The recent case of BMA Special Opportunity Hub Fund Ltd. & Ors v African Minerals Finance Ltd [2013] EWCA Civ 416 (23 April 2013) serves as a stark reminder to commercial parties negotiating a contract that “commercial common sense” will not override the clear words of the contract. In this case, the Court of Appeal affirmed the first instance decision that a prepayment fee did not have to be paid by a borrower on the refinancing of a loan. The prepayment was required by the contract, which only required a prepayment fee to be paid if the payment was “voluntary”.

The respondent borrower had facilities with various lenders, including the appellants. On 3 February 2012 the borrower entered into a new facility agreement with the intention of refinancing the appellants’ loan. On 8 February 2012, the borrower prepaid in full its existing loan using the proceeds of the new facility. The existing facility agreement provided that on a prepayment of the existing loan under the voluntary prepayment clause, the borrower was obliged to pay a prepayment fee. However, the borrower took the position (ultimately correctly) that in these circumstances, it was not obliged to pay any prepayment fee as the prepayment was not “voluntary”. As a result, the lenders began proceedings against the borrower and claimed the prepayment fee of approximately US$17million.

The existing facility agreement provided that the borrower must prepay the existing loan in “an amount equal to the amount of ... any Finance Proceeds promptly upon receipt of any…Finance Proceeds by any member of the Group”. The Court of Appeal held that once the borrower had received the proceeds of the refinancing facility, the borrower was required to use those proceeds to prepay the existing loan. Consequently, the prepayment was not a “voluntary prepayment” and no prepayment fee was payable.

The Court of Appeal distinguished between the decision to enter into the refinancing facility and the requirement to use the proceeds of that facility to repay the existing loan in full; it held that these were two separate matters. Once the two acts were separated out it was obvious from the relevant clause that when the borrower had obtained the proceeds of the refinancing facility, the prepayment it was required to make was mandatory. To hold such a prepayment out as “voluntary” was an abuse of the language of the relevant clause.

The Court of Appeal confirmed the established legal position that a court can only prefer an interpretation that is more consistent with “business common sense” where there are two possible constructions of a contract. The concept of “commercial or business common sense” is not an overriding principle of contractual interpretation, nor is an individual judge to be the subjective arbiter of what a “sensible solution should be”. Consequently, a party should look first at the words of a contract and note that those words will generally override any subjective view as to the “commercial common sense” of the provisions.

The case also highlights on a practical level, that lenders and indeed borrowers should be clear in their loan agreements as to the circumstances in which fees, prepayment or otherwise, will become payable. Neither party should rely on their own understanding of when fees become payable (however “commercial” that might seem) if it is not clear from the words of the relevant loan agreement.

A copy of the decision can be found here.