Merthyr (South Wales) Ltd (FKA Blackstone (South Wales) Ltd) v Merthyr Tydfil County Borough Council

A contractual obligation to make periodic escrow payments remains enforceable when a missed payment increases the amount due on a later payment date. Language requiring the later payment to include the outstanding amount does not retrospectively extinguish the original debt.

A court will not imply a term which contradicts the contract’s language, makes an express payment obligation optional, defeats the transaction’s commercial purpose, and produces an irrational result. Considerations of commercial common sense must be applied with proper regard to the language used. Arguments that wording is surplusage cannot justify a meaning that the contract, read as a whole, cannot bear.

Previous documents may establish the objective commercial purpose of a transaction. Pre-contractual negotiations, including a provisional consensus, are not admissible to infer the meaning of the contractual wording.

The mining company operated an open-cast coal site and was obliged to carry out restoration works. After replacement of parent-company guarantees, it entered an escrow account agreement with the council. Clause 4.2 required quarterly deposits intended to build a fund of £15 million for restoration.

The company made no deposits. The council obtained summary judgment and an order requiring payment of £6.25 million into the account from HHJ Keyser QC in the Circuit Commercial Court: [2018] EWHC 1506 (QB).

On appeal, the company maintained that missed quarterly payments were merely rolled forward and created no presently enforceable obligation before the funding longstop date of 30 June 2022. It also relied on material generated during the negotiations as evidence of the clause’s genesis.

1. Appeal dismissed. The mining company was under a current and continuing enforceable obligation to make the quarterly escrow payments. The judge was right to enforce that obligation by specific performance.

2. Clause 4.2 required the amount payable on each Funding Date to be calculated on that date. The words “subject to” and “as adjusted” required account to be taken of clauses 4.2(b) and (c), which increased the amount due on a later Funding Date by unpaid arrears. They did not require a retrospective reduction or extinction of the sum due on the missed date. The references to an “outstanding amount payable” confirmed that the earlier liability subsisted.

3. The company’s construction depended on implying a term that a missed payment ceased to be due until the next Funding Date. That term was inconsistent with the express language of obligation, including “shall”, “payable” and “outstanding”. It would make each quarterly payment optional, undermine the purpose of building a restoration fund while mining generated income, and be commercially irrational.

4. Arnold v Britton [2015] UKSC 36 required caution in invoking commercial common sense to displace contractual language. It did not assist the company, because its construction required words absent from the agreement and contradicted its language, purpose and effect. The apparent redundancy of the longstop provision could not justify that construction.

5. The Proposal and council report were admissible to identify the objective commercial purpose of establishing an escrow fund. They were not admissible to show that the parties intended clause 4.2 to give “rolled forward” payments the meaning advanced by the company. Under Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, negotiations cannot be used to draw inferences about contractual meaning, even where they indicate a provisional consensus. In any event, the negotiations concerned inability to pay and used different language from clause 4.2.

• Court of Appeal (Civil Division) Dismissed the appeal and upheld the order for specific performance: [2019] EWCA Civ 526.

• Business and Property Courts of England and Wales, Circuit Commercial Court (QBD) HHJ Keyser QC granted summary judgment for the council and ordered the mining company to pay £6.25 million into the escrow account: [2018] EWHC 1506 (QB).