Business common sense – interpreting ambiguous contracts

The case

In the case of BlackLion Law LLP v Amira Nature Foods Ltd [2022] EWHC 1500 (Ch), the court was required to consider the meaning of a payment clause with two very different interpretations.

The case concerned a claim by a law firm against its former client for breach of contract in respect of two contracts of retainer entered into by the parties in relation to a finance transaction.

The clause in question stated as follows:

The claimant undertook work from January 2017 and completed 88 eight our days before the transaction collapsed in June 2017. As such, the “Matter” never completed. It was the defendant’s opinion that this clause was unambiguous and meant that as the matter was not finalised by this date, no fees would be due. However, the claimant law firm argued the clause meant the fee was fixed until 31 May 2017 and additional fees would apply if work continued after this date.

The decision

In his judgment, HHJ Paul Matthews found that the use of “subject to” introduced an element of conditionality, it was unclear which part of the clause was made conditional and therefore had to consider which construction was most consistent with commercial common sense. Applying this principle to the facts, the judge concluded that it made no commercial sense for the claimant – a small law firm – to agree to a contingent fee arrangement under which it would be paid a fee of less than its recorded time at that date. The judge went further by stating that no reasonable small business, like that of the claimant, would use its entire workforce on a project of this nature only to be paid if successful on completing by this date. On the other hand, an arrangement under which the claimant would receive a fixed fee of £300,000 if the matter completed by 31 May 2017, and could charge in addition for work done after that date, does make business sense. It made no commercial sense that the law firm owner would “bet the firm”.

Comment on ambiguous contracts

Whilst the issue of rectification of a contract subsequently became academic following the judge’s interpretation of the clause in question, the judge found evidence of a shared understanding that the fee was not subject to the matter being completed by considering pre-contract negotiations and post-contract conduct. Consequently, had he needed to conclude on the issue, the judge would have held that the contract would have been rectified in the claimant’s favour.

Some may consider this to be a fortunate outcome for the claimant and question whether it is the courts’ duty to protect organisations from unwise commercial decisions. In other words, if a clause in the contract was ambiguous, was the claimant the author of its own downfall and should the defendant have paid the price for that failure? Such litigation could have been avoided by clarity in the drafting and this judgment re-enforces the need for care and clarity when setting out what has been agreed.