We welcome again Anis Waiz, solicitor and head of commercial litigation at Curtis Law Solicitors, as he continues his critical review of current case law.
The key issue before the Court of Appeal was whether the defendants were liable to pay VAT to the claimant on a property transaction in which the claimant agreed to sell a property comprising commercial premises in the West Midlands to the defendants.
The case raised a very important point as to contractual terms and certainty and provides as ever a very useful resume of the law.
The claimant was registered for VAT and gave notice HMRC that it had opted to waive the exemption from VAT in respect of the property.
The claimant offered to sell the property to the defendants in 2002 at an agreed price of £130,000.Solicitors instructed by the claimant sent solicitors acting for the defendant a draft contract. The parties contemplated the transaction would proceed to completion in the spring of that year. However, for reasons which were not relevant it was not until 2005 that the parties resumed negotiations.
In December 2005, the claimants informed the defendant’s solicitors that they were again instructed in relation to the proposed sale and indicated that they were awaiting details of the purchase price from the claimant. The Defendant’s solicitors replied explaining that it was their understanding that the purchase price was still £130,000 and that this sum, which they described as the whole of the consideration, had already been paid to the claimant.
The claimant solicitors noted in correspondence in March 2006 that:
“ We are pleased to report that our clients’ have signed the contract at a sale price of £130,000 in readiness for exchange. They have acknowledged that they have received all of the sale monies of £130,000 on this matter, subject to contract.”
The claimant responded to standard requisitions on title as to the amount payable on completion as follows:
5.1 Balance of purchase monies."
The Contract for Sale
The contract was in conventional form and contained special conditions and general conditions. The Definitions included “Purchase price" as £130,000. The special conditions also noted that where there was a conflict between the general conditions and the agreement or the general conditions were not consistent with the express terms of this agreement, the agreement would prevail
By General Condition 1.4.1 which applied except as varied or excluded by the special conditions which dealt with VAT:
"1.4.1 An obligation to pay money includes an obligation to pay any value added tax chargeable in respect of that payment.
1.4.2 All sums made payable by the contract are exclusive of value added tax."
The claimant having exercised its option to waive the exemption, was liable to pay VAT on the transaction. In late 2007 HMRC raised a notice of assessment. The claimant’s solicitors wrote to the defendant’s solicitors informing them of the notice and seeking under the terms of clause 1.4 of the general conditions, the VAT. The defendants did not accept that they were liable to pay to the claimant any sum in respect of VAT
The VAT position
The relevant provisions of the Value Added Tax Act 1994 was summarised as follows:
1. The transfer of the freehold of the property was a supply of goods within the meaning of the 1994 Act.
2. The transaction would, however, have been an exempt supply had the claimant not waived that exemption by exercising the option to tax.
3. The claimant having waived the exemption, the obligation to pay VAT to HMRC fell upon the claimant as supplier.
4. VAT became chargeable by reference to the value of the supply which, absent some provision in the agreement, would, by virtue of s.19(1) and (2) of the 1994 Act, have been such amount as would, with the addition of VAT have amounted to £130,000
In Lancaster v Bird (1998) 73 Con LR 22, a case concerning the supply and erection of an agricultural building on a farm. Chadwick LJ noted:
"Normally of course it will be made clear expressly. It is in the interests of the builder who will be receiving the price to make it clear because, as between the builder and the Commissioners for Customs and Excise, the provisions now found in section 19(1) and (2) of the Value Added Tax Act 1994 require the recipient to account for value added tax on the basis that the consideration that he receives is such amount as equals the value of the goods or services plus value added tax. So if the builder fails to make it plain to the employer that he is stipulating for the payment of value added tax in addition to the contract price, he will be left to account to the Revenue for the value added tax out of what he receives."
The following issues were raised on the Appeal:
1. Whether the contract did contain an operative provision dealing with the value of the supply and whether it imposed upon the defendants an obligation to pay the VAT to the claimant.
2. The claimant argued that the answer to both questions was “yes", and pointed to clause 1.4 of the general conditions. It contends that this clause makes it abundantly clear that the purchase price, £130,000, is exclusive of VAT,
3. The defendants submitted that if this is the correct interpretation of clause 1.4 of the general conditions, then it is inconsistent with the special conditions when properly interpreted in the light of the relevant background.
4. On appeal, Judge Oliver-Jones noted there was indeed a conflict between the special conditions and the general conditions and that in those circumstances the special conditions must prevail. He noted:
"The Deputy District Judge, in effect, concluded that there was no conflict between the Agreement [the special conditions] and the General Conditions. In my judgment he was wrong to do so and failed to have regard to the fact that the consideration for this transaction was clearly stated in the agreement to be £130,000. If the words ‘plus VAT’ had been added to the figure of £130,000 on the definitions-page of the Agreement which defined the purchase price, then there would have been no conflict with clause 1.4 of the General Conditions. Both the requisition on title and the transfer document submitted to the Land Registry make it clear that the consideration for the purchase was money in the sum of £130,000. Even if one were to ignore the requisition and Land Registry document, the purchase price is, as I say, defined in the agreement."
5. As to s.19(2) of the 1994 Act, he continued:
"Therefore, in identifying the purchase price as being £130,000 without specifying that VAT should be added, the agreement was inconsistent with the terms of general condition 1.4(2) that all sums payable by the contract are exclusive of VAT. There is no inconsistency with 1.4(1) because all that says is that an obligation to pay money viz. £130,000, includes an obligation to pay any VAT chargeable in respect of that payment. The VAT chargeable is calculated in accordance with section 19(2) and has been paid by the defendant. So there is nothing due and owing."
The Court of Appeal noted the following:
1. The correct approach to the interpretation of a contract is to determine what the parties meant by the language they used, and ascertaining what a reasonable person would have understood the parties to have meant,
2. The relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The parties’ subjective intentions are irrelevant.
3. In construing the words of the contract, the court must have regard to the circumstances of the parties’ relationship and the relevant facts surrounding the transaction as known to them. The contract must be construed as a whole and every effort must be made to give effect to all of its clauses. Whilst the contract comprises special and general conditions, and includes a condition which expressly provides that, in the event of a conflict, the special conditions shall prevail, the court should nevertheless preserve the general conditions so far as possible.
4. Clause 1.4 of the general conditions was in the opinion of Lord Justice Kitchin susceptible of only one reasonable interpretation, namely that any liability for VAT should fall on the defendants. This conclusion was supported by two authorities cited (Hostgilt Ltd v Megahart Ltd  STC 141 and Wynn Realisations Ltd (in administration) v Vogue Holdings Inc  STC 524.)
5. However the analysis did not end with the ascertainment of the meaning of clause 1.4 as the contract must be interpreted as a whole in the light of all of the circumstances of the parties’ relationship and the relevant facts surrounding the transaction as known to them. In this regard the following points were material. First, it was never suggested that the claimant ever communicated to the defendants that it had exercised the option to tax. .Second, the defendants were individuals and whilst the property comprises commercial premises, there has never been any suggestion that the defendants were aware or had any reason to suppose that the transaction might be subject to a VAT charge. In this respect the circumstances of the present case were very different from those of the Hostgilt case.
6. .Third the purchase price was agreed in principle a considerable time before completion. The purchase price of £130,000 had been paid over by the defendants to the claimant by, at the latest, 2005. There was never any suggestion that VAT might be payable, still less that the defendants would be liable for it. Indeed to the contrary, the letter from the claimant’s solicitors in March 2006 contained an express acknowledgement that the claimant had received "all of the sale monies of £130,000 on this matter, subject to contract". The purchase monies were then repaid before being paid over once again on exchange and completion.
7. Fourth, the standard requisitions asked for details of the exact amount payable on completion. The response was "Balance of purchase monies", £130,000. No hint was given that VAT was or might be payable. The importance of the requisition and response was recognised in clause 12 of the special conditions (an entire agreement and non-reliance provision).
8. Fifth, the special conditions specify that the "Purchase price" is £130,000. They contain no indication that this price was exclusive of VAT. Indeed they make it clear that this and no other sum was due upon completion because a table in the contract in which details of any "Other payments/allowances" could have been (but were not) included makes no mention of VAT or any other sum being payable by way of "other payments" in addition to the specified purchase price.
9. Taking all these matters into consideration and considering the matter from the perspective of the reasonable person who had all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, the Court of Appeal held that such a person would conclude that the parties intended that nothing was or could become payable by the defendants over and above the specified purchase price of £130,000.
10. In the particular circumstances of this case it was not possible to interpret "Purchase price" as the price exclusive of VAT. The reasonable person would therefore consider the special conditions were not reconcilable with clause 1.4 of the general conditions and that the parties intended that, in these circumstances, the special conditions must prevail.
There was clearly a tension between the special and general conditions. Here the Court of Appeal applying the usual approach to contractual interpretation noted that the defendants were not aware and had no reason to be aware that the transaction might be subject to VAT. The fact is that the purchase price had been paid over to the claimant and a letter from the claimant solicitors contained an express acknowledgment that the claimant had received all of the purchase price. The purchase price was of course defined.
The special conditions prevailed perhaps as against the claimant’s understanding and more crucially against the claimant’s solicitors intentions. Clearly the key issue here was to ensure there was clarity and no tension in the contract.
Standing back and considering the purchase price may have prevented an expensive claim. Crucially it will be noted that VAT became chargeable by reference to the value of the supply which, absent some provision in the agreement, would, by virtue of s.19(1) and (2) of the 1994 Act, have been such amount as would, with the addition of VAT, have amounted to £130,000.
In short getting the contractual provision correct is as ever essential.