Parham v F Parham Ltd. & Anor

Where a remuneration clause first provides for an annual salary to be agreed and then specifies a salary in default of agreement, the two mechanisms operate independently. An agreed salary does not become the base for a later default calculation unless the contract says so. A default figure stated for the first year and increased annually by a fixed percentage therefore continues as a compounded contractual baseline. Clear contractual wording should not be rewritten merely because the result is surprising or disproportionate. Commercial common sense may assist where the language has plainly gone wrong or the natural construction flouts business common sense.

The defendants appealed against part of the decision and order of His Honour Judge Rose in the Queen’s Bench Division dated 30 June 2005. The judge had awarded Eric Parham £410,005.88, subject to deduction of income tax, for breach of a 1973 employment agreement. The only issue on appeal concerned clause 7 of an agreement under which Mr Parham’s annual salary was to be agreed, with a default formula if agreement was not reached.

The judge held that the default salary began at £10,000 in 1973 and increased by 10 per cent on a compound basis each year. The defendants argued that the default figure should instead be 10 per cent more than the salary agreed in the previous year. The central issue was the proper construction of clause 7 for the years 2003, 2004 and part of 2005.

1. Disposition. The appeal was dismissed unanimously. The Court of Appeal upheld the construction adopted by His Honour Judge Rose.
2. Structure of clause 7. The clause contained two distinct mechanisms. The first provided for an annual salary to be agreed between the technical adviser and the company. Where agreement was reached, that agreed sum was the salary for the year. The second part operated only in default of agreement and supplied a formula for calculating the salary for that year.
3. Default formula. The default salary was called the basic salary for the purposes of the formula. It was £10,000 in the first year of operation. Thereafter it increased by 10 per cent at the end of each year, and the increased figure became the basic salary for the following year. An agreed salary did not replace or reset that underlying default figure.
4. Contractual interpretation. The defendants’ construction required words to be added or altered so that a previously agreed annual salary became the basic salary for the next year. There was no warrant for doing so. The court considered the principles stated in [1998] 1 WLR 896 and [1985] AC 191, but found that the language had not gone wrong and that the claimant’s construction did not flout business common sense.
5. The fact that 10 per cent compound increases produced a large and superficially surprising entitlement after 32 years did not make the clause absurd. The agreement allowed flexibility through annual agreement, while providing a continuing default mechanism. The judgment and order below therefore stood.

1. Court of Appeal (Civil Division) — On 16 February 2006, the appeal was dismissed.
2. Queen’s Bench Division — His Honour Judge Rose, on 30 June 2005, awarded the claimant £410,005.88, subject to deduction of income tax, for breach of contract and dismissed the larger part of the claim.