Signature Litigation: Contractual interpretation – eyes on the Financial List

Disputes over contractual interpretation find their way to the courts relatively frequently, leaving judges to unpick the wording of complex commercial agreements which will often have been negotiated in detail over many months. The courts will have to weigh up the natural meaning of the words in the contract after hearing arguments driven by the commercial implications of different interpretations for the parties involved, and what one might conclude after applying business common sense. The establishment of the Financial List is itself testament to the complexities encountered by the court in resolving financial markets disputes, and in these types of cases the exercise of contractual interpretation can involve more complexities than most.

The Supreme Court in Arnold v Britton [2015] leaned towards a focus on the words chosen by the parties to articulate their commercial arrangement. The approach aims to give due attention to the parties’ intentions as articulated in the contract, which is after all the document which records the deal which has been struck. So the court’s starting point is the words that comprise the relevant term of the contract – to establish, on the basis of the words chosen by the parties, how a reasonable person would understand that provision to operate. If the terms are unambiguous, then the court must apply them irrespective of whether doing so results in a less commercially reasonable outcome than might otherwise have been the case. The court’s function is to interpret the contract, not rewrite it.

However, if the words of a term in a contract are not clear enough to allow the court to glean a single and unambiguous meaning, the court is forced to adopt a different approach. In Rainy Sky v Kookmin Bank [2011] the court determined that it was generally more appropriate in these circumstances to adopt the interpretation which the court felt most accurately reflected its perception of business common sense.

Business common sense might, perhaps understandably, be confused with the commercial purpose of a contract, or even the commercial intentions of the parties. However, commercial intention is a subjective factor, and intentions evolve over time. For this reason, the court must limit itself to the manifestation of the parties’ intentions as captured by the relevant provisions of the transaction documentation, subject only to what business common sense suggests is the most reasonable interpretation of the language.

‘There is plenty of scope for argument and we are likely to continue to see judges faced with difficult balancing exercises.’

These basic principles apply equally to cases involving complex transactions in the financial markets. With the introduction of the Financial List, which specialises in handling complex and important financial markets cases with a high value or which raise market issues, we are starting to see how judges formally specialising in hearing these types of cases will resolve issues of contractual interpretation.

Two recent disputes involving Class X noteholders and their claims to default interest in commercial mortgage-backed securities transactions were heard by different judges who adopted differing approaches but arrived at the same outcome on substantially the same facts.

Hayfin Opal Luxco 3 SARL v Windermere VII CMBS was heard in the Financial List and the decision highlighted the premium to be placed on the language used in the documentation. The approach taken in the Financial List in this case was in line with the principles reaffirmed in Arnold v Britton, and respects the documentation which was intensively negotiated by the parties. The approach recognises that considerable time, energy and money will have been spent to achieve what the parties will have hoped would be a fair reflection of their complex arrangement.

In Credit Suisse Asset Management v Titan Europe 2006-1, the judge adopted an approach grounded in business common sense and what he determined must have been intended by the parties. While the facts were substantially very similar to Windermere, the judge determined that although the natural and ordinary meaning of the words was plain, the informed reader might, in light of certain contextual factors, understand the meaning of the words to be something different.

In one recent case, the battle went all the way up to the Supreme Court. In BNY Mellon Corporate Trustee Services v LBG Capital No 1 [2016] the court of first instance found in favour of BNY, which argued for what was later held by the Supreme Court to be an overly literal interpretation of the documentation. The Court of Appeal and the Supreme Court both found in favour of LBG. While adopting what Lord Neuberger later described as ‘a rather pedantic approach to interpretation’, BNY sought to rely on ancillary documents as standing alongside the contract to indicate the commercial intentions of the parties. Neither element of BNY’s appeal found favour with the courts. In its concluding remarks, the Supreme Court acknowledged that the exact weight to be placed on contemporaneous documents in the interpretation of the terms of a trust deed is highly dependent upon the facts of the case, but that very considerable circumspection is appropriate before the content of other documents are taken into account. Further, the majority affirmed the view of Lord Collins in Re Sigma Finance Corporation [2009] that ‘it is the wording of the instrument which is paramount’.

These cases certainly all emphasise that the process of contractual interpretation in financial markets disputes is not straightforward, even though the core principles may seem to be well established. There is plenty of scope for argument and we are likely to continue to see judges faced with difficult balancing exercises. It will be particularly interesting to see how the principles are applied in financial markets disputes by the specialist judges in the Financial List.

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