In the recent Court of Session case of Ardmair Bay Holdings Ltd v James Douglas Craig it was decided that the defender breached a contract in relation to a Sale & Purchase Agreement (SPA) following a failure to disclose an invitation to tender for a contract which was of material importance to the company.
The case highlights the importance of understanding not only your rights under a contract but also your obligations. The risks of misinterpretation could be damaging both financially and reputationally.
Facts of the case
The dispute in this case arose following Ardmair (the pursuers) purchase of the share capital of Craig Group Limited, of which James Craig (the defender) was the chairman and largest shareholder.
Prior to completion of the SPA, Ardmair conducted an in-depth analysis of the company’s profitability which determined the purchase price. A large proportion of the company’s income was derived from two contracts in respect of specialist vessels provided to Repsol for offshore services. The agreements in respect of these vessels contained an option to extend the contractual period.
Craig Group Ltd were confident that these contracts would be continued owing to the specialist nature and specification of their vessels. However, the day prior to conclusion of the SPA, Craig Group Ltd were invited by Repsol to tender for the contract in respect of the specialist vessels.
This clearly indicated that those valuable contracts were no longer secure. Even if the contracts were successfully re-negotiated it would likely be at a reduced rate which would impact on the company’s estimated income. The defender failed to share this information with the pursuers and the SPA was concluded.
Ultimately the company tendered for renegotiated contracts with Repsol in respect of the specialist vessels but was unsuccessful.
Legal principles
In this case the Court of Session highlighted some of the basic principles which have emerged from a recent history of cases dealing with contractual interpretation, starting with Rainy Sky SA v Kookmin Bank Co Ltd, Arnold v Britton, HOE International Ltd v Andersen, Wood v Capita Insurance Services Ltd, Midlothian Council v Bracewell Stirling Architects and Scanmudring AS v James Fisher.
The basic principles were outlined as follows: -
“First, a contract must be construed objectively. The meaning of any particular provision is what a reasonable person in the position of the parties would have understood it to be…a contract will have two or more parties, and it is obvious that its meaning cannot depend upon the subjective intention or understanding of any one of those parties…
“Secondly, the words of a contract must be construed contextually. Language is inherently ambiguous, and in no serious intellectual field is it possible to reach a sensible view on the meaning of a passage of text without placing that passage in context...The relevant context takes in the contract itself, construed as a whole, and the surrounding circumstances that ought objectively to be known to the parties. It includes not merely the surrounding factual situation but also the legal context; that legal context comprises both the surrounding contractual and other legal arrangements and the general law…
“Thirdly, the provisions of a contract must be construed purposively, that is, in such a way as to give effect to the fundamental purposes of the contract; points of detail or niceties of wording should not stand in the way of achieving the contract’s basic purposes. What the basic purposes are must obviously be determined on an objective basis, and the context is relevant.
“Fourthly, in construing a contract, commercial, or business, common sense may be important…The application of commercial common sense is a relatively straightforward process...It obviously involves elements of general common sense as an aid to practical reasoning, such as considering whether a view is widely held by those with knowledge of the particular field in question... At a commercial level, the most important factor is probably the use of elementary microeconomics (the branch of economics that covers the behaviour of individuals and businesses in their commercial dealings with other persons). That will normally involve consideration of the practice followed in a particular trade, and the understanding held by people operating in that trade, for example as to what is commercially important or what would be regarded as commercially undesirable.”
Comment
The principles outlined in this case are important and can be applied to all types of contract, whether written or implied. Understanding and interpreting the effect of a contract correctly can be a difficult task. However, ensuring you are clear on your rights and obligations could help avoid future lengthy and costly disputes
If you need advice on any aspect or at any stage of a contract, please get in touch with a member of our team who can provide advice and support you through any dispute.
