Ms Sofia Shafi (Appellant/Claimant) v Dr Alexandra Rutherford (Respondent/Defendant)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Floyd,Lord Justice Underhill,Lady Justice Gloster |
| Judgment Date | 19 June 2014 |
| Neutral Citation | [2014] EWCA Civ 1186 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2013/2305 |
| Date | 19 June 2014 |
[2014] EWCA Civ 1186
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEEDS DISTRICT REGISTRY
(HIS HONOUR JUDGE PHILIP MARSHALL QC)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Gloster
Lord Justice Underhill
Lord Justice Floyd
Case No: A3/2013/2305
Mr Andrew Latimer (instructed by Bury & Walkers LLP) appeared on behalf of the Appellant
Mr Jonathan Bellamy (instructed by Clarion Solicitors LLP) appeared on behalf of the Respondent
This is an appeal from the judgment and order of Mr Philip Marshall QC, sitting as a deputy High Court judge, on a preliminary issue in a dispute relating to a contractual expert determination of an amount to be paid for the sale of a share in a dental practice. The judge declared, contrary to the appellant's contentions, that the determination was not valid and enforceable. The appellant appeals. Mr Andrew Latimer represented the appellant, Mr Jonathan Bellamy represented the respondent.
The dispute arose in the following way. The claimant and appellant, Ms Sophia Shafi, is a businesswoman who invests in and administers dental practices. The defendant and respondent, Dr Alexandra Rutherford, is a practising dental surgeon. In May 2007 the parties formed a company, the Shipley Dental Team Limited ("the company") in order to establish a dental practice. The parties each held 50% of the shares in the company and jointly owned the premises from which the practice carried on business. In order to establish the practice, a number of items of equipment were acquired under the terms of leases from Close Asset Finance, trading as Braemar Finance ("the Braemar leases").
In 2009 the parties decided to part company. On 17 December 2009 the parties entered into an agreement ("the agreement"). By the agreement the appellant agreed to sell her 50% shareholding in the company and her 50% interest in the business premises to the respondent, leaving the respondent to continue the practice at the premises on her own account. The agreement required the respondent to pay £25,000 on completion.
Thereafter the agreement contained detailed terms designed to enable the parties to work out the precise amount of the consideration and for resolution of any disputes on the completion account. A dispute arose concerning the proper treatment of the Braemar leases in the completion accounts. In due course this led to the appointment of Mr Richard Pughe, an independent chartered accountant, as an expert to resolve the dispute.
In the company's accounts for the year ending 2008, the Braemar leases were apparently treated as operating leases and thus as giving rise to only a small amount to be taken into account as a liability. The expert concluded that the Braemar leases were not operating leases but finance leases, and therefore that they should be treated on that basis. However, he also concluded that he was prevented by the terms of the agreement from treating the Braemar leases in that way, and was bound to treat them as operating leases, contrary to the fact. He did not therefore have to determine a subsequent question which is what sums under the leases when treated as finance leases ought to be brought into account at the completion date.
I need to set out some of the terms of the agreement. By clause 4.1, the share consideration was £136,500 less 50% of all Completion Liabilities as calculated in accordance with Schedule 4 and detailed in the Completion Accounts, and further adjusted by reference to certain other matters which are not relevant.
"Completion accounts" were defined in the agreement as:
"The unaudited balance sheet of the Company, as at the Completion Date, and the unaudited profit and loss account of the Company for the period from the Accounts Date [which is defined elsewhere as 30 June 2008] to the Completion Date, prepared in accordance with Clause 6."
"Completion liabilities" were defined as:
"all liabilities of the Company as at the Completion Date net of all relevant receipts from the PCT, as calculated in accordance with Schedule 4 as detailed in the Completion Accounts, as agreed or deemed (as the case may be) pursuant to clause 6."
That brings me to clause 6, which provided:
"As soon as practicable following Completion … the Buyer shall procure the preparation of the draft Completion Accounts by the Accountants on the basis of the requirements, accounting policies and accounting methods set out in Part II and Part III of Schedule 4."
Clause 6.5.1 provided that the parties would attempt to resolve all matters in dispute, but in the event that they failed to do so by 31 March 2010 they could refer any matter in dispute to an independent expert accountant. Clause 6.5.2 provided:
"In making such determination, such accountant shall act as an expert and not as an arbitrator and the decision shall (in the absence of manifest error) be final and binding on the parties."
Schedule 4, Parts II and III of the agreement contained provisions governing the preparation of the completion accounts. The provisions of Part II, so far as material, read:
"1.2 The draft completion accounts shall:
1.3 be prepared in accordance with the specific accounting policies and principles set out in Part III of this schedule so that, in the case of any conflict, such policies and principles shall override the provisions of paragraphs 1.4 and 1.5;
1.4 subject to paragraph 1.3, be prepared in accordance with the accounting policies, principles, practices and procedures adopted by the Company in the preparation of the Accounts, which include the policies set out in paragraphs 1, 2, 3 and 5 of Part III of Schedule 4, so that, in the case of any conflict, such policies, principles, practices and procedures shall override the provisions of paragraph 1.5;
1.5 where none of the accounting policies, principles, practices or procedures referred to in paragraphs 1.3 and 1.4 deal with the matter, be prepared in accordance with generally accepted accounting principles in the UK as applicable to small companies as at the Completion Date."
The proper construction of paragraph 1.4 of Part II of Schedule 4 is at the heart of this appeal. In paragraph 1.4, "the Accounts" is a defined term, which means, according to Clause 1.1, "the financial statements of the Company, prepared in accordance with the Act and the FRSSE as applicable to small entities for the accounting reference period ended on the Accounts Date." The accounts date is further defined as 30 June 2008. "The Act" is the Companies Act 2006 and FRSSE means Financial Reporting Standard for Smaller Entities. We have seen the accounts prepared by the company's accountant, Morris & Co, to 30 June 2008. They contain an express statement that they have been prepared under FRSSE. Under the heading "Accounting Convention", they state that the accounts have been prepared under the historical cost convention and in accordance with FRSSE effective at January 2007. They are in the short form permitted by Part VII of the Companies Act for small companies. One does not learn from them anything express about the treatment of the Braemar leases, which are not mentioned in the accounts.
Part III of Schedule 2 went on to provide some specific matters in accounting. In particular, paragraph 2.1 provided:
"In the calculation of the Completion Liabilities, liabilities shall include any and all sums paid at or payable by reference to the period up to and including the Completion Date including but not limited to [certain specific matters]."
Pursuant to the agreement, exchange and completion took place on the same day, whereupon the appellant transferred her 50% shareholding and 50% beneficial interest to the respondent and the respondent paid £25,000 on account. The respondent has continued to trade from the premises.
Morris & Co produced two sets of draft completion accounts for the period ended 16 December 2009: one in May and one in July 2010. The draft accounts treated the Braemar leases as operating leases not finance leases, in the same way as had been done in the company's 2008 accounts. The parties did not agree either set of accounts; it does not matter why. This led to the appointment of Mr Pughe.
The joint letter of 2 March 2011 appointing Mr Pughe as expert included the following:
"Our respective clients are parties to the Agreement. They cannot agree on the balance of the Consideration to be paid for the sale and purchase of Ms Shafi's shares in the Company. The disagreement revolves around those items which are assets and liabilities of the Company and whether the prepared accounts comply with the accounting terms and policies of the Agreement, and as such, whether they are to be included in the Completion Accounts.
Terms of Appointment.
Pursuant to Clause 6.5.1 of the Agreement, it has now become necessary to refer the matter to an Independent Accountant to resolve this dispute, subject to strict reference to the Agreement to the parties' wish to jointly instruct you in this matter on the following terms:
1. Upon you accepting this appointment, the parties shall make written submissions to you within seven days of such appointment becoming effective, on the issues of:
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