Interpretation of uncertain provisions – Kitcatt and others MMS v UK Holdings Ltd and others [2017] EWHC 675

How will a Court interpret a clause that is uncertain or which appears to be unworkable?

The facts

Kitcatt sold their advertising agency to MMS (a subsidiary of Publicis Groupe SA).  Under the sale agreement, Kitcatt was entitled to deferred consideration from the buyer.  The amount depended on how Kitcatt performed following its merger with Digitas, a marketing agency within the Publicis group.

The sale agreement contained a warranty that MMA/certain persons were not aware:

“of any facts or circumstances that could reasonably be expected to have a material adverse impact upon the Operating Income and/or Revenue in 2012 or 2013 (being a reduction of at least 20% in the case of Operating Income and 10% in the case of Revenue) including, without limitation:(i) the resignation or expected loss of any client of Digitas; or (ii) any significant current or threatened litigation involving Digitas.”

Digitas lost a significant amount of work from a key client such that there was no deferred consideration.  Kitcatt claimed for breach of warranty.  MMS argued that the warranty provided no reference point which would allow a comparison to be made and so it was void for uncertainty.  Also if the terms 'Operating Income' and 'Revenue' were given their defined meanings the clause became meaningless.

The decision

The Court found that the warranty was enforceable and had been breached.  The key points were:

• the defined terms 'Operating Income' and 'Revenue' should not be applied.  The parties intended the warranty to be enforceable and so the definition should not be incorporated.  The definitions clause also provided a definition would apply, “unless the context requires otherwise”.  The Judge noted “a definition should be the servant of clarity, not a dictator of absurdity”
• the Court applied Arnold v Britton and found that the relevant background knowledge and overall purpose of the clause included that the deferred consideration was partly dependent on Digitas' performance; and the warranty was an important part of the whole deal
• against that background, the Court could construe the clause as providing for a comparison between the information that had been disclosed and if the loss of the Digitas client had been disclosed.  This gave effect to the purpose of the clause and made commercial common sense
• for these reasons, the Court rejected the argument that this was a meaningless clause to which it could not give effect – as had been held in Prophet v Huggett [2014] EWCA Civ 1013.  The Court was reluctant to decide that an important clause, central to the deal, was unenforceable.

Why is this important?

This case is another good example of the Court being reluctant to find an important clause is void for uncertainty or because it is meaningless.  Instead, the Court will seek to interpret the clause to give effect to its purpose and the objective intentions of the parties.

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