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Contract Interpretation in Breach of Contract Ca

Contract Interpretation in Breach of Contract Ca

In the case of Barclays Bank Mexico v. Urbi, Desarrollos Urbanos the Supreme Court of New York County examined a dispute between parties based in Mexico but with a somewhat unusual procedural history in that plaintiff Barclays seeks to assert jurisdiction over the defendant in New York. Jurisdiction is part of an area of the law quite distinct from contract law, known as civil procedure. Jurisdictional arguments seek to determine whether or not a court has the power to hear the case. Here, the defendant seeks to defeat the jurisdiction of a New York court based on both the fact that both parties are based in Mexico with insufficiently strong ties to New York and the fact that certain contract language should be interpreted as defeating the jurisdiction of New York. Plaintiff, interestingly, argues that the contract language is the sole basis it has of asserting New York jurisdiction. Thus, for our purposes, this case was a great look at how a New York court applied contract interpretation.

Background of the Case

Barclays and Urbi entered into several financial transactions involving derivatives and entered into a Master Agreement as part of the deal. The relevant part of the Master Agreement provided that either English law or the laws of New York would apply. The agreement also said that English Courts would have jurisdiction if English law applied, else New York courts would have jurisdiction if New York law applied. The Schedule, incorporated by reference into the Master Agreement, provides that New York law applied.

However, when the transactions were made, Barclays sent Urbi items known as “Confirmations.” The Confirmations stated that they were part of and supplemental to the Master Agreement, and that in the event of inconsistencies between Confirmation and Master Agreement, the language of the Confirmation would apply. The Confirmations all contained this statement: “Governing Law: English.”

Eventually, Barclays alleged that Urbi did not make certain payments it was required to under the agreement and sued to recover. Urbi’s main defense was that New York does not have jurisdiction.

Contract Interpretation

A lot hinges upon the interpretation of the Master Agreement and subsequent documents incorporated into it. The legal standard in New York is that a court must “give effect to the parties’ intentions.” They must also be interpreted “in accordance with their reasonable intentions at the time.” Additionally, “when the literal meaning of contract language cannot reasonably have reflected the parties' contemplation, the language must be given its reasonable, rather than literal application.”

Urbi asserted that the language in the Confirmation saying its choice of law applies over the Master Agreement’s language should be interpreted broadly, and should thus control.

Barclays said that the Confirmation language simply meant that English law should be applied to disputes arising out of that individual transaction (recall that a Confirmation is issued for each transaction made.) The Confirmation should not be interpreted to govern disputes over the actual Master Agreement. And here, Urbi’s conduct amounted to a breach of the actual Master Agreement, not of individual Confirmation-transactions.

The court used the factors above to look at the reasonableness of these competing arguments. It focused on the fact that the Master Agreement was heavily negotiated, while characterizing the Confirmations as ‘receipts.’ It also raises the point that conceptually, it is not really possible to ‘breach’ a Confirmation-transaction since it is just a simple trade. The court also decided that it was too unreasonable to believe the parties intended language on the receipts to change the heavily negotiated Master Agreement to such a degree. Finally, the court looked at other evidence, such as letters exchanged between the parties to try to determine what the parties’ true intent was. The court found good evidence that, prior to the dispute, both parties thought that New York law applied.

Contract interpretation is an extremely difficult aspect of the law. It is important to hire competent counsel when either entering into a contract or litigating it to ensure that a court’s interpretation does not unexpectedly detriment you. Please do not hesitate to contact our office for a consultation.

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