Skip links

Business Common Sense Prevails in £15 Million Escrow Account Dispute

Even the most carefully drafted contractual clauses may be capable of bearing more than one meaning. However, as a Court of Appeal ruling showed, the intention of the parties and business common sense are the touchstones to which judges turn.

A mining company had agreed with a local authority to pay £15 million into an escrow account to be used to fund restoration of a site once mineral extraction works ceased. The agreement provided that the company would make 24 quarterly payments of £625,000 into the account and that, if one of those payments were missed, it would be rolled forward for payment on the next quarter day.

After the company failed to make any payments into the account, the local authority launched proceedings, seeking specific performance of the agreement. A judge entered summary judgment against the company, requiring it to pay £6.25 million into the account, that sum representing 10 missed payments.

In challenging that decision, the company submitted that, on a true reading of the agreement, its only obligation was to pay the full £15 million on the last of the 24 quarter days. It was argued that, in the event of a missed payment, the duty to make that payment immediately ceased and was rolled forward to the next quarter day.

In dismissing the company’s appeal, however, the Court noted that such a reading of the contract would be to eviscerate its obligation to deposit money into the account on each quarter day. In the absence of such an obligation, the agreement provided nothing more than an option for the company to make such payments if it pleased.

That would be an absurd intention to attribute to contracting parties and would fly in the face of business common sense. It would also expose the council to the risk that, when it came to making the final £15 million payment into the account, the company would lack the resources to do so. Such an outcome would not only be surprising and imprudent, but irrational in conceptual and commercial terms.