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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> The Square Mile Partnership Ltd v Fitzmaurice McCall Ltd [2006] EWCA Civ 1690 (18 December 2006) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2006/1690.html Cite as: [2006] EWCA Civ 1690, [2007] 2 BCLC 23 |
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
Mann J.
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE JONATHAN PARKER
and
LADY JUSTICE ARDEN
____________________
THE SQUARE MILE PARTNERSHIP LIMITED |
Appellant |
|
- and - |
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FITZMAURICE McCALL LIMITED |
Respondent |
____________________
WordWave International Ltd
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Christopher Nugee QC & Michael Gadd (instructed by William Blakeney) for the Respondent
____________________
Crown Copyright ©
Lady Justice Arden:
The factual matrix
The terms of the agreement
"4. Completion
4.1 Completion shall take place on the Completion Date when the transactions set out in Sub-Clauses 4.2 to 4.5 shall, to the extent that they have not already been performed, be performed…
4.3 The vendor shall procure that at completion:-
4.3.1 All indebtedness owing as:
(a) between the Vendor on the one hand and RBF and the subsidiary on the other hand (or vice versa);
(b) between RBF and the Subsidiary on the one hand and any of the Directors or employees or former employees of RBF and/or the Subsidiary, except as provided in the accounts to the Last Accounts Date;
is repaid or otherwise discharged or waived (whether such indebtedness is due for payment or not)…
6.3 The Vendor has prior to this Agreement removed certain assets from RBF on the basis of the Management Accounts and if the Audited Accounts when available show that any adjustment exceeding one thousand pounds is required each Party remains liable to the other Party to pay to the other Party such sum as shall be shown by the Audited Accounts to be due to the other Party.
14. Proper Law and Construction
14.1 The construction, validity and performance of this Agreement shall be governed by the laws of England.
14.2 This Agreement sets out the entire bargain and understanding between the Parties in connection with the sale and purchase of The Shares and other matters provided for in this Agreement and that prior to this Agreement the Vendor has caused RBF and the Subsidiary to transfer to the Vendor (or elsewhere as directed by the Vendor) the accumulated net worth of RBF and of the Subsidiary (excluding the IBA assets and the IBA Fund less the IBA liabilities) but including (without prejudice to the generality of the foregoing) all reserves, all brokerage paid to RBF prior to the date of this Agreement, all interest earned and all investments (other than the lease of the Property)."
Issues on this appeal
Judgments of Mann J
"Dear Mr Blackburne
Robert Bruce Fitzmaurice (Group) Ltd & The Square Mile Partnership Ltd
I enclose my cheque in favour of your firm for £58,808 on behalf of my client, Robert Bruce Fitzmaurice (Group) Ltd. This is the amount which it owes to your client, The Square Mile Partnership Ltd, pursuant to the agreement for the sale of all the shares in Robert Bruce Fitzmaurice Ltd ("RBF"), following the audit of RBF for the 13 months to 31 May 2002.
RBF's shareholders' funds as shown in the balance sheet | £453,732 |
Add IBA deficit | 128,591 |
582,323 | |
Less net inter-company debt | 528,056 |
Due to my client once it has settled the IBA deficiency, so far as it is liable | £54,267 |
Square Mile has accepted that £50,000 of the IBA shortfall is not due from my client. The enclosed cheque is therefore calculated as follows:- |
My client's share of IBA shortfall | 78,591 |
Less due to my client, as above | 54,267 |
24,324 | |
Add tax adjustment for prior years | 5,462 |
Add final auditor's bill | 8,225 |
Add book value of tangible assets | 22,797 |
60,808 | |
Less due for motor car, as agreed at completion meeting | 2,000 |
£58,808 |
The book value of the tangible assets, primarily furniture, fittings and computer equipment is included, as the intention was that each side should be able to remove whatever of them it wanted. It would therefore be unfair to expect your client to pay for those assets in full.
The motor car is different: all cars were to be removed, but at completion it was found that your client still needed a car for one of the two employees remaining with RBF. Although it was agreed at the completion of the meeting that a cheque for £2,000 for that car would follow, it never arrived.
The tax adjustment in respect of prior years shown in the audited accounts is included in the enclosed payment. There should, however, eventually be a repayment of tax to RBF and this should be passed on to my client under clause 6.6. Has any tax refund been received? If so, when, how much and with what repayment supplement?
Yours sincerely
William Blakeney"
"As you are aware my client [S] claims a substantially greater sum than the sum set out in your letter. In the circumstances, I have been instructed to accept the sum of £58,808 on account of my client's claims against your client. This sum is not being accepted in full and final settlement of my client's claims, and I shall be writing to you separately in relation to those claims and also commenting upon the calculations made in your letter."
"While in terms an attempt to bring about an overall financial reckoning between the two sets of parties, it was explicitly and in terms an attempt to work out the sums due under the agreement; it was not tendered as a payment by [F]. I cannot see a basis for treating it as such a payment."(judgment, para. 19)
Discussion and conclusions
(1) The "accumulated net worth" issue
i) General effect of the agreement - I examine the general effect of the relevant provisions of the agreement.
ii) Clause 6.3 - I examine the provisions of clause 6.3. This refers to transfers of assets and provides for adjustments between the parties in either direction. I conclude that the adjustments can be for the purpose of giving effect to the transfer of net assets, even if this could not be achieved by a transfer of assets by RBF before completion.
iii) Clause 14.2 – I examine the provisions of clause 14.2. I agree that this contemplates a transfer of accumulated net worth by the vendor prior to completion. However, in the context accumulated net worth must mean net assets. The transfer can be achieved by use of the adjustment mechanism in clause 6.3.
iv) Evidence as to pre-contractual events – I conclude that evidence about the assets transferred before completion and in addition evidence as to the calculation made by Mr Rupal to effect that transfer was admissible to identify the assets transferred and the form of the transaction, and the judge was entitled to consider whether the parties had reached any agreement about this which would amount to a collateral agreement as to the form in which transfers were to take place under the agreement. However, the evidence as to the communications between the parties in connection with the transfer was not admissible on the interpretation of the agreement.
v) Purposes for which the parties agreed to use the audited accounts - the audited accounts were the contractually agreed reference point for the purpose of determining if an adjustment was required and for the purpose of determining the amount of the liability which arose as a result of an adjustment.
(i) General effect of the agreement
(ii) Clause 6.3
(iii) Clause 14.2
(iv) Evidence as to pre-contractual events
"(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not an occasion on which to explore them."
"Evidence as to negotiations between the parties to a contract leading up to the making of that contract may be admissible for the purposes of interpretation in wider circumstances than I have indicated above, but it is unnecessary for me to go further than those circumstances for the purpose of this appeal. Lord Hoffmann recognises in the ICS case that the boundaries of the rule excluding evidence of pre-contractual negotiations on questions of interpretation is unclear. Moreover, Lord Nicholls has argued in the passage cited by Mummery LJ in para. 34 of his judgment and elsewhere, that the rule should be relaxed. The exclusion of pre-contractual negotiations is not on the face of it consistent with the general principle that a contract should be interpreted in the light of its context. Nor, on the face of it, is the application of a meaning which is not that which the parties themselves gave to a term consistent with the general approach of contract law, which is to respect party autonomy. The results may be anomalous. If the judge's ruling in this case expresses the general position in law, the result would be that the parties' meaning would be adopted if they defined the term in their written contract but not if they only did so only in the course of pre-contractual negotiations. Moreover, in that latter event, the meaning given to the term by the court would prevail, and (if the court's meaning is one which is different from that on which both parties in fact proceeded) a party would be able to avoid its contractual obligations deriving from the parties' meaning. That may be the law but, if it is, it is not, on the face of it, an attractive result. There are considerations that may go the other way. Lord Hoffmann's holding is that the exclusionary rule is based on reasons of practical policy (see para. (3) of the passage cited above from the ICS case). That policy would have to be carefully considered if evidence of pre-contractual negotiations is to be admitted in evidence in interpretation questions in the future on any wider basis than the law presently permits. In that sense there may be parallels to be drawn with the use of legislative history in the interpretation of statutes. In addition, careful consideration may have to be given to the aims to be achieved by contractual interpretation and the precise extent to which the law requires an objective interpretation, as set out in para. (1) of the passage cited above from the ICS case. It may be appropriate to consider a number of international instruments applying to contracts. It is sufficient to take two examples. The UNIDROIT Principles of International Commercial Contracts give primacy to the common intention of the parties and on questions of interpretation requires regard to be had to all the circumstances, including the pre-contractual negotiations of the parties (article 4.3). The UN Convention on Contracts for the International Sale of Goods (1980) provides that a party's intention is in certain circumstances relevant, and in determining that intention regard is to be had to all relevant circumstances, including preliminary negotiations. Consideration may also have to be given to the question whether some matters outside the text of a contract should be given less weight where (for example) the contract is one to which different persons adhere at different points in time, such as a company's constitution, than in the case of "one-off" contracts between two persons, as in this case."
(v) The audited accounts
(2) the effect under the agreement of the failure by RBF Group to cause the intercompany debt owed by RBF to F of £54,982 to be discharged
(3) whether the sum of £50,583, being the balance of the sum of £58,808 paid by RBF Group under cover of the letter dated 17 February 2004, can be appropriated to the amounts due from F to S in this action
Postscript: Procedural issues
Disposition
Lord Justice Jonathan Parker:
The Master of the Rolls: