Situ Ventures Ltd v Bonham-Carter & Anor

The Court of Appeal was asked to construe clause 4.2 of a share sale agreement which provided that the vendor directors "shall remain as Directors of the Company in a Non-Executive capacity unless otherwise agreed and/or requested by the Purchaser" until the purchase price was paid in full. The primary legal question was whether a purchaser's request under that clause could operate to require the vendors to resign as directors or merely to relieve them of their contractual obligation to remain as directors.

The court held that, on a proper construction of clause 4.2, the purchaser's request was naturally directed to a state of affairs in which the vendors ceased to be directors and therefore could carry with it the effect of requiring resignation. The court emphasised the tripartite structure of the clause, the shared benefit to both parties and the imperfect drafting (including the use of "and/or"), and preferred the purchaser's construction based on the natural meaning of the words rather than commercial convenience.

The Court noted that the formal effect of termination of directorships remained governed by the Companies Act 2006 and the company’s articles, and that the judge below reached a possible but different construction; the Court of Appeal allowed the appeal on the construction point.

Background and parties: The dispute arose from a sale of shares in Harbour Estates Limited (HEL) by vendors including Jennifer Bonham-Carter and Antoinette Horn to Situ Ventures Limited for £800,000 under a share sale agreement dated 6 June 2003. Because the purchase price was payable by instalments the agreement required the vendors to provide assistance and to remain as non-executive directors of HEL until the purchase price was paid in full.

Nature of the claim/application: The claimants sought declarations that they had been and remained non-executive directors of HEL and could not be required to resign under clause 4.2. The purchaser contended either that there had been an informal unanimous agreement to remove the claimants or that notices served on 27 May 2011 and 12 July 2011 pursuant to clause 4.2 had validly required their resignation. The judge below declared that the claimants had remained directors and that clause 4.2 did not permit the purchaser to require resignation; permission to appeal was limited by Arden LJ to the construction point.

Issues framed by the court:

• What is the natural meaning and proper construction of clause 4.2?
• Does a request by the purchaser under clause 4.2 have the effect of terminating the vendors' directorships (i.e. requiring resignation), or does it merely end the vendors' contractual obligation to remain as non-executive directors while leaving them free to remain?
• How should the clause be interpreted in light of the remainder of the agreement and the surrounding circumstances?

Reasoning and decision: Mummery LJ examined the clause's tripartite structure (the unpaid balance, the obligation to remain as non-executive directors, and the qualifier "unless otherwise agreed and/or requested by the Purchaser"). He found the clause was for the benefit of both parties and that the drafting was imperfect. The judge below’s construction — that a purchaser's request only terminated the contractual obligation but did not compel resignation — was acknowledged as a possible construction. However, on balance Mummery LJ concluded that the natural meaning of the clause is that a purchaser's request contemplates a change to the vendors' status such that they cease to be directors, and therefore the request can have the effect of requiring resignation. Aikens LJ and Lewison LJ agreed. The Court allowed the appeal and set aside the contrary conclusion below.

Other procedural/contextual points: By the time the appeal was opened the purchaser had paid the balance in other proceedings and the vendors had resigned the week before the hearing, so the substantive dispute had been overtaken and costs remained the primary live issue. The Court emphasised that the formal termination of directorships remains a matter for company law and the articles.

Appeal allowed. The Court of Appeal held that clause 4.2, properly construed by reference to its natural meaning and structure, permits a purchaser's request to operate so as to require the vendor directors to cease to be directors (i.e. to resign). The court preferred the defendant's construction over the judge below despite acknowledging that the judge’s construction was a possible one; the drafting imperfections did not justify departing from the natural meaning of the clause.

Appeal from the High Court of Justice, Chancery Division (Mr Richard Sheldon QC sitting as Deputy High Court Judge), HC11CO2196. Permission to appeal was limited by Arden LJ on 11 July 2012 to the construction point. The Court of Appeal ([2013] EWCA Civ 47) allowed the appeal.