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Does your contract say what you think it does?

on Monday, 14 March 2016.

Many of the matters we advise aerospace and defence clients about relate to different interpretations of contracts by the parties related to them.

Such as: what the deliverables under a contract were, when delivery would be performed, or when payment would be made.

Commercial disputes are often the result of contractual uncertainty or differences of interpretation.

Recent court decisions indicate that an increasingly literal approach is being taken to contract terms when there is a dispute over meaning, highlighting the importance of getting contracts right from the start.

Does the contract do what you think it does?

A 99 year lease contained a service charge provision, whereby the service charge was initially £90 per year and would increase at a rate of 10% per annum.

Under this clause, the service charge due for the final year would be over £1,000,000 and the total service charge over the term of the lease would be over £11,000,000. The dispute concerned uncertainty, were the service charge increases:

  • capped at a maximum of £9 per year, which would have resulted in a maximum charge of £981 in the final year; or
  • were they cumulative and annual, which would result in the £1,000,000 final year charge

The Supreme Court held that it was a clear term of the lease that the service charge increase would happen in full each year and would be cumulative. It was irrelevant that it increased so significantly.

How widely can a clause be interpreted?

An agreement set out that a Partner would be given 6 months' written notice of termination.

The Partner was given 14 months' notice that his role was to be terminated. He was placed on Gardening Leave. No other correspondence about his termination was received. At the end of the 14 months, he claimed not to have been given notice under his contract.

The Court found that the agreement was clear. Exactly 6 months' notice had to be given to retire the Partner from the business. Notice terminating his role 14 months after the date of that notice was not valid, meaning he would continue to be a Partner even after the 14 months came to an end.

The interpretation of the clause was restricted to a literal reading of the clause.

Can a term be implied where the contract does not do what we expected?

The Supreme Court recently clarified when a term may be implied into a contract.

Over time, case law had been interpreted by courts in a way that gave them an increasingly wide scope to imply terms into contracts where the existing terms were not clear.

The Supreme Court decided that courts were implying terms into contracts when they should not. For example, where implied terms changed the meaning of the agreements that had been executed. It has limited the circumstances when terms can be implied by a Court. It considers a negotiated contract must be considered an accurate reflection of the parties' intentions.

For a term to now be implied it must be necessary for business efficacy or be so obvious as to go without saying.

How can we help you?

These decisions highlight that the Court is being increasingly literal in its interpretation of contracts. The Court will only vary a contract term in very limited circumstances. It is therefore important that you know what you are agreeing to (and that it does what you want it to) before you sign a contract.

Our specialist Aerospace & Defence solicitors are able to review, advise upon and draft contracts or leases for you, ensuring they avoid uncertainty.

Please contact our Aerospace and Defence Specialists Ben Holt on 0117 314 5478 or Nick Roberts on 0117 324 5282 if you would like to discuss any contract arrangements you have or are putting into place.

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