Contractual Terms – Context vs Contract

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Posted in:Corporate and Commercial|June 17, 2013 | Join the mailing list

Recent case law has shown a move towards the increased power and willingness of courts to give effect to the notions of business common sense and context when interpreting a written contract. However, the most recent case of BMA Special Opportunity
Hub Fund ltd & Ors v African Minerals Finance Ltd saw the Court of Appeal give priority to the written word ahead of what may be seen as the more commercial outcome.

In this case the court was asked to ascertain whether a prepayment fee should apply in relation to a loan. The facility had an effective date from February 2011 and repayment was due to commence in April 2012. A 6% prepayment fee was to be
applied if the loan was repaid during the first year. Due to refinancing from another lender the borrower repaid the loan in the first year and the lender tried to enforce the 6% prepayment fee. The crux of the debate was whether or not the prepayment was
voluntary, if voluntary then the prepayment would apply, if not then the borrower did not have to pay additional costs for repaying the loan.

The borrower argued that, although refinancing was voluntary, the subsequent prepayment was not voluntary because the refinancing had triggered a mandatory prepayment obligation.  The lender argued that it was not commercial that the agreement
would allow a borrower to avoid the prepayment fee because the money came from a third party financer and not the borrower’s own funds.

The court found in favour of the borrower separating the voluntary decision to refinance from the subsequent mandatory obligation to prepay the loan. In reaching the decision the court established three main points:

1. Commercial common sense was not to be elevated to an overriding criterion of construction;
2. Parties to a contract should not be subject to one judge’s notion of what made a sensible solution; and
3. Construction should not be determined by what seems like commercial common sense from the point of view of one party.

It should be noted that in this case the drafting of the facility had taken three months, six sets of lawyers and $2m of legal fees on behalf of the lender to draft. Due to the level of negotiation involved and the time spent on the construction
of the contract the court was even more reluctant to apply judicial red ink.

The result of this case is that although there has been an increasing movement to apply judicial red ink all will depend on the facts of any given case. The written contract and language used will, more often than not, be largely determinative
even when it may not appear to lead to the most intuitive result. The lesson being that parties to a contract need to make sure that the words written reflect the consequences they want to happen. A court may not amend a contract just because intuitively it
would make common business sense to include said amendment.

Should you have any concerns regarding your existing contracts, or seek guidance and advice in relation to drafting new commercial contracts please contact Stephen Foster, Head of Corporate at or by telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional
legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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