Contract disputes are usually about the meaning of words or phrases. Barrister, Professor Rudi Klein, advises that you should keep an accurate record of your pre-contractual obligations.
Where words have a natural or ordinary meaning there isn’t a problem. If a word does possess an ordinary and natural meaning a contracting party would face an uphill struggle in arguing that another meaning was intended. There are exceptions. One is where the word or phrase in question has a certain technical meaning in addition to its ordinary meaning.
Another is where the ordinary or natural meaning would flout business commonsense.
But words don’t always lend themselves to absolute precision; many words have more than one meaning.
Where words are unclear or ambiguous the courts have to be as objective as possible in deciphering what the parties meant.
In a recent Supreme Court case it was said that the Court “must….ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been
available in the parties….at the time of the contract, would have understood the parties to
have meant”.
Take, for instance, the word ‘discount’ in a sub-contract. Does this relate to prompt payment or does it simply mean a ‘trade’ discount?
The Court of Appeal in Team Services plc v Kier Management and Design (1993) had to consider this issue. The sub-contract between the parties referred to a cash discount “if payment is
made within 14 days”. But the italicised words were deleted. The Court drew the conclusion
that the deletion of these words indicated that the parties had accepted that the discount
was not to be dependent on prompt payment.
Another rule is that you cannot use evidence of pre contractual negotiations to support your argument for a word having a particular meaning; such evidence is likely to be too subjective. In pre-contract negotiations it is difficult to distinguish between statements reflecting a consensus view and those which only reflect the view of one of the parties. Moreover, for the courts to admit precontractual negotiations would create uncertainty of outcome in disputes overinterpretation and add to the cost of advice and any litigation. All correspondence
and emails would have to be read; statements would even have to be taken from those involved in oral negotiations.
One rare exception is the ‘private dictionary principle’. This applies where the
evidence shows that the parties had decided that a word should be given a particular meaning. Take the following phrase: ‘after 12 months trading’.
The word ‘after’ in this phrase could give it two meanings:
• on the expiry of 12 months,
or
• at any time after 12 months.
In a 1970s case precontract telex exchanges (an early form of email) indicated that the parties had agreed that ‘after’ meant on the expiry of 12 months.
In a more recent case the Court of Appeal had to consider the meaning of ‘preferred supplier status’. Did this give a supplier a right of first refusal in preference to other suppliers being considered for the same services? Or did it mean that the supplier in question
enjoyed a certain status with the client which made it more likely that the supplier would
win more contracts?
This phrase was not defined in the contract in question and neither did it have a plain natural and ordinary meaning. The Court held that evidence of the pre-contract negotiations should be admitted. They appeared to show that the parties had a shared understanding that this phrase meant first refusal.
LEGAL TIP
* Maintain an accurate note of your pre-contract discussions.
*Ensure that any agreed definitions – particularly of words and phrases affecting your key obligations and entitlements – are transferred into the contract.
