Commercial Division Blog

Posted: November 6, 2020 / Categories Commercial, Contracts

Parties' Course of Dealing Used to Interpret Ambiguous Contract Term

On October 22, 2020, the First Department issued a decision in China Privatization Fund (Del.), L.P. v. Galaxy Entertainment Group Ltd., 2020 NY Slip Op. 06010, applying the parties' course of dealing to interpret an ambiguous contract term, explaining:

In a prior appeal, this Court determined that the disputed language in the subject indenture was ambiguous. After extensive discovery, the court conducted a bench trial as to the negotiating parties' intent for the conversion price.

Contrary to plaintiff's argument, the trial court considered admissible extrinsic evidence and properly assessed the evidence in reaching its conclusion in defendant's favor. We reject plaintiff's contention that the testimony of William Barron, the deal attorney for the consortium of which plaintiff was a member, was inadmissible because Barron had no recollection of the negotiations and did not know the parties' intent and because his interpretation of the disputed terms constituted after-the-fact expert testimony that amounted to his personal view about the correct resolution of the parties' dispute. On the contrary, Barron's testimony was based on his participation in the negotiating and drafting of the indenture. Indeed, in a prior appeal from an order granting defendant's motion to continue Barron's deposition, this Court had determined that Barron's testimony established that he led the team which primarily drafted the indenture and that he was familiar with the intended structure of the indenture and its conversion price provisions. Moreover, during the reopened deposition, Barron testified that he recalled the deal and that, based on his participation in negotiations, it was his understanding that there was a fixed floor price.

We also reject plaintiff's contention that certain other testimony and internal documents relied on by the trial court constituted inadmissible expressions of uncommunicated subjective intent. Even if some of those witnesses did not personally participate in the negotiations, the voluminous evidence before the court, taken as a whole, overwhelmingly reflects an intent communicated and shared among the parties to use a fixed floor price. The evidence includes Barron's testimony and corroborative written documents and communications made during negotiations. It also contains the parties' post-contract course of performance, which is highly probative of their state of mind at the time the contract was signed. After the deal closed, defendant and the investors consistently applied a floor price to analyze the conversion price, and in 2011, one of the investors, Canyon Capital Advisors LLC, stated, "It's clear that if a holder converted today, the conversion price is HK $7.44," and converted its bonds to shares in defendant at that price. The evidence also included material such as press releases, annual reports, and notices to noteholders publicly distributed by defendant. The absence of protest following such publications indicates that the investors intended what was published. Significantly, after the deal closed, Mart Bakal of plaintiff sent an email admitting that the lowest price was HK $7.44, and used this floor price in financial statements issued by plaintiff. In addition, defendant had disclosed to the Hong Kong Stock Exchange that it would issue a maximum of 251,612,903 shares at a floor price of HK $7.44.

(Internal quotations and citations omitted).

One reason that commercial parties all over the world choose to have their contracts governed by New York law is that the general rule in New York is if the contract is unambiguous, it is enforced as written despite what someone might later argue in a lawsuit. But when a contract is ambiguous, a court can consider other evidence, including evidence of how the parties performed the contract, in interpreting it. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.