A triumph for strict contractual interpretation over "business common sense"

Background

In BMA Special Opportunity Hub Fund Ltd v African Minerals Finance LtdRainy Sky SA v Kookmin Bank, the Court of Appeal highlighted the limitations of the 'business common sense' approach to contractual interpretation as articulated by the Supreme Court in , re-emphasising the importance of clear contractual wording in the construction of commercial contracts. This case arises in the context of an increasing willingness of the Courts to adopt a business common sense approach when construing commercial agreements, even in the absence of ambiguity.

Facts

The dispute in this case concerned a clause in a facility agreement that entitled the lenders to a 6% pre-payment fee if the borrower opted to voluntarily repay the loan early. Clause 8 provided for pre-payment of the loan, and stated that the loan had to be pre-paid in full in the event of a refinancing. Within a year of entering into the facility, the borrower entered into a refinancing of the facility through a third-party bank. The lender demanded that the 6% pre-payment fee be paid, stating that the pre-payment was voluntary because it arose as a result of a voluntary refinancing. The borrower stated that this was not the case as the repayment was mandatory under clause 8.3.

The lenders argued that the borrower's interpretation could not have been the intended consequence and would amount to an uncommercial construction. They argued that the pre-payment fee aimed to compensate the lenders for the loss of interest payments in the case of an early repayment. A literal construction would allow the borrower to avoid the pre-payment fee by a refinancing of the loan, rather than triggering the pre-payment fee if the borrower repaid the fee early in the standard manner.

Decision

The Court of Appeal found in favour of the borrower. Aikens LJ, stressed that the starting point for contractual construction is the wording used by the parties. He found "that commercial common sense' is not to be elevated to an overriding criterion of construction and…that the parties should not be subjected to…the individual judge's own notions of what might have been the sensible solution to the parties' conundrum.'".

The Court was hesitant to find that the facility lacked business common sense given that it had taken three months to negotiate; it ran to 146 pages and had incurred legal fees of almost £1.3 million in the drafting process. With this in mind, the Court examined the structure and wording of clause 8, concluding that the parties intended the sub-clauses to deal with specific factual circumstances when pre-payment may be made without financial penalty. Applying this to the case, the Court found that the decision to refinance was separate to the subsequent mandatory requirement to repay the loan. As a result, the Court found that to characterise the pre-payment as voluntary would be "an abuse of language".

Comment

This case indicates that parties cannot rely upon the use of the 'business common sense' approach to contractual interpretation expressed in Rainy Sky SA v Kookmin Bank to attempt to rewrite a contract when commercially undesirable consequences later arise. If the wording of a contract is sufficiently clear, this case suggests that the Courts will hold the parties to the wording they have agreed – particularly when the contract was subject to intense negotiation and has had the benefit of significant legal advice.

Although this English Court of Appeal case is not binding law in Scotland, it is highly persuasive to Scottish Courts and serves as a useful reminder that parties must be careful to draft contracts clearly and precisely to ensure that the language of the contract conforms to their intentions.