Gillatt v Sky Television Ltd & Anor

Whether a valuation mechanism is an essential contractual term depends on construction of the particular agreement in its linguistic and commercial context. Valuation machinery may be subsidiary where the contract provides for a fair and reasonable price ascertainable by objective standards. In that event, the court may substitute effective machinery if the agreed process fails. But parties may make a specified valuation method integral to entitlement. Where the contract makes payment conditional on an independent accountant determining open market value, and the agreement supplies no sufficient basis for the court’s own valuation, the determination is an essential pre-condition to payment.

Mr Gillatt claimed payment from Sky Television Ltd under an agreement concerning the sale of shares in Tele-Aerials Satellite Ltd. Clause 6.1 provided for payment of 55 per cent of the shares’ open market value, as determined by an independent chartered accountant. No accountant was appointed.

Lloyd J held that the determination was integral to the entitlement, that it was too late to initiate the contractual reference, and that no payment was due. Mr Gillatt appealed, contending that the accountant’s determination was only optional dispute-resolution machinery which the court could replace by determining the value itself.

1. Appeal dismissed. The determination by an independent chartered accountant was an integral and essential part of the definition of the payment due under clause 6.1.
2. The issue depended on construction of the TAS Agreement. Sudbrook Trading Estate Ltd v Eggleton [1983] AC 444 and Re Malpass [1985] Ch 42 established the importance of distinguishing essential from subsidiary valuation machinery. They did not determine the construction of this differently worded agreement.
3. Clause 6 differed from clause 4. Clause 4 contained detailed machinery for resolving disputes about periodic profit-based payments. Clause 6 concerned a final payment and applied only the provisions concerning appointment of the accountant, not the full dispute-resolution procedure.
4. Although open market value is an objective expression, the agreement gave no definition or prescribed valuation basis. Several approaches were possible, including earnings, assets and discounted cash flow bases. The parties had entrusted the judgment as to value exclusively to the independent accountant and agreed that the determination would be final and binding.
5. This was not a breakdown of contractual machinery. Mr Gillatt could have sought appointment of an accountant without Sky’s co-operation, but failed to take the necessary contractual steps. The court could not substitute its own valuation for the agreed determination.
6. Lord Justice Pill expressly agreed with Mummery LJ and added that Sudbrook did not prevent parties from making a valuation method essential. Sir Ronald Waterhouse agreed. The order was: appeal dismissed with costs; leave to appeal to the House of Lords refused.

• Court of Appeal (Civil Division): dismissed the appeal from Lloyd J’s preliminary ruling. The court ordered dismissal with costs and refused leave to appeal to the House of Lords.