Cavendish Corporate Finance LLP v Gil Investments Ltd

In construing a contractual commission clause, the court must read the definition of consideration in the agreement as a whole and against the admissible factual background. Words such as gross and in kind may include indirect benefits, but they do not remove the requirement that the relevant amount is received by a shareholder. A reference to bank loans does not convert every company liability into consideration or make enterprise value the agreed measure. Amounts neither paid nor received, including a notional value for unsold shares, are excluded. Commercial expectations about earning a higher fee cannot overcome wording that cannot reasonably bear the proposed construction.

Cavendish agreed to assist three shareholders in selling shares in Tractiv Group Ltd. Its engagement letter provided for a commission calculated by reference to gross amounts received by the shareholders in cash or in kind, including settlement or assumption of shareholder liabilities and bank loans.

GIL and Close sold 77.5% of the shares. Cavendish claimed commission by reference to the company’s enterprise value of £14.6 million, including bank and hire-purchase liabilities, an audit-cost adjustment and the notional value of the shares retained by the third shareholder. The High Court held that enterprise value was the relevant consideration and ordered GIL to pay the balance of the commission.

GIL appealed. The central issue was whether the contractual definition included those items or was confined to amounts received by the selling shareholders.

Lord Justice Lloyd gave the judgment. Lord Justice Richards and Lord Justice Waller agreed.

1. Construction. The court began with the contractual definition of consideration, read in the context of the engagement letter as a whole and the admissible factual background. Commercial expectations could inform the construction, but could not impose a meaning which the words could not reasonably bear.
2. Meaning of the definition. The primary phrase focused on gross amounts received by shareholders, whether directly or indirectly and whether in cash or in kind. The word including introduced examples of matters already within that primary phrase. It did not dispense with the requirement for a receipt or create an independent category of consideration.
3. Company liabilities. The reference to bank loans did not justify treating all company liabilities as consideration or equating consideration with enterprise value. A company liability could qualify only if it was settled or assumed as part of the transaction in a manner capable of constituting a receipt or benefit to a shareholder. The Barclays debt and hire-purchase liabilities were not received by any shareholder and were not settled or assumed in that relevant sense.
4. Other excluded items. The notional value attributable to the shares retained by Mr Howat was neither paid nor received by anyone. The £36,000 audit-cost adjustment was a price adjustment, not an amount received by the vendor shareholders. Neither item formed part of the contractual consideration.
5. Disposition. The expectation that Cavendish might earn more than its minimum fee, or obtain the higher percentage rate, was insufficient to overcome the wording of the clause. The appeal was allowed, the High Court order was set aside, and judgment was substituted for Cavendish for the admitted minimum fee of £38,730 plus interest. Costs orders were made as specified in the formal order.

• Court of Appeal (Civil Division). [2009] EWCA Civ 368 allowed GIL’s appeal, set aside the order below and substituted judgment for Cavendish for £38,730 plus interest.
• High Court of Justice, Chancery Division, Manchester District Registry. His Honour Judge Stephen Davies, sitting as a Deputy Judge, held that the relevant consideration was the company’s enterprise value of £14.6 million and ordered GIL to pay Cavendish £116,480 plus interest.