The Judicial Committee of the Privy Council Decisions

Alexiou & Anor v. Campbell (The Bahamas) [2007] UKPC 11 (26 February 2007)

Privy Council Appeal No 63 of 2006

(1) Emanuel Alexiou

(2) Anthony Ferguson Appellants

v.

James A Campbell Respondent

FROM

THE COURT OF APPEAL OF

THE COMMONWEALTH OF THE BAHAMAS

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL

Delivered the 26th February 2007

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Present at the hearing:-

Lord Bingham of Cornhill

Lord Scott of Foscote

Baroness Hale of Richmond

Lord Carswell

Lord Brown of Eaton-under-Heywood

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[Delivered by Lord Bingham of Cornhill]

1. This appeal turns on the construction of a sale and purchase contract embodied in a consent order made by Small J dated 25 July 2005. By that contract the appellants, Mr Alexiou and Mr Ferguson, agreed to buy the shares of the respondent, Mr Campbell, in Colina Financial Group Limited ("CFG") at their fair market value. Mr Campbell contended successfully before Allen Sr J and the Court of Appeal (Ganpatsingh, Osadebay and Longley JJA), and contends before the Board, that in the context of this case "fair market value" should be understood to mean "fair market value as agreed or determined or $12,500,000, whichever is greater". Mr Alexiou and Mr Ferguson contend that the expression means "fair market value as agreed or determined, whether more or less than $12,500,000".
2. CFG was the Bahamian holding company of a group of some 17 companies doing business primarily in the fields of insurance and financial services. One of these companies was Colina Holdings (Bahamas) Limited ("CHBL"), a publicly subscribed company in which CFG held a 67% shareholding and of which Colina Insurance Company Limited ("CIC"), as it was then called, was a wholly owned subsidiary. The appellants and the respondent were directors of these companies and held other offices in them. Mr Alexiou and Mr Campbell each owned 45% of the shares in CFG. Mr Ferguson owned the remaining 10%. Mr Alexiou and Mr Campbell owned their shares through companies which they owned and controlled, but these companies (P J Enterprises Limited, in the case of Mr Campbell) are of no independent significance.
3. Differences of opinion arose between Mr Alexiou and Mr Campbell, and in March 2005 Mr Campbell told Mr Alexiou and Mr Ferguson that he wished to sever his interests from theirs. They took steps to remove Mr Campbell as a director and officer of CFG and its subsidiaries. In response, Mr Campbell, on 22 April 2005, issued an originating summons seeking relief under section 280 of the Companies Act (Chapter 308 of the Statute Laws of the Commonwealth of the Bahamas). He complained of oppression by the other shareholders of CFG and sought an injunction to restrain them and CFG from removing him as a director or officer of CHBL and from any such position in any subsidiary or affiliate of CFG. He also sought an order that CFG be liquidated and dissolved on the ground that it was just and equitable to wind up the company. An ex parte injunction was granted on 26 April 2005, but Messrs Alexiou and Ferguson and CFG sought to strike out the summons and discharge the injunction on the ground that section 280 was inapplicable and there had been no oppressive conduct. Mr Alexiou also sought, in the alternative, an order that he and Mr Ferguson should purchase the shares in CFG held by Mr Campbell in the name of his company "at a price to be determined by the valuer already agreed upon" by the three shareholders. This was a reference to instructions to Eckler Partners Limited, mentioned below, given by the three shareholders on 14 April 2005. On 11–12 May Small J discharged the injunction he had earlier granted, and an appeal against that decision was dismissed by the Court of Appeal on 19 May.
4. Since April 2005 the parties had been engaged in discussion with a view to agreeing a price at which Mr Alexiou and Mr Ferguson might buy Mr Campbell's interest in CFG, or at which he might buy theirs. To assist them in these negotiations, the parties commissioned Eckler Partners Limited to assess what was described as the "Estimated Appraisal Value of Colina Life Insurance Company (Back-of-the-Envelope)". This Eckler Partners did in and under cover of a letter dated 8 May 2005. The estimated appraisal was made as of 31 December 2004, using the latest and unaudited financial statements as of that date. In the letter Eckler Partners stated:

"It should be made very clear that, at the request and instruction of the Shareholders of CFG and in conformity with our engagement letter, this Estimated Appraisal Value has been determined using approximation techniques in order to quickly determine such value. We refer to this approach as a "back-of-the-envelope" calculation. As such, the Estimated Appraisal Value should not necessarily be considered as reliable as it might otherwise be had it been determined in the normal fashion, and cannot be assumed to be free of a material difference compared to what a full actuarial appraisal would have revealed. In any event, such value is only as reliable as the assumptions upon which it is based and a different set of assumptions would generate a different value."

A number of caveats were appended to the letter, the first two of which were:

"(1) This is a back-of-the-envelope calculation. As such, certain assumptions and estimates are made which in a normal more scientific and detailed approach may not be required.

(2) A more scientific approach of determining the appraisal value of Colina would have taken at least two to three months, and would have cost several hundreds of thousands of dollars. The purpose of performing the back-of-the-envelope calculation was to avoid this lengthy and expensive process."

On this basis Eckler Partners, using a net discount rate of 10.75%, put forward an estimated appraisal value of CIC of £57.3 million, giving a value of $2.32 per CHBL share.

5. The parties continued their discussions thereafter. Mr Alexiou and Mr Campbell engaged accountants (respectively Mr Garner and Mr Lightbourne) to advise them and seek agreement on the values of companies in the group, and at a later stage Mr Ferguson did the same and engaged a Mr Gomez. Pursuant to leave granted by Small J on 28 June 2005, Mr Campbell amended his originating summons to ask for an order that Mr Alexiou and Mr Ferguson "or either of them do purchase at fair market value [his] shareholdings held by PJ's Enterprises Limited [sic] in the capital of [CFG]".
6. Discussions continued between the parties' appointed accountants on the values of the various entities in the group, but no final and comprehensive agreement was reached. On 25 July 2005 the three shareholders and CFG, all of them legally represented, attended before Small J and a consent order was made embodying the terms of an agreement reached between them:

"IT IS HEREBY ORDERED BY CONSENT that:

1. [Mr Alexiou and Mr Ferguson] do purchase the shares of [Mr Campbell] (held by PJ Enterprises Ltd) in [CFG] at its fair market value;

2. Graham Garner, Ishmael Lightbourne and Craig (Tony) Gomez ("the Experts") do convene a meeting no later than 25 August 2005 for the purpose of agreeing the fair market value of the interest of PJ Enterprises in [CFG], such agreement to be concluded by 10 September 2005, all parties be at liberty to make representations to the Experts;

3. In the event the Experts are unable to agree the question of the fair market value, the matter of fair market value shall be referred to a single arbitrator agreed to by Counsel for the parties whose decision shall be final and binding on the parties;

4. Pursuant to paragraph 1 of this Order [Mr Alexiou and Mr Ferguson] do pay an initial sum of $3,500,000.00 on or before Wednesday 3 August 2005 and a further sum of $9,000,000.00 on or before Wednesday 31 August 2005;

5. Upon payment of the sum of $3,500,000.00 [Mr Campbell] shall:

(a) Release to [Mr Alexiou and Mr Ferguson] the duly endorsed share certificate representing the interest of PJ Enterprises in [CFG] and the duly endorsed share certificate representing [Mr Campbell's] interest in Sentinel Bank and Trust Ltd.

(b) Provide his resignations in the various companies in and related to Colina Group of Companies in which he currently serves as Director or Officer.

6. Subject to the determination of the fair market value as provided for in paragraphs 2 and 3 hereof any outstanding balance due to [Mr Campbell] pursuant to paragraph 1 hereof (after payment of the $12,500,000.00 referred to in paragraph 4 above) shall be paid by [Mr Alexiou and Mr Ferguson] to [Mr Campbell] on or before the 31 December 2005, such balance to bear interest at the rate of 10% from the 1 September 2005. [Mr Alexiou and Mr Ferguson] shall provide to [Mr Campbell] a guarantee of a commercial bank to secure the payment of the balance.

7. All parties shall bear their own costs on this application.

8. That all parties have liberty to apply.

7. On a straightforward reading of this order certain points are clear. First, the obligation of Mr Alexiou and Mr Ferguson was to buy Mr Campbell's shares at their fair market value. This was the object of the agreement as stated in clause 1 and referred to in clauses 2, 3 and 6. Secondly, the agreement did not provide for or permit protracted consideration of fair market value by the experts: if agreement had not been reached by 10 September, the issue was to be resolved by arbitration. Thirdly, it was recognised that the experts might be unable to agree the fair market value: hence the provision for arbitration. Fourthly, it was recognised that the parties had competing interests. Thus they were to be free to make representations to the experts, and would enjoy that right in any arbitration. Fifthly, the parties contemplated that the fair market value of Mr Campbell's shares might be more but would not be less than $12,500,000, since that sum was agreed to be paid before the deadline for the experts to reach agreement and before any award could be made by an arbitrator. Further, there was no provision for repayment if the sum of $12,500,000 paid under paragraph 4 exceeded what was payable at fair market value, but there was provision for payment with interest of any additional sum due when the fair market value of Mr Campbell's holding was agreed or determined. Sixthly, the parties intended that Mr Campbell's involvement in the group should be speedily ended, on the making of the initial payment within ten days of the order. The consent order did not specify the date at which the fair market value of Mr Campbell's interest in CFG was to be assessed, but the parties treated 30 June 2005 as the relevant valuation date. This date was no doubt convenient, being the end of the half year immediately preceding the date of the consent order, but it was not the date at which Eckler Partners had valued CIC.
8. After the consent order events followed an irregular course. Mr Alexiou and Mr Ferguson made the initial payment of $3,500,000 on 3 August 2005, but subject to escrow terms which delayed effective payment until 10 August. Mr Campbell provided the share certificates and resignations specified in clause 5 of the order, but he did so to CFG and stipulated that the share certificates were to be held in escrow pending receipt of the second payment of $9,000,000. Mr Alexiou and Mr Ferguson did not make the second payment or any part of it by 31 August. Instead, they both made applications to the court, invoking the liberty to apply included in the consent order, asking that payment of the second payment be stayed until 31 December 2005 or pending determination by the experts of the fair market value of Mr Campbell's interest in CFG. The applications came before Lyons J on 30 November 2005 to be mentioned. Only Mr Campbell and Mr Alexiou appeared or were represented, but the judge ordered that the parties to the action should formally engage Eckler Partners to undertake an actuarial valuation of CIC as at 30 June 2005 in accordance with a request of the experts made on 30 September 2005 "to facilitate them in ascertaining the fair market value of PJ's Enterprises [sic] interest in [CFG]". He also (although this was not recorded in the order) extended the time within which the experts were to report and ordered that the second payment of $9,000,000 be stayed. Although the parties had chosen, on 25 July 2005, for reasons which are not apparent, to embody their agreement in a consent order of the court rather than (as is usual) scheduling it to an order staying the proceedings, it is clear that the judge had no jurisdiction to vary the parties' agreement without their consent.
9. The applications came before Allen Sr J together with a summons by Mr Campbell seeking payment of the outstanding sum of $9,000,000 and an order for cross-examination of Eckler Partners and/or the experts to enable the court to make a determination of the fair market value of Mr Campbell's interest in CFG. On 20 January 2006 she dismissed the applications and discharged the stay ordered by Lyons J, rightly holding that the court had no jurisdiction to extend the time for compliance with paragraph 4 of the consent order or to stay performance of it. She ordered that the outstanding sum of $9,000,000 be paid forthwith. She dismissed Mr Campbell's summons seeking cross-examination and determination of fair market value by the court, rightly holding that he was seeking to substitute the court for the arbitrator as the final arbiter of the value of Mr Campbell's interest. In addition, the judge ruled on the parties' competing submissions made to her on the construction of the agreement embodied in the consent order. She ruled in favour of Mr Campbell in paragraphs 24-25 of her judgment:

"24. Having carefully examined the language of the Consent Order, I am of the view that the parties meant and did say that [Mr Alexiou and Mr Ferguson]were to purchase [Mr Campbell's] shares in [CFG] at fair market value estimated at a minimum of $12,500,000.00 to be paid in two instalments, with any outstanding balance due to [Mr Campbell], in accordance with the determination by the Experts of the fair market value, being paid thereafter, but on or before 31 December 2005.

25. From a reading of the Consent Order, the parties clearly intended the matter to be resolved quickly, and with as little rancor as possible. That is why, in my view, they made time of the essence, providing for the payment of $3,500,000.00 to [Mr Campbell], the release of his shares and the submission of his resignations within nine days of the Consent Order, and the payment of the balance of the agreed minimum within a month thereof. Further, any balance found to be due, was to be paid after the payment of the initial sum and within five months of the Consent Order. Obviously, the parties intended this matter to be wrapped up as quickly as possible in the interest of [CFG]".

10. Mr Alexiou and Mr Ferguson appealed against the judge's decision, but for reasons given in a written judgment of Ganpatsingh JA dated 19 April 2006 the Court of Appeal upheld it. He held (in paragraph 4) that to determine what the parties agreed to, as reflected in the language of the consent order, it was necessary to outline the tortuous process of negotiation between the parties. This he did, making reference to the Eckler valuations, offers, counter-offers, revised offers and a memorandum of understanding and settlement agreed in relation to CHBL on 20 June 2005. He recorded (paragraph 8) that the parties had contemplated $12,500,000 as the fair market value of Mr Campbell's interest in CFG based on the mutually agreed valuations of some entities in the group and held (paragraph 9) that the consent order had obviously been structured on the valuations that had been agreed on by the parties. In paragraphs 12-13 he ruled:

"12. The situation in the present case, as we see it, is that the parties have, in their bargain, gone a considerable way in settling the price to be paid for the shares. They have agreed as evidenced by the terms of the order, that it will be no less than $12.5 million. In effect, what the experts have been asked to determine, and this is perfectly possible given the basic fundamentals of the formula agreed on, is the extent to which the price exceeds that sum.

13. It seems quite plain to us, that the payments to be made in paragraph 4 pursuant to paragraph 1 were intended to be on account of or toward the purchase price of [Mr Campbell's] shares. That purchase price was determinable, based on the valuation of certain entities which had been mutually agreed on. Those valuations would necessarily have been an indispensable component of whatever formula the experts would use for arriving at the fair market value. More particularly, the Eckler valuation of CHB as at 31 December 2004, mutually agreed on for the consent order, had been inextricably locked into that formula. The valuations mutually agreed on, had suggested a determinable purchase price for the shares which as indicated above, would be no less than $12.5 million and judgment was entered for that sum pending a final determination of the purchase price. The experts were not only aware of the values agreed on, but in the context of the order, they are bound to act on them in determining the fair market value of [Mr Campbell's] shares."

11. His final conclusion was expressed in paragraph 28:

"In our opinion, the consent order was clearly intended to be a judgment for an amount of not less than $12.5 million based on the mutually agreed valuations at the date of the order. This explains why no provision was included to cover the eventuality of the fair market value of the shares being less than that sum. In our view [Mr Alexiou and Mr Ferguson] cannot at this stage call into question the obligation to make the further payment."

12. Mr Alexiou and Mr Ferguson were separately represented before the Board but their argument is essentially the same and is very simple. The agreement embodied in the consent order is a contract made between the parties, to be construed like any other contract according to familiar principles. The parties' contractual intentions are to be derived by giving a fair commercial meaning, in the relevant factual setting, to the terms of their contract. Here, the contract is that Mr Alexiou and Mr Ferguson will buy Mr Campbell's shares in CFG at fair market value. That is the bargain expressed in paragraph 1 of the consent order, to which all other paragraphs are ancillary. This is what Mr Alexiou and Mr Ferguson agreed to do. It is what Mr Campbell in his amended summons had asked the court to order. It is all that the court could under section 280(3)(f) of the Companies Act have ordered them to do. It was hoped (clause 2) that the experts might reach early agreement on the fair market value of Mr Campbell's interest, but recognised (clause 3) that they might be unable to do so. The payment obligation in paragraph 4 of the order is expressed to be pursuant to paragraph 1 and is thus intended to give effect to paragraph 1, not to qualify or contradict it. Paragraph 6 of the order reflects the parties' belief, based on the material available at the date of the order, that the fair market value of Mr Campbell's interest was likely to be at least $12,500,000. Hence the provision for payment of any difference between that sum and the fair market value, and the absence of any provision for repayment. But the obligation in paragraph 6 is expressly "[s]ubject to the determination of the fair market value as provided for in paragraphs 2 and 3" and if (contrary to the parties' expectation) the fair market value is agreed or determined at a figure below $12,500,000 commercial necessity requires the implication of an obligation on Mr Campbell promptly to repay any excess over the fair market value. Mr Alexiou and Mr Ferguson are contractually bound to buy out Mr Campbell's interest at its fair market value, whatever that turns out to be. But they have never agreed to pay more.
13. To this argument counsel for Mr Campbell, seeking to uphold the decisions below, gives essentially two answers. The first, depending on detailed reference to negotiations between the parties (particularly Mr Alexiou and Mr Campbell) and the experts (particularly Mr Garner and Mr Lightbourne) before the consent order, is that the valuations of a number of entities in the group, including CIC, had been effectively agreed. Thus the parties were far advanced on the road to final overall agreement when the consent order was made. All that remained was to agree on the valuation of a few outstanding entities. That was why a short period was allowed for the experts to reach agreement, and why no protracted and expensive process of valuation was contemplated. The provision for payment of $12,500,000 was made because, on values already agreed, it was clear that that sum at least would be due to Mr Campbell. It was, as the courts below had held, an agreed minimum.
14. The second answer advanced by Mr Campbell is that the terms used by the parties in their agreement were to be understood as subject to a special meaning agreed between them to the effect that the experts' task (and the arbitrator's task, if the matter reached that stage) was, taking the valuations already agreed as a starting point, to assess the value of the group entities which had not already been the subject of agreed valuations.
15. In the opinion of the Board, the construction advanced on behalf of Mr Alexiou and Mr Ferguson is sound and both the answers given by Mr Campbell are unsound. The first answer falls foul of the principle, vouched by such compelling authorities as Prenn v Simmonds [1971] 1 WLR 1381, 1384-1385, and Investors Compensation Scheme Limited v West Bromwich Building Society [ 1998] 1 WLR 896, 913, that evidence of prior negotiations not leading to any antecedent agreement is inadmissible to construe a contract. In the present case, it is not contended that the negotiations led to a binding agreement at any time before the consent order. Thus what took place, not untypically, was a negotiation in which issues were considered one by one, and a large measure of agreement reached, in a context where all such agreements, and any concessions made to achieve them, were provisional unless and until a final comprehensive agreement had been concluded. That stage was never reached. The effect of the consent order was to leave all issues of valuation open to reconsideration and review.
16. It would of course have been open to the parties to define the task of the experts and the arbitrator as limited to that of agreeing or deciding the values of group entities not already the subject of provisionally agreed valuations, or of agreeing or deciding what value (if any) greater than $12,500,000 should be attributed to Mr Campbell's interest in the group. But by no legitimate process of construction can either of these readings be derived from the language the parties used, and neither is consistent with paragraphs 1, 2, 3, 4 and 6 of the consent order.
17. The second answer must also be rejected. It is well-established that, in construing a contract, evidence is admissible to show that the parties have used terms bearing a special or technical meaning. But the parties have in the consent order used no language bearing a special or technical meaning. Mr Campbell is seeking to show that the true effect of the order is that the valuations provisionally agreed should be treated as settled, and the remit of the experts and the arbitrator confined to valuation of the other group entities not the subject of any provisionally agreed valuation. Since, however, this is not a meaning which can be derived from construction of the order, his real argument must be that the order does not reflect the full agreement made between the parties. This is not how the case has been put, and if so put would be a claim for rectification not a claim based on construction. It is inappropriate for the Board to rule on the merits of a rectification claim which has not been advanced, although it would have faced obvious difficulties.
18. Mr Campbell resisted the implication of a repayment term into the contract, arguing that he might not have been willing to agree to such a term. It must, however, be assumed for present purposes that Mr Campbell was negotiating in good faith, and further that he understood his entitlement to be, and only to be, the purchase of his shareholding by Mr Alexiou and Mr Ferguson at its fair market value, no more and no less. The question what should happen if, unexpectedly, the fair market value were agreed or determined at a figure below the aggregate of the two down payments, must be considered in that context. It could yield only one possible answer: that any excess should be promptly repaid. Any other answer would contradict the core provision of the contract.
19. The appeal now before the Board arises from notices of motion in which Mr Alexiou and Mr Ferguson sought relief to which, as the courts below rightly held, they were not entitled (and did not seek before the Board). But in the course of argument below an issue of construction of the consent order arose. On this their argument is correct. The Board makes the following declarations:

(1) The fair market value of the shares held by PJ Enterprises Limited in Colina Financial Group Limited is to be agreed or determined as of 30 June 2005.

(2) The sum of $12,500,000 agreed to be paid under paragraph 4 of the consent order dated 25 July 2005 is not a minimum sum.

(3) The parties did not agree that valuations of group entities agreed between them and their experts in the period April-July 2005 should be contractually binding.

(4) If the fair market value of the shares held by PJ Enterprises Limited in Colina Financial Group Limited should be agreed or determined in any sum less than $12,500,000, any difference between that sum and the fair market value as agreed or determined should be reimbursed forthwith by Mr Campbell or PJ Enterprises Limited to Mr Alexiou (or his company) and Mr Ferguson.

20. The parties are invited to make written submissions on the costs of these proceedings within 21 days of this judgment.