Courts must read effect into ambiguous contracts, says Court of Appeal

A litigation expert said that the case is an illustration of how a lack of clarity in contracts can lead to expensive court cases with results that neither party is happy with.

Lady Justice Arden said in her ruling that courts should look at whether there is an interpretation of a poorly written contract that would make it effective. If there is, that should be chosen above an interpretation that would make it have no effect, she said.

She also said that courts should choose an interpretation that is the likely outcome of the parties' agreement, rather than one that seems improbable.

"The agreement is not well drafted. In that situation, a principle which has particular potency and resonance is that, if the agreement is susceptible of an interpretation which will make it enforceable and effective, the court will prefer that interpretation to any interpretation which would result in its being void," she said in a dispute over a property deal.

"The court will also prefer an interpretation which produces a result which the parties are likely to have agreed over an improbable result," she said.

Mark Surguy is a litigation expert at Pinsent Masons, the law firm behind OUT-LAW.COM. He said that the ruling underlined an established principle that companies should bear in mind when drafting contracts.

"This underscored the long-standing rule of law that a court will always try to declare a contract effective by ruling on what it intended to mean even if that is what neither party thinks it means," he said.

Two companies disagreed over the meaning of a contract they had agreed upon. The seller of a pair of properties in Bournemouth claimed that a discount to the price should not be applied. The buyer believed it should.

The buyer wanted to turn the houses into flats but the permission to do that was needed from the trustees of the Cooper Dean Estate, which had a restrictive covenant on the properties.

The contract dealt with who should pay those fees, estimated as likely to be between £8,000 and £10,000. It said that the sale price should be £862,000 minus the covenant fees.

The Cooper Dean Estate, though, would not alter the covenants until planning permission had been received, but the buyer had decided to go ahead and buy the buildings before it had received planning permission.

It said it should receive the discount on the purchase price because it would have to pay those costs eventually. The seller said that the discount should not apply because the covenant had not been changed at the time of sale.

The High Court had heard the case and rejected both companies' interpretations of the contract but the judge had refused to give his own.

Lady Justice Arden said that the contract was poorly drafted, but said that the discount should be applied because it was a cost that would have to be paid by the buyer at some point, regardless of whether that was before or after the completion of the sale.

Surguy said that the case illustrated why companies should make sure their contracts are very clear.

"This just shows that the problems you can encounter if you do not clearly express your commercial bargains in writing are often underestimated," he said. "Contractual disputes are not easy to resolve."

Surguy said that the Court of Appeal disagreed with each company's interpretation of the contract and made its own. He said that the case illustrates that litigation is an unpredictable and potentially expensive way to settle a contractual dispute.

"In contractual disputes it is very difficult to predict the outcome. The costs are significant and the outcome may well be one that neither party was looking for," he said.

"This is why companies should take care when drafting contracts and should pay to have them drafted by a lawyer in the first place because if they don't pay at the start they could well pay much more at the end when they have to go to the courts," he said.