Aberdeen City Council (Respondent) v Stewart Milne Group Limited (Appellant) (Scotland), [2011] UKSC 56, 7 December 2011

Thu, 15 Dec 2011 10:51:00 GMT

Supreme Court case concerning the interpretation of commercial missives for Stewart Milne’s purchase of development land from Aberdeen City Council. The missives contained the following provision for an uplift in the price on the occurrence of certain events:

“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 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.”

The clause therefore contains 3 triggers for the payment of the uplift (or profit share):

Stewart Milne could buy out the Council’s share by serving a notice on them indicating that they wished to do so;
the Council would be entitled to a share on the sale of the property by Stewart Milne; or
the Council would be entitled to a share on a lease of the property by Stewart Milne.

Profit Share was defined in the schedule as follows:

“‘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.”

Stewart Milne sold the property to a group company and then argued that the uplift payable should be based on the actual price paid (£483k- which meant that no uplift was payable) rather than the open market value (£5.67m) of the property. The Council argued the reverse.

It may have been intended that “estimated profit” [1] applied to the notice procedure, “gross sale proceeds” applied to a sale of the property and “lease value” applied to the lease of the property with the prospect of a sale to group company simply not considered [2] (by the Council at least).

However, although the Supreme Court [3] (Lord Hope giving the leading judgement) observed that, it was not stated that “gross sale proceeds” are only to be used in the event of a sale on the open market, it also noted that there was nothing in the definitions to say that “estimated profit” (or “open market value”) could not also be applied to a sale.

Having observed that it was a reasonable assumption that all three methods were intended to produce the same figure (albeit by different routes) and that basing the calculation in the open market was (on a fair reading of the agreement) the commercial purpose the various methods were intended to achieve, the Supreme Court came to the conclusion that the context showed that the base figure was to be the open market value of the subjects.

Alternative argument

The Supreme Court also allowed Stewart Milne to introduce an alternative argument (which they had been prevented from presenting to the Inner House) to the effect that the word “disposal” in clause 9 should be read as referring to an arms length transfer at market value but not to an associated company for a notional value. Thus the sale to the group company would not trigger the uplift but instead the onward sale by the group company on the open market would trigger the uplift. However, the Supreme Court rejected that argument observing that that interpretation did not fit with the words of the contract. Also, as the group company were not party to the contract between the Council and Stewart Milne, adopting the argument would mean that it would have been necessary to re-write the contract to protect the Council against the obvious risks that the arrangement would entail. That was not an option open to the court.

Helping the feckless?

Lord Hope also referred to the argument that a party who has been feckless in drafting a contract should not be protected from its fecklessness by the court’s application of a commercially sensible approach [4] However, Lord Hope did not view the current case in that way. In this case the context showed that the parties’ intention must be taken to be that the base figure for the calculation of the uplift was to be open market value. The fact that this made good commercial sense was simply a makeweight, the words of the contract making it clear that open market value must have been what the parties had in mind when they entered the contract. The only question was whether effect could be given to the unspoken intention without undue violence being done to the words; the court finding that it could.

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[1] Which was defined as being the Open Market Value under deduction of the allowable costs.

[2] Both the Inner house and the Supreme Court commented adversely on the drafting.

[3] Upholding the declarator granted by the Outer House and upheld on appeal in the Inner House.

[4] Martin Hogg, Fundamental issues for reform of the law of contractual interpretation (2011) 15 Edin LR 406, 420

RTS Flexible Systems Limited v Molkerei Alois Muller Gmbh & Company KG (UK Production), [2010] UKSC 14

Thu, 20 May 2010 19:22:28 GMT

The appellant (A) appealed against the decision of the CA that it had not entered into a contract with the respondent (R). Although the parties had intended that a written contract would set out the terms on which the work was to be carried out, work had begun before the terms were finalised. For the purpose of enabling the work to begin, and while continuing to negotiate the full contract terms, the parties had entered into a contract formed by a letter of intent.

The Supreme Court restated the principles to be applied in circumstances where work had been carried out but there was a dispute as to whether a contract had been entered into. Where a contract was being negotiated subject to contract, and work began before the formal contract was executed, it could not be said that there would always, or even usually, be a contract on the terms that were agreed subject to contract. That was too simplistic and dogmatic an approach. The court was not to impose binding contracts that the parties had not reached; all would depend upon the circumstances. On the evidence in this case, a binding agreement had been reached. Appeal allowed.

RTS Flexible Systems Limited v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] UKSC 14

Wed, 05 May 2010 16:18:37 GMT

Contract (Commercial)

Aberdeen City Council (Respondent) v Stewart Milne Group Limited (Appellant) (Scotland), [2011] UKSC 56, 7 December 2011

RTS Flexible Systems Limited v Molkerei Alois Muller Gmbh & Company KG (UK Production), [2010] UKSC 14

RTS Flexible Systems Limited v Molkerei Alois Muller Gmbh & Company KG (UK Production) [2010] UKSC 14