Disputes between parties to a written agreement almost always involve disagreements about the meaning and effect of particular contractual terms. When asked to decide such disputes, the courts seek to give effect to the presumed intention of the parties at the time of entering into the agreement, mainly by reference to:
- The natural and ordinary meaning of the words used: what would a reasonable person, having appropriate regard to the commercial context of the agreement, understand by the disputed term?
- The course of dealings between the parties: in performing the contract did they consistently behave in accordance with a particular interpretation?; and
- Custom and practice in the relevant commercial sector or industry.
Unless certain exceptions apply the court will not, however, consider evidence of pre-contractual negotiations when interpreting a particular term. Persimmon Homes Ltd almost fell victim to this rule in a dispute with Chartbrook Ltd. It had to go all the way to the House of Lords (as it then was) to have a contractual payment calculated as had been intended, because the contract, as worded, did not accurately reflect that. The difference was worth more than £3.5 million. The addition of five words to the provision in question would have avoided the problem.
Existing contractual provisions
If you discover existing contractual provisions that do not accurately reflect your intention at the time of entering into the agreement, make a note to clarify the position at the next possible negotiation opportunity (e.g. on renewal).
If a dispute arises in the meantime, consider the following options:
- Rectification: an equitable remedy available where it is both obvious, viewed objectively, that there has been a mistake in drafting; and clear what the parties actually intended. Evidence of pre-contractual negotiations is admissible (indeed vital) in this context. Although rectification is only available in limited circumstances and can be hard to prove, it is often sought in the alternative to other remedies, in order to ensure that evidence of pre-contractual negotiations is seen by the court.
- "Private dictionary": where a term does not have a conventional meaning, or does but is intended by the parties to have a different meaning, the courts will consider evidence of pre-contractual negotiations. For example, "preferred supplier status" has been held to be a "private" term.
- Evidence of pre-contractual negotiations is admissible in so far as it helps the court to determine the general background to a transaction. This is another route often used by parties to get such evidence before the court.
- The courts are increasingly willing to consider evidence of standard industry practice, although it will be a secondary consideration to the intention of the parties.
New agreements: key points to consider at the drafting stage
It is vitally important to ensure that your intentions are made clear at the drafting stage, to avoid disputes and put yourself in the best position in the event that a dispute does arise. Particular attention should be paid to:
- Background/Recitals: the importance of this opening section of an agreement is often overlooked. The background section lists agreed statements setting out the purpose of the agreement; the parties' intentions in entering into it; and sets the scene for the operative provisions of the agreement. For example, it is permissible to achieve a comprehensive settlement of all possible causes of action, even including allegations of fraud, if it is made absolutely clear in the settlement agreement that this is what the parties intend.
- Definitions: clear, tight and consistent definitions are key to avoiding any ambiguity in contractual terms. Where you are using a "private" term, the safest course of action is to provide for it specifically in the definitions section.
- Figures, times and dates: particular care is needed here. For example by "after 12 months" do you mean "on the expiry of" or "any time after the expiry of" 12 months?
- Parties: have you included all relevant parties (including any relevant subsidiaries) and considered structuring the agreement as a deed if there is any uncertainty about consideration?
- Precedence: where there is any possibility of conflict between contractual provisions, particularly when referring to separate terms and conditions, ensure that you have specified clearly the order of precedence that is to prevail.
- Termination and events of default: have you made sufficiently clear the circumstances in which the parties may terminate the agreement; and the consequences of termination?
- Industry custom and practice: the courts are increasingly willing to consider this, but the intention of the parties takes precedence. Do not assume your agreement need not include terms that are standard in your industry. On the other hand, if you intend to depart from standard industry practice you should make this clear.
Remember that the courts will construe an ambiguous contractual term against the party seeking to rely on it, so you should take particular care with contractual terms that are included for your benefit or protection.
In case a dispute does arise, you should also keep an orderly paper trail evidencing:
- The pre-contractual negotiations. For example, ensure that all drafts are numbered and dated with changes clearly tracked; and that all relevant correspondence is preserved. There may well be an argument that an exception applies to allow the court to consider this evidence; and
- The course of dealings in performing the contract (particularly regarding commercial and payment procedures).
- The clearer your intentions are specified in an agreement, the smaller the risk of a dispute, expensive litigation and/or an adverse finding in court. The background and definitions sections should be the cornerstones of your agreement.
- Since it can never be guaranteed that disputes will not arise, ensure that you keep an orderly paper trail of all relevant evidence.
- If a dispute arises and evidence of pre-contractual negotiations would support your position, consider whether any of the avenues for introducing this in court are available to you.