CONTRACT DRAFTING PRACTICAL GUIDANCE & BEST PRACTICE PRACTICE - - PowerPoint PPT Presentation
1 CONTRACT DRAFTING PRACTICAL GUIDANCE & BEST PRACTICE PRACTICE John Bennett John Bennett Eversheds www.mblseminars.co.uk 0161 793 0984 2 What you will learn (1) What you will learn (1) Why it is important to start with an open
www.mblseminars.co.uk 0161 793 0984
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These materials are provided solely as teaching examples in the context of discussion of their use and different styles of drafting and should not be used as precedents
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MBL W ebinar - “Contract Drafting – Practical Guidance & Best Practice” I ntroduction This webinar will give you practical guidance on drafting commercial contracts in the context of the latest case law on contract interpretation. It is becoming harder to draft contracts in a way that preserves freedom of contract as the courts show a greater willingness to intervene where there are ambiguities in the contract drafting. This means that it has become even more important to avoid uncertainty, especially when allocating risk. Notes to accom pany slides Slide 5 – Modern Law of Contact I nterpretation: Traditionally the court’s role in construction had largely been limited to “gap filling” to the extent that it is necessary for “business efficacy”. Things changed over the 1980s and 1990s with arguably the key judgment being that of Lord Hoffmann in this famous passage from Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28: “… I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen- Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of "legal" interpretation has been discarded. The principles may be summarised as follows: (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects
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These materials are provided solely as teaching examples in the context of discussion of their use and different styles of drafting and should not be used as precedents
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(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (See Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd [1997] 2 WLR 945 (5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. 19851 A.C. 191, 201: ". . . if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense." The term “business common sense” was later interpreted in Rainy Sky S.A. and
court is asked to construe a provision in a contract that can have more than one possible meaning, the meaning which is consistent with commercial common sense is the one to be preferred. This follows on from rulings such as Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, where the court held that if there is no sensible commercial justification to construe a particular clause in that way then the court will be reluctant to adopt that
amount of red ink or verbal rearrangement or correction which the court is allowed”. Rainy Sky has been followed in many recent cases for example: PSG Franchising Ltd v Lydia Darby Ltd [2012] EWHC 3707 (QB), in the context of interpreting a restrictive covenant in a franchise agreement; Spencer v Secretary of State for Defence [2012] EWHC 120 (Ch) in the context of interpreting a rent review clause and Yafai v Muthana [2012] EWCA Civ 289 in the context of interpreting a partnership deed. Slide 6 – Law yers Know ledge ( 1 ) statutory provisions: S61 Law of Property Act 1925 – lays down a number of presumptions (depending on context) that are wider than just their application to property transactions (“all deeds, contracts …and other instruments”): “Month” means calendar month (see also s10(3) SGA 1979) “Person” includes corporation The singular includes the plural and vice versa The masculine also embraces the feminine and vice versa
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These materials are provided solely as teaching examples in the context of discussion of their use and different styles of drafting and should not be used as precedents
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S17(2)(a) Interpretation Act 1978 – deals with interpretation of statutes: Where an Act repeals and re-enacts, with or without modification, a previous enactment then, unless the contrary intention appears, any reference in any other enactment to the enactment so repealed shall be construed as a reference to the provision re-enacted Note also wide definition given to the word “writing” (see Schedule 1) in the context
whether or not an “e-mail” would be considered to be communication “in writing” in a contract when drafting a Notice provision (Slide 16) because it probably would be in a statute. Slide 7 – UCTA 1 9 7 7 : UCTA applies to clauses which seek to restrict or exclude business liability; although UCTA does not apply to international supply contracts (s26). UCTA applies different controls according to the nature of the liability which the parties wish to exclude or restrict:
ineffective (s2(1)).
the “reasonableness test” (s2(2)).
permitted, clause wholly ineffective (s6(1)).
(s13, s14 and s15 SGA 1979 and parallel provisions in s9-11 1973 Act). A term excluding or restricting liability for any of these implied terms is wholly ineffective against a person dealing as a consumer (s6(2)) but in B2B transactions it must satisfy the “reasonableness test” (S6(3)).
contract; but if the other party is a consumer or has contracted on the supplier's written standard terms of business, the contract terms are enforceable only to the extent that they satisfy the “reasonableness test” (s3 UCTA). Even in an individually negotiated contract between two businesses there may be a suggestion that the exclusion is a standard clause and part of the standard terms of business even though other parts of the contract are not.
guarantee which excludes or restricts liability for loss or damage caused by the goods proving defective while in consumer use as a result of the negligence of the manufacturer or distributor of the goods is wholly ineffective (s5 UCTA). It should be noted that this relates only to the relationship between manufacturer and buyer i.e. it does not apply to the contract of sale
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These materials are provided solely as teaching examples in the context of discussion of their use and different styles of drafting and should not be used as precedents
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between the supplier and the buyer. The reasonableness test A contract term is “reasonable” if: "... a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made" (s11 (1) UCTA). Schedule 2 to UCTA contains a non-exhaustive list of guidelines in assessing reasonableness, which strictly speaking were intended to apply only in deciding whether the exclusion or limitation of any of the implied conditions referenced in s6 & 7 (e.g. sale and hire purchase) were “reasonable” but have been used more widely as guidance by the courts. The guidelines include:
(including alternatives open to customers, for example, ability to insure).
and any previous course of dealing between the parties). In relation to UCTA 1977, note generally also the impact of Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) which apply only to consumer contracts but are of much wider scope than UCTA, covering all terms in the contract. This legislation is subject to review with a view to potential consolidation etc. Slide 14 – Entire Agreem ent Clauses - Discussion exam ple of drafting: The purpose of an entire agreement is: “…to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim.” (Lightman J in Inntrepreneur Pub Co Ltd v. East Crown Ltd [2000] 2 Lloyds Rep 611) This Agreement constitutes the entire agreement between the parties relating to the subject matter of this Agreement. [Its written terms supersede and replace all previous negotiations, drafts, agreements, arrangements and understandings between the parties, whether written or oral] Each party agrees and acknowledges that it is not entering into this Agreement as a result of any statement or representation made to it by the
No party shall have any claim for innocent or negligent misrepresentation based upon any statement in this Agreement [and each agrees that their sole remedy in respect of those statements that are set out in this Agreement will be for breach of contract as set out in [DN: cross reference to appropriate clauses in contract]
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These materials are provided solely as teaching examples in the context of discussion of their use and different styles of drafting and should not be used as precedents
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Nothing in this clause shall limit or exclude any liability that either may have for fraud See cases such as: HIH Casualty and General Insurance Ltd and others v Chase Manhattan Bank and others [2003] UKHL 6 (on ‘carve out’ of fraud) and Axa Sun Life Services Plc v Campbell Martin Ltd & Ors [2011] EWCA Civ 133 (on the application “reasonableness” under UCTA 1977). Slide 16 – Notice Provision – Discussion exam ple of drafting: Any notice or other communication required to be given to a party under or in connection with this Agreement shall be in writing and shall be delivered by hand or sent by Royal Mail Ltd.’s “Special Delivery” service or by another similar next working day delivery service [that provides both proof of postage and proof of delivery] to one of the named people at the named address [“proper address”] set out in the table below [or if sent by fax to the other party's main fax number set out in the table below] Any notice or communication shall be deemed to have been received if delivered by hand, or on signature of a delivery receipt or at the time recorded by the delivery service itself [or at the time the notice is left at the proper address], [or if sent by fax, at [10.00 am] on the next Business day after its transmission] [This clause does not apply to the service of any proceedings or other documents in any legal action or, where applicable, any mediation, expert determination, arbitration or other method of dispute resolution] For the purposes of this clause, "writing" shall not include e-mail and notices will not be sent by e-mail Slide 17 – Force Majeure – Discussion exam ple of drafting: Neither party shall be in breach of this agreement nor liable for delay in performing, or failure to perform, any of its obligations under this Agreement if such delay or failure results from events, circumstances or causes beyond its reasonable control, including but not limited to any of the following: Acts of God, flood, earthquake or other natural disaster or fire, explosion
war, terrorist attack, armed conflict, civil commotion, riots or similar actions; nuclear, chemical or biological contamination or any act of government authority permitting or restricting access or other similar restriction or prohibition (but not failing to obtain any necessary licence); labour disputes in the nature of strikes, industrial action or lockouts; Non-performance by suppliers or subcontractors [(other than by companies in the same group as the party seeking to rely on this clause)]; In such circumstances:
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These materials are provided solely as teaching examples in the context of discussion of their use and different styles of drafting and should not be used as precedents
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the time for performance of any obligation shall be extended by a period equivalent to the period during which performance of the obligation has been delayed or failed to be performed; Provided that if the period of delay or non-performance continues for a period of [one month] the party not affected may terminate this agreement by giving [14 days'] written Notice to the other party, such termination constituting a “no fault termination” in accordance with Clause [x] [DN. Clause not supplied]. Slide 18 – Reasonable endeavours: Virtually every contract has a set of mutual obligations. Sometimes the obligations are not written as absolute but that one party must “try” to do something. The degree of effort may vary. When negotiating efforts it is common to be presented with an original draft that starts out with drafting that states your client must use its “best endeavours”; this is sent back marked up with the word “best” replaced by “reasonable” until finally a compromise is negotiated e.g. “all reasonable endeavours”. Traditionally, this has been seen as a hierarchy. Best endeavours – the most onerous obligation; All reasonable endeavours – a less onerous obligation; Reasonable endeavours – a even less onerous obligation still. However, the precise scope of an “endeavours” clause is similar to any other contract clause and is subject to judicial interpretation (see Slide 5 on “modern law of contract interpretation”). Therefore, the precise meaning of each phrase is unclear. In Jet2.Com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417 “In my view the obligation to use best endeavours to promote Jet2's business
succeed and grow and I do not think the object of the best endeavours is too uncertain to be capable of giving rise to a legally binding obligation. In my view the promotion of Jet2's business did extend to keeping the airport open to accommodate flights outside normal hours [despite BAL incurring losses] subject to any right it might have to protect its own financial interests” (Lord Justice Moore-Bick). Generally “best endeavours” is considered to require a party to sacrifice or at least compromise its own commercial interests if this is necessary to perform the contract. “Reasonable endeavours” are if anything an even less tangible concept, but it is generally thought that there does not need to be the same sacrifice of commercial
balance as against the obligations it has agreed to try to perform under the contract. Again though this is a matter of judicial construction. In Ampurius Nu Homes v Telford (Creekside) Ltd [ 2012] EWHC 1820, the contractor agreed to use “reasonable endeavours to procure the completion of” construction works by a particular date. It was held that the wording of the clause would not soften the obligation to meet that date using the excuse not having sufficient money
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These materials are provided solely as teaching examples in the context of discussion of their use and different styles of drafting and should not be used as precedents
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to perform the contract. The phrase, read objectively, was designed to cover matters relating to the physical conduct of the works, and could have potentially provided an excuse for non-culpable delay for bad weather etc. but it would not apply to wider matters affecting the company rather than the project itself. The “compromise” typically achieved in negotiations over whether an obligation should be “best” or “reasonable” is "all reasonable endeavours". This is generally considered to fall between the two other obligations. The very use of the word “reasonable” suggests that it will allow some balancing of commercial interests, but again it is subject to judicial interpretation. In CPC Group Ltd v Qatari Diar Real Estate Investment Company [ 2010] EWHC 1535, the precise phrase was: "all reasonable but commercially prudent endeavours". The judge said: “It seems to me, therefore, that the obligation to use “all reasonable endeavours” does not always require the obligor to sacrifice his commercial interests. In this case, the matter is, however, clearer, because the contract itself, as I have already said, contains other indications that QD was not to be required to sacrifice its commercial interests. Indeed the words of clause 7.1 itself make that clear by using the added words “but commercially prudent” in the phrase “all reasonable but commercially prudent endeavours” (Vos J). This again illustrates the fact that the wording used in these clauses will be interpreted objectively and in context. John Bennett January 2013
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