“Grossing up” clauses are familiar in commercial contracts where one party is bound to make a payment to another party, and are intended to ensure that the other party is fully compensated for any tax liable on the sum received. In Davies v Novatrust Ltd EWHC 1196 (Ch), the Court was asked to construe a grossing up clause applicable to a pension benefit.
The claimant was entitled to a pension under an agreement with the defendant trustee of a trust set up by the family of the claimant’s employer, which provided that:
"The amount that will be paid to [the claimant] in each year will be that gross amount which, after deduction of tax levied at the highest rate applicable to [the claimant] in the country of [his] residence in that year, will result in a net (after-tax) amount of…"
"…the Initial Net Amount is to be grossed up such that, after payment of tax on it, [the claimant] will be left with the Initial Net Amount…”
The issue was whether the claimant’s pension was liable to be grossed up at the highest marginal rate of income tax in the UK as his place of residence (as the claimant claimed), or at the highest effective marginal rate of income tax actually payable by him (as the defendant claimed).
HHJ Jarman KC, sitting as a Deputy Judge of the High Court, applied the well-established principles of construing the terms of a contract that focused on the wording of the agreements and which required the court to apply unambiguous wording even if that course led to an improbably commercial result, citing Arnold v Britton  UKSC 36 and Rainy Sky v Kookmin Bank  UKSC 50. The Judge also emphasised the inadmissibility of subjective evidence of what the parties thought their agreement was, and he treated many of the background facts upon which the claimant sought to rely as just such evidence.
The Judge accepted the defendant’s case that the aim of the grossing-up clause was to protect the claimant from the incidence of tax, not to provide him with more than the net amount stipulated. The Judge held that the words were unambiguous and clear, and envisaged three steps: the payment to the claimant of a gross sum; the payment of income tax by the claimant on that sum; and the retention by the claimant after the payment of tax of the stipulated net amount. The words "applicable to" the claimant were clearly a reference to the highest rate applicable to the gross pension sum that would give him the stipulated net amount.
Having held that the claimant’s pension was to be grossed up by reference to the highest rate of income tax actually payable by him in his place of residence, the Judge agreed with the defendant that the claimant was required to provide information of his income to the defendant for the purpose of calculating the appropriate grossing up in the future, on the basis that such a requirement was a implied term of the agreement necessary to make the agreement work.