Contractual interpretation: what’s there and what’s not
So, you’ve successfully navigated the occasionally perilous waters of negotiation and reached an agreeable foundation for a deal. The next step, ideally, is to set out the terms of your deal in ‘black and white’.
Whether you are buying a business, selling a business, entering into a new commercial transaction or varying an existing commercial arrangement, it is always advisable to have the terms of the deal laid down within a written contract. This has several benefits, such as preserving the understanding of the parties from the outset, flushing out any potential misunderstandings and clarifying the rights and responsibilities of everyone involved. Furthermore, it helps to govern any ongoing relationship between the parties including, for example, any liabilities or future exit mechanisms.
Despite the precautions and best intentions of the parties, sometimes a deal might nevertheless go awry. The resulting case law can offer an insight into the interpretative faculties of the courts and, in turn, this can provide useful lessons to bear in mind when negotiating and drafting contracts. Recently, the courts have determined some interesting decisions, including:
- Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd ( EWCA Civ 396) – the parties had established a long-term agreement for the exclusive manufacture and supply of electric motors. A breach of contract was alleged after the buyer purchased alternative improved motors from another manufacturer. In finding that the buyer was not in breach, the court held that it will not rewrite or improve the parties’ written agreement if it later transpires to have been a bad deal for one of the parties and also that it was not for the court to interpret the drafting of the contract imaginatively. The court also decided to look at the issue of whether a contractual term that stated it could be varied in writing only prevented the effectiveness of a verbal variation or a variation by conduct, and held that it did not. It’s worth bearing in mind this does not make such a clause obsolete and indeed it retains many merits, as a written variation will always be easier to prove evidentially, whilst a variation that’s not in writing will face a greater burden of proof. It does demonstrate, however, that you should always exercise caution in your actions.
- Transocean Drilling UK v Providence Resource plc  EWCA Civ 372 – this case arose from a defect in a semi-submersible oil-drilling rig, where the contract contained a mutual undertaking and indemnity in respect of consequential losses. The court noted the importance of the equal bargaining power of the parties and, as a result, took the view that it should not override the parties’ express drafting. It held that the natural meaning of the language used when drafting the contract was paramount when interpreting it.
- Narandas-Girdhar v Bradstock  EWCA Civ 88 – this case related to a challenge in respect of the validity of an individual voluntary arrangement. The court held that, where there are ambiguities in the drafting, it would look to the previously removed provisions as an aid to construction. By taking into account deletions, the court was better able to interpret the intention of the parties because, essentially, “the fact of deletion shows what it is the parties agreed that they did not agree”.
No matter how carefully you draft your contracts, there is unfortunately going to be the possibility of inconsistencies and misunderstandings arising at a later date. Setting out your agreement in writing is the first step to help reduce the chance of such issues arising, but it is worth remembering that it is always best to have an expert on hand help to draft, or at least review, your contracts.