Alchemy Metals Ltd v CAV Aerospace Ltd

Contractual words are construed objectively, starting with their natural and ordinary meaning and viewed against the relevant factual matrix. Previous negotiations and subjective intentions are generally inadmissible, except in a claim for rectification. A pricing clause providing for prices to be adjusted in line with a market indicator may require a pound-for-pound link rather than a flexible adjustment by reference to market trends, where that is the ordinary meaning and trade usage. A party’s persistent operation of the contract on an incorrect basis, resulting in substantial underpayment and failure to remedy the position, may cumulatively evince an intention not to be bound and entitle the other party to accept repudiation.

The claimant, a scrap-metal dealer, contracted to purchase aluminium waste from the defendant. The agreement contained a payment clause requiring prices to be adjusted in line with London Metal Exchange and Metal Bulletin prices. The parties later disagreed whether this required a pound-for-pound adjustment or merely a flexible adjustment by reference to market trends. The defendant alleged substantial underpayment and purported to repudiate the contract. The claimant treated that repudiation as wrongful and sought to rely on its own construction of the clause. The court had to construe the payment provision, determine whether any collateral agreement or special meaning displaced its ordinary meaning, and decide whether the defendant was entitled to treat the contract as repudiated.

1. Construction. The court applied the objective approach to contractual interpretation stated in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All E 896. The court must begin with the contractual words, give them their natural and ordinary meaning where possible, and interpret them from the viewpoint of the informed observer. The factual matrix may be considered, but previous negotiations and subjective intentions are generally excluded.
2. Meaning of the payment clause. In its commercial and factual context, in line with meant linked to, fixed to, or parallel with the relevant Metal Bulletin price. It did not mean merely following a trend or using the indices as guidelines. The parties had not established a collateral contract or agreed special meaning which displaced the ordinary construction.
3. Comparator and discontinued prices. Metal Bulletin, rather than the London Metal Exchange, was the appropriate comparator for scrap metal. The nearest product price was to be used, with the contractual premium calculated by reference to the contract price. If a particular published price ceased to be available, the nearest product and a premium adjusted back to the contract date could provide a reasonable price under the agreement.
4. Repudiation. The claimant had made substantial underpayments, had operated the contract on an incorrect basis, and had failed to remedy the position within a reasonable time. Those matters, individually and cumulatively, evinced an intention not to be bound by the contract. The defendant was therefore entitled to treat the contract as repudiated. Permission to appeal was refused.