Croftcall Ltd v Morgan & Anor

Commercial contracts must be construed by reference to the meaning conveyed to a reasonable person with the relevant background knowledge. Literal wording may be qualified where it would produce an absurd result which the parties cannot have intended. A completion-accounts mechanism should be construed according to its commercial function and does not require a purchaser to pay twice for assets already reflected in the agreed price or separately dealt with by the contract.

Croftcall acquired shares in a property-holding company and related property assets from Mr and Mrs Morgan under a share purchase agreement. The agreement provided for adjustment by reference to net current assets at completion. The vendors claimed a substantial additional payment, including the value of properties, a novated debt and proceeds relating to a separately transferred property.

Croftcall argued that those items had already been taken into account. The central issue was the proper construction of the completion-accounts provisions, with rectification pleaded in the alternative.

1. Claim succeeded. The stock of properties, the Ocean debt and the French property or its proceeds were excluded from the statement of net assets at completion under paragraph 1.1(c) of Schedule 8. The detailed balance remained for later determination if necessary.
2. The agreement was construed using the principles stated in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. A literal reading producing double payment would be commercially absurd.
3. Paragraph 1.1(c) was therefore construed as subject to a qualification excluding items already fully taken into account elsewhere. This was a contextual limitation, not an implied term.
4. The mechanism retained a proper function for reconciling cash balances, accrued liabilities and other current assets not reflected in the agreed price. The alternative rectification claim and other technical issues did not require decision.