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Commercial Court considers Law on Interpretation of Defined Terms in Commercial Contracts


Europa Plus SCA CIF and Anthracite Balanced Company (R-26) Ltd v Anthracite Investments (Ireland) Plc [2016] EWHC 437 (Comm)

On 3 March 2016, Mr Justice Popplewell gave judgment in two claims and a counterclaim which raised issues as to the true construction of an agreement dated 16 March 2012 (“Termination Agreement”) by which two total return swaps entered into as part of the Anthracite Series 26 Note programme were unwound.  In his judgment, Popplewell J considered and applied the legal principles applicable to the interpretation of defined terms in commercial contracts.

On 7 July 2008 Anthracite Investments Ireland Plc (“AII”) received the sum of €1.3 million and €1.6 million as partial redemptions of investments made in the shares of two Italian hedge funds called “Duemme”. Pursuant to two total return swaps entered into by AII with Anthracite Balanced Company (R-26) Ltd (“Balco”) as part of the Anthracite Series 26 Note Programme, AII was obliged to pay those sums to Balco but failed to do so.  On 1 September 2009, the Duemme hedge funds were merged into a new hedge fund also called “Duemme”.  The total return swaps were subsequently unwound and the remaining shares in the new Duemme hedge fund were transferred to Europa pursuant to the Termination Agreement. By clause 14 of the Termination Agreement, AII was obliged to pay to Europa any payment received by AII “in respect of the Duemme Shares” which had not been paid to Balco.  By clause 1 of the Termination Agreement “Duemme Shares” were defined as the shares held by AII in the new Duemme hedge fund.  In April 2013, AII discovered that the €1.3 million and €1.6 million payments had not been made to Balco. After taking advice from its Irish lawyers, AII paid the €1.6 million to Europa, but not the €1.3 million.

Europa commenced a claim against AII for the sum of €1.3 million under clause 14 of the Termination Agreement. AII brought a counterclaim against Europa for repayment of the sum of €1.6 million on the ground that this payment was made in the mistaken belief that AII was liable under clause 14 of the Termination Agreement.  Balco commenced a contingent claim against AII for the sum of €1.3 million under one of the total return swaps in the event that the Court held that Europa was not entitled to that sum.

In giving judgment for Europa, the Court concluded that, on the true construction of the Termination Agreement, in the light of the relevant factual matrix, the expression “Duemme Shares” in clause 14 encompassed the shares in the old Duemme hedge funds, as well as the new Duemme hedge funds.  If necessary, the Court would have reached the same conclusion by a process of implication of a term by adding the words “or their predecessors” to “Duemme Shares”.  Accordingly, the Court held that: (1) AII was obliged to pay to Europa both the €1.3 million and €1.6 million payments; (2) Europa’s claim for €1.3 million succeeded; (3) AII’s counterclaim for €1.6 million failed because there was no mistake, but it would have succeeded on the facts if there had been a relevant mistake; and (4) Balco’s contingent claim did not arise.

In considering the legal principles applicable to the interpretation of defined terms used in commercial contracts, the Judge held, inter alia, that: (1) where a defined term is used inconsistently within a contract so as sometimes to bear the defined meaning and sometimes other than the defined meaning, the potency of the inference that the parties intended it to bear its defined meaning in a particular provision is much diminished; (2) the process of interpreting a defined term used in a commercial contract remains the iterative process in which the language used must be tested against the commercial consequences and the background facts reasonably available to the parties at the time of the contract; (3) this process may lead to the conclusion that the parties did not intend the defined term to bear the defined meaning in the provision in question; (4) the dictum of Jacob LJ in City Inn Jersey Ltd v 10 Trinity Square Ltd [2008] EWCA Civ 156, to the effect that the court will only fail to give effect to the use of a defined term if absurdity is established, is not consistent with the reasoning of the Supreme Court in Rainy Sky and is not the law.

The Judge also held that the existence of the unpaid amounts was part of the admissible background to the Termination Agreement, even though no party actually knew they were not paid, on the ground that all parties could have discovered this fact had they made enquiries which were reasonably open to them.

The Judgment can be found here.

Jasbir Dhillon QC appeared for Europa, instructed by Sidley Austin LLP

Geoffrey Kuehne appeared for Balco, instructed by Trowers & Hamlins LLP

Simon Salzedo QC appeared for AII, instructed by Reed Smith LLP