Written by Zubair Hussain
Carscallen LLP litigators won a commercial arbitration earlier this year for a client in a contract interpretation dispute.
The client and Claimant (“Client”) entered into a Share Repurchase and Dividend Agreement (“Dividend Agreement”) as part of the sale of the Client’s business to the Respondent as regional master franchiser of a cleaning and maintenance business. Carscallen LLP acted as litigation counsel to the Client in this arbitration but was not counsel to the Client in negotiating or drafting the operative agreements in the sale of the Client’s business.
Primarily at issue in the arbitration was the calculation and payment to the Client of a preferential dividend (“Dividend Payment”) by the Respondent, which was made in conjunction with and as the primary component of the sale of the Client’s franchise business to the Respondent. The Dividend Payment was made by the Respondent for approximately 18 years without any significant issues. However, a dispute arose in 2018 regarding the calculation of the Dividend Payment based on changes by the Respondent to accounting practices of the business.
The arbitrator was tasked with determining the proper interpretation of “Gross Revenue” in the Dividend Agreement, and specifically with whether monies paid by customers for “Janitorial Services” should be included in the definition of “Gross Revenue”. Unfortunately, the definition of “Gross Revenue” in the Dividend Agreement was not drafted with sufficient precision to be determinative.
In arriving at his determination, the arbitrator canvassed relevant principles of contractual interpretation, including the ability of the courts (and arbitrators) to refer to the contextual setting/factual matrix known to the parties at the time of contracting. The arbitrator distinguished between admissible evidence of commercial context/factual matrix and inadmissible evidence of a party’s subjective intentions at the time of signing a contract, holding that evidence of subsequent conduct should only be considered if the contract remains ambiguous after considering its wording and the admissible evidence of the surrounding circumstances.
Finding in favour of the Client, the arbitrator held that the plain, ordinary meaning of “Gross Revenue” under the Dividend Agreement suggested a broad interpretation of the amount upon which the dividend calculation was based, and that this interpretation was also supported by the commercial context/factual matrix in which the Dividend Agreement was signed.
The arbitrator also dismissed arguments based on expert accounting evidence regarding the applicable accounting principles, holding that this was a contract interpretation case and not an accounting case. As such, the issue to be determined was limited to the arbitrator’s interpretation of the parties’ intentions, in accordance with the contractual wording they used at the time of signing the contract regarding the meaning of “Gross Revenue” under the Dividend Agreement.
This case demonstrates the importance of having experienced legal counsel drafting commercial agreements, and the need to draft contractual definitions and provisions with the requisite precision and clarity to avoid costly and time-consuming dispute resolution and litigation over disagreements in the future.
Carscallen LLP'S Commercial Arbitration and Commercial Litigation Expertise
Carscallen’s team of experienced litigators has successfully represented clients in both domestic and international commercial arbitrations. Our extensive dispute resolution experience allows us to focus on practical, common sense legal solutions to disputes. We represent public corporations, private enterprises and individuals and are adept at tailoring unique solutions to meet your needs and protect your interests. We have achieved regular and consistent success at trial and appellate levels of courts, before a number of different tribunals, and we have a strong track record of effectively resolving disputes outside the formal legal process through mediations and arbitrations.
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*This update is intended for general information only on the subject matter and is not to be taken as legal advice.