Johnson & Anor v Secunda & Anor

Where parties extend an agreement for the continued operation of a business, the court must interpret the extended contractual terms rather than supply a fair allocation which the parties omitted. An income-sharing clause referring to gross income during a defined management period applies to income actually received and entered in the business’s books during that period where the wording and parties’ conduct support that construction. A term is implied only where necessary to give the contract business efficacy, not merely because it would be fair or reasonable. The court cannot create a new bargain to address a contingency which the parties considered but for which they made no provision.

The parties entered into an agreement under which the respondents would run the appellants’ estate agency business for twelve months, receive 90% of gross income, bear running costs and have an option to purchase the business. The option was not exercised, but the respondents continued operating the business until 3 July 2006 under an agreed extended contractual arrangement.

The respondents claimed damages for breach of contract, including loss of the opportunity to purchase the business and commission from sales completed after the extended period. The loss-of-bargain claim was abandoned. The county court awarded the respondents £22,643.04 for pipeline commission, implying an equal-sharing term on the basis of fairness. The central issue was whether the agreement, as extended, entitled the respondents to share in commission earned during their management period but received after it ended.

1. Appeal allowed. The Court of Appeal unanimously held that the parties’ “extended contract”, admitted on the pleadings, extended clauses 1 to 5 of the original agreement until 3 July 2006.
2. Clause 2, read with clause 1, entitled the respondents to 90% of the business’s gross income during the contractual operating period. “Gross income” meant commission actually received and entered in the business’s books during that period. It did not include commission relating to transactions carried out during the extended period but received after that period.
3. Clause 4 dealt specifically with pipeline commission arising from transactions negotiated before 1 May 2005. It did not create a general entitlement to later-received pipeline commission. Clause 5 expressly contemplated that the purchase option might not be exercised and provided for the business to revert to the appellants, but contained no equivalent pipeline provision for that event.
4. The court rejected the implication of a term dividing later-received pipeline commission equally. Contractual terms cannot be implied merely because they would be fair or reasonable. Implication requires necessity to give the contract business efficacy, or to enable it to work. That necessity was absent because the extended agreement operated without the proposed term.
5. The judge below had impermissibly decided what the parties might have agreed had they considered the issue, thereby creating a new agreement rather than interpreting the existing one. The order awarding £22,643.04 was to be varied, with the precise substituted figure left for further submissions. The costs order below and any costs order on appeal were to be reconsidered in light of the respondents’ failure on both claims.

• Court of Appeal (Civil Division): Appeal from the Southend County Court allowed. The order awarding £22,643.04 was to be varied and costs revisited.
• Southend County Court: HHJ Dedman awarded the respondents £22,643.04 for pipeline commission and ordered the appellants to pay the costs.