Aberdeen City Council v Stewart Milne Group Limited

A contract must be read objectively and in its full context. The court may give effect to an evident unspoken intention where the contractual language permits that result. Commercial sense may reinforce the conclusion, but cannot alone justify it.

A term may be implied where it is so obvious that an officious bystander would receive an immediate affirmative answer, or where it is necessary to make the contract work or give it business efficacy. In a profit-sharing agreement intended to capture development value, a non-arm’s-length sale at an undervalue may therefore require an open-market valuation rather than reliance on the actual proceeds. The court cannot instead rewrite the bargain by inserting numerous provisions governing transactions involving non-parties.

The appellant purchased development land from Aberdeen City Council under missives providing for an uplift or profit share following a buy-out, sale or qualifying lease. It later sold the land to an associated company for £483,020 and contended that the actual proceeds, after allowable costs, produced no uplift. The Council sought a declarator that the calculation must instead use the land’s open-market value at the date of sale.

The Lord Ordinary granted the declarator in [2010] CSOH 80. The Extra Division refused the appellant’s reclaiming motion in [2010] CSIH 81. The central issue before the Supreme Court was whether the missives required an open-market valuation when a sale was not conducted at arm’s length in the open market.

1. The appeal was dismissed unanimously. Lord Hope delivered the principal judgment, with which Lady Hale, Lord Mance and Lord Kerr agreed. Lord Clarke delivered a concurring judgment with which all the other members of the court agreed. The Extra Division’s interlocutor was affirmed.

2. Per Lord Hope, the contractual provisions contemplated three events triggering the profit share: a buy-out, a sale and a qualifying lease. Although the associated calculation methods appeared mutually exclusive, their common commercial purpose was to identify what the land would fetch in an arm’s-length transaction in the open market. The parties could reasonably be taken to have expected the different methods to produce the same base figure. Otherwise, the purchaser could avoid the open-market basis by selling to an associated company at an undervalue.

3. The context established that the parties intended the base figure to be the land’s open-market value at the date of the triggering event. Commercial good sense was a supporting consideration rather than the source of that conclusion. The contractual language did not prevent effect being given to the parties’ unspoken intention. An open-market valuation could therefore be used where a sale was not made at arm’s length in the open market.

4. Per Lord Clarke, the case differed from Rainy Sky SA v Kookmin Bank [2011] UKSC 50, which concerned a choice between available interpretations. The language here appeared to refer to the proceeds actually received. The result was better reached by implying a term requiring an open-market valuation for a non-arm’s-length sale. Such a term was obvious to an officious bystander and necessary to make the contract work or give it business efficacy.

5. The alternative construction, under which the associated-company transfer would be disregarded until a later open-market sale, was rejected. The contract governed only a sale by the appellant and did not bind its associate. Making the alternative effective would require numerous protective provisions and would impermissibly rewrite the parties’ bargain.

6. The appellant was permitted to advance that alternative construction despite the earlier refusal of amendment. It involved no new factual inquiry, the respondent had notice of it, and substantial justice favoured hearing another proposed construction of the same contractual words.

1. United Kingdom Supreme Court: Dismissed the appeal and affirmed the Extra Division’s interlocutor: [2011] UKSC 56.

2. Inner House of the Court of Session, Extra Division: Refused the reclaiming motion and adhered to the Lord Ordinary’s interlocutor: [2010] CSIH 81.

3. Outer House of the Court of Session: The Lord Ordinary granted declarator that the further sum due under the missives was to be calculated by reference to the land’s open-market value at the date of sale, less allowable costs: [2010] CSOH 80.