Commercial Law – Corporate Law – Joint Venture – Contractual Construction of Clause in Joint Venture

The case of Nearfield Ltd v Lincoln Nominees Ltd and another [2006], dealt with the issue of the interpretation of a contractual term in an agreement. The first defendant was a company designated by the second defendant. The first defendant was incorporated in the British Virgin Islands.

In April 2002, the plaintiff company entered into a joint venture agreement (“JVA”) for the redevelopment of certain property. Under clause 4.1 of the JVA, the claimant was required to advance a loan of £3,000,000 to the first defendant. In accordance with clause 5.1.3, the duration of the loan would be three years from the date of the loan. After three years, the second defendant would “procure” repayment of the loan along with all outstanding interest upon plaintiff’s written request.

The refurbishment of the property was unsuccessful and the property was therefore 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 attempted to enforce clause 5.1.3 of the JVA.

The claimant alleged that ‘procure’ in clause 5.1.3 imposed an obligation on the second defendant to ensure that the first defendant repays the sum of £3,000,000 together with outstanding interest at the written request of the claimant. They argued that in the event that the first defendant failed to make payment, he was obligated to pay damages equal to the amount payable but not reimbursed by the first defendant.

The second defendant maintained that the scope of its obligation under clause 5.1.3 was merely to seek repayment of the loan from the first defendant and did not extend beyond providing security or assurance that the loan would be repaid. . in full by the first defendant.

The claim was admitted.

The meaning that a document would convey to a reasonable man was not the same as the meaning of its actual words. The court held that the meaning of the words was a matter of dictionaries and grammars, while the meaning of the document in question was what the parties would have reasonably understood those words to mean together with the relevant background.

The normal meaning of the word procure was ‘to see to it’. Thus, a person who agreed to procure that a third party fulfilled a contractual obligation had to do the following:

– They would be obliged to ensure that the third party complied with the obligation; Y

– In the event that the third party fails to comply, they must pay compensation calculated for the amount that the third party should have paid.

There was nothing in the correspondence between the parties in this case to suggest that ‘procure’ under clause 5.1.3 should have a different meaning in different parts of the JVA, nor could it be suggested that ‘procure’ means anything other than as the claimant put it: namely, that it meant ‘take care of it’.

Also, there was no limitation expressed in the JVA and it could have been easily done. Therefore, it was held that clause 5.1.3 should be interpreted as the claimant had argued. In any event, there was no document or evidence from the pre-JVA drafts that could have led to a different conclusion.

The court decided that the second defendant was responsible for “procuring” the first defendant to repay the loan to the plaintiff.

Comment: Parties should always limit the scope of their responsibilities when entering into joint ventures.

Contact us for more information on assessing damages due to termination of a contract at [email protected]

Visit http://www.rtcoopers.com/practice_corporatecommercial.php or http://www.rtcoopers.com/practice_corporatefinance.php

© RT COOPERS, 2007. This Information Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. Its sole purpose is to highlight general issues. Specialized legal advice should always be sought in relation to particular circumstances.