City Alliance Ltd v Oxford Forecasting Services Ltd

When construing a commercial agreement, the court must begin with the words the parties used and assume that they reflect a sensible commercial purpose. The court may supply words only where the existing wording produces a result so commercially nonsensical that the parties cannot have intended it, and the alternative purpose can be identified with confidence. Commercial common sense does not permit the court to make a different bargain. A clause prohibiting the issue of shares and the grant of options may contain an exception limited expressly to actual share issues. Where an arguable damages cross-claim may exceed a debt demanded in winding-up proceedings, the dispute should ordinarily be resolved in the substantive proceedings rather than through insolvency process.

City Alliance agreed to subscribe for shares in Advanced Transaction Systems Ltd, with payment by instalments. The agreement prohibited the creation or issue of share or loan capital and the grant of options, subject to a proviso permitting ATS to issue ordinary shares for at least £100,000 per share.

ATS later agreed to grant an employee an option over shares. After City Alliance withheld instalments, ATS accepted the alleged repudiation and served a statutory demand. The Deputy High Court Judge held that the proviso extended to options and refused relief. City Alliance appealed, raising the construction of the proviso and whether its alleged cross-claim justified restraining presentation of a winding-up petition.

1. Appeal allowed. Lord Justice Chadwick delivered the substantive judgment. Lord Justice Latham and the Vice-Chancellor agreed.
2. The proviso to clause 6(B) permitted ATS to issue shares at not less than £100,000 per share. It did not permit ATS to grant an option or right to acquire shares in the future. The distinction between the prohibition, which expressly referred to options and rights, and the proviso, which referred only to issuing shares, was significant.
3. The court could introduce words not used by the parties only if:
   • the words used produced a result so commercially nonsensical that the parties could not have intended it; and
   • the parties’ intended alternative commercial purpose could be identified with confidence.
   Neither condition was satisfied. A fixed-price share option could dilute an existing investor’s interest and could remain exercisable for a substantial period. The parties could therefore sensibly have chosen to prohibit options while allowing actual share issues at a specified minimum price.
4. The proviso did not authorise the directors to issue shares at an undervalue contrary to their duties. It merely prevented issues below the stated price where an issue at that price would otherwise be permissible.
5. The employee’s option therefore constituted a breach of clause 6(B). There was, conceptually, a cross-claim for damages because the option could devalue City Alliance’s existing shares and its own rights to acquire further shares. The amount could not be determined summarily and might exceed the debt in the statutory demand. The presentation of a winding-up petition was accordingly inappropriate while the dispute required determination in the Chancery proceedings.

• Court of Appeal (Civil Division): Appeal from the order of Mr Stanley Burnton QC, sitting as a Deputy High Court Judge in the Chancery Division. Appeal allowed.