Supreme Court: Construction company’s agreement with IBRC bound it to accept expert’s profit estimation
A construction company that changed the terms of its loan agreements with IBRC, allowing for an expert to estimate the amount of profit to be evenly distributed, has lost its appeal to the Supreme Court.
About this case:
- Citation: IESC 2
- Court:Supreme Court
- Judge:Mr Justice Frank Clarke
Finding that the agreement entered into in 2011 bound the company to accept the terms of agreement which were skewed in IBRC’s favour, Mr Justice Frank Clarke said that the company had accepted that it would be at risk of losing out if there were a shortfall in the profits ultimately realised.
Between 2002 and 2007, Irish Nationwide Building Society (now Irish Bank Resolution Corporation) advanced a series of loan facilities to Jackie Greene Construction Ltd to purchase lands and construct residential and commercial units (the Development).
An aspect of the loan facilities advanced to Jackie Greene Construction was a profit-sharing arrangement, which Mr Justice Clarke said, “rather curiously, was referred to as an arrangement fee”.
The mechanism for the operation of the profit-sharing arrangement was set out in a number of supplemental loan agreements (SLAs); essentially providing that Jackie Greene Construction was to lodge the net proceeds from the sale of the units at the Development to a designated account, and that on completion of the Development, the SLAs provided for a 50:50 distribution of the profits between the parties out of the funds in the account.
Jackie Greene Construction lodged what it maintained were the net sale proceeds to the designated account and in February 2011, the relevant account contained €8,694,396.51.
On 3rd February 2011, IBRC removed €6,279,354.06 from the account.
Jackie Greene Construction alleged that this was done without prior notice, without their consent, and in circumstances where the Development was incomplete. Jackie Greene Construction issued proceedings seeking the return of that latter sum of money to the account.
The Compromise Agreement
In November 2011, a Compromise Agreement entered into between the parties. The terms relevant to the present proceedings were:
- Clause 1 provided that the parties agreed to an Expert determination in respect of the profit or loss of and concerning the Development;
- Clause 10 provided that the Expert would consider the possible sale price of the unsold units including the likely ongoing costs while the sale process is undertaken;
- Clause 12 provided that IBRC would hold the sum of €6,279,354.06 together with interest accrued since 4th February 2011, and Jackie Greene Construction would not take steps to access or utilise the 2.4m held in the PTSB account pending the Experts decision of the profit or loss;
- Clause 13 provided that the Expert’s decision in respect of the profit (if any) will be first satisfied from the funds in respect of which the relevant Parties have given their above undertakings and thereafter insofar as those funds are insufficient to meet the award of the Expert, or insofar as the Expert identifies a profit related specifically to future sales of units in the Development, the balance shall be distributed from the net proceeds, as defined in the Supplement Loan Agreements, of actual sales of the units currently remaining unsold in the Development on a 50:50 basis as such net proceeds become available, until the entirety of the profit identified by the Expert has been distributed or the entirety of the net proceeds of sale of all units has been exhausted, whichever occurs sooner;
- Clause 17 provided that IBRC would, following the discharge of the full profits, release Jackie Greene Construction from any or all encumbrances related to the Development and the directors of the said company will be released from any personal guarantees provided by them on such discharge.
The Expert’s Determination
In April 2012, the Expert concluded that the profit from the Development was €17,655,857, and that each party was accordingly entitled to €8,827,928.50.
Thereafter, IBRC issued a motion seeking judgment against Jackie Greene Construction for €2,548,574.44 – i.e. the difference between the profit share identified by the Expert and the sum already received.
Jackie Greene Construction contended that the proceeds of sale held in the account were insufficient to satisfy each party’s entitlement as determined by the Expert, and that the balance of profit due to each party should be satisfied on a 50:50 basis from the net proceeds of sale following the disposal of the then 23 remaining units in the Development.
In the High Court, Mr Justice Paul Gilligan made judgment in favour of IBRC for €8,827,928.50, with credit being given for the cash already obtained together with further credit for 50% of the net proceeds of sale of any unsold units at the development.
Jackie Greene Construction appealed the order of the High Court, arguing in particular that it was, at all times, both in the original agreements identified in the SLAs, and also in the compromise agreement, accepted that both parties would share the profit on a 50:50 basis.
Mr Justice Clarke said that it was clear that the original agreements between the parties did not contemplate a situation where IBRC would obtain a greater share of the profits than Jackie Greene Construction. However, the Compromise Agreement altered that situation.
Mr Justice Clarke said that by accepting that the profits would be determined by the Expert “in circumstances where that determination would necessarily involve an element of estimation…Jackie Greene Construction were accepting that the 50:50 split previously agreed might be departed from in circumstances where the profits ultimately earned fell short of or, indeed, exceeded the amount determined by the Expert”.
“In addition, by accepting that the sums actually held by the parties at the time of the compromise agreement (which were significantly skewed in favour of IBRC) would be the first port of call, Jackie Greene Construction was accepting that the company would be at risk of losing out if there were a shortfall in the profits ultimately realised”.
While accepting that there was some ambiguity in the contract, Mr Justice Clarke was satisfied that the proper approach to the construction of the contract as a whole was that “it bound Jackie Greene Construction to procure that IBRC received its share of the profit as determined by the Expert. To take any other view would be to render the expert evaluation which lay at the heart of the compromise agreement at nought and would also create a contradiction with Clause 17”.
Mr Justice Clarke held that Mr Justice Gilligan was correct in his interpretation of the compromise agreement, but that he was incorrect to give judgment for the full sum against Jackie Greene Construction:
“What the compromise agreement provided for was not just a determination of the profit on the basis of an estimation in respect of which both parties would be bound, but also a method for payment. IBRC were entitled, in accordance with the agreement as thus interpreted, to the release to them of the sum of €6,279,354.06 together with interest. It follows that the interest accrued must be included in the sum for which IBRC are to be given credit in determining the sums actually paid over in part satisfaction of 50% of the profit as determined by the Expert.”
Mr Justice Clarke continued: “IBRC were also entitled to a declaration that Jackie Greene Construction, whether by the release of monies which they held, or otherwise, was obliged to make up the shortfall between that sum and 50% of the profit share as identified by the Expert. It seems to me that an order along those lines would have been more appropriate rather than a judgment for a sum which Jackie Greene Construction would never have been obliged to pay over.”
- by Seosamh Gráinséir for Irish Legal News