Contractual interpretation: It doesn't have to make sense

Three recent cases have confirmed the courts’ approach to the principles of construction of contracts, rejecting arguments based on uncertainty and giving effect to the parties’ intentions.

Astor Management AG v Atalaya Mining Plc [2017] EWHC 425 (Comm) concerned a business sale in which the defendant agreed to pay the claimant deferred consideration upon the defendant securing a senior debt facility to fund the restart of operations. In the event operations were able to restart anyway, due to an intra-group loan.

The claimant argued that to make commercial sense of the agreement, if a senior debt facility was not required because sufficient sums to restart operations had been raised in another way, compliance with that condition would be pointless and unnecessary. The claimant relied on the ‘principle of futility’ in the interpretation of contracts: if the fulfillment of a precondition becomes futile or unnecessary, the courts should not insist upon it.

The court held that no such ‘principle of futility’ had emerged, nor was the existence of such a principle consistent with legal doctrine.

In Kitcatt and others v MMS UK Holdings and others [2017] EWHC 675, a dispute arose over the claimant’s sale of an advertising agency to the defendant, which would merge it with its own business. The sale agreement provided for deferred consideration, linked to the performance of the claimant’s business but containing a warranty that the defendant was not aware of any facts or circumstances that could lead to a reduction of at least 20 per cent in the operating income of its own business. That business ultimately declined significantly.

The defendant argued that the warranty provided no baseline which would enable any comparison to be made and that it was therefore unenforceable as the warranty would not make sense.

In upholding the warranty, Mr Justice Males explained that he was reluctant to conclude that a clause which was obviously intended to provide an important protection to the claimant and which underpinned the whole structure of the deal was meaningless and therefore unenforceable.

In Associated British Ports v Tata Steel UK Ltd [2017] EWHC 694, a port licence agreement included a provision entitling the parties to renegotiate terms in the event of a major change of physical or financial circumstances affecting the operation of the port, with a reference to arbitration if no agreement could be reached.

The defendant served a notice under the arbitration clause, arguing that changes in the worldwide steel market had fundamentally affected circumstances.

The claimant argued that the arbitration clause was void for uncertainty, because it was not possible to determine whether a trigger event had occurred, or because the clause failed to define criteria by which the arbitrator would determine the renegotiated terms.

Mrs Justice Rose found against the claimant: the arbitrator would be able to determine whether a trigger event had occurred, notwithstanding the difficulty in doing so, and would also be able to determine new terms, if appropriate. The arbitration clause was binding, indicating the parties’ intention to enter a long-term contract which acknowledged that the terms of the contract might have to be readdressed if necessary by an independent third party.

Although, as a matter of English law, a contract may be void and unenforceable for uncertainty, the courts will be reluctant to come to such a conclusion, and will strive to give the contract meaning and effect.

While the court will recognise the need for a contract to make commercial sense and avoid a construction which achieves an unreasonable result, it will not substitute what it believes to be a better bargain for the one actually made, and unless the contract is illegal, parties remain free to contract in whatever way they wish.

As in Kitcatt, a judge will be slow to reach such a conclusion or to resort to special rules of construction (such as supplying additional words to make sense of an otherwise nonsensical clause).

These judgments therefore underline the English judiciary’s commitment to party autonomy, and highlight the obstacles in the way of those seeking to persuade a court that a commercial contract is void for uncertainty, particularly where it has been substantially performed, as in the ABP case.

Matthew Wescott is a partner at DAC Beachcroft and a London Solicitors Litigation Association member. John Bramhall is a partner and head of commercial litigation at DAC Beachcroft and immediate past president of the LSLA

www.lsla.co.uk

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