Contractual interpretation; rectification

Gwyn y Mor Ofto plc v Gwynt y Mor Offshore Wind Farm Ltd [2020] EWHC 850 (Comm)

The question

How will the Court apply contractual interpretation in the context of the whole of the contract, and an alternative case of rectification of the contract? 

The key takeaway

The Court’s approach to contractual interpretation is set out in the leading Supreme Court decisions of Wood v Capita, Arnold v Britton and Rainy Sky. In this case, it was the consideration of the relevant provision in the context of the contract as a whole, rather than factual matrix, which was crucial. 

The Court also considered an alternative rectification case, for which pre-contractual negotiations and the parties’ actual intentions is relevant; although such matters are inadmissible for contractual interpretation. 

The background

Ofgem organised the sale of the transmission system of a wind farm comprising 160 wind turbines, located off the Welsh coast. A consortium of Balfour Beatty and Equitix were the preferred bidder (Buyer). Various RWE companies were selling the business of owning and operating the electrical transmission link (Sellers). The deal was by way of an asset sale for a purchase price of £352m.

The SPA was signed on 11 February 2015 and completed on 17 February 2015.

The wind farm used four subsea export cables, which were included within the definition of Assets in the SPA. Less than two weeks after completion, one of the cables failed as a result of seawater penetrating a damaged sheath on the cable. A second cable failed in September 2015. The corrosion dated back months or years, prior to the signing or completion of the SPA.

The Buyer claimed for £15m of repair costs under an indemnity in the SPA, which provided that “[I]f any of the Assets are destroyed or damaged prior to Completion … the [Sellers] shall indemnify the [Buyer]”.

The decision

The Court applied the accepted approach to contractual interpretation (referring to Wood v Capita, Arnold v Britton and Rainy Sky). The Buyer stressed the detailed and complex nature of the contract, negotiated over several years with professional assistance, and urged a principally textual analysis, with limited/no regard to the factual matrix. The Sellers sought to advance factual matrix material and suggest provisions that impose wide liabilities should be construed narrowly. The Court preferred the Buyer’s approach, but noted the provision must be considered in the context of the agreement as a whole. 

The Court gave judgment in favour of the Sellers, noting that the wording of the indemnity, when considered in the broader context of the SPA, supported the view that it only covered the period between signing and completion – a period of six days. 

The choice of the words “are damaged” as opposed to “have been damaged” (which would have covered historical damage) meant that the parties had intended to exclude pre-signing damage from the scope of the indemnity.

If the parties had intended to give the Buyer the benefit of a widely-drafted indemnity, that indemnity would have also applied to damage that the Sellers had disclosed. Further, the Sellers had provided warranties as to the absence of damage to Assets that did apply to the pre-signing period (but this was qualified to apply only in specific circumstances). The Court noted that these warranties would not give any additional protection if the same issues were also covered by an open-ended indemnity. 

The Sellers also advanced a rectification case based on the pre-contractual negotiations. The Court noted that such material was not relevant to the contractual interpretation exercise. However, if the Court had preferred the Buyer’s interpretation, the Court indicated that it would have rectified the contract to reflect the Sellers’ interpretation, on the basis that the parties shared a common continuing intention, that the parties had communicated. 

Why is this important?

This is a useful example of the Court’s applying the established approach to contractual interpretation by reference to the whole of the contract, with limited reliance on the factual matrix. It also considers an alternative case for rectification (based on the actual (subjective) intentions of the parties), where pre-contractual negotiations are admissible.

Any practical tips?

Always ensure that the drafting of key provisions is clear. Check for consistency of provisions throughout the agreement, particularly those that deal with the same or similar subject matter. Consider including relevant factual background/context within the agreement (eg recitals).

Maintain copies of communications, notes, transaction files, etc, in case the drafting of the contract has gone wrong and you need to fall back on a rectification argument (and note that the lawyers involved may be required to give evidence!).