UK: Court Of Appeal Prefers Natural Meaning Of Words In A Clause

Last Updated: 15 April 2013
Article by Mark Alsop

The Court of Appeal reversed a High Court decision and held that directors were required to step down "if so requested". The SPA related to a sale of shares in Harbour Estates Limited (HEL), an estate agent specialising in properties in Chelsea Harbour. HEL was owned by the respondents (who were the vendors under the SPA and also directors of HEL). The respondents sold their shares in HEL to the appellant (Situ Ventures) for Ł800,000 which was payable by instalments over five years. The SPA included a provision that the vendors were to provide assistance to Situ Ventures, if reasonably required and, in clause 4.2, went on to say:

"Until all of the Purchase Price has been paid to the Vendors, the Director Vendors shall remain as Directors of [HEL] in a non executive capacity unless otherwise agreed and/or requested by the Purchaser."

At first instance, the judge construed clause 4.2 by determining whose benefit it was for. The vendors contended that the clause entitled them to remain on the board of HEL until the entire purchase price had been paid; they were obliged to remain as directors unless and until Situ Ventures served notice, after then they had the option to remain (i.e. the clause was for their benefit and protection until the purchase price had been paid in full). On the other hand, Situ Ventures contended that the clause placed the vendors under an obligation, prior to payment of the entire purchase price, to remain as non-executive directors for as long as Situ Ventures wished, but then had to resign if requested to do so.

The judge concluded that clause 4.2 was inserted for the benefit of the vendors and imposed an entitlement on the vendors to remain as directors until the purchase price had been paid in full. And therefore a request submitted by Situ Ventures gave them the option but not the obligation to resign. Situ Ventures appealed.

Before the appeal, Situ Ventures paid the balance of the purchase price and the vendors resigned as directors of HEL. The issue of construction of clause 4.2 was still relevant to determine who was responsible for the costs of the initial hearing and this appeal.

The Court of Appeal allowed the appeal.

  • The decision centred on three points: · First, the clause had a tripartite structure. It stated the outstanding balance (described as "the peg on which the clause hangs"); then it identified what hung on the peg: the substantive provision for the vendors to be non-executive directors of GEL; finally it concluded with the means by which that state of affairs may be made "otherwise", as either agreed and/or requested by the purchaser ("what was hanging on the peg is taken off it").
  • Second, it was incorrect to treat the clause as for the benefit of one party only. Although Situ Ventures was the only party that could make the request, the clause was inserted for the benefit of both parties: for the vendors by providing a presence in HEL, potentially until they had been paid in full; and for the purchaser in furtherance of the assistance promised by the vendors, if reasonably required, under clause 4.1.
  • Third, it was highlighted that neither clause 4.2 nor the SPA as a whole could be construed as the product of careful drafting, as demonstrated by the fact that the same words used in the agreement did not always have the same precise meaning. Furthermore, the use of "and/or" was unnecessary and confusing, as in clause 4.2 it could only mean "or". Mummery LJ (who gave the leading judgment) commented that the use of "and/or" in any legal document is "in any case open to numerous more fundamental objections of inaccuracy, obscurity, uncertainty or even as being just plain meaningless" .

In concluding his judgment, Mummery LJ said that, when construing clause 4.2, the actual wording was a more reliable guide to construction than anything else, and that pointed to Situ Venture's construction as the one that should prevail. Neither the overall context of clause 4.2 nor the commercial consequences of the differing constructions were such as to justify a departure from the draftsman's natural meaning to the structuring of the clause and the words used. The function of the courts was to construe what was said in the written formal agreement legally drafted for the parties, with its imperfections and infelicities, not to construct another legal agreement that eliminates some of those imperfections and infelicities. Comment. It is interesting to compare the court's analysis with that in the Kudos case above. Here, the High Court "bent" the words away from their most natural meaning, a decision that was overturned by the Court Appeal. In Kudos, the High Court applied the natural meaning and that was overturned by the Court of Appeal which interpreted the words in a wider context. It is a little hard to reconcile the two decisions.

The case reiterates the importance of careful drafting, particularly in relation to clauses that are not regarded as standard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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