UK High Court holds that a variation clause was ambiguous as to if it prevented oral modifications

Integral Petroleum SA v Bank GPB International SA [2022] EWHC 659 (Comm)

The question 

What type of wording should companies be aware of and avoid when drafting variation clauses in their agreements?

The key takeaway

If the terms of a variation clause are not sufficiently clear, it can lead to the potential variation of the agreement through ways which were not intended. It is therefore important that these clauses be drafted clearly to ensure only the intended methods of amendment are usable. 

The background

The First Claimant, Integral Petroleum S.A. (Integral), is a company whose business comprised the purchasing of commodities from production facilities in Turkmenistan via intermediaries, namely Etoile Energy Ltd and Ajap Trading LLP, which it then sold on to other third parties.

On 28 September 2017 Integral entered into Uncommitted Commodity Finance Facility (the Facility) with Bank GPB International SA (GPB) in order to finance the purchase of commodities for the maximum amount of $35m. Integral’s obligations under the Facility were also guaranteed by the other Claimants in the case. The Facility was amended and restated on 20 December 2018.

In the Autumn of 2019 Integral faced a number of issues with its producers in Turkmenistan, which caused significant delays in respect of some commodities. Due to this, many of its suppliers’ purchase contracts expired before the cargoes could be loaded, which led to the producers charging penalties for the late lifting of the cargoes. Because of this, Integral was unable to pay GPB for the financing of the cargoes, which matured in September and October of 2019, leading to Integral’s default on some of the loans. The parties then started discussions on restructuring the debts. 

Despite GPB arguing that the loans had reached their maturity dates, Integral argued that the parties had agreed, over the phone, on a repayment plan, which included an extension on the maturity dates of the loans. A part of the conditions of the restructuring was that Integral signed a letter acknowledging the total outstanding sum due under the Facility. 

GPB argued that this letter contradicted Integral’s position, and that no extension was agreed between the parties in relation to the debts under the Facility. 

Ultimately, the parties never agreed on any restructuring of the Facility’s terms. As a part of the court proceedings, GPB initiated a counterclaim against Integral demanding the repayment of the monies owed under the Facility of c. $25m and the same from its guarantors and applied for summary judgment. Integral argued that, among other things, the parties agreed to extend the maturity dates on its loans with the result that it was not then in default of the Facility. 

GBP’s position in relation to the variation was that, even if one had been agreed, the agreement was not legally binding as it had not been agreed in writing as required by the variation clause.

The decision

The court considered that the variation clause, which stated that “any term of the Finance Documents may be amended or waived with the agreement of the Borrower and Lender in writing”, was ambiguous.

Mrs Justice Moulder set out that it was not clear whether the clause required that any amendment be effected in a written document or whether it is sufficient for it to be evidenced in writing, if agreed orally. The court would have to weigh the natural meaning of the language against the factual context and commercial common sense to determine the actual meaning of the clause. 

Because of this Mrs Justice Moulder rejected GPB’s application for summary judgment. 

Why is this important?

Although the case is very fact reliant, it does demonstrate that language in clauses, such as the one above, can create ambiguity as to its intended meaning, and therefore issues down the line. It is important to make sure that any variation clauses (or any other key clauses) are drafted with clarity in mind so as to make it as certain as possible that your intended outcome will be reached in the event of any dispute. 

Any practical tips?

Check any key agreements for wording in terms of any variation clauses and ensure that they are not ambiguous, and potentially negotiate any amendments where they might be needed.