Andy McNish – partner in our Corporate/Commercial department – discusses Bad Cases

As a commercial lawyer, cases sometimes come along that make you raise an eyebrow or even just sigh, as you realise a judge (quite unnecessarily) has just made your life more difficult.

Often this happens when the court is seeking to achieve a fair result in a specific case, but doesn’t factor in the unintended consequences of the decision.

The recent tax case of McQuillan v HMRC ([2016] UKFTT 305) is a case in point: in order to help a husband and wife qualify for Entrepreneurship Relief, the First Tier Tribunal managed to decide that shares that don’t carry any dividend rights at all effectively carry a fixed zero percent dividend and are therefore (as fixed dividend shares) not included in a company’s ordinary share capital.

Given that shares with voting and capital rights which don’t carry a dividend have always until now been regarded as ordinary shares – both by practitioners and HMRC themselves – and that all sorts of tax and other legal consequences can flow from the structure and ownership of a company’s ordinary share capital, it is to be hoped that this rather surprising decision is reversed when the matter gets in front of the Upper Tribunal. An appeal by HMRC is ongoing.

The other trigger for troubling case law tends to be judges living in Ivory Towers, far away from real world commercial practice. A recent example of this is the case of Dooba Developments Ltd v McLagan Investments Ltd ([2016] EWHC 2944 (Ch)), where the court was persuaded to listen to a clever grammatical argument and find ambiguity where none existed in commercial reality.

A contract related to the purchase of some land and its development as a superstore. The contract was based on a standard precedent often used in such developments. The buyer had a right to rescind a conditional contract where “all of the Conditions have not been discharged … by the Longstop Date”. There is no real commercial ambiguity as to what was intended here. However there is grammatical ambiguity. What happened was that some but not all of the conditions had been met by that date.

In the initial summary hearing the High Court had previously applied a commercial, common sense interpretation based on the principles set out in Arnold v Britton ([2015] UKSC 36) and decided that the clause entitled the buyer to rescind unless all of the contractual conditions had been satisfied by the longstop date. On appeal from the summary decision, however, it now applied a more literal approach based on grammatical correctness and determined that the right to rescind only applied where none of the conditions had been discharged by the longstop date.

The pendulum has been swinging between strict and purposive construction of documents for many decades now of course, but this particular decision doesn’t seem to assist in giving parties the certainty of interpretation which those who argue for stricter interpretation claim as the main benefit of such an approach.

The practical effects of this case – indicating as it does that the High Court will now ignore common sense interpretation to resolve an ambiguity in favour of applying strict grammatical construction – are to ratchet up the paranoia levels required when drafting any commercial contract (no doubt adding time and cost across the board) and, on a more general level, make it less likely that agreements (whether drafted by lawyers or not) will be enforced in line with the commercial intention of the parties at the time. Of course this is just a first instance decision, so it’s possible further guidance will come down from the higher courts in due course.

For more information about Andy and his work, please click HERE.

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