Negotiating and Drafting a Contract
Introduction
The recent case of Proforce Recruit Ltd v The Rugby Group Ltd [2007] EWHC1621 has reinforced the well-established principle that, save in exceptional cases, the meaning of a word, phrase, or clause used in a contract will be interpreted without giving consideration to what the parties said in their negotiations leading up to the contract, or their declarations of subjective intent.
What does the case mean for parties negotiating and drafting contracts?
If you want a word, phrase or clause that you use in a contract to have a particular meaning, purpose, or effect then you should expressly and clearly state and explain this in the contract. If you don't, you cannot expect to be able to put evidence before the Court as to what the parties said, or may not have said, in their negotiations leading up to the signing of the contract, nor evidence of their declarations of subjective intent.
Background
The case revolved around the meaning of a clause contained in a Service Cleaning Contract, which stated:
'This contract will be of a minimum two-year period and will be re-negotiable at the end of that period. During that period Proforce will hold preferred supplier status'.
In summary, Proforce (the Claimant) asserted, inter alia, that the term 'preferred supplier status' meant that during the contract period the Claimant would be offered the first opportunity to supply contract labour and hire equipment, in preference to other suppliers. The Claimant alleged that, in breach of this clause, the Defendant had failed to offer the Claimant the opportunity to supply contract labour and hire equipment at the Defendant's site in Rugby, in preference to other suppliers, and had engaged other agencies to meet its requirements for contract labour and machinery.
The Defendant disputed the Claimant's construction of the meaning of the clause and denied that it was in breach of contract.
The decision
The Court held that the word 'status' is not a word that is ordinarily used when defining express rights or obligations. Further, in its view, the words 'preferred supplier status' did not convey any form of exclusive right. The term 'preferred' meant 'approved'.
When handing down his judgement, Mr Justice Cresswell declared that he would construe the words 'preferred supplier status' as meaning that, in relation to the provision of personnel to the Defendant's site in Rugby for cleaning services of the nature referred to in the Service Cleaning Contract, the Defendant was simply acknowledging that the Claimant was of sufficient standing to justify the status of a preferred/approved supplier for such services. However, it did not mean 'sole supplier status', or a supplier who could expect to be approached first. Nor was there any obligation on the part of the Defendant to offer any particular contract to any company that achieved 'preferred supplier status'. The Defendant did not commit itself to only doing business with such suppliers.
The crux of the case
Mr Justice Cresswell reaffirmed the well-established rules on the interpretation and construction of the meaning of a word, phrase or clause contained in a contract (some of which have recently been doubted by some commentators and have also been the subject of analysis in a number of recent court cases).
In summary:
1. The objective of the Court is to give effect to what the contracting parties intended.
2. To ascertain the intentions of the parties, the Court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction, so far as known to the parties.
3. But, when ascertaining the parties' intentions the Court does not enquire into the parties' subjective states of mind.
4. The Court will interpret a word, phrase or clause contained in a contract by giving it the meaning which it 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.
5. The meaning that a word, phrase or clause contained in a contract would convey to a reasonable person may be different to a strict dictionary meaning. It is the meaning the parties using those words, against the relevant background, would reasonably have been understood to mean.
6. Words are normally given their 'natural and ordinary meaning'. However, if one can nevertheless conclude from the background materials that the words used meant something else to the parties, then the Court will attribute that meaning.
7. Words are normally interpreted in the way in which a reasonable commercial person would construe them, in the light of the background materials.
8. The Court will not normally look at the subsequent conduct of the parties to interpret the meaning of a written agreement.
9. The only time, when construing the meaning of a word, phrase or clause in a contract, the law will allow parties to submit evidence before the Court as to the previous negotiations of the parties and/or their declarations of subjective intent is where it is alleged that the parties have, in effect, negotiated on an agreed basis that the words used bore a certain meaning. Thus, they have, in effect, given their own dictionary meaning to the words used as a result of their common intention. However, this exception will seldom arise.
As Carl Steele, a Partner at Ashfords explains:
"The safest course of action is to spell out in writing in the contract exactly what you mean. If a word, phrase or clause you use could have several different meanings, or its purpose or intent is open to debate, clarify the matter by stating in the contract exactly what the parties mean and intend. It is surprising how may people fail to do this in practice"
Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.
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