Strict Interpretation of Contract Terms in Share Purchase Agreements – Keiron David Paterson v Angelline (Scotland) Ltd

Introduction

The case of Keiron David Paterson against Angelline (Scotland) Ltd ([2022] ScotCS CSIH_33) revolves around a dispute arising from the interpretation of a Share Purchase Agreement (SPA) between the parties. The pursuer, Keiron David Paterson, was a majority shareholder and director of Keir Pharmacy Limited (KPL) and its subsidiary, A D Healthcare Limited (ADHL). The defenders, Angelline (Scotland) Ltd, acquired the shares of KPL under the SPA, leading to disagreements over the calculation of the Initial Deferred Consideration (IDC), specifically whether the net current assets of both KPL and ADHL should be included in the purchase price adjustment.

Summary of the Judgment

The Scottish Court of Session's Inner House, delivered by Lord Carloway, examined whether the SPA's term "Current Assets" should encompass both KPL and ADHL or solely KPL as defined. The court concluded that the contractual language was clear and unambiguous, limiting "Current Assets" to KPL alone. Consequently, the defenders were not obliged to include ADHL's net current assets in the IDC adjustment. The court dismissed the pursuer's claims for an implied term and rectification, upholding the defenders' interpretation of the contract terms.

Analysis

Precedents Cited

The judgment extensively referenced established precedents in contract interpretation. Key among them were:

Inglis v Buttery & Co (1878): Emphasizing that surrounding circumstances can inform contractual interpretation.
Wood v Capita Insurance Services (2017): Highlighting the objective meaning of contract language within its context.
Arnold v Britton (2015): Underlining that clear contractual terms should be given their natural meaning, even if outcomes appear commercially impractical.
Ashtead Plant Hire v Granton Central Developments (2020): Advocating for a commercially sensible construction when interpreting contracts.

These precedents collectively reinforced the court's stance on adhering strictly to the expressed terms of a contract, limiting the scope for implied terms unless absolutely necessary for business efficacy.

Legal Reasoning

The court's legal reasoning centered on the principle that the precise language of a contract governs its interpretation. The term "the Company" in the SPA was unequivocally defined as Keir Pharmacy Limited. Despite the pursuer's arguments for including ADHL's assets based on prior negotiations and the commercial context, the court held that:

The contract's words were clear and unambiguous regarding which assets were to be considered.
Implying terms or rectifying the contract would amount to rewriting its terms, which is impermissible.
Background circumstances do not override the express terms unless there is a demonstrable ambiguity.

Additionally, the pursuer failed to meet the stringent criteria required for rectification and implying terms, as established under the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985.

Impact

This judgment reinforces the sanctity of clear contractual language in commercial agreements. Parties drafting SPAs and similar contracts should ensure that all essential terms are explicitly defined to prevent ambiguities. The decision limits the courts' willingness to infer or rectify contract terms based on perceived commercial intentions or prior negotiations, emphasizing that the written agreement's language prevails. This ruling may lead to more meticulous drafting of contracts and a reduced scope for altering contract terms post-execution through implied terms or rectification.

Complex Concepts Simplified

Share Purchase Agreement (SPA): A legal contract outlining the terms and conditions under which shares of a company are sold and transferred from the seller to the buyer.

Initial Deferred Consideration (IDC): A portion of the purchase price that is paid after the completion of the transaction, subject to adjustment based on certain financial metrics.

Rectification: A legal remedy allowing a court to correct a written contract to reflect the true intention of the parties if the document contains a mistake.

Implied Term: A provision not explicitly stated in a contract but introduced by the court to reflect the presumed intention of the parties.

Conclusion

The Keiron David Paterson v Angelline (Scotland) Ltd case underscores the paramount importance of clear and precise language in contractual agreements. The court's decision to strictly interpret the SPA in favor of the expressions used, rather than inferred intentions or prior negotiations, sets a significant precedent in Scottish contract law. For practitioners and parties engaging in commercial transactions, this judgment serves as a compelling reminder to ensure that all crucial terms are explicitly and unambiguously articulated within their contracts to safeguard against future disputes.