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Jonathan Addo
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Contractual Interpretation: Establishing the relevant ‘factual matrix’

In the recent decision of Lehman Brothers International v Exotix Partners LLP the English High Court considered the admissibility of external evidence adduced to establish the relevant ‘factual matrix’ and provided practical guidance that is sure to find favour in the Bermuda, BVI and Cayman Courts.

The case concerned the sale of a (disputed) number of Peruvian Government Global Depository Notes by Lehman Brothers to Exotix. Sometime after the notes had been transferred, both Lehman Brothers and Exotix discovered that the notes had been sold significantly undervalue. 22,955 notes with a value of S/22,955,000 (approximately US$7.7m) had been transferred for a total consideration of US$7,707.93. Upon discovery of their mistake, Lehman Brothers sought restitution on the grounds that the actual agreement was for 22 notes only and it had inadvertently over-delivered.

A central issue arose as to whether Exotix could inter alia rely on the following evidence to establish the relevant factual background to the contract:

  1. That Lehman knew it held 22,955 notes; and the fact that information was ‘reasonably available’ to Exotix;
  2. Various documents produced after the contract had been agreed;
  3. Certain post-contract conduct of Lehman; and
  4. The subjective understanding of both parties that the value of the notes was S/1 each (as opposed to their actual value of S/1,000 each).

The Court gave the following guidance in respect to each of the categories above:

  1. Evidence of knowledge or information actually known to both parties prior to the trade is plainly admissible, however caution must be taken when applying the test of ‘reasonable availability’. Reasonably available information is only admissible if it is known to one party, necessary for a proper understanding of the contract and there is no difficulty obtaining it;
  2. A distinction is drawn between documents that are created post-agreement, as part of the contracting process, which are admissible; and documents that simply record one party’s understanding of the agreement after the fact, which are not admissible;
  3. Parties conduct after an agreement is concluded is not admissible (unless it was intended to form part of the contracting process as per (2) above); and
  4. Where the issue of one of interpretation, subjective intentions are equally inadmissible (the Court distinguished situations where a factual enquiry is required to identify a contract’s subject-matter, which may legitimately require consideration of the parties subjective intentions).
Contractual Interpretation: Establishing the relevant ‘factual matrix’

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