Recent Developments in Contract Ed Peel June 2013 Interpretation - PDF document

WIN CONTRACT LAW UPDATE  17 June – Leeds  18 June – London Professor Ed Peel Professor of Law at Keble College, Oxford Recent Developments in Contract Ed Peel June 2013 Interpretation Rainy Sky - reminder • I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other” at [21]…it is not necessary to conclude that a particular construction would produce an absurd or irrational result before having regard to the commercial purpose of the agreement at [43] • BUT: “where the parties have used unambiguous language, the court must apply it [even if it produces a commercially improbable result]” Lord Clarke at [23] 1

My commercial vs. Your commercial • Aston Hill Financial Inc v African Minerals – 8.3 Disposal Proceeds and Finance Proceeds (a) The Borrower shall prepay, and the Parent shall ensure that the Borrower prepays, the Loans in an amount equal to the amount of Disposal Proceeds or Finance Proceeds promptly upon receipt of any Disposal Proceeds or Finance Proceeds by any member of the Group… – 8.5 Voluntary prepayment of the Loan The Borrower, if it gives the Facility Agent not less than five Business Days’ (or such shorter period as the Majority Lenders may agree) prior notice, may prepay the whole or any part of the Loan (but, if in part, being an amount that reduces the Loan by a minimum amount of $100,000,000). – 8.8(d) On prepayment of all or any part of the Loans pursuant to Clauses 8.5 (Voluntary prepayment of the Loan), the Borrower shall pay to the Facility Agent (for the account of each Lender) a prepayment fee on the date of such prepayment, in the following amount... My commercial vs. Your commercial • Aston Hill Financial Inc v African Minerals – in my judgment, the main fallacy in the claimants’ argument is the failure to distinguish between, on the one hand, the refinancing, and, on the other hand, the prepayment... although the refinancing was “voluntary”, the prepayment was not. Eder LJ. – I should emphasise that I remain very uncertain whether this conclusion accords with business common sense... for reasons stated above, I found the arguments in relation to what was supposedly business common sense difficult to apply and whatever such arguments may be, the conclusion which I have reached is one which, in my judgment, is more consistent with the language used in the Facility. Eder J. Rainy Sky - reminder • I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other” at [21]…it is not necessary to conclude that a particular construction would produce an absurd or irrational result before having regard to the commercial purpose of the agreement at [43] • BUT: “where the parties have used unambiguous language, the court must apply it [even if it produces a commercially improbable result]” Lord Clarke at [23] 2

‘Public’ documents • Cherry Tree Investments v Landmain – Our courts have already drawn distinctions between the use of background material in the interpretation of what I might call “ordinary” commercial contracts on the one hand, and the interpretation of negotiable and registrable contracts or public documents on the other’… ‘in all these cases the justification for the restrictive approach is that third parties might (not will ) need to rely on the terms of the instrument under consideration without access to extraneous material’. Lewison LJ at [125] – ‘Even the staunchest advocates of the court’s ability to consider extrinsic evidence stop short of saying that by the process of interpretation the court can insert whole clauses that the parties have mistakenly failed to include’ Lewison LJ at [132] Implied terms: an objective process • Spencer v Sec of State for Defence – the within written clear yearly rent of £16,250 … shall in consequence of the above mentioned addition be increased by £83.00 … thereby causing the said rent to be £16,333.00 [or such other rent from and after 29 September 1999 as should be determined by the arbitrator in the rent review under the 1987 Tenancy] – When considering the implication of a term, it is permissible to assume that the reasonable observer had knowledge that the parties did not in fact have, certainly if that knowledge is as to established and well-known legal principles. I need go no further for the purposes of this case, but it seems to me that the same will apply to the knowledge of the reasonable observer when one considers the construction of a contract as much as when one considers the implication of a term. Vos J • Spencer v Sec of State for Defence, CA – ‘IN ALL OTHER RESPECTS the terms conditions and covenants of the Principal Agreement as varied by the said Memoranda shall remain in force as heretofore unchanged.’ • But it is still whether the reasonable observer would consider the term to be a necessity, not simply whether the alleged term is reasonable: Procter & Gamble v Svenska Cellulosa Aktiebolaget SCA • See also: Dear v Jackson, Gavin v One Housing Group Ltd Interpretation or implied terms? ‘Whether this is described as choosing the more commercially sensible of rival interpretations of express terms ( Rainy Sky SA v Kookmin Bank [2011] UKSC 50 [2011] 1 WLR 2900) or implying a term ( Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 [2009] 1 WLR 1988) does not seem to me to matter; since the objective of both is to determine what the reasonable person with the background knowledge of the parties would have understood the contract to mean ( Rainy Sky §14; Belize Telecom § 18)’, per Lewison LJ in Mirador International LLC v MF Global UK Ltd [2012] EWCA Civ 1662, at [52]. 3

Exemption Clauses • A throwback to the old days? – KG Bominflot v Petroplus • There are no guarantees, warranties or representations, express or implied, [of] merchantability, fitness or suitability of the oil for any particular purpose or otherwise, which extend beyond the description of the oil set forth in this agreement. • “such obligations can only be excluded by language which expressly (or perhaps one may add which must necessarily be taken to) refer to conditions” Rix LJ – Air Transworld v Bombardier Air Transworld 4.1 The warranty, obligations and liabilities of seller and the rights and remedies of buyer set forth in the agreement are exclusive and are in lieu of and buyer hereby waives and releases all other warranties, obligations, representations or liabilities, express or implied, arising by law, in contract, civil liability or in tort, or otherwise, including but not limited to a) any implied warranty of merchantability or of fitness for a particular purpose, and b) any other obligation or liability on the part of seller to anyone of any nature whatsoever by reason of the design, manufacture, sale, repair, lease or use of the aircraft or related products and services delivered or rendered hereunder or otherwise. Exemption Clauses • Getting rid of SGA conditions – KG Bominflot v Petroplus • “such obligations can only be excluded by language which expressly (or perhaps one may add which must necessarily be taken to) refer to conditions” Rix LJ – Air Transworld v Bombardier • “It is right that there is no term which purports to exclude the buyer’s right to reject the goods and recover the price, nor to the specific sections of the Sale of Goods Act, but the words “all other… obligations… or liabilities express or implied arising by law”, which the purchaser expressly waives, necessarily include the conditions implied by the Sale of Goods Act.” Cooke J. – Dalmare SpA v Union Maritime • ‘as was’ at the time of inspection • ‘as is’? 4