Contractual Interpretation and Rectification: Insights from Paterson v Angeline (Scotland) Ltd [2021] ScotCS CSOH_101

Introduction

The case of Keiron Paterson Against Angeline (Scotland) Ltd ([2021] ScotCS CSOH_101) before the Scottish Court of Session presents a pivotal examination of contractual interpretation and rectification within the context of share purchase agreements (SPA). The dispute centers around the interpretation of specific contractual definitions regarding "Current Assets" and "Current Liabilities," and whether these definitions sufficiently encompass the net current assets (NCA) of all entities involved in the transaction.

The parties involved are:

Pursuer: Keiron David Paterson, represented by ECM MacLean of Blackadders LLP.
Defender: Angeline (Scotland) Limited, represented by Dean of Faculty of Morton Fraser LLP.

Central to this case is the SPA dated 5 July 2019, which outlines the terms under which Paterson sold his pharmacy business to Angeline (Scotland) Ltd. The crux of the legal battle lies in the interpretation of the "Initial Deferred Consideration" and whether adjustments to this consideration should reflect the net current assets of both the parent company (KPL) and its subsidiary (ADHL).

Summary of the Judgment

Lady Wolffe adjudicated the matter in the Outer House of the Court of Session, delivering an opinion that allows the pursuer's case to proceed to proof on multiple legal grounds. The pursuer seeks an upward adjustment of the Initial Deferred Consideration based on the inclusion of ADHL's net current assets, arguing that the SPA's definitions were intended to cover both entities. Conversely, the defender maintains that the definitions explicitly refer only to "the Company" (KPL), excluding ADHL.

The court meticulously analyzed the SPA's provisions, the surrounding factual matrix, and relevant case law to determine whether the contractual definitions should be interpreted strictly or flexibly to reflect the parties' commercial intentions. Ultimately, Lady Wolffe found that the pursuer had sufficiently pleaded a relevant case under three legal grounds: interpretation, implication, and rectification, thereby permitting the case to proceed to proof.

Analysis

Precedents Cited

The judgment extensively references seminal cases that shape the principles of contractual interpretation and rectification in Scots law. Notable among these are:

The Moorcock (1889) 14 PD 64
Investors Compensation Scheme Ltd v West Bromwich Building Society (1998) 1 WLR 896 ("Investors Compensation")
Bank of Scotland v Dunedin Property Investment Co Ltd (1998 ScotCS 657) ("Dunedin Property")
Luminar Lava Ignite v Mama Group PLC [2010] CSIH 1
Rainy Sky SA v Kookmin Bank [2011] UKSC 50
Arnold v Britton & Ors [2015] UKSC 36
Wood v Capita Insurance Services Ltd [2017 UKSC 24]
Patersons of Greenoakhill Ltd v Biffa Waste Services Ltd 2013 SLT 929
Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38

These cases collectively underscore the judiciary's evolving stance on balancing textualism and contextualism in contract interpretation. They highlight when courts may prioritize the literal meaning of contract terms versus the commercial purpose and factual background surrounding the agreement.

Legal Reasoning

Lady Wolffe's legal reasoning is anchored in the dichotomy between textualism—the strict interpretation of contract terms—and contextualism—the consideration of surrounding circumstances to ascertain the parties' intent.

The defender advocated for a textualist approach, asserting that the definitions within the SPA were clear and unambiguous, thus excluding any external context. Citing Global Port Services v Global Energy and similar cases, the defender emphasized that in the absence of ambiguity, the natural meaning of words should prevail, even if the outcome seems commercially implausible.

Contrarily, the pursuer invoked contextualism, arguing that the intricate factual matrix and the commercial practices in the sector necessitated a more interpretative approach. By referencing cases like Inglis v Buttery & Co (1878) and Luminar Lava, Lady Wolffe acknowledged that surrounding circumstances could and should inform the interpretation when they illuminate the commercial purpose of the contract.

The court found merit in the pursuer's arguments, recognizing that the exclusion of ADHL's NCA from the Completion Accounts Statement, despite their inclusion in the broader SPA, created a discordant and commercially nonsensical outcome. This inconsistency suggested a drafting error, making a case for rectification to align the contract's terms with the parties' likely intentions.

Impact

This judgment serves as a critical reference for future contractual disputes, particularly in scenarios involving complex commercial agreements like SPAs. It reiterates the judiciary's willingness to delve beyond the superficial text to uphold the contract's commercial integrity and the parties' true intentions.

Specifically, the case underscores the importance of:

Ensuring that contractual definitions are comprehensive and reflective of all parties' interests.
Recognizing and rectifying drafting errors that lead to commercially irrational outcomes.
Balancing textual clarity with contextual relevance to preserve the contractual bargain.

By allowing the case to proceed to proof, the court has set a precedent that parties may successfully challenge contractual terms by demonstrating that a strict textual interpretation contravenes the contract's commercial purpose.

Complex Concepts Simplified

            Net Current Assets (NCA): This refers to the difference between a company's current assets (like cash, stock, and debtors) and current liabilities (like trade creditors and taxes). In this case, the inclusion or exclusion of ADHL's NCA significantly impacts the financial obligations stemming from the SPA.
        

            Initial Deferred Consideration: Part of the total payment in a share purchase agreement, this is a sum that may be adjusted based on post-completion financial assessments, such as the NCA.
        

            Completion Accounts: Financial statements prepared post-completion of the SPA to assess any necessary adjustments to the consideration based on the actual financial position at the time of sale.
        

            Interpretation vs. Implication vs. Rectification:
            Interpretation: Determining the meaning of contractual terms based on their language.
Implication: Inferring terms that are not explicitly stated but are necessary to reflect the parties' intentions.
Rectification: Correcting the written contract to accurately reflect the agreed-upon terms due to a mutual mistake or drafting error.

        

Conclusion

The judgment in Paterson v Angeline (Scotland) Ltd provides a nuanced exploration of contractual interpretation and the mechanisms available to rectify ambiguities or errors that undermine the contract's commercial purpose. By permitting the pursuer to proceed with proof on all three legal grounds—interpretation, implication, and rectification—the court reinforces the principle that contracts should faithfully reflect the parties' mutual intentions and commercial objectives.

This case underscores the judiciary's commitment to upholding fair and commercially sensible agreements, even in the face of complex contractual language and stipulations. Future litigants and legal practitioners can draw valuable lessons on the importance of clear contractual drafting and the avenues available to address flaws that may emerge post-execution.