Some recent cases have suggested that the courts are willing to apply broad notions of business common sense when construing commercial agreements (eg see Kudos Catering v Manchester Central Convention Complex, reviewed in our last update). A more recent decision suggests that there are limits to how far the courts will interfere with clear language in heavily negotiated contracts simply because it may seem ‘uncommercial’.
African Minerals entered into a $500m loan facility agreement with BMA and other lenders in February 2011, to finance a mining project in Sierra Leone. Repayment by instalments was due to start in April 2012. The contract allowed the borrower voluntarily to prepay the loan in some circumstances, and required it to prepay in others. If it voluntarily prepaid in the first year, it would be obliged to pay an extra 6 per cent prepayment fee.
The borrower refinanced the loan and prepaid it in full within a year with no prepayment fee. It said that the prepayment was not voluntary, as the agreement required it to apply the proceeds of any refinancing to prepay the loan. The lenders argued that this was an uncommercial interpretation, as it would allow the borrower to avoid the 6 per cent fee for voluntary prepayments simply by refinancing the loan (instead of prepaying it from its own funds).
The Court of Appeal held that the decision to obtain the refinancing was separate from the requirement to use the refinancing proceeds to repay the loan. Construing prepayment in these circumstances as voluntary would be an abuse of language. The loan agreement was 146 pages long, took three months to negotiate, and involved six sets of lawyers for the original lenders. In this context, the court was unwilling to accept the lenders’ view of commercial common sense over the clear wording of the contract.
The court emphasised that commercial common sense should not be elevated into an overriding criterion of construction. It shouldn’t be down to an individual judge’s view; and certainly not the perspective of only one party.
The case breaks a recent trend for the courts to use wide concepts of commercial common sense to interpret contracts. Courts will be reluctant to override clear and unambiguous wording based on one party’s view of good business sense, particularly in negotiated contracts between sophisticated counterparties.