Scottish Court of Session Decisions

Pursuers: Sandison; Brodies

Defenders: Howie QC; Paull & Williamsons

3 June 2009

[1] By missive letters of various dates in 2001, 2002, 2003 and 2004, the pursuers ("the Sellers") contracted to sell and the defenders ("the Purchasers") contracted to buy heritable property ("the Subjects") lying to the north of the B9119 public road and extending in area to 11 acres or thereby on the terms and conditions set out therein. The parties are in dispute as to whether the defenders are entitled to an uplift on the purchase price in terms of clause 9 of the contract concluded by the missives. The parties are agreed that the question is capable of being resolved at debate.

[2] Clause 2 of the missive letter of 6 November 2001, which formed part of the contract ultimately concluded between the parties, provided as follows:

"2. Subject to any uplift payable in terms of Clause 9 thereof, the purchase price, payable for the Subjects on the date of entry, will be THREE HUNDRED AND SIXTY FIVE THOUSAND POUNDS (£365,000) STERLING (exclusive of Value Added Tax). No Value Added Tax will be paid on the purchase price."

Clause 9 of that missive letter, headed "Uplift" provided as follows:

"9. In addition to the purchase price detailed in Clause 2 hereof, the Purchasers and the Sellers have agreed that the Sellers shall be entitled to a further payment ("the Profit Share") upon the Purchasers purifying the suspensive conditions contained in Clause 4 hereof and issuing a notice to the Sellers intimating to the Sellers that the Purchasers wish to purchase the relevant part of the profit-share as defined in the Schedule to which the Sellers are entitled. The Sellers' entitlement to the relevant part of the profit-share will also be triggered by the Purchasers disposing either by selling or by granting a lease of the whole or any part of the subjects."

The suspensive conditions are set out in clause 4. They include the obtaining by the Purchasers within three months of conclusion of the missives of various surveys and reports, the agreement within one month of conclusion of the missives of a detailed plan showing the precise boundaries of the Subjects, the obtaining by the Purchasers within twelve months of conclusion of the missives of various necessary consents and permissions (such as Planning Permission, sewerage and water authority consent etc.), the Purchasers satisfying themselves within six months of conclusion of the missives that all mains services are available at a reasonable cost, and the obtaining of road construction consent within four months thereafter. It is to be noted, as Mr Sandison pointed out, that clause 9 refers to the suspensive conditions being purified, not waived.

[3] There then follow seven sub-paragraphs dealing with the details of calculation and payment of the profit share. It is necessary to set these out in full:

"9.1 To enable the profit share to be calculated, the Purchasers shall be obliged to keep separate accounts in respect of the Allowable Costs as after defined, and the Sellers shall be entitled to examine the same at any time on a full disclosure basis; if required, the Purchasers shall provide the Sellers with certified copies of all relevant vouchers in relation to the Allowable Costs.

9.2 The profit share shall be calculated in the first instance by the Purchasers, and in the event of the Sellers disputing the Purchasers' calculations, the matter shall be referred to an independent Chartered Surveyor ... who shall act as an expert and whose decision shall be final and binding on the parties, save in the case of manifest error. ...

9.3 In the event of the Purchasers serving a notice in respect of part only of the Subjects or in the event of the Purchasers selling or leasing part only of the Subjects after servicing, and this Clause 9 shall apply to each and every such notice sale or lease ...

9.4 Of the relevant part of the profit share due to the Sellers shall be paid by the Purchasers to the Sellers within 14 days of it being calculated in accordance with Clause 9.2 hereof or in the event of a sale 14 days after receipt of the gross sale proceeds by the Purchasers.

9.5 The Purchasers shall be entitled to serve a notice to the Sellers any time after purification of the suspensive conditions in clause 4 hereof intimating that the Purchasers wish to purchase the profit share as aforesaid. Any notice served in accordance with this Clause shall specify the part of the Subjects to which it relates, the estimated profit, the Purchasers' estimate of the Open Market Valuation and the Allowable Costs.

9.6 In the event of the Sellers disputing the Purchasers' Estimated Profit or the Lease Value their matter shall be referred failing agreement between the parties by the Chairman or other senior office bearer for the time being of the RICS ("the Surveyor"). ...

9.7 For the avoidance of doubt in the event of all part of the Profit Share being paid following upon the grant of a lease of all part of the Subjects no further Profit Share shall be payable upon the sale of that part of the Subjects in respect of which the Profit Share has already been paid."

[4] Relevant definitions are set out in the Schedule to that letter. The most important for present purposes is the definition of "the Profit Share", which

"means 40% of 80% of the estimated profit or gross sale proceeds or lease value lest the Allowable Costs as herein defined."

Certain other definitions should be noticed. "Estimated Profit" means

"the Open Market Valuation under deduction of the Allowable Costs."

"Open Market Valuation" is itself a defined term. It means

"the open market value of the Subjects or relevant parts thereof as specified in a notice at the date of the notice served in accordance with clause 9.5 with the benefit of that subject to the necessary consents ..."

"Gross Sale Proceeds" is defined as

"the aggregate of the sale proceeds of the Subjects received by the Purchasers for the Subjects."

Finally, "Allowable Costs" means the costs incurred by the Purchasers in relation to the Subjects, including the purchase price under the missives, legal and professional fees, insurance premiums, local authority rates and other charges, servicing and construction costs, i.e. broadly all costs incurred by the Purchasers to bring the Subjects to the condition at which the right to the uplift is triggered.

[5] Each of the suspensive conditions was duly purified. A development of the kind contemplated by the missives was carried out by a company in the same group of companies as the defenders.

[6] By letter dated 13 December 2006, solicitors acting for the defenders intimated that the defenders had disposed of the Subjects by way of sale. The Subjects were sold, along with certain other land, to a company in the same group of companies as the defenders, namely Stewart Milne Westhill Ltd. The pursuers characterise this as a sale "not on the open market". The consideration attributable to the Subjects (the Gross Sale Proceeds) was stated in the letter to be £483,020. The letter also stated that the Allowable Costs amounted to £559,696; and that, because the Allowable Costs were greater than the Gross Sale Proceeds of £483,020, no profit share was payable to the pursuers in terms of the missives.

[7] The pursuers do not challenge either that the Gross Sale Proceeds were £483,020 or that the Allowable Costs were reasonably stated as the £559,696. However, they contend that, as at the date of the sale to Stewart Milne Westhill Ltd, the open market value was in the region of £5,670,000, more than 11 times the price at which the Subjects were sold. If that value were to be applied as the relevant base figure for the calculation of the profit share due to the pursuers under the contract, the sum due to the pursuers by way of the profit share would be in the region of £1.7 million.

[8] It is in these circumstances that the pursuers have brought this action seeking vindication of their contention that, in the present circumstances, where the defenders have sold the Subjects to a company in the same group of companies, and not at arms length at an open market value, the profit share should be calculated on the basis of that open market value and not on the basis of the actual sale price. There is no agreement between the parties as to the open market value at the time of the sale to Stewart Milne Westhill Ltd, nor is it even admitted that the sale was not at the open market value, but this does not matter for present purposes since the pursuers conclude for declarator

"that, in terms of the contract between the parties constituted and contained in [the] missive letters ... any further sun due to the pursuers in terms of Clause 9 of the missive of 6 November 2001 falls to be calculated by reference to the open market value of the subjects referred to in the said contract as at the date of their sale by the defenders to Stewart Milne Westhill Limited, lest the "Allowable Costs" as defined in the Schedule to the said missive letter."

The matter is therefore presented as one of principle. If the pursuers are correct on this point, the open market value can no doubt be the subject of agreement or, if necessary, further proceedings.

[9] For the pursuers, Mr Sandison moved the court to grant decree de plano. He presented the matter as one of contextual construction of the contract. He referred to the well-known passages in L. Schuler A.G. v. Wickman Machine Tool Sales Ltd. [1974] AC 235, 251 (per Lord Reid), The Antaios [1985] AC 191, 201 (per Lord Diplock), Mannai Investment Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] AC 749, 771 (per Lord Steyn), Society of Lloyd's v. Robinson [1999] 1 WLR 756, 763 (per Lord Steyn), and Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, 912 (per Lord Hoffmann), to the effect that the courts will generally favour a commercially sensible construction since such a construction is likely to give effect to the intention of the parties. As Lord Steyn said in the passage which I have identified in Society of Lloyd's v. Robinson, "the reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language." Or, as Lord Hoffmann put it in Investors Compensation Scheme, "the law does not require judges to attribute to the parties an intention which they plainly could not have had". The definition of "the Profit Share" in the Schedule to the missive letter provided three different points of reference: the estimated profit; the gross sale proceeds; and the lease value. The contract did not require the gross sale to be used whenever there was a sale. The parties to the contract could not possibly have intended that the purchasers could deprive the sellers of any entitlement to a Profit Share by the simple device of selling the subjects to an associate company at an undervalue. Referring to Lord Steyn's remarks in Society of Lloyd's v. Robinson, he submitted that a "disinterested observer" would be puzzled at such an anomalous result without any context to explain it. In such a case the Profit Share should be calculated by reference to the open market value of the Subjects at the time of sale rather than the artificially low sale price. Mr Sandison emphasised that he was relying upon a "mild" contextual construction. He did not need to go so far as to say that the parties had used the wrong words but, if a "strong" contextual construction was necessary to achieve a sensible interpretation of the contract, it should be used. He referred to the case of Glasgow City Council v. Caststop Ltd. 2002 SLT 47, 2003 SLT 526 which he said was "not functionally dissimilar". In that case the clause provided for an additional sum to be paid to sellers of land by the purchasers if a particular planning permission was obtained by the purchasers, but the court held that the additional sum was payable even though the permission was obtained not by the purchasers but by a subsidiary company.

[10] For the defenders, Mr Howie QC moved the court to dismiss the Summons as irrelevant. He submitted that the pursuers' arguments involved a rewriting of the contract. The missives were clear and comprehensible and excluded the pursuers' case. The draughtsman contemplated three possible events in which the uplift, or Profit Share, would be payable, namely: a "buy-out", triggered by the Purchasers giving notice that they wished to purchase the relevant part of the profit-share; a lease of the Subjects by the Purchasers, defined as a lease for a term of more than 25 years; and a sale of the Subjects by the Purchasers. Clauses 9.2 to 9.6, read in combination with the definitions in the Schedule to the letter, provided the mechanism applicable to each event. The "estimated profit" referred to in the definition of "the Profit Share" meant the Open Market Valuation under deduction of the Allowable Costs. The Open Market Valuation was defined as the open market value of the Subjects "at the date of the notice served in accordance with clause 9.5". The notice served in accordance with clause 9.5 was a reference to the Purchasers' option of a buy-out. That was the only circumstance in which the Open Market Valuation was relevant; it had no relevance to the case of a sale by the Purchasers. In the case of a lease of the subjects, the "lease value" was defined as meaning "the open market capital valuation of the Subjects" having regard to the terms of the lease. Again, there was a reference to an open market valuation but only in the context of a lease. In the case of a sale, clause 9.4 made it clear that the relevant part of the profit share was to be paid by the Purchasers to the sellers "14 days after receipt of the gross sale proceeds by the Purchasers". There was no other provision dealing with the payment obligation when the entitlement to the profit share was triggered by a sale of the Subjects. The gross sale proceeds were defined as "the aggregate of the sale proceeds of the Subjects received by the Purchasers for the Subjects". This clearly showed that, in the event of a sale, it was the actual proceeds of sale received by the Purchasers that were to be taken into account in calculating the profit share payable to the Sellers under clause 9. The contract was quite clear. The "estimated profit", the "Open Market Valuation" and the "open market capital valuation" were all by definition incapable of applying to the case of a sale by the Purchasers. In those circumstances, the pursuers had to go beyond mild or even strong contextual construction. They required to resort to creative construction, i.e. reading words into the contract or taking words out. They could not say that there was a clerical error or an error of expression of the type referred to by Lord Hoffmann in Investors Compensation Scheme and in Jumbo King Ltd v. Faithful Properties Ltd. (1999) 2 HKCFAR 279 at para.59, quoted by Lord Reed in Credential Bath Street Ltd. v. Venture Investment Placement Ltd. [2007] CSOH 208 (unreported, 31 December 2007) at para.[18]. The alternative was rectification, but the pursuers did not pursue that course. Nor could it be said that the literal construction flouted common sense. A disinterested observer would not be puzzled in the least. The reason for the provision was simple: in the case of a sale, the reference to the proceeds of sale received by the defenders meant that there was an accurate record of the amount to be taken into account. An intra group sale made commercial sense. It was plainly foreseeable by the parties at the time of entering into the contract that the Purchasers might, for fiscal or other reasons, sell to a single purpose vehicle (SPV) within the group, and that the SPV would then take on the development costs, the financing of the development and the market risk. If the purchasers in such a situation were obliged to pay the sellers a Profit Share based upon open market value, they would be paying upon a value that they had not received and where, due to future market fluctuations, the contemplated profit might never be realised. The declarator sought by the pursuers would not accurately reflect the true construction of the contract.

[11] The point at issue is a short one of construction and I can express my views with equal brevity. It is clear, in my opinion, that the parties to the contract anticipated that the Subjects would be developed, as they were, and that in addition to the initial sale price the Sellers would be entitled to a share in the profit resulting from that development. They have endeavoured in clause 9, clauses 9.1-9.6 and in the definitions in the Schedule to the relevant missive letter, to set out how this is to be calculated. They have anticipated three events triggering the Sellers' entitlement to the Profit Share. I am not here concerned with two of those, namely the buy-out and the least of the Subjects by the Purchasers, save to note that in both those cases the Profit Share was to be calculated by reference to an open market value of the Subjects. The third event was a sale by the Purchasers. It seems to me to be plain that the parties, in approaching the calculation of the Profit Share in the event of a sale, must have contemplated a sale at arms length and at open market value. Otherwise it would be within the power of the Purchasers in every case to defeat the Sellers' entitlement to receive any amount by way of profit share. This is something which, so it seems to me, the parties cannot have intended. Mr Howie QC submitted that the parties would have foreseen the possibility that the Purchasers would sell to an SPV within their group, and that in those circumstances the sale which would trigger the sellers' entitlement to the Profit Share would not be an arms length sale and might well not be at an open market value. I accept that. There might be fiscal or other reasons why the purchasers would wish to sell within the group at a price falling short of the open market valuation. But those are of no concern to the sellers. Whilst they might, had they thought about it, have foreseen the possibility of an intra group sale, I do not think that the Sellers would have contemplated with equanimity the idea that such a sale might deprive them of any share of the profit from the development; and I do not think that the Purchasers could possibly have thought that the Sellers would have contemplated such an idea with equanimity. The test, of course, is not subjective. Expressed objectively, neither party can, in my opinion, be taken to have understood that the contract would work in this way.

[12] The approach advanced by the pursuers in Mr Sandison's submissions was that of contextual construction. His arguments might, in earlier times, have involved submitting that a term should be implied in order to make the contract work in the way in which the parties must have intended it to work or, if different, by an application of the "of course" test. The test, in my opinion, is effectively the same. I am content to deal with the matter as one of construction in line with the passages in the authorities to which I was referred. Those passages recognise that in certain circumstances the court, in order to give effect to the clear intention of the parties, will allow a departure from the exact words used where to follow those words would mean attributing to the parties an intention which they plainly could not have had. Mr Howie may well be correct in saying that on a technical construction of the clauses under consideration the parties have, in the case of a sale, only provided for the Profit Share to be calculated by reference to the sale proceeds received. But that does not prevent court giving effect to what was plainly their intention.

[13] No point was taken as to the precise terms of the declarator sought by the pursuers. In light of the conclusion which I have reached on the question of construction, I shall grant decree in terms of the Conclusions to the Summons.