Keeping one's (written) word

The Court of Appeal has recently applied some judicial brakes on the movement towards contextual, business common sensical, interpretations of commercial agreements.

An analysis of the decision is here (the full judgment is here).  The case concerned the applicability of a prepayment fee in a loan facility agreement, which would be triggered in the event of voluntary prepayment of the loan.

The borrower argued that, although it had voluntarily refinanced the facility, the subsequent prepayment was not voluntary because the refinancing had triggered a mandatory prepayment obligation.  The lender maintained that this was an uncommercial construction that would allow the borrower to avoid the fee simply by arranging a refinancing of the loan rather than using its own funds.

The Court of Appeal held that the borrowers' prepayment of the loan had not been voluntary and that there was therefore no liability to pay the fee.  The court considered that the provision, which had been the product of negotiation and enshrined in a written agreement, was itself the essence of commercial common sense and refused to undermine the written provisions – holding that it would be an abuse of language to characterise a prepayment as voluntary in the face of a contractual obligation to repay.

This decision should serve as some comfort to those who fear an increasing splurge of judicial red ink in the commercial context.  Whilst all will depend on the facts of any given case, the words used will, more often than not, be wholly or largely determinative even when they do not appear to lead to the most intuitive result.  This is particularly so in cases, such as this, in which the written agreement is comprehensive and the product of considerable negotiation and professional advice. 

The Court of Appeal is to be commended for having resisted the temptation to engage in judicial draftsmanship to impose a result that might be regarded as a better 'commercial fit' but which, in the process, would have elevated retrospective intuition above the parties' actual agreement.

In a previous blog post I argued that a truly commercial court should have the power to interpret commercial agreements in their proper commercial context and that, to do this, the court must be entitled - and trusted - to adopt a flexible and commercial approach to words as signposts to meaning.  This decision adds to the growing body of case law by which the court is proving itself well equipped to shift the signposts when it is appropriate to do so and to respect their positioning when it is not.