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Case No: CHANI 1999/0671/A3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE LLOYD
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Wednesday, 9th February, 2000
B e f o r e :
LORD JUSTICE PILL
LORD JUSTICE MUMMERY
and
SIR RONALD WATERHOUSE
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|
ARTHUR
GILLATT
|
Appellant
|
|
-
and -
|
|
|
(1)
SKY TELEVISION LIMITED (FORMERLY SKY TELEVISION PLC)
(2) SKY SUBSCRIBER SERVICES LIMITED
|
Respondent
|
- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr Alain Choo Choy and Mr Sa'ad Hossain (instructed by Marshall Ross
and Prevezer for the Appellant)
Mr Murray Rosen QC and Mr Kenneth MacLean (instructed by Messrs
Herbert Smith for the Respondent)
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
Wednesday, 9 February 2000
JUDGMENT
LORD JUSTICE MUMMERY:
This appeal turns on the construction of a contractual term relating to the
determination of the open market value of shares in a private company,
Tele-Aerials Satellite Limited (TAS), in the context of a transfer of those
shares by the respondent, Sky Television Limited (Sky), to a wholly owned
subsidiary, Precis (1043) Limited, on 21 March 1991.
Clause 6.1 of the contract dated 25 September 1990 (the TAS Agreement)
provided for payment by Sky to Mallard Limited of " 55 per cent of the open
market value of such shares....as determined by an independent chartered
accountant..." Neither Sky nor Mallard nor Mr Gillatt, the appellant and
assignee of Mallard, who were all parties to the TAS Agreement, have taken any
steps at any time to appoint an independent chartered accountant to determine
the value of the shares.
The issue is : what effect does the absence of such a determination have on
this action ? In the action the claimant is Mr Gillatt, to whom Mallard
assigned all its rights in the course of the proceedings. He claims payment
from the First Defendant, Sky , of
"....a sum equal to 55 per cent of such sum as is found to be the value of the
true open market value of the issued share capital of TAS as at 21March
1991..."
At the trial of the action in May 1999 the parties asked Lloyd J to rule on a
number of agreed preliminary issues. In his order of 7 May 1999 he ruled that
" (1) The determination by an independent chartered accountant is integral to
any claim under clause 6.1 of the TAS Agreement and there is no entitlement
under clause 6.1 in the absence of such a determination.
(2) It is no longer open to either the claimant or the Defendant to call for
the appointment of an independent chartered accountant for the purposes of
Clause 6.1 of the TAS Agreement.
(3) No payments are due to the Claimant from the First Defendant under Clause
6.1 of the TAS Agreement."
Mr Gillatts' claim based on 55% of the open market value of the TAS shares was
therefore dismissed.
Mr Gillatt appeals with the permission of the Judge.
It is accepted by Mr Choo Choy, who has argued this appeal skilfully on behalf
of Mr Gillatt, that the appeal must fail if the judge was right in construing
the determination of the independent chartered accountant as an integral
feature of the parties' rights and obligations under clause 6.1 and as an
essential pre-condition to the existence of any entitlement of Mr Gillatt to
payment under that clause. The Judge accepted Sky's submission that the
reference under clause 6 could be made at any time within a reasonable time of
the sale of the TAS shares. It was agreed by both parties that it is now too
late for there to be such a reference .
FACTUAL BACKGROUND
In 1973 Mr Gillatt started the business of TAS. Its activities included the
sale and installation of satellite receiving equipment. It was incorporated in
October 1986.
TAS was a direct installer of reception and de-coding equipment under an
installation agreement made on 24 July 1989 with the second defendant, Sky
Subscriber Services Limited (SSS), a wholly owned subsidiary of the first
defendant, Sky, which carried on the business of satellite television
broadcasting.
On 25 September 1990 the TAS Agreement was made between Mr Gillatt, Mallard,
an Isle of Man Company wholly owned by Mr Gillatt, and Sky. Sky acquired the
shares in TAS. Under clause 4 Mallard was entitled to receive quarterly "Earn
Out Payments" from Sky equal to 55 per cent of the profits (if any) earned by
TAS, as shown in the management accounts of TAS. The profits were to be
computed in the agreed fashion and certified in writing to the parties by the
Auditors, acting as experts, at agreed times. Under clause 4.7 the parties were
entitled to object to or disagree with the certificate, in which case they were
entitled to refer the matter
".....for determination by an independent chartered accountant ...appointed in
the absence of agreement between Mallard and Sky at the request of either of
them by the President for the time being of the Institute of Chartered
Accountants in England and Wales."
Clause 4.8 provided for the supply of information to the independent
accountant in connection with the carrying out by him of his review of the
relevant profits and the entitlement of Mallard to the Earn Out Payments.
Clause 4.9 was in the following terms
" The decision of the Independent Accountant as to whether any increase or
decrease in the amount of the Profits or in Mallard's entitlement to the Earn
Out Payments which are the subject of the certificate in question should be
made shall be final and binding on the parties hereto."
Mr Gillatt, to whom Mallard assigned all its rights under the TAS Agreement in
January 1997, claims to be entitled to payments from Sky under clause 6.1 in
respect of the shares in TAS transferred on 21 March 1991 to the Sky
subsidiary, Precis (1043) Limited. At about the same time Mr Gillattt was
removed from office as a director of TAS. The profit based entitlement of
Mallard to Earn Out Payments came to an end in accordance with clause 6.1.
Instead Mallard became entitled to the sums specified in clause 6 by way of a
final payment for the period from the end of the previous quarter to the date
of sale and a payment in respect of the sale of the shares or of the
undertaking. Clause 6 provides
" Sale of TAS
6.1 If Sky shall sell or otherwise dispose of the entire issued share capital
of TAS or a majority of such issued share capital or if TAS shall sell or
otherwise dispose of the whole of its undertaking during the period to 30th
September 1997 then Mallard's entitlement to Earn Out Payments shall cease in
respect of all periods after the completion of such sale or other disposal and
shall be replaced by an entitlement to a final payment for the period from the
end of the previous quarter to the date of sale and either 55 per cent of the
proceeds of sale or other disposal or in the case of sale or disposal of a
majority of the issued share capital 55 per cent of the value of the whole of
the issued share capital of TAS or, where such sale or other disposal is to a
company which is at that time holding company of Sky or a subsidiary or
subsidiary undertaking of such holding company or at an under value, to 55
per cent of the open market value of such shares or undertaking (as the
case may be) as determined by an independent chartered accountant
Provided that the amount that Sky shall be obliged to pay to Mallard
hereunder shall be limited so that the aggregate of the Earn Out
Payments.......and the amount payable pursuant to this clause shall not exceed
£3,145,300. (Emphasis added.)
6.2 The provisions of Clause 4 as to the appointment of such independent
chartered accountant and Clause 5 as to the payment of any amount due to
Mallard shall apply hereto mutatis mutandis."
The sale was followed by inter solicitor correspondence about the
certification of profits by the auditors of TAS and about the open market
value of the shares in TAS. In a letter of 20 June 1991 to Mallard's
solicitors Messrs Herbert Smith, on behalf of Sky, contended that TAS had no
value and that there was no payment for an independent accountant to
determine. They asked for confirmation that there was no necessity to appoint
an independent accountant and suggested that, if they did not agree, they
should provide details of who Mallard proposed be appointed as independent
accountant. This request was repeated in a letter of 19 August 1991.
In their reply of 2 October 1991 Mallard's solicitors stated that their
clients did not agree that TAS had no positive value and stated that legal
proceedings would be commenced claiming payment pursuant to the TAS Agreement.
In their reply of 4 October Herbert Smith stated that their clients reserved
all their rights under the TAS Agreement
"including but not limited to their right to require the appointment of an
independent Chartered Accountant to determine the value of TAS."
The writ claiming payment was issued on 18 November 1991. Neither it nor the
Statement of Claim made any reference to any determination by an independent
accountant. It was alleged that the TAS shares had a "very substantial value."
The defence expressly pleaded that no determination had been made by any
independent accountant and denied that any final payment was due and owing to
Mallard from Sky. It was denied that Mallard was entitled to any payments under
or pursuant to the TAS Agreement. In the Reply Mallard denied that the absence
of a determination by an independent chartered accountant under the TAS
Agreement provided Sky with any contractual defence to the claim.
There was no attempt by Mallard, Mr Gillatt or Sky to obtain a determination
of an independent chartered accountant as to the open market value of the TAS
shares as at 21 March 1991. Nor was there any application by Sky (a) to stay
the proceedings pending the determination of an independent valuer ; or (b) to
strike out any part of the action. It is not suggested, however, that the
failure of Sky to take any of these steps has given rise to any estoppel or
waiver preventing them from now taking the point on the absence of a
determination of open market value by an independent accountant.
As already indicated, Lloyd J rejected the submission of Mr Choo Choy for Mr
Gillatt that the reference to an independent accountant in clause 6.1 was, as
in the case of clause 4, only optional machinery or a permissive procedure for
the ascertainment of the final payment and of the open market value of the
shares and was not integral to the essence of the contractual obligation. He
held that
"the text of clause 6.1 shows clearly that a determination by an independent
chartered accountant is integral to Mallard's entitlement. The incorporation
of procedural machinery provisions by reference to clause 4.7 does not convert
that from an essential to a merely optional element."
He concluded
"I hold that a determination by an independent chartered accountant appointed
under clause 6 is integral to any entitlement, and therefore to any claim,
under that clause and therefore the claim, so far as it is made under that
clause, cannot succeed."
APPELLANT'S SUBMISSIONS
Mr Choo Choy submitted that the words "as determined by an independent
chartered accountant" in clause 6.1 were intended as a description of the
machinery to be followed for resolving any dispute between the parties as to
the proper quantification of any entitlement under the clause and were not
intended as an essential condition precedent or integral pre-condition to the
existence of any entitlement under the clause. As neither side had chosen to
operate or enforce that machinery it was open to the court to determine the
extent of Mr Gillatt's entitlement under clause 6.1.
Although it was accepted that the issue is one of construction of the
particular contract (i.e the TAS Agreement), Mr Choo Choy relied strongly on
two decisions to support his construction of clause 6.
He cited Sudbrook Trading Estate Ltd v. Eggleton [1983] AC 444 at
478E-479G, 482C-486E, 486G-H and 487G-488C for the proposition that where the
determination of price or value is by a named individual or office holder and
the agreement contains no objective criteria by which the valuation is to be
carried out, it is more likely that the determination of the named valuer was
intended to be an essential ingredient of the contractual entitlement; but
where, as here, the third party valuer is not a named individual or office
holder and the agreement contains objective criteria by which the value is to
be determined (i.e open market value), it is less likely that the determination
of the third party was intended as essential or fundamental to entitlement.
He also cited Re Malpass [1985] Ch 42 at 48F-49A and 50A-E as an
instance of a court holding that a reference in a testamentary option to value
(in that case "agricultural value") "as agreed with the district valuer" was
inessential machinery and not the essence of the obligation, so that the option
remained valid even though the district valuer refused to participate in the
process of valuation.
Building on those cases and on the Court of Appeal decision in Didymi
Corporation v. Atlantic Lines and Navigation Co. Inc. [1988] 2 Lloyd's Rep.
108 applying the Sudbrook principle, Mr Choo Choy contended that
various considerations pointed away from the literal construction of the clause
and from the characterisation of the reference in clause 6.1, which he
described as "a relatively standard expert clause", to the determination of the
independent accountant as the essence of Mr Gillatt's entitlement, as opposed
to mere dispute resolution machinery. He relied in particular on the following
factors: the accountant was neither a named individual nor an office holder ;
the clause contained objective criteria by which the entitlement to a final
payment and a proportion of the open market value is to be ascertained in the
absence of agreement between the parties; clause 6.2 applied the provisions of
clause 4.7 to 4.10 which are conceded by Sky to be mere machinery for
quantification of Earn Out Payments based on profits in cases of disagreement ;
from a commercial point of view the subject matter of clauses 4 and 6 is
effectively the same; the determination by the accountant notionally applies to
an arm's length cash sale of the shares to an independent third party for an
ascertainable amount, yet no-one could sensibly suggest that in such a case
there was no entitlement to payment for the shares in the absence of an
accountant's determination; and the essence of the commercial bargain was that
Sky would make payments based on profits, as defined, and on the open market
value of the shares and not simply a payment to be determined by an
independent accountant.
CONCLUSION
In my judgment the judge correctly construed clause 6.1 of the TAS Agreement.
He correctly answered the questions raised by way of preliminary issue.
I would dismiss this appeal for the following reasons.
(1) The Authorities.
Little assistance on the construction of the TAS Agreement can be gathered
from decisions in other cases on differently worded agreements concluded in
different circumstances.
I should, however, examine in more detail the principal authority heavily
relied on by Mr Choo Choy, namely the majority speeches of Lord Diplock and
Lord Fraser in Sudbrook Trading (supra).
That case concerned the enforceability of an option in a lease for lessees
to purchase the leasehold reversion " at such price ....as may be agreed upon
by two valuers one to be nominated by the lessor and the other by the lessee
and in default of such agreement by an umpire appointed by the... valuers."
The lessees exercised the option, but the lessors refused to appoint a valuer.
When the lessees commenced proceedings for a declaration that the option was
valid and had been validly exercised and sought an order for specific
performance, the lessors contended that it was only an agreement to agree or,
alternatively, that the option was void for uncertainty as the price was an
essential element of the contract, and no price was ascertained and the court
should not substitute its own machinery to determine the price where the
parties had stipulated for that purpose machinery which later became
ineffective.
These contentions were rejected by the House of Lords. They construed the
option as an agreement for sale of the reversion at a fair and reasonable price
by the application of objective standards and held that, once the option was
exercised, the price was capable of being ascertained. The price was therefore
certain and a complete contract for sale was constituted.
As to the contractual machinery for the ascertainment of the price it was held
that that was a subsidiary and non-essential part of the option, so that, if it
broke down for any reason, the court could ascertain a fair and reasonable
price by directing an inquiry by the court as to the fair valuation of the
reversion.
Lord Diplock pointed out at p. 477B that there was a contractual obligation on
the lessors and the lessees to appoint their respective valuers to fix what was
(by necessary implication) the fair and reasonable price for the reversion.
The essence of Lord Diplock's reasoning is at p 478H-479F:
" Why should the presence in the option clause of a convenient and sensible
machinery for ascertaining what is a fair and reasonable price, which the
lessors, in breach of their contractual duty, prevent from operating, deprive
the lessees of the only remedy which would result in justice being done to
them? It may be that where upon the true construction of the contract the price
to be paid is not to be a fair and reasonable one assessed by applying
objective standards used by valuers in the exercise of their professional task
but a price fixed by a named individual applying such subjective standards as
he personally thinks fit, and that individual, without being instigated by
either party to the contract of sale, refuses to fix the price or is unable
through death or disability to do so, the contract of sale is thereupon
determined by frustration. But such is not the present case. In the first place
the contract upon its true construction is in my view a contract for sale at a
fair and reasonable price assessed by applying objective standards. In the
second place the only thing that has prevented the machinery provided by the
option clause from operating is the lessors' own breach of contract in refusing
to appoint their valuer. So if the synallagmatic contract created by the
exercise of the option were allowed to be treated by the lessors as frustrated
the frustration would be self induced, a circumstance which English law does
not allow a party to rely on to his own advantage. So I see no reason why,
because they have broken one contractual obligation the lessors should not be
ordered to perform another contractual obligation on their part namely to
convey the fee simple in the premises to the lessees against payment of a fair
and reasonable price assessed by applying the objective standards to which I
have referred.
As regards the assessment of the fair and reasonable price to be paid by the
lessees upon specific performance of the contract to convey, the lessors have
clearly waived their contractual right to have that price assessed by the
machinery for which the option clause provides. The lessees in their turn are
content also to waive their corresponding right to use that machinery. This
will leave it to the court itself to determine upon the expert evidence of
valuers what is the fair and reasonable price."
Lords Fraser, Scarman and Bridge agreed with Lord Diplock.
Mr Choo Choy cited part of Lord Fraser's speech at p.483D-484D in which he
focused on the distinction between those cases "where the mode of ascertaining
the price is an essential term of the contract, and those cases where the mode
of ascertainment, though indicated in the contract, is subsidiary and
non-essential..." and concluded that the general principle was that "...where
the machinery is not essential, if it breaks down for any reason the court
will substitute its own machinery." He did not confine this principle to cases
where the breakdown had been caused by the fault of one of the parties in not
co-operating in making the machinery work.
He also expressed the view that it was unrealistic to regard the term as to
the mode of valuation as essential where the machinery "...consists of valuers
and an umpire none of whom is named or identified." Cf the appointment as
valuer of an auditor of a company with special knowledge of the company whose
shares are to be valued.
In Re Malpass (supra) Sir Robert Megarry V-C applied this general
principle to uphold the validity of a testamentary option where ineffective
machinery for ascertaining the agricultural value of land had been provided,
but was merely subsidiary and inessential: in that case the value was to be as
determined for probate purposes "as agreed with the district valuer" and the
district valuer refused to take any part in the process of valuation. It was
held that the will was ineffective in a subsidiary and inessential respect and
that that deficiency could be remedied by the court substituting effective and
workable machinery. i.e by directing an inquiry as to the "agricultural value."
There was no ground for thinking in that case that "the testator or anyone else
can have been attaching any particular value to the participation of the
district valuer in the process." (p 50D-E). The testator had made an
assumption, which proved to be unfounded, that the district valuer would take
part in the process and that it was no burden to put him into the option. It
was not the essence of the option that the agreement of the district valuer
should be obtained. It was more in the nature of a safeguard for ensuring a
full and proper price for the land and not the mere "probate value."
These cases are relevant to the resolution of this appeal to the extent that
(a) they identify the importance of distinguishing between essential and
inessential contractual terms and the different consequences of them becoming
ineffective; (b) they indicate the factors to be considered in determining
whether a term is an essential one or not; (c) they emphasise the importance
of upholding, if possible, the validity of the contract and the intentions of
the parties ; and (d) they illustrate the approach of the court in seeking to
prevent contracts from becoming ineffective in consequence of a party taking
advantage of either his own failure to perform his contractual obligations or
of the refusal or inability of a non-party to fulfil the role which the parties
contractually anticipated he would fulfil.
Those cases do not, however, determine the decision in this case. The critical
question is, as the judge appreciated, to determine whether clause 6 of the TAS
Agreement, construed both linguistically and contextually, made the
determination of the independent chartered accountant essential to Mr
Gillatt's entitlement to payment for the shares in TAS. Only the terms and the
surrounding cirumstances of the TAS Agreement can supply the answer to that
question.
(2) The Terms and Circumstances of the TAS Agreement
(a) As a matter of the natural and ordinary meaning of the language of clause
6. 1 I would hold that the expression "as determined by an independent
chartered accountant " is an integral and essential part of the definition of
the payments to which Mallard (and now Mr Gillatt) is entitled on a sale of the
shares in TAS. In answer to the question "What are you entitled to be paid for
the TAS shares?" the correct contractual response is not simply " 55 per cent
of their open market value" ; according to clause 6.1 it is that percentage of
that value "as determined by an independent chartered accountant."
(b) It follows that I would reject the contention that the reference in
clause 6.1 to the determination of the independent accountant is merely a
mechanism or permissive procedure for dispute resolution. This is in contrast
to the structure of clause 4 which sets out a detailed procedure for settling
disputes between the parties about the calculation of the profits on which the
Earn Out Payments are based: management accounts ; auditor's certificate;
objections by the parties to the certificate; reference to an agreed
independent accountant; appointment of that accountant by the President of the
Institute in the absence of agreement between the parties; review by the
accountant; the provision of information by the parties to the accountant; the
decision of the accountant as to whether there should be an increase or
decrease in the amount of profits or in Mallard's entitlement to the Earn Out
Payments.
That mechanism is neither expressly replicated in nor incorporated in clause
6 which is not concerned with the calculation of periodical Earn Out Payments
(which ceased in any event to be payable on the sale of the shares), but with
the entitlement to a final payment for the period from the previous quarter to
the date of sale and to payment of a specified % of the open market value of
the TAS shares. Clause 6.2 only applies to clause 6 the provisions of clause 4
as to the "appointment of" such independent chartered acountant. It does not
apply to clause 6 all the detailed procedures in clause 4 so as to govern the
determination to be made by the independent accountant whose appointment is
made in accordance with clause 4.
(c) I do not accept the submission that the reference in clause 6.1 to "open
market value" of the shares in TAS would provide the court with adequate
objective criteria in this case for the court to determine the value of the TAS
shares. I recognise that the concept of open market value is objective in the
sense that expert valuers called by the parties would be able to offer to the
court reasoned opinions on the value of the TAS shares. The real difficulty for
the experts and the court, however, would be that the TAS Agreement does not
contain any definition of "open market value" or any indication of the basis
on which it is to be ascertained, otherwise than by reference to the opinion
of the independent accountant. As Mr Rosen QC pointed out on behalf of Sky and
as Mr Choo Choy recognised, there is more than one possible approach to such a
valuation of shares in a private company: an earnings basis, an assets basis, a
discounted cash flow basis, or a combination of these approaches. The fact is
that in this case the parties expressly recognised that such a valuation is
pre-eminently a matter of judgment for the independent accountant entrusted
with the task by the parties. The TAS Agreement did not prescribe for him any
detail of the basis on which he was to approach the determination of open
market value. It was treated as a matter of judgment entrusted to his decision
which the parties agreed to accept as final and binding. It is the duty of the
court to give effect to the parties' agreement on ascertainment of entitlement
to the final payment and to payment for the TAS shares. It is not the function
of the court to modify clause 6.1 of the TAS Agreement so as to enable it to
intervene and make its own valuation.
(d) There is no question in this case of the "breakdown" of machinery for the
determination of value, either as a result of the parties failing to perform
their legal obligations or as a result of the nominated valuer being unable or
unwilling to fulfil his role. There was no legal obligation on the parties in
the TAS Agreement to agree on the value of the shares or to agree on the
accountant to be appointed or to agree on invoking the assistance of the
President of the Institute. It was open to Mr Gillatt before this action was
started to seek the appointment and the determination of the independent
accountant without the co-operation of Sky. But for reasons of his own, which
are not disclosed in the evidence, he did not attempt to do so. It is not a
case of a breakdown of contractual machinery; it is a case of a failure by the
party claiming payment to take the necessary contractual steps to ascertain
entitlement to payment. There is, in my view, no question of the court becoming
entitled in these circumstances to substitute something different (i.e its own
opinion on open market value) in place of what was contractually agreed between
the parties (i.e the opinion of the accountant) for the determination of Mr
Gillatt's entitlement, but which Mr. Gillatt has simply disregarded.
(e) Commercial considerations indicate that, contrary to the submission made
on behalf of Mr Gillatt, the parties probably intended that the determination
of the open market value of the TAS shares should be by an independent
accountant and not by the court. Assuming that such considerations are relevant
to the question of construction (and both sides agreed that they are), they
favour Sky's construction as being more likely to produce an outcome reflecting
the probable common intention of the parties. The determination of the
independent accountant is more expeditious, less expensive and more certain
than litigation. It would have a final and binding effect consistent with the
intended termination of the relationship between the parties.
I agree with the rulings of the Judge. I would dismiss this appeal.
SIR RONALD WATERHOUSE:
I agree
LORD JUSTICE PILL:
I agree and for the reasons given by Mummery LJ. I add a few words in
deference to the helpful submissions of Mr Choo Choy and in view of the
reliance he places on the decision of the House of Lords in Sudbrook Trading
Estate Ltd v Eggleton [1983] AC 444. The relevant contractual term in that
case has been set out by Mummery LJ. It was held that the agreement was for
sale at a fair and reasonable price by the application of objective standards.
The price was to be ascertained by machinery which, on the true construction of
the agreement, was a subsidiary and non-essential part of the contract and the
court would, if the machinery broke down for any reason, substitute its own
machinery, to ascertain a fair and reasonable price.
Mr Choo Choy relies upon that part of the speech of Lord Diplock quoted by
Mummery LJ. If the third party valuer is a named individual and the agreement
contains no objective criteria by which the valuation is to be carried out, it
is more likely that the determination of the named valuer was intended as an
essential ingredient of the entitlement under the agreement. However, if, as is
claimed to be the position in the present case, the third party valuer is not a
named individual and the agreement contains objective criteria by which the
value is to be determined, it is submitted that it is less likely that the
determination of the third party valuer was intended as essential to the
entitlement. The appellant was not deprived of his remedy in the courts by the
failure to appoint an independent chartered accountant.
The judicial committee in Sudbrook was concerned to consider one
"central proposition" stated by Templeman LJ in the Court of Appeal in
Sudbrook. Lord Diplock accepted that Templeman LJ had "accurately
summarised" a long line of authority before stating the proposition. The
proposition was that "where the agreement on the face of it is incomplete until
something else has been done, whether by further agreement between the parties
or by the decision of an arbitrator or valuer, the court is powerless, because
there is no complete agreement to enforce". Lord Diplock stated (p 478C) that
the proposition "involved a fundamental fallacy. A contract is a contract as
soon as the parties have reached agreement as to what each of its essential
terms is or can with certainty be ascertained ... ." It was to expose that
"fundamental fallacy" that Lord Diplock continued the analysis as he did.
Lord Fraser analysed the situation in a similar way (483E to 484B):
"I recognise the logic of the reasoning which has led to the courts' refusing
to substitute their own machinery for the machinery which has been agreed upon
by the parties. But the result to which it leads is so remote from that which
parties normally intend and expect, and is so inconvenient in practice, that
there must in my opinion be some defect in the reasoning. I think the defect
lies in construing the provisions for the mode of ascertaining the value as an
essential part of the agreement. That may have been perfectly true early in the
19th century, when the valuer's profession and the rules of valuation were less
well established than they are now. But at the present day these provisions are
only subsidiary to the main purpose of the agreement which is for sale and
purchase of the property at a fair and reasonable value. In the ordinary case
parties do not make any substantial distinction between an agreement to sell at
a fair value, without specifying the mode of ascertaining the value, and an
agreement to sell at a value to be ascertained by valuers appointed in the way
provided in these leases. The true distinction is between those cases where the
mode of ascertaining the price is an essential term of the contract, and those
cases where the mode of ascertainment, though indicated in the contract, is
subsidiary and non-essential: see Fry on Specific Performance, 6th ed.
(1921), pp. 167, 169, paragraphs 360, 364. The present case falls, in my
opinion, into the latter category. Accordingly when the option was exercised
there was constituted a complete contract for sale, and the clause should be
construed as meaning that the price set was to be a fair price. On the other
hand where an agreement is made to sell at a price to be fixed by a valuer who
is named, or who, by reason of holding some office such as auditor of a company
whose shares are to be valued, will have special knowledge relevant to the
question of value, the prescribed mode may well be regarded as essential.
Where, as here, the machinery consists of valuers and an umpire, none of whom
is named or identified, it is in my opinion unrealistic to regard it as an
essential term. If it breaks down there is no reason why the court should not
substitute other machinery to carry out the main purpose of ascertaining the
price in order that the agreement may be carried out."
Similarly, Lord Scarman set out the "question for decision" at p 487H:
"Were the parties agreeing to a sale `at a fair valuation,' i.e. `at a
reasonable price'? Or were they treating their chosen mode of ascertaining the
price as being of the essence of their contract? What was the object of their
contract? A fair and reasonable price? Or a price reached only by the means
specified?
Unembarrassed by authority, I would unhesitatingly conclude that the parties
intended that the lessee should pay a fair and reasonable price to be
determined as at the date when he exercised the option. The valuation formula
was introduced into the contract merely as a convenient way of ascertaining the
price at that future time. Should we be deterred from so construing the
provision by the exercise of a line of authority stretching back over 150 years
in which provisions remitting to a valuer or arbitrator the ascertainment of a
price have been construed as making the machinery of ascertainment an essential
term of the contract?
I think not. ... We would be doing a public disservice if, in deference to
ancient law, we were to invalidate a simple, sensible, and practical formula
for ascertaining a fair and reasonable price. In today's conditions a valuation
by professional valuers achieves exactly that."
I do not read the opinions of their Lordships, when exposing the "fundamental
fallacy", as preventing, or even discouraging, parties from agreeing a formula
for valuation which is an essential term of the contract. There may be an
agreement to sell "at a fair value" but there may also be a prescribed mode of
ascertaining the price which is to be regarded as essential. The chosen method
of ascertaining the price may be "of the essence of the contract".
I agree with Mummery LJ and with Lloyd J that, construing the words used in
clause 6 on their own merits and in their commercial context, it was an
essential term of the agreement that the sum to be paid was the open market
value as determined by an independent chartered accountant. In context, "open
market value" cannot be equated with the fair and reasonable price contemplated
in Sudbrook. The parties agree that there is more than one possible
approach to such a valuation of shares in a private company. Among the
possibilities, Mr Rosen QC mentions an earnings basis, an assets basis, a
discounted cash flow basis, or a combination of these. A company with a low
asset value may have a high open market value if it has a stable market niche
and a good workforce. Mr Choo Choy raises the possibility of an approach to
open market value by way of "price earnings multiple". It is unsurprising that
the parties intended to confer the task of valuation exclusively upon an
independent chartered accountant. That method of ascertaining the sum to be
paid was in this case an essential term of the contract.
I too would dismiss the appeal.
Order: Appeal dismissed with costs; leave to appeal to the House of
Lords refused.
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