Commercial Law – Corporate Law – Joint Venture – Contractual Construction of Clause in Joint Venture
The case of Nearfield Ltd v Lincoln Nominees Ltd and Another , dealt with the issue of the construction of a contractual term in an agreement. The first defendant was a nominee company of the second defendant. The first defendant was incorporated in the British Virgin Islands.
In April 2002, the claimant company entered into a joint venture agreement (“the JVA”) for the redevelopment of a certain property. Under clause 4.1 of the JVA, the claimant was under an obligation to advance a loan of £3,000,000 to the first defendant. According to clause 5.1.3, the duration of the loan would be for three years from the date of the loan. After three years, the second defendant would ‘procure’ the payment of the loan together with all outstanding interest on written demand by the claimant.
The redevelopment of the property was not successful and so the property was subsequently sold. Although some payment was made to the claimant, the shortfall was £2,251,406.23 plus interest of £1,030,947.35. The claimant sought to enforce clause 5.1.3 of the JVA.
The claimant submitted that ‘procure’ in clause 5.1.3 put an obligation on the second defendant to ensure the first defendant repaid the sum of £ 3,000,000 together with outstanding interests on written demand by the claimant. They argued that in the event of a failure by the first defendant to make the payment, it was liable to pay damages equal to the amount payable but not repaid by the first defendant.
The second defendant contended that the extent of its obligation under clause 5.1.3 was merely to seek to bring about the repayment of the loan by the first defendant and did not extend further so as to provide any assurance or guarantee that the loan would be repaid in full by the first defendant.
The claim was allowed.
The meaning which a document would convey to a reasonable man was not the same thing as the meaning of its actual words. The court held that the meaning of words was a matter of dictionaries and grammars, whilst the meaning of the document in question was what the parties using those words in conjunction with the relevant background would reasonably have been understood to mean.
The normal meaning of the word procure was to ‘see to it’. Thus a person agreeing to procure that a third party performed a contractual obligation had to carry out the following:
– They would be required to attempt to make sure that the third party complied with the obligation; and
– In the event that the third party failed to comply, they would have to pay damages calculated by the amount that ought to have been paid by the third party.
There was nothing in the correspondence between the parties in this case which suggested that ‘procure’ under clause 5.1.3 should be given a different meaning in different parts of the JVA, nor could it be suggested that ‘procure’ meant anything other than as the claimant put it: namely that it meant ‘see to it’.
In addition, there was no limitation expressed in the JVA and it could easily have been done. Therefore, it was held that clause 5.1.3 should be construed as the claimant had submitted. In any event, there was no document or any evidence from the drafts leading up to the JVA which could have led to a different conclusion.
The court decided that the second defendant was liable to ‘procure’ that the first defendant repaid the loan to the claimant.
Comment: Parties must always limit the extent of their liabilities when entering joint ventures.
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© RT COOPERS, 2007. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.