Companies tripping up on contractual terms

Contract law is usually one area of commercial litigation practice on which Scottish and English lawyers can agree. Harmonisation of contract law across the UK is important for businesses, giving them certainty that any dispute will be treated consistently, regardless of whether it arises north or south of the border.

The principles applicable to interpretation of contracts are long-established by the Supreme Court (Rainy Sky SA v Kookmin Bank [2011] UKSC 50; Arnold v Britton [2015] UKSC 36; Wood v Capita Insurance Services [2017] UKSC 24). The Scottish courts have followed suit (Hoe International v Andersen & others 2017 SC 313; Ashtead Plant Hire v Granton Central Developments 2020 SC 244). Rectification of contracts is less well developed across the jurisdictions, particularly where rectification is based on a non-binding prior agreement. Rectification also has a different legal basis in Scotland and England with the former having a legislative foundation in the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 and the latter being based on common law. However, in recent years the Court of Appeal has given us FSHC Group Holdings Limited v Glas Trust Corporation Limited [2019] EWCA Civ 1361, which the Outer House of the Court of Session followed in Briggs of Burton plc v Doosan Babcock Ltd [2020] COSH 100.

The Court of Session has had to deal with these areas of law in Paterson v Angelline (Scotland) Limited. In Paterson, the defender, Angelline, was buying a pharmacy from Mr Paterson. It entered into a share purchase agreement with him and a dispute arose over the manner in which the deferred consideration was calculated under the agreement. On the pursuer’s interpretation he was due an additional payment. On the defender’s interpretation, it was due money back. The point of contention was that a change had been made to the draft agreement in the middle of the negotiation process, shortly before completion. The change was not concealed, but highlighted and track-changed so it was clear exactly what had been amended. Mr Paterson nevertheless claimed that this final version of the agreement did not reflect the parties’ common intention.

Rectification precluded

Mr Paterson relied on the heads of terms and on pre-contractual discussions between the parties and their lawyers. He even suggested at one point that Angelline’s solicitors had made a mistake because the principal adviser was on holiday when the disputed wording was inserted. Failing an interpretation in his favour, he sought to have the contract rectified. Angelline’s position was more straightforward: the only thing that mattered was exactly what the final signed version of the contract said, which, Angelline argued, was unambiguous and clear. The exclusionary rule against reliance on pre-contractual negotiations applied and rectification was precluded.

At first instance, the commercial judge had been attracted to the pursuer’s submission. There was no reason why the court could not consider the pre-contractual material and the words of the contract, no matter how clear, had to be interpreted in light of all the factual background. If, considering the words in their full context, the result was an unusual one then a term could be implied and rectification was not excluded despite the clear terms of the final signed agreement ([2021] CSOH 101). In relation to rectification the commercial judge distinguished FSHC and Doosan Babcock.

On appeal, the Inner House reversed the commercial judge’s decision. Primacy had to be given to the words of the contract and, while the court may have regard to the surrounding circumstances, if the words were clear, they had to be applied. In Paterson there was no ambiguity, and the court could not rewrite the contract nor, in such a case, rely on pre-contractual negotiations. Implication of a term was impermissible because it was not necessary in order to give the contract business efficacy. The contract worked well without a term being implied. The most interesting part of the court’s decision was in relation to rectification. In FSHC the Court of Appeal had focused on there being an ‘outward expression of accord’ and the defender argued that that was the appropriate test in Scotland as well (relying on Doosan Babcock).

The court disagreed, pointing out that the Scottish Law Commission had considered that wording prior to the introduction of the 1985 act and had chosen not to adopt it. The test in section 8 of that act depended solely on whether the final signed agreement accurately expressed the common intention of the parties. That intention, the court explained, had to be assessed objectively, reiterating that commercial contracts are made by what people say and not what they think in their inmost minds (Muirhead & Turnbull v Dickson [1905] 7 F 686).

However, the court, in any event, found for the defender. The only evidence in Paterson as to the parties’ intention was the negotiated draft circulated shortly before completion which reflected the final agreement. It was of no assistance to look at prior drafts or correspondence between the parties in order to identify their intention. These drafts and discussions had all been superseded by the final agreement and that precluded rectification.

Richard McMeeken is a partner in the litigation and dispute resolution team of Scottish firm Morton Fraser