In Fliptex Limited v Edney Enterprises Limited [2002] All ER (D) 439 the High Court considered the effect of whether a specific liability arising out of a shareholders’ agreement and imposed upon one of the parties was covered by an ambiguous guarantee. The court emphasised that it would give effect to the ordinary words of the guarantee, so far as it was possible to do so, rather than apply the ‘contra proferentem rule’. Simply stated, the rule is a principle whereby if the true meaning of a defendant’s obligation is ambiguous, the court will resolve the ambiguity in favour of the defendant rather than the party seeking to impose the obligation.
The facts
The guarantee in question forms part of a transaction under which the claimant company (Edney), an investment company, acquired 20 percent of the issued share capital of a company used as a vehicle for a television channel (EAST) for £750,000 and subsequently ultimately for £750,000 of the redeemable loan stock of EAST. The remaining 80 percent of the share capital of EAST was acquired by H Ltd, a private company owned by two individuals.
In the shareholders’ agreement, H Ltd. covenanted with the claimant that in the event that EAST entered into liquidation, H Ltd. would pay the claimant £1.5m plus accrued interest on the loan stock. The agreement also allowed the claimant to exercise a put option requiring H Ltd. to purchase its loan stock and shares on default by EAST of certain contractual obligations. By an “on-demand” guarantee, the defendant (Fliptex) agreed to pay the claimant firstly all indebtedness of EAST to it in respect of the loan stock with accrued interest, and secondly the liabilities of H Ltd. to it under the shareholders agreement in respect of the loan stock and shares.
EAST later went into liquidation and the claimant made a demand on H Ltd. for payment of the £1.5m plus interest. The claimant also attempted to make a demand on the defendant under the guarantee in respect of its obligations.
The defendant denied that this particular liability was covered by the guarantee. It claimed that on literal interpretation, the words of the defendant’s guarantee only covered liabilities of H Ltd. which would accrue in the event that H Ltd. became contractually liable to purchase the loan stock and shares. Therefore, the terms of the guarantee could only be relied upon if the put option was actually exercised which it could not legally do in the post-liquidation period.
The decision
On consideration of the construction of both the shareholders’ agreement and the guarantee, the Judge upheld an earlier judgment ordering payment under the guarantee. It was decided that the proper construction of the documentation includes and refers to not only the liability of H Ltd. to its obligation to pay the £1.5m plus accrued interest, but also to its liability under the second obligation to buy back the shares and loan stock (despite the fact this was now impossible). The Judge held that the application of the contra proferentem rule is a last resort. Wherever ordinary words have been used it is first the court’s duty to attempt to interpret the document by giving effect to the ordinary meaning of the words in the relevant context in which they appear.
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