Contractual interpretation: High Court upholds the importance of business sense when interpreting ambiguous provisions

BlackLion Law LLP v Amira Nature Foods Ltd [2022] EWHC 1500 (Ch)

The question

How will the courts interpret ambiguous wording in a commercial contract?

The key takeaway

The court confirmed that, where drafting was unambiguous it would give effect to the terms of the contract as drafted. However, when considering the meaning of an ambiguous clause where parties could legitimately draw different conclusions as to its meaning based on the language alone, the court would look at factors such as what a reasonable person would understand the commercial purpose of the contract to be.

The background

The case concerned a claim by a law firm against a former client for non-payment of its fees in relation to advice regarding a bonds issue. The Defendant claimed that, under the terms of its retainer with the law firm, no fees would be payable unless the bonds issue went ahead on or before 31 May 2017.

The bonds issue did not go ahead either before or after this date. 

The terms of the retainer provided for the payment of a fixed sum of £300,000 “subject to the completion of the Matter by 31 May 2017”. The law firm argued that this qualifier meant that, if work continued on the matter beyond 31 May 2017, additional fees would be payable. Conversely, the Defendant argued that this should be interpreted to mean that no fees were payable unless the matter completed successfully on or before the required date. 

The decision

The court considered that the payment clause was unclear and there were two tenable readings of the provision. The court therefore asked what would a reasonable person with all the background knowledge available to the parties at the time that the agreement was made have understood the clause to mean? In establishing this, the court will consider the ordinary meaning of the words used, the purpose of the document, and what makes commercial sense.

The Defendant sought to argue that the clause should be construed against the Claimant, and argued that the Claimant itself had introduced the “subject to” wording, the Claimant could have introduced specific provisions for hourly billing after 31 May 2017 if it had wanted to, and that both parties knew that completing the bonds issue by 31 May 2017 was important for the Defendant.

The court relied heavily on what made good business sense in interpreting the contract (referring to the Supreme Court decision in Rainy Sky v Kookmin [2011] 1 WLR 2900). The court noted that it was clear to the parties when the agreement was made that the bonds issue might not go ahead by the required deadline, and that the matter would involve a significant volume of work. It therefore made no commercial sense to infer that the law firm would have willingly agreed to an arrangement which required a significant amount of time when there was a good chance that it would not get paid. Conversely, agreeing a fixed fee of £300,000 for any work done before 31 May 2017 did make commercial sense.

The court also confirmed (obiter) that it would have rectified the contract, if the Defendant’s interpretation had been applied. The court reviewed the pre-contract negotiations and post-contract performance (for the purposes of rectification, not contractual interpretation) and found that the parties had the same actual intention and shared understanding in relation to the payment provision (applying FSHC Group Holdings v GLAS Trust Corporation [2020] Ch 365). 

Why is this important?

This highlights the importance of commercial common sense where there is ambiguity in the wording of a contract. If there are competing interpretations, the court will prefer the interpretation that makes more commercial sense. 

Any practical tips?

Seek to avoid ambiguity in the drafting, so that the provision is applied as drafted!  Use recitals and acknowledgments within the contract to explain the commercial context of the deal and purpose of the provision (especially if they are unusual). Always retain the transaction file, including heads of terms, communications before and after the contract, etc, in case it is necessary to rectify the agreement and show the parties’ shared understanding.