When ruling on the interpretation of a contractual agreement, the courts’ primary focus is on the wording of the agreement itself. Recently, a man who had sold a company successfully applied to the High Court for summary judgment by way of declarations as to the proper construction of a Share Purchase Agreement (SPA).

The man had sold a payroll company which acted as an intermediary between contractors and end users or recruitment agencies. The company’s agreements with clients did not oblige them to place work with it: instead, work was provided through successive ad hoc instructions. The SPA included an earn-out mechanism under which the man might receive further payments during the three years following the sale, depending on the amount of ‘new revenue’ received by the company.

A dispute arose as to the meaning of the phrase ‘new revenue’. The buyer argued that it did not include revenue from existing clients which maintained their existing business rather than increasing it. The man contended that, as clients normally placed their business on a short-term basis without any future obligation to do so, there was nothing to be ‘maintained’. He sought summary judgment on the proper interpretation of the SPA. The buyer submitted that it was not an appropriate case for summary determination. It argued that the ordinary meaning of the expression ‘new revenue’ was inconsistent with the man’s contention that it extended to all or substantially all revenue generated by the business, and that the question of what the parties had intended by the phrase required investigation of the surrounding facts and circumstances.

The Court considered that it had all the evidence necessary to determine the issue. The relevant contractual wording was before it, and the underlying features of the company’s business, which provided the relevant objective factual matrix, were substantially common ground.

The starting point was the definition of ‘new revenue’ in the SPA. It comprised four categories of business: new clients, new business from existing clients, clients acquired following an introduction by the man, and existing clients agreeing to renew or increase their business. When that wording was read against the agreed description of the company’s business, it became apparent that the definition had been drafted to address all material ways in which revenue could be generated. The parties had not chosen language limited to increases in business. Instead, they had expressly referred to existing clients agreeing to renew or increase their business. The word ‘or’ plainly distinguished two separate concepts.

The Court noted that it had to give effect to the words the parties had actually chosen. Commercial common sense could not be used as a licence to rewrite the bargain. It was impossible to reconcile the buyer’s contention that renewed business fell outside the definition with the express reference to existing clients agreeing to renew their business. In the Court’s judgment, a reasonable person, possessed of the background knowledge available to the parties when the SPA was executed, would understand the definition of ‘new revenue’ to include revenue arising from existing clients renewing their business. The buyer’s construction was contrary to the language of the SPA and had no realistic prospect of succeeding at trial.