REUTERS |

Honesty is the best policy part 2: the spreadsheet with the wrong result

In my last post I discussed what you do when you receive an offer which is too good to be true. But what if the contract terms are too good to be true. Can you take advantage?

The Court of Appeal seems to be saying that it all depends on how you behave…

…while ING Bank NV v Ros Roca SA is not a construction case, it is a recent decision by the Court of Appeal which makes some good points about how to interpret a contract and the importance of being honest.

What was the story?

Ros Roca is a Spanish company specialising in waste and environmental services. ING acted as its financial adviser when it planned to purchase another company. In addition to a fixed fee, Ros Roca agreed to pay an additional fee, calculated by reference to an “Enterprise Value/EBITDA 2006” (2006 value). The problem arose for the simple reason that while the contract referred to the 2006 value, the deal was done in 2007.

Using the 2006 value, the additional fee would be €6.7 million. However, using a 2007 value reduced that additional fee to €943,922.44. ING said the contract must be applied. Ros Roca countered that it made no commercial sense to apply an out of date value that inflated the fee.

What makes the case interesting is that ING spotted that this would happen, but decided to keep quiet. No prizes for guessing who had the moral high ground, but does that defeat the express words of the contract?

The trial judge

The trial judge found that neither party was mistaken when they signed the contract, they simply did not appreciate the deal might take place in 2007. So no arguments based on mistake.

However, the judge relied on Lord Hoffmann’s well known phrase and held that “something has gone wrong with the language”. ING’s interpretation was “commercial nonsense” so the date “2006” was interpreted to mean “2007”.

Commercial sense, like common sense, is not always that obvious. Lord Hoffmann recognised in Chartbrook Ltd v Persimmon Homes Ltd that:

“[it is] not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another.”

The Court of Appeal

In ING v Ros Roca, the Court of Appeal started by reminding us that if the language is clear and unambiguous, there is no issue about what is the right interpretation. 2006 can only mean 2006 and the court will not save a party from a bad bargain or try to achieve fairness:

“The fact that no-one may have contemplated the actual transaction being delayed beyond that time is not in itself a reason for rewriting the agreed formula. …it is hard to see why a straightforward application of its language should be castigated as nonsense.”

So ING won the appeal on the interpretation point.

The inevitable e-mail

Unusually, the Court of Appeal revisited the evidence. Yet again, it was an e-mail that provided some key evidence. An ING employee emailed his boss to say he could not resist calculating the fees on both 2006 and 2007 values and said:

“I don’t know if the Excel has gone wrong (and isn’t calculating properly) or…”

…the fee would be much higher than anticipated.

In the same way that HW Construction had to decide what to do when it was told of the mistake in the tender (see my last post), ING had to decide what to do when it spotted the higher fee. In the end, it gave Ros Roca an estimate of fees based on a 2007 value. When giving evidence, the ING Managing Director described a “potential disruption” to the deal, if a higher estimate had been given. What he meant was that this would have (or at least might have) scuppered the deal.

This evidence was enough for the Court of Appeal to agree with Ros Roca that this was a case of estoppel by convention, that is, when parties act on an assumed state of facts or law, and that assumption is either shared or made by one and acquiesced by the other.

In other words, ING letting Ros Roca believe that the lower fee applied, knowing what the contractual position was, meant ING could not rely on its contractual entitlement. Interestingly, Lord Justice Rix discussed good faith duties and observed that while:

“…silence gives no hostage to fortune. If, however, the contractor speaks then he may have to live up to what he says…”

In these circumstances he thought ING had a positive duty to raise this issue with Ros Roca, it could not keep quiet and see what happened.

Honesty is still the best policy

If ING had told Ros Roca the true position, the deal would perhaps have been re-negotiated. This is not always a commercial option. While the courts won’t necessarily stop a party from taking advantage of an unintended benefit, the benefiting party must not have led the other party astray…

One thought on “Honesty is the best policy part 2: the spreadsheet with the wrong result

  1. What a very fine case and judgment – well found Shy – and interpreted for the construction industry.

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: