Legal Briefing

Interpreting commercial contracts: a plane task?

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Corporate and commercial | 01 December 2011

Where two large businesses contract, there is an assumption that they appreciate the consequences of the contractual wording adopted. In such circumstances courts tend to give effect to the literal meaning of those terms in a contract. In Gesner Investments Ltd v Bombardier Inc [2011] the Court of Appeal was asked to interpret the terms of a contract for the construction and delivery of an aircraft and held that the terms should be interpreted in a literal sense even where those terms were commercially questionable. The judgment in this case provides an interesting opportunity to consider the court’s approach in these circumstances.


GESNER V BOMBARDIER


The appellant buyer, Gesner Investments Ltd (the buyer) appealed against a decision of the Commercial Court on the interpretation of an Aircraft Purchase Agreement (APA), under which the respondent seller, Bombardier Inc (the seller), was to construct and sell an aircraft to the buyer. The seller failed to tender the aircraft for the buyer’s inspection on the contractual ‘readiness date’. After a period of 90 days of ‘non-excusable delay’, the buyer served notice of termination 
and sought reimbursement of the money it had paid the seller to date plus interest at a rate provided for in the APA. However, the seller contended that the buyer’s termination was ineffective as it had failed to adhere to the procedural requirements for termination as specified in the APA. Accordingly, the seller called for payment of the final instalment of the purchase price. When this was not paid, the seller reimbursed the buyer for the payments it had made, less 10% of the total purchase price. It was entitled to do this under the APA in circumstances where the buyer had failed to make full payment following notification that the aircraft was ready for inspection and delivery.

It fell to the Court of Appeal to 
determine which party stood to be compensated in accordance with the 
terms of the APA. It upheld the decision 
at first instance, and accepted that the buyer had failed to take the correct steps to terminate the APA. As such, the seller was able to retain 10% of the overall purchase price as liquidated damages 
for the buyer’s default.

THE APA

The buyer became a party to the APA upon a novation dated 20 November 2006. The APA provided that the seller would construct a specific aircraft (the aircraft) and have it ready for inspection and acceptance by 15 October 2009 (the readiness date), in return for a purchase price of $44m, payable by the buyer in instalments.

The salient clauses the case turned on were Articles 8.4 and 9.2. Article 8.4 provided that, in the event that the aircraft was not ready for the buyer’s inspection and acceptance by the readiness date due to ‘non-excusable delay’ (a defined term that essentially included any delay that was within the seller’s control), liquidated damages would begin to accrue on an increasing scale, up to a maximum amount of $675,000 after 90 days. During this period, the buyer would not have the right to terminate the agreement. After the 
90-day period, that would expire on 
14 January 2010, had the aircraft not been offered for the buyer’s inspection, the buyer would have the right to ‘terminate [the APA] pursuant to Article 9’. At trial, the dispute surrounded the interpretation of Article 8.4, and specifically, what was meant by ‘pursuant to Article 9’.

Counsel for the buyer argued that the reference to Article 9 was intended to refer only to those parts of Article 9 that deal with the consequences of termination; in this case Article 9.3, which provided that, upon termination of the agreement, all amounts paid by the buyer to the seller should be reimbursed together with interest. Thus, the buyer argued that in providing a period of 90 days within which the buyer could not terminate, but was instead compensated, Article 8.4 provided its own free-standing right of termination upon the expiration of the 90-day period, the consequences of which were outlined in Article 9.3.

Counsel for the seller argued that 
reference to Article 9 referred to all 
aspects of that Article, including Article 
9.2. This provided that:

‘The buyer may terminate [the APA] before delivery time if, subject to Article 8.4, seller is in default or breach of any material term or condition of this agreement and does not act to cure such default or breach within 10 days after receipt of written notice from the buyer specifying such default or breach and does not continue thereafter to diligently correct or cure the alleged default or breach.’

The effect of Article 9.2 applying to the procedure set out at Article 8.4 would be to require the buyer to provide written notice of the seller’s breach at the expiration of the 90-day period for non-excusable delay, effectively providing the seller with a further 10 days within which to remedy 
the breach. On the facts of the case this was critical because the 90-day period expired on 14 January 2010 and the seller had indicated that the aircraft was ready 
for inspection and acceptance on 
10 January 2010 – under the terms of the APA, the buyer agreed to accept delivery of the aircraft within 10 days of the seller’s notification of readiness.

CONSIDERATIONS: DECISION AND JUDICIAL REASONING

The difficult decision for the Court of Appeal was made harder by the plethora of conflicting authorities on the issue of interpretation.

Buyer

The buyer’s argument was broadly that its interpretation was the most commercially sensible approach. It sought to rely on Lord Bridge’s judgment in Mitsui ConstructionCo v A-G of Hong Kong[1986]. In that decision, Lord Bridge held that on interpreting an obviously badly drafted contract:

‘… the intention of the parties must be ascertained from the language they have used interpreted in the light of the relevant factual situation in which the contract was made.’

This case afforded the court a margin of appreciation to interpret contracts, where it was reasonable to do so, through a ‘sensible and businesslike’ lens.

In support of this approach, the buyer referred to the following factors: first, that, as Article 8.4 provided a mechanism to compensate the buyer for late delivery, it did not make sense that there be a period following the 90-day non-excusable delay period where compensation ceased but the buyer was not entitled to terminate; secondly, had there been an ‘excusable delay’ as defined by the APA (that meant there was a delay in providing the aircraft that was not the fault of the seller), then the APA could be terminated immediately on the expiration of the period of that delay; and thirdly, that the inclusion of the additional notice period provided uncertainty as to when the buyer was
able to terminate.

Seller

The seller’s argument was that an approach favouring the literal meaning of the terms in the APA should be taken, particularly because the contracting parties were both large commercial entities. The Court of Appeal considered Patten LJ’s judgment in Kookmin Bank v Rainy Sky [2010], that was cited in support of the seller. In Kookmin, Patten LJ held that:

‘… the starting point has to be that commercial parties can look after themselves and are sufficiently organised and well advised as to be able to ensure that the contractual documents which they sign accurately reflect their intentions.’

The seller made the following arguments: first, the cross-referencing in Article 9.2 to Article 8.4 showed that the draftsman had not intended to keep Article 8.4 
self-contained; secondly, there was 
nothing uncommercial about a notice allowing a grace period of 10 days to rectify any failings to tender the aircraft; and thirdly, had the parties intended for the buyer to have a right to terminate immediately upon the expiration of the 90-day period, then Article 8.4 could have simply said so, as it had in Article 8.2 with regard to an excusable delay.

THE JUDGMENT

Lord Justice Rix held that the language of Article 8.4 was reasonably clear: there was no other reasonable interpretation of it that did not involve recourse to Article 9.2. Appealing to Article 9.3 as a consequence for the free-standing right to terminate within Article 8.4, as the buyer did, was to artificially stretch the language present in the contract. He quoted Lord Justice Patten’s dictum inKookmin Bank:

‘Unless the most natural meaning 
of the words produces a result which 
is so extreme as to suggest that it 
was unintended, the court has no alternative but to give effect to its terms. To do so otherwise… [would] amount to no more than guesswork 
on the part of the court.’

While the Court of Appeal accepted that the terms of the contract were somewhat strange and asymmetric – for instance, the buyer being able to terminate immediately following the expiration of the period of excusable delay, but not non-excusable delay – it dismissed the appeal and found in favour of the seller. The seller was accordingly able to retain 10% of the overall purchase price and was not liable to pay 
any interest to the buyer on the amounts 
it repaid.

COMMENT

This case illustrates the weighing-up process courts may undertake when faced with interpreting commercial contracts. In this case, the Court of Appeal did have reservations about the commercial sense of the APA on its literal reading. However, it considered that the parties were sophisticated enough to be able look out for their own interests when negotiating the terms of a deal. Certainly the Court was unwilling to perform what it perceived to be linguistic gymnastics in order to interpret the contract in any way more beneficial 
to the buyer than its terms explicitly provided. This was so even though the buyer in this instance acquired its contractual right by way of novation. Reading between the lines, the Court 
of Appeal might have considered that 
the buyer had its chance to consider whether it accepted the contractual terms prior to entering into the novation agreement.

On balance, it is possible to see why the Court reached the decision it did. Although the application of certain terms of the APA produced illogical results, the overall application of the relevant procedures were not so absurd as to suggest the parties had not recorded their true intentions. It appears quite logical that, as the seller provided notice of readiness within the 90 days, the buyer could not terminate the contract simply because it elected not to inspect and accept the aircraft before that timeframe expired. The 10-day period set out in Article 9.2 represented a general timeframe within which any breach could 
be remedied and such terms are common 
in commercial agreements. The 90-day period within which the buyer was unable 
to terminate could be construed as protecting the seller as much as the buyer, taking into account the specialist nature of the product being constructed and should not therefore simply replace the 10-day remedy period.

The decision acts as a reminder to 
those drafting contracts that they 
should express their intentions clearly. 
The courts cannot be relied upon to 
give a commercially sensible result to a 
contract that does not offer such sense on its wording.