Say what you mean: the importance of express terms in a contract
In Contra Holdings Limited v Mark Bamford [2023] EWCA Civ 374, the Court of Appeal looked at the question of whether an obligation had arisen to pay a success fee, in circumstances where there was a dispute about whether the express condition required to trigger the obligation had been met.
The judgment builds upon the recent Supreme Court judgment in Barton v Gwyn Jones [2023] UKSC 3 covered in an earlier Perspective and highlights the limitations of asserting implied terms and attempting to invoke the factual matrix to support an interpretation that contradicts the express wording of a contract. The judgment will be of interest to those entering into contingent obligations (particularly success fee arrangements) in all sectors.
Facts
The claimant, Contra Holdings Limited (“Contra”), via its CEO Richard Bamford had provided consultancy services to the defendant, Mark Bamford, from around 2005 in respect of a possible sale of the JCB Group in 2012.
Contra entered into a written agreement (the “Agreement”) with Mark Bamford which provided that Contra would be paid a “success fee” of £2.6m for services provided by Richard Bamford up to and including a settlement reached on 17 June 2011 between Mark Bamford and his brother, Anthony Bamford. The contract also stated that Mark Bamford would keep Richard Bamford updated on the enactment of the settlement and the steps being taken to prepare the JCB Group for sale in 2012 (“Project Crakemarsh”). Under the terms of the Agreement, Mark Bamford anticipated that Richard Bamford would be his “commercial advisor” for Project Crakemarsh, in respect of which Contra would ensure Richard Bamford was able to assist on an “exclusive basis”. The Agreement provided that in consideration of those services, Contra would be paid a further “success fee” on the completion of Project Crakemarsh in the amount of 2% of the 50% shareholding in the JCB Group held by two trusts (less the £2.6m success fee mentioned above) (the “Further Success Fee”).
While the £2.6m success fee was paid to Contra, the Further Success Fee was not paid as the JCB group was not ultimately sold.
Contra claimed that Mark Bamford had breached the Agreement in failing to pay the Further Success Fee. Contra argued that the Agreement expressly provided that the Further Success Fee was payable not only on the sale of the JCB group but also on any other type of restructuring of the group. Alternatively, Contra argued there was an identical implied term which provided the same. In addition, Contra argued that there was an implied term that if the JCB group was not sold, Contra would regardless be paid an appropriate rate for the services performed after 17 June 2011.
Mark Bamford’s position was that the Further Success Fee was only payable on completion of Project Crackermarsh in accordance with the terms of the Agreement. Accordingly, he made an application for strike out and/or reverse summary judgment.
High Court judgment
The High Court granted Mark Bamford’s application and dismissed Contra’s claim on a summary basis. The Court rejected Contra’s arguments in their entirety, agreeing with Mark Bamford that the express terms of the Agreement made clear that the Further Success Fee was only due in the event of the sale of the JCB group. There was nothing in the factual matrix surrounding the agreement that justified an alternative interpretation of the Agreement which would have conflicted with the natural and ordinary meaning of the words used.
Similarly, the Court did not accept that the Agreement included the implied terms contended for by Contra. It held that the implied terms were neither necessary for the operation of the Agreement nor so obvious that they went without saying. The Court also rejected the Third Argument, holding that the concept of a success fee was uncomplicated, and that if the agreed trigger for the Further Success Fee did not occur, there was no basis for implying the term suggested.
Contra appealed principally on the basis that the Court:
1) had adopted an erroneous approach to the interpretation of contracts where the surrounding circumstances developed in a manner that was not anticipated by the parties;
2) misinterpreted the relevant factual matrix; and
3) erred in its interpretation of the success fee element of the Agreement which, properly interpreted, was a deferred payment clause in respect of services rendered and to be rendered providing for an uplift on completion of any restructuring as opposed to a traditional success fee which did not relate to rendered services.
Court of Appeal judgment
The Court of Appeal unanimously rejected Contra’s appeal, holding that the first instance Judge had not erred in summarily dismissing Contra’s claim.
Express contractual terms
The Court of Appeal held that, based on a textual analysis of the Agreement, the reference to “Project Crakemarsh” as the condition for payment of the Further Success Fee could only be a reference to a sale of the JCB group. Accordingly, Contra was only entitled to the fee in the event of a sale.
In reaching this decision, the Court of Appeal stated, while the exercise of interpretation must be carried out against the relevant factual matrix, “it must also be remembered that it is not permissible to construct from the background a meaning that the words of the contract will not legitimately bear”. Moreover, it held that the factual matrix (leaving aside that some it arguably constituted inadmissible precontractual negotiations) did not in any event help Contra get past the clear meaning of the language in the Agreement.
The Court of Appeal added that it would also be “an obvious commercial absurdity” for Contra to have an absolute right to deferred payment in the amount of the Further Success Fee in circumstances where that fee (estimated to be £30 million (less the £2.6m already paid)) was significantly higher than the value of the services provided. In this regard, the Court of Appeal noted that Contra had valued the services of Richard Bamford in the five years leading up to the Agreement as valued at no more than £4.5 million and any further services leading up to the sale of JCB Group could not plausibly plug the gap. The scale of the Further Success Fee was “far more consistent with a conventional “success fee”, being an abnormally large reward for success with no reward in the event of failure”.
Implied contractual terms
The Court of Appeal agreed with the first instance Judge that Contra’s asserted implied terms were not sustainable “either as a matter of obviousness or business efficacy”. Applying the Supreme Court’s decision in Barton, the Court of Appeal held that the asserted implied terms were not consistent with the express and complete terms of the Agreement such that they could not be implied into the contract.
Comment
While the decision is fact specific, the Court of Appeal judgment once again (following the recent decision in Barton) highlights the need to ensure express contractual terms are clear and encompass all potential scenarios. This is particularly critical in the case of agreements concerning the conditionality of potentially sizeable success fees.
In Barton (on different facts), while the contingent payment was also denied by the majority of the Supreme Court, the decision was more finely balanced than in this case which serves to demonstrate that all scenarios should be expressly dealt with in contracts. This will serve to avoid the prospect of expensive and time-consuming disagreements regardless of the eventual outcome of such disputes.