The Court of Appeal has held that the methodology of calculations set out under the heading “example” was binding, rather than merely illustrative.

The case of Sutton Housing Partnership Limited v Rydon Maintenance Limited [2017] EWCA Civ 359highlights the need for care in contract schedule drafting. It also demonstrates the application of existing authorities on contractual interpretation to avoid a conclusion that was described as an “absurdity”.

Facts of the case

In May 2013 Sutton engaged Rydon to repair and maintain housing stock under a five year contract. The “minimum acceptable performance” levels (MAPs) were defined with reference to the figures in three tables under the heading “example”. If performance was worse than those levels, with the requisite notice, Sutton was entitled to trigger early termination. Rydon was also entitled to receive bonus payments if MAPs were exceeded.

During 2014 Sutton became dissatisfied with Rydon’s service. Following an exchange of correspondence Sutton finally served notice terminating for Service Provider Default, on the basis that Rydon had failed to meet the MAPs.

A dispute then arose about the lawfulness of that termination with Rydon contending that there were no MAPs under the contract and therefore Sutton could not terminate. Sutton argued that the MAPs could be derived from the example calculations.

At adjudication Rydon was successful and Sutton commenced proceedings seeking declarations to challenge the outcome of the adjudication. The declaration at issue was that the contracts contained the specified MAPs.

The action came before the TCC, which found in favour of Rydon stating that the contract does not provide for MAPs. Sutton appealed to the Court of Appeal on the grounds that the contract expressly provided for the MAPs pleaded in the particulars of claim, or that in so far as the contract did not set out the MAPs expressly, it did so by implication.

Judgment - interpreting the contract

Lord Justice Jackson stated that while he was of the opinion that the schedules were poorly drafted, the facts pointed towards the fact that both parties must have intended to provide for MAPs. If there were no MAPs, Sutton would be deprived of its power to terminate for poor performance and Rydon would be deprived of their right to bonuses. The only place where they could be argued to appear was in the three “examples” in the framework.

Restating the approach of the Supreme Court in Arnold v Britton, Jackson LJ concluded that the contract properly construed must mean that the MAPs were in the examples. Although the performance figures were hypothetical, the calculations formed the contractual mechanism for calculating the MAPs.

He stated “The contract in this case is a commercial one, made between a local authority and a building contractor. Self-evidently, Rydon intended to receive all the bonuses that were due to it under the incentivisation scheme. That was only possible if the contract specified MAPs. Also self-evidently, Sutton intended to retain their valuable power to terminate for poor service….That was only feasible if the contract contained MAPs.”

The decision in this case focused on the consequences of the interpretation that there were no MAPs, and the reciprocity of the use of MAPs in the contract. It can be seen as the application of common sense in avoiding a conclusion that couldn’t have been intended by either party. The courts will not relieve commercial parties from a bad bargain but the approach in this case was to interpret the contract on the basis of what both must have intended. As Jackson LJ stated, it was the “only rational interpretation of the curious contractual provisions”.

Whilst the case was decided on its facts, many contracts include complex payment mechanisms and worked examples using formulae. The case is an important reminder that those mechanisms and formulae may be contractually binding even if expressed as an example.