The issue in the case was essentially about contractual interpretation. The Defendant (‘HZI’) was the main Engineering, Procurement and Construction contractor. The Claimant (‘ICL’) was a subcontractor, engaged under a design and build contract. The HZI had terminated the contract with ICL, and removed ICL from the building site, due to an alleged failure to proceed regularly and diligently with the works. The relevant clause in the contract read:

“43.1 If [any of a list of terminating events occur] then, subject to sub-clause, 43.1A (…) the purchaser may forthwith by notice terminate the employment (…).”

Subclause 43.1A read: “ In the case of a default by the contractor under [specified terminating events], the purchaser may (at its absolute discretion) notify the contractor of the default and if the contractor fails to commence and diligently pursue rectification (…) within a period of seven (7) days (…) purchaser may by notice terminate the employment (…).

”In the termination notice HZI stated that it did not wish to exercise its discretion under subclause 43.1A. ICL sought a part 8 declaration that the two clauses together were to be read as denying HZI the right to terminate without first giving notice under 43.1A and the seven day rectification period has expired.

Mrs Justice Jefford DBE agreed with ICL. Following Wood v Capita [2017] UKSC 24, Jefford J first held that the textual approach of the objective meaning of the words was appropriate as the contract was a complex commercial document with careful consideration and drafting. The words ‘subject to’ clearly indicated that the right to terminate was conditioned in certain instances by the requirement of notification and seven-day period of rectification. The wording was similarly used in other clauses, clearly indicating that ‘subject to’ was meant to be taken as a qualification of certain contractual rights.

Jefford J also tested the meaning put forward by HZI of the clause, namely that ‘subject to’ did not create a requirement of notification as the matter was left to HZI’s absolute discretion under the term. In doing so she omitted the words ‘subject to’, and found the meaning of the clause to be exactly as HZI suggested. This meant that the words, on HZI’s construction, were redundant. Such an interpretation in a carefully crafted bespoke contract was unlikely.

Finally, Jefford J found that as it is a general right without the need for a specific contractual provision of HZI to require rectification of a breach and put ICL on notice that a failure to do so will result in termination, the words have no meaning if they do not denote the conditioning of the right to terminate by the seven-day notice.The counter-argument was, of course, that on this reading the words ‘absolute discretion’ would have no meaning. Jefford J rejected this, holding that those words emphasise the power of HZI to give notice and thereby initiate the termination process.

The declaration sought by ICL was thereby granted.

The case is a good reminder for lawyers in both drafting and dispute stages of the life of a contract that the court will strive to interpret inconsistent provisions in a contract so far as is possible to keep the term in force, and this can have unexpected consequences for a party relying on the term. A power of a contracting party cannot both be ‘at its absolute discretion’ and ‘subject to’ a different term in the contract without one of those wordings giving way. As ‘absolute discretion’ takes the conditions of decision making outside the limitations of the contract, and ‘subject to term x’ makes that decision making conditional on an express term of the contract, it seems the latter is the naturally superior provision. Where a terminating event occurs, it is always in the party’s absolute discretion whether to terminate – but if that discretion has expressly been limited in the contract, the party is bound by it.