What does my contract mean?

So, you have a written contract, which you spent hours negotiating with the other party and both of you have signed it. Everything is in black and white, so you think that each party’s obligations and rights are easily identifiable and agreed. 

Then you start work, and everything seems to be going well until the other party says to you “oh but that clause  means I am entitled to  x…”.
To which you say “ hang on, the clause actually means you are only entitled to y…” . You have a dispute on what the terms mean. It is not uncommon, but how do you solve it? Perhaps you look back at the correspondence leading up to the signed agreement, or the drafts, or maybe you are quite certain as to what you think or thought the clause meant.

In fact - whatever came before, and what you and the other party think the clause means is not the answer.

The test the courts apply in  interpreting contracts is what the reasonable objective person thinks that the contract means having all the background information that was available to the parties at the outset of contract formation. 

This test has been confirmed in the very recent decision of the House of Lords in  Chartbrook Limited v Persimmon Homes Limited and Another [2009] UKHL 38, where it was held that even if a contract appears to be very unfavourable to one of the parties, that alone will not be an adequate reason for the court to decide it does not mean what it says.  That’s because the courts take the view that businesses are free to contract into any bargain and it is not for the court to assess the merits of a bargain or strike out something purely because it is not a good deal.

The Court reminded us that pre-contract negotiations are not allowed to be taken into account in construing the meaning of the clause.  But they also said that where it is clear that something has gone wrong with the language of a contract, the court will construe it in accordance with what a reasonable person would have understood the parties to have meant, taking into account the relevant background.

Taking the time to negotiate, agree and record those agreements in a formal contract may seem like a waste of money when everyone is full of the enthusiasm of a new project, getting on site and starting building.

But it is a lot easier than having to sort out differences of opinion when these arise during the works, if you don’t have a clear contract to fall back on for some guidance. Taking matters to court or adjudication to get a Judge or adjudicator to tell you what your contract means will undoubtedly be more expensive than the costs of preparing a formal contract in the first place – and of course, this ignores the impact that such adversarial processes can have on your commercial relationships with suppliers/contractors.

Here at Flint Bishop we pride ourselves on helping our clients help themselves, by equipping them with the knowledge, skills and draft contracts to help manage the risks that can arise on complex construction and engineering projects. If you have any queries arising out of this note, or generally, please don’t hesitate to get in touch with our partner Thomas Jacobs.

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