Contractual Intention and Confusing Clauses - Interpreting Unclear Contracts
When there is uncertainty over meaning within a contract, the Supreme Court in the 2015 case of Arnold v Britton established that the court ascertains the parties' intentions by reference to what a reasonable person having all the background knowledge...
...available to the parties would have understood them to mean using the language in the contract.
They focus on their documentary, factual and commercial context, assessing the meaning in light of:
- the natural and ordinary meaning of the clause
- any other relevant provisions of the contract
- the overall purpose of the clause and the contractthe facts and circumstances known or assumed by the parties at the time the document was executed
- commercial common sense
- but disregarding evidence of the parties' subjective intentions
Despite those clear guidelines, there are still cases that arise in practice that need to be decided.
The case of Kitcatt v MMS has recently been decided upon in the High Court where the meaning was not clear.
The Facts
The sellers sold their advertising agency called Kitcatt to a subsidiary of Publicis. Under the sale agreement, the sellers were entitled to deferred payments. The amount of the payments depended on Kitcatt's performance following its merger with Digitas, which was a marketing agency within the Publicis group. The sellers therefore had a warranty from the buyers about the state of Digitas, in case anything would have affected the level of the deferred payments.
The warranty was concerning knowledge of "any facts or circumstances that could reasonably be expected to have a material adverse impact upon the Operating Income and/or Revenue (being a reduction of at least 20% in the case of Operating Income and 10% in the case of Revenue) including without limitation (i) expected loss of any client of Digitas or (ii) any significant litigation involving Digitas."
Digitas lost significant work from a key client. The sellers said the buyers were in breach of warranty because they knew this was on the cards. The buyers argued that the warranty clause was meaningless as it was not clear what the base level was to calculate whether there had been a drop by 10% or 20%. The buyers therefore said the clause was unenforceable.
High Court Decision
The High Court said the warranty was enforceable and the buyers were in breach. The intentions of the parties were plain from the clause. If interpreting according to the strict letter of the wording used would have rendered the clause unenforceable, that was not what the parties would have intended.
It was clear that the intention was concerned with a comparison between what was reasonably expected between the information that had in fact been provided and if the loss of a key client would have been disclosed. This was the natural meaning of the clause in line with giving effect to the purpose in accordance with commercial common sense.
The judge would be reluctant to conclude that a clause intended to provide an important protection which underpinned the whole deal would be meaningless and unenforceable; this would only be a last resort.
The Court added, "A definition should be the servant of clarity, not a dictator of absurdity."
The Court also added that the wording in the definitions clause helped to avoid any absurdity: "unless the context requires otherwise".
Comment
This case provides yet further guidance on how to interpret unclear wording in contracts. The Court sensibly concluded that it would be best to try to give effect to the likely intention even if the wording had not been written as clearly as it could have been. However, there still involved uncertainty and cost, time and hassle in having to go to court to get to this position. Far better would have been to have a clear contract in the first place.