JUDGMENT
Aberdeen City Council (Respondent) v Stewart
Milne Group Limited (Appellant) (Scotland)
before
Lord Hope, Deputy President
Lady Hale
Lord Mance
Lord Kerr
Lord Clarke
JUDGMENT GIVEN ON
7 December 2011
Heard on 10 November 2011
Appellant Respondent
R Craig Connal QC Craig Sandison QC
Jim Cormack David Thomson
(Instructed by McGrigors
LLP)
(Instructed by Brodies
LLP)
LORD HOPE (WITH WHOM LADY HALE, LORD MANCE AND LORD
KERR AGREE)
1. The issue in this appeal raises what the courts below have correctly
described as a short point of construction. It relates to a contract which the
appellants, Stewart Milne Group Limited, entered into with the respondents,
Aberdeen City Council, for the purchase of land with a view to its development to
form a business park or for industrial development. The subjects comprised an area
of about 11 acres lying to the north of the B9119 public road at Westhill,
Aberdeen. The purchase price was £365,000, but it was subject to a possible uplift
in the events described in clause 9 of the missives. In general terms this was to be
payable if the appellants issued a notice indicating their wish to buy out the
respondents’ share of the open market value of the land with the benefit of all
necessary consents and agreements for its development, or if the appellants wished
to dispose of the whole or part of the subjects by sale or by a lease for a term of
more than 25 years.
2. The negotiations which were recorded in the missive letters between the
parties were conducted over a period of several years. They began with a missive
letter by the appellants’ solicitors dated 6 November 2001 in which all the terms
relevant to the present dispute are set out. By missive letter dated 8 November
2001 the respondents accepted the appellants’ offer on the terms and conditions
contained in the letter of 6 November 2001 and held the bargain as concluded. But
further negotiations then followed, the missives were re-opened and the bargain
was not finally concluded until 26 August 2004. The appellants took title to the
subjects as heritable proprietors. A development of the kind contemplated by the
missives was then carried out.
3. On 4 October 2006 the appellants transferred their title to the subjects to
another company within the Stewart Milne Group called Stewart Milne (Westhill)
Limited (“Westhill”). On 13 December 2006 their solicitors wrote to the
respondents stating that they had disposed of the subjects to Westhill by way of
sale. Their contention was that the effect of this transaction was to trigger the
obligation to pay the uplift to the purchase price that the missives provided for.
They contended also that the gross sale proceeds for the purposes of the
calculation of the uplift that the missives provided for must be taken to be that part
of the total consideration paid by Westhill for the whole of the development land
that was attributable to the subjects, which was £483,020. As this was less than the
allowable costs which were to be deducted from the sale price in terms of the
missives, the result was that no uplift was payable to the respondents. The
respondents refused to accept that the transaction had this effect, as they
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maintained that the open market value of the subjects was greatly in excess of the
consideration paid by Westhill.
4. The parties were unable to agree on this matter, so the respondents raised an
action in the Court of Session in which they concluded for declarator that any
further sum due to them in terms of the missives falls to be calculated by reference
to the open market value of the subjects referred to in the contract as at the date of
their sale by the appellants to Westhill, less the allowable costs as defined in the
schedule to the missive letter of 6 November 2001. The appellants’ defence to this
action was that the contract between the parties, on its true construction, did not
provide that any additional payment under clause 9 of the missives should, in the
case of a sale of the subjects, be calculated on the basis of their open market value.
5. It was agreed that the matter was capable of being resolved by debate. The
debate took place before the Lord Ordinary, Lord Glennie, in May 2009. On 3
June 2009 he found in favour of the respondents and granted decree of declarator
in terms of the conclusion of the summons. The appellants reclaimed and the
reclaiming motion was heard by an Extra Division (Lord Clarke, Lord Hardie and
Lord Drummond Young) on 6 July 2010. On 14 October 2010 the Extra Division
refused the reclaiming motion and adhered to the Lord Ordinary’s interlocutor.
The appellants have now appealed to this court. Their solicitor advocate, Mr Craig
Connal QC, invited us to recall the Extra Division’s interlocutor and to dismiss the
action.
The contractual provisions
6. The appellants were referred to in the missive letter of 6 November 2001 as
“the Purchasers”. The respondents were referred to as “the Sellers”. In clause 2 it
was stated that the purchase price of £365,000 payable for the subjects on the date
of entry was subject to any uplift payable in terms of clause 9. Clause 4 contained
a list of conditions which were described as conditions suspensive of the missives.
They provided for a site and soil survey report and an environmental audit on the
subjects, the obtaining of outline planning permission and sewage connection
consent and water authority consent for the construction and subsequent operation
of the development on the subjects. The opening paragraph of clause 9, which was
headed “Uplift”, was in these terms:
“In addition to the purchase price detailed in Clause 2 hereof, the
Purchasers and the Sellers have agreed that the Sellers shall be
entitled to a further payment (‘the Profit Share’) upon the Purchasers
purifying the suspensive conditions contained in Clause 4 hereof and
issuing a notice to the Sellers intimating to the Sellers that the
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Purchasers wish to purchase the relevant part of the profit-share as
defined in the Schedule to which the Sellers are entitled. The Sellers’
entitlement to the relevant part of the profit-share will also be
triggered by the Purchasers disposing either by selling or by granting
a lease of the whole or part of the Subjects.”
7. Various expressions used in clause 9 were defined in a Schedule to the
missives. They included a definition of “the Allowable Costs”. The definition,
which does not need to be quoted in full, comprised various costs that were likely
to be incurred by the appellants with a view to obtaining planning permission and
all other necessary consents in connection with the development and servicing of
the subjects. Among the other definitions were the following:
“‘Estimated Profit’ means the Open Market Valuation under
deduction of the Allowable Costs.
‘Gross Sale Proceeds’ means the aggregate of the sale proceeds of
the Subjects received by the Purchasers for the Subjects.
‘lease’ means a lease for a term of more than 25 years.
‘Lease Value’ means the open market capital valuation of the
Subjects or that part of the Subjects to be leased having regard to the
terms of the lease but assuming that the lease is an open market
transaction carried out at arms length with no consideration or other
incentives being paid by either party other than the rent or, in the
case of a lease granted in consideration of a grassum, the grassum…
‘Open Market Valuation’ means the open market value of the
Subjects or relevant part thereof as specified in the notice at the date
of the notice served in accordance with clause 9.5, with the benefit of
and subject to the necessary consents and all agreements entered into
with the local Planning Road [sic], Water or other Authority or
service provider relative to the Subjects and making due and proper
allowance for the costs of remedying any adverse ground conditions,
any off site infrastructure or planning gain contributions to be made
in terms of any of the necessary consents or the aftermentioned
agreements and the costs of completing any access road within or
serving the Subjects to adoptable standard.
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‘Profit’ means the Gross Sale Proceeds under deduction of the
Development Costs.
‘the Profit Share’ means 40% of 80% of the estimated profit or gross
sale proceeds or lease value less the Allowable Costs as herein
defined.”
8. By clause 9.1 the appellants were to be obliged to keep accounts in respect
of the Allowable Costs, which the respondents were to be entitled to examine at
any time. Clause 9.2 provided that the profit share was to be calculated in the first
instance by the appellants, and that in the event of the respondents disputing their
calculations the matter was to be referred to an independent chartered surveyor for
his determination. Clause 9.3 provided for what was to happen if the appellants
served notice in respect of a part only of the subjects or if they sold or leased part
only of them after servicing. Clause 9.4 was in these terms:
“The relevant part of the profit share due to the Sellers shall be paid
by the Purchasers to the Sellers within 14 days of it being calculated
in accordance with clause 9.2 hereof or in the event of a sale 14 days
after receipt of the gross sale proceeds by the Purchasers.”
Clause 9.5 provided that the appellants were to be entitled to serve a notice to the
respondents intimating that they wished to purchase the profit share at any time
after purification of the suspensive conditions in clause 4. Clause 9.6 provided that
in the event of the respondents disputing the appellants’ Estimated Profit or the
Lease Value the matter was to be referred, failing agreement between the parties,
to an independent chartered surveyor for his determination. Clause 9.7 was in these
terms:
“For the avoidance of doubt in the event of all or part of the Profit
Share being paid following upon the grant of a lease of all or part of
the Subjects no further Profit Share shall be payable upon the sale of
that part of the Subjects in respect of which the Profit Share has
already been paid.”
9. It should be noted that, quite apart from the problem that has given rise to
the present dispute, the drafting of these provisions is not without its defects. The
definitions of the expressions “Estimated Profit” and “the Profit Share” in the
Schedule, if they were to be taken literally, would require the Allowable Costs to
be deducted twice in arriving at the Profit Share in the event of the amount that it
refers to having to be calculated by means of an open market valuation. That
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plainly cannot be right. So one of those two directions must be disregarded to
make sense of the agreement. The definitions of “Lease Value” and “Open Market
Valuation” both direct attention to the capital value of the subjects in the open
market. But they differ in their description of the assumptions on which these
valuations are to be arrived at. The date as at which the valuation in the open
market is to be arrived at is provided for in the definition of “Open Market
Valuation”. But a direction on this point is absent in the case of the capital
valuation that is to be undertaken in the case of the Lease Value. These infelicities
appear to be due more to untidy drafting than to differences in matters of
substance.
10. I mention these drafting points because they may make it easier to attribute
the problem that we have to deal with to oversight rather than to a deliberate
choice when the agreement was being drafted.
The issues
11. The appellants’ primary case is that the effect of their sale of the subjects to
Westfield is to trigger clause 9 of the missives, with the result that their obligation
is to pay to the respondents 40% of 80% of the gross sale proceeds less the
Allowable Costs. They submit that the language of the missives is clear. The
definition of the Profit Share, read together with the opening paragraph of clause 9
(see para 6, above), contemplates three different situations in which an uplift may
be payable: (1) a buy-out of the respondent’s interest in the development value of
the subjects, (2) a disposal by way of sale; and (3) a disposal by way of a lease for
more than 25 years. Each of these alternatives provides its own base figure for the
calculation of the Profit Share: (1) the estimated profit in the case of buy-out; (2)
the gross sale proceeds in the case of a sale; and (3) the lease value in the case of a
lease.
12. The respondents’ reply to this argument is that the agreement does not
require the sale proceeds to be used as the basis of calculation in all circumstances
where the subjects were disposed of by way of sale. The commercial purpose of
the agreement was to enable the respondents to participate in a share of the
development value of the subjects. This was to be arrived at by assuming an open
market transaction carried out at arms length, whatever the event was that gave rise
to the respondents’ right to a share of the uplift. Effect should be given to that
purpose when construing the words of the agreement.
13. Mr Connal sought leave to present an entirely different argument which he
had attempted to raise in the Inner House at a late stage but had been prevented
from doing so. This was because on 9 June 2010 he was refused permission to add
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this argument to his grounds of appeal, presumably because it was inconsistent
with the case that was presented in his pleadings, and was then on 25 June 2010
refused leave to amend his pleadings in respect that, as the interlocutor of that date
puts it, his motion to do this came too late. The point which he wished to argue
was that any commercial absurdity could be addressed by holding that the transfer
of the subjects to Westhill did not fall within the definition of a “sale” for the
purposes of the obligation to make payment to the respondents of an uplift. In
other words, the word “disposal” in the opening words of clause 9 should be read
as referring to market value at arms length to a third party rather than to an
associated company for a notional value as had happened in this case.
14. For the respondents Mr Sandison QC submitted that the appellants should
not be allowed to present this argument as it had not been heard by the Inner
House and it did not form part of the appellants’ written case in this court. But,
very properly, he conceded that he had received notice of it and that it did not raise
any new matters of fact which would require to be investigated before he was in
position to reply to it. An appeal under section 40 of the Court of Session Act 1988
has the effect of submitting all the prior interlocutors in the cause to the review of
this court: section 40(4). But I do not think that it is either necessary or appropriate
to become involved in the niceties of procedure. The overriding aim should be to
do substantial justice as between the parties. This aim is best served by allowing
the further argument about how the contract should be construed to be presented. It
is, after all, just another way of trying to make sense of the words used in the
missives in the light of admitted facts.
Discussion
15. It is helpful, at the outset, to take an overall view of what the agreement
appears to have had in mind in the provisions that it sets out for the payment to the
respondents of a share of the uplift. Three events are identified as triggers to bring
the appellants’ obligation into effect. They are set out in the opening words of
clause 9 and are picked up again in the Schedule where the expression “the Profit
Share” is defined. The Schedule then sets out three ways in which the base figure
for the profit share is to be arrived at. At first sight they appear to be mutually
exclusive. In the case of a buy out, the base figure is the estimated profit. This is to
be arrived at by means of an open market valuation of the subjects, or the relevant
part of it as specified in the notice, as at the date when the notice is served in
accordance with clause 9.5: see the definition of “Open Market Valuation”. In the
case of a sale it is the gross sale proceeds. In the case of a lease it is to be arrived at
by means of a capital valuation of the subjects in the open market.
16. These three approaches appear, as I have said, to be mutually exclusive. But
the context tends to indicate that they have one thing in common. This is that the
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base figure is to be taken to be the amount which the subjects would fetch in a
transaction that was conducted at arms length in the open market. This is expressly
provided for in the case of a buy out, in which event a valuation of the subjects
must be undertaken. This is also provided for expressly in the case of a lease. No
mention is made of a valuation exercise in the case of a sale. But a sale at arms
length is usually taken to be the best evidence of the value of the subjects in the
open market. On this view there was nothing more to be said about the base figure
in the event of a sale, other than that it was to be the gross sale proceeds.
17. As the choice between these three methods lay entirely in the hands of the
appellants and clause 9.7 precludes the respondents’ entitlement to any further
Profit Share in the future, it is a reasonable assumption that these methods were
expected to produce the same base figure, albeit by different routes or methods of
calculation. Otherwise it would be open to the appellants to avoid the basis for the
calculation in the case of a disposal by lease by disposing of the subjects to an
associated company at an undervalue and arranging for the lease to be entered into
by that company. Basing the calculation on the open market value was, on a fair
reading of the agreement, the commercial purpose that these various methods were
intended to serve.
18. The problem that the facts of this case give rise to is that it was not
expressly stated anywhere in clause 9 or the definitions set out in the schedule that
the gross sale proceeds were only to be used in the event of a sale at arms length in
the open market. Was this a deliberate choice, or was it simply an oversight? The
answer to this question is to be found by examining how the agreement can be
given effect on the assumption that this was an oversight. There are, of course,
well understood limits to the extent to which a court can depart from the express
terms of an agreement that has been reduced to writing in solving a problem of this
kind. Would the court be transgressing these limits if it were to give effect to the
case for the respondent in the face of the appellant’s submission that the contract
should simply be given effect according to its terms?
19. The problem can be addressed by taking the definitions in the Schedule in
their logical order. First, there is the definition of “the Profit Share”. The three
methods of arriving at the base figure are presented as alternatives. They are
separated by the word “or”. It is plain that the method referred to as the lease value
would be appropriate only in the case of a disposal by way of lease. But the
wording of the definition does not, in terms, confine the method to be used in the
case of a sale to the gross sale proceeds. In the case of a sale at arms length in the
open market a separate valuation would be a needless formality, as it would almost
certainly produce the same figure as was provided for in the contract. But it would
serve a very real purpose if the sale was clearly not one undertaken at arms length
in the open market, as happened in this case.
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20. The question then is whether there is anything in the definition of the
expression “Open Market Valuation” which shows that this method cannot be used
in the case of a sale. The definition directs attention to the open market value of
the subjects “or the relevant part thereof as specified in the notice at the date of the
notice served in accordance with clause 9.5”. There is no requirement for a notice
in accordance with clause 9.5 in the case of a sale. But the absence of a notice does
not make the valuation exercise directed by this definition unworkable. In the case
of a sale the information that a notice would provide is to be found in the contract,
just as in the case of lease it seems not to have been thought necessary to identify
the date as at which the subjects were to be valued in order to arrive at the Lease
Value. It seems to me therefore that there would be no difficulty in implying a
term to the effect that, in the event of a sale which was not at arms 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 see this as the product of the way I would
interpret this contract.
21. This was, in essence, the approach which the Extra Division took to the
problem. In para 12 of his opinion Lord Drummond Young said that any other
approach would defeat the parties’ clear objectives. Martin Hogg, a much
respected senior lecturer in law at the University of Edinburgh, has criticised this
decision: Fundamental issues for reform of the law of contractual interpretation
(2011) 15 Edin LR 406, 420. Why, he asks, where a party has been feckless in
allowing a clause susceptible of a commercially disadvantageous sense to form
part of a contract, should it be protected by the court giving the contract a
commercially sensible interpretation rather than allowing the party simply to suffer
the results of its commercial fecklessness? Why should commercial good sense be
attributed to a party which has not shown it in the drafting of the contract? At pp
421-422 he recommends a departure from what he refers to as a naïve focus on
subjective intention in favour of an objective approach to the interpretation of
contracts. That would minimise the temptation which some courts have shown to
improve upon the bargain reached by parties in the name of commercial good
sense.
22. I would not, for my part, view the present case in that way. It seems to me
that the position here is quite straightforward. 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 fact that this makes good commercial sense is
simply a makeweight. The words of the contract itself tell us that this must be
taken to have been what they had in mind when they entered into it. The only
question is whether effect can be given to this unspoken intention without undue
violence to the words they actually used in their agreement. For the reasons I have
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given, I would hold that the words which they used do not prevent its being given
effect in the way I have indicated.
23. Mr Connal said that the appellants would never have agreed to having to
pay the uplift before the profit that was expected to result from the development
had been realised. At any rate the likelihood of their agreeing to this was very
slight. So it would be wrong to read the words of the contract in a way that
produced that result in this case. But the answer to that submission is to be found
in the fact that the sellers’ entitlement to the relevant part of the profit share is
triggered by the grant of a lease of the whole or part of the subjects for more than
25 years, and in the definition of “the Profit Share” which requires that the capital
sum produced by the calculation of “the Lease Value” be paid when the lease is
entered. As Mr Sandison pointed out, the obligation to pay this sum could
anticipate the date when the profit had been realised. So I do not accept that the
contract must be approached on the basis that it was an essential element of the
bargain that the profit had actually been realised before the obligation to pay the
Profit Share was triggered by any of the transactions referred to. It should be noted
too that the timing of the transactions that would give rise to that obligation was
entirely in the hands of the appellants.
24. I turn then to Mr Connal’s alternative argument. It seems to me that it
creates more problems than it solves. It also tends to support the need to approach
the agreement in the way the respondents contend for. There is obvious force in his
starting point. This is the assumption that when clause 9 refers to a disposal by
way of sale it contemplates a sale at arms length in the open market. But it is also
clear that the sale, and the only sale, that it contemplates is a sale by the appellants.
This is made clear by the definition of the expression “Gross Sale Proceeds”,
which refers to the sale proceeds received by “the Purchasers” for the subjects. The
opening paragraph of the missive letter of 6 November 2001 states that the
appellants are referred to in it as the “Purchasers”. The appellants, it must be
emphasised, are the only parties with whom this contract was being entered into.
25. Mr Connal suggested that the sale to Westhill should be disregarded and the
obligation to pay the uplift triggered instead by a sale of the subjects in the open
market by Westhill. But that solution cannot fit with the words used in the
contract, to which Westhill are not a party. It would not be enough merely to
substitute for the word “Purchasers” in the definition words that would include an
associate company. It would also be necessary to write in clauses to protect the
respondents against the obvious risks that such an arrangement would give rise to.
As the contract stands, there would be nothing to prevent the appellants from
disposing of the subjects to a wholly owned subsidiary and then disposing of that
company to a third party over which it had no control. It would require the
insertion of a number of carefully worded provisions to restrict the appellants’
opportunity for avoiding the obligation to account to the respondents for the uplift
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when it was realised. This would involve re-writing the bargain for the parties,
which the court cannot do.
Conclusion
26. I am not persuaded that the Extra Division was wrong to uphold the
decision of the Lord Ordinary. I would dismiss the appeal and affirm the Extra
Division’s interlocutor.
LORD CLARKE (WITH WHOM LORD HOPE, LADY HALE, LORD
MANCE AND LORD KERR AGREE)
27. I gratefully adopt Lord Hope’s account of the facts and the missives. I agree
that the appeal should be dismissed.
28. In the course of argument some reference was made to the recent decision
of the Supreme Court in Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1
WLR 2900. That appeal was concerned with the role of commercial good sense in
the construction of a term in a contract which was open to alternative
interpretations. It was held that in such a case the court should adopt the more,
rather than the less, commercial construction. The court applied the principle that
the ultimate aim in construing a contract is to determine what the parties meant by
the language used, which involves ascertaining what a reasonable person would
have understood the parties to have meant; the relevant reasonable person being
one who has all the background knowledge which would reasonably have been
available to the parties in the situation in which they were at the time of the
contract.
29. This appeal is concerned with a somewhat different problem from that
which arose in Rainy Sky. Under the missives the respondent sellers were entitled
to “the Profit Share” arising out of the on sale of the subjects by the appellant
buyers. The expression “Profit Share” was defined as “the Gross Sale Proceeds”,
which were in turn defined as “the aggregate of the sale proceeds of the Subjects
received by the Purchasers for the Subjects”.
30. Lord Hope has drawn attention in para 9 to certain infelicities of drafting.
However, the critical language in clause 9.4 is the promise on the part of the
appellants to pay 40% of 80% of the gross sale proceeds “within 14 days after
receipt of the gross sale proceeds”. On the face of it the reference to the gross sale
proceeds is a reference to the “actual sale proceeds” received by the appellants.
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31. It is not easy to conclude, as a matter of language, that the parties meant,
not the actual sale proceeds, but the amount the appellants would have received if
the on sale had been an arm’s length sale at the market value of the property. Nor
is it easy to conclude that the parties must have intended the language to have that
meaning. As Baroness Hale observed in the course of the argument, unlike Rainy
Sky, this is not a case in where there are two alternative available constructions of
the language used. It is rather a case in which, notwithstanding the language used,
the parties must have intended that, in the event of an on sale, the appellants would
pay the respondents the appropriate share of the proceeds of sale on the
assumption that the on sale was at a market price.
32. In this regard I entirely agree with Lord Hope’s conclusions at para 22
above. As he puts it, the context shows that the parties must be taken to have
intended 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
parties expressly agreed that in the case of a buy out or lease the profit would be
arrived at by reference to market value. Rather like counsel for the respondent
bank in Rainy Sky, Mr Craig Connal QC was not able to advance any
commercially sensible argument as to why the parties would have agreed a
different approach in the event of an on sale. I have no doubt that he would have
done so if he had been able to think of one. As Lord Hope says at para 17, on the
appellants’ approach, it would be open to them to avoid the provisions relating to
the open market value of a lease by selling the subjects to an associate company at
an undervalue and arranging for the lease to be entered into by that company. The
parties could not sensibly have intended such a result.
33. 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 it 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.
