Contractual interpretation – recitals

What factors will a court consider when interpreting contractual clauses?

The background

Blackpool Football Club (Properties) Ltd (Formerly Segesta Ltd) (Segesta) entered into an investment agreement with VB Football Assets (VBFA) in 2008 (the Agreement). VBFA's rights under the agreement were assigned to JSC Baltic International Bank (JSC), who was substituted as the claimant.

Under the Agreement, the parties funded the development of Blackpool Football Club's ground (owned by Segesta). The development's net income would then be divided annually and equally between Segesta and VBFA. To enable phases 1 and 2 of the development, VBFA agreed to loan Segesta £4.75 million and Segesta committed £1 million. In 2010, the club was unexpectedly promoted to the Premier League and Segesta consequently borrowed monies from the club for the third phase of the development. This third phase was to build a hotel, which was operated by a third party, Blackpool Football Club Hotel Ltd (BFC).

In 2011, Segesta paid £181,832 to JSC as its share of 'income'. JSC issued proceedings claiming that (other than for payments for financial years 2009/2010 and 2010/2011) it received no income under the agreement and would have done so had Segesta not incorrectly deducted monies from the income.

The judge held at first instance that the Agreement did not permit: (i) any deduction from income in relation to sums lent to Segesta by BFC; (ii) deduction of losses arising in connection with constructing the hotel; or (iii) sums for notional rent (as the hotel occupied some land owned solely by Segesta) which was outside the scope of the agreement. The decision was then appealed to the Court of Appeal.

The decision

The Court of Appeal agreed with the judge and the appeal was dismissed. Specifically, the Court of Appeal had regard to the relevant recitals and the factual matrix.

Clause 6(A) of the Agreement permitted deductions from the income in certain situations, including '(i) all items of revenue expenditure (and any expenditure of a capital nature in excess of the amounts provided by the parties pursuant to this agreement) [in relation to the development]'. The judge concluded:

• in respect of the deductions from income of sums lent to Segesta by BFC, the ordinary meaning of clause 6(A)(i) and the Agreement as a whole did not permit deduction from income of sums lent to Segesta by BFC. Also, clause 19 of the Agreement set out a mechanism for when further funds were required, including a requirement for consent from VBFA. Further, recital (C)(iv) made it clear that the intention of the parties was that the costs of the third phase would "be borrowed from a third party on terms acceptable to the Parties". This was consistent with the finding that the parties did not consider Segesta would contribute over £1million or that BFC would be able to advance funds for that purpose under clause 6(A)(i);
  
  
• as the hotel was operated by a separate legal entity, the income and losses of the hotel were those of that entity and were not revenue expenditure in relation to the development. As such, those losses were not entitled to be deducted under clause 6(A)(i); and
  
  
• clause 6(A)(i) was only concerned with the actual state of affairs and so despite some of the hotel being built on land outside the scope of the clause, there was no room in the interpretation of the clause for the deduction of notional rent.

Why is this important?

The Court of Appeal reached this decision by interpreting the clause not only using the natural and ordinary meaning of the words of specific clauses in the agreement (more specifically clause 6(A)(i)), but also by considering the clause and agreement as a whole (including the recitals, and specifically recital (C)).

The Court will use all the evidence they have available to reach a decision, and will seek to identify the factual matrix objectively known by the parties on the date that the agreement was executed.

Any practical tips?

Recitals to a contract should be carefully drafted to reflect the purpose and intentions of the parties.