Two organisations entered into a contract for the maintenance of housing stock. The contract included tables which set out worked examples for how certain key performance indicators (KPIs) worked in order to measure the minimum acceptable performance specification in the contract. The KPIs were linked to a bonus scheme and the interaction between the two was set out in three worked examples in the contract.
One of the parties became dissatisfied with the service being offered and gave the other party a month to improve performance. A notice to terminate the contract was later provided, which was challenged on the basis that because the contract did not specify any specific minimum acceptable performance, termination was inoperable. This was argued as untrue because the worked examples showed how minimum acceptable performance was calculated.
The High Court concluded that the worked examples were not binding because this was not specified in the contract. The decision was appealed.
When looking at how to interpret a contractual term, the court will take certain factors into account, such as the overall purpose of the clause (and the contract)and commercial common sense. In this case, although the contract was badly drafted, it was concluded that both parties had intended to provide for minimum acceptable performance because without this mechanism one party would have been unable to terminate and the other would have bene unable to claim a bonus payment. On this basis, despite the worked examples being hypothetical, they showed there was a mechanism in place for calculation minimum acceptable performance using the agreed KPIs. The worked examples were therefore found to be legally binding.
Contracts often include hypothetical worked examples as they can provide much needed clarity on complex mechanisms agreed between parties. Whilst worked examples are extremely valuable in contracts, this recent decision has shown caution should be taken because those examples could now be legally binding on the parties to the agreement.