Case law: Failure to anticipate potential changes in circumstances can adversely affects party's contractual rights

Businesses entering into a contract should consider whether, if circumstances change, their contractual rights and obligations could be affected, otherwise they risk losing out, a ruling has made clear.

A clause in a contract stated that certain events specified in the contract could not take place without obtaining certain confirmations from three, named ratings agencies.

The parties wanted one of these event to take place, but since the contract had been entered into, one of the ratings agencies had changed its policy, and no longer gave such confirmations.

One of the contractual parties argued that the clause should be read as if confirmations were only required from those agencies willing to give them. The absence of confirmation from an agency that had changed its policy did not therefore matter.

The legal test when construing or interpreting the terms of an agreement (including exclusion clauses) is the objective test of what a reasonable person in possession of all background information reasonably available to both (not just one of) the parties at the time the contract was entered into would think they meant.

The principles that apply are:

  • Words used should be given their natural or ordinary meaning. This may depend on the 'factual matrix' – the circumstances at the time contract was made. The courts will not rescue a contractual party from a bad bargain if the words used are clear
  • If the meaning of the words is ambiguous or otherwise unclear, the court will apply the interpretation that makes most commercial sense
  • If using the natural or ordinary meaning of words gives an absurd result, but it is clear to a reasonable person what the parties must have meant, the court will apply that interpretation

In this case, the court said that the natural and ordinary meaning of the words used made it clear that the confirmation of all three ratings agencies was required. The fact one of them no longer provided such confirmations did not mean the parties could ignore the requirement for its confirmation.

It also found that the result was neither 'inherently inconsistent with commercial common sense' nor 'commercially absurd'.

Operative date

  • Now

Recommendation

  • Businesses entering into contracts should consider whether, if circumstances change, their rights and obligations under the contact could be affected, so that they should plan for any such changes in the contract terms

Case ref: Cheyne Capital (Management) UK (LLP) v Deutsche Trustee Company Limited [2016] Court of Appeal

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