The Commercial Court has recently considered an application for summary judgment brought by a lender in relation to the construction of an agreement pursuant to which it lent $486,000.

The Facts

From 1987 to 2007, Lester Charles Landgraff (the “Defendant”) was a partner in the U.S. law firm LaBoeuf, Lamb, Greene & MacRae (“LaBoeuf”). It was the Defendant’s evidence that, in accordance with LaBoeuf’s constitution, he made and maintained a capital contribution to LaBoeuf of around 33% of his annual target compensation.

Dewey Ballentine LLP (“Dewey”) was another U.S. law firm, which, by 2007, was reported to be in dire financial troubles. Barclays Bank Plc (the “Claimant”) was one of Dewey’s bankers. It was the Defendant’s submission that the Claimant would have known about Dewey’s financial troubles. On 1 October 2007, LaBoeuf and Dewey merged to form Dewey & LeBoeuf LLP (the “Firm”).

During the years 2008 – 2011, the Firm persistently failed to meet its target income. In May 2010, the Defendant was approached by the Firm’s management and was told about the Claimant’s Capital Loan Program (“BCLP”). The Defendant contended that the Firm’s management had described the BCLP to him as:
(a)    a mechanism through which the Firm could finance the shortfall in its distributable income by the substitution of bank debt in the capital amount; and
(b)    the burden of repayment of any loans extended pursuant to the BCLP was that of the Firm (or at any rate, primarily the Firm) and not of its individual partners.

The Defendant decided to participate in the BCLP and in or around May 2010 he signed the Claimant’s loan agreement (the “Loan Agreement”) and other contractual documents.  The Loan Agreement was addressed to the Defendant at the New York head office of the Firm. The Defendant was defined in the Loan Agreement as the “Borrower” and the purpose of the loan was stipulated as “[t]o be used to assist the Borrower with a partnership capital subscription to Dewey & LeBouef LLP”.

Pursuant to the Loan Agreement, the Claimant transferred $486,000 to the account in the name of the Firm. It was the Defendant’s submission that he played no part in the administration of the loan and had no subsequent contact with the Claimant in this regard, just as he had no direct contact with the Claimant during execution of the contractual documents.

The Claimant contended that under the BCLP, the interest payments were serviced by the Firm and were expected to be deducted from partner’s income. The Defendant’s evidence was that he did not recall interest payments ever being deducted in his case. It was also noted by the Defendant that following execution of the contractual documents, all statements of account and other documents concerning the loan were sent to the Firm directly and not to him.

On 28 May 2011, the Firm filed for Chapter 11 bankruptcy relief and, as a result, the indebtedness of the Firm (in excess of $250,000) became immediately due and payable. On 18 December 2012, the Claimant made demand on the Defendant pursuant to paragraph 10.1 of the Loan Agreement. No payment was made by the Defendant and the Claimant commenced proceedings on 18 January 2013.

The Law

In noting the principles laid down in Easyair Ltd v Opal Telecom Limited [2009] EWHC 339 (Ch), the Commercial Court considered the correct approach to adopt when considering an application for summary judgment. The Commercial Court noted its requirement to “consider the language used and ascertain what a reasonable person having all the background knowledge which was reasonably available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant”.

The content of the background knowledge is commonly referred to as the “factual matrix”. As the Commercial Court noted, a consideration of the factual matrix may indicate that the meaning which the parties would reasonably be taken to have intended could be given effect despite the fact it was “not, according to conventional usage, an ‘available’ meaning of the words or syntax which they had actually used”.

The Decision

Though the Commercial Court accepted that the Loan Agreement appeared to confirm the Defendant’s liability, it also recognised the possible inference that the BCLP was used to enable the Firm to obtain further capital in circumstances where such funding could not be given by the Claimant directly to the Firm under its lending criteria. Popplewell J noted that “[i]t is not fanciful to suppose that with the benefit of disclosure and cross-examination at trial, the impression which arises on first reading of the contractual documents would appear in a very different light”.

Accordingly, the Claimant’s application for summary judgment was dismissed.

Conclusion

The decision of the Commercial Court is an important reminder of the Courts’ readiness to consider the parties’ intended meaning of a contract over the ordinary linguistic meaning of the document. The trial has been listed for the end of the year and will be eagerly anticipated by lenders.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.