Interpretation – contextual analysis leading to departure from clear wording of contract.
The Facts
A holding company acquired control over a trading company, dependent for its profits, on the efforts of an individual employee who was also a shareholder in the trading company. A share buy-back option was given to the employee on condition that accumulated profits of the holding company exceeded a stipulated minimum at a stipulated date.
The holding company was not itself a trading company and its declared profits could be manipulated by the individual in control of the group of companies.
At the stipulated date, the profits of the holding company fell marginally short of the required minimum. On the other hand, the accumulated profits of the group of companies considerably exceeded the stipulated minimum.
The written agreement was the product of sophisticated bargaining, both protagonists being legally represented.
Findings
In a trial before Pennycuick J, the employee succeeded on a claim to alter the definition section of the contract to substitute the name of the holding company with that of the group of companies. This had the effect of making the employee eligible for the buy-back option.
The Court of Appeal (Lord Denning M.R, Widgery and Cross LJJ) affirmed the Judge on the basis of the construction or interpretation of the contract.
The House of Lords (Lords Wilberforce, Donovan, Pearson, Reid and Diplock – Speech by Lord Wilberforce) affirmed the Court of Appeal on the point of construction.
Lord Wilberforce referred to Lord Blackburn’s judgment in River Wear Commissioners v Adamson (1877) and Cardozo J in Utica City National Bank v Gunn (1918 New York Court of Appeals) in support of the liberal interpretation of the contract.
Commentary
The outcome involves a stark departure from the natural meaning of the contract and is probably wrong.
Lord Diplock’s assent is less than enthusiastic.
This is an example of a hard case making bad law – equities were clearly in favour of the employee. Possibly the rectification case was the intellectually honest one. Lord Denning and the House succumbed to the temptation of shaping the outcome to fit in with their sense of justice – much as happened in Chartbrook v Persimmon.
The value of Lord Wilberforce’s speech is the well reasoned rejection of evidence of negotiations and subjective intentions of the parties on the question of construction.
This content is restricted to site members. If you are an existing user, please login. New users may register below.