When negotiating contracts, business people should be aware of the recent decision in the High Court in the case of Spencer v Secretary of State for Defence [2012].

The case related to the tenancy of agricultural land and whether the parties had agreed that a rental figure should be assessed on review. The court held that, when deciding whether to imply a term into a contract, knowledge of clear and well known legal principles may be attributed to the parties, even if they were in fact unaware of them. If the court's ruling had been made any other way, the tenant would receive a 'windfall' that was not intended or expected.

Although the facts in this instance were exceptional, the judgment establishes a clear principle: when deciding whether to imply a term into a contract, the reasonable business person is endowed with knowledge of clear and well established legal principles, even if they are ignorant of them. This principle would apply to the negotiations of all types of contracts, whether for the supply and purchase of goods or services, distribution contracts, manufacturing agreements etc.

So what should you do differently as a result of the ruling?

Most companies have standard terms of business and template contracts relating to its core business which are drafted in their favour. It is crucial for businesses, when negotiating and entering into contracts, to ensure that:

  • The contract includes an 'interpretation' clause which seeks to exclude some of the clear and well-established legal principles that the parties do not want to apply to the contract. For example, you will often find a clause in a commercial contract to the effect that that "the words 'include' and 'including' shall be construed without limitation". This is since there is a well known legal principle that use of such words excludes from the scope of the clause similar but distinct items. The application of the principle is often not what the parties intended when agreeing the terms of the contract.
  • The contract includes the relevant 'boilerplate' clauses properly tailored to the context of the transaction. Boilerplate clauses deal with those generic contractual provisions which are generally found in commercial contracts, whatever the nature of the transaction. They can have significant practical implications for the parties. For example, they may include provisions which restrict rights of assignment, impose obligations of confidentiality, or define events of force majeure (also known as 'Acts of God') when the carefully negotiated contractual terms will not be capable of enforcement.
  • The commercially agreed terms are drafted clearly and unambiguously. Whilst this is commonsense, a vast majority of court disputes arise from two slightly different interpretations of the same clause. The court then has to apply its own interpretation to that clause, applying the many legal principles governing the interpretation of terms of contracts.
  • Your standard terms and template contracts are compliant with the latest legislation. Particular clauses can be deemed 'void' and thus of no effect if they are contrary to law, despite both parties having negotiated and agreed them, often in good faith.

Interpretation clauses and boilerplate provisions are often in a more or less standard form, which means that they may not always receive the attention they deserve while the "commercial" terms are being negotiated. This makes it all the more important to include appropriate clauses.

Of course, the best contracts will lie untouched in the bottom of your desk drawer, just gathering dust. If the contract is well-drafted, it will be clear, concise and, as a result, all contracting parties will know where they stand.