does not seem to have been alleged that the impact of capital payments on the Death Payment was actually discussed between the parties. Rather, the Respondent's point seems to be that the variation only made sense on the basis that if the obligation to make the Business Sale Payment was extinguished by capital payments it inexorably follows that the obligation to make the Death Payment was thereby also extinguished.
In our judgment the Royal Court's decision is correct. We have been impressed by four points in particular:
1.The Appellant accepts that the capital payment made by the Respondent on 31st March, 1996, extinguished his obligation to make Annual Goodwill Payments. However, it was contended on his behalf that the obligation to make the Business Sale Payment and the Death Payment survived. But this is not consistent with the Appellant's own letters of 16th March, 1989, or 9th May, 1990, to which we have referred nor with the bonus concept which, in our judgment, is only logically explicable as a substitute for the extinguished Business Sale Payment.
2.The Appellant accepts that the Business Sale Payment and the Death Payment were alternatives in the sense that the obligation to pay the latter would be extinguished by the payment of the former. It follows from this that the discharge of the Business Sale Payment effected by the payment on 31st March, 1996, also had the effect of discharging the Respondent's obligation to make the Death Payment.
3.According to the Agreement the Death Payment falls to be calculated on the basis of a multiple of the Annual Goodwill Payment paid to the Appellant for the year immediately preceding the relevant death. If, however, the obligation to make the Annual Goodwill Payments has been extinguished (and it is common case that it has) a vital component in the calculation of the Death Payment has been lost. In an effort to meet this problem the Appellant was driven to arguing that the Death Payment should be calculated on the basis of a notional Annual Goodwill Payment. This, in our view, cannot have been intended by the parties. A similar point may also be made in respect of the calculation of the Business Sale Payment.
4.According to p. 92 of the transcript of the evidence given on 8th June, 1998, the Appellant acknowledged a memorandum in his own hand. He said: "I think I started to prepare this after our variation, so maybe 1990, to keep a track of what I was receiving." Part of this memorandum reads as follows:
"ADC (i.e., the Respondent] can make capital payments instead of capital only being payable 1) on death or 2) on sale of business."
We agree with the substance of what was put to the Appellant in relation to these words: "The natural interpretation of what you have written is that there will be capital payments instead of death and instead of business" (transcript 8th June, 1998, p. 93). In our opinion the Appellant failed to give a coherent explanation at the trial of his own words consistent with his own case. In our judgment what he wrote not only points in favour of the Respondent's interpretation of the variation but also to the Appellant consciously expressing the same interpretation on a date relatively close in time to the material discussions between the parties.
As against these and other matters favouring the Respondent, Mr. O'Connell relied, in particular, on the argument that to the Respondent's knowledge the Appellant's price for the sale of his share of the business was intended to be £1.68 million, that this figure is reflected in the Agreement (although not expressly stated) and that it would have been most unlikely that the Appellant would have agreed to a variation that would not have resulted in him receiving a total of £1.68 million or thereabouts albeit on foot of different arrangements. The Respondent denied knowledge contemporaneous with the evolution of the Agreement of the £1.68 million figure or that it had ever been raised but it appears in the form of a manuscript annotation in the hand of a Mr. Nicholas Morgan on a document dated June, 1988, and disclosed by the Respondent by way of discovery.
The Appellant contended that the annotation was made by Mr. Morgan at a meeting with the Respondent prior to the making of the Agreement. The Respondent denied this and called Mr. David Morgan, an English solicitor, who had been involved both in the evolution of the Agreement in 1988 and later when the disagreement between the parties emerged. He dated the annotation to 1995.
The Royal Court resolved this issue against the Appellant. It criticised the Appellant for not having called Mr. Nicholas Morgan. Mr. O'Connell argued that this criticism was not well founded as his client did not know who had made the note until the trial and that this error must have coloured the Royal Court against the Appellant on this important point.
While accepting that the Appellant did not know the identity of the annotator until trial we do not consider that the failure to call Mr. Nicholas Morgan was determinative of this issue. Furthermore, even if, to the knowledge of the Respondent, the Appellant had articulated the figure of £1.68 million prior to the execution of the Agreement we consider that this has little to say to the question of what the parties agreed by way of variation. On one view, and irrespective of what figure, if any, he had in mind in 1988 the variation diminished the Appellant's benefit under the Agreement. But the Appellant may well have seen advantage in the accelerated receipt of capital.
Mr. O'Connell also submitted that this Court should invoke equité to redress the imbalance in the variation unfavourable to his client. Not only do we reject the premise underlying this submission but we do not accept that there is any general doctrine of Jersey law which would enable a court to vary an agreement, whether by implying terms or otherwise, simply because it concluded that the benefits on one side were not matched by those on the other.
The only authority on this issue cited by Mr. O'Connell (Ex parte Wimborne (Viscount) (1983) JJ 17) is a case on the law of trusts and in our opinion there is nothing in the judgment of Crill, DB, to support Mr. O'Connell's submission. Furthermore, in our judgment it is inconsistent with the maxim "la convention fait la loi des parties" (see Donnelly -v- Randalls Vautier Ltd (1991) JLR 49 at p. 57) and also with the rules as to the implication of terms into contracts laid down by this Court in Sibley (née Pavey) -v-Berry (née Du Feu) (7th July, 1987) Jersey Unreported CofA. Accordingly we reject this submission.
We now return to the issue of the bonus payment. It seems that at the time of the variation both parties intended that a sum would be paid to the Appellant if the business was sold notwithstanding that the Respondent might have discharged his obligation to make the Business Sale Payment provided for in the Agreement (as, in the event, we have ruled has happened). However, the parties have never been ad idem as to how this sum should be calculated.
It is not for this court to devise a formula and impose it on the parties. At an earlier stage it might have been arguable on the Appellant's behalf that the failure to agree the terms of the bonus payment meant that the requisite consensus was absent thus vitiating the variation as a whole. But the fact of the matter is that the rest of the variation has since been performed, the Appellant having received large lump sums which he would not have received in that form had the variation not been substantially implemented. Having conducted himself on the basis that the variation was effective to that extent the Appellant cannot now be heard to say that the bonus payment is not a severable element.
In our judgment the parties got no further than agreeing to agree at some time in the future on a bonus payment. Therefore we hold that the Appellant has no enforceable entitlement to such a payment.
In the course of his submissions to us Mr. O'Connell raised the question of the Appellant's entitlement to a payment under paragraph 5 of the Agreement in respect of the Respondent's admission into partnership of a former employee, a Mr. Bell. In our judgment to have been justiciable in these proceedings this issue ought to have been specifically raised in the pleadings, whether originally or by subsequent amendment, at the appropriate time. This has not been done and we decline to address it.
Accordingly, we affirm the decision of the Royal Court.
Authorities
Sarum Hotels Ltd -v- Select Agencies (Jersey) Ltd & Ors (1987-1988) JLR 343.
Ex parte Wimborne (1983) JJ 17.
Royal Court Rules 1992, as amended: Rule 6/8; 6/12.
RSC (1999 Ed’n): O.18: r.8, 12.
RSC (1999 Ed’n): O.20: r.8.
Takilla Ltd -v- E. Farley Ltd [1991] JLR 91.
E. Farley Ltd -v- Takilla Ltd [1992] JLR 54 CofA.
Hyams -v- English (1981) JJ 89 CofA.
Donnelly -v- Randalls Vautier (1991) JLR 49.
Sibley -v- Berry (7th July, 1987) Jersey Unreported CofA.