“We wuz robbed” – The Perils of Sloppy Drafting

01 October 2013

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When drafting contracts, parties often become wrapped up in ensuring they are successful in what they view as the bigger, more commercially significant, points.  This often means that the seemingly smaller points can get pushed to the side or, on occasion, completely ignored.  This is a mistake as countless cases have shown that ostensibly insignificant points have the potential to come back to bite parties in an extremely damaging manner.  The recent case of Situ Ventures Limited v Jennifer Bonham-Carter & Anr [2013] EWCA Civ 47 illustrates the perils of careless drafting and highlights the very real possibility that a failure to pay attention to all clauses in your contract could leave you high and dry.

Facts

  • In June 2003, the claimant (the “Vendor”) and defendant (the “Purchaser”) entered into a share sale agreement (the “Agreement”) in relation to the sale of Harbour Estates Limited, an estate agency involved in the sale of properties in Chelsea Harbour (the “Company”).
  • The total purchase price payable under the Agreement was £800,000, consisting of an initial payment of £100,000 on completion with the balance being payable by way of deferred payments over the next 5 years.
  • As one would expect, the Agreement provided that the Vendors would provide post-completion assistance to the Purchaser.  The problem, and the key issue in the case, arose, however, in the wording of the relevant provision.  Clause 4.2 of the Agreement stated that “until all of the Purchase Price has been paid to the Vendors, the Director Vendors shall remain as Directors of the Company in a Non-Executive capacity unless otherwise agreed and/or requested by the Purchaser.”
  • Before the remaining balance of the consideration had been fully paid, the Purchaser issued a written request that the Vendors resign their positions as directors in accordance with clause 4.2. The Vendors, however, argued that, as the Purchaser had not yet paid the outstanding consideration in accordance with the Agreement, they were entitled to remain as non-executive directors of the Company.

At first instance, the court agreed with the Vendors.  Richard Sheldon QC held that clause 4.2 imposed upon the Vendors an obligation to remain as non-executive directors of the Company for the prescribed period, and it was this obligation only which came to an end upon request by the Purchaser. Clause 4.2 did not, however, require the Vendors to resign upon the Purchaser’s request. Therefore, the Vendors were still non-executive directors of the Company, they had been so at all material times since the date of the Agreement, and they could not be required by the Purchaser to resign from this position under clause 4.2.

The Purchaser appealed this decision, arguing that, on a proper reading of clause 4.2, a request by the Purchaser for the Vendors’ resignation did not just end the Vendors’ obligation to hold the position of non-executive director, but required them to resign their positions as non-executive directors.  The Court of Appeal made it clear that the starting point in interpreting the meaning of clause 4.2 had to be the words used in clause 4.2 itself.  Mummery LJ, giving the leading judgment, made a few telling points and observations:

  • Mummery LJ was very critical of the draftsman, finding the use of the phrase “and/or” in clause 4.2 to be “unnecessary and confusing.”  Further, he stated that the use of the phrase in any legal document can be open to objections on the basis of “inaccuracy, obscurity, uncertainty or even as being just plain meaningless.”
  • He pointed out that, if the Vendors agreed to resign, it would be unnecessary for the Purchaser to request them to do so. Therefore “and/or” in this instance could actually only mean “or”. If the Vendors did not agree to resign, it would be pointless for the Purchaser to have the ability, as it did under clause 4.2, to request the Vendors to resign, if such a request did not result in an obligation on the part of the Vendors to resign.
  • Mummery LJ made clear in his judgment that his decision had to be based on the actual wording contained in clause 4.2, rather than on the result which would make the most commercial sense. In light of this, he indicated that he could only find that clause 4.2 of the Agreement conferred on the Purchaser the power to terminate the Vendors’ non-executive directorships of the Company.  

Comment

There are a few points to take from this case:

  • Avoid carelessly worded clauses:  Parties need to be aware of the need to ensure that each clause has the effect they intend it to have.  This requires a careful choice of words when drafting contractual rights and obligations.  This case demonstrates, in particular, the dangers in the use of the phrase “and/or” and it would be sensible for anyone using this phrase to sense-check the relevant drafting to ensure that it is, in fact, the right phrase in the context of the relevant clause.
  • Courts might not be able to arrive at the most “commercial” conclusion:  The judgment highlights that parties will not be able to rely on the courts to simply interpret the wording in the manner which produces the most commercial result.  Per Mummery LJ, “the function of the courts is to construe what is said in the written formal agreement legally drafted for the parties, with its imperfections and infelicities, not to construct for the parties another legal agreement that eliminates some of the imperfections and infelicities.”  
  • Remember that every clause has a function:  Every provision in an agreement is designed to achieve or advance a particular object.  If you ignore a provision, you do so at your peril as you might find that that provision is the one which leaves you exposed or in difficulties further down the line.

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