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23rd January 2012

Unusual decision on implying terms into a contract

In a recent decision, Aberdeen City Council v Stewart Milne Group Limited, the Supreme Court implied terms into a contract to reflect the intentions of the parties rather than the contract's actual wording.

The case was an appeal from the judgment of a Scottish court on the interpretation of a contract for the sale of the Council’s land. The purchase price was subject to a possible uplift in certain circumstances including on a subsequent sale of the site by the company. In that event the further payment was to be calculated by taking a percentage of the gross sale proceeds less the allowable development costs.

Some time after the sale of the land, the company disposed of the property at an undervalue to a company within its own corporate group and, as the price was less than the allowable development costs, argued that no uplift was payable. The Court disagreed and decided that an open market valuation should be used to arrive at the base figure for calculating the uplift. The Court held that the context showed that this was what the parties had intended.

There were two other triggers for payment of an uplift. The mechanism for calculating the base figure for the uplift for both these triggers included reference to an open market valuation. The mechanism for calculating the uplift in the case of the onward sale did not. The Court acknowledged the “well understood limits to the extent to which a court can depart from the express terms of an agreement that has been reduced to writing”. Nevertheless it decided that it would not transgress these limits to imply a term to the effect that an open market valuation should be used to arrive at the base figure in the event of a sale which was not at arms length in the open market and not just on the occurrence of the other triggers.

The Supreme Court therefore imported into an agreement a form of protection for a vendor which would normally be included in this type of agreement but which in this case clearly was not. In our view the Supreme Court has on this occasion adopted a more lenient and forgiving approach to a drafting omission than has been its practice in the past, and it will be interesting to see if this heralds a more fundamental development in the rules of contractual interpretation, or will stand as a one off decision on its facts.

Despite its surprising nature, the decision does highlight the importance of clear and careful drafting throughout a contract. For more information on the drafting points made by this case or to discuss its implications for contract interpretation going forward, please contact Martin Smith on martinsmith@hewitsons.com or on 01223 461155.

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