Legal Updates

In a contract between two sophisticated parties the wording of the contract governs side by side with its economic logic

March 10, 2022

As part of a financing for a purchase transaction, the financing party received an option to purchase one of the assets, in lieu of the recipient of the financing, within 30 days of a written notice of termination of the transaction by the seller of that certain asset. When the financing party exercised the option the recipient contended that 30 days lapsed since it gave notice to the financing party of the termination of that asset purchase transaction and thus the option lapsed.

The Court held that the option was duly exercised. Generally, in the interpretation of a contract, decisive weight should be given to its wording, especially when interpreting a business contract executed between sophisticated parties. However, when there is an argument between the parties regarding the interpretation of the contract, its economic logic and reasonableness should also be reviewed as they can serve as a guideline for the parties' intent. Here, beyond the fact that the wording of the agreement indicates that because the purchase transaction was canceled, the financing party had the right to exercise the option, the economic logic, according to which the option agreement was executed due to uncertainty which clouded the purchase transaction and in order to grant the financing party security, also indicates that a written notice signed by the terminating seller is required to commence counting the 30 days option period and notice by itself does not suffice.