A recent case illustrates the importance of clarity in the contractual arrangements associated with the disposition of a debtor’s assets. In the case, the Court appointed receiver was given Court approval for an auction services agreement. Under that agreement, the auctioneer was to conduct an auction sale of the debtor’s assets and was entitled to charge and collect a buyer’s premium equal to a minimum of 12% of the sales price. This is typical in auction agreements and, simply put, provides that an asset which is sold for say $100,000 results in the buyer paying $112,000, with the auctioneer keeping $12,000 and not being accountable to the Receiver for that. In this instance, the auctioneer received a private offer to purchase substantially all of the debtor’s assets for $8,500,000 prior to the auction. That price was considered to be better than the result would have been at auction. The offer made no mention of a buyer’s premium. The private sale closed and the Receiver demanded its full share of $8,500,000. The auctioneer demanded that the Receiver pay 12% of the $8,500,000 in respect of the buyer’s premium prior to the allocation of sale proceeds. When the Receiver refused, the auctioneer obtained a handwritten amendment to the offer post-closing indicating that the purchase price was inclusive of a buyer’s premium.

The Court at the first instance dismissed the auctioneer’s claim to a buyer’s premium relying on “the entire agreement” section contained in the offer for the sale of assets.

On appeal, the Court of Appeal overturned the decision and ordered the Receiver to pay a buyer’s premium. The Court noted that all parties were aware that the auction services agreement provided for a buyer’s premium and that the ultimate purchaser was aware of that agreement as well. The Court held that contractual interpretation of commercial documents is to be in accordance with sound commercial principles and good business sense, and in a way which avoids commercial absurdity. In this case, the Court held that a commercial absurdity would result if the auctioneer was entitled to receive the buyer’s premium from a winning bid at auction, but would not receive a premium when it obtained a much higher value under a private sale. The Court determined that awarding a buyer’s premium to the auctioneer produced a fair result whereas the denying the buyer’s premium would provide a $700,000 windfall to the Receiver.

This case provides insight into the Court’s view of contractual interpretation of commercial agreements and highlights the importance of careful and judicious drafting.