Out-Law Guide | 16 Aug 2011 | 10:46 am | 9 min. read
After a contract is signed the parties may not need to refer to it again unless a dispute arises. Imagine that you have spent months in negotiations and a happy commercial relationship looks to be on the cards.
However, within a month or a year a problem develops and escalates and the contract is consulted. You might think that the relevant clause supports the stance taken by your company, but the other side could say the exact same thing. This could be because the contract was not written clearly enough in the first place.
This guide will look at some of the factors which can lead to unclear contract drafting, and provide some practical tips.
Standard forms: frequently, a contract is based on someone else's standard conditions or an industry specific standard form such as JCT or NEC. There is a good chance that words which are designed to be flexible and fit as many situations as possible may not be the ideal words to be used for your particular requirements. At times, drafting can be less of an exercise in capturing the parties' intentions in a clear way and more of a struggle to crowbar them into a framework which is unsuitable from the outset.
Late night/last minute negotiations: sometimes the final wording is agreed at a point in negotiations where people are tired or desperate to meet a tight deadline. Last minute tweaks to what has been agreed often have to be made to the terms without enough time for careful analysis of the most appropriate drafting.
Doing a deal/compromise: is the way that a negotiated compromise is expressed a suitable half-way house? Or does it fall between the two camps and end up saying very little?
Using unsuitable precedents: using a precedent as the basis of a new contract can save time, but only if it is appropriate to the parties' objectives and is properly adapted to express what they actually want. It may be that the precedent has itself been adapted to suit particular circumstances, in which case parts of it may not be relevant to what you're trying to achieve, or it may incorporate errors from previous wording that nobody has picked up.
Not proof reading properly: ideally the contract should be read by a fresh pair of eyes for an objective view of its meaning, rather than the author simply checking for errors. It is easy to be complacent and incorrectly assume that the wording successfully conveys what you want it to convey.
The English language is not always as clear as we imagine it to be. When drafting legal documents, complex principles need to be conveyed. If you keep the language too simple some of what you are trying to say may get omitted, but make it too complicated and nobody will be able to understand what you're trying to say at all. Language may be used to convey a particular technical, legal or scientific meaning which may be different from everyday usage. It is important that all the parties to the contract have the same understanding of the context in which the language is going to be used.
The first step could simply be to contact the other party to see if the issue can be worked out through discussion and negotiation, on the basis that it is in everybody's interest to try to put the problem behind you. However, if that route doesn't succeed there are a number of ways a court could deal with the problem.
Rectification: sometimes both parties have made a clear mistake in the contract – something simply does not make sense or reflect the actual intentions of the parties when the contract was drawn up. In this scenario the court can step in and correct the mistakes, usually as a last resort, by rewriting the contract to reflect the parties' intentions. If only one side has made a mistake, rectification may still be available - but only if the other party noticed the mistake, is going to benefit from it and has failed to draw attention to the mistake.
Interpretation: where there has not been a clear mistake in a contract, things become more complex. A very literal reading might give one particular meaning to a clause, but another party might say that this meaning was obviously not the one which both sides had meant to achieve during negotiations or when they signed the contract. A court's first point of reference will be the Golden Rule: words should be interpreted in line with everyday usage and given their natural and ordinary meaning. This should apply unless it results in an absurdity or inconsistency with the rest of the contract. In this case, the grammar and ordinary sense of the words can be modified as far as is needed to resolve the absurdity or make business common sense of the contract if it is clear what the parties must have meant, but no further.
In assuming that words have one ordinary meaning, the Golden Rule has its limitations:
When interpreting contracts, courts will try to ascertain the meaning which the document would convey to a reasonable person having all the knowledge which would reasonably be available to the contractual parties in the situation in which they were in at the time of the contract. It is therefore an objective exercise.
A word's ordinary meaning is its plain, popular sense. However, its 'popular' meaning may be restricted to a small group of people in a particular class or occupation. If the court does not understand the language used in a document, it can look at a dictionary to try to clarify a word's meaning. Other ways in which words can be understood include:
However, the court cannot use previous negotiations between the parties as evidence of intention. These can only be considered in an action for rectification – see above.
Imprecise meaning: many words have fairly broad meanings and are not limited to precise factual situations. Others have shades of meaning which vary according to the context in which they are used. A court may well form a decision as a matter of the impression that it forms of a term's meaning, reaching a clear conclusion without it always being possible to describe the reasoning that has led to that conclusion. For example, in a case concerning an airline contract the court decided to prefer the definition of 'summer' used by the International Air Transport Association even though there was no evidence that it was widely accepted for such contracts.
Customary meanings: if a word is used in a particular way in a specific line of business or trade, or in a specific locality, evidence can be put before the court that the parties intended to use the word in that particular way. The word should then be interpreted accordingly. A dozen may mean thirteen if you're a baker, and 'thirty' days may refer to a calendar month. However, a customary meaning must be well-established – the court will not admit evidence from members of a particular trade or industry giving their views on what the term might mean.
Missing words: sometimes a dispute can arise because the final version of a contract omits a phrase or a clause of the agreed draft version. In such cases the court will try to reflect the parties' intentions. Even if there is more than one possible version of the replacement wording, this should not prevent the court from carrying out its usual task of choosing between competing interpretations.
Parol evidence rule: this prevents a party to a written contract from presenting additional evidence outside of the contract that contradicts or adds to the written terms of the contract. However, there are many exceptions. Evidence can be admitted:
It is arguable that there are so many exceptions to this rule that it now exists more as a principle than a rule of law. It can be said that the principle amounts to a presumption that the contract contains the whole of the agreement between the parties. The presumption can be overturned so if parties are keen to ensure that the terms of the agreement between them are limited to what they have written in the contract they can add an entire agreement clause to the contract, which states expressly that the contract contains the whole agreement between them.
Pre-contractual negotiations: evidence of pre-contractual negotiations is not usually admitted to help in the interpretation of a contract. However, it has been suggested that this should not be treated as a hard and fast rule and in some situations it may be appropriate to consider this form of evidence with all due caution. That aside, there are exceptions to the rule even as it currently stands. Evidence of pre-contractual negotiations might be admitted:
Draft agreements: these are not admissible as they do not usually represent a final consensus. However if the draft does represent a final consensus (for example, a draft lease annexed to an agreement for a lease) it may be admissible.
Explanatory notes: these can be taken into account in questions of interpretation. However a note will not override the plain meaning of a contract, and the contract itself will prevail if the note contradicts its content.
Contemporaneous documents: a document which is executed at the same time as, or shortly after, a contract can be used to help in interpretation so long as it forms part of the same transaction, as this will give a fuller picture of the transaction.
Conduct of the parties: conduct after a contract has been formed is not usually permitted as evidence in court. However, if an agreement is partly oral, subsequent conduct can be allowed as evidence in order to try to determine all the terms of the full contract. It is worth noting that this basic rule conflicts with what is allowed in many other jurisdictions, where evidence of subsequent conduct is admissible.
Sometimes a clause is put into a contract to limit or exclude one party's liability. If there is ambiguity in this clause, the 'contra proferentem' principle will be applied – meaning that the clause will be interpreted against the party seeking to rely on the exclusion clause.
The clearer the drafting of a contract, the less room there is for ambiguity and dispute. Here are some tips to make drafting clearer: