In BlackLion Law LLP v Amira Nature Foods Ltd, the High Court considered the meaning of a law firm’s payment clause which referred to payment on completion of a matter by a specified date.
In summary, the High Court held that in light of the two possible interpretations, it was more consistent with business common sense to construe the clause as meaning that the law firm was to be paid irrespective of whether the matter was completed by the specified date. The judgment is noteworthy, both from the perspective of contract interpretation and rectification.
The key facts
The case concerns a claim by a law firm against its former client for breach of contract in respect of two retainer agreements entered into between the parties.
In November 2016, the law firm and the client entered into a general retainer under which the law firm would provide services based on specified hourly rates. In January 2017, the client instructed the law firm to work on a bond issue known as Project Avatar under the general retainer.
By early March 2017, the law firm was concerned that the bond issue was taking longer than originally envisaged and the parties entered into a second retainer agreement on 3 May 2017. The second retainer provided for the client to pay the fixed fee of £300,000 in either cash or shares. The relevant part of the second retainer states as follows:
“We have agreed that the Firm will charge the Company a fixed fee of £300,000 (“Fixed Fee”) for the Services plus disbursements (“Disbursements”) in connection with this Matter, subject to the completion of the Matter by 31 May 2017” (emphasis added).
The matter was not completed by 31 May 2017 and in fact, was not completed at all. However, the law firm continued the project in June and July 2017 and requested payment of its invoices.
The client withheld the fixed fee and submitted that the words “subject to the completion of the Matter by 31 May 2017” meant that, if the matter was not completed by 31 May 2017, then nothing would be payable to the law firm for its work on the project. The law firm, however, submitted that those words did not qualify the concept of the fee itself, but instead its fixed quality. In other words, if the matter was completed by 31 May 2017, then the law firm would receive the fixed fee and no more. If, on the other hand, the matter was not completed by this time, then the fixed fee would be payable for the work done by then, but the work done after 31 May 2017 would be separately chargeable.
HHJ Paul Matthews, sitting as a Judge of the High Court, gave a helpful summary of the law of contractual interpretation:
- The court asks itself the question what a reasonable person having all background knowledge which would have been available to the parties would have understood the words used in the contract to mean. In addition to the background knowledge which would have been available to the parties, the court takes into account the natural and ordinary meaning of the words, in the context of the whole document, the purposes of the provision or provisions of which the words form part, and commercial common sense. The court will also take into account the sophistication and legal expertise of the parties. However, the court will disregard the subjective evidence of any party’s intentions: Arnold v Britton, (paragraph 15, judgment).
- If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to the reject the other. On the other hand, where the parties have used unambiguous language, the court must apply it: Rainy Sky SA v Kookmin Bank (paragraph 21, judgment).
The judge held that the wording of the second retainer was not clear and unambiguous. The words “subject to” introduced an element of conditionality but it was unclear which parts of the preceding clause they qualified. Accordingly, the judge looked to construe the agreement in accordance with the factual matrix. In those circumstances, the law firm’s construction was far more consistent with business common sense. In particular, the judge relied on the following factors:
- First, the client already knew from the first general retainer what were the approximate levels of hourly rate charged by the law firm and therefore approximately what the law firm would expect to charge for a piece of work taking a certain amount of time.
- Second, the work began in January 2017 and continued into July 2017, although the second retainer itself was not fully signed until early May 2017. By the end of April 2017, the law firm had already recorded over £385,000 worth of time on the matter. It was clear to all concerned by that stage the bond issue would be difficult to complete successfully.
- Third, it was not likely that a small law firm, with all its cash-flow needs, would be prepared to tie up a huge proportion of its available human resources on a project to be paid only if it was successful.
- Fourth, it made no commercial sense for the law firm to agree to be paid a fee worth far less than its total work done on the project if the matter completed by the deadline, and nothing at all if it did not. It made better business sense to construe the retainer as entitling the law firm to be paid the fixed fee irrespective of whether the matter completed by the deadline and to charge separately for work done after that date.
The judge went on to consider (obiter) whether if he had preferred the client’s construction of the wording, whether he would have rectified the retainer as sought by the law firm.
- The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention: Swainland Builders Ltd v Freehold Properties Ltd (paragraph 33, judgment), as approved in Chartbrook Ltd v Persimmon Homes Ltd (paragraph 48, judgment).
- It is necessary to show either (1) that the document fails to give effect to a prior concluded contract or (2) that, when they executed the document, the parties had a common intention in respect of a particular matter which, by mistake, the document did not accurately record. In the latter case it is necessary to show not only that each party to the contract had the same actual intention with regard to the relevant matter, but also that there was an ‘outward expression of accord’ – meaning that, as a result of communication between them, the parties understood each other to share that intention: FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd (paragraph 176, judgment).
The judge held that he would have ordered rectification of the agreement based on mistake. The correspondence, pre-contract negotiations and post-contract conduct (which interestingly are admissible in rectification but not in contract interpretation) showed that there had been a common intention that the fixed fee was not contingent on the matter being completed on the specified date and there was an outward expression of accord to that effect.
Comment and conclusion
First, the judgment is a useful reminder of the importance of business common sense in contract interpretation where the contractual clause in question is open to multiple interpretations. However, where the parties have used unambiguous clear language, the judge must apply the language, regardless of its commercial effect.
The judge stated that “the parties could certainly have found clearer wording to express their agreement in the present case” (paragraph 59, judgment). The key takeaway for parties is to be clear when drafting commercial contexts and to ensure the language and the wording used reflects the intentions of the parties.
Second, the judgment provides a helpful summary of the law of rectification. Notably, the parties must have the same actual intention and to have outwardly confirmed their shared understanding. Pre-contract negotiations and post-contract conduct will be admissible as part of this assessment.