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Natural Meaning of Contract Term Prevails

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

In the context of an agreement for the sale of an estate agency business, the Court of Appeal has ruled that a contractual clause should be interpreted in line with its ‘natural meaning’. Notwithstanding the rather surprising outcome, the commercial context did not justify a departure from a literal interpretation.

The business was sold for consideration of £800,000, to be paid by instalments over a five-year period. The contract provided that the sellers would remain non-executive directors of the company during that period so as to provide assistance to the buyer. A dispute arose over payment and the buyer purported to terminate the sellers’ directorships. The sellers argued that they were entitled to stay on as non-executive directors until the whole of the purchase price had been paid.

The sellers’ arguments prevailed at first instance. However, in reversing that decision, the Court of Appeal ruled that, on a correct interpretation of the contract, the buyer did have the power unilaterally to remove the sellers from office as soon as the agreement had been made and prior to the balance of the purchase price being paid.

The Court acknowledged that this was a surprising result. It agreed that the contract should be viewed as a whole and that the judge’s interpretation of the relevant clause at the original court hearing was a ‘possible’ one and was backed by ‘respectable arguments’. However, the Court ruled that the commercial context was not so compelling as to require a departure from the usual rule that contracts should be interpreted in accordance with their ordinary meaning. The Court concluded that in this case ‘the actual wording is a more reliable guide to construction than anything else’.

If you are selling your business with the sales consideration being received over time, we can advise you how to construct the contract for maximum protection of your position.

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