The Square Mile Partnership Ltd v Fitzmaurice McCall Ltd

Commercial share-sale agreements are construed objectively by reference to the background reasonably available to the parties and the agreement as a whole. In a commercial transaction, “accumulated net worth” may mean net assets rather than only lawfully distributable profits where the wording and adjustment provisions support that construction. A contractual mechanism may require payment to compensate for assets not transferred lawfully before completion. Audited accounts may be the agreed reference point both for identifying the need for an adjustment and quantifying it; “show” includes disclosure on analysis, not merely an express line item. Evidence of the assets transferred and their form may be admissible, but negotiating communications about contractual meaning generally are excluded. A debt required to be discharged is eliminated between the parties for the adjustment, even if it remains in the company’s accounts. A payment tendered to settle sums due under the agreement must be appropriated to those sums.

The appellant purchased the shares in Robert Bruce Fitzmaurice Ltd from Robert Bruce Fitzmaurice (Group) Ltd under an agreement providing for the transfer of accumulated net worth and adjustments based on audited accounts. It sued Fitzmaurice McCall Ltd, the former ultimate holding company, as assignee of an intercompany debt owed to RBF. F counterclaimed for contractual adjustments. Mann J gave judgment on the claim and counterclaim in the Chancery Division: [2006] EWHC 236 (Ch). The appeal concerned the meaning of accumulated net worth, the effect of failing to discharge a £54,982 intercompany debt, and whether part of a payment made under a settlement letter could be appropriated to other liabilities.

Lady Justice Arden, with whom the Master of the Rolls and Lord Justice Jonathan Parker agreed, dismissed the appeal and allowed the cross-appeal.

1. Contractual interpretation. The agreement had to be construed objectively, by reference to the background reasonably available to the parties and the commercial context. The court should adopt a commercially sensible construction where the language could bear it, reading the agreement as a whole. Subjective intentions and, generally, pre-contractual negotiations were inadmissible: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.
2. Accumulated net worth. Clauses 6.3 and 14.2 operated together. “Accumulated net worth” meant net assets, not merely distributable profits. Clause 6.3 permitted an adjustment to give effect to the transfer of net assets, even where the transfer could not lawfully have been achieved by a dividend. The illegality argument therefore failed because the adjustment mechanism imposed a compensating liability between the contracting parties.
3. Evidence and accounts. Evidence identifying the assets transferred and the form of the transaction was admissible. Communications concerning the parties’ intended contractual meaning were not admissible under the law as it stood. The audited accounts were the agreed reference point both for establishing that an adjustment was required and for quantifying it. “Show” meant disclose when the accounts were analysed, rather than state the adjustment as an express line item.
4. Intercompany debt. The agreement required the £54,982 debt to be discharged. Although it remained in RBF’s accounts, it was treated as eliminated between the parties for calculating accumulated net worth, requiring a corresponding adjustment.
5. Payment and orders. The £50,583 balance of the payment made under the letter of 17 February 2004 had to be appropriated to sums due under the agreement. The judgment and costs order below were set aside. Judgments for £453,732 were substituted on both the claim and the counterclaim.

1. Court of Appeal (Civil Division): In [2006] EWCA Civ 1690, the court dismissed the appeal, allowed the cross-appeal, set aside the judgment and costs order below, and substituted judgments for £453,732 on both the claim and counterclaim.
2. Chancery Division: Mann J, in [2006] EWHC 236 (Ch), awarded £559,297 on the claim and entered judgment for £453,732 on the counterclaim, leaving a balance payable by the respondent.