In last week’s judgment in Sahara Energy Resource Limited v. Societe Nationale de Raffinage SA (SONARA)[1] the Court of Appeal overturned the High Court’s surprising ruling that claims labelled “undisputed” in an agreement between the parties did not mean that the claims were agreed. In restoring the natural meaning of the word, the Court of Appeal reiterated some of the key principles of contractual interpretation that had fallen by the wayside in the court below.
Background
The dispute arose from a 2013 contract under which Sahara had supplied crude oil to SONARA, a Cameroonian refinery operator, between 2013 and 2016. In addition to claims for the principal amount of the invoices and contractual interest, Sahara claimed the following categories of loss:
- Incremental Interest, representing the difference between the contractual interest rate and the rates that Sahara had to pay its own banks over the period of nonpayment.
- Penal Charges, being excess interest and penalty charges levied by Sahara’s banks when Sahara failed to make payment on various letters of credit it used to finance the relevant cargoes.
- FX Differential, representing foreign exchange losses incurred by Sahara due to the depreciation of the Euro against the US dollar during the payment delay.
On 4 and 5 September 2019, the parties held a “reconciliation meeting”, following which a Joint Report was concluded and signed by the attendees. This Joint Report contained tables setting out SONARA’s claims as follows:
- The first table, headed 2013 Outstanding on Principal, recorded a sum due of approximately €8.8 million.
- The second table, headed Reconciled Claims, listed contractual interest and other items totalling approximately €27.3 million and US$4.97 million.
- The third table, the primary focus of the subsequent dispute, headed Undisputed Claims, contained the claims for Incremental Interest and FX Differential, totalling almost US$77 million.
- The fourth table, headed Disputed Claims, contained the Penal Charges claim of US$50+ million. This table had an additional column headed Comments, which included a comment to the effect that SONARA rejected the claim for Penal Charges.
Under a section headed Resolution, which included the following bullet points:
- SONARA would review and collate the documents for submission to the government of Cameroon.
- SONARA completely rejects all Penal charges and requests a waiver of the same.
- SONARA will communicate a date within two weeks to [sic] for the parties to reconvene and to propose potential flexible payment terms, a schedule and further negotiations on the undisputed claims.
With regard to the first of these, following a fire at its refinery, SONARA was in financial difficulty and would be reliant on the Cameroon government to fund any payments it made to Sahara.
The dispute continued and Sahara issued proceedings. By the time the claim reached trial, SONARA had paid the amounts set out in the first and second tables. The primary issue in dispute was whether the Joint Report constituted a binding agreement by SONARA to pay the amounts listed under Undisputed Claims.
The High Court’s decision
The judge at first instance held that the Joint Report was a legally binding agreement, but only in relation to the amounts set out in the 2013 Outstanding on Principal and Reconciled Claims tables. She rejected Sahara’s contention that there was also a binding agreement to pay the Incremental Interest and FX Differential amounts listed under Undisputed Claims.
The judge’s reasoning hinged on the meaning of the word “undisputed” in the context of the agreement. She considered that the parties had used “reconciled” to mean agreed as to both liability and quantum, but “undisputed” to mean something narrower – “undisputed” as to quantum but disputed as to liability, or vice versa. In her view, this interpretation was necessary to give full weight to the reference in the agreement to “further negotiations on the undisputed claims”. She reasoned that if the claims were truly agreed, there would be nothing to negotiate.
The judge also placed weight on the factual background, including SONARA’s dependency on the Cameroon government to fund payment to Sahara. She found that any “agreement” on the Undisputed Claims was, at best, an agreement to present the matter before the Cameroon government and reconvene for negotiations if the government refused to pay.
Finally, the judge considered previous drafts of the agreement that had been produced and were relied upon by both parties. She noted in particular that while the Incremental Interest and FX Differential were listed under an Undisputed and Reconciled heading in the first draft produced by Sahara, these were moved to appear under the Disputed heading by SONARA in the second draft and, even though they were moved under a new heading of Undisputed Claims in the final agreement, they remained separate from the Reconciled Claims.
For these reasons, she dismissed Sahara’s claims.
The Court of Appeal’s decision
The Court of Appeal allowed Sahara’s appeal.
The court started by setting out the nature of its task when interpreting an agreement: it is to ascertain objectivity, with the benefit of the admissible background, the meaning of the words that the parties used. The court will consider the words used in the context of the agreement as a whole; it will have regard to the nature, formality and quality of drafting the agreement; and it will have regard to the wider context. However, “notwithstanding the approach taken by the parties in this case, evidence of the negotiations and earlier drafts is not admissible as an aid to interpretation of the final agreement” – emphasis in the original.
The Court of Appeal considered, unsurprisingly, that the ordinary and natural meaning of the words “undisputed claims” was simply that there was no dispute about those claims.
In support of this being the correct meaning in the context of the agreement, the court noted that there was no difference in format between the tables for the agreed claims and the Undisputed Claims. Both lacked any Comments column indicating unresolved issues. The Disputed Claims table, by contrast, expressly recorded SONARA’s rejection.
With respect to the High Court’s reliance on the reference to “further negotiations on the undisputed claims”, the Court of Appeal determined that that could perfectly well be understood as referring to negotiations over SONARA’s proposed flexible payment terms and payment schedule, rather than negotiations over liability itself.
In the court’s view, it was not right to adopt a strained interpretation of “undisputed claims” to give meaning to the word “negotiations”.
As for the judge’s reliance on the requirement to submit documents to the Cameroon government, the Court of Appeal observed that this did not support a conclusion that government approval was a condition precedent to any binding agreement between the parties. There were no words to that effect anywhere in the Joint Report. Nor was there any evidence that any such condition had been communicated to Sahara. The documents were more likely being provided to enable the government to decide how much financial support to provide, rather than to give the government a veto over SONARA’s commercial autonomy. The court also observed that if the judge’s conclusion were correct, there was no obvious explanation why the government’s consent would have been required for the Undisputed Claims but not for the 2013 Outstanding on Principal and the Reconciled Claims.
While the Court of Appeal stressed that the prior drafts of the agreement were inadmissible, it was noted that these actually supported Sahara’s case. The claims for Incremental Interest and FX Differential had been deliberately moved from a Disputed Claims heading in an earlier draft to the new Undisputed Claims heading in the final document – a change that could hardly signal anything other than a fundamental shift in SONARA’s position. Furthermore, the earlier draft had referred to flexible payment terms being negotiated “if an agreement is arrived at”, whereas this condition was deleted from the final document and replaced with an unconditional requirement for SONARA to propose terms. This strongly indicated that an agreement had in fact been arrived at.
Accordingly, the court held that the Joint Report constituted a binding agreement by SONARA to pay the Undisputed Claims.
Takeaways
This is not a groundbreaking judgment; it simply restores the normal and proper status quo. Nevertheless, there are a few points to take from this:
- Firstly, while the courts often emphasise that labels and headings are not determinative, this case demonstrates that they are still extremely important.
- Secondly, references to subsequent steps to be taken or agreed – in this case negotiations regarding payment terms – do not prevent an agreement from becoming legally binding.
- Thirdly, if an agreement is to be conditional on, for example, third-party approval, it must clearly state that.
- Finally, it is easy while negotiating contracts for one’s understanding of a particular term to be clouded by its evolution over the course of several drafts. It is vital to review the final form of the agreement with fresh eyes to satisfy oneself that it properly and objectively captures the parties’ true intentions
[1] [2026] EWCA Civ 54
Contributors
Alex Radcliffe