If for some commercial reason terms do have to be drafted on an abnormal basis, then this should be clarified for the avoidance of any doubt. Above all, the parties to the contract need to know what has been stated and how it will work. It is not an all-purpose cure for incorrect drafting or poor proof-reading.
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In our case history above, the remedy of rectification was, perhaps surprisingly, not asked for when the case first appeared in the Chancery Division. The reason was probably that one party was in breach of the agreement, and equity will not usually assist a party in breach. The other reason is that the parties almost certainly did not know what the correct version of Clause 4 of the agreement was meant to be, and that, as we shall see, is an important requirement to obtain rectification. So the case had to be argued on other grounds.
If rectification can be obtained, then it may in some circumstances be a quick and effective means of getting a contract to work in the manner intended. But to obtain rectification one cannot merely assert that the wording appears to contain an error. One must know what the correct version was meant to be. The parties to a contract for the sale and purchase of companies had, at meetings and in correspondence, expressed an intention to proceed in accordance with certain accounting principles, but the contract as written and signed failed to reflect this intention.
By the agreement two companies were purchased, and the agreement provided for a price reduction by reference to profits shown in the accounts of the two companies. Two methods of drawing up the accounts were possible, and advice of leading counsel was that the contract as actually written provided that the accounts of the two companies merely had to be aggregated without adjustment.
But one of the parties argued that the parties had really intended that the accounts should be drawn up by a different method, in accordance with the principles of acquisition accounting, complying with GAAP.
So the party taking this view sought rectification, which was granted by Arden J. These are: 1. Proof that both parties had intended to include in the contract something which was not in fact reflected in the written agreement. Proof that the parties had a common intention which persisted throughout the negotiations. The party seeking rectification must show that the proposed rectification does not conflict with any of the other agreed terms of the contract.
Mutual understanding: plain intelligible language All commercial contracts should be intelligible. Language should be as plain as is compatible with accuracy of meaning. The question is how to achieve this. Under these rules, the Office of Fair Trading can require that terms be put into plain language and can enforce this, if necessary, by application for an injunction. In any case before the courts, if there is any doubt about the meaning of a term in a consumer contract falling within these rules, the interpretation most favourable to the consumer will prevail.
In commercial contracts there is as yet no equivalent requirement, although the Unfair Contract Terms Act applies to many commercial contracts, and the knowledge of the customer of the extent of a term may in some cases be a relevant factor in deciding whether the term is reasonable or not. How to make a term clearer 1. Clear headings. Clear paragraphing to break up large blocks of text. Short sentences. Making it clear which party is to do what: if necessary by repeating a name instead of using a pronoun.
Avoidance of obscure words see below for some examples. Avoid unnecessary provisos layers of provisos. Number and indent provisos or qualifications. Use good, well-chosen definitions. Use recitals where appropriate to clarify the background to the contract. Use schedules, appendices or annexes to set out details and to separate them from the main body of the contract 12 Use formulae where necessary, but check that they do exactly what is intended. Obscure words A few examples will suffice to give the reader an idea of what to be wary of.
Few people, however, have any precise knowledge of its meaning. Since at least two of the cases we will be looking at in the next chapter were about time provisions, and in one case turned upon a matter of minutes, meanings of expressions such as this can be of considerable importance.
The words are common enough and have come to the aid of those drafting contracts on numerous occasions. For instance, there are terms under which a person is deemed, after a stated period of time to have accepted goods, or clauses under which certain property is deemed to belong to a party at a certain time.
However, the precise meaning of the words can be obscure because it leads to a question of whether the state of affairs that is deemed to exist really exists, as a matter of fact or of law, or is merely treated for the time being as though it exists. If the latter is the case, this can lead to difficult questions as to how to classify this provisional state of affairs. In this case a contract for the separation of shale from coal by means of a coal washing plant provided by Clause 53 2 that all plant, goods and material owned by the contractor was, when on site, deemed to be the property of the council.
By another clause of the same contract, the council could in certain circumstances, such as the liquidation of the contractor, retain the plant and sell it on completion of the works. In the event, the contractor got into financial difficulties and left the site leaving the plant there.
The administrator applied for delivery of the plant, or payment for its use. In the Chancery Division and the Court of Appeal it was held that the terms of the contract did not have the effect of transferring legal ownership of the plant to the council. Millett L. What the council had in this case was a possessory right, together with a power of sale. But the power of sale was invalid in this case, since it required registration as a floating charge, under the Companies Act , and this had not been done.
The council had drafted terms which achieved some possessory rights, but these stopped short of what the council really wanted, and caused the litigation. What this case demonstrates is that an obscure word can give rise to extremely complicated legal relationships, and a failure to achieve commercial objectives.
This form of wording is not usual and the purchaser thought that it displaced the normal rules applicable to bonds. The Court of Appeal held that it was legitimate for a court to look at the context and the commercial background to the contract, in interpreting this provision, so as to avoid an unreasonable result, and accordingly they held that the purchaser was only entitled to retain sums equal to its actual loss. This conclusion seems entirely just, but the case again shows that a simple commercial device can be made unnecessarily contentious by the use of a few ambiguous words.
Comm Finally, it should be noted that simple and popular expressions can be obscure. The parties had allowed the agreement to run for the initial five years and for one five year period of renewal. But the words used were too uncertain to allow further renewals. If the words were construed so as to entitle the distributors to renew in perpetuity, this would be void as a restraint of trade. In some cases it will be insufficient to set out a commercial plan, or part of it, merely as a verbal statement: it may involve numerical data, statistics, calculations, or comparisons or criteria.
Formulae can be of great assistance in making these accessible, and particularly in making sure that only one outcome or interpretation is possible. This is not to say that a formula has to be a substitute for the words of a term; a formula should be a supplement, or alternative way of conveying the identical information to the words of the relevant term. In this case Ms Martinez, a former Wimbledon champion, entered into a five year sponsorship contract with Ellesse, a sportswear manufacturer, in The problem was that when this term was applied to the relevant period, and her best rankings were added together and divided by 12, the result was a figure of 2.
This gave rise to the litigation in question. If the parties, at the time when the contract was drafted, had attempted to express the relevant terms as a detailed formula then the ambiguity would immediately have been spotted, and a suitable corrective formula or statement could have been put into the contract.
In the event, the Court of Appeal held that the numerical figure arrived at was not sufficient on its own to qualify for a bonus, and that a comparative ranking with other players was the main criterion. There were other players, who by the same criteria ranked higher than the plaintiff, so she in fact ranked only fourth and did not qualify for the bonus.
This is probably the most important question to be answered in approaching time obligations in a commercial contract. Whether the parties agree that time is to be of the essence or not will depend a great deal upon the overall commercial strategy that one or both of the parties will have in mind when negotiating the contract.
With some commercial transactions, time is not critical and there will be no need to set particular deadlines. With others a delay amounting to a few minutes will be of commercial importance. It is in these latter instances that time is most likely to be of the essence. The fact that time is of the essence can sometimes be inferred from the nature and circumstances of the contract.
However, there will be instances when either of the parties will wish to make it clear by the terms of the contract, one way or the other, whether or not time is of the essence. We will deal with this point in more detail when we look at the ways in which the validity of a contract can be contested in Chapter six. This means that the smallest breach, and even an unintentional breach of the term, will entitle the other party to terminate or rescind the contract. These are harsh consequences, but two cases will demonstrate their application.
Lombard North Central plc v Butterworth 2 W. This meant that even an unintentional delay in making payment would permit the lender to exercise the same remedies against the borrower as if there had been a repudiation by the borrower. This had particularly harsh consequences for the borrower, who argued that what was being imposed upon him amounted to a penalty. However, the Court of Appeal held that to put into a contract a term making time for payment of the essence is to make a choice about the nature of a term, and this is not the same thing as stipulating damages although it may affect the assessment of damages.
So it did not amount to a penalty. In this important case there was a contract for the sale and purchase of a flat in Hong Kong. This is somewhat unusual in ordinary domestic conveyancing, but may sometimes be a feature of a commercial conveyance of a particularly desirable property. As it turned out, the cheque for the purchase price was delivered ten minutes too late, and the vendor rescinded the contract and claimed that the deposit was forfeited.
The purchaser raised a number of arguments which were eventually heard in the Privy Council. One of these was based on waiver, but this argument was clearly unsustainable. Another argument was that the forfeiture clause amounted to a penalty. But the Judicial Committee of the Privy Council held that this was a deposit, and the forfeiture of a deposit is not the same thing as damages.
The rule against penalties would only have applied in the circumstances if the deposit had been too large to be a genuine deposit. Finally, the appellant argued that equitable relief should be granted against the harsh consequences of time being of the essence. The Judicial Committee held that there was no general principle of equitable relief in this area, and that there were no specific grounds in this particular case. It was stated by Lord Hoffmann that if the court accepted the argument that ten minutes delay was not late enough for the normal rules of breach of an essential term to apply, then it would frequently be faced with arguments about how late was too late.
So the usual rules applied. Positive obligations: firm undertakings or endeavours? When we draft terms about the things that each party is to do for the other, it is important to appreciate that there is a significant choice to be made as regards each term of this kind. Each of these expressions has a different shade of meaning. There is an element of the subjective with reasonable endeavours, as the Phillips v Enron case shows. Every term has to be taken as a whole and in its context.
The terms left certain terms to be agreed and stated that the parties were to use reasonable endeavours to agree as much in advance as possible, but in any case not less than 30 days in advance of the date on which the seller would commence deliveries of gas to the buyer the commissioning date.
The parties were also under an obligation to use reasonable endeavours to coordinate the construction of their facilities and to develop operationally necessary procedures. The buyer argued that it was entitled to take into account its own financial position when seeking to agree a commissioning date. The seller argued that the only criteria were technical and operationally practical criteria i.
The Court of Appeal held by a majority that, when taken in their contractual setting, and in particularly in view of the fact that there was a fall-back date if the parties were unable to agree, the words used did not impose upon the buyer an obligation to disregard the financial effect upon the buyer of agreeing a commissioning date. Are there any problems in enforcing endeavours clauses? The answer to this is that it depends upon what it is that a party has to endeavour to do. If what has to be done is certain enough, such as delivery of goods, or commissioning of equipment, then a promise to use endeavours to carry out such functions will be enforceable.
But if the thing promised is uncertain, such as endeavours to agree, or to negotiate, then the term may fail for lack of certainty. However, for present purposes we need only note that in the Court of Appeal it was held that this particular obligation to use reasonable endeavours was capable of being enforced.
It was argued that the obligation in the clause quoted in this case was too uncertain to be enforceable. However, Lord Justice Morritt stated that it was reasonably clear and sufficiently certain what the contracting party was to do. So, unlike a contract to negotiate, a term that one party would use all reasonable endeavours to obtain a right of first negotiation i. What this issue has in common with other issues in this chapter is the commercial importance of making an appropriate choice at the outset.
There are a number of ways in which all or some of the terms of a contract may become enforceable by a third party. The two parties to the contract have a choice, when making their contract, as to how far third party rights should be permitted, and on what terms. Putting this into a commercial context, if a third party is permitted to take advantage of a contract, this could be potentially harmful to the commercial interests of one or the other of the two original contracting parties.
To exclude, or control the rights of third parties, parties drafting a commercial contract need to bear in mind three concepts: 1. Assignment of rights. The creation of a trust of benefits arising from a contract.
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Novation Since novation can be agreed upon at any time, or declined at any time, it is not usual to draft clauses in a contract either permitting it or restricting it. However, there may be cases where a contract is created between A and B in the knowledge that it will later be novated to a third party. Controlling assignment Unless the contract contains terms restricting in some way the right of one or both of the parties to assign benefits of that contract, it is assumed as a matter of law that assignment is permitted. The right to assign may be controlled in a number of ways: there may be a clause which states simply that neither of the parties may assign any part of the contract.
The clauses do not have to be bilateral: there are contracts in which one party, such as a major supplier or purchaser, restricts the right of the party it is dealing with to assign, while not mentioning its own rights to assign, which are assumed to have been preserved. The Linden Gardens case In the case mentioned above, the issue before the House of Lords was whether or not a clause prohibiting assignment, or restricting it in such a way as to require prior permission, was valid in English law. It was argued that as a matter of policy such clauses should be ineffective. However, the House of Lords held that there was no such rule of public policy in English law and these controlling clauses mean exactly what they say, so that where permission is required and there is no permission to assign, a third party will not be able to take the assigned benefit s.
This raises some important issues of commercial planning. As we have already observed, there will be some instances in which parties actively want some form of restriction of the right to assign. In other cases, however, a restriction of the right to assign will be undesirable, since a purchaser of goods or services may wish to sell onwards, and to include the benefit of any term or contractual warranty relating to those goods or services.
In the Linden Gardens case, a building had had decontamination work done to it and the question was whether claims relating to this could be enforced by any subsequent owner or lessee of the building, if the benefits of the contract had been assigned. The contract had a clause restricting assignment.
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The House of Lords held that claims could not be brought by any assignee. There will be cases when a purchaser of services or goods will need, for commercial reasons, to take steps to preserve third party rights. In an action concerning the validity of purported assignments it was held that if the relevant clause is drafted in this way, then there can be no valid assignment unless and until prior permission is sought. In this case, since no prior permission had been sought, the question of whether such permission could reasonably have been refused was not strictly necessary for the decision.
Nevertheless, Lord Justice Evans did give some consideration to this question, and his view gives us an indication of how courts are likely to deal with this issue in the future. He was prepared to look at the facts of the case and at the differences between the assignor and the assignee. Chartsearch would presumably have refused to give permission to assign to Hendry, if such permission had been asked for. The original party to the contract with Chartsearch was a company and could have been made to give security for costs in litigation. The assignee, being an individual, and in any case entitled to seek legal aid, did not have to give security for costs.
These were, in the opinion of Lord Justice Evans, grounds which would have made it reasonable for Chartsearch to have refused permission to assign. The creation of a trust of the benefits arising from a contract This possibility was first thought of in the nineteenth century but was seldom used commercially. Only recently, as a result of the cases involving Don King Productions Inc v Frank Warren and others, have the possibilities of either expressly providing for the creation of a trust, or expressly excluding the creation of a trust of one or more of the benefits of a commercial contract been considered as a normal part of the planning of a commercial contract.
However, the supposedly assigned contracts contained provisions expressly prohibiting assignment. On behalf of Mr Warren it was argued that this meant that no valid assignments had taken place. This would have greatly assisted Mr Warren in his contention that the contracts were not partnership property.
The issues referred to the Chancery Division, and subsequently the Court of Appeal, as preliminary issues were whether, and with what effect, the purported assignment of non-assignable rights could be valid as a creation of a trust. To these questions Mr Justice Lightman, with whom the Court of Appeal agreed, gave the following answers: 1. A trust may exist of a contract. A declaration of a trust in favour of a third party of the benefit of a contract or of the profits obtained from a contract is different in character from an assignment.
A clause prohibiting assignment does not extend to declarations of trust of the benefits of a contract. If one party wished to protect himself against the other party declaring himself a trustee, and not merely against an assignment, he should expressly so provide. This had not been done in this case. The immediate result of this case was that the parties reached a settlement on the basis that the contracts in question were indeed partnership property.
The long-term result is that those who draft contracts might want to make it clear from the outset that they may wish to put into trust for one or more third parties some, or all, of the benefits arising from the contract. If they do this, then they must make sure that the wording of the contract is not inconsistent with this.
If, on the other hand, a party to an intended contract does not wish the other party to be able to create such a trust, whether deliberately or unintentionally, then the clause which prohibits assignment will need to be improved and extended so that it also prohibits the creation of any form of trust. Although some of its provisions have now been tested in the courts, its full implications will take many years to become clear.
One of its more obvious effects will be to extend to third parties the protection of clauses excluding or limiting liability. This will have powerful commercial effects in areas such as shipping, transport, construction and design, where one of the original contracting parties uses third parties to carry out all or part of the work. This change in the law will be looked at when we deal with limiting and excluding liability.
Another important effect of the new Act will be to confer positive rights upon certain third parties, such as the right to enforce payment, or the right to enforce a warranty, or the right to enforce any terms about performance of duties. To this extent, the new Act will serve a similar purpose to that already served by the assignment of rights, or the assignment of debts. However, the difference will be that there will be no need for an assignment, so a term of a contract restricting or prohibiting assignment will not touch the rights conferred by the new Act.
Moreover, the nature of the rights conferred upon third parties will be defined and structured by the Act itself, and not by the law of assignment. The new Act was passed on 11 November and came into force at once, but with a period of grace which meant that unless contracting parties expressly agreed to make use of the new Act at once, it would not affect any contracts made before 11 May Apart from this commencement provision, there are at least two main issues which have caused some apparent difficulty.
To what extent, if at all, could a third party acquire rights under a contract without the two original contracting parties intending this to happen? Once a third party has acquired such rights, to what extent does this tie the hands of the two original contracting parties and affect their ability to alter or to modify terms of the contract or to end the contract by agreement? Several points of interest emerge from this text.
Firstly, those who wish to make use of the new laws may expressly confer rights upon one or more third parties. The rights are to enforce terms rather than the contract as a whole, so one may select the particular terms to be enforced by the third party, and exclude others. This rather obscure provision contains potential dangers. If a third party can successfully claim that a term appears to confer a benefit on him, he can enforce it even though this might not have been contemplated by the parties to the contract. However, subsection 2 enables the parties to the contract to make their intentions clear in this respect if they so wish.
As a result of these provisions it is expected that it will be fairly standard for contract terms to contain a clause stating either that the parties do not intend any term of the contract to be enforceable by a third party; or that the parties do not intend any term of the contract to be enforceable by any third party except where the parties have expressly stated that a named third party may enforce a particular term. The terms provided that a commission of two per cent would be paid equally to two companies, one of which was Cleaves.
But Cleaves was not a party to the contract. The Commercial Court held that since the relevant clause of the contract purported to confer a benefit upon Cleaves, Cleaves was entitled to enforce the term under Section 1 of the Act. Further, since the contracts provided for arbitration, Cleaves was entitled to refer the matters to arbitration, as this is provided for by Section 8 of the Act. Identification Another of the problems posed by the new Act is that under Section 1 3 a third party can acquire the right to enforce a term either by being named in the contract as was the position in the above case , or by being identified in the contract as a member of a class, or by being identified in the contract as answering to a particular description.
There need be no problem with named third parties.
This is the kind of issue that would need to be clarified in the contract. Variation and rescission Section 2 of the Act creates further issues. A third party qualifies by having acquired rights under the contract and by making the promisor aware that he intends to rely upon those rights. The section is complex and its details will not be explored here. However, Section 2, subsection 3 provides that the parties are free to include an express term under which they may by agreement rescind or vary the contract without the consent of the third party.
It is expected that this will become a standard term of commercial contracts if third party rights are not completely excluded. In the last of these instances the common law principle of frustration may sometimes have a part to play, but in the absence of a clause providing for termination, the parties may have to resort to litigation to ascertain the true position.
A person drafting the termination provisions for a commercial contract will have to make a number of choices: 1. Should the clause state the termination rights of both parties? If a clause is drafted in this style, it will normally state that either of the parties may terminate the contract if any of the listed circumstances occurs. On the other hand, some lawyers would prefer to have a separate clause for each party, because the events would be different in each case. Should the clause provide only for breach and insolvency, or should it provide for other events, such as change of control, or the departure of or unavailability of key persons?
Should the right to terminate be with immediate effect, or only after the expiry of a period of notice? The answer to this depends upon the ground for termination. Where insolvency is involved, it would be sensible to provide for termination by notice to take effect immediately. With breaches of contract, the position may require a distinction to be made between different terms of the contract, so that in the case of those breaches that are capable of being remedied, a stated period of notice would be provided for; while in the case of breaches that cannot be remedied, termination would be by notice to take effect immediately.
Any right of either party to terminate by notice without giving reasons should of course provide for a commercially reasonable period of notice. Apart from these points, it needs to be pointed out that there have been a great many important cases on the subjects of termination and notices. Almost invariably they have arisen out of ambiguities in the wording of the contracts concerned or unreasonableness of the provisions. The courts require clear language, particularly where the exercise of a right to terminate on account of breach by one of the parties could bring about harsh consequences.
It is also essential that all provisions about termination should be free from ambiguity. Wickman Tools Ltd v Schuler AG AC This case is now much cited as an authority for the proposition that if one wishes to achieve an unusual effect by the wording of a term, very clear words are required. This clause provided for a party who had committed a material breach of the agreement to have 60 days in which to remedy the breach, after having been required to do so. These terms led to litigation.
Schuler AG relied upon the status of the terms about the obligations of Wickman Tools Ltd, and argued that any breach of conditions could lead to immediate termination of the contract. But presumptive meanings can be displaced when they come into conflict with other terms which are so clear that their natural meaning simply cannot be disregarded. Ltd AC This more recent example shows how important it is to be clear about dates or periods for notices to terminate contracts. The majority of the House of Lords held that when the tenant gave the notice he did in fact intend to terminate on the third anniversary, although the words that he used had misdescribed that anniversary.
For practical purposes it becomes clear that if anniversaries are relevant to dates for termination or indeed any other dates , it would be good practice to state what that anniversary is, as a calendar date. Not least of the problems in the above case is that the tenant may have thought that what was required was a notice to expire at the last moment of the day before the anniversary, or the first moment of the actual anniversary, that is, midnight on 12 January A good contract term would have left no doubt as to what was really required.
In this case the parties had entered into an agreement for the supply, support and maintenance of software by Harbinger. The problem with a term drafted in this way is that it is not clear whether this means that there is an entitlement to at least one year of automatic renewal, or whether the notice can be given in such a way as to take effect at the end of the initial term.
The Court QBD opted for the latter interpretation. But it cannot be too strongly stated that a well drafted contract simply does not allow for these arguments.
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Material breach; substantial breach; repudiation If a term provides for termination on grounds of breach by one of the parties, it is helpful to provide for: 1. It is also helpful to specify the nature of the breach that will give rise to the right of the party not in breach to terminate. As far as notice is concerned, the Wickman Tools case already cited shows that the courts are reluctant to construe a term so as to allow for termination with immediate effect except in recognized cases such as where time is of the essence.
But a carefully drafted term may allow for this in the case of breaches which are not capable of being remedied such as breaches of confidentiality. If a breach is capable of being remedied, then it is sensible to provide for a period of notice in which to remedy the breach, and that if it is not remedied in that time, termination will take effect immediately. In the event, the council was not happy with the performance of the contractor, served default notices and eventually terminated the contracts.
For these reasons the Court of Appeal took the view that the parties could only have intended the literal interpretation of this term to apply to extreme cases, which is to say, to repudiatory breaches. The court stated that single breaches, under this term, would have had to have been repudiatory, while multiple breaches would have had to have been cumulatively repudiatory, to justify termination by notice with immediate effect. Part of the reasoning behind this case is that with long-term contracts in which the contractor has made considerable investment, without clear words, one would not normally expect the contractor to have put himself at the risk of having the whole contract terminated for comparatively minor reasons.
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