The Court of Appeal (CoA) was asked to consider whether the High Court was wrong to have concluded that a profit-sharing agreement was not engaged.
Background:
The claimant's father entered into a profit-sharing agreement (PSA) with the respondent for the sale of the real estate and trademarks in a golf course business, Valderrama. Under the terms of the PSA, a profit share was expressed to be triggered in the event of the sale of real estate assets.
When the claimant's father died in 2013, the rights under the PSA passed to the claimant. In 2015, MGI sold the shares in Soto and Campo to a third-party purchaser, but not the real estate assets themselves. The claimant started proceedings claiming that either the sale had triggered the profit-sharing rights under the PSA or else he was entitled to damages for breaches of the PSA. The Judge, dismissing the claim, held that the PSA provided for a payment following the sale of the underlying real estate and did not apply to a sale of the shares. The appellant appealed. He submitted that the Judge's conclusion that the profit share only applied to a sale of underlying assets was wrong, both in terms of the natural meaning of the words used in the PSA and commercial reality.
Decision:
The CoA dismissed the appeal and held that the claimant’s entitlement to a profit share under the terms of a PSA was not triggered by the sale of the shares in the relevant business but rather upon the sale of the business’s underlying assets.
The CoA also noted that the High Court Judge’s conclusion was neither vitiated nor incorrect. The Court was unwilling to follow the claimant’s approach based on commercial common sense as this would have relegated the language of the PSA to a far too subservient role in the process of construction. Then noting that “It is obviously wrong in principle to start with a preconceived view as to the commercial benefits to be derived by a party from an agreement and then to shoe-horn the language of the agreement to conform with that view.” Instead, the right approach was to analyse the language of the PSA and the provisions defining the event upon which the obligation to pay a profit share might arise. The natural and ordinary language of the PSA did not state that a sale of the shares triggered a profit share. Further, that construction did not lead to commercially unreal or absurd results. Accordingly, the Judge's interpretation of the PSA would be upheld.
Implications:
This case is a good reminder that the terms of an agreement are crucial and will form the starting point of any analysis. Courts will not be willing to depart from a clearly drafted asset or share sale agreement. Commercial common sense will only be considered if such terms are not clear. In this case, the language, as well as the circumstances, justified distinguishing between an asset sale and a share sale.