Mind what you say, and what you don't say – Court of Appeal

​The Court of Appeal has provided a useful reminder that the intention of a contract will be judged by the specific wording used – and that the courts may attach relevance to any deletions made during contract negotiations.

The case

BOS International (Australia) Limited (BOS) and Strategic Nominees Limited (Strategic) were in dispute over $804,586.91 paid by Takapuna Village Limited (Takapuna) to BOS.  At issue was whether capitalised interest was to be treated as interest or as loan principal after Takapuna, now in liquidation, defaulted.

BOS’s loan to Takapuna had priority over Strategic’s pursuant to an inter-creditor deed up to a nominated amount plus any interest and fees.  But the parties had expressly deleted the words “including capitalised interest” from the priority amount definition when referring to interest.

During the term of the BOS loan, interest was capitalised, treated as having been paid and added to the principal amount.  Consequently there was no outstanding interest at the time of default.

BOS claimed that interest accrued after Takapuna’s default did not lose its character as interest because it could not be capitalised under the terms of the loan agreement and the inter-creditor deed.  Accordingly, it was entitled to the principal amount as at the date of default (including all capitalised interest) up to the nominated amount plus interest accrued after that date. 

The disputed sum was the difference between the total loan repayments made by Takapuna to BOS and the nominated amount.

The decision

The Court decided that BOS was only entitled to the nominated amount and Strategic was entitled to the disputed sum as all interest accrued before and after default had been capitalised so there was no interest owing.  This was because:

  • the interpretation of a contract will depend on the language of the particular provision in the context of the particular case
  • there was nothing in the BOS loan agreement, inter-creditor deed or at law that prohibited BOS from capitalising interest after default.  In fact, the words of the contracts indicated that the parties had agreed that interest could be transformed to principal
  • the inter-creditor deed should be interpreted consistently with the BOS loan agreement, meaning that capitalised interest lost its character as interest
  • BOS’s actions in continuing to treat interest accrued after default as capitalised were significant when determining the commercial intentions of the parties
  • the inter-creditor deed was the only agreement between the three parties and was designed to determine the issue of priority so the plain language of the contract should be given its natural and ordinary meaning
  • the commercial consequences of a particular interpretation may be relevant as to whether that interpretation was in fact intended.  Here, BOS’s interpretation would produce unlikely commercial consequences because it would mean that BOS’s total priority was greater than Takapuna’s total obligations under the BOS loan agreement even with penalty interest.  It is more likely that the priority amount provisions were intended to protect, at a minimum, the loan principal, fees and interest capitalised during the term of the loan
  • reference to interest “including capitalised interest” in the definition of priority amount was expressly removed during the negotiation stage but was not deleted when referring to the amount equivalent to Takapuna’s indebtedness, and
  • non-waiver clauses do not enable a party to alter what it has already done and retrospectively seek to do something different.  BOS was not able to alter its decision to treat the interest as capitalised after the default date.

Chapman Tripp comment

The case1 highlights the importance of the specific words in a contract and of obtaining expert advice to ensure the meaning of all provisions in a contract and their potential consequences are understood. 

In addition, the Court highlighted:

  • that deletions agreed during contract negotiations may be looked at by the courts at a later date.  The Court accepted Strategic’s evidence that the agreement to delete the words “including capitalised interest” could be relied upon to show “objectively the meaning the parties intended their words to convey” and “any objectively apparent consensus” as to their meaning2
  • the importance for lenders to ensure that arrangements in the loan documents relating to capitalised interest and priority match what is to occur in practice, and
  • that lenders may not always be able to rely on boiler plate clauses such as non-waiver clauses.

Our thanks to Sam Dykes for writing this Brief Counsel. For further information, please contact the lawyers featured.


Bos International (Australia) Limited v Strategic Nominees Limited (In Receivership) – [2013] NZCA 643  [12 December 2013]

2  See the Judgment at paragraph 58

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