Making a contract – does it do what it says on the tin?

In principle, making a legally binding contract is straightforward. But the next big question is will it work? Will it do what it says on the contractual tin? And, taking a step back, have the parties read and understood just what they have agreed to do?
What does the contract say?

Lamenting an error in a case last year, where the wrong document was included in the contract documents for signature, Mr Justice Coulson noted that the error was perhaps:

“a sad reflection of the fact that modern day contracts of this kind are so complicated that nobody (not even the consultants) bothers to check the actual documentation being signed.”

And that was a case where lawyers and management consultants were involved.

And what about website terms and conditions, sometimes barely comprehensible, that run to thousands of words that no one has time, or indeed the lifespan, to be able to read and digest, even if they were negotiable? Perhaps unsurprising then, is the story of the cyber security company that set up a free WiFi hotspot in London’s financial district and included, as a test, a ‘Herod clause’ in their terms and conditions for use of the free network. The clause apparently said that, in exchange for the WiFi, the recipient agreed to assign their first born child to the company for eternity. Six people signed up.

Sometimes even simple messages may not get through. A van driver who drove under a low bridge that took the roof off his new van missed six warning signs, and the Charge of the Light Brigade might never have earned immortality if Lord Lucan had carefully followed the written orders from Lord Raglan, instead of relying, as has been suggested, on the messenger who conveyed an over-enthusiastic, and wrong, version of their content.

The consequences of signing up to a contract that has not been carefully read and understood can be serious. Take, for instance, the famous case of Harriet L’Estrange and the cigarette machine. In 1933 Harriet bought the machine for her cafe in Llandudno and signed a sales agreement without reading it, especially the small print that excluded (in the olden days before the Unfair Contract Terms Act) all conditions and warranties. When, perhaps inevitably, the machine soon stopped working, the exclusion clause meant that poor Harriet could not get her money back.

Does it mean what it says?
Fast forward to a caravan park, this time in South Wales, and to chalet owners who, between 1977 and 1991, entered into 99 year leases. Those leases contained a covenant to pay an annual service charge, starting at a modest looking £90 but increasing, on a compound basis, by 10% each year. Which meant that the service charge for a lease granted in 1980, for example, would consequently become over £2,500 in 2015, and, by 2072, over £550,000. That was what the wording said but could the court intervene to rescue the chalet owners?

The Supreme Court in Arnold v Britton [2015] AC 1619 said it could not. From 1974-1981, for instance, annual inflation had been running at well over 10%, although it was less than 10% after 1981. The 10% annual increase was included to allow for a factor out of the control of either party, namely inflation, and there is no principle of interpretation entitling a court to re-write a contractual provision simply because the factor the parties catered for does not seem to be developing in the way they might have expected. Just because a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.

A court should be very slow to reject the natural meaning of a provision simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed.

And the moral of the story? Check very carefully what you are letting yourself in for.

What does the contract not say?
And does the contract cover everything you want it to? Has anything been left out? An estate agent, Mr Estafnous, introduced a prospective buyer to a company property owner. They entered into an agreement, drafted by solicitors, which said that commission was payable on the sale of the property. The transaction that finally went through, however, was structured as a sale of shares in the owner's ultimate holding company.

The express terms of the commission agreement did not cover the share sale but could the court imply a term to save Mr Estafnous’s commission?

No, said the Court of Appeal in Estafnous v London & Leeds Business Centres Ltd [2011] EWCA Civ 1157. The parties had not thought about what should happen if the property sale was restructured as a share sale, so there was no implied term and no commission.

In a very recent case, Williams Tarr Construction Ltd v Anthony Roylance Ltd [2018] EQHC 2339 (TCC), the parties disagreed, and so the court had to decide, exactly what civil engineering services the first or second defendant (another point of dispute) had been engaged to provide. On the answer to that question rested the success or (as it turned out) the failure of the claimant’s breach of contract claim.

Be careful, therefore, that the contract covers all the issues, unlike the poor garrison of Sebastia. The tyrant Temures promised them that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried them all alive. This is what the courts call literalism. Others might describe it differently.

How does the court decide what the contract means?
Rules of interpretation
And talking of the courts, they have, of course, their own rules of interpretation which Mr Justice Coulson succinctly summarised in another recent case, Dynniq UK Ltd v Lancashire County Council [2017] EWHC 3173 (TTC):

“What matters is the objective meaning of the language used, to be derived from the natural usual meaning of the words in the contract, when seen against the background/context of the contract. Where there are rival interpretations, one test is to consider which interpretation is more consistent with business common sense.”

The test is objective, what the reasonable person, rather than the parties with their subjective intentions and expectations, would understand the contract to mean. But the court cannot look at the parties’ negotiations to help decide how a contract is supposed to work. And sometimes even courts may disagree as to what a contract means, which is a powerful reason to be very clear in the contract wording, and to work hard to eliminate ambiguity and uncertainty so as to avoid time and money-consuming outings to the courts that might produce an unexpected answer.

Examples of contract wording puzzles

1. Uncertain contract formulas
   Uncertainty as to how a contract formula was supposed to work was at the heart of a House of Lords decision in Chartbrook Ltd v Persimmon Homes Ltd (Chartbrook Ltd, PT 20 defendants) [2007] 1 All ER (Comm) 1083. A dispute between a developer and the owner of the development site turned on the interpretation of the wording of the contract formula for calculating the owner's share of the sale proceeds.
   
   The court proceedings eventually reached the House of Lords, which came to a different conclusion on interpretation from the first instance judge and the Court of Appeal. The inclusion in the contract, however, of a worked example to show how the formula was supposed to work might just have saved the parties a lot of trouble and expense.
2. Approach to be taken when different/inconsistent standards/requirements are in issue
   Another contract wording puzzle went to the Supreme Court in Højgaard v E.On [2017] UKSC 59. Who should be given a €26 million bill for dealing with the failed foundations of two wind farms in the Solway Firth? Was it the contractor, MT Højgaard A/S, or its employer, two E.On companies?

In designing the foundations Højgaard had two key obligations, to comply with an international standard, J101, and to ensure the foundations had a lifetime of 20 years without planned replacement. Højgaard complied with J101 but, after the foundations were constructed, J101 was discovered to contain a significant error. The foundations started to fail and remedial works costing €26.25 million had to be carried out. The Court of Appeal said that the two obligations were inconsistent and the 20-year requirement could effectively be ignored, but the Supreme Court disagreed.

Its view was that where the two relevant contract obligations imposed different or inconsistent standards or requirements, rather than concluding that they were inconsistent, the correct analysis under the contract was that the more rigorous or demanding of the two standards or requirements must prevail. The less rigorous could be treated as a minimum requirement. And if there was an inconsistency between a design requirement and the required criteria, the contract made it clear that, although it may have complied with the design requirement, Højgaard would be liable for the failure to comply with those required criteria, as it was its duty to identify the need to improve on the design accordingly. So the court’s answer left Højgaard with the bill. Another case, perhaps, of a contract doing exactly what it said on the tin.

Might legislation or the court add any terms?
Implied terms
There is also the possibility that an additional term might be implied into the contract. Legislation, for instance the Sale of Goods Act or Supply of Goods and Services Act, can add terms to an agreement. And the courts may find that there is an implied term, as a matter of law or fact, although they did not find one to save Mr Estafnous’s commission.

Cooperation
Some contracts need co-operation if they are to be performed, for example, a shipbuilding contract where the builder’s entitlement to a stage payment is dependent on the buyer’s representative certifying that the relevant milestone has been reached.

In Swallowfalls Ltd v Monaco Yachting & Technologies S.A.M. [2014] EWCA Civ 186 the Court of Appeal confirmed that an implied term as to co-operation is an ordinary implication in any contract where co-operation is required for its performance, but this is not expressly spelled out in the contract.

Reasonableness
Reasonableness is not, however, a sufficient ground for implying a term; an implied term must, among other requirements, pass the test of business necessity or, alternatively, obviousness (the classic “officious bystander” test).

Conclusion
The terms that the parties agreed may therefore not be the whole story, and there may sometimes, on the facts of a particular case, be other issues, such as misrepresentation.

In the end, as so often, it all comes down to working at getting the basics, the simple but vital things, right, starting with a very careful reading of the proposed contract. As the singer songwriter Pete Seeger once observed: “Education is when you read the fine print. Experience is what you get if you don't.”