In our dispute resolution work, we see many examples of disputes arising because contract terms were unclear or not tailored to the specific project. There have been a number of decisions recently that provide clear examples of how not to draft a contract. They are a useful reminder that it is worth reviewing your contracts from time to time to ensure they reflect both your current trading practices and the current law. Here's our pick of the recent decisions.
Are you sure you know what your time limits are for serving notices?
In Nobahar-Cookson & Ors v. The Hut Group Ltd  EWCA Civ 128 (22 March 2016), the Court of Appeal had to decide how to construe a contractual time limit for the making of warranty claims under a share purchase agreement (the SPA). The parties had made warranty claims against each other under the SPA but a dispute arose as to whether one of the parties had given its notice of claim within the contractual time limit.
The clause in question was as follows:
"The Sellers will not be liable for any Claim unless the Buyer serves notice of the Claim on the Sellers … as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter."
The words in bold were ambiguous and their interpretation was keenly argued in the hearing. Lord Justice Briggs determined that they could mean one of three things, namely that the notice giver was:
- aware of the facts giving rise to the Claim (even if unaware that those facts did give rise to a claim); or
- aware that there might be a claim under the warranties; or
- aware of the Claim, in the sense of an awareness that there was a proper basis for the Claim.
(See paragraph 9 of the judgment.)
In considering which interpretation to make, the court had to consider various legal principles including whether the "contra proferentem" principle applied. This rule requires the court to construe the unclear words against the one putting them forward. The trial judge had rejected this approach as no longer of any significant weight for construing commercial contracts, and a principle of interpretation of last resort. However, the Court of Appeal disagreed. In cases where the wording of the contract is unclear and a "linguistic, contextual and purposive" analysis does not help to resolve the issue, the contra proferentem rule can be applied. The court therefore adopted the narrowest interpretation of the limitation clause – option (c) – as the correct interpretation.
Tip: check your contract terms – and any amendments – are clear and make sense
We do not deal here with the intricacies of the court's thinking behind the application of the contra proferentem rule. Instead, we highlight the fact that this dispute – about the meaning of one phrase – had to be taken all the way to the Court of Appeal. The parties had to bear all the attendant cost and time consequences and would, we are sure, agree that it is better, by far, to stomach the extra time and expense of preparing a watertight contract at the outset than to risk relying on the courts to work out what you agreed with the other party much later.
The effects of amending a standard form contract
All those who work in the construction industry will be familiar with or have come across at least one of the standard form contracts. They are relied on as tried and tested mechanisms to ensure that projects are operated efficiently and fairly from start to finish. More often than not, however, the standard forms are amended for one reason or another (or many). The risks inherent in making such amendments were set out clearly in the Technology and Construction Court's (TCC) decision in Murphy & Sons Ltd v. Beckton Energy Ltd  EWHC 607 (TCC).
In the Murphy case, the parties entered into a contract relating to the construction of a power plant using the FIDIC Yellow Book form. As part of this contract, Murphy agreed to supply a performance bond. The contract also set up a new regime in clause 8.7 for dealing with delay claims for liquidated damages. Unfortunately, the parties' amendments to the contract for claiming damages for delay effectively set up an alternative regime without deleting the standard form's original regime under clause 2.5.
When the project was delayed, Beckton gave notice that it was going to make a claim for liquidated damages under clause 2.5 by calling on the bond. Beckton then changed its position and based its claim on clause 8.7, that being an easier route to recover liquidated damages as there was no requirement for determination by the Engineer. Murphy argued that Beckton had to first go through the procedures set out in clause 2.5 before calling on the bond and it was left to the court to construe the contract terms. The court concluded that clause 8.7 had all the constituent parts to enable it to stand and operate apart from clause 2.5: it was a totally separate mechanism. There was therefore nothing to prevent Beckton from making a call on the bond without the need to go through the clause 2.5 procedures.
Tip: check your amendments are consistent with the terms of the standard form.
The parties might not have found themselves arguing these points in court had they checked their amendments were consistent with and not in conflict with the standard form terms. The effects of contract amendments on the whole contract should always be thoroughly reviewed before the parties agree them.
The dangers of deleting words from standard form contracts. Once they're gone, they're gone … right?
While we're on the topic of amending contracts, the Court of Appeal has confirmed that words deleted from a contract may be taken into account to resolve ambiguities in the remaining words.
Narandas-Girdhar and another v. Bradstock  EWCA Civ 88 involved a dispute on the validity of an individual voluntary arrangement (IVA). The facts are not relevant here save to say that the debtor had applied to the court to set aside the IVA arguing it was invalid. In ascertaining whether or not the IVA had been validly approved at a creditors' meeting, the court had to consider how to interpret the debtor's modified proposal about the IVA and whether wording deleted from the proposal could be taken into account.
At first instance, the judge held that, to establish the purpose of the modification, he was entitled to consider the words deleted from the original. On this basis, he refused the application. The debtor appealed, claiming; "these removed provisions fell out of account for the purposes of interpretation''. (See paragraph 18 of the judgment.)
The Court of Appeal dismissed the debtor's appeal. The court confirmed the judgment in Mopani Copper Mines PLC. v. Millennium Underwriting Ltd  EWHC 1331, where Clarke J claimed "the deletion of words may be taken into account … if the fact of deletion shows what … the parties agreed that they did not agree and there is ambiguity in the words that remain". (See paragraph 19 of the judgment.)
The Court of Appeal also agreed with Clarke J that, where a court has recourse to deleted words, it must exercise care as to what inferences, if any, can be drawn from them. If the remaining words are "unambiguous, reference to the deletions is unnecessary" (Keating on Building Contracts).
Tip: remain vigilant about the effect of deletions on the rest of the contract
In an industry where contracts are used and adapted regularly, contracting construction parties and their lawyers must remain vigilant when deleting words and provisions from standard form contracts. It is important to consider the effect of the deletions on the remaining provisions and to adapt them if necessary to ensure they make sense and fit the parties' circumstances. If the remaining clauses are ambiguous and incomplete, the court may ask to see the words that were deleted to help determine the parties' contractual intention.
Think of amending contracts as a process of brushing unwanted clauses under a rug: the provisions are out of the picture while the going is good. However, should the remaining clauses prove difficult to understand and implement, the court may lift the rug and take a good look.
Incorporating standard terms of contract
Unfortunately, carelessness about whose standard terms are included in a contract is a common feature of the negotiating process in the construction industry. Those who are concerned to ensure their own conditions are incorporated are often the ones who have learnt from experience the down side of agreeing inadvertently to the other party's terms.
In Commercial Management (Investments) Ltd v. (1) Mitchell Design and Construct Ltd and (2) Regorco Limited (formerly Roger Bullivant Limited)  EWHC 76, the TCC had to decide preliminary issues about whether certain terms were included in the sub-contract and whether the Unfair Contract Terms Act 1977 (UCTA) applied.
The first defendant (Mitchell) was a contractor engaged to design and build a warehouse. Mitchell sub-contracted certain ground treatment works at the site to the second defendant (Regorco), who was also sub-contracted to carry out piling at the same site under a separate sub-contract.
The facts involved a process that will be familiar to many of you: a pre-contractual "to-ing and fro-ing" between the parties of quotations, orders and contract documents that included both Mitchell's and Regorco's own terms and conditions and hand-written amendments to the terms. Suffice to say, it wasn't clear which terms were included in the sub-contract. When defects materialised in the ground compaction work, the uncertainty about which conditions applied became crucial.
In November 2011, nine years after practical completion, the occupying sub-tenant complained of settlement of the slab beneath the warehouse. By then, Commercial Management (Investments) Ltd (CML) had acquired an interest in the warehouse, including the benefit of a collateral warranty from Regorco in relation to the works. CML made a claim in the TCC against both Mitchell and Regorco.
Regorco relied on its own conditions, which included a rather onerous clause 12(d). This clause provided that all claims had to be notified with 28 days of an alleged defect appearing and claims would be waived and barred if not notified within one calendar year of the completion of the works. CML argued that Mitchell's terms applied but that, in any event, clause 12(d) did not comply with UCTA. The court had to review the parties' correspondence and their contract negotiations and concluded that this term had not been included in the sub-contract.
The court was also asked to decide on whether such a provision was unreasonable under UCTA. The judge concluded that, at the time, the sub-contract was made, given the nature of the works, it was not reasonable to expect Mitchell to comply with clause 12(d) and meet the 28-day and one-year time limit.
Tip: don't underestimate the value of a properly negotiated (and signed) contract
Two points arise from this decision relating to contract negotiations:
- contracting parties should not underestimate the importance of getting a properly drafted and negotiated contract in place; and
- any negotiated amendments to a contract must still comply with UCTA: they must still be reasonable. Had the court found that clause 12(d) was validly incorporated into the parties' contract, it would nevertheless have been unenforceable in the circumstances because it was unreasonable under UCTA.
Guidance for the courts on how to interpret a commercial contract
Last year, the Supreme Court provided guidance in Arnold v. Britton  UKSC 36 on the correct way to interpret an agreement. That case involved the interpretation of a service charge clause in a 99-year lease. However, the guidance is of application to commercial and construction contracts and is usefully summarised by Lord Neuberger of Abbotsbury in paragraph 15 of the judgment:
"When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v. Persimmon Homes Ltd  UKHL 38,  1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant word ..."
Lord Neuberger highlighted a number of factors to consider including the following (as set out in paragraphs 17 to 22 of the judgment):
- "the reliance placed in some cases on commercial common sense and surrounding circumstances (for example, in Chartbrook, paragraphs 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed …
- when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning …
- commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made …
- while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed …
- When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties …
- in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention …"
Round-up – general points to keep in mind when negotiating a construction contract ??
- Always read the terms and conditions and contract documents before you agree to carry out works. Do not agree to the other party's terms and conditions unless you understand the liabilities and duties you are taking on. Ensure all contracts are signed.
- If you or the other party suggest amendments, check that the changes are consistent with the other contract terms. Agree the contract terms before starting work, preferably in writing.
- Ensure the terms are legible. If terms and conditions are used, ensure the font is of an adequate size.
- If in doubt, seek legal advice: it is cheaper to employ a specialist construction lawyer to update or create your contracts than to employ a litigator to argue about what your contract means.