Understanding contractual terms

The problems with understanding and interpreting contractual terms are many. Even seemingly simple statements can sometimes carry a hidden meaning for the lay reader. Equally, there can be a disconnect between what we think a contractual condition obliges us to do, and the strict meaning of the statement and its consequences.

Griffiths & Armour
03 September 2014

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Case study: Understanding contractual terms 1

Case study: understanding contractural terms 2

For example, we may agree in contract to ‘ensure’ that something comes about e.g. a set of drawings by a particular deadline. Unfortunately, flooding has caused a power cut, meaning that the computer systems on which the drawings are stored cannot be used and no-one can gain access to the office to retrieve back-ups. Do these circumstances relieve us of the obligation to ensure the drawings are with the client at 17:00? Usually not.

“Much of this chapter covers circumstances where there is little doubt as to the meaning of the words in the contract. There are, however, times where the meaning is unclear with two or more interpretations possible and little guidance in the drafting as to which interpretation should prevail.”

Scenarios such as this call for us to understand what we mean when we agree, in this case, to ‘ensure’ something comes about. Unless there is language to the contrary, we have in essence ‘guaranteed’ that something will happen. If it does not, the party to whom the promise has been given has a right to claim for the consequences of that breach.

When reviewing such obligations, one might be tempted to think that in such circumstances we will be relieved of the strict requirement to provide the documents on time - “they’ll be happy giving us a day or two longer when they know why”, is an easy comfort blanket to reach for.

The reality is that where the terms are unambiguous and the client aggrieved, a literal interpretation of the words of the contract is usually sought and obtained by the injured client.

Much of this chapter covers circumstances where there is little doubt as to the meaning of the words in the contract.

There are, however, times where the meaning is unclear with two or more interpretations possible and little guidance in the drafting as to which interpretation should prevail. It is here where we shall begin.   

Saying what we mean

As non-lawyers, we might from time to time dip into the rules of contractual interpretation, usually as a result of a particular case throwing up a distinction between words we had hitherto thought to mean the same thing, but by and large this world of ‘literalism’ passes us by. Generally, this is no bad thing.

However, understanding the obligations to which we sign up is fundamental. Having got this uncomfortably obvious point out of the way, it is nevertheless one which in practice can be a difficult goal to reach, for a number of reasons. At the “legal” end of the spectrum, we might simply not be aware of the legal significance of a form of words and whilst we understand the literal meaning, there might be some obligation inferred as a result of past case law. Perhaps, as is so often the case, we may simply not have the time to review every word of each contract that we sign, with the result that an innocuous liability stays hidden from view. 

This chapter is certainly not intended to instruct the reader in the fine art of contractual interpretation – that is far beyond the scope of this work. However, no chapter on this subject is complete, without at least a summary of what the courts try to undertake when interpreting ambiguous contractual terms at issue.

Why interpret at all?

Perhaps the first point to consider is that contracts often need legal argument to determine what they actually mean. Indeed, disputes regarding the meaning of contractual terms are one of the largest sources of litigation. On the face of it, this seems unusual, particularly when one considers that the contracts have, more often than not, been drafted by lawyers in the first place who should know what they mean.

The difficulty lies not least in the fact that contracts cannot cater for every contingency. Given any construction project of value and the associated documentation that goes with it, it is surprising that disputes are not more commonplace. By their very nature, contracts cannot cater for every eventuality and the application of ‘standard’ contract terms to novel situations can be genuinely difficult. Equally, the words used when drafting contracts are not preserved in aspic – their meaning changes not only over time, but in the context in which they are used in the contract and, moreover, in the context of the situation against which they are being read to seek clarification of the parties’ responsibilities. 

It’s literally true

In times past, a ‘literal’ interpretation of the contract was the norm. When determining what ambiguous terms meant, the courts simply read the contract and adjudicated on what the meaning of those words was. It was immaterial in what context the agreement was entered into, or what the parties thought, wanted or intended by using them. This can produce unfortunate results for those who did not perhaps fully understand what they had agreed to

A series of cases shifted this approach to what has been called a ‘purposive approach’. In dealing with ambiguous contractual terms, the courts must now do more than simply read and interpret the words on the page. 

They need to look at what meaning the document would convey, not to a judge, or indeed the parties, but to the reasonable man having the background knowledge of the parties in the situation in which they were at the time of the contract. The courts have developed quite detailed rules relating to interpretation, but it is the parties’ intention that is at the heart of the solution when the meaning of the term is in dispute.

Where the meaning is clear, however, the courts are still prepared to give a literal interpretation of what has been put to paper, particularly in the case of commercial disputes, where it is usually deemed that the parties have had the opportunity to seek legal advice.

Even the most beneficial terms can be useless if not correctly used

See case study: Understanding contractual terms 1

The example above is by no means the only example of a claim where a consultant was deemed to have passively accepted a contractor’s alternative design because he did not raise any clear objections to it. The Association for Consultancy & Engineering (ACE) standard appointment agreements contain the following clause of relevance to contractor designed portions: 

“Design by contractors or sub-contractors F2.3 The Consultant may recommend to the Client that the detailed design of any part of the Works should be carried out by a Contractor or Sub-Contractor and the Client shall not unreasonably withhold consent to such recommendation. The Consultant shall examine such detailed design in accordance with the provisions relating thereto in Part G: The Schedule of Services and integrate it into the Services. The Consultant shall not be responsible for such detailed design or liable for defects in or omissions from it.”

Note that, in order for a consultant to be absolved from liability for the contractor’s design, he must recommend that it be carried out by a contractor/sub-contractor and obtain the client’s consent to it. 

See case study: understanding contractural terms 2

This example relates to a claim against a consulting engineer in connection with this clause and which resulted from the failure of a specialist contractor’s foundation design.

“In dealing with ambiguous contractual terms, the courts must now do more than simply read and interpret the words on the page. They need to look at what meaning the document would convey... to a reasonable man.”

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Introduction
Understanding contractual terms
Indemnity clauses
Strict liabilities
Certification
Net contributions and limits of liability
Novation
Closing remarks