Ace Paper Ltd v Fry & Ors

Contractual language must be construed objectively by asking what a reasonable person with the relevant background would have understood. Business common sense assists where language is ambiguous, but it is not an independent criterion for rewriting clear words. A transfer of an unusually valuable assigned debt, especially after the assignee has paid substantially its value, requires sufficiently clear language. Ambiguity in a document drafted by one party may be construed against that party. Pre-contractual negotiations may illuminate background context, but cannot establish subjective intention.

Ace had assigned customer debts to RBS Invoice Finance Limited under an invoice discounting agreement. After RBS had paid Ace under bad-debt protection in respect of a debt owed by Capital Print & Display Limited, the agreement was terminated. RBS signed and returned Ace’s letter stating that claims against Ace, its guarantor or third parties were waived, released and transferred or re-transferred to Ace.

Ace claimed that the letter re-assigned the Capital debt to it and appealed against Deputy Registrar Garwood’s refusal to set aside the liquidators’ rejection of its proof of debt. The central issue was the proper construction of the words “such claims” and whether they transferred Ace’s right to prove in Capital’s liquidation.

1. Appeal dismissed. The liquidators’ rejection of Ace’s proof of debt was upheld.
2. The court applied the objective contractual construction principles stated in Rainy Sky SA v Kookmin Bank Ltd [2011] UKSC 50. The question was what a reasonable person, with the relevant background knowledge, would have understood the parties to mean. Subjective intentions and pre-contractual negotiations were irrelevant except insofar as factual background illuminated the contractual context.
3. The phrase “any such claims” could not sensibly mean all existing or prospective claims against any third party, since that would be excessively broad. Nor could it naturally be confined to claims against Ace or Paperun, because the references to third parties and to transfer or re-transfer would then have no proper function.
4. The language was therefore ambiguous. Read in its commercial context, it referred to some claims against third parties connected with Ace, including customer claims previously assigned under the agreement, but it did not clearly re-assign the Capital debt. The court applied the principle in Antaios, Antaios Compania Naviera v Salen Rederierna [1998] 1 AC 191 that detailed semantic analysis must yield where it produces a result contrary to business common sense.
5. It was counterintuitive that RBS should transfer a debt for which it had already paid Ace substantially its full value, especially when Ace had also recovered value from related goods. The proposed re-assignment was permissible in principle, but required much clearer words. The ambiguity was additionally construed against Ace because it drafted the letter. The question of consideration was not determinative.

High Court (Chancery Division): On appeal from Deputy Registrar Garwood, the court dismissed Ace’s appeal and upheld the refusal to set aside the liquidators’ rejection of Ace’s proof of debt.