25 April 2018 - Post by:Lucy Judge
In Blackpool FC Properties v Baltic International Bank, the recitals of an agreement for the development of the club’s stadium were influential in informing the natural and ordinary meaning of the clause in dispute.
Baltic’s loan, and BFC Properties’ commitment, was to cover phases one and two of the development. A recital provided that the cost of the third phase would be borrowed from a third party on terms acceptable to both parties. Baltic would be jointly responsible for repaying those funds, but only if it had consented to the terms of the financing.
The key clause stated that the net income from the development would be divided annually equally between the parties after the deduction of (i) “revenue expenditure (and any expenditure of a capital nature in excess of the amounts provided by the parties)”; (ii) any mortgage payments; and (iii) taxes.
When the club was unexpectedly promoted to the Premier League, it loaned BFC Properties the funds to complete the third phase. However, Baltic’s approval was not sought as required. A dispute arose about BFC Properties’ allowable deductions. The trial judge found that the clause only allowed the deduction of additional funds beyond the amounts advanced by the parties. Had the funds been obtained externally (and with consent), they would have been deductible under another provision. It was clear from the recitals that the parties had assumed the cost of the third phase would be borrowed from an external third party, and matters of “commercial common sense” could not be invoked retrospectively. Whilst accepting that the recitals set out a “preliminary assumption”, and were not fixed in stone, the judge held them to be clear evidence of how matters were perceived by the parties at the time.
On appeal, BFC Properties argued that the use of “any” was sufficiently broad to cover any capital expenditure (other than mortgaged loans) and that the recitals were mere expectations or aspirations, rather than contractual straitjackets. Baltic maintained that the recital, coupled with requirement for consent (which would otherwise be redundant) evidenced the parties’ understanding that the third phase would be externally funded.
The Court of Appeal unanimously dismissed the appeal. The “natural and ordinary” meaning of the clause when read in context (including, in particular, the recitals) did not permit BFC Properties to deduct spending on the third phase funded by the club.
This case serves as a reminder not to underestimate contractual recitals – in the event of a dispute, they may be among the only clues that a judge or tribunal has to decipher the contemporaneous intentions of the parties. It also illustrates why you shouldn’t argue your position with the benefit of hindsight: at trial BFC Properties had sought to argue that the parties had understood there was a possibility that the third phase funds might not have needed to be sourced externally, to which the judge (a little witheringly) pointed out that even the club’s own witness admitted that no one could have anticipated the club hitting the Premier League.