Banco de Sabadell v Cerberus Global NPL Associates LLC & Ors | FZ Postcard Cases
Banco de Sabadell SA v Cerberus Global NPL Associates LLC & Ors [2024] EWHC 3022 (Comm) (04 December 2024)
Contractual laws can use different tools to give meaning to an agreement. English law’s primary aim is to ascertain the objective meaning of a contract’s wording. This typically renders extrinsic evidence of the parties’ communications irrelevant for interpretation purposes (except on occasions for commercial background).
An English court may use different tools when applying foreign law. In the case of Banco de Sabadell v Cerberus, the English Commercial Court determined that Spanish law was the applicable law.
The dispute concerned the sale of Spanish real estate-owned portfolios. A number of the assets had issues with registration. The parties disagreed on the deferred amount payable. Sabadell argued that (1) 21% of the price, which had been deferred, was due and (2) the allocated value for unregistered properties would be reduced by their fair market value. Meanwhile, Cerberus claimed that the only relevant amount to be paid was the fair market value of the unregistered properties.
Based on Spanish law expert testimony, the Court held that contract terms must be read sensibly together and not in isolation. Moreover, when there is a conflict between the parties’ intent and the contractual wording, the former prevails. Since the contract wording was unclear, the Court accepted extrinsic evidence from both during and after the contract formation to ascertain the parties’ intent. After examining the relevant contract and various drafts exchanged, the Court ultimately ruled in favour of Sabadell.
Additionally, the Court considered the absurdity principle. This principle usually rejects a proposed construction that would result in an absurdity that would be “highly unlikely to have been the parties’ intended contractual effect.” The Court held that such principle applies only if the outcome would be “highly unusual, rare, and inexplicable.” The Court noted that if the contract is properly construed, this principle does not amount to a revision of the contract because it was not “sensible or good bargain.” Here, Cerberus argued that, if the unregistered properties amount surpassed an agreed threshold, the 21% of the purchase price (which included registered assets) was relinquished and replaced with the fair market value of the unregistered properties. The Court rejected this argument finding would constitute a EUR 600m gamble and that it was not commercially rational or explicable.