Igote Ltd v Badsey Ltd

• Jurisdiction: Ireland
• Judge: Mr Justice Francis D Murphy
• Judgment Date: 18 July 2001
• Neutral Citation: [2001] IESC 65
• Court: Supreme Court
• Docket Number: [S.C. No. 240 of 2000]
• Date: 18 July 2001

[2001] IESC 65

THE SUPREME COURT

Keane CJ

Denham J

Murphy J

240/2000

IGOTE LTD v. BADSEY LTD

Between:

Igote Limited

Plaintiff/Respondent

AND

Badsey Limited

Defendant/Appellant

Citations:

GREAT WESTERN RAILWAY V BRISTOL CORPORATION 1918 87 LJ CH 414

IRC V RAPHAEL 1935 AC 26

PRENN V SIMMONDS 1971 1 WLR 1381

REARDON SMITH LINE LTD V YNGVAR HANSEN-TANGEN 1976 1 WLR 989

PLUMB BROTHERS V DOLMAC (AGRICULTURAL) LTD 1984 271 EG 373

ROHAN CONSTRUCTION LTD V INSURANCE CORPORATION OF IRELAND 1988 ILRM 373

KRAMER V ARNOLD 1997 3 IR 43

COMPANIES ACT 1963 S205

FINANCE ACT 1973 S34

Synopsis

COMPANY LAW

Shares

Share subscription agreement - Construction of contract -Intellectual property rights - Payment of dividend - Distribution of monies - Patents - Payment of royalties - Whether debt owed on foot of agreement - Intention of parties - Whether obligation to "distribute" or "pay" monies (240/2000 - Supreme Court - 18/7/01)

Igote Ltd v Badsey Ltd - [2001] 4 IR 511

The plaintiff claimed that the defendant owed a total of £80,000 on foot of a share subscription agreement. The defendant claimed the sum in question was only payable by way of a dividend and thus would only be made if funds were available for that purpose. In the High Court Mr. Justice Butler granted the plaintiff judgment and the defendant appealed. Delivering judgment in the Supreme Court, Mr. Justice Murphy held that the obligation to distribute the monies in question arose in the form of a dividend. Such monies would only be distributed if profits were available for that purpose. The appeal would be allowed and the plaintiff's claim would be dismissed.

1 Judgment of Mr Justice Francis D Murphy delivered the 18th day of July, 2001 [nem diss]

2 In these proceedings the Plaintiff/Respondent (Igote) claim that the Defendant/ Appellant (Badsey) is indebted to them in the sum of £40,000 for the year ended the 31st March, 1997, and a further sum of £40,000 for the year ended the 31st March, 1998 (making a total of £80,000) on foot of an agreement in writing dated the 27th day of July, 1991 (therein and hereinafter referred to as "the Share Subscription Agreement") made between Igote (therein referred to as "the First Subscriber") of the first part Bagrave Limited (therein and hereinafter referred to as "the Company") of the second part and Badsey (therein referred to as "the Second Subscriber") of the third part.

3 Clause 4.3 of the Share Subscription Agreement provided as follows:-

"It is agreed that in respect of any financial period of the company of twelve months duration, the Company shall distribute at least IR£40,000. If a financial period is of greater or lesser duration that twelve months, the amount shall be adjusted proportionally. Notwithstanding the respective shareholdings in the Company, this IR£40,000 or (sic) proportionate amount shall be distributed to the First Subscriber and thereafter a similar amount shall be distributed to the Second Subscriber. Any dividend in excess of such amounts shall be split between the shareholders in proportion to their holdings of Ordinary Shares. The First Subscriber and the Second Subscriber will execute any dividend waiver necessary to implement the above, and will arrange where possible to pay such distributions by way of interim dividends as agreed."

4 It was pleaded on behalf of Igote and contended in argument that the annual payment of £40,000 was a contractual commitment to pay that sum and the failure to do so amounted to an indebtedness by the Company. On behalf of Badsey it was argued that the sum of £40,000 referred to in clause 4.3 aforesaid was a commitment to pay that sum by way of dividend and accordingly to make the payment only if profits were available for that purpose. The learned trial Judge (Butler J) upheld the argument of Igote in an ex tempore judgment delivered on the 12th day of July, 2000 and it is from the judgment and order made on foot thereof that Badsey appeals to this Court.

5 The issue between the parties concerns the proper construction of the Share Subscription Agreement. The purpose of construing a document entered into between two or more persons is to ascertain their common intention. What "intention" in that context means and how it is ascertained has been the subject matter of much judicial authority in respect of which no real controversy arises in the present case. Perhaps a convenient explanation of the word "intention" in this context was provided by Lord Shaw in Great Western Railway .v. Bristol Corporation [1918] 87 LJ Ch 414 when he said:-

6 ".... one hears much use made of the word "intention", but courts of law when on the work of interpretation are not engaged upon the task or study of what parties intended to do, but of what the language which they employed showed that they did; in other words, they are not constructing a contract on the lines of what may be thought to have been what the parties intended, but they are construing the words and expressions used by the parties themselves. What do these mean? That, when ascertained, is the meaning to be given effect to, the meaning of the contract by which the parties are bound. The suggestion of an intention of parties different from the meaning conveyed by the words employed is no part of interpretation, but is mere confusion."

7 Lord Wright expressed the same view in not dissimilar terms in IRC .v. Raphael [1935] AC 26 when he said:-

"It must be remembered at the outset that the court, while it seeks to give effect to the intention of the parties, must give effect to that intention as expressed, that is, it must ascertain the meaning of the words actually used. There is often an ambiguity in the use of the word "intention" in cases of this character. The word is constantly used as meaning motive, purpose, desire, as a state of mind, and not as meaning intention as expressed."

8 There are numerous maxims and rules which have evolved over the years which may provide assistance in what can be the difficult task in ascertaining the intention of the parties. Igote placed particular reliance on one such rule. It may be described as "the factual matrix rule". That rule is frequently identified with Lord Wilberforce and the speeches made by him in Prenn .v. Simmonds [1971] 1 WLR 1381 and Reardon Smith Line Ltd .v. Yngvar Hansen-Tangen [1976] 1 WLR 989. In the Prenn Case Lord Wilberforce said (at page 1383):-

"The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations .... We must ... inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object appearing from those circumstances, which the person using them had in view."

9 Lord Wilberforce then continued in terms to the later part of which particular attention was directed by Counsel on behalf of Igote, namely:-

"In my opinion, then, evidence of negotiations, or of the parties intentions, and, afortiori, of Simmonds' intentions, ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the "genesis" and objectively the "aim" of the transaction."

10 In the Reardon Smith Line Case Lord Wilberforce repeated his views (at page 995) in these terms:-

"No contracts made are in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as "the surrounding circumstances" but this phrase is imprecise; it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes a knowledge of the genesis of the transaction, the background, the contract, the market in which the parties are operating."

11 The dangers involved in exploring the background or surrounding circumstances to a document under construction and the limitations which must be placed upon the factual matrix rule were referred to in Plumb Brothers .v. Dolmac (Agriculture) Ltd [1984] 271 EG 373 by May LJ when he said (at page 374 L):-

"There has grown up a tendency to speak about construing documents in or against what is described as the "factual matrix" in which the contract or documents first saw the light of day. In truth that is only, I think, a modern...