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1
OUTER HOUSE, COURT OF SESSION
[2021] CSOH 101
CA3/21
OPINION OF LADY WOLFFE
In the Commercial Action
KEIRON DAVID PATERSON
Pursuer
against
ANGELLINE (SCOTLAND) LIMITED
Defender
Pursuer: ECM MacLean; Blackadders LLP
Defender: Dean of Faculty; Morton Fraser LLP
12 October 2021
Introduction
The issue at debate
[1]
The parties entered into a share purchase agreement dated 5 July 2019 ("the SPA")
under which the pursuer sold, and the defender acquired, the whole pharmacy business
conducted by the pursuer from three premises using two corporate vehicles. That SPA
provided for payment of the total consideration by four different types of payments (as after
defined). A dispute has arisen about the adjustment to the second type of payment,
described as "the Initial Deferred Consideration".
2
The pursuer's position
[2]
The pursuer contends that an upward adjustment is required, resulting in a payment
due to him in the amount of £341,932 and he concludes for declarator and payment. The
pursuer's legal grounds are based first on what he says is the proper interpretation of the
SPA, and in the alternative on an implied term. By way of further alternative, in the event
that the court is not with him on either of these grounds, he seeks rectification to achieve the
same end.
The defender's position
[3]
The defender contends for a different, and it says much more straightforward,
interpretation. It also contends that the pursuer's legal grounds for an implied term or
rectification are irrelevant. On its interpretation of the disputed provision, it submits that a
downward adjustment is required, with the effect that the pursuer is obliged to pay the
defender the sum of £228,904, and payment of which it seeks in its counterclaim.
The parties' motions
[4]
Both parties moved for decree de plano in his or its favour. The pursuer seeks one or
more declarators (depending on the legal basis on which he might succeed) and payment in
the principal action, and dismissal of the defender's counterclaim. The defender resists the
principal action (which it contends is irrelevant) and it seeks payment of the sum in t he
counterclaim said to be due.
3
The circumstances preceding the conclusion of the SPA
[5]
While the pursuer's first legal ground concerns the construction of the SPA, the
pursuer relies on the background circumstances as providing relevant context in which the
SPA fell to be construed, or as forming part of the factual matrix of which both parties were
aware. Accordingly, before setting out the core provisions of the SPA, I first set out the
circumstances referred to in the pleadings as constituting the background to, and context of,
the SPA. Most of this was not accepted by the defender.
The pursuer's pharmacy business operated by two companies from three premises
[6]
As at July 2019 the pursuer was a director of, and 95% shareholder in, Keir Pharmacy
Limited ("KPL") and defined in the SPA as "the Company". He was also a director of
A D Healthcare Limited ("ADHL"), a wholly-owned subsidiary of KPL, which was defined
in the SPA as "the Subsidiary". KPL owned and operated a pharmacy in Denny. Ms Lucie
Capaldi, a pharmacist and senior employee in the pursuer's business, owned the
remaining 5% of the shares of KPL. ADHL owned and operated two pharmacies, in Larbert
and Plean. Collectively, the business was comprised of these two companies ("the
companies"), which operated three successful pharmacies from these three premises
(collectively "the premises"). In the SPA, the Company and the Subsidiary were defined as
"the Group".
Communings preceding the heads of agreement
[7]
The pursuer avers that from about February 2019 there were discussions between
him and Ms June Friel ("Ms Friel"), the sole director of the defender. These discussions took
the form of meetings as well as emails, culminating in the pursuer's acceptance on 5 March
4
2019 of the defender's informal offer to buy the business for approximately £6.35 million
plus a sum for net current assets. The pursuer also avers that in "the market for the sale of
such businesses, that was a common means of determining, and paying for, stock and other
current assets of a pharmacy".
The heads of terms
[8]
The pursuer also avers that on 10 May 2019, the pursuer and the defender signed
heads of terms ("the heads"), the principal terms of which recorded their non-binding
agreement for the sale to the defender of all KPL's shares and, with them, the whole assets of
the two companies and the three pharmacies comprising the business. The heads recorded
that the consideration was to be £6.35m "plus net current assets", a valuation which the
pursuer avers had been arrived at assuming a sale on a debt-free and cash-free basis ("the
valuation assumption"). The pursuer also avers that payment for that was agreed to be
structured as follows:-
1)
A first payment of £5.2m,
2)
Payment of 75% of the estimated net current assets of the companies in cash
on completion,
3)
A third payment totalling £200k, payable in 60 equal monthly instalments
over the succeeding 5 years, and,
4)
At the end of that 5-year period the remaining £1 million was to be paid.
Moreover, the second payment (the Initial Deferred Consideration) was to be adjusted
following preparation of completion accounts, which were intended to determine the value
of inter alia the actual net current assets value of the business. The intended sale was subject
to the defender undertaking due diligence of both KPL and ADHL and their affairs, and the
5
common provisos that there were no material adverse changes in the business, assets and
financial positions of either. Thereafter, the defender carried out its due diligence of both
companies and their affairs. The pursuer's position is that there were no material changes.
[9]
In relation to certain current assets, the pursuer avers that on about 29 June 2019,
shortly prior to completion, the parties arranged for joint valuations of stock (as this fell
within current stock) to be carried out at each of the three pharmacies. The pursuer also
averred that neither KPL nor ADHL was denuded of cash (another current asset).
The different drafts of the SPA
Definitions of assets and liabilities that included both companies
[10]
The pursuer makes detailed averments about several iterations of the draft SPA, inter
alia dated 28 June, 29 June, 30 June and 3 July 2019. As I understood it, this was to
demonstrate that even though there were changes in defined terms (eg from "Net Curr ent
Assets" and "Net Current Liabilities" to "Current Assets" and "Current Liabilities"), these
terms always included the assets and liabilities of "each Group Company". The term
"Group" was consistently defined as "the Company [ie KPL] and the Subsidiary [ie
ADHL]", and "Group Company" meant either one of them.
[11]
However, the pursuer focuses on a draft of the SPA of 3 July 2019 (intimated by
email timed at 13:02 (and which he defined as "the further revised draft")), containing
further revisions (as tracked changes) by which the defined terms "Current Assets" and
"Current Liabilities" replaced the definitions of "Net Current Assets" and "Net Current
Liabilities", but in which the assets or liabilities (as the case may be) were now restricted to
being only those of "the Company" (that is, KPL) ("the Company changes") and therefore
omitting the assets and liabilities of ADHL. The pursuer relies on the fact that the tracked
6
changes effecting the Company changes ceased to be apparent a few hours later, when a
further draft was intimated (by email timed at 16:06). Subject to the insertion of "cash at
bank" into "Current Assets", those revised definition s were contained in the executed SPA.
The effect of Company changes resulted in the omission of ADHL's NCA from the defined term
"Current Assets" and "Current Liabilities"
[12]
By reason of the Company changes, namely, the insertion of the two disputed
defined terms, of "Current Assets" and "Current Liabilities" (which no longer included the
assets or liabilities of ADHL), the adjustment to the Initial Deferred Consideration was no
longer by reference to the assets and liabilities of both companies (defined as "the Group" in
the SPA), but by reference only to those of KPL. This change is at the heart of the dispute
between the parties and the issue debated.
Other conduct prior to conclusion of the SPA founded on as providing relevant context
[13]
The pursuer founds on other conduct said to be relevant, and indicative of (it is said)
the parties' shared understanding that the net current assets ("NCA") of both companies
were to be calculated and factored into the total consideration. The relevant conduct was
said to include the following:
1)
Calculations of the NCA of both companies: the pursuer refers to an NCA
calculation of both companies (based on revised management accounts to 31 March
2019) and produced by the pursuer's accountants to the parties, their agents and the
defender's accountants on 2 July 2019 ("the 2 July NCA Calculation"). He avers that
the following figures were produced, which were based on these accounts. The
7
significance for present purposes is that the 2 July NCA Calculation included the
NCA of the Subsidiary (ie ADHL):
KPL
ADHL
Total
Stock
£41k
£88k
£129k
Debtors
£262k
£264k
£526k
Bank & Cash
£141k
£632k
£773k
Creditors
(£175k)
(£319k)
(£494k)
Net Total
£269k
£665k
£934k
It will be noted that ADHL was the biggest contributor, by far, to the total NCA of
the two companies and that the sum it held in cash exceeded the figure of £500,000
stipulated as the Initial Deferred Consideration.
2)
No objections by the defender or its accountants to the inclusion of ADHL's
assets in the NCA Calculation: The pursuer's position in respect of these figures is
that the parties made clear inter se that the defender and its accountants had
reviewed the NCA Calculation and the management accounts on which the
calculation was based; that the defender's accountants h ad advised the defender
about, and provided a written summary of, their observations on the NCA
Calculation and, again, in which there was no mention of, and no objection to, the
inclusion of ADHL's accounts, current assets and current liabilities in the NCA
Calculation;
3)
The resultant agreement to pay the Initial Deferred Consideration based on
the NCA Calculation: The pursuer also avers that in light of the advice Ms Friel had
8
received from the defender's accountants following receipt of the NCA Calculation
she had proposed that, subject to the defender receiving satisfactory evidence of both
companies' bank balances at a specified date, the defender would pay £500k to
account of the "NCA value" a week after completion; that the pursuer accepted that
proposal and this became the Initial Deferred Consideration (the second tranche of
the total consideration was paid); and
4)
The pursuer's production of the bank statements, including that relating to
the balances held in ADHL's bank accounts: the pursuer thereafter exhibited the
bank statements for both companies as at the agreed date, which showed that the
cash held by KPL's and ADHL's respective bank accounts was then
approximately £90k and £555k, respectively.
The foregoing is a summary of the kinds of conduct or communings on which the pursuer
founds. In submissions the pursuer also referred to a number of drafts and communings (by
email or WhatsApp) comprising the two lever-arch files of productions lodged for the
debate to illustrate these chapters of evidence. It is not necessary to set out the details of
those in this opinion.
Completion and payments under the SPA
[14]
The pursuer notes that following execution of the SPA, completion took place on
5 July 2019, as a consequence of which:
1)
The defender paid the first tranche of £5.2 million to the pursuer;
2)
The pursuer implemented his completion obligations, including repayment
by the pursuer of his director's loan and transfer to the defender of all the issued
9
shares in KPL and, thereby, the whole business of the two companies, three
pharmacies group, together with both companies' assets, including all current assets.
3)
Thereafter, the defender paid the Initial Deferred Consideration (being
the £500k to account of NCA), timeously;
4)
The "Instalments" became due each month since then (being the 60 monthly
payments to be made as the third element of the consideration); and
5)
In August and November 2019, the defender paid invoices for current
liabilities incurred by ADHL prior to completion.
Conduct post-dating the SPA founded on as providing relevant context
[15]
As noted below, the Initial Deferred Consideration, paid a week after completion,
was subject to adjustment in due course in accordance with Schedule 8 to the SPA. This
adjustment entailed the preparation of draft Completion Accounts and the Completion
Account Statements for both KPL and ADHL. The pursuer notes the following timeline of
the steps taken to finalise the adjustment in accordance with Schedule 8 to the SPA:
1)
The draft Completion Accounts and the Completion Account Statements,
produced in December 2019 and February 2020 and intimated to the defender and/or
its accountants, at all times included NCA figures for KPL and ADHL;
2)
In February 2020, the defender's accountants acknowledged receipt of these
documents and requested detailed back up schedules for all balance sheet items,
which were subsequently provided;
3)
On 25 February 2020, in implement of paragraphs 1.2 to 1.3 of Schedule 8 of
the SPA, the defender's accountants notified the pursuer of a number of respects in
10
which they were not satisfied that the details of the draft Completion Accounts of
both KPL and ADHL were correct; and
4)
Thereafter, and especially from 10 April 2020, the parties and their respective
accountants, in implement of paragraph 3 and Schedule 8 of the SPA, endeavoured
to resolve those matters by consistently communicating on the provision and import
of information relating to them. In the result, on 13 May 2020, the defender's
accountants proposed final minor revisions to the draft Completion Accounts
Statement which culminated in their agreement on those matters by 22 May 2020.
The pursuer observes that by this date, all outstanding matters were resolved. None of these
ever related to the inclusion of ADHL's current or other assets and liabilities. Moreover, of
the comments made from time to time by the defender's accountants in respect of the draft
Completion Accounts or the Completion Account Statements, none related, or otherwise
objected to the inclusion of ADHL's current or other assets and liabilities in t hose
documents.
The first objection by the defender to the inclusion of ADHL's NCA in the Completion
Accounts Statement
[16]
The pursuer avers that it was only by letter dated 5 June 2020, from the defender's
accountants to the pursuer's solicitors, that they purported to notify him for the first time
("the purported notification") that the defender was not satisfied with the details of the
Completion Accounts Statement by reason, inter alia, of the inclusion of ADHL's current
assets and liabilities. This was shortly after the pursuer had demanded payment, by letter of
29 May 2020, of the balance of the adjusting payment for net current assets due to him in
terms of clauses 2.1 to 2.2 of and Schedule 8 to the SPA.
11
The parties' positions on the relevance of the factual context
The pursuer's analysis of the objective factors informing his three legal grounds
[17]
Mr MacLean, advocate, who appeared for the pursuer, identified what he described
as objective fundamental aspects of the background which he submitted were, or ought
reasonably to have been, known to both parties when they entered into the SPA on 5 July
2019. These were as follows:
1)
That the sale, under the SPA, would transfer the whole business comprised
of the two companies and three pharmacy premises, together with all their assets,
including current assets, to the defender in exchange for the consideration;
2)
That, as was common in that market, the element of consideration referable
to net current assets was to be separately assessed by subsequent preparation and
agreement on, or determination of, completion accounts with a payment to account
of them on or about completion;
3)
In the end that payment to account of the net current assets of the business
was agreed to be £500,000, paid a week after completion;
4)
That there was substantial cash, stock, debtors and, overall, net current
assets in KPL and in ADHL;
5)
That there was, broadly, twice as much in the latter as in the former;
6)
That the cash was to remain in the respective companies at completion of
the sale, along with the other current assets;
7)
That the current assets in each were then likely to be of the order set out in
the table above (at para [13(1)]);
8)
That it would not have been commercially sensible to omit the net current
12
assets of ADHL from the assessment and payment of the part of the consideration
for such assets;
9)
That, from February 2019 until about 3 July 2019, when the defender's
solicitors returned the further revised draft (defined at para [11], above), all the
parties' discussions, documents and prior drafts had expressly contemplated,
stipulated, or provided for, the inclusion therein of ADHL's net current assets and
the contrary had never been suggested;
10)
That, at no stage, had the parties or their advisors discussed, mentioned or
implied that the effect of changes to the further revised draft was, or might have
been, to exclude those assets therefrom; and
11)
That such exclusion would have been likely to reduce the consideration for
net current assets by over £600k and oblige the pursuer to repay over half the £500k
to be paid to account just after completion.
In light of the foregoing, Mr MacLean submitted that these objective fundamental aspects of
the background strongly reinforced the conclusion that a reasonable person would then have
understood that the parties intended that the defender was to pay for the net current assets
of ADHL, as well as KPL, all of which were, therefore, to be included in the Completion
Accounts Statement.
The defender's position on the factual context
[18]
In its pleadings, the defender denies the vast majority of the pursuer's averments.
(Under reference to PIK Facilities Ltd v Watson's Ayre Park Ltd 2005 SLT 1041 at paragraph 25,
the pursuer relies on the defender's failure to aver a positive case, as justifying the pursuer's
primary motion for decree de plano.) In response to questions from the court, the defender's
13
counsel, the Dean of Faculty, confirmed that in respect of the 11 factors the pursuer
identified, the defender accepted items 1, 4, 5 and 7; it did not accept items 2, 3, 6 and 8; and
it offered no comment on the remaining items.
The effect of the competing interpretations
The pursuer's position
[19]
The pursuer's position is that his interpretation accords with the commercial purpose
of the SPA, which was the transfer of the assets of the business carried on by the two
companies, and that the consideration included the assets of both of those companies.
Otherwise, the defender would have an arbitrary and wholly unexpected windfall, and the
pursuer would suffer an equally arbitrary and unexpected loss. For these reasons, the
disputed definitions were, in the context of the consideration provisions relating to NCA
and in the context of the SPA as a whole, and against those objective aspects of its
background, to be construed as applying to both of those companies, which failing a term
should be applied or the disputed definitions rectified to achieve that end.
The defender's position
[20]
On the defender's analysis of the disputed definitions, they could not be clearer; they
should be construed according to their terms; they admitted no alternative interpretation;
and therefore the factual context was irrelevant. The disputed definitions excluded the NCA
of ADHL. It could not be said that the value of ADHL's assets had not been included in one
of the other elements of the consideration. In terms of the commercial purpose of the SPA,
this was to transfer the shares in KPL to the defender. There was a utility in including
ADHL's NCA in the Completion Accounts, even if not in the Completion Accounts
14
Statement (as a consequence of the application of the disputed definitions), so that the
defender was aware of what it was getting and because some of these assets were subject to
warranties.
Discussion
The SPA
[21]
The principal provisions relevant to the parties' dispute include the following:
1)
many of the defined terms (in clause 1.1),
2)
the provision for consideration setting out the four types of payments to be
made (in clause 3.1),
3)
the mechanism for adjusting the consideration (in clause 3.3) and which was
to be done in accordance with the provisions of Schedule 8, and
4)
the "Entire Agreement" clause in clause 13.1, on which the defender relies.
In submissions, reference was made to many other provisions in the SPA, particularly by the
pursuer, essentially to demonstrate that throughout the SPA it contained references to the
Group that is both KPL and ADHL not just the former, and that the Company changes
resulting in the definitions of Current Assets and Current Liabilities being anomalous by
reason of the exclusion of ADHL from its terms. I quote these provisions below, so far as it
is necessary to do so. Unless otherwise stated, all of the defined terms come from clause 1.1
of the SPA.
The four payments comprising the consideration
[22]
While the parties' submissions focused on the definitions of the "Current Assets"
and "Current Liabilities" ("the disputed definitions"), it is how those terms operate in the
15
provisions governing the calculation of any adjustment to the second tranche (the Initial
Deferred Consideration) of the total consideration that the differences between the part ies'
positions is evident. I therefore start with the structured consideration, provided for in
clause 3.1. I shall bring in the defined terms as appropriate.
[23]
Clause 3.1 of the SPA provided for the consideration and was the aggregate of four
tranches of payments, as follows:
1)
the "Completion Payment" (defined as the sum of "£5,200,000") was payable
on completion (which was 5 July 2020) (clause 3.1.1);
2)
the "Initial Deferred Consideration" (of £500,000), which was defined as " a
payment to account of any adjustment to the Consideration in accordance with
clauses 2.1 and 2.2 of Schedule 8" (emphasis added) (the words quoted are repeated
in clause 3.1), payable on the day following 7 days from completion (clause 3.1.2);
3)
the third tranche of the consideration comprised the "Instalments" (being
59 monthly payments of £3,333.53 and a final payment of £3,333.53 (resulting in a
total of £1,000,000 paid as Instalments), payable in accordance with clause 3.1.1; and
4)
the Final Deferred Consideration (defined as £1,000,000 payable in terms of
clause 3.1.4) was due on the fifth anniversary of the Completion (subject to certain
"Trigger Events" in clause 3.5 not here relevant).
It should be noted that the structured payment of the consideration in the SPA, by four
different types of payments, reflects that in the heads of agreement, although the figures in
the third element (providing for instalment payments over 5 years) differ and there is now a
figure specified for the Initial Deferred Consideration of £500,000 in place of 75% of the
estimated net current assets of the companies. The pursuer avers that in early July 2019,
shortly before the SPA was entered into, the pursuer had explained to Ms Friel that he had
16
around £1 million in cash sitting in the business; that Ms Friel suggested he could save
significant sums in tax if the cash were left in the companies at the time of the purchase and
then paid out thereafter in instalments; and that it was accordingly agreed that this would
be done. For that reason, the purchase was no longer expressed as being on a cash-free basis.
By structuring the payment in this way the pursuer would effectively reduce the tax rate of
46% (assessed on income) to 10% (assessed as capital gains) on that sum. The third element
of the consideration was increased (to £1,000,000) but still payable over the same number of
months as in the heads of agreement (see para [8], above). It should be noted that the only
element of the consideration which was subject to any adjustment was the Initial Deferred
Consideration. I therefore turn to consider the provisions of the SPA governing that matter.
The provisions governing the adjustment to the Initial Deferred Consideration
[24]
The element at the heart of this dispute, the Initial Deferred Consideration, was
defined (in clause 1.1) as a payment of:
"£500,000 as payment to account of any adjustment to the Consideration in
accordance with clauses 2.1 and 2.2 of Schedule 8)". (Emphasis added.)
The operative provisions relating to the Initial Deferred Consideration are found in two
places: clause 3 of the SPA (defining the four elements comprising the consideration and the
dates on which they are to be paid), and Schedule 8 to the SPA and of which paragraph 2 is
most germane to the parties' dispute. (While parties referred to provisions in both the
principal SPA and in its schedules as "clauses", in order better to distinguish these, I shall
use "clause" for the principal SPA and "paragraph" when referring to a provision within a
schedule to it.) In terms of paragraph 2, if the Completion Accounts Statement produced
Actual Net Current Liabilities there would be a downward adjustment and repayment of the
17
Initial Deferred Consideration; if it produced a figure which was less than the Initial
Deferred Consideration (of £500,000), there would be a reduction in the overall
consideration. If the Completion Accounts Statement produced a positive figure, there
would be an upward adjustment in the consideration in the amount equal to the Actual Net
Current Assets. The disputed definitions are given effect to in paragraph 2 of Schedule 8,
because the defined terms of "Actual Net Current Assets" and "Actual Net Current
Liabilities" incorporate the disputed definitions ("Current Assets" and "Current
Liabilities").
The Completion Accounts
[25]
The starting point is to note the accounts on which any calculation to the Initial
Deferred Consideration was based. Clause 3.3 (headed "Completion Accounts") provided:
"The Completion Accounts shall be prepared and the Con sideration shall be
adjusted as set out in Schedule 8 and payments made in accordance with clause 2.2
of the said schedule."
Before turning to paragraph 2 of Schedule 8 to the SPA, it is helpful first to note what was
covered by the term "Completion Accounts". The term "Completion Accounts" was
defined as
"the balance sheet and profit and loss account of each Group Company for the
period from the Last Accounts Date [defined as 30 April 2018] down to 23:59 on
30 June 2019 prepared in accordance with the provisions of Schedule 8". (Emphasis
added.)
The "Accounts" were defined as the unaudited financial statements of each Group
Company comprising the balance sheet, profit and loss account and cash flow of each.
Further provision governing the Completion Accounts is found in paragraph 3.1 of
Schedule 8, which stipulated that the Completion Accounts were to be prepared in
18
accordance with certain policies or usages, of which the first three (in the order of priority
were:
(i)
"Specified Policies" (as defined in Schedule 8),
(ii)
the usage in the preparation of the Accounts, and
(iii)
Standard accounting method.
It suffices to note for present purposes that, to the extent matters were not covered by the
"Specified Policies" (in paragraph 3.1.1), the same accounting "standards, principles,
policies and practices..." as were used in the preparation of "the Accounts" were to be
adopted in the preparation of the Completion Accounts: clause 3.1.2. Accordingly, the
inclusion of the NCA of ADHL is consistent with both the Specified Policies and the usage in
the preparation of the Accounts. So far as relevant, the Specified Policies (in paragraph 4 of
Schedule 8 to the SPA) being the first in priority of the matters governing the preparation
of the Completion Accounts included "full provision" for salaries (paragraph 4.1) "full
provision" for corporation tax in the period up to completion (paragraph 4.3), and that
"stock" was stated at the value certified by the professional stock-taker at completion. In
none of these matters (salaries, tax or stock) was any distinction made between KPL and
ADHL. The clear implication was, for example, that the "stock" stated was the stock of both
of the companies, not of just one of them. This would be wholly consistent with how "the
Accounts" were prepared, which was the second in order of priority of the principles
governing the preparation of the Completion Accounts, and with the fact that they included
the financial statements of each Group Company. The inclusion of ADHL's NCA was also
entirely consistent with the definition of "Completion Accounts".
[26]
It is in my view highly significant that the Completion Accounts included the assets
and liabilities of both companies. The inclusion of the assets and liabilities of both of the
19
companies ("each Group Company") is consistent with the definition of "Accounts" as being
(read short) "the unaudited financial statements of each Group Company, including balance
sheet, profit and loss account and cash flow statements" of each. As will be seen, it is
expressly provided that the "Completion Accounts Statement" (referred to in paragraph 2 of
Schedule 8) was derived from the Completion Accounts. There is an obvious disconnect
between the omission of ADHL's NCA from the Completion Accounts Statement, and the
inclusion of those assets at all other relevant points in the SPA and where its commercial
object is to transfer the whole assets of both companies for value calculated by reference to
their NCA as a distinct element of the consideration (as the pursuer avers is consistent with
the structure of share purchase agreements in this sector).
The process of adjusting the Completion Accounts and the Completion Accounts Statement
[27]
The next matter to be considered is the provision governing the procedure for the
preparation and agreement of the Completion Accounts and Completion Accounts
Statement, in paragraph 1 of Schedule 8 to the SPA. The pursuer (described as the
"Warrantor" in paragraph 1.1 of schedule 8) was obliged (by paragraph 1.1 of schedule 8) to
prepare "draft Completion Accounts and the Completion Accounts Statement in accordance
with paragraph 3 of schedule 8" ("Basis of Preparation"), which I have just noted. It should
be noted that only the Completion Accounts were to be prepared as a draft but not the
Completion Accounts Statement. This reinforces the understanding that Completion
Accounts were the means by which the parties were to arrive at agreed figures and that,
once done, the mathematical calculation provided for in paragraph 2 of schedule 8 would be
done based on those figures and inserted into the Completion Accounts Statement. The
buyer's accountants (being the defender's accountants) then had an opportunity to review
20
the draft Completion Accounts in order "to satisfy themselves that it [ie the Completion
Accounts] has been prepared in accordance with" paragraph 2 of Schedule 8. (The reference
to paragraph 2 is probably incorrect paragraph 2 relates to the Completion Account
Statement, not the Completion Accounts; the basis of preparation of the Completion
Accounts Statements is governed by paragraph 3 of Schedule 8). The remainder of
paragraph 1 of Schedule 8 sets out an alternative dispute mechanism (which has not been
operated by the parties).
[28]
It will be recalled that the pursuer founds on the parties' communications (see
paras [15] to [16], above) falling within paragraph 1.2 of Schedule 8 as part of the factual
matrix, and, specifically, the failure of the defender or the defender's accountants
throughout that process from December 2019 to early June 2020 to object to the inclusion of
the assets and liabilities of ADHL and which, on the defender's reading of the relevant
provisions fall to be excluded.
[29]
Having regard to the terms of the foregoing process, the Accounts and the
Completion Accounts both included the NCA of ADHL. The latter were the means by
which the parties arrived at the agreed figures inter alia for the NCA of both companies. The
terms of clause 3.3 reinforce this understanding, as it provided:
"The Completion Accounts shall be prepared and the Consideration shall be
adjusted as set out in Schedule 8 and any payments made in accordance with clause
2.2 of the said Schedule."
This was a two-step process: the adjustment of the draft Completion Accounts (the pursuer's
relative averments of which are summarised above, at para [15]), and then the use of those
figures to calculate in accordance with para 2 of Schedule 8 the amount of any balancing
payment to be made. Once the first step was completed, and parties had agreed on the
figures in the Completion Accounts, then these figures were fed into the Completion
21
Accounts Statement for the essentially mechanical exercise of determining if any balancing
payments were required to the Initial Deferred Calculation as determined by paragraph 2 of
Schedule 8. It should be noted that prior to the stage of the preparation of the Completion
Accounts Statement, the disputed definitions played no part.
The Completion Accounts Statement
[30]
The Completion Accounts Statement was defined as:
"the statement of Actual Net Current Assets or Actual Net Current Liabilities, as
appropriate, prepared by the Warrantor's [ie the pursuer's] Accountants derived
from the Completion Accounts" (emphasis added.)
As is clear from the words highlighted, the Completion Accounts form the basis for the
Completion Accounts Statement. Moreover, the adjective "Actual" is at least suggestive that
the "Actual" NCA was the result arrived at following the process of adjustment to, and
agreement of, the Completion Accounts between the parties (a process the pursuer relies on
and which occurred between late 2019 and mid-2020). However, the first two defined terms
embedded within the definition of the Completion Accounts Statement, namely, of "Actual
Net Current Assets" or "Actual Net Current Liabilities", are themselves defined,
respectively as "the excess of Current Assets over the Current Liabilities" or "the excess of
Current Liabilities over Current Assets", in each case as "disclosed by the Completion
Accounts calculated on a debt free basis". Until one turns to the definitions of "Actual Net
Current Assets" and "Actual Net Current Liabilities", the natural expectation would be that
these are (like the Accounts and the Completion Accounts) inclusive of the NCA of both
companies. However, because the terms "Actual Net Current Assets" and "Actual Net
Current Liabilities" incorporated the disputed definitions, the NCA of ADHL fall out of
22
account, a change which is at the heart of the dispute between the parties. I turn to consider
the disputed definitions.
The disputed definitions: "Current Assets" and "Current Liabilities"
[31]
The "Current Assets" are defined as:
"cash at bank, stock, trade debtors, prepayments, accrued income and other debtors
in the normal course of trading of the Company" (emphasis added),
and "Current Liabilities are defined as:
"those amounts due to trade creditors, accruals, corporation tax, VAT and PAYE/NI
and other creditors in the normal course of trading of the Company" (emphasis
added).
The effect of the use of the words "the Company" is, prima facie, to confine current assets or
liabilities, as the case may be, to those of KPL, to the exclusion of ADHL's assets and
liabilities. This is the point where the parties join issue.
[32]
The pursuer contends that these definitions are to be construed as including the
assets and liabilities of both companies. He seeks to achieve this by reading in or implying
certain words (using the definition of "Current Assets" to illustrate this), namely:
1)
By adding the words "and the Subsidiary" (after the word "Company"), to
read:
"those amounts due to trade creditors, accruals, corporation tax, VAT and
PAYE/NI and other creditors in the normal course of trading of the Company
and the Subsidiary" , or
2)
by changing the word "Company" to the plural, "companies", to read:
"those amounts due to trade creditors, accruals, corporation tax, VAT and
PAYE/NI and other creditors in the normal course of trading of the
companies,", or
23
3)
by inserting the words "of each Group" in place of "the" where it appears
before "Company", to read:
"those amounts due to trade creditors, accruals, corporation tax, VAT and
PAYE/NI and other creditors in the normal course of trading of each of
Group Company".
If this cannot be achieved on the application of a purposive construction or by implication,
the pursuer seeks rectification to achieve one of these readings.
[33]
The reason the pursuer seeks this is because of the effect of these defined terms,
when incorporated into the defined terms of "Actual Net Current Assets" and "Actual Net
Current Liabilities", and which are themselves incorporated into the definition of the
Completion Accounts Statement. Spelling out each of these defined terms, the definition of
"Completion Accounts Statement" would read as follows:
""the statement of the excess of Current Assets ... of the Company over the Current
Liabilities... of the Company ... as disclosed in the Completion Accounts on a debt
free basis or the excess of Current Liabilities ....of the Company over the Current
Assets...of the Company... as disclosed in the Completion Accounts on a debt free
basis....derived from the Completion Accounts. (Emphasis added).
Considering the disputed definitions within the context of the SPA, there is a dissonance
between the use of the words "the Company" (in bold), which confine the assets and
liabilities to those of KPL, and the references to "the Completion Accounts" (underlined),
which definition included the assets and liabilities of both ADHL as well as those of "the
Company" (ie KPL).
[34]
There is another tension arising from the numerous references to "the Accounts of
both companies (and therefore necessarily including ADHL's NCA) and the use of those
Accounts to compile the Completion Accounts (again including the NCA of ADHL), on the
one hand, and the omission of the NCA of ADHL from the Completion Accounts Statement,
on the other.
24
[35]
I turn to consider parties' competing submissions on the principles of interpretation
to be applied.
The parties' competing positions as to the principles of interpretation which were
applicable
[36]
The cases the pursuer cited to vouch the principles of interpretation he relied on
included classic cases such as The Moorcock (1889) 14 PD 64, one of the trilogy of seminal
cases of Lord Hoffmann in the late 1990s (Investor's Compensation Scheme Ltd v West Bromwich
Building Society 1998 1 WLR 896 ("Investors Compensation"), the first consideration of that
case in Scotland by the First Division in Bank of Scotland v Dunedin Property Investment Co Ltd
1998 SC 657 ("Dunedin Property") and as subsequently considered by a differently
constituted First Division in Luminar Lava Ignite v Mama Group PLC [2010] CSIH 1, 2010 SC
310 ("Luminar Lava")), as well as the ongoing reformulation of those principles in several
Capita Insurance Services Ltd [2017 UKSC 24, [2017] AC 367 ("Wood")).
[37]
By reason of the focus of discussion in some cases on a rule of evidence to exclude
prior communings (eg Dunedin Property at p 665F, or Luminar Lava at para 41), the
interpretation of contracts might be understood as having a presumption favouring the
primacy of the words used to the exclusion of context; or, if it could be said that the meaning
of the words was clear, that was conclusive of the interpretative task on which the court was
engaged. I understood this to be, essentially, the position adopted by the defender, coupled
with its submission that in the absence of ambiguity or an alternative meaning, resort to the
background as the pursuer sought to do was impermissible.
25
[38]
In this case, the defender seeks to persuade the court that the pursuer's averments of
the surrounding circumstances are irrelevant and that the defender is entitled to decree de
plano. Its position is that the natural meaning of the words is clear; they admit of no
alternative reading and the disputed definitions should simply be given effect to. In making
that submission the Dean of Faculty, who appeared for the defender, founded strongly on
Global Port Services (Scotland) Limited v Global Energy (Holdings) Limited & Ors [2015] CSIH 42
("Global Port Services") at paragraphs 30 to 32, particularly the court's observation that, in the
absence of ambiguity or where the wording under consideration was not open to more than
one interpretation,
"it is not open to the court to construe it in a manner contrary to its natural meaning.
It must apply that meaning, even if the result is a commercial outcome which could
be considered to be improbable." (at paragraph 30).
The court concluded in that case that there was "no sufficient justification for the bargain to
be rewritten" (para 32).
[39]
Attractive though the simplicity of the defender's submission is, the principle that in
construing a contract the court may permissibly have regard to the surrounding
circumstances is long established in Scots law (see Inglis v Buttery & Co (1878) 5 R (HL) 87 per
Lord Ormidale (at pp 66 and 67) and per Lord Blackburn (at pp 106 and 107), cited with
approval in Dunedin Property) in order "to ascertain what a reasonable person, having all of
the background knowledge which would have been available to the parties, would have
understood them to be using the words in the contract to mean" (per Lord Hodge in Luminar
Lava at paragraph 41) or "to establish the parties knowledge of the circumstances with
reference to which they used the words in the contract" (per Lord President Rodger (as he
then was) in Dunedin Property at p 665F to G). Consideration of the surrounding
circumstances can also elucidate the commercial purpose of the transaction (see Lord Hodge
26
in Luminar Lava at para 42). Where the surrounding circumstances are considered for these
purposes, the exclusionary rule has no application. Indeed, for these purposes, the
permissible (or admissible) background which a party may invoke can include things said
and done during the process of negotiations (per Lord Rodger in Dunedin Property at
p 665G).
[40]
The respective approaches of the parties in this case brings into sharp focus the
different paradigms of "textualism" and "contextualism" Lord Hodge referred to in Wood (at
para 13) and "their occupation of the field" or, in this case, battlefield "of contractual
interpretation". The full passage of Lord Hodge's observations (at paras 9 to 13) repays
re-reading, but I quote only the last paragraph, in which he said:
"Textualism and contextualism are not conflicting paradigms in a battle for the
exclusive occupation of the field of contractual interpretation. Rather, the lawyer
and the judge, when interpreting any contract, can use them as tools to ascertain the
objective meaning of the language which the parties have chosen to express their
agreement. The extent to which each tool will assist the court in its task will vary
according to the circumstances of the particular agreement or agreements. Some
agreements may be successfully interpreted principally by textual analysis, for
example, because of their sophistication and complexity and because they have been
negotiated and prepared with the assistance of skilled professionals. The correct
interpretation of other contracts may be achieved by a greater emphasis on the
factual matrix, for example because of their informality, brevity or the absence of
skilled professional assistance. But negotiators of complex formal contracts may
often not achieve a logical and coherent text because of, for example, the conflicting
aims of the parties, failures of communication, differing drafting practices, or
deadlines which require parties to compromise in order to reach agreement. There
may often therefore be provisions in a detailed professionally drawn contract which
lack clarity and the lawyer or judge in interpreting such provisions may be
particularly helped by considering the factual matrix and the purpose of similar
provisions in contacts of the same type. The iterative process, of which Lord Mance
judge to ascertain the objective meaning of the disputed provisions." (Emphasis
added.)
At times the defender's approach in this case appeared to be that, if the terms to be
construed admitted of a clear meaning, that was effectively preclusive of the use of other
27
tools (as Lord Hodge described them, ibid) to assist the court in its essential task of
interpreting the contract or the disputed definitions under consideration.
[41]
In considering parties' competing submissions I bear in mind that the overarching
task of the court is "to ascertain the objective meaning of the language in which parties have
chosen to express their agreement" (per Lord Hodge in Wood at paragraph 13). The court's
approach to that fundamental task will naturally be informed by the approach taken by the
parties in the case before it. In a case where parties do not pray in aid surrounding
circumstances in the presentation of their cases, the court's focus will naturally be on the
words used, construed in accordance with the other provisions of the contract . Even on that
approach, the court may have regard to matters extrinsic to the deed, namely, the
underlying commercial purpose of the transaction (even if that commercial purpose is only a
"makeweight", per Lord Hope in Aberdeen (at para 22)), and which may assist a purposive
interpretation or help the court to discern between two competing readings.
[42]
In other cases, by contrast, parties may, as the pursuer does here, invoke a
substantial amount of the factual background. In such cases the court is likely to have
regard to those extrinsic matters in ascertaining the objective meaning of the parties'
contract. This is not judicial interventionism or the illegitimate protection of the
commercially feckless (see paras 21 to 22 of Aberdeen City), so much as the court's
responsiveness to the nature of the case and the arguments presented to it. Different cases
will naturally call for the use of different tools from the judicial toolkit Lord Hodge
described.
[43]
As will be apparent from paragraphs [7] to [17], above, the pursuer seeks to prove an
extensive body of factual material as forming the relevant context of the SPA. It respectfully
seems to me that the defender's submissions, and the cases it cites, do not engage with the
28
pursuer's primary case on interpretation. In a case where one party invokes the factual
matrix, it is no answer to ignore that or to seek to dismiss it under reference to an
exclusionary rule (eg about prior communings) which has no application.
[44]
Moreover, the case law also discloses examples of cases in which hard questions of
interpretation arise, even where the contracts have been drafted by professional advisers,
and which may only become apparent when the provisions come to be considered or
applied to an unprovided for circumstance. Two of the cases the pursuer cited, Multi-Link
Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47, 2011 SC 53 ("Multi-
("Aberdeen City Council"), illustrate this. In Multi-Link, the issue was whether the "full
market value" of the land the tenant sought to buy under an option was valued as
agricultural land or taking into account its development potential for housing. Lord Hope
DPSC (giving the opinion of the Supreme Court) expressly acknowledged that the
contractual provisions at issue (the assumptions and disregards in an options clause) could
not be reconciled to resolve the dispute between the parties, and the dispute had to be
resolved having regard to the objective commercial background (see para 22).
[45]
In Aberdeen City Council the dispute was whether the basis of calculation of an uplift
due to the disposing council by the purchaser developer required to be by reference to an
arms-length disposal (as the council contended) or could be on the basis of a lower non-arms
-length disposal to a related company of the developer (as the developer contended). The
problem was that the parties' contract made no express provision governing that question
(see para 18). Lord Hope (DPCS) noted that there were "well-understood limits to the
extent to which the court can depart from the express terms of the agreement that has been
29
reduced to writing to solve a problem of this kind" (at para 18, emphasis added). "Would
the court", he asked,
"be transgressing these limits if it were to give effect to the case for the respondent in
the face of the appellants' submission that the contract should be given effect
according to its terms?" (Emphasis added.)
After considering the disputed provisions in light of the known context (at paras 19 to 21),
Lord Hope answered the rhetorical question he posed in the negative, and found in favour
of the respondents. In other words, the court could not resolve the dispute by giving effect
to the contract "according to its terms", but could only be resolved by resort to the context.
"The context shows that the intention of the parties must be taken to have been that
the base figure for the calculation of the uplift was to be the open market value of the
subjects at the date of the event that triggered the obligation. In other words, it can
be assumed that this is what the parties would have said if they had been asked
about it at the time when the missives were entered into.... The only question is
whether effect can be given to this intention without undue violence to the words
they actually used in their agreement. For the reason I have given, I would hold
that the words which they used do not prevent it being given effect to in the way I
have indicated." (Emphasis added.)
By contrast, Lord Clarke, who delivered the only other judgement, noted that the
construction being upheld was one that was "not easy to conclude, as a matter of the
language" used by the parties. Nor, indeed, was he persuaded that the parties intended that
the language used could have that meaning (see para 31 and 32). In short, the limitations to
the extent to which a court may "depart from the express terms" as a matter of
interpretation were, in Lord Clarke's view, breached and, therefore, precluded giving effect
to parties' intention by the route of interpretation. Rather, Lord Clarke regarded it as a case
in which,
"notwithstanding the language used, the parties must have intended that, in the
event of a sale, the appellants would pay the respondents the appropriate share of
the proceeds of the sale on the assumption that the on sale was at market price".
(Emphasis added).
30
In his view, the case he was considering therefore raised a different issue than that
addressed by cases like Rainy Sky, where there were two available constructions of the
contractual provisions. While he agreed with the result Lord Hope had reached,
Lord Clarke preferred to reach it by a different route, namely by implication of a term:
"Lord Hope says at para 20 that there would be no difficulty in implying a term to
the effect that, in the event of a sale which was not at arm's length in the open
market, an open market valuation should be used to arrive at the base figure for the
calculation of the profit share, I agree. If the officious bystander had been asked
whether such a term should be implied he or she would have said `of course'. Put
another way, such a term is necessary to make the contract work or to give effect to
business efficacy, I would prefer to resolve this appeal by holding that such a term
should be implied rather than by a process of interpretation. The result is of course
the same". (Emphasis added.)
The case of Aberdeen City Council is also instructive, because it demonstrates that judicial
views may differ as to whether the dispute is resolved as one of interpretation (per
Lord Hope) or by implication (per Lord Clarke). Indeed, the fact that the other four justices
agreed with both Lords Hope and Clarke notwithstanding the divergence in their
approaches illustrates that more than one tool in the judicial toolkit might be appropriate,
and that the use of one does not necessarily preclude another.
The purpose of the SPA and the provisions giving effect to the seller's obligations
[46]
In light of the cases discussed, I turn first to consider the overall purpose of the SPA,
which was to effect the transfer of the shares in KPL (as the parent company of ADHL) in
return for payment of "the Consideration" (defined as "made in accordance with 3.1 and
subject to the adjustments in clause 3.3" and summarised at para [23], above). The SPA
contained further provisions in order to effect the transfer of the underlying assets of both
companies which were used to conduct the pharmacy business carried on by the Group
(defined as "the Business" in the SPA). Apart from the definition of "Current Assets", in
31
every other instance in the SPA, the provisions giving practical effect to completion include
both companies. This is clear, for example, from the definitions of "Properties" (which
include the three premises used by the companies (set out in part 1 of schedule 3 to the
SPA)) and "Property Documents", of "Intellectual Property" read together with "Group
Intellectual Property", and of "IT Systems" and "Proprietary Software".
[47]
The obligations imposed on the seller, and the associated warranties he granted, also
relate to both companies. So, for example, upon completion, the pursuer was obliged to
deliver the following:
1)
Resignations of all directors from the Group (meaning both companies)
(clause 4.2.2),
2)
All of the books, records, cheque books and statutory books and minute
books of "each Group Company" (clause 4.2.4),
3)
The Property Documents (which are for the Properties for both companies)
(clause 4.2.6),
4)
All books of accounts and records as to customers and/or suppliers and other
records and all insurance policies in any way relating to or concerning the Business"
(clause 4.2.7),
5)
Releases of each Group Company and its officers and employees from any
liability which may be owed to the pursuer by any Group Company (clause 4.2.8),
6)
Statements confirming the cash balances of "the Company's/Group's bank
account(s)" as at the date of the SPA and adjusted to reflect the balances on the day
preceding settlement (clause 4.2.10), and
7)
Mandates of each Group Company to its bankers (clause 4.2.11).
32
There was further provision for the release of any guarantee or indemnity granted by either
Group Company, coupled with a personal indemnity granted by the pursuer for any failure
to secure such releases (clause 4.3). Other provisions provided for protection of the goodwill
of both companies (clause 6) and the non-disclosure by the pursuer of Confidential
Information (defined as that relating to "the Business [ie that carried on by the Group] or the
technology, customers or financial or other affairs of the Group..." (clause 7).
[48]
Moreover, the associated warranties (eg governing the Properties, as well as TUPE
transfers, pension obligations etc. (see clause 5.1 and schedule 4 and part 2 of schedule 5)
and the specific indemnities (see clause 8) relate to both companies, as do the tax covenants
(clause 4.7 and part 1 of schedule 5). For the purposes of the latter, for example, the liability
of the pursuer to assume responsibility for any latent tax liability (in clause 2 of part 1 of
schedule 5) is expressed as liability extending to both Group companies. The extent of that
liability is measured against the "Relevant Accounts" (as defined at the beginning of part 1
of schedule 5) and which incorporates the definition of "the Accounts" from clause 1.1 of the
SPA, namely:
"the unaudited financial statements of each Group Company comprising the
balance sheet, profit and loss account and cash flow statement of the Company, the
Group and the Subsidiary together with the notes thereon and the directors' report
as at and for the financial period ended on the Last Accounts Date". (Emphasis
added.)
All of these obligations related to both companies.
Justification for use of the disputed definitions in the Completion Accounts Statement
[49]
As noted above, the assets and liabilities of both companies were included in the
Accounts and in the Completion Accounts. Given the linguistic overlap between the terms
33
"Completion Accounts" and "Completion Accounts Statement", the latter being the
statement "derived from the Completion Accounts" (per the definition), one would have
expected a similar overlap of their content. The language used, that the Completion
Accounts Statement was the statement of "Actual Net Current Assets" and "Actual Net
Current Liabilities", would reinforce that expectation. Giving "actual" its ordinary or natural
meaning would betoken the specific figures actually ascertained, as adjusted and agreed
between the parties in the Completion Accounts. The result of the exclusion of ADHL's
assets from the "actual" net current assets sits uneasily with the adjective "actual".
However, the incorporation of the disputed definitions into the definitions of "Actual Net
Current Assets" and "Actual Net Current Liabilities" results in the omission of ADHL's net
current assets and liabilities. Ostensibly, to the extent that the Completion Accounts
included the NCA of both companies, the preparation and adjustment of these is
substantially redundant, if the Completion Accounts Statement omits those of ADHL. That
omission is given effect to at the final stage, involving the adjustment to the Initial Deferred
Consideration (as provided for in paragraph 2 of Schedule 8 ("Adjustment to the
Consideration")), noted above (at para [24]), and which is made on the basis of the
Completion Accounts Statement.
[50]
The defender sought to explain the otherwise redundant references to ADHL's NCA
throughout the SPA as enabling the defender to know what it was acquiring or to test the
scope of the warranties. I am not persuaded by this submission, given the magntitude of the
redundancies and the other features of the SPA that I have noted. In respect of the exclusion
of ADHL's NCA from the Completion Accounts Statement made pursuant to paragraphs 2
of Schedule 8, as I understood it, the only explanation the Dean of Faculty could offer for
that was to protect the seller from a catastrophic decline of value of ADHL's asset position to
34
one of balance sheet insolvency (see paragraph 9 of the defender's note of ar gument). On
this scenario, the "benefit" to the seller was the exclusion of ADHL's net current liabilities,
thereby excluding the risk of a downward adjustment to the Initial Deferred Consideration.
While, in the abstract, that reflects an available reading giving effect to the disputed
definitions according to their terms, the Dean of Faculty did not seek to relate that to the
shared background knowledge of the parties that, as disclosed in the table of net current
assets produced a few days before settlement, ADHL was asset-rich to the tune of £665,000
(see para [13(1)], above) and which, on the pursuer's averments of the structure of
acquisitions in this sector, was to be reflected in a specific and identifiable element of the
overall consideration.
[51]
I return to the effects of the parties' competing interpretations. On the pursuer's
analysis, the defender's interpretation would result in the defender acquiring the net current
assets of the larger of the two companies for no consideration. The defender resists this, not
by advancing an interpretation that belies the pursuer's analysis, but by suggesting that
ADHL's net current assets might have been accommodated in one of the other elements of
the consideration. The difficulty with that submission is that it invites the court to speculate
on a matter for which evidence is required, and it is inconsistent with the relative constancy
of the different elements of the consideration prefigured in the heads of agreement and the
elements comprising the consideration which have found their way into the SPA.
[52]
I am not persuaded that the approach and interpretation urged by the defender is
well-founded. Drafting errors in commercial contracts rarely announce themselves as such,
but become patent upon a consideration of the operation of the term or terms in question
within the context of the contract as a whole (and which, as here, may expose a tension or an
anomaly), or as those contractual provisions come to be applied in a particular set of
35
circumstances. It is in such cases that consideration of the commercial purpose of the
contract or its factual matrix may assist the court in its essential task of ascertaining the
intention of the parties. As Lord Hope DPCS put it in Multi-Link (where he had
acknowledged that it was not possible to reconcile the terms in question (the assumptions
and disregards): "In this situation the solution must be found by recognising the poor
quality of the drafting and trying to give a sensible meaning to the clause as a whole which
takes account of the factual background known to both parties at the time when the lease
was entered into" (see paragraph 19). In my view, having regard to the tensions and
redundancies generated by the disputed definitions I have noted above, to the effect those
definitions lead to, and to the inconsistency of that outcome with the commercial purpose of
the SPA, I am persuaded that the pursuer has pled a relevant case and that the court is faced
with a patent mistake in the drafting subject, of course to proof of the relevant context. It
falls into the category of cases described by Lord Hodge (at the end of para 13 of Wood)
where, notwithstanding the assistance of professional drafters, the provisions of the SPA
governing the adjustment to the Initial Deferred Consideration (in particular, the disputed
definitions) are such that "lawyer or judge in interpreting such provisions may be
particularly helped by considering the factual matrix and the purpose of similar provisions
in contracts of the same type" (ibid). As most of this factual matrix is not admitted or agreed,
a proof on the pursuer's averments must follow. Given that the factual matrix is contested,
it suffices for the court to consider whether the pursuer has pled a relevant case on any of
the three legal grounds of interpretation, implication or rectification on which he relies.
36
The pursuer's legal grounds of interpretation, which failing implication
[53]
I consider the pursuer's cases based on interpretation and implication together. I do
so because the pursuer founds on essentially the same factual basis in support of both legal
grounds and also because, as the difference already noted between the approaches of
Lord Hodge and Lord Clarke in Woods illustrates, the boundary between interpretation and
implication may be fluid and difficult to define with any certainty. Indeed, in light of the
concurrence of the other four justices in Wood with both Lord Hodge and Lord Clarke, it
may not be necessary in all cases to draw a bright line between interpretation and
implication. In any event, in this case it would be unwise to try to do so without the benefit
of evidence.
[54]
In my view, the pursuer has pled a sufficient and relevant basis to justify inquiry into
the factual matrix it seeks to rely on for its first two grounds. First, the pursuer has referred
to the practice of how agreements in this sector are structured (one of the factors identified
in the case law as relevant), and which was to agree a consideration, but to make separate
provision for the valuation of the net current assets of the business to be acquired. The
pursuer is entitled to seek to prove that averment. At debate, however, this averment is
taken pro veritate. A construction of the SPA which is radically inconsistent with that
practice because it results in the exclusion of the major portion of the NCA - is prima facie
inconsistent with, or even frustrates, the commercial purpose of the SPA. The Dean of
Faculty suggested that it might have been the case that the defender's payment for ADHL's
NCA were covered in some other element of the consideration. As already observed, that
can only be a matter of speculation at this stage and is a further justification for allowing a
proof. Other elements of the factual matrix the pursuer identifies may be seen as militating
against that: the fact that the overall structure of the consideration (into four tranches, with
37
the separate calculation of the NCA of the business) remained essentially the same as
between the heads of agreement and the SPA; the strong asset position of ADHL and the
fact that it was the holder of the majority of the business' net current assets (including very
substantial cash balances similar in magnitude to the amount of the Initial Deferred
Consideration to be paid); the fact that there was no adjustment to the other elements of the
consideration to counterbalance the omission of ADHL's NCA from the Initial Deferred
Consideration; or the oddity of stipulating for payment of Initial Deferred Consideration (as
a payment to account) in an amount that is n early double the NCA of KPL and which
therefore necessarily entails a repayment by the seller (the pursuer) to the purchaser.
[55]
In holding that the pursuer has pled a relevant case, I bear in mind the observations
in the case law that the court must of course guard against regretful hindsight by a party
who may have made a bad bargain, and it must not lose sight of the possibility that a
provision may have been altered to reflect a compromise in the negotiations (see Wood at
paragraph 11). Returning to the Completion Accounts Statement, while the adjustment
provision in paragraph 2 of Schedule 8 anticipated all possible theoretical outcomes, on the
matters the pursuer avers (including about the usual structure of agreements in this sector)
and as to the state of knowledge of the parties, the pursuer has relevantly put in issue the
improbability that parties would have agreed that the NCA of the larger of the two
companies was to be left wholly out of account. As Lord Hodge framed this issue (in
Luminar Lava at paragraph 43), if an interpretation of the contract frustrates the commercial
purpose, "the court would prefer an alternative interpretation". The pursuer has offered an
alternative interpretation, which in my view is an available one. In other words, in my view,
the pursuer has averred a relevant case which, if his averments are proved, could entitle the
court to draw the conclusion that a literal construction of the SPA did not give effect to the
38
parties' intention, objectively ascertained in light of the parties' shared knowledge and
having regard to the commercial purpose of the SPA; and that the pursuer's alternative
interpretation is an available one "without", as Lord Hope put it in Multi-Link (at
paragraph 21), "doing undue violence to the words ...actually used" in the SPA and (if the
factual matrix is established) is to be preferred.
[56]
For completeness I should note that the pursuer advanced a discrete argument based
on the opening words of clause 1.1. That clause contained the common proviso that the
defined terms applied "unless the context otherwise requires". The pursuer contended that,
here, the context otherwise required the disputed definitions to be interpreted differently.
The defender's reply was that that proviso could not be used to displace the defined term in
the definition itself (the disputed definitions only appear in the definitions in clause 1.1 and
nowhere else in the SPA). In my view, there is no limit to the way that a drafting error may
manifest itself in a complex commercial contract. Had it been necessary to determine this
issue, I would have regarded the features of the SPA already noted to have been sufficient to
enable the pursuer to rely on the proviso, notwithstanding that the effect would be to dis-
apply the definition itself.
[57]
Putting the issue between the parties in a manner consistent with a case of
implication, if the officious bystander had asked the parties whether it was their intention
that the NCA of ADHL were to be omitted from the defined terms "Current Assets" and
Current Liabilities" and therefore omitted from the Completion Accounts Statement, the
pursuer has averred a relevant basis upon which, if his averments are proved, a court may
conclude that the parties would have answered that question in the negative.
[58]
For these reasons, I find that the pursuer has pled a relevant case for inquiry based
on his first two legal grounds.
39
The pursuer's case of rectification
[59]
The pursuer needs only to establish that he has a relevant case for any one of the
three legal grounds. In light of my decision on his first two grounds, I can deal with his
third legal ground, of rectification, without setting out all of the authorities parties produced
(including in the supplementary bundle). In any event, other than to agree the terms of the
statutory provisions, the parties were unable to agree the principle or principles derived
from the case law informing the court's exercise of the statutory power. Much of the
discussion in the cases cited concerned whether the proper approach to be taken to an
uncommunicated subjective change of intention by one party, at least in circumstances
where reliance was placed on evidence of a "common continuing intention" derived from an
earlier non-binding agreement (which is sufficient to ground an action of rectification, for
the reasons explained by Lord Hoffmann in Chartbrook Ltd at paragraph 60 and applied by
Lord Hodge in Patersons of Greenoakhill Ltd v Biffa Waste Services Ltd 2013 SLT 929 at
paragraph 38), rather than an antecedent agreement, was objective or subjective. Lord Tyre
favoured the latter (see Briggs of Burton Plc v Doosan Babcock Ltd [2020] CSOH 100 ("Briggs")
at paragraph 62), whereas Lord Reed (sitting in the Outer House) provisionally favoured the
latter but reserved his opinion (see Macdonald Estates Plc v Regenesis (2005) Dunfermline Ltd
the present case. While there was a superficial similarity on the facts of Briggs (on which the
defender relied), because the change of intention was reflected in a draft which preceded the
conclusion of the contract in question, I did not understand the parties (or, more
particularly, the defender) to contend that there was such a change of intention on its part in
this case. There was no suggestion of this in the two paragraphs of the defender's note of
40
argument addressing rectification. Nor was this the position adopted in its submissions or
its pleadings. Had this been the defender's position, some averment would have been
necessary, not least because it would be likely that the court would require to hear evidence
on that matter including, potentially, the communicated statements and conduct of the
defender's professional advisers (see paragraphs 42 to 43 of Patersons). Moreover, where
there has been a mistake in the expression of the parties' agreement (eg as identified by
Lord Hodge in Patersons at paragraph 84, after proof), that necessarily precludes an
argument that the agreement correctly expresses the parties' agreement even if embodying
an uncommunicated change of position.
[60]
Turning therefore to the statutory requirements: A party seeking rectification must
satisfy the court that "a document intended to express or give effect to an agreement fails to
express accurately the common intention of the parties to the agreement at the date when it
was made" and, if so satisfied, the court may order the document to be rectified "in any
manner that it may specify in order to give effect to that intention": section 8(1)(a) of the law
Reform (Miscellaneous Provisions) (Scotland) Act 1985 ("the 1985 Act").
[61]
In the event that I had not been with the pursuer on his first two grounds, I find that
he has established a relevant ground for rectification. I have already noted above the factors
the pursuer has identified from the factual context preceding the SPA and from the non-
binding heads of agreement to the effect that the NCA of both companies was to be included
in the Initial Deferred Consideration. Lord Hoffman's observations in Chartbrook Ltd v
prior consensus on which the rectification is premised may be based wholly or in part on
oral exchanges or conduct, is apposite to this case. The pursuer has detailed averments
about the parties' conduct following the SPA, in particular, the 5 or 6 month period during
41
which the parties and their accountants went back and forth on the detail of the Completion
Accounts without any challenge by the defender to the inclusion of ADHL's NCA. As
Lord Hodge identified in Patersons (at paragraph 43), conduct post-dating the conclusion of
the agreement may "cast light on the parties' intention when they entered into the contract".
On the background the pursuer sets out, he offers to prove that at no stage, prior to receipt
of the purported notification, had the defender or anyone on its behalf ever notified any
such dissatisfaction with the Completion Accounts or Completion Accounts Statement, or
any drafts thereof by reason of the inclusion of the assets or liabilities of ADHL. At no such
stage had the defender or anyone on its behalf ever asserted or even suggested that the
current assets and liabilities of ADHL were to be excluded from the assessment of, and
payment for, ADHL's NCA under the SPA. I have already noted the pursuer's position that
the effect of the disputed definitions is wholly to omit ADHL's actual net current assets ( it
was not balance sheet insolvent) from the Completion Accounts Statement. That
distinguishes this case from those where there was a seller's regret, as it were, in the price
achieved: here, if the defender's interpretation were given effect, there was no consideration
paid to the pursuer in exchange for the transfer of ADHL's substantial assets to the
defender. That is suggestive of the kind of "arbitrary, irrational or commercially nonsensical
outcome" identified by Lord Hodge (in Pattersons at paragraph 16) as some of the indicia of a
mistake having been made in the translation of the parties' agreement into the final contract
terms, and which is susceptible to rectification.
[62]
If, throughout the 6 month period during which the Completion Accounts and the
Completion Accounts Statement were under consideration, the defender or its professional
advisers had adopted or supported the position which the defender now adopts, it would
ostensibly be a surprising dereliction not to have immediately pointed out the (on its
42
approach) egregious misreading of the SPA on the part of the pursuer in including ADHL's
NCA. There is nothing in the material presented to suggest that the defender's professional
advisors had proffered such advice and which the defender disregarded. Rather, the long
period during which the adjustment of figures in the Completion Accounts and the
Completion Accounts Statement appeared to be premised on the basis that the NCA of both
companies was encompassed in the Initial Deferred Consideration may, if established,
provide compelling evidence as to the parties' true agreement, justifying rectification of the
SPA, as the pursuer seeks. The pursuer avers that the parties agreed that if the defender
were satisfied with the calculation of the NCA (which then included those of ADHL), the
defender would pay the Initial Deferred Consideration (defined as a "payment to account")
to the pursuer a few days after the SPA was entered into. That payment was duly made,
and in an amount that was nearly double the amount of KPL's own NCA. This may be a
significant adminicle of evidence in respect of the parties' conduct, and by inference their
common intention, at the time of settlement.
[63]
Again, however, whether the pursuer is entitled to rectification can only be
determined after proof. In my view, the pursuer has made ample relevant averments of the
parties' conduct which, when coupled with the heads of agreement, are sufficient to entitle
him to proof of his averments on this legal ground as well. For completeness, I should
record that, for reasons explained by Lord Reed in Macdonald (at paragraph 178), I accept as
patently correct that an entire agreements clause (as founded on by the defender in this case)
does not preclude the remedy of rectification.
[64]
Finally, I am of the view that, having found that the pursuer has pled a relevant case
for all three of the legal grounds founded upon, it is appropriate to allow him a proof on all
three grounds. It might be suggested that the remedy of rectification is inconsistent with
43
interpretation (and implication): so, for example, if the SPA is capable of interpretation,
rectification would be unnecessary or, conversely, if a deed requires to rectified, that
presumes that the same result cannot be reached as a matter of interpretation. In also
allowing the pursuer a proof on this matter, I bear in mind that views may also differ in a
particular case as to where the boundary lies between competent and inadmissible evidence.
Compare, for example, the approach of Lord President Rodger in Dunedin Properties at 665F
to G (quoted above) and Lord Kirkwood's comments in the same case (and founded on by
the defender in this case), that in Lord Kirkwood's view some of the evidence led by the
Bank at proof "went rather beyond what was properly admissible as evidence of
surrounding circumstances" (at 671A to B). (On the other hand, Lord Kirkwood
acknowledged (at 670A to B) that, had he had to construe the disputed condition in
isolation, he would have found it difficult to have supported the construction actually
accepted by the court upon a consideration of the surrounding circumstances.) Some of the
evidence the pursuer may seek to prove to support its case of interpretation might be held to
be inadmissible for such a case; however, that same evidence might nonetheless be relevant
for a case of rectification. Having found that the pursuer has averred a relevant case under
the three legal grounds he seeks to establish, and having regard to the fact that essentially
the same factual basis is pled, it is appropriate that the pursuer's whole case goes to proof.
Decision
[65]
It follows that I will allow a proof on all averments in the principal action and will
dismiss the counterclaim. I will reserve all question of expenses meantime.
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