When using defined terms in a contract, how careful do you need to be in their consistent application?
GB Building Solutions (a main building contractor) (GB) engaged SFS Fire Services (SFS) as a subcontractor to design and install a sprinkler system in a Manchester office development. The building was flooded before practical completion of the main contract works.
The case turned on whether the flooding took place before or after the “Terminal Date” – the practical completion of the subcontractor's work. If before, GB would be barred from bringing an action because flooding was a “specified peril” and under the contract “specified perils” were covered by the contractor's all risks insurance so the subcontractor would have no liability for remedying the damage. A core difficulty was that the definition of “Terminal Date” referred to the “date of practical completion of the Sub-Contract Works”. Note that “practical completion” here was lower case, whereas there was a definition of “Practical Completion” in the Schedule which was the “issue of the Certificate of Practical Completion pursuant to the Main Contract”. GB claimed that where “Practical Completion” was capitalised it was to be used as a defined term and, where it was not, practical completion was a matter of fact. SFS instead claimed that “Practical Completion” applied to all instances of practical completion.
The High Court applied the principles of construction as set out by the Supreme Court in Wood v Capita by which the court adopted “the iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated”. As the judge stated, “there may often be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type”. It followed that the judge preferred GB’s interpretation that the definition of Terminal Date in the Schedule referred to practical completion without capitalisation and the definition of Practical Completion in Schedule 1 did not apply. Hence the flooding occurred after the Terminal Date and GB could bring its action for the flood damage.
Why is this important?
The case is a clean application of Wood v Capita, by which contractual interpretation is determined by a review of the contractual wording and the commercial consequences of each suggested interpretation. It also shows that particular care must be taken when drafting key definitions, and ensuring that they are applied consistently throughout.
Any practical tips?
Draft with clarity! If you use defined terms, use them consistently throughout. Otherwise the court may decide that the use or not of capitalised terms was intentional within the contract wording, and this might well prove costly.