Supreme Court remits loan case for rehearing after finding trial judge erred in ignoring subsequent events to determine oral contract terms.

An Chúirt Uachtarach

The Supreme Court

Clarke CJ

Dunne J

Charleton J

Supreme Court appeal number: 67/2012 SC

[2019] IESC 000

High Court record number: 2009 4304S

[2011] IEHC 528

Between

Damien Stapleton

Plaintiff/Respondent

- and -

Philip Doran

Defendant/Appellant

Judgment of Mr Justice Peter Charleton delivered Thursday 28th of March 2019

1. At issue on this appeal is whether the High Court was correct to decide that the plaintiff Damien Stapleton lent €300,000 to the

defendant Philip Doran personally in July 2008. The defendant’s case is that the transfer of money, which undoubtedly took place,

was part of a larger transaction whereby the plaintiff was investing in shares in Easiwrap Limited, a company of which the defendant

was the main shareholder and effective managing director. What was involved was an oral contract. Hence, there is no

documentation, apart from subsequent recording of events, to support either contention. In all, the plaintiff furnished to the

defendant the €300,000 in issue shortly after a meeting in the plaintiff’s home on 21 July 2008 and a further €434,000 was furnished

as an investment in Easiwrap on various dates from January 2009 up to July of that year. Hogan J, the trial judge, held by written

judgment dated 20 December 2011, that this former sum was furnished as a personal loan. The latter sum, he also held, was furnished

so that the plaintiff could assume a major role in Easiwrap whereby he became a shadow director, as defined by s 27(1) of the

Companies Act 1990 as being:

a person in accordance with whose directions or instructions the directors of a company are accustomed to act (in this

Act referred to as 'a shadow director') shall be treated for the purposes of this Part as a director of the company unless

the directors are accustomed so to act by reason only that they do so on advice given by him in a professional capacity.

2. Easiwrap has since been liquidated. Thus the €434,000 paid by the plaintiff to that company is not now recoverable. The purpose

of the action, commenced by summary summons on 8 October 2009, was to recover the €300,000 from the defendant. Points of claim

and points of defence were exchanged and the case proceeded to an oral hearing. Since the trial judge had the opportunity of

hearing and seeing the witnesses, his decision on issues is final where there was any evidence in reasonable measure to support such

findings, and his decision as to any inferences to be drawn from primary facts must be respected; Hay v O’Grady [1992] 1 IR 210 at

page 217. Unless, therefore, the trial judge approached the evidence on a basis that meant that he probably did not construe the

relevant testimony in accordance with law, his judgment must stand.

The judgment of the High Court

3. At the outset of his judgment, the trial judge sets out the principles applicable to the construction of a contract. In so doing, the

principles to which he refers are those applicable to the construction of a contract which is in writing. In that respect, the trial judge

was clearly correct. A written contract assumes form after some sort of negotiation or bargain. It is the expression of the intention of

the parties as put into language for the benefit of those bound by the agreement. Hence, that expression of mutual obligations and

burdens is not to be construed in accordance with their subjective views as to what the language means, much less by reference to

what one or other did in purported performance of the contract, but rather by the plain meaning of words in the context of the

agreement as a whole set against the factual background. The point of reducing a series of obligations to writing in a written contract

is so that it will itself speak as to the agreement of the parties. Hence, the trial judge correctly approached the construction of a

written contract in his judgment:

3. In a matter of this kind, the general surrounding circumstances and the relevant factual matrix of the dispute is critical.

The task of the court, after all, is to determine the intentions of the parties to the contract at the time insofar as they

can be objectively ascertained. As Keane J. said in Kramer v. Arnold [1997] 3 I.R. 43, 55:

"...where the parties are in disagreement as to what a particular provision of a contract means, the task of the

court is to decide what the intention of the parties was, having regard to the language used in the contract itself

and the surrounding circumstances."

` 4. In the case of a purely verbal contract, the examination of the surrounding circumstances assumes a particular

importance. This is especially true where (as we shall see) the two parties to the verbal agreement disagree

fundamentally concerning key terms of that oral contract. Of course, the general approach of the court is to confine the

ascertainment of this general factual matrix to the circumstances in existence and known to the parties at the time of the

entry into the contract, since as Finlay C.J. observed in Re Wogan's (Drogheda) Ltd. [1993] 1 I.R. 157, 170, "the mischief

created by a departure from [this principle] would be in many instances considerable." In that case the Supreme Court

refused to have regard to post-execution events for the purposes of construing whether a charge in a debenture deed

was a fixed or a floating charge.

5. These sentiments were echoed by Keane J. in Bula Ltd. v. Tara Mines Ltd. [1999] IESC 17. Here the argument was

that (an admittedly detailed) contract should be capable of a different construction depending on the passage of

subsequent events. This was squarely rejected by the Supreme Court:-

"....in the light of what were said to be the wholly different circumstances in which the plaintiffs found themselves

at a later stage when the planning permission for an open cast mine was refused, it was reasonable to give the

clause a different construction. It need hardly be said that such an approach would be wholly contrary to

elementary principles of our law of contract: the meaning of any agreement is to be determined by ascertaining the

intentions of the parties as expressed in the agreement (subject to such extrinsic evidence as may be admissible)

at the time they entered into the agreement and not otherwise."

6. My task, therefore, in the light of these two Supreme Court decisions is to ascertain in the first instance the relevant

factual circumstances at the time of the making of the verbal contract in July 2008.

Construing a disputed oral contract

4. This, however, was not a case where there was a written contract waiting to be construed. It was keenly contested as between

the plaintiff and the defendant both as to the circumstances in which the sum of €300,000 was paid over, whether to the defendant

as a personal loan or, instead, to the defendant on behalf of a shareholding in the company, meaning a purchase of shares and thus

an investment in the company. Within that context, it is appropriate, with a view to understanding what was agreed, to consider the

conduct of the parties leading up to the contract and how they behaved afterwards from the point of view of apparently performing

their obligations. Apart from a written contract, there may also be circumstances where, by action and words, it is both clear and

uncontested as to what bargain the parties arrived at. For instance, if there is no dispute that at a meeting on a particular day, a

bargain was struck whereby one party agreed to sell and the other to buy a particular horse for a particular price paid by a particular

date, it becomes irrelevant from the point of view of construing a contract that money was not paid until after that date or that the

particular horse was not handed over on time. None of that can inform the terms of the bargain that the parties had effected.

5. Where, on the other hand, as in the present case, the issue is as to what was agreed, then how parties interacted with each

other after their bargain, or what is alleged by one side to be the bargain, may assist the judge in construing exactly what the

bargain was. The case of Henley Forklift v Lansing Bagnall [1979] ILRM 257 was one where Griffin J appeared to take post-contractual

conduct into account when assessing whether or not two agreements should be read together. In concluding that they were not to

be read as such, he observed at page 264 “that this was so was clearly demonstrated by the manner in which the agreements were

performed until June 1975 and by the conduct of the plaintiffs”. In McDermott & McDermott - Contract Law (2nd edition, Dublin,

2017) it is correctly stated at paragraph 10.69 that it is generally accepted that evidence of the conduct of the parties subsequent

to the making of the contract is not admissible, noting the rationale that “if such evidence were admitted it might follow that a

contract meant one thing the day it was concluded but, due to subsequent events, meant something different a month later.” In the

High Court, the trial judge in this case cited Bula Ltd v Tara Mines [1999] IESC 17 where at page 37 Keane J held that “it is, of

course, the case that it is not legitimate to use as an aid in construction of a contract anything which the party said or did after it

was made.” See also the warning by Gannon J in Browne v Mulligan (High Court, unreported, 9 July 1976) at page 8 that “the court

must, I think, be on its guard against being influenced in the construction of the contract by the significance of subsequent events,

as the parties themselves are most likely to be.”

6. The exceptions to the rule that subsequent acts of the parties cannot be used as evidence to determine the construction of a

contract cited in Chitty on Contracts (32nd edition, London, 2015) at page 1089 include “where the contract is oral or partly oral.”

The correct approach is that set out by Smith LJ in Maggs v Marsh [2006] EWCA Civ 1058 at paragraph 26:

In my judgment it is clear that the principle set out in Miller's case, does not apply to an oral contract. Determining the

terms of an oral contract is a question of fact. Establishing the facts will usually, as here, depend upon the recollections

of the parties and other witnesses. The accuracy of those recollections may be tested and elucidated by things said and

done by the parties or witnesses after the agreement has been concluded. Receiving evidence of such words or actions

does not mean that the judge is losing sight of his task of deciding what the parties agreed at the time of the contract. It

is simply helping him to decide whose recollection is right. It is not surprising to me that the editor of Lewison should

observe that there is nothing in the authorities to prevent the court from looking at post contract actions of the parties.

As a matter of principle, I can see every reason why such evidence should be received.

7. On a consideration of the relevant decision in Ireland and elsewhere, at paragraph 10.74, McDermott & McDermott note that

although generally post-contractual behaviour is not relevant to the interpretation of the contract, there are some circumstances

where such evidence may be admitted. These are noted as follows:

(i) To show that the parties have agreed on an additional oral term which was not written down

(ii) To show a subsequent variation of the contract

(iii) To show what the terms of the original contract were

(iv) To found an estoppel

(v) If there was no performance to show that the parties are no longer intended to perform a particular contract.

8. The trial judge properly described and analysed the circumstances leading to the meeting in Rosslare in July 2008 against the

background of prior financial discussions. He summarised these as concerning the release from bank obligations of a property in

Glasnevin owned by the defendant and rented to Easiwrap. The plaintiff was to use his best endeavours to secure the release of the

security by the bank. As it turns out, that was not successful.

The trial judge’s analysis

9. Under stress in consequence of these concerns, the defendant and his domestic partner visited the plaintiff in his holiday home,

where there was first of all a social interaction. Then, according to the plaintiff, the defendant asked him for the loan of €300,000.

That was granted the next morning, the defendant having stayed overnight in the plaintiff’s home. The defendant saw that transfer

of money not as a personal loan to him, but as part of an investment of over €1,000,000 in Easiwrap. While the money was

transferred to his personal account, it was then put into the company as a director’s loan from the defendant. In a later meeting with

solicitors, it was similarly described and treated. The trial judge deals with the subsequent events as follows:

32. It is not disputed but that the moneys were transferred within a few days thereafter by Mr. Stapleton to Mr. Doran's

own personal account. On 24 July 2008 Mr. Doran sent Mr. Moyles (Mr. Stapleton's own personal accountant and financial

adviser) his own personal bank account details by e-mail. Although Mr. Doran suggested in evidence that he also supplied

the bank account details of Easiwrap, this is not borne out by the terms of e-mail correspondence of 24 July 2008. On the

same day Mr. Stapleton sent a fax to his own bank requesting a transfer of the sum of €300,000 from his own account to

the personal bank account of Mr. Doran. Mr. Doran then in turn lent the money in various tranches to Easiwrap over the

following weeks.

33. This is further confirmed by a file memorandum prepared by Mr. Moyles on July 23, 2008:

"PD advises EM that company needs cash now to keep going.

EM calls DS and DS agrees to put in €300,000 via loan to PD to be refunded from equity release from Ulster Bank."

34. In passing, it should be said that other witnesses also confirmed that Mr. Doran had acknowledged to them that the

loan was a personal loan. This was, for example, the evidence of Mr. Fitzgerald and Mr. Cunningham. Other witnesses-

such as Ms. Hogan and Mr. Weir​ had clearly been given an alternative impression.

35. It is also worth noting that at a slightly later stage in early 2009 when Mr. Doran and Mr. Stapleton were

contemplating a share transfer agreement, they both went for this purpose to Mr. Doran 's own legal advisers, McDowell

Purcell. That firm of solicitors sent Mr. Doran a letter on 9th January, 2009, which records the term s of the previous

day's discussions:

"Firstly, you have explained that Damian has made a loan to you in the amount of €300,000 in cash and the loan

was documented in a loan agreement (I would be grateful if you could let me have a copy of this agreement). You

used the €300,000 to make an equivalent loan of €300,000 to the Company. Was this loan documented and, if so,

can you please let me have a copy of it?

I am operating on the assumption that neither of the above loans are secured in any way, however, if I am

incorrect about this please let me know.

Secondly, I understand it is intended that simultaneous with the execution of a Share Subscription and Shareholders

Agreement in relation to the Company that Damian will invest €300,000 in cash in return for the allotment of shares

in the capital of the Company.”

36. Nor can the manner in which the loan was treated in Easiwrap's 2008 accounts be overlooked. Note 15 to those

accounts states:

"During the year Philip Doran advanced €891 ,882 in funds to the company. Expenses paid on behalf of the director

and loan repayments to the director totalled €4276,512. The Director also transferred plant and machinery with a

value of €309,000 to the company. The balance owing to the Director at the year and was €980,388..."

10. There was supporting evidence for both the argument that this was a loan to the company ultimately for the purchase of shares

and that it was a loan to the defendant. The trial judge regarded the evidence as establishing “overwhelmingly” that this transaction

of €300,000 was a personal loan to the defendant.

11. The trial judge also looked at the circumstances which suggested that as and from July 2008, the plaintiff behaved as if he was a

partner in the business, in particular by sourcing and then bringing in a new executive officer to manage Easiwrap. Regarded as

credible up to that point, the trial judge had a different view of the reliability of the plaintiff’s evidence as and from the events after

August 2008. His view was that the plaintiff was becoming more and more “deeply involved in the affairs of the company”. That series

of events, however, the trial judge excluded from any consideration as to where the balance of the evidence lay on the issue of

whether the payment of €300,000 in July 2008 was part and parcel of an overall agreement, not of loan but of investment in and

shadow directorship of Easiwrap, and the acquisition of a substantial shareholding by that means. He further excluded it from his

analysis of the payment of a further €434,000 as and from 13 January 2009 on various dates. The trial judge ruled out any of this

evidence as informing what the contract was. Rather, he construed it as only relevant to the question of whether by agreement and

the exchange of fresh consideration, the terms of the contract had changed from what was orally agreed in July 2008:

40. Mr. Doran contends, however, that after the payment in late July 2008 Mr. Stapleton acted as if he were a

partner in or, at least, had some proprietary rights in Easiwrap, so that the €300,000 payment can only be

understood as in effect a form of downpayment for a share of the business. In the light of the clear statements of

the law from the Supreme Court in both Wogans and Bula to the effect that a court cannot have regard to post-

contractual events for the purpose of construing the contract, the events post-dating July 2008 are thus irrelevant

for the purposes of the construction of the oral contract. Rather, these post-contractual events are only relevant if

it is clear from this subsequent evidence that the original verbal agreement was either expressly varied or,

alternatively, tacitly waived or altered by the parties, so that the €300,000 payment had in truth been treated by

them as either a payment to the company or some form of downpayment towards the acquisition of at least part of

the company by Mr. Stapleton.

41. In order to evaluate that claim, it is necessary to assess what happened thereafter. It is common case that

there was no express agreement to vary the terms of the loan. What has to be examined is whether the

subsequent conduct of the parties admits of no other explanation save that the oral agreement to make a personal

loan to Mr. Doran had been so tacitly varied or altered in some way in the manner contended by Mr. Doran.

12. Hence, subsequent events were regarded as another transaction, and not as potential evidence as to what the original

transaction was. A judge hearing this case could properly have considered the overall conduct of the parties. Instead, the plaintiff’s

evidence, having been previously accepted, was regarded as not as sound as that of the defendant:

44. On 8th January 2009 both Mr. Doran and Mr. Stapleton attended a meeting at the offices of the former's solicitors,

McDowell, Purcell. I have already referred to that letter insofar as it referred to the loan of July 2008 as being a personal

loan to Mr. Doran. It is clear from the balance of the letter, however, that the parties contemplated a transfer of 50% of

the shareholding following an investment by Mr. Stapleton of up to €1.3m. in the company.

45. At this point, Mr. Stapleton 's father was gravely ill and, sadly, he was to die later that year in June 2009. I am quite

satisfied that during his period much of Mr. Stapleton 's attention was - quite understandably - completely taken up with

the care and welfare of his father. When Mr. Doran made an approach for an investment based on what he said was a

recent collapse in the price of silage wrap with the consequent possibility of significant profit opportunities, Mr. Stapleton

made a snap decision to lend the company the money, possibly​ as he put it - at a time when his judgment was impaired.

It is not disputed but that on this occasion Mr. Stapleton made an investment in the company by means of six separate

cheques, commencing with a cheque of €150,000 on 13th January 2009 and ending with a final cheque of€16,000 in July

2009. The total sum of this investment came to €434,000.

46. Nor is disputed that Easiwrap made eight payments of €2,500 to Mr. Stapl eton during this period. Mr. Stapleton

maintains that this was by way of the repayment of the loans, whereas Mr. Doran contends that this was in lieu of a

director's salary. Certainly, Mr. Stapleton was never formally employed- he was never assigned a P60 or P45 or given a

PRSI number.

47. Matters came to a head in September 2009 when on the eve of completing the share transfer deal which was still

under discussion, Mr. Stapleton's legal advisers, Byrne Wallace, discovered that a key patent held by Marmions Ltd. (a

company also controlled by Mr. Doran which was vital to the protection of Easiwrap's manufacturing processes) had also

lapsed in 2007. The deal at that point collapsed.

13. Despite not accepting the evidence of the plaintiff as to his presence on Easiwrap’s premises and his management role, the trial

judge felt constrained by his interpretation of the law to only look at subsequent events from the point of view of the reformation,

and not the original formation, of the contract. The trial judge held:

67. Taking all the evidence in the round, it is perfectly clear that Mr. Stapleton's role in Easiwrap deepened appreciably

after July 2008 to the point where by the middle of July 2009 he was a shadow director, certainly in all but name…

68. Certainly by July 2009 no decision of note was being taken by the company without reference to Mr. Stapleton and

his advisers. The very fact that BOSI insisted that Mr. Stapleton become a co-signatory on the chequebook merely

underscored a progression towards deeper involvement in the affairs of the company which had been gathering pace since

July 2008 and which had accelerated throughout the early and middle parts of 2009. I accept that neither Mr. Stapleton,

nor, indeed, Mr. Fitzgerald or Mr. Cunningham, may have realised that this was the consequence of their involvement on

Mr. Stapleton's behalf and I fully accept their bona fides in their regard. But rather in the fashion of Moliere's character,

M. Jourdain, who belatedly discovered that he had been speaking prose all his life without realising it, the same can be

broadly true of the position of a shadow director. In these matters, subjective intent and beliefs are largely irrelevant-

what counts is whether the shadow director has effective and de facto control of the company. A person may thus have

become a shadow director without realising it or even- and, indeed, this may possibly be one such case- without ever

really wanting to be in that position.

14. Later, the trial judge reached these conclusions:

76. Coming now to the central issue in the case, can it be said that the evidence unequivocally shows that the post-July

2008 conduct of the parties is consistent only with a conclusion that the parties must have tacitly varied, waived or

otherwise altered the terms of the July 2008 verbal contract?

77. Not without some hesitation, I am driven to find that the evidence is sufficiently ambiguous to admit of the conclusion

that the parties must have tacitly waived or altered the terms of the July 2008 verbal contract. I accept, of course, that

by the early months of2009 Mr. Stapleton was wading knee deep in the affairs of the company. This, however, was after

the commencements of his loans to the company in January 2009 and his conduct thereafter is also consistent with a

desire to protect that particular investment.

78. It does not inevitably mean, however, that the July 2008 personal loan had been retrospectively converted into a de

facto loan to the company. I agree that at times Mr. Stapleton may have been ambiguous on this question and may have

said different things to different people, possibly as the exigencies of the occasion required. But there is also clear

evidence from the McDowell Purcell letter that as late as January 2009, Mr. Doran acknowledged that the loan.

Issue in this case

15. It is clear that the trial judge approached the issues before him by separately considering two different phases of the interaction

between the parties. So far as construing the agreement reached in July 2008 is concerned, the trial judge did not consider that he

could properly take into account subsequent events in determining the terms of that agreement. On that basis the trial judge went on

to consider all of the subsequent events against the question of whether, in his own words, “the evidence unequivocally shows that

the post-July 2008 conduct of the parties is consistent only” with a view that the terms of the agreement, the terms of which he had

already decided, had been changed.

16. If the trial judge was correct in his approach to determining the terms of the July 2008 agreement, then the way in which he dealt

with subsequent events would undoubtedly be correct. If there is an agreement in place, then it can only be varied or otherwise

altered by a subsequent clear agreement between the parties. But that analysis begs the question of whether the trial judge’s

approach to the determination of the terms of the July 2008 agreement was correct in the first place for if it was not the analysis

which followed must also have been affected.

17. The problem is that the issue in this case was not as to the construction of an agreement whose terms were clear, as would be

the case in a written contract or an oral contract where there was no dispute as to what had been agreed, but rather as to what the

terms actually were. Where an agreement is in writing then its terms are clear: they are found in the words used in the written

document. It may be that the terms of an oral agreement are also clear for there may be no dispute as to what was actually said by

the parties. There might, for example, be a recording of the discussions. In either such case, where the terms themselves are clear,

the law is clear concerning reliance on subsequent events to potentially re-interpret what the parties had agreed. But where there is

actually a dispute about the terms of the agreement itself then the same considerations do not apply. As noted earlier, one of the

key reasons why subsequent events cannot normally be relied on in interpreting an agreement is that such a course of action could

mean that the proper interpretation of a contract could change. That would not be a valid approach. The issue in this case, however,

was not as to the proper interpretation of a contract whose terms were clear, but rather as to what terms were actually agreed in

the first place. In such a case, the subsequent actions of the parties can, and in appropriate cases should, be given all due weight

for the purposes of determining what terms were actually agreed in the first place. In such circumstances, as in this case, a court is

not relying on subsequent events to provide an interpretation of clear terms, but rather is seeking to resolve a factual dispute as to

what the terms were. To fail to give appropriate weight to subsequent events in such circumstances is an error.

Result

18. A different view was possible to that arrived at by the trial judge in relation to the issue of whether the loan in July 2008 was to

the defendant or the company, or to the company as part of an overall transaction with the object of the plaintiff gaining substantial

control over it. As a result of the trial judge’s interpretation of the law, he constrained his analysis in such a way that relevant events

were not taken into consideration as an aid to finding out what the contract actually was.

19. No view is hereby expressed as to where the weight of that evidence, had it been considered in that context, may have brought

the trial judge. Nor can an appellate court substitute a view of a judgment or of transcripts or of documents which seems, perhaps

wrongly, more attractive. Rather, an error essential to the proper construction of the facts having been demonstrated on appeal, the

order of the High Court of 1 February 2012 must be set aside and the matter remitted for rehearing.