Ceviz v Frawley & Anor

A written agreement for a joint business venture may require the court to infer the parties’ intended corporate structure from its language, purpose and commercial context. Where profit-sharing provisions would otherwise be illusory, they may support a construction that the claimant was to receive the corresponding shareholding. A provision excluding a party from day-to-day responsibilities may support an intended directorship where the agreement otherwise gives that party executive powers. Rescission for innocent misrepresentation remains discretionary. It may be refused where restoration is impossible, the claimant has affirmed the agreement or delayed substantially, or it is equitable to uphold the agreement and award damages in lieu. Damages under section 2(1) of the Misrepresentation Act 1967 require proof of loss.

The claimant agreed with the defendants to establish and operate a pizzeria through a company to be incorporated at premises previously occupied by the claimant’s business. The written agreement provided for weekly payments, later profit-sharing, an option concerning sale of the business, and the defendants’ responsibility for day-to-day management. It did not expressly state the parties’ shareholdings or the claimant’s directorship.

The defendants alleged that the claimant had misrepresented the existence and duration of a lease and sought rescission, repayment and damages. The claimant sought payment, recognition of his shareholding and appointment as a director. The central issues were the construction and implication of the agreement, breach, misrepresentation, rescission and damages.

1. Construction and implication. The court construed the written agreement objectively, having regard to its language, provisions, purpose, known background and commercial context. Negotiations and post-agreement conversations were not admissible as aids to construction. The express terms had to be construed before any implication of terms was considered.
2. The reference to the claimant having no fixed responsibilities was more consistent with his being a director than with his having no corporate role. The sale option also contemplated that he would have authority to act for the company. The agreement therefore required all three parties to be directors, with the defendants responsible for day-to-day management for at least three years. After that period and until the end of year five, the claimant could require a sale of the business or remain as sole director if the defendants resigned.
3. The profit-sharing clause was most coherently construed as giving the claimant a 50% shareholding from year two. The agreement was made between the three individuals, not the unincorporated company. Without that construction, the defendants could potentially defeat the claimant’s profit entitlement by controlling directors’ remuneration. Section 51 of the Companies Act 2006 supported the conclusion that the agreement created personal obligations between the parties.
4. Breach. The agreement remained effective. The defendants were in breach by failing to make the weekly and profit payments and by failing to procure the claimant’s 50% shareholding and appointment as a director.
5. Misrepresentation and rescission. The claimant represented that he was transferring the existing lease from Chai to a new company. That representation implied that there were no reasonable grounds to believe that assignment was impossible, that the lease was vulnerable to imminent loss, or that the new pizzeria could not occupy the premises. Those implied representations were false, but the express representation was not fraudulent. The defendants did not rely on the matters in which the representations were false.
6. Even assuming reliance, rescission would have been refused. Restitutio in integrum was impossible because the parties’ positions had materially changed and the defendants sought to retain the benefit of the venture while excluding the claimant. The defendants had affirmed the agreement, or alternatively delayed substantially, and the court would have upheld the agreement under section 2(2) of the Misrepresentation Act 1967, with nominal damages in lieu of rescission if necessary.
7. No damages under section 2(1) of the Misrepresentation Act 1967 were awarded. The defendants failed to prove loss. The claim succeeded and the counterclaim failed.

First-instance decision. No appellate history was stated in the judgment.