Contracts should regulate how a project is carried out. They establish a legal framework for the parties’ relationship that should also set up a mechanism for resolving any issues. At least, that’s the theory…
In reality, most contracts are rarely consulted once agreed. That’s fine if the parties get along on site. But if disagreements arise, the wording of the contract becomes all important. Unclear wording makes arguments more likely: goodwill can be soon lost, the project suffers and profits dwindle.
Example 1: unclear work scope and delay provisions for sectional completion
In Vinci Construction UK Ltd v. Beumer Group UK Ltd [2017] EWHC 2196 (TCC), the claimant (Vinci) was contracted to develop part of the South Terminal at Gatwick Airport for Gatwick Airport Ltd.
Vinci subcontracted various of the baggage handling system works to the defendant (Beumer) using a contract based on the NEC Engineering and Construction Subcontract (Third Edition) with amendments. The subcontract provided for sectional completion dates and the payment of liquidated delay damages if those dates were missed.
Delays occurred triggering the subcontract compensation events procedure. The parties reached a settlement agreement to extend the key dates but could not then agree on how to allocate delay damages under the subcontract in the light of that settlement agreement.
Beumer argued that the provisions for sectional completion and delay damages were, following the settlement agreement, “uncertain, inoperable and unenforceable” – and an adjudicator agreed. Vinci then went to court for a declaration on the proper construction of the subcontract as to whether the provisions were valid or unenforceable.
At court, the parties agreed on the overall scope of the subcontract works. However, they could not agree on whether certain of the works fell within section 5 or 6 and the defined scope of those works.
Vinci argued that the allocation was sufficiently identifiable from the subcontract as amended by the settlement agreement and the provisions were therefore operable and enforceable.
Beumer disagreed, arguing it was impossible to define what work would fall within section 6. The provisions were therefore too uncertain to be enforced.
How does a court go about interpreting a contract provision?
When asked to interpret a contract, a judge will always start with what the parties have actually written. A court will not interpret a provision unless the parties can show clearly that something has gone wrong with the wording used. There must also be a clear answer to the question: what would a reasonable person, knowing what the parties did at the time, have understood the parties’ intention to have been when drafting the clause. If the intentions are clear, the court will interpret the wording by analysing the actual words used in their documentary (i.e. contractual), factual and commercial context.
Judges are reluctant to find unclear contract terms void for uncertainty and will try to find an interpretation that gives effect to the parties’ intentions. However, if the judge cannot reach a conclusion on what was in the parties’ minds – and it is legally or practically impossible to give effect to the parties’ intentions – then he/she will find the clause void. The judge has no power to redraft the wording.
In Vinci, the judge concluded that the parties had intended the works to be completed in sections and that delay damages would be payable if the sections were not completed on time. After reviewing the various schedules, Works Information and flow diagrams, the judge also concluded that the works that fell within sections 5 and 6 were sufficiently identifiable and certain and that the sectional completion and delay damages provisions were operable and enforceable.
Example 2: an ambiguous limitation of liability clause
Another example of the court being asked to interpret a contract is found in Royal Devon and Exeter NHS Foundation Trust v. ATOS IT Services UK Ltd [2017] EWHC 2197 (TCC). The defendant (ATOS) had contracted to supply the claimant (the Trust) with various electronic document management services for nearly £5 million. Unhappy with these services, the Trust terminated the contract and claimed nearly £8 million in damages for wasted expenditure incurred due to ATOS’ breach of contract.
When ATOS relied on a limitation of liability clause, the Trust argued the meaning of that clause was unclear and therefore unenforceable. The judge considered the legal principles referred to above, acknowledging that the courts will give effect to provisions that reflect the parties’ commercial allocation of contractual risk. However, where provisions limit a party’s liability for its own wrongdoing, their wording must be clear and unambiguous to be enforceable.
Here, the judge agreed the limitation clause was not “drafted with precision” but then considered whether it could be made to make sense with sufficient clarity and certainty to make it enforceable. She focussed on the parties’ intentions when drafting the clause and the meaning of the relevant words in their documentary, factual and commercial context. The judge concluded that the clause had two interpretations: one of which made commercial sense on the facts; the other did not. She applied the former (in favour of ATOS) and held the limitation clause valid and enforceable.
Example 3: unclear notice provisions
In Interserve Construction Ltd v. Hitachi Zosen Inova AG [2017] EWHC 2633 (TCC), the defendant, (Hitachi) had served notice of termination without serving a prior seven-day notice of default.
The claimant (Interserve) sought a declaration from the court that Hitachi’s contractual right to terminate “(at its absolute discretion)” was “subject to” it giving seven days written notice to Interserve of the default before terminating. The meaning of the words in quotes was disputed. The judge was able to ascertain the intention of the parties and interpret what they had meant by the quoted words by (amongst other things), considering how those words had been used elsewhere in the contract. The judge held that Hitachi should have given the prior notice.
Clearly worded contracts matter – make sure they reflect your intentions – 5 tips
- Your contract must say what you mean. The scope to argue later that it was incorrectly worded is extremely limited. You will need to establish a very strong case that something has gone wrong with the wording before the courts will agree to try and interpret what you meant. Even then, the courts will not reformulate alternative wording.
- Use clear wording that accurately reflects the parties’ agreed intentions to minimise future disagreement.
- If you need to amend a standard form, take advice to ensure any necessary amendments work with other provisions.
- Ensure the project team have a working knowledge of and understand how the contract works, (particularly if there are bespoke amendments). Arrange regular team updates to check compliance with the contract.
- If you amend the contract during the project to deal with issues such as delay, ensure the amendments are in writing, are clearly drafted and are consistent with the terms of the original agreement.
This article was originally written and published on the internet by Dentons on 18/12/17.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
BDAS specialise in: providing contract advice, resolving construction disputes, managing construction claims & adjudications and will give you competitive, independent advice tailored to your specific construction problems.
If you could benefit from this please call Jon now on 07795 231 231 or email: Jon@BDASweb.com