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Scots court issues ‘timely reminder’ on interpretation of terms in contracts

Out-Law News | 29 Aug 2022 | 8:35 am | 2 min. read

A ruling in the Sheriff Appeal Court has emphasised its focus on the natural and ordinary meaning of the words used when interpreting a contract, according to one legal expert.

The dispute arose when Paul McClure left his role as director of Remote Measurement Systems Ltd (RMS) in May 2020. McClure remains a 40% shareholder in the company, which provides support services to the oil and gas industry. The remaining 60% of shares in RMS have been held by Newtech Services Holding Ltd since February 2017, when it bought them from McClure through a share sale and purchase agreement (SPA). McLure, Newtech and RMS are all parties to a shareholders' agreement that was also signed in February 2017.

Clause 4.2 of the shareholders’ agreement stated that any shareholders with a stake of more than 25% in RMS “shall be entitled to appoint and maintain in office one director”. When McClure did not appoint a new director upon stepping down, Newtech sought an order requiring him to find a replacement director, as well as payment of £1.4 million from McClure for breach of contract. Both were rejected by the Sheriff Court.

Graham Horsman

Senior Associate

The starting point with interpretation should be the ordinary and natural meaning of the words used.

At the Sheriff Appeal Court, Newtech argued that when properly read in context, Clause 4.2 obliged McClure to appoint a new director when he stepped down from the role. It said the sheriff had mistakenly concluded that, in the absence of a definition of the word ‘entitled’ used in Clause 4.2, the term should be given its “normal and natural meaning”. It added that the sheriff should have given more weight to the use of the word in the context of the shareholders’ agreement as a whole.

Clause 2.2, it said, requires each shareholder to use “reasonable endeavours to promote the success” of RMS, while Clause 4.6 requires the attendance of at least two directors – including attendance by at least one director appointed by each shareholder – at a board meeting for it to be quorate. Newtech said that Clause 4.7 requires that certain board resolutions must be approved by directors appointed by both the appellant and the respondent. It argued that, without a director being appointed by McClure, RMS was unable to make certain decisions listed in Clause 4.7, decisions to plan for its success.

Meanwhile, McClure argued that the language of Clause 4.2 did not contain a mandatory requirement and that the shareholders’ agreement as a whole anticipated that one or other of the shareholders might not appoint a director. He said that Clause 4.1 made provision for “up to” a maximum of three directors. If Clauses 4.2 and 4.3 were obligatory then the clause would require there to be exactly three directors instead.

McClure added that Clause 4.6 provided for a quorum to include a director appointed by each shareholder “provided that such a director holds office at the relevant time”. He argued that this provision clearly anticipated that a shareholder might not appoint a director.

The Sheriff Appeal Court rejected Newtech’s arguments, finding that Clause 4.2 entitled McClure to appoint a director, but did not oblige him so to do. Handing down the decision of the court (9 pages / 458KB PDF), Sheriff Principal C D Turnbull said: “There is no uncertainty as to the language adopted. The language of Clause 4.2 is unambiguous. Therefore, the natural and ordinary meaning of the word ‘entitled’ confers a right, not an obligation.”

Graham Horsman of Pinsent Masons said: “This case is a timely reminder of the starting point for interpretation in any contract – not just an SPA. Looking at another typical contract, such as a lease, for example, it usually operates largely through well-trodden styles. However, it will on occasion throw up an irregularity. When that happens, the starting point with interpretation should be the ordinary and natural meaning of the words used.”

He added: “Assistance can be gleaned from the surrounding provisions of the contract and the commercial context, but as matters stand with the courts, where the meaning of the words or clause are not uncertain or ambiguous, the natural and ordinary meaning will prevail.”