The Commercial Court provides guidance on the interpretation of defined terms and the implication of terms in complex commercial contracts.

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The Commercial Court provides guidance on the interpretation of defined terms and the implication of terms in complex commercial contracts

Published 28 April 2016

Europa Plus SCA CIF and Anthracite Balanced Company (R-26) Ltd v Anthracite Investments (Ireland) Plc [2016] EWHC 437 (Comm).

The claim concerned a series of transaction documents entered into as part of a structured note offering, the Anthracite Series 26 Note programme. The portfolio of assets included, amongst other things, shares in two hedge funds managed by Duemme Hedge: (1) Duemme Multi-Strategy Series 2 Fund, and (2) Duemme Hedge Protection Fund (collectively “the Old HP Funds”).

Anthracite Investments (Ireland) PLC ("Anthracite"), was an "orphaned company" and was not intended to have commercial shareholders with an economic interest. Pursuant to two total return swap agreements, Anthracite invested sums in the Old HP Funds, but the entire financial benefit of those investments would pass to Anthracite Balanced Company (R-26) Ltd ("Balco"), an SPV.

In April 2008, Anthracite submitted requests for €1.3 million and €1.6 million worth of shares to be redeemed. The sums were paid into Anthracite's account in July 2008. Pursuant to two total return swaps agreements, the sums should have been paid by Anthracite to Balco. For unknown reasons, this was overlooked. 

In 2009, the Old HP Funds were merged into a single separate fund, the Duemme Hedge Protection Fund (“the New HP Fund”). Subsequently, in December 2011 Europa Plus SCA CIF (“Europa”) acquired ownership of the redeemable preference shares in Balco and the parties entered into an agreement dated 16 March 2012 by which the two swaps were unwound and, by clause 14, Anthracite was obliged to transfer all its interest/pay to Europa any payment received by Anthracite “in respect of the Duemme Shares”, which had not been paid to Balco (“Termination Agreement”). By clause 1 of the Termination Agreement “Duemme Shares” were defined as the shares held by Anthracite in the new Duemme hedge fund.

In April 2013, Anthracite discovered the €1.3 million and €1.6 million remained in its bank account. After taking legal advice as to who was entitled to the sums, it paid €1.6 million to Europa, but retained the €1.3 million. Europa commenced a claim against Anthracite for the sum of €1.3 million under clause 14 of the Termination Agreement Anthracite brought a counterclaim against Europa for repayment of the €1.6 million, on the ground that this payment was made in the mistaken belief that Anthracite was liable under clause 14. 

Anthracite contended that Duemme Shares meant only the shares then held by Anthracite, which were being transferred to Europa by the Termination Agreement, and that the 2008 payments fall outside the scope of the provision, because they were redemptions of shares previously held by Duemme Hedge in funds that no longer existed and were not the subject matter of the transfer. 


The Court granted judgment in favour of Europa, concluding that, on the true construction of the Termination Agreement and in the light of the relevant factual matrix, the expression “Duemme Shares” in clause 14 of the Termination Agreement encompassed the shares in the Old HP Funds, as well as the New HP Fund. 

It was held that, when the Court is interpreting a contractual provision which uses a defined term, the starting point for a textual analysis will often be the definition, but not always. Clause 14 applied to the Duemme Shares (capitalised) meaning the shares in the New HP Fund but the expression had not been used consistently throughout the Termination Agreement. Given this inconsistent use, the Court considered the strength of the inference that the parties intended it to bear its defined meaning was diminished so the use of the capitalised term provided little guidance to interpretation of clause 14.

The Court then proceeded to test the language used against the commercial consequences and the background facts reasonably available to the parties at the time of the contract and found that:

  1. The commercial objective was for Europa to have the benefit of sums to which Balco had been entitled under the swap agreements, which extended to the 2008 payments, in return for collapsing the swaps and security arrangements in connection therewith;
  2. The orphaned nature of Anthracite, its role in the note holding structure, and its inability to hold substantial assets for its own benefit or to distribute more than $500 in dividends to its charitable shareholders, meant that neither party could have contemplated that almost €3 million to which Balco was entitled could be kept as a windfall by Anthracite. The construction advanced by Anthracite had consequences which all parties at the time would have regarded as commercially absurd;
  3. The existence of the unpaid amounts was part of the admissible background to the Termination Agreement, even though no party actually knew they were not paid because each party could have discovered that fact had they made enquiries which were reasonably open to them.  

The Court also held that, if it had found that “Duemme Shares” fell to be construed as being confined to shares in the New HP Fund, it would have implied a term to add words such as “or their predecessors”. Such a term was necessary to give the Termination Agreement business efficacy: without it, the Termination Agreement would lack practical and commercial coherence. It would leave Anthracite with substantial sums which no reasonable person in the parties’ position would have intended at the date of the contract. The implied term would meet the requirements of necessity and obviousness - it would be fair and reasonable, capable of clear expression and would not contradict any express term.

Given the extensive use of defined terms in legal documentation, whether drafted by lawyers or not, the case is an important reminder to ensure that defined terms are not used in different contexts throughout the document as this could give rise to unintended consequences.  


Jonathan Brogden

Jonathan Brogden

London - Walbrook

+44 (0)20 7894 6290

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