Pursuers and respondents: Sandison, QC; Brodies

Defenders and reclaimers: Connall, QC, Solicitor; McGrigors LLP

14 October 2010

[1] By missives concluded ultimately in August 2004 the pursuers agreed to sell to the defenders an area of land amounting to 11 acres at Cairnie, Westhill, Aberdeen. A price of £365,000 was stipulated in the missives, but this was subject to an uplift in the circumstances specified in clause 9 of the first of the missive letters, dated 6 November 2001. The circumstances in which an uplift was payable included a sale of the property by the defenders. By letter dated 30 December 2006 the defenders' agents wrote to the pursuers to intimate that the defenders had disposed of the subjects by way of sale. That sale was to another company in the defenders' group of companies, Stewart Milne Westhill Limited ("Westhill"). Other land was included in the transaction, but the consideration attributed to the subjects that originated with the pursuers was £483,020. Under the provisions of the parties' contract, certain costs (the "Allowable Costs") required to be calculated in order to calculate the uplift. The Allowable Costs were said in the defenders 'agents' letter to amount to £559,696. Because the Allowable Costs were greater than the sale proceeds, the defenders claimed that no uplift was payable in terms of clause 9. The pursuers aver in the present action that at the time of the sale the subjects were properly valued at a sum in the region of £5,670,000. If that value were used in the calculation of the uplift, the sum due to the pursuers would, it is averred, be in the region of £1.7 million.

[2] In the foregoing circumstances, the pursuers have raised an action against the defenders for declarator that, under the parties' contract, any further sum due to the pursuers in terms of clause 9 falls to be calculated by reference to the open market value of the subjects at the date of their sale by the defenders to Westhill, deducting the Allowable Costs in accordance with the parties' contract. The defenders dispute that that is the correct way to carry out the calculation; instead, they maintain that the calculation should be based on the sum actually paid by Westhill, with the result that no uplift is due. Parties were agreed that this question was capable of being resolved at debate, and the action proceeded to debate before Lord Glennie in May 2009. Lord Glennie found in favour of the pursuers and granted the declarator sought by them. The defenders have reclaimed against his interlocutor.

[3] The outcome of the parties' dispute turns upon the wording of the missives, and of clause 9 in particular. Clause 9, which is headed "Uplift", provides as follows:

"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 indicating 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 contained in clause 4 include obtaining a satisfactory site survey, agreeing a detailed plan showing the precise boundaries of the subjects, obtaining outline planning permission and other standard consents, and the defenders satisfying themselves that services required for the development of the subjects were available at reasonable cost.

[4] After the initial paragraph of clause 9, the precise manner in which the Profit Share was to be calculated is set out in a number of detailed subparagraphs. These are as follows:

"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...

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 experienced in valuing business parks and industrial land in the Aberdeen City and Aberdeenshire areas....

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, this Clause 9 shall apply to each and every such notice sale or lease under declaration that any of the Allowable Costs which relate to more than the part then being sold or leased and which cannot otherwise be equitably apportioned will be apportioned in the percentage which the area of the Subjects described in the notice, sold or leased bears to the Developable Area. If any such calculation following a notice, sale or lease produces a loss in accordance with the provisions of this Clause 9, then the Purchasers shall be entitled to deduct that loss from the Profit in respect of any other part of the Subjects which is the subject of any future notice, sale or lease.

9.4 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 the matter shall be referred failing agreement between the parties to an independent Chartered Surveyor...

9.7 For the avoidance of doubt in the event of all or part of the Profit Share being paid following upon the grant of a lease of all or 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".

[5] Definitions of the terms used in clause 9 are set out in the Schedule to the missive letter of 6 November 2001. Central to the calculation directed by clause 9 is the Profit Share. This is defined as meaning

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

The "Estimated Profit" is defined as

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

The Open Market Valuation is defined as

"the open market value of the Subjects or relevant part thereof as specified in the notice at the date of the notice served in accordance with clause 9.5 with the benefit of and subject to the necessary consents",

after making certain adjustments for costs related to ground conditions, infrastructure and the like. Allowable Costs are the subject of a complex definition; the basic part of this is

"in relation to the Subjects the aggregate of the costs incurred by the Purchasers ... in relation to the Subjects";

these include the purchase price, payments for off site wayleaves, any planning gain contribution and the costs of providing off site infrastructure, legal expenses and outlays, and certain other costs and professional fees.

[6] Finally, the definition of the Profit Share refers to two concepts in addition to the Estimated Profit; these are the Gross Sale Proceeds and the Lease Value. "Gross Sale Proceeds" are defined as

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

Lease Value is defined as

"the open market capital valuation of the Subjects... but assuming that the lease is an open market transaction carried out at arms length".

It should be noted that the definition of the Estimated Profit includes a deduction of the Allowable Costs, but the definition of the Profit Share also refers to the deduction of Allowable Costs. On a strictly literal wording that could suggest that the Allowable Costs were to be deducted twice in the event that the Estimated Profit, and hence an open market valuation, was relevant. That would be absurd, however, and neither party contended for such construction. Nevertheless, this feature illustrates the imperfect manner in which clause 9 and the Schedule are drafted.

[7] It is a matter of agreement that the Gross Sale Proceeds attributable to the subjects transferred to Westhill was £483,020 and that the Allowable Costs were reasonably stated at £559,696. It is further accepted that at the time of the transfer to Westhill the open market value of the subjects transferred was substantially in excess of the amount of the Gross Sale Proceeds. The critical question is accordingly whether, in terms of clause 9 of the missive letter of 6 November 2001, the Profit Share should be calculated by reference to the actual consideration paid by Westhill to the defenders or by reference to the market value of the subjects at the date of transfer. The Lord Ordinary treated this issue, in our opinion correctly, as a short point of construction. He held that clause 9 anticipated three events that triggered the pursuers' entitlement to the Profit Share. The relevant event in this case was a sale by the defenders, the purchasers. He thought it 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 defenders in every case to defeat the pursuers' entitlement to receive any amount by way of profit share. He thought that that was something which the parties could not have intended, on an objective basis.

[8] Before us it was contended for the defenders that the literal wording of clause 9 required that a sale by the purchasers should be treated differently from a buy-out by the purchasers of the sellers' profit share; the distinction appeared clearly from the initial part of clause 9, and was repeated in later parts of the clause. The same distinction underlay the definition of profit share in the Schedule, which was defined as a percentage of the estimated profit, in the event of a buy-out, or the gross sale proceeds, in the event of a sale, in which case under deduction of the allowable costs. The gross sale proceeds were defined as the aggregate of the sale proceeds of the subjects received by the purchasers for the subjects. That was a reference to the actual amount received. It was only in the event of a buy out of the profit share that the estimated profit became relevant, and it was only in that event that an open market valuation, as defined in the Schedule, was to be used. In the present case the land had been sold to Westhill. Consequently it was the actual price paid by Westhill to the defenders that was relevant for the purpose of calculating the Profit Share; the open market valuation was irrelevant. Reference was made to a number of authorities: L Schuler AG v Wickman Machine Tool Sales Ltd, [1974] AC 235, per Lord Morris at 256; Glasgow City Council v Caststop, 2002 SLT 47; 2003 SLT 526; Credential Bath Street Ltd v Venture Investment Placement Ltd, [2007] CSOH 208; Bank of Scotland v Dunedin Property Management Ltd, 1997 SC 657; Chartbrook Ltd v Persimmon Homes Ltd, [2009] 1AC 1101. The fundamental point was that the plain words used by the parties in clause 9 and the Schedule should be given effect.

[9] For the pursuers it was contended that the commercial purpose of the price uplift provisions was that a relatively modest initial price should be paid subject to a potential uplift, the profit share, in the event that circumstances materialized whereby the value of the land increased. That uplift should be payable in any case where one of the three triggering events (a buyout, a sale or a lease) occurred; that included a sale to an associated company at an artificially low price. Consequently, when the definition of profit share referred to gross sale proceeds, it must have been assumed that the sale in question would be a bona fide sale in the open market. Otherwise a commercially absurd result would follow. Any sale triggered the obligation to pay the profit share, but the mechanism for calculating the uplift varied according to the type of sale. In the event of an open market sale, the actual price should be used. In other cases, however, the estimated profit should be used, in the same way as would apply in the event of a buy out. That did not involve rewriting the clause; it merely involved choosing among the three mechanisms provided, in order to determine which was most likely to have been intended by a reasonable man in the position of the parties.

[10] In our opinion it is clear that the parties must have intended, on an objective basis, that in the event of a sale of the subjects the profit share payable by the defenders should only be based on the actual price paid in the event that the sale is at arms length and at open market value. If the sale is not of that nature, the profit share should be based on an open market valuation. The commercial purpose of clause 9 seems to us to be very clear: if, as was obviously likely, the subjects of sale turned out to have a value in excess of the £365,000 paid at the time of the contract, the pursuers were to take a share of the increase in value. That share was to amount to 32% (defined as 40% of 80% in the definition of profit share) of the increase in value. If the defenders' construction of clause 9 is correct, it would be open to them to sell the property at an artificially low price to an associated company, and in that way to defeat the pursuers' entitlement to share in the increase in value. That in our opinion does not make commercial sense; clause 9 is plainly an important part of the parties' bargain, and such a provision should not be capable of being defeated at the whim of one of parties.

[11] The defenders contended that the wording of clause 9 and the Schedule compelled a different construction. We do not think that this is so. In recent years the importance of construing contractual provisions in context, and in such a way as to give effect to the parties commercial objectives, has been emphasized in a large number of cases; the principal authorities are well known and scarcely require discussion. We note in passing, however, that at least in Scotland this approach is not new; it appears clearly from cases such as Mackenzie v Liddell, 1883, 10 R 705, Bank of Scotland v Stewart, 1891, 18 R 957, and Jacobs v Scott & Co, 1899, 2 F. (HL) 70. Following this approach, we are of opinion that clause 9 and the associated definitions in the Schedule should be construed in such a way as to give effect to the parties' clear commercial purpose in agreeing to that clause.

[12] Achieving that result is not difficult. The opening part of clause 9 provides that the further payment due to the pursuers is to be triggered by any one of three events: the defenders' issuing a buy out notice to the pursuers, the sale of the subjects or any part thereof and the granting of a lease of the subjects or any part thereof. In the present case it is a sale that has triggered a payment. Under clause 9, the amount of such payment is based on the Profit Share. That expression is defined in the Schedule by reference to a percentage of "the estimated profit or gross sale proceeds or lease value". Thus three separate amounts can serve as the basis for the calculation. Those three amounts are not, however, expressly divided among the three events that may trigger a payment. The third of them, the lease value, is defined in the Schedule in such a way that a lease is clearly contemplated, and thus it seems that that method of calculation is tied to a particular triggering event. It is notable, however, that the lease value is defined as open market value, which tends to indicate an intention to use realistic, not artificial, values. The definition of the second basis of calculation, the gross sale proceeds, can clearly only apply if there is a sale. In relation to the first basis of calculation, on the other hand, the definition merely refers to the open market valuation under deduction of the allowable costs. That could apply to a buy out by the defenders, but it could equally apply to a sale by them, in the event that the sale was not at market value. In our opinion the definitions of the profit share and the estimated profit must be so construed. The result is that, if a sale is at arms length and at market value, the profit share is based on the gross sale proceeds; if the sale is not of that nature, the profit share is based on the estimated profit, and hence on the open market valuation as at the date of the sale. Any other construction would defeat the parties' clear commercial objectives.

[13] Perhaps the strongest point for the defenders is the fact that the definition in the Schedule of estimated profit refers to the Open Market Valuation, which in turn is defined as the open market value of the subjects or relevant part thereof as at the date of the notice served in accordance with clause 9.5. Clause 9.5 is the provision that allows the defenders to buy out the pursuers' interest in the subjects. Nevertheless, it is not difficult to apply the definition of Open Market Valuation to a sale that is not at market value, with the date of the sale being substituted for the date of the notice served under clause 9.5. We think that that definition must be so construed, for the compelling commercial reasons discussed previously. Some slight violence to the wording of the parties' contract is involved, but the damage seems slight by comparison with the damage to the parties' objectives that would result from a contrary view.

[14] For the foregoing reasons we will refuse the reclaiming motion and adhere to the interlocutor of the Lord Ordinary, in terms of which he granted decree in terms of the conclusions of the summons.