Term Sheet could not be used to imply terms into signed contract
SNCB v UBS [2012]
This decision involved the interpretation of certain finance contracts and, in particular, the relevance of a ‘Term Sheet’ which was previously agreed between the parties to document the agreed outline commercial terms. The case also looked at the basis upon which terms can be implied into a written contract.
Facts:
- The parties agreed a ‘Term Sheet’ in November 2001, although on the evidence it was never signed. In January 2003, they eventually agreed an Amended Deposit Agreement (‘ADA’).
- There were crucial differences between the Term Sheet and the ADA. S claimed that the Term Sheet was part of the contractual documentation and could be used as an aid to construction of the ADA. S sought to rely upon provisions which, although they appeared in the Term Sheet, were absent from the ADA. It was clear that in the intervening period between agreeing the Term Sheet and the ADA, there had been extensive discussions between the parties and multiple redrafts of the formal legal documentation had been exchanged.
Decision:
- Interpretation
- The Term Sheet could not assist when it came to construing the terms of the signed ADA. The basis of the deal appeared to have changed. No similar or equivalent term to the one relied upon by S appeared in the ADA and both its terms and the relevant concepts were significantly different from those set out in the Term Sheet.
- The Court said that when interpreting the words used in a written contract, it must consider the language used and ascertain what a reasonable person would have understood the parties to have meant, assuming that reasonable person to have all the relevant background knowledge which would reasonably have been available to the parties in the situation in which they stood at the time of contracting. This is the so called ‘factual matrix’.
- As the Court made clear, there are limitations upon what is admissible ie what can legitimately be put forward as evidence for a Court to consider when seeking to interpret a contract. Evidence of a party's own subjective intentions, evidence of its belief as to the meaning of the words used and evidence of the negotiations leading up to the written contract being signed are strictly not admissible as aids to construction. That having been said, such evidence is readily admissible for other purposes such as establishing the background facts and knowledge of the parties and in connection with a claim for rectification (correction) of the written document due to a mistake. Although the judges are adamant that such evidence does not influence their decision on matters of interpretation, they are only human after all!
- Implying terms
- Turning to the basis upon which contract terms can be implied, the Court said that any proposed implied term must simply ‘spell out what the contract actually means’. Courts have no power to improve upon the written contract. They cannot introduce terms to make the contract fairer or more reasonable. Any implied term must be "capable of clear expression" and "must not contradict any express term of the contract". The Courts’ concern is only to discover what the instrument means to a hypothetical ‘reasonable person’ having all the background knowledge which would have reasonably been available to the parties at the time the contract was entered into.
- In many respects therefore, the exercises of interpreting contracts and adjudicating on implied terms have many similarities. The question of implication of terms only arises when the written contract does not expressly provide for something. The judge emphasised that the most usual inference in such cases is that nothing is to happen ie nothing is implied. As the judge said, “If the parties had intended something to happen, the written contract would have said so”. The Courts are clearly wary of implying terms with the benefit of hindsight.
- The Court was at pains to stress that the different ways of expressing the basis upon which terms should be implied into a contract ("necessary to give business efficacy to the contract"; "so obvious that it goes without saying") are not different or additional tests but simply different ways of expressing the same thing. However, it did recognise the dangers inherent in these different formulations since depending upon the way in which the question is asked, a different answer may be produced.
- Exercise of a contractual discretion
- Unlike under some bodies of foreign law, English law does not impose general duties of good faith and fair dealing into commercial contracts. However, looking at the implied restrictions on the exercise of a contractual discretion, this exercise will be limited by concepts of “honesty, good faith and the absence of arbitrariness, capriciousness, perversity and irrationality”.
- The exercise of any discretion must be consistent with the purpose for which the discretion has been given under the contract. The English Courts will not, however, go further than that. They will not, subject to the requirements previously stated, look to assess whether the discretion has been exercised in an entirely reasonable manner.
Points to Note:
- This case re-emphasised the limited role that pre-contract documentation plays in connection with interpreting contracts and also highlighted the cautious approach taken by the Courts to implying terms into a contract. Both principles stressed the importance of getting the wording of the formal written contract right and ensuring that it deals as comprehensively as possible with all of the issues.
- If trying to maintain an argument that a particular term should be implied, it is probably best to argue for a single implied term rather than putting forward a number of alternatives since that, by itself, would seem to undermine the obviousness or necessity of any particular provision.