This is an appeal from a decision of Peter Smith J, which concerns the interpretation of the agreed terms on which a sum of money was paid to a firm of solicitors, and ultimately involves deciding who is entitled to the money in the light of those terms.

The basic facts, which I largely take from the Judge’s summary at [2010] EWHC 1693 (Ch), paras 4-10, are as follows.

By a share purchase agreement (“the Agreement”), Wigmore Street Investments Ltd (“WSI”), then called Real Estate Property Corporation Ltd, acquired from Tradegro (UK) Limited (“Tradegro”) the majority shareholding in a company. Two terms of the Agreement are centrally relevant for present purposes, namely, a provision whereby Tradegro provided WSI with a tax indemnity, and a provision whereby WSI agreed to pay Tradegro certain “Additional Consideration”. Under the terms of the Agreement, the final variable to enable the calculation of the Additional Consideration was to be assessed by an expert if the parties could not agree it.

In 2008, there were three different sets of proceedings between WSI and its associates on the one hand, and Tradegro and its associates on the other; the most relevant for present purposes, was a claim brought by WSI against Tradegro in respect of the tax indemnity. After a trial in respect of that claim, Tradegro was found liable to WSI on 15th October 2008 in the sum of £647,098.31 (inclusive of a payment on account of costs). When judgment was delivered, it was envisaged that that judgment and the judgments in the two other actions would be netted off. However, Tradegro’s solicitors, Eversheds, wrote on 3 November 2008 to WSI’s solicitors, Olswang, stating that “each order must be strictly complied with”. That was reluctantly accepted by Olswang in a letter written a week later.

On 12 November 2008 Eversheds threatened to seek a freezing injunction in respect of the £647,098.31 (“the Sum”) as soon as it had been paid to WSI owing to an alleged risk of dissipation. Tradegro was concerned about this risk because, of course, the Additional Consideration due from WSI had not been determined, and Tradegro anticipated that it would exceed the Sum.

Olswang wrote on 14 November 2008 denying that WSI had any intention of dissipating the sum if it was paid by Tradegro, but stating “it has no objection to that [S]um being paid into [Olswang’s] client account on the basis of an undertaking (the precise terms of which we will need to agree) to hold the monies to your order pending the determination of the amount of the Additional Consideration due to your client.” This proposal was stated to be conditional on Tradegro not applying for a freezing injunction.

Eversheds replied on 14 November 2008 accepting the proposal. Olswang prepared a form of undertaking, which reflected what was ultimately agreed, and they set it out in a letter of 17th November 2008 to Eversheds, who accepted its terms in a letter sent on 19 November 2008.

The undertaking (“the Undertaking”) was then set out in a letter from Olswang dated 19 November 2008. It provides as follows (with numbering added for convenience):

“Undertaking to hold received funds

(i)

Upon receipt in cleared funds of £647,098.31 from Eversheds LLP on behalf of Tradegro ("the Monies"), we undertake that we will:

(a)

hold the Monies upon deposit in this firm's client account with Lloyds TSB Bank Plc; and

(b)

not take any steps to transfer or otherwise deal with the Monies (save for the purposes of the ordinary operation of our client account);

(ii)Without the consent in writing of Tradegro, or order of the court, until the satisfaction in full of any Additional Consideration determined to be payable by WSI to Tradegro under the terms of the [Agreement] (or other agreement between the parties regarding that Additional Consideration)

(iii)

provided always that this undertaking will be immediately discharged by the payment of the Sum to Tradegro, whether in full or partial settlement of the Additional Consideration, and whether following a final determination of that Additional Consideration or on an interim basis.”

Upon receipt of the letter of 19 November 2008, and the Undertaking included therein, Tradegro paid the Sum to Olswang who placed it in their client account, where it remained until Peter Smith J ordered that it be paid into court.

WSI went in to administration pursuant to an order made on 17th September 2009. Mr Charles Price then took over the dispute in relation to the Sum on behalf of WSI, because he claims to be a substantial creditor of that company. He has been added as a party to these proceedings, and neither WSI nor its administrators have appeared or been represented. Accordingly, I shall treat the submissions made on his behalf as made on behalf of WSI.

On 13 October 2009 an expert appointed under the provisions of the Agreement determined a figure, which the parties had been unable to agree, in the formula for calculating the Additional Consideration. Initially WSI did not accept that the Additional Consideration itself was at that point determined in accordance with the Agreement. That stance was maintained, until the instant proceedings came before Peter Smith J, when Mr Collings, after some indications from the Judge, realistically accepted on behalf of WSI that the Additional Consideration had been determined by reason of the determination of the expert.

Accordingly, as the Judge said, the Additional Consideration was £2,417,820 and became due from WSI to Tradegro on 20th October 2009.

It is clear that WSI is heavily insolvent, and will never pay be in a position to pay the Additional Consideration.

Peter Smith J, no doubt on the basis of the arguments before him, and indeed as was reflected in the skeleton arguments before us, devoted some consideration to questions such as whether the Undertaking gave rise to purely contractual rights, whether it constituted a trust, whether Olswang were stakeholders, and whether the Undertaking was a solicitor’s undertaking in the technical sense.

As Mr McGhee submitted, and as Mr Collings ultimately accepted, such questions are, subject to one point, ultimately academic. The real question is what the Undertaking means, and, in particular, whether, in the events which have happened, the Sum is to be paid over to the administrators of WSI or to Tradegro. The Undertaking is an arrangement negotiated for a commercial purpose, and therefore must be interpreted according to well established principles, namely by considering the words of the Undertaking, in the context of the factual matrix and taking into account commercial common sense. Because the Undertaking is in correspondence, the parties are agreed that the contents of the correspondence can be referred to as part of the matrix of facts, i.e. the surrounding circumstances.

As I see it, this exercise may result in the Undertaking being interpreted in such a way as to give rise to a trust, a stakeholder arrangement, a solicitor’s undertaking, or a personal contract (and not all of these are by any means mutually exclusive), but that is merely a result of the interpretation exercise.

Mr Collings made much of the contention that the court should lean against an interpretation which imposes a particular burden on Olswang, but it seems to me that there is nothing in that. If Olswang, whether stakeholder, trustee or undertaking solicitor, was faced with competing claims for the Sum, it would be fully entitled, indeed, in case of doubt, well advised, to apply to the court for directions.

As Arden LJ pointed out, the only circumstance in which the status of the Undertaking might be significant would be if it created a charge in favour of Tradegro over the Sum as against WSI. In such an event, the charge would appear to be invalid on the ground that it had not been registered. However, neither party argued for that characterisation of the Undertaking, and in the event it is unnecessary to consider it further.

Tradegro contends that, as the Additional Consideration has now been determined, and WSI has not paid it to Tradegro and it is clear that WSI will never pay it, the Sum should be paid by Olswang to Tradegro. WSI, on the other hand, contends that the Sum belongs to it, and that the court should accordingly order that it is paid to its administrators.

The Judge agreed with Tradegro, essentially on the basis that the Undertaking was silent as to what would happen if WSI failed to pay Tradegro the Additional Consideration after it had been determined, and that, in all the circumstances, a term should be implied into the Undertaking to that effect. In his argument on behalf of Tradegro, Mr McGhee QC, while supporting this analysis, proffered an alternative way of reaching this conclusion, namely, that para (iii) of the Undertaking (“para (iii)”) imposes a duty on Olswang to pay the Sum to Tradegro once the Additional Consideration was determined, if it was not paid by WSI.

On behalf of WSI, Mr Collings contended that the Judge was wrong, and that the Sum should be paid to WSI’s administrators, on the ground that the effect of the Undertaking was that the Sum was WSI’s money, and that the purpose of the Undertaking was not to enable Tradegro to treat itself as a secured creditor of WSI, to the extent of the Sum, in respect of the Additional Consideration.

I do not find the resolution of the issue easy, not least because the Undertaking is not particularly well drafted. Thus, contrary to the literal meaning, as the Judge said, it is clear that the expressions “the Monies” in para (i) of the Undertaking (“para (i)”) and “the Sum” in para (iii) were intended to have the same meaning. As he also said, it is clear that the words contained in para (ii) are intended to apply to para (i)(b) only.

However, for me to castigate the drafting of a document which has to be construed is like a bad worker blaming his tools: each of us has to get on and do the best we can with the material which we have got.

The Judge was impressed with the notion that there was no express provision as to what was intended to happen to the Sum if the Additional Consideration was determined and not paid to Tradegro. He was right to say that there was no such provision. However, it seems to me that there is what might be characterised as an anterior point.

Para (ii) of the Undertaking (“para (ii)”) does not spell out in terms what was intended to happen if the Additional Consideration was determined and paid in full to Tradegro. The parties are, plainly rightly, agreed that, in such an event, not merely would the Undertaking be discharged, but that Olswang would be obliged to pay the Sum to WSI.

What seems to me to follow from this is that the Sum was paid by Tradegro, through Eversheds, to Olswang to be held for WSI, albeit that it was not to be paid to WSI, without Tradegro’s consent or an order of the court, unless the Additional Consideration was paid in full. In other words, the person primarily entitled to the Sum once it was paid to Olswang, that is the person for whom the Sum was held by Olswang, was WSI, albeit not unconditionally so. That analysis is supported by a number of other factors.

First, the Sum was paid to WSI’s solicitors, not Tradegro’s solicitors. That is little more than a straw in the wind, but it is of some significance. The point is reinforced by the fact that (a) in the letter of 17 November 2008, which first proposed the terms of the Undertaking to Eversheds, Olswang referred to the fact that “[y]our client will pay to ours the [S]um”, and (b) in the letter two days later giving the Undertaking, Olswang referred to the fact that Eversheds would “make payment (on behalf of Tradegro) of [the Sum] to us (on behalf of WSI)”. It is true that, in their letter of 14 November 2008, Olswang also referred to the Sum being held “to your order” (presumably the order of Tradegro), but, given that Tradegro had on any view some control over payment, that was not inaccurate on WSI’s case.

Secondly, Tradegro made it clear through Eversheds in their letter of 3 November 2008 that each of the three judgments, including the judgment for the Sum, had to be treated separately, and Olswang accepted this, albeit reluctantly, in their letter of 10 November. This leads to the inference that the parties presumably intended the three judgments to be enforced separately.

Thirdly, the purpose of the undertaking was to give to Tradegro similar protection from that which it would have enjoyed if it had paid the Sum to WSI, and immediately obtained a freezing order over the Sum, and that would have resulted in WSI having the Sum and Tradegro having no proprietary right over it – see Flightline Ltd v Edwards [2003] EWHC 1648 (Ch), [2003] 1 BCLC 427. It is true that, while a freezing order was the primary protection referred to in the correspondence, there was also reference to “security”, but this was not pursued, and it is by no means clear that the parties had in mind a formal charge over an asset of WSI in favour of Tradegro. Mr McGhee made much of the difference between the arrangement contained in the Undertaking and a freezing order, but I do not consider that there is, in truth, much difference, or that any difference goes to the issue which has to be determined.

Fourthly, this conclusion is at least on the face of it consistent with para (iii). That provision, according to its natural meaning appears to permit, but not to require, the Sum to be used to pay the Additional Consideration, once it is determined. On that basis, it cannot be intended to permit Olswang to decide whether the Sum can be used to pay the Additional Consideration, it must be a question for WSI whether to pay the Additional Consideration in full from its resources, and then invoke para (ii) to recover the Sum, or whether to invoke para (iii) and instruct Olswang to pay the Sum to Tradegro for the purpose of paying (no doubt in part) the Additional Consideration. If that is right, it provides strong support that, although it cannot be released to WSI unconditionally, until one of the conditions in para (ii) is satisfied (Tradegro agreeing, an order of the court, or payment of all the Additional Consideration), the Sum is held for WSI.

Mr McGhee argued that, on closer analysis, para (iii) did not have this effect. He suggested that, properly interpreted, it meant that, if WSI did not pay the Additional Consideration as soon as it was determined, Olswang should pay the Sum to Tradegro as, no doubt partial, satisfaction of the Additional Consideration. I do not accept that suggestion. First, it is simply not what para (iii) says as a matter of ordinary language. Its mandatory words are directed to what will happen to the Undertaking if the Sum is used towards paying off the Additional Consideration, not to requiring the Sum to be used for that purpose. Secondly, it is hard to reconcile Mr McGhee’s argument with the reference at the end of para (iii) to “an interim basis”. The expert under the Agreement had no power to make an interim determination, and it is unlikely that the parties had in mind an interim order of the court: that is inherently improbable. The natural meaning of the words is directed to an interim arrangement agreed between the parties ahead of, or even instead of, a determination. It seems inherently improbable that it would have been envisaged that Olswang could pay the Sum to Tradegro against WSI’s will on the back of an arrangement into which WSI would have been wholly free to refuse to enter.

Accordingly, I consider that the effect of the Undertaking is that the Sum was held by Olswang for WSI’s benefit, albeit subject to the terms of the Undertaking.

This conclusion informs the approach to the question what happens if WSI becomes insolvent, so that the Additional Consideration is not, and never will be, paid to Tradegro. The argument that, in that event, the Sum is simply repaid to Tradegro seems to me to run into problems in the light of the terms of the Undertaking. As the Judge rightly said, it involves implying a term. But it seems to me that such a term is unnecessary: under para (ii), the court is expressly given power to decide what should happen to the Sum, if Tradegro does not agree and the Additional Consideration is not paid. I also consider that the implication of a term that, in all circumstances, the Sum is to be paid to satisfy WSI’s liability to pay the Additional Consideration is scarcely consistent with the provisions of para (iii), which, as explained above, envisages WSI being able to choose to instruct Olswang to use the Sum for that purpose.

Further, particularly given the conclusion that the Sum is held for WSI, the implied term would involve giving Tradegro more than it was seeking in November 2008, when the Undertaking was offered and accepted. Tradegro was merely concerned to stop WSI dissipating its assets, not to obtain security for payment of the Additional Consideration, or a set-off of its present liability against its future or contingent asset in the form of the Additional Consideration.

Having said that, I agree with the Judge that, in the event of WSI being solvent, and refusing to pay the Additional Consideration, the court would have power, and would, in the absence of good reasons, exercise that power, to order Olswang to pay the Sum towards satisfying WSI’s liability to pay the Additional Consideration. That is consistent with the conclusion that the Sum is held for WSI, and can, in principle, be used to meet its liabilities. The question whether, in particular circumstances, the Sum can be used to pay the Additional Consideration, if it is not paid by WSI, must be determined by ensuring that Tradegro is granted neither more nor less than it is entitled to under the terms of the Undertaking.

If, as has unfortunately transpired to be the case, WSI is insolvent, it seems to me that it would be wrong to treat the Undertaking as effectively giving, or intended to give, Tradegro’s claim for the Additional Consideration a special secured status as against all WSI’s other creditors. Decisions such as Palmer v Cary [1926] AC 703 and Flightline [2003] 1 BCLC 427 show that the courts are not too ready to hold that, where A and B agree an arrangement whereby A’s money is held in a specific account, or by a third party, to protect B’s prospective claim, the money is to be treated as held on trust for B, or as security for B’s claim. Clear words are needed to show that this was the intention of the arrangement before the court will hold that that is its effect.

In this case, one cannot spell such an intention out of the terms of the Undertaking, unless one implies a term, as the Judge did, that, in the event of WSI not paying the Additional Consideration, the Sum must always be used to pay it. For the reasons already given, I do not consider that the implication of such a broad term is appropriate in the light of the express terms of the Undertaking, at least in so far as it has the effect of the Sum being security for Tradegro’s claim for payment of the Additional Consideration.

It appears to me that this conclusion is consistent with the approach adopted in the two cases to which I have referred. In a passage quoted with approval and applied by Jonathan Parker LJ when giving the judgment of the Court of Appeal in Flightline [2003] 1 BCLC 427, para 45, Lord Wrenbury LC, giving the opinion of the Privy Council, said this in Palmer [1926] AC 703, 706 (with the emphasis supplied by Jonathan Parker LJ):

“An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund.”

To adapt what was said in Palmer [1926] AC 703, 707, the Undertaking in this case “gives [Tradegro] a most efficient hold to prevent the misapplication of the [Sum], but there is nothing in the [Undertaking] to give [Tradegro] a property by way of security or otherwise in the moneys of [WSI] before or after [Tradegro] has them in [its] charge.”

In my view, the proper application of the Undertaking in the light of WSI’s insolvency is that, as Tradegro does not agree to the release of the Sum to the administrators and the Additional Consideration has not been, and will never be, paid, the court must make an appropriate order, and, as the Sum is held for WSI, and the purpose of the Undertaking was to avoid the risk of dissipation, the Sum should be paid to WSI’s administrators for distribution among its creditors (including Tradegro) in accordance with the general insolvency law.

I would accordingly allow this appeal.

I agree.

I also agree.