Situ Ventures Ltd v Bonham -Carter & Anor

A written commercial agreement must be construed by starting with the language used, read in the structure of the clause and agreement, its purpose and relevant surrounding circumstances. Imperfect drafting and surprising commercial consequences do not justify departing from the natural meaning of the words or rewriting the parties’ bargain. A clause requiring vendors to remain non-executive directors until payment in full, unless otherwise agreed or requested by the purchaser, may empower the purchaser to require them to cease being directors. It need not merely release them from a contractual obligation to remain.

The purchaser appealed from a decision of the High Court of Justice, Chancery Division, concerning the construction of clause 4.2 of a share sale agreement. The clause required the vendor directors to remain non-executive directors until the purchase price had been paid, unless otherwise agreed or requested by the purchaser.

The deputy judge declared that the vendors remained directors and could not be required to resign pursuant to a request under clause 4.2. By the hearing of the appeal, the balance of the purchase price had been paid and the vendors had resigned. The substantive dispute was therefore spent, and the appeal proceeded because of the costs consequences. The central issue was whether a purchaser’s request could require resignation or merely end the vendors’ contractual obligation to remain directors.

The Court of Appeal allowed the appeal. Although the underlying directorship dispute had become spent, the court determined the construction point because it affected the costs issue.

1. Method of construction. The wording of clause 4.2 had to be construed in the context of the agreement’s purpose and surrounding circumstances. The starting point was the language used and the structure of the clause. Commercial arguments could not justify departing from the natural meaning of the words or constructing a different agreement to cure imperfect drafting.
2. Meaning of clause 4.2. The clause first identified the period during which the purchase price remained unpaid, then provided for the vendors to remain non-executive directors, and finally stated the circumstances in which that position could be otherwise. In ordinary English, the alternative state of affairs was that the vendors ceased to remain directors, rather than merely ceasing to be contractually obliged to remain directors.
3. Effect of a request. If the vendors had agreed to resign, the agreement limb would apply. A separate request limb would therefore be pointless unless it carried an obligation to act as requested. The purchaser’s request under clause 4.2 consequently contemplated resignation and cessation of directorship, even though the drafting did not spell out every consequence.
4. The expression ‘and/or’ in clause 4.2 was read as ‘or’, since agreement and request operated as alternatives. The appeal was allowed because the deputy judge’s contrary construction was wrong.

• Court of Appeal (Civil Division) — [2013] EWCA Civ 47; allowed the appeal on the construction of clause 4.2.
• High Court of Justice, Chancery Division — on 13 February 2012 declared that the vendors were non-executive directors and could not be required to resign under clause 4.2.