A recent Court of Appeal decision demonstrates a pragmatic approach to the resolution of errors and omissions in the drafting of long-term construction contracts. The decision overturns an earlier TCC decision which had held that the omission of certain parameters had deprived the contract of effect in certain respects. The Court of Appeal’s decision will be of interest to those operating under PFI or other long-term contracts with poorly drafted financial or performance schedules.

Sutton Housing Partnership Limited v Rydon Maintenance Limited

Sutton engaged Rydon to carry out maintenance and repairs to a large housing portfolio under a long term five-year contract. The contract included a right of termination where Rydon’s performance fell below certain Minimum Acceptance Performance levels or “MAPs” for short. MAPs were defined by the contract as being “the minimum level of performance as measured by a KPI (as set out in the KPI Framework) that the Client is prepared to tolerate such that if performance is worse than that level for that KPI the Client can serve a notice [of termination]".

The KPI Framework was contained in a schedule to the contract and set out various Key Performance Indicators (KPIs) with targets designed to incentivise Rydon to exceed these targets or penalise them for not achieving them.

Despite the various references to MAPs, the KPI Framework did not expressly specify what the MAPs were in relation to each KPI. MAPs were specified, however, in three examples contained in the KPI Framework used to demonstrate how the penalty and incentive scheme would operate. In those examples, the MAPs were 3% below the KPI target in every case.

Over the course of the contract, Sutton became dissatisfied with Rydon’s level of service and served a notice of termination for Rydon’s failure to achieve various contractual MAPs. Rydon claimed that the termination notice was invalid as the contract did not specify any MAPs and because the examples in the KPI Framework were merely illustrative.

Rydon succeeded first in an adjudication on the dispute and again before the TCC in proceedings brought to challenge the adjudicator’s decision. The TCC judge considered the examples to be an insufficient basis to support a right of termination in a long-term contract. In those circumstances, the judge required something clearer. Whilst this conclusion meant that Sutton would be deprived of a right of termination which it was intended to have under the contract, it would not render the contract unworkable as Sutton could terminate by other means.

The Court of Appeal decision

The Court of Appeal found this to be an unduly conservative approach. Whilst care was needed in interpreting rights of termination in long-term contracts, it was clear (and both parties had accepted) that Sutton was intended to have a right of termination for failures to achieve the MAPs. Rydon’s case was based on an accidental failure to specify MAPs in the KPI Framework. This was not therefore a case where there was genuine ambiguity over the existence or scope of a right to terminate, where a court might otherwise require a degree of clarity in the language used in the contract.

The court noted that an absence of MAPs would mean that the bonus provisions for Rydon's benefit in the incentivisation scheme were inoperable, as well as the termination provisions for the benefit of Sutton. Such a result would frustrate the commercial basis of the contract and could hardly have been intended. As the only place MAPs were specified was in the examples, and as each of the examples were consistent, the proper interpretation of the contract must mean that those were the MAPs agreed by the parties. This was, the court concluded, “the only rational interpretation of the curious contractual provisions” entered into by the parties.

Conclusion and implications

This decision should provide reassurance to Employers and Public Authorities contracting on a long-term basis through PFI contracts and the like. Such contracts often contain detailed schedules setting out the commercial basis on which the parties have agreed to regulate performance of the contract over its term. PFI contracts, for example, will often contain detailed payment mechanisms with complex availability and usage formulas. It is inevitable that mistakes and omissions will sometimes be made in the drafting of such contracts.

The present decision provides helpful confirmation that such mistakes need not frustrate the commercial basis of the contract in circumstances where the overall aim and intention of the parties is clear. The court will be willing to “roll up its sleeves” and do its best to ascertain the how the contract must have been intended to work.