TJH and Sons Consultancy Ltd v CPP Group Plc
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Elias |
| Judgment Date | 02 February 2017 |
| Neutral Citation | [2017] EWCA Civ 46 |
| Docket Number | Case No: A2/2015/1619 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 February 2017 |
[2017] EWCA Civ 46
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE LEEDS COMBINED COURT,
QUEEN'S BENCH DIVISION
HIS HONOUR JUDGE GOSNELL
3YS12212
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Elias
and
Lord Justice Lewison
Case No: A2/2015/1619
Mr Scott Ralston (instructed by Gibson & Co) for the Appellant
Mr George Spalton (instructed by Eversheds LLP) for the Respondent
Hearing date: 26 January 2017
Approved Judgment
The main issue on this appeal is whether an additional fee referred to in clause 5.1 (a) of a consultancy agreement between TJH & Sons Consultancy Ltd ("TJH") and CPP Group plc (CPP") is payable as of right or whether CPP has a discretionary power not to pay it. HHJ Gosnell held that CPP had a discretion to decline to pay.
CPP is in the financial services business in the course of which it supplies a number of services both to business and to consumers. In about April 2006 Mr Haig was appointed as CPP's UK sales director where he was also based. As sales director he received substantial annual remuneration part of which consisted of bonuses awarded under the discretionary bonus scheme operated by CPP. In early 2011 Mr Haig was told that he was to be promoted to the role of Regional Director with responsibility for Turkey, India and Germany. After his promotion was announced, Mr Haig raised the possibility of leaving his employed position and working for CPP via an independent company as a consultant. There were tax advantages in this course of action both for him and for CPP; and in due course that is what happened.
TJH is a company incorporated in the Turkish Republic of Northern Cyprus, where Mr Haig was building a house. It is wholly owned and controlled by Mr Haig. It became the company which entered into the consultancy agreement with CPP. TJH claimed additional fees under the agreement for the years 2012 and 2013; but CPP declined to pay on the ground that the group as a whole was in financial difficulties, claiming to have a discretion to withhold payment. The judge held that CPP was entitled to withhold payment.
Although the written consultancy agreement bears the date 2012 it appears to have been made in about March 2011. By clause 2 of the agreement TJH was engaged as consultant and undertook to make Mr Haig available to provide the services defined in the agreement. This obligation was supplemented by detailed provisions in clause 3. By clause 4.1 CPP undertook to pay TJH a fee of £700 per day inclusive of VAT reviewable each year. Clause 5 was headed:
"ADDITIONAL CONSULTING FEES"
It provided:
"5.1 Additional consultancy fees will be charged as follows:
(a) An additional annual fee may be payable in March subject to the level of service provided and the impact of this on regional performance. Additional fees may be awarded up to a maximum potential of £99,000 in 2011 and £132,000 in future years. The calculation of the additional fee will follow similar principles to the Regional Director's Annual Bonus Plan operated by CPP.
(b) The following consulting fees will be payable to incentivise continuity of the consultancy services provided by the Consultancy Company…."
The clause went on to specify fees to be paid in 2013 and 2014 calculated by reference to gains which would arise over a specified number of share options under certain long term incentive plans operated by CPP.
Clause 5 (1) (a) referred to the Regional Director's Annual Bonus Plan operated by CPP. The bonus plan with which we have been supplied was not in fact limited to regional directors. It applied to any employee selected by the remuneration committee "in its absolute discretion" to participate in the plan. "Bonus" was defined in clause 1.1 as "a discretionary cash sum (if any) payable to a Participant under this Plan". Clause 3 provided that the maximum potential bonus in respect of a performance period (i.e. a financial year) expressed as a percentage of annual base salary should be "determined by the Committee, in its absolute discretion" subject to certain maxima. Clause 4 enabled the remuneration committee to set performance targets. These are not defined except by reference to the committee's power to set them. Clause 4.1 required the committee to communicate performance targets to the participants as soon as reasonably practicable after they had been set. Clause 4.2 provided:
"For the avoidance of doubt, the Committee may set more than one Performance Target and Participants may be subject to different Performance Targets."
Clause 5 dealt with payment of bonuses. Clause 5.1 provided:
"The maximum amount of Bonus payable to a Participant for a Performance Period shall depend on the extent (if at all) to which the Performance Targets are, in the opinion of the Committee, satisfied over the Performance Period."
Clause 5.2 required the committee to notify the participant of the "amount that is potentially payable" but went on to provide that between the date of notification and the date of payment "the Committee may, in its absolute discretion, reduce the amount payable on such basis as it determines." Clause 5.8 provided that:
"For the avoidance of doubt and notwithstanding any Rule or term to the contrary, a participant shall have no right, interest or entitlement to be paid a bonus until it is paid."
The general approach to the interpretation of contracts is that laid down by the Supreme Court in Arnold v Britton [2015] UKSC 36, [2015] AC 1619. Lord Neuberger said that the court is concerned to identify the intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. He continued at [15]:
"And it does so by focusing on the meaning of the relevant words, …in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions."
He emphasised a number of points. These included:
i) The reliance placed in some cases on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed.
ii) The court should not embark on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning.
iii) Commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.
In considering the background knowledge which was available to the parties, the court should not rely on the parties' pre-contractual negotiations except for very limited purposes: Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101. Those purposes include establishing a fact which may be relevant as background: Chartbrook at [42].
The consultancy agreement is clearly not a self-contained document because of the reference in clause 5 (1) (a) to the principles of calculation applicable to the Regional Director's Annual Bonus Plan operated by CPP. It is clear, therefore, that there must be some recourse to extraneous material in order to flesh out the bare bones of clause 5 (1) (a). The question is: what and to what extent? In Tradigrain SA v King Diamond Marine Ltd [2000] 2 All ER (Comm) 542 this court considered the effect of a contract incorporating by reference terms contained in a different contract. Rix LJ said at [78]:
"The first rule relating to the incorporation of one document's terms into another document is to construe the incorporating clause in order to decide on the width of the incorporation. … A second rule, however, is to read the incorporated wording into the host document in extenso to see if, in that setting, some parts of the incorporated wording nevertheless have to be rejected as inconsistent or insensible when read in their new context."
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Mpb v Lgk
... [2000] 2 All ER (Comm) 542 at [78], as more recently applied by the Court of Appeal in TJH and Sons Consultancy Ltd v CPP Group plc [2017] EWCA Civ 46, per Lewison LJ at [13] to [14]: “The first rule relating to the incorporation of one document's terms into another document is to constru......