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On appeal from: [2011] CSIH 87; [2011] CSOH 105

The respondent charitable foundation was established by Deed upon the flotation of the TSB Group plc. The original Deed was executed in 1986, amended in 1993 and replaced in 1997, and under the 1997 Deed the appellant covenanted to pay the respondent the greater of either an amount equal to 0.1946% of their pre-tax profits for the relevant accounting period, or a sum of £38,920. TSB Group’s acquisition of HBOS converted the appellant’s loss of over £10bn into a profit before taxation of over £1bn in its audited accounts, if the unrealised “gain on acquisition” was taken into account. The respondent brought a claim asserting that it was entitled to a percentage of profit payment that included the “gain on acquisition”.  

The Supreme Court unanimously allowed the appeal, restoring the decree of absolvitor dismissing the claim. The Deeds should be understood in the context of the legal and accounting position at the dates when they were executed. In this case, the fundamental principles that a profit and loss account was concerned with ordinary activities before taxation, and that only profits realised at the balance sheet date could be included in the profit and loss account applied. A contextual and purposive interpretation of the Deeds led to the same conclusion.

Additionally, although the doctrine of equitable adjustment is part of Scottish law, it was held that a contract cannot be equitably adjusted on the basis that its performance, while not frustrated, is no longer that which was originally contemplated.

For judgment, please download: [2013] UKSC 3
For press summary, please download: Press Summary
For a non-PDF version of the judgment, please visit: BAILII