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EUR wrong: when sterling means euros

Kerry Chan

In McDonagh v Bank of Scotland, there was a loan for “Seven Million Five Hundred Pounds [sic] (£7,500,000) to be drawn down in Euros”. The High Court used interpretation rather than rectification to fix the unhappily drafted agreement, since to “remove words from a written contract and then to interpret the contract without those words is a radical step”.

The dispute was about whether the amount owed was in sterling or euros. It suited McDonagh for the amount to be in sterling.

The High Court, following Chartbrook v Persimmon, reiterated that evidence of pre-contractual negotiations are not admissible as an aid to interpretation. However, the court held that this did not exclude evidence of what was said or done during pre-contract negotiations, if that evidence is being used to establish a fact which may be relevant as background.

The “admissible background” showed McDonagh wished to have a “euro loan” since he wanted to pay the rate of interest appropriate for a loan in euros rather than that in sterling. Euribor interest was lower than LIBOR interest. The amount of the loan was reduced in order to mitigate the currency risk, which it was accepted lay with McDonagh, to avoid the cost of a currency hedge. The loan was expressed in sterling, because “it was appreciated that the amount of the loan would be expressed in euros by reference to the rate of exchange current at the date of drawdown”.

Applying the principles in Wood v Capita, the High Court concluded that the loan was for €11,071,500 (at an exchange rate of approximately 1.47 euros to sterling). The following supported its conclusion:

  1. the reference to “Seven Million Five Hundred Pounds” was a misstatement of the amount “£7,500,000”, which showed some lack of care in drafting the agreement (though this should not be over emphasised);
  2. the drawn down was expressed to be in euros and so, it was a loan of a sum of euros;
  3. the loan stated the drawn down was into a euro account;
  4. the interest rate was in euros and the interest was to be debited to a euro account;
  5. the loan stated “All sums payable under this letter, with the exception of the arrangement fee and the interest rate contract fee, shall be paid in Euros”;
  6. the use of a “sterling equivalent” calculation showed that the loan was not itself in sterling; and,
  7. although the repayment clause stated “The term loan will be repaid in one lump sum of Seven Million Five Hundred Pounds [sic] (£7,500,000)”, reading this provision with the rest of the contract, the obligation to repay would be performed by making a payment in euros at the exchange rate at the time of draw down.

If this was not correct, the court held it could reach the same result through rectification by removing the reference to £7.5 million in the repayment clause.