Ardagh Group SA v Pillar Property Group Ltd

In construing a commercial agreement, clear language governs. Commercial common sense may resolve genuine ambiguity, but it does not authorise the court to add a valuation exercise or rewrite a provision merely because an outcome later appears unattractive. A contingent payment linked to an effective offset of allowable losses was triggered when the tax authority agreed that the losses could be set off, or a court upheld that position. It was not conditional on proving a wider commercial net benefit. The parties’ failure to cater expressly for an unusual package arrangement, and the fact that the arrangement proved expensive, did not justify departing from the straightforward contractual meaning.

Ardagh sold the shares in Yeoman Holdings Limited to Pillar under a Sale Agreement. Clause 6.1 required contingent consideration equal to 9 per cent of allowable losses effectively offset against taxable profits or gains. Following a package agreement with HM Revenue & Customs, Yeoman’s losses were allowed against profits of companies in the Pillar Group, but other tax advantages were surrendered.

Ardagh sought summary judgment for £7,394,038.83. The Chancery Division dismissed the application, holding that an effective offset might require proof of a commercial or financial net benefit and that the issue required a trial. The appeal concerned the proper construction of clause 6.1 and whether the package agreement prevented the contractual payment from arising.

Appeal allowed. The Chancellor gave the leading judgment, with Lord Justice Kitchin and Lord Justice Underhill agreeing.

1. The court applied the established principles of commercial contract interpretation stated in [2009] 1 AC 1101 and [2011] UKSC 50. Unambiguous language must be applied. Where language permits two interpretations, the commercially sensible interpretation is preferred. A substantial departure from the literal wording is justified only where something has clearly gone wrong with the language and the reasonable intended meaning is clear.
2. In clause 6.1, allowable capital losses meant losses of Yeoman allowable for capital gains tax purposes. The offset became effective when HM Revenue & Customs agreed that the losses could be set off, or when that position was upheld by a court. The clause did not require proof that the Pillar or British Land group had obtained a separate commercial net benefit.
3. The court was prepared to assume that a package agreement of the relevant kind was lawful and could have been envisaged when the Sale Agreement was made. It was unnecessary to determine the underlying statutory validity of the set-off, including the disputed effect of paragraph 7(9) of Schedule 29 to the Finance Act 2000.
4. Pillar’s proposed construction required a speculative and potentially complex valuation of surrendered tax advantages, involving risk assessments, expert evidence and possibly a trial. That exercise was inconsistent with the agreement’s simple mechanism and the requirement in clause 6.2 to pay within five business days after final determination of the relevant tax assessment. The absence of valuation or arbitration machinery reinforced the conclusion that no such condition was intended.
5. The fact that the arrangement later proved expensive, or that the parties had failed to provide expressly for the particular circumstances, did not permit departure from the clear contractual language. Section 54(1) of the Taxes Management Act 1970 did not assist in construing clause 6.1.

1. Court of Appeal (Civil Division): Allowed Ardagh’s appeal from the dismissal of its summary judgment application.
2. Chancery Division: By an order dated 21 December 2012, Sir Andrew Morritt dismissed Ardagh’s summary judgment application with costs, holding that the existence of an effective offset could require determination at trial.