Legal Updates

A commercial agreement is to be construed in light of the business logic behind it

December 27, 2021

A company that borrowed funds in accordance with a loan agreement to which the shareholder was a guarantor did not meet the terms of the loan agreement and a settlement agreement was executed under which the shareholder signed a guarantee for part of the settlement amount.The Court held that the shareholder is a guarantor to the full amount stipulated in the settlement agreement.

Generally, the starting point in the interpretation of a contract is its wording. However, a distinction is to be made between an open agreement formulated in general terms and a closed and exhaustive agreement which entire terms are defined. In addition, in the case of an agreement made between sophisticated and represented parties, the wording will be given a decisive significance, while in the case of an agreement made between private individuals who may use limited contractual wording due to their partial familiarity with the law, a larger weight will be given to the realization of the parties’ will at the time of execution. Here, the settlement agreement is an exhaustive one, which terms are mostly defined and was executed between two sophisticated parties and therefore the wording of the agreement must be given a decisive status. The settlement agreement does not stipulate that it cancels the loan agreement or the guarantee, and instead stipulates that "for the avoidance of doubt" the shareholder guarantees a certain amount of the settlement. Furthermore, an agreement should be read in light of its commercial logic and there is no logic that a lender would agree to waive the guarantee for the full amount as part of the settlement agreement.