Construction of contract terms

Where both parties to a contract believe their construction of its meaning provides business common sense, it can be difficult for the court to determine which is correct.

In Aston Hill Financial Inc & Ors v African Minerals Finance Ltd, the parties entered into a loan facility and the defendant borrowed US$417.7 million. Prior to the first anniversary of the loan, the defendant's parent company arranged refinancing and the borrowing was redeemed as per the obligation imposed by cl.8.3 of the facility agreement. The claimant took the view that the obligation to repay on refinancing under cl.8.3 did not prevent that repayment also being a 'voluntary payment' pursuant to cl.8.5 of the agreement and sought a 6% fee payable on 'voluntary payment'.

The claimant considered the two clauses were not mutually exclusive but could stand alongside each other. The defendant alleged that the payment was compulsory under cl.8.3 (even though the decision to refinance had been a voluntary one) and the payment fee under cl.8.5 did not therefore apply.

The High Court held that contracts should be construed to give them business common sense. Here the possible constructions available were not decisive but evenly balanced. The judge concluded, however, that given the wording of the various clauses, the refinancing triggered the defendant's obligation to pay the loan under cl.8.3 and the payment was not voluntary for the purposes of cl.8.5. No fee was payable.

Things to consider

The judgment shows that the courts will strive to give business common sense to the construction of a contract. However, where there is more than one possibility, the court will look at the language used in the contract itself to determine what the (sophisticated) parties to it must have intended.

No imposition of duty of care

This was the finding of the High Court in relation to advice given by a firm of accountants to its client and which a third party then relied on.

In Arrowhead Capital Finance Ltd (in liquidation) v KPMG LLP, KPMG had given due diligence advice to its client (D) in relation to VAT input tax claims. D subsequently entered into a loan via a special purpose vehicle (the SPV) with Arrowhead.

As part of the loan negotiations, Arrowhead had seen documents relating to KPMG's due diligence exercise. Following an investigation by Revenue and Customs, D's claims for input tax were dismissed due to fraud which it could and should have identified. D's appeal was dismissed and it was subsequently dissolved. The SPV defaulted on the loan with Arrowhead.

Arrowhead claimed against KPMG on the basis that KPMG owed it a duty of care, as it would have known D would relay its advice to potential investors. KPMG sought to strike out the claim on the basis that it owed no duty of care to Arrowhead.

The High Court agreed with KPMG. It held that KPMG did not owe a duty of care to Arrowhead, whether on an assumption of responsibility basis or on a foreseeability, proximity and fair, just and reasonable basis. There had been no direct communication between Arrowhead and KPMG before most of the loans took place. KPMG's retainer letter to the client included specific limitations on the extent of its liability, including a cap on its financial liability.

Any reasonable business man would have appreciated that KPMG would have a retainer containing certain limitations. It was inconceivable, unfair and unjust to believe KPMG would voluntarily assume an unlimited responsibility towards potential investors in D, and even more so where they were not direct investors.

Things to consider

This case is a reminder that while services provided by accountants may affect third parties dealing with their client, that alone is unlikely to lead to a duty of care being imposed, unless there are special circumstances.

Guidance on appeals out of time

The Court of Appeal has recently provided some guidance on what will be taken into account in determining whether leave to appeal substantially out of time should be permitted.

In Cassa Di Risparmio Della Republica Di San Marino Spa v Barclays Bank PLC, the claimant was some seven and a half months late in filing its notice of appeal. The claimant had lost its case at first instance. The time for filing a notice of appeal and application for permission to appeal was extended for a short period while the claimant sought a means of funding the appeal. No further extension of time was sought but some seven and a half months later, the claimant, having obtained funding, served its notice of appeal. The Court of Appeal refused the claimant's application for an extension of time for filing its notice of appeal and for permission to appeal.

Although the Court of Appeal accepted that the case was factually difficult and that the claimant had a new legal team in place, which would account for some of the delay, it also noted that the defendant had not been warned that an appeal remained in prospect. Further, the parties' commercial relationship was ongoing in relation to restructuring proposals and the court wondered whether the claimant's failure to notify its intention to appeal was to avoid souring the ongoing relations and negotiations between the parties.

In reaching its decision, the Court held that:

  • There is a clear public interest in the closure or finality of litigation.
  • The claimant should have appealed in time and then sought a stay whilst its funding issue was dealt with.
  • The opposing party should be kept in the picture as to what is happening.
  • There always has to be good reason to extend time for filing a notice of appeal and there would have to be exceptional circumstances where the delay had been in excess of two months.
  • The fact the claimant was only prepared to appeal when it was fully funded (the funder was to receive 80% of any recovery) was a bad reason to allow the appeal.
  • There did not have to be specific or express prejudice to the respondent before refusing leave to appeal. In any event the court considered that the defendant might have suffered prejudice by being kept in the dark whilst conducting the restructuring negotiations with the claimant.
  • The notice of appeal should not have been filed out of the blue; the defendant should have been put on notice of the intention to appeal.
  • As one extension of time had already been requested and granted, the defendant was entitled to expect notice of any further applications and the fact that none was given made the claimant's position worse.

Things to consider

In this case, the defendant could reasonably conclude that there was, and could be, no appeal. The rules on appeal are there to ensure that litigation is not open-ended. The court will also look at the merits of the case when making its decision and only if the merits are strong will the above factors be overridden in the court's decision making process.

Effect of restoring a dissolved company

S1032(1) of the Companies Act 2006 provides that when a company is restored to the register of companies, it is "deemed to have continued in existence as if it had not been dissolved or struck off the register".

This was confirmed by the Court of Appeal in Peaktone Ltd v Joddrell in which Joddrell brought a personal injury claim against Peaktone, its employer of several years previous. Without Joddrell's knowledge, Peaktone had been struck off the register and dissolved shortly before the proceedings were commenced. Joddrell had attempted to serve Peaktone at its registered office address, which had lead to it being notified of Peaktone's dissolution.

Joddrell then obtained an order from the Companies Court, restoring Peaktone to the register for the purpose of bringing proceedings. Joddrell did not disclose that proceedings had already been issued, nor seek directions in relation to those proceedings.

Peaktone sought to strike out the proceedings as an abuse of the court's process. It alleged the proceedings were a nullity when issued as it (Peaktone) was not then in existence and the order restoring the company did not retrospectively validate the proceedings.

At first instance the claim was struck out but was reinstated in the High Court, which held that the proceedings had been validated by the restoration. Peaktone appealed to the Court of Appeal, arguing that the proceedings should not have been commenced until the company was restored to the register.

The Court of Appeal, dismissing the appeal, confirmed that the effect of S1032(1) was retrospectively to validate an action purportedly commenced by, or against, a company while dissolved. The court also has the power at the time of restoring the company to give directions in connection with such an order.

Things to consider

Restoration of a company therefore has far reaching consequences and the full force of its retroactive aspects can easily overcome procedural objections; such as in relation to acknowledgment of service by a defendant company while dissolved.

Restoration may be an appropriate step for lenders if there is an asset that can be charged or repossessed. It may also be used if there is an insurance policy that can be called into play once the company is restored, or where the company was stuck off for a simple procedural failure but is continuing to trade.