Commercial Contracts and Changes in Circumstances

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A failure by a contractual party to anticipate a change in circumstances before entering into a contract, could adversely affect their contractual rights should a dispute arise. At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and their rights and obligations.

A failure by a contractual party to anticipate a change in circumstances before entering into a contract, could adversely affect their contractual rights should a dispute arise.  At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and their rights and obligations.

An important ruling¹  has provided important clarification for disputes that arise where unanticipated circumstances arise. This is an important ruling in the UK’s Court of Appeal which has persuasive effect on the courts in The Bahamas.

What was the case about?

A contractual clause appeared in an issuer servicing agreement in a securitisation transaction stating stated that no termination of the special servicer was to take effect unless certain confirmations from three, named ratings agencies were obtained.

In the event, since the contract had been entered into, one of the ratings agencies had changed its policy, and no longer gave such confirmations.

One of the contractual parties argued that the clause should be read as if confirmations were only required from those agencies willing to give them – so that the absence of confirmation from an agency that changed its policy did not matter.

The basic rules of construction of a commercial agreement include the objective test of what a reasonable person would have understood the contractual wording to mean.  The applicable principles are:

• The words used should be given their natural or ordinary meaning. The courts will not rescue a contractual party from a bad bargain if the words are clear
• If the meaning of the words is ambiguous or unclear, the court will apply the interpretation that makes most commercial sense
• If using the natural or ordinary meaning of words gives an absurd result, but it is clear to a reasonable person what the parties must have meant, the court will apply that interpretation

Here, the Court of Appeal ruled that the natural and ordinary meaning of the words used made it clear that the confirmation of all three ratings agencies was required.   This did not mean a commercially absurd result because the servicing agreement provided a get-out of the overriding Noteholder extraordinary resolution option.

What does this mean?

Whilst this case concerned a servicing agreement in the context of rating agencies, the general contractual principles applied.  Unless the natural meaning of the words used will produce a commercially absurd result, or one that is inconsistent with commercial common sense, the courts will not alter the contract terms.

It is, therefore, important to take expert legal advice from experienced commercial lawyers if you are concerned about the potential implications for the performance of contract terms, should a change in circumstances arise.

How can we help?

For expert, strategic legal advice on your commercial contracts and disputes, contact the experienced commercial lawyers at ParrisWhittaker.  If you are considering or negotiating new contract terms, or there is a change in circumstances that may affect your existing contractual rights and obligations, we can help you with clear, effective legal advice and representation to fully protect your interests.

^{1Cheyne Capital (Management) UK (LLP) v Deutsche Trustee Company Limited [2016]}