A recent High Court decision is a good example of the court’s willingness to deal with questions of contractual interpretation on a summary basis in an appropriate case, without the need for a full trial. However, it also highlights the difficulties that will be faced in successfully striking out a defence based on the common law doctrine of frustration, which is likely to be of particular interest to financial institutions in the context of the COVID-19 pandemic: Natixis & Anor v Famfa Oil Ltd [2020] 2 WLUK 330.

The court found, on a summary judgment and strike out application, that the sums claimed by the claimant investment banks had fallen due for payment as a matter of construction of the relevant contracts. While parties often seek to determine contractual construction disputes at full trial or by trial of preliminary issues, the decision is a helpful reminder that summary judgment is also available to achieve early determination of such matters, in an appropriate case. The following factors (in particular) were highlighted as making the present case suitable for determination by summary judgment: the claim involved a short point of contractual construction; the factual matrix was not in dispute; the agreements were sophisticated, complex and drafted by skilled professionals; and it was appropriate to interpret the contracts principally by a textual analysis.

Summary judgment may provide a quicker route to early determination as parties can apply as soon as statements of case are served. Trials of preliminary issues, on the other hand, require a party to apply for (and obtain) an order for a trial of preliminary issues before those issues can be heard. In the Commercial Court, applications for a trial of preliminary issues are normally considered at the first Case Management Conference which can cause further delay in obtaining early determination.

However, the court was not prepared to summarily strike out a defence based on the doctrine of frustration. Having regard to the need to take a multi-factorial approach to this question, the court held that the relevant factors (including the parties’ knowledge and expectations at the time of entering into the contract, in particular as to risk) could only properly be investigated at trial following disclosure and the exploration of oral evidence in cross-examination.

Interestingly, the court found that the frustration defence was realistically arguable where the event relied on created a “real risk” that the relevant financing contracts would become incapable of being performed or that the obligations would be rendered radically different. In other words, the defendant did not need to wait for the risk of frustration to materialise for the defence to be realistically arguable. Whether the contracts were actually frustrated on the facts of the case is yet to be established at trial. However, for parties facing disputes arising from the impact of the current COVID-19 pandemic on commercial contracts, the decision may provide helpful guidance on when frustration might be available. For further legal analysis and insights in relation to COVID-19, and how we expect the crisis to operate as a catalyst for change, please visit our Catalyst Hub.

Background

The defendant (a private company incorporated in Nigeria) entered into a series of contracts with the claimants (the Banks) and others for the provision of, inter alia, a $1.2 billion syndicated term loan and underwriting services. The facility was to enable the defendant to bid for and purchase a company known as Petrogas Oil and Gas PV (Petrogas). The parties intended that the defendant would service the facility by using revenue generated from the defendant’s participating interest in part of the Agbami oil field in Nigeria (known as OML 127).

However, after executing the finance documents and submitting its binding offer for Petrogas, the defendant received a letter from the Department of Petroleum Resources of the Federal Republic of Nigeria (the DPR) suggesting that the Federal Government of Nigeria intended to acquire the defendant’s interest in OML 127 (which would risk its ability to service the facility).

The defendant alleged that the DPR’s letter created an unquantifiable and material risk that outweighed any potential upside from winning the bid to purchase Petrogas. The defendant withdrew from the purchase process and the finance agreements were terminated in accordance with their respective terms.

The Banks subsequently demanded fees allegedly due under: (i) a mandate letter in relation to the underwriting; and (ii) a fee letter in relation to the arrangement of a substitute facility for Petrogas (Petrogas had an existing borrowing facility that was subject to a change of control provision, and this agreement was to guard against the risk of existing lenders refusing to consent to the change of control). The Banks commenced proceedings to recover the payments allegedly due. They subsequently applied to strike out part of the defendant’s defence and for partial summary judgment on some of the issues in dispute.

Decision

Among the issues to be determined by the court were:

  1. whether, as a matter of construction, the defendant had a realistically arguable defence to the sums claimed under the mandate letter and fee letter; and
  2. whether the defendant had a realistically arguable defence based on either frustration and/or common mistake.

Contractual interpretation claims

The court was satisfied that the issues were short points of contractual construction that could properly be determined on a summary judgment application. In particular, there was no realistically arguable relevant factual matrix evidence in dispute; and the agreements were sophisticated and signed by parties who had the benefit of extensive legal advice. Accordingly, the true meaning and effect of the agreements was dependant on the language used by the parties when read in the proper context (i.e. adopting a textual analysis).

Applying the well-established principles of contractual construction, the court held that the drafting of the relevant contracts was clear and that the sums demanded by the Banks were due even though they had not actually provided any underwriting or arranged substitute financing for Petrogas (which the defendant argued were pre-conditions for the payments).

Defences of frustration and common mistake

The court declined to strike out the defences based on frustration and/or common mistake, finding that these could only properly be investigated at trial following disclosure and the exploration of oral evidence in cross-examination.

In relation to frustration, the court provided a helpful summary of the current state of the law, as summarised in Canary Wharf (BP4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch). This case confirms that the court is required to take a multi-factorial approach, and the factors to consider include:

“…the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed neutrally and objectively, and then the nature of the supervening event and the parties’ reasonable and objectively ascertainable calculation as to the possibilities of future performance in the new circumstances.”

The court held that it was close to impossible on a strike out application, having regard to the need to take a multi-factorial approach, to conclude that the frustration defence was unreal. Before such a conclusion can he reached, it will be necessary to determine the parties’ knowledge, expectations, assumptions and contemplations in particular as to risk.

The court acknowledged the Banks’ argument that the DPR’s correspondence did not actually expropriate the defendant’s interest. It was also uncertain that any negotiations with DPR would necessarily lead to the defendant losing its interest in OML 127. However, the court noted that the defendant could realistically argue that the effect of the DPR’s correspondence was:

“…to create a real risk that such would occur so as to put at risk its ability to repay the loan and therefore to participate successfully. Given the terms as to repayment and the unconditional nature of the offer that had to be made for the shares, it is realistically arguable that the threat was sufficiently great to enable the defendant to allege that the correspondence was a frustrating event.

Julian Copeman
Julian Copeman
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Ceri Morgan
Ceri Morgan
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Jade Hu
Jade Hu
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