Vol 7 (2010) - Issue 2

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In re Sigma Finance Corporation [2009] UKSC 2

1. Introduction

How is the Court to make sense of a document which has no obviously correct construction?
In Glynn v Margetson & Co [1893] AC 351, in relation to a dispute about a deviation clause in a bill of lading, Lord Halsbury observed, at 359, that ‘both carrier and customer differ very widely sometimes as regards what is reasonable and what is not, and for that reason they call upon Courts of Law to construe sometimes somewhat loose and irregular instruments’. The Court assumes that 'mercantile men when they do business … recollect that a business sense will be given to business documents'.
In re Sigma Finance Corporation [2009] UKSC 2, in construing the terms of a security trust deed, Lord Collins similarly observed, at [35] and [37], that '[i]n complex documents of the kind in issue there are bound to be ambiguities, infelicities and inconsistencies' and that '[d]etailed semantic analysis must give way to business common sense'.
Lord Mance agreed with these observations at [10], describing 'the reasonable man’s task' at [32] as being 'greatly facilitated by the existence of a clear basic form from which it is improbable that the parties would have wished to depart.'
On one view, it is very difficult to disagree with this approach. Words are different from their meaning. If this were not true, translation would be impossible. The task of any interpreter is, therefore, to give sense to the words used. In the contractual context, that sense must derive from the parties’ intention because that is the source of their rights. The extreme example of this logic is the so-called 'private dictionary case', in which the Court has regard to particular pre-contractual negotiations to identify a specific, idiosyncratic meaning common to the parties: Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 at [44]-[45]. In ordinary cases, the Court is, as noted above, content to assume a conventional meaning of language and, crucially, as used by reasonable commercial parties in the position of the actual parties.
On another view, it is in fact very hard to agree with this approach because of the discretion inherent in supposing what reasonable commercial parties would have intended. In Sigma, there is no sharp distinction between the principles of interpretation explained in the Supreme Court and those explained in the Court of Appeal or by the judge at first instance; but, counting the votes of all the judges involved, four favoured the socalled ‘pay-as-you-go’ construction, four favoured the effective 'pari passu' construction, and one favoured an entirely different approach.
This case note summarises the facts and decision of the Supreme Court in Sigma and asks whether anything is usefully added to the 'iterative process' of construction (described by Lord Neuberger at [98] of his judgment in the Court of Appeal) by a general assumption about what reasonable parties would have intended. The cost of making such an assumption too readily is commercial certainty.

2. Issue and decision

The case turned on the correct construction of the Security Trust Deed pursuant to which the assets of Sigma Finance Corporation were secured for the benefit of the holders of loan notes issued by Sigma and held by the Security Trustee.
The issue focused on clause 7.6 of the Security Trust Deed and, very broadly, was whether Sigma’s secured liabilities were to be discharged as they fell due or on some other basis in the Realisation Period (x) following enforcement by the Security Trustee but (y) prior to distribution of the assets from the various asset pools to be formed in accordance with the Security Trust Deed.
The Court of Appeal (Lloyd and Rimer LLJ) had affirmed the decision of Sales J in holding that Sigma’s secured liabilities were to be discharged as they fell due in the Realisation Period.