Coral Group Trading Plc v Hilton Group Plc

Contractual construction must begin with the natural meaning of the words used, read in the context of the clause, contract and known background. Where one sub-clause identifies the relevant subject matter and another provides machinery for implementing the obligation, the machinery should not distort the primary provision. An “interest” in a joint venture may extend beyond shares to associated loan capital and contractual rights. “Equivalent interest” does not necessarily mean an identical interest. Reasonable endeavours provisions may require expenditure and cooperation to reconstruct an equivalent commercial position, even where the contractual mechanism is imperfect.

The claimant appealed from the decision of Toulson J in the Commercial Court, reported at [2001] 2 Lloyd's Rep 373. The dispute arose under an agreement for the resale of the Coral betting business following the Monopolies and Mergers Commission’s recommendation that the business be divested.

The agreement required the defendant to use reasonable endeavours to procure for the claimant an interest in Tote Direct equivalent to the interest held by Bass immediately before its sale to the defendant. The preliminary issues concerned the scope of Bass’s interest and the equivalent interest which the defendant had undertaken to procure.

1. Appeal allowed. The Court of Appeal, comprising Rix LJ, Robert Walker LJ and the Vice-Chancellor, unanimously reversed the preliminary rulings below.

2. The word “interest” was a chameleon expression whose meaning depended on context. Bass’s interest in Tote Direct immediately before 31 December 1997 was not confined to its 125,000 shares. It included the £1 million holding of promissory notes and the rights connected with those notes, including the contemplated conversion into further shares. The Bass sale agreement and the Monopolies and Mergers Commission report, which referred to both shares and promissory notes, supported that construction.

3. Clause 4.14.2(a) had primacy because it identified the interest held by Bass. Clause 4.14.2(b) dealt principally with the mechanics of procuring an equivalent interest. Its reference to an “equivalent” rather than “identical” interest allowed a less precise reconstruction of the former position. The difficulties in applying the machinery to the notes also existed, to some extent, in relation to the shares. They did not justify using sub-clause (b) to subvert the natural meaning of sub-clause (a).

4. In light of the parties’ common ground that equality of outcome was required, the equivalent interest which the defendant had undertaken to use reasonable endeavours to procure was 125,000 shares and £666,666.66 of the promissory notes. The court did not decide whether the defendant had in fact used reasonable endeavours or what remedy would follow. It indicated that the defendant could not establish compliance without being prepared to use its holding of notes for the contemplated acquisition.

5. The preliminary issues were answered accordingly. Appeal allowed, with a minute of order to be lodged.

• Court of Appeal (Civil Division): Appeal allowed and the preliminary issues answered in favour of the claimant.
• Commercial Court, Queen's Bench Division: Toulson J held that Bass’s interest comprised its 125,000 shares and that the equivalent interest was 125,000 shares: [2001] 2 Lloyd's Rep 373.