The Square Mile Partnership Ltd v Fitzmaurice McCall Ltd

The Court of Appeal considered the proper interpretation of a commercial share sale agreement, in particular the meaning of the phrase "accumulated net worth" in clause 14.2 and the operation of the adjustment mechanism in clause 6.3 tied to the audited accounts. The court applied established principles of contractual interpretation, including the factual matrix and the exclusion of subjective pre-contractual negotiations as evidence of meaning, and examined the limited circumstances in which pre-contractual events are admissible as part of the factual matrix.

The court held that "accumulated net worth" meant net assets (not merely lawfully distributable profits) having regard to the language of clause 14.2, its references to specific asset categories (IBA assets, reserves, brokerage, interest and investments) and the commercial context. Clause 6.3 was construed as permitting adjustments to give effect to transfers of net assets disclosed by the audited accounts, even where those transfers could not have been effected by a lawful dividend prior to completion.

The court further held that an intra-group debt of £54,982 shown in the audited accounts should be treated as eliminated for the purposes of computing accumulated net worth and accordingly gave rise to an adjustment under clause 6.3. It also held that a payment of £58,808 made by the vendor's solicitors and accepted by the purchaser could not be appropriated by the purchaser to non-agreement debts; the purchaser was required to appropriate the relevant balance to amounts due under the agreement.

Background and parties: The dispute arose from a poorly documented commercial share sale of Robert Bruce Fitzmaurice Ltd (RBF). The vendor was Robert Bruce Fitzmaurice (Group) Ltd and the purchaser was The Square Mile Partnership Ltd (S). Fitzmaurice McCall Ltd (F) was the ultimate holding company and became involved by assignment of claims and liabilities. RBF conducted brokerage business and held insurance broking accounts (IBA accounts).

Nature of the claim and procedural posture: S sued (as assignee of a debt due from F to RBF) to recover £559,297 (being a balance of an intercompany debt less payments). F counterclaimed under the adjustment provisions of the share sale agreement for amounts shown in the audited accounts (notably £453,732). The case was tried in the Chancery Division (Mann J: [2006] EWHC 236 (Ch)), where the judge gave judgment for S on its claim and for F on part of its counterclaim, resulting in a net payment due from F. Both sides appealed to the Court of Appeal.

Issues before the Court of Appeal: (i) Whether "accumulated net worth" in clause 14.2 was limited to lawfully distributable profits (distributable reserves) or meant net assets; (ii) the contractual consequence of the vendor's failure to procure discharge of an intercompany debt of £54,982 as required by clause 4.3.1; and (iii) the effect of a letter of 17 February 2004 enclosing £58,808 and whether sums paid thereunder could be appropriated by S to other debts outside the agreement.

Court's reasoning: The Court of Appeal restated the relevant principles of interpretation (factual matrix, objective meaning, limited admissibility of pre-contractual negotiations). The court analysed clauses 6.3 and 14.2 together: clause 6.3 contemplated removal of assets and an adjustment mechanism based on the audited accounts, and clause 14.2 expressly referred to a range of asset items which pointed to an asset/net-asset calculation rather than merely distributable profits. The court found that the adjustment mechanism could give effect to transfers of net assets even if they could not lawfully have been distributed as dividends prior to completion. Evidence of the transfers actually effected before completion was admissible to identify what had been transferred, but evidence of pre-contractual communications as to intention could not be relied on to change the objective construction of the written agreement.

The court further held that the intercompany debt appearing in the audited accounts should be treated, for the purposes of computing accumulated net worth, as eliminated where the agreement required its discharge, so that an adjustment under clause 6.3 was required in favour of the purchaser. Finally, the court held that the £58,808 payment, which the vendor tendered as calculated under the agreement, could not be appropriated by S to unrelated debts and that the purchaser had to apply the sum against amounts due under the agreement.

Result and wider comment: The appeal by S was dismissed and the cross-appeal by F was allowed in respect of the three issues; substituted judgments were entered for £453,732 on both claim and counterclaim. The court commented on the narrow scope for admissibility of pre-contractual negotiations but accepted that objective evidence of pre-completion transfers could be relevant to identify what had been done.

This is an appeal from a Chancery Division judgment. The Court of Appeal dismissed the appellant's appeal and allowed the respondent's cross-appeal on the three discrete issues. Reason: on proper construction of the agreement "accumulated net worth" meant net assets (not merely distributable profits); the adjustment mechanism in clause 6.3 applies to give effect to transfers or non-transfers of net assets disclosed by the audited accounts; the £54,982 intercompany debt shown in the audited accounts was to be treated for contractual purposes as eliminated and gave rise to an adjustment in favour of the purchaser; and the £58,808 tendered by the vendor had to be appropriated to sums due under the agreement and reduced the purchaser's recovery. Substituted judgments for £453,732 were entered on both claim and counterclaim.

First instance: Chancery Division (Mann J) [2006] EWHC 236 (Ch). Appeal to Court of Appeal: [2006] EWCA Civ 1690 (this judgment).