Context of contract terms key to housebuilder's share of profits agreement, court rules

The Council sold land to Stewart Milne Group (SMG) in 2004 for £365,000 and negotiated terms entitling it a share of any profits SMG made on the land.

There were three circumstances which would trigger payment of a proportion of the profits: if SMG  bought out the Council's rights to the profit share; if SMG leased the property to a third party for more than 25 years; and if SMG sold the property to a third party. 

In 2006 when SMG sold the land to a subsidiary for £483,020 it said that as certain pre-agreed costs were to be deducted from the price paid by the subsidiary and this resulted in a loss to SMG, no profit was realised and no additional payment was due to the Council.

Although not expressly provided for in the property contract, Aberdeen City Council argued that the intention of the profit share provision in the event of sale required SMG to calculate whether it had to pay a share of profits based on the "open market valuation" of the land at the time of sale rather than on the basis of the "gross sale proceeds" but SMG disagreed. The Court of Session in Scotland sided with the Council and SMG lost its appeal against that ruling at the Supreme Court on Wednesday.

The Supreme Court ruled that the "context" of the terms set out in the contract between the disputing parties had meant that SMG should have assessed the Council's entitlement to a share of the re-sale profits based on an open market valuation of the land.

"The context shows that the intention of the parties must be taken to have been that the base figure for the calculation of the uplift was to be the open market value of the subjects at the date of the event that triggered the obligation. In other words, it can be assumed that this is what the parties would have said if they had been asked about it at the time when the missives were entered into," the Supreme Court ruled. (13-page / 52KB PDF)

"The fact that this makes good commercial sense is simply a makeweight. The words of the contract itself tell us that this must be taken to have been what they had in mind when they entered into it," it said. "The only question is whether effect can be given to this unspoken intention without undue violence to the words they actually used in their agreement. For the reasons I have given, I would hold that the words which they used do not prevent its being given effect in the way I have indicated."

The Court had derived the context of what the contract meant by assessing in full those parts of the contract that set out the calculation of what extra money the Council would be entitled to.

"The parties expressly agreed that in the case of a buy out or lease the profit would be arrived at by reference to market value," the Supreme Court said. 

Nicola Davey, expert in property law at Pinsent Masons, the law firm behind Out-Law.com, said the Court had placed less emphasis on the 'commercial good sense' test than the Court of Session had. "Rather, it emphasised the objective intention of the parties in light of the context of the contract as a whole," she said.

"This can be contrasted with the recent English case between Rainy Sky and Kookmin Bank in which the commercial good sense test was used to decide between two differing interpretations of the relevant contract," said Davey. "This test was not the key interpretative tool in the SMG case.  Common sense has won the day and the original intentions of the parties involved upheld, but the case highlights that tight drafting of such clauses is always best so that there can be no doubt as to what a contract intends."

Aberdeen City Council said it was "pleased" with the ruling. It has said that SMG owes it £1.7 million as a result of the re-sale arrangements between the two parties.

"The contract at the centre of the dispute was drawn up to ensure Aberdeen City Council on behalf of the people of Aberdeen obtained the best value for the land ... by securing a share of the profits from any onward sale of this piece of land by the Stewart Milne Group, which should have been made at proper market value," the Council said in a statement. " We were confident that we were right in pursuing the case through the courts to achieve the right result for the city and the people of Aberdeen. The council wishes to resolve this matter speedily, and will make every effort to recover monies due by negotiation or, if required, court proceedings."

SMG said it accepted the ruling but said the Council's estimation of what it is owed is based on an "overstated assumption". It wants the Council to agree to an independent review of the worth of the land.

"We appointed external experts to review independently the value and on the basis of the criteria determined by the Supreme Court, their assessment of the value which will be due to be paid by Stewart Milne Group is substantially below £0.5m," SMG said in a statement.

"We are keen to appoint in conjunction with Aberdeen City Council an independent expert external to both parties who can look at the full information and decide the value to be paid," it said.. "We will be happy to abide by whatever valuation is decided by this independent expert."