In Anglo Continental Educational Group (GB) Ltd v Capital Homes (Southern) Ltd [2009] EWCA Civ 218, the English Court of Appeal ruled that where neither party’s interpretation of a clause, which was poorly drafted and difficult to interpret, provides a satisfactory solution, the Court prefers an interpretation that makes the clause effective, over an interpretation that results in the clause being void.

BACKGROUND

The parties in this case reached an impasse over a contractual provision for a discount in the calculation of the purchase price for two properties. The properties fell within a conservation area and were subject to covenants that prevented their development without the consent of the covenantees, the trustees of the Cooper Dean Estate. The parties entered into an agreement on 4 January 2006 subject to the buyer, Capital Homes, obtaining planning permission for the development of the properties. Both parties had the right to terminate the agreement if planning permission was not obtained within nine months, subject to Capital Homes’ right to waive planning permission.

Under the agreement, the purchase price was £862,000 “less the amount (including covenantees’ fees and costs) required to obtain a deed of release/variation of the covenants…to enable the development to be implemented”. Those fees were estimated between £8,000 and £10,000.

Capital Homes decided to waive the condition requiring planning consent. Completion did not, however, take place because a dispute arose as to the precise amount payable.

THE DISPUTE

Anglo Continental issued proceedings claiming that no discount was payable where the buyer had waived the planning condition and no deed of release/variation of the covenants was in existence at the contractual completion date. Capital Homes counterclaimed for damages for breach of contract, claiming that the discount was allowable but, as it couldn’t be calculated at completion, a term should be implied for the deduction of an estimated amount at completion with the true amount to be determined at a later date.

At first instance, the judge disagreed with both interpretations. He declined to make a declaration as to what in his judgment was the true interpretation of the agreement, asserting that the declaration should only be made on the basis of a submission advanced by one or other of the parties.

COURT OF APPEAL DECISION

According to the Court of Appeal the agreement was not well drafted and neither party’s interpretation produced a satisfactory solution. However, where an agreement was susceptible to an interpretation that would make it enforceable and effective, the Court should prefer that interpretation to any interpretation that would result in it being void. The Court should also prefer an interpretation that produced a result that the parties were likely to have agreed over an improbable result. The judge considered it improbable that the parties would have agreed that there should be no discount for the cost of obtaining release of the covenants where the planning condition had been waived.

In the Court’s view, the discount was not conditional on planning permission and was calculable on the basis of what was reasonably required for the purpose of obtaining the release/variation of the covenants such as would enable the development.

In addition, it was held that the judge had been wrong to find that he had no jurisdiction to make a declaration.

COMMENT

This was an expensive way for the parties to find out that neither of them was right. As the recession hits, businesses may be tempted to cut costs and ask lawyers to put together deals on a shoestring or, worse, cobble agreements together themselves, storing up expensive problems for the future, with poor drafting of contractual terms at the heart of them.