Contracts form the cornerstone of business relationships. Having clarity as to the terms parties are bound by in a contract is paramount to business efficacy. Such terms and their interpretation are also vital when it comes to disputes arising within contractual relationships.

Navigating the complexities of contractual interpretation and understanding when and how terms may be implied into a contract by the courts may seem daunting. This article looks at the established principles of English law that apply to interpreting contracts and how the approach taken by the courts is designed to provide clarity and certainty to contractual arrangements.

Interpretation of Contracts

The interpretation of contracts is an essential aspect of contract law: ensuring that parties understand the rights and obligations outlined within the agreement. When disputes arise, the court’s primary objective is to ascertain the intention of the parties based on the language used in the contract. In doing so, the court considers various factors, including:

Literal Meaning:

The starting point for interpreting a contract is the literal meaning of the words used.  Each term is given its ordinary and natural meaning. In essence, if it is clear and obvious within the contract as to what the wording means, the court will not override these provisions even if, on its face, the contract may not make commercial sense.

‘… the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’… so said Lord Hoffman in the case of Chartbrook Ltd v Persimmon Homes [2009] AC 1101

This approach has been reiterated in a recent case in the High Court: Dooba Developments Ltd v MacLagan Investments Ltd [2016] EWHC 2944 (Ch). In Dooba it was held that where the meaning of words in a contract is clear and unambiguous, it is not necessary to consider commercial common sense or the intent of the parties. The literal meaning of the words will take effect.

Whole contractual approach:

Another approach the courts adopt is to interpret individual clauses in a manner that is consistent with the overall purpose and intent of the contract. In this respect, the contract is to be viewed as a whole, rather than focusing on one particular term and/or phrase.

Context

Where the words used in a contract are less clear and/or have an air of ambiguity about them, the courts will examine the contract as a whole and consider the surrounding circumstances and context in which it was formed. It is considered that this holistic approach helps to uncover the true intention of the parties.

Although the court will not deviate from the text within the document, it can look at the wider context and background information available to the parties when the document was first made. This is an objective test.

For example, the parties’ past dealings or course of conduct may provide insight into their intentions, especially when interpreting ambiguous terms.

Implied Terms

In addition to the express terms explicitly stated within a contract, English law recognises the existence of implied terms. Implied terms are obligations that are not expressly stated in a contract but are nonetheless deemed to be part of the contractual agreement. These terms can be implied in three main ways:

  1. Statutory Implication: Certain terms may be implied into contracts by statute, such as the Sale of Goods Act 1979, which implies terms regarding the quality and fitness for purpose of goods sold in the course of business.
  2. Custom and Trade Usage: Implied terms may arise from established customs or trade usage within a particular industry. These customary practices become inherent to contracts within that industry.
  3. Common Law: Implied terms may also arise through common law, where the court determines that certain terms are necessary to give business efficacy to the contract or to reflect the presumed intentions of the parties.

Implied terms play a crucial role in filling gaps within contracts and ensuring fairness and reasonableness in contractual relationships. Generally, however, terms will not be implied by the courts if the contract terms are clear and unambiguous, and their literal meaning can be applied objectively.

Seeking Clarity and Certainty

For businesses navigating the intricacies of contract interpretation and implied terms, seeking professional legal advice is essential. A skilled solicitor can provide invaluable guidance in drafting, interpreting, and enforcing contractual agreements, minimising the risk of disputes and providing clarity and certainty to business transactions. It is vital that parties are clear on what they intend to contract for, which in turn will allow those drafting the contract to ensure that it accurately reflects that intention.

In conclusion, understanding the principles of contract interpretation and implied terms is vital for businesses seeking to enter into clear and enforceable agreements. By adhering to established legal principles and seeking expert advice when necessary, businesses can mitigate risks, foster successful commercial relationships and avoid costly and time consuming disputes.

Ultimately it should also be remembered that clarity in contracts leads to certainty in business.

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The ‘battle of the forms’ is a phrase which is used to describe the common scenario in which contracting parties compete to ensure their standard terms and conditions apply.

In the second of our six-part blog series about commercial contracts we look at the practical ways businesses can ensure their terms and conditions are incorporated into their business dealings, and who is likely to come up trumps in the battle of the forms.

The traditional approach

In the first blog in this series we considered what it takes to form a legally binding contract and examined what is meant by an offer and an acceptance (Commercial contracts: a practical guide for businesses – Pannone Corporate). When considering which contract terms apply, these principles again become important as the court will examine whether there has been an offer to contract on specific terms which has been unequivocally accepted.

This traditional approach can give rise to two contrasting examples:

Where competing terms of business are at play, the court will be looking at the chronology of when offers were sent and the behaviour of the parties in determining the point at which a set of terms has been accepted.

Last shot fired

More often than not, the last set of contractual terms presented without any objections being raised will be deemed as accepted. This is often referred to as the “last shot”.

For example, where a customer places an order on the basis of its standard terms and the supplier responds with its own standard terms, if the customer then proceeds to place the order and accept delivery then the last contractual terms fired will be deemed to govern the relationship (in this case the supplier’s terms).

A misfired shot

A risk for parties is failing to adequately bring terms to another party’s attention.

Standard terms and conditions must be readily available to the other party if they are to be capable of being accepted. If a document is sent by email with terms and conditions on the reverse, those terms must also be emailed if they are to be relied on.

Similarly, if documents are sent with a link to website terms and conditions, the link should be a live link through which the contractual terms can be accessed.

The court will look at all the facts of a case to determine whether or not terms and conditions have sufficiently been brought to another’s attention.

Course of dealing

The last shot fired doctrine can be displaced where the correspondence between the parties or their conduct shows that they intended to contract on some other terms. The court will examine all the evidence in the case to determine the prevailing terms.

For example, where there has been a framework agreement entered into in relation to the terms governing future supplies then a last shot fired may not succeed in overriding that framework. Similarly, where there has been a course of dealing between parties pursuant to one party’s terms then it may be difficult to displace that by shooting across competing terms, without something more.

The wording of a party’s terms may also help to guard against the last shot fired principle. In the case of TRW Ltd v Panasonic Industry Europe Gmbh (2022), the last shot doctrine was not accepted. Instead, the judge concluded that the first set of terms sent (being the seller, Panasonic) applied. Panasonic’s general conditions protected it from falling victim to the “last shot” doctrine, as it disapplied any conditions of TRW that diverged from its own terms, and the parties continued to deal with one another on that basis.

Practical Implications

Losing out in the battle of the forms can have commercially catastrophic consequences for contracting parties. It is therefore important that businesses consider their systems and processes when entering into new contracts to ensure they are legally and commercially protected through the governing terms. In practical terms, businesses should consider:

Finally, if parties do not in fact intend to be bound by contractual terms until a formal document is signed, or further terms are agreed, they should mark all negotiations, correspondence and draft agreements as being ‘subject to contract’ to avoid inadvertently being bound to draft terms.

If you would like to discuss this blog, please contact Sarah Bazaraa on 07920 237599 or by email to sarah.bazaraa@pannonecorporate.com

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