Investec Bank (Channel Islands) Ltd. v The Retail Group Plc

A commercial contract is construed objectively, by reference to its language and the relevant factual background. The parties’ subjective understandings do not control construction. Negotiations may be considered to identify the genesis and object of a provision, but not as evidence of subjective intention. Commercial common sense cannot justify rewriting clear language.

Where a profit-sharing agreement deducts acquisition and development costs, a further deduction of the borrowing used to fund those costs may amount to double-counting. Clear language is required before such a result will be adopted. A claim for damages based on economic duress requires pleading and proof of the elements of the tort of intimidation, including deliberate use of unlawful means.

Investec provided senior and mezzanine finance to The Retail Group plc for the acquisition and development of property in Southsea. The parties entered into an Exit Fee Agreement under which Investec was entitled to a percentage of the development profit.

The principal dispute concerned the meaning of an amendment stating that sale proceeds were to be taken after repayment in full of the bank debt. The defendant argued that the bank debt was a further deduction from profit. The claimant argued that the wording merely postponed calculation of the exit fee until the debt had been repaid. The court also determined which financing, tax, legal and development costs were deductible and considered claims for rectification, repayment and economic duress.

1. Construction of the Exit Fee Agreement. The agreement was to be construed objectively, having regard to the language used and the factual background reasonably available to the parties. The parties’ undisclosed subjective understandings were irrelevant. Negotiations could be used to establish the genesis and object of a provision.
2. The Bank Debt amendment did not create a further minus item in the calculation of the Surplus. It operated temporally, so that the exit fee was not payable until the Bank Debt had been repaid. Treating the Bank Debt as an additional deduction would double-count acquisition costs and interest already deducted under the agreement and would defeat the commercial purpose of a 35 per cent profit share.
3. Interest deductible under the agreement was limited to interest payable to Investec. Repayment of third-party borrowing, third-party interest and capital gains tax were not deductible. Properly incurred legal costs connected with sales, charges, acquisition and arranging development finance were deductible. Planning, management and development costs could include expenditure incurred before Investec’s funding, where the agreement concerned the whole development.
4. The consideration received for the medical-centre transaction and the corresponding design-and-build obligations were to be treated as corresponding positive and negative items in the Surplus calculation.
5. Rectification was unnecessary because Investec succeeded on construction. In any event, no objectively manifested common intention supporting rectification had been established. The claim for repayment of £500,000 failed because at least that amount was due under the agreement. A claim for damages based on economic duress required a properly pleaded tort of intimidation, including unlawful means deliberately used to exert pressure. That case was not pleaded or proved, and the facts disclosed an ordinary commercial negotiation rather than illegitimate pressure.
6. The parties were directed to agree the final exit-fee calculation in accordance with the principles determined in the judgment.