UK: Avoid Costly Contractual Mistakes - Both In Drafting And Performance

Two recent cases highlight the danger of failing to ensure that all the blanks are completed prior to execution of a contract or to perform a specified contractual procedure set out in it.

We review the cases of Sutton Housing Partnership Ltd v Rydon Maintenance Ltd [2017] and The Manchester Ship Canal Company Ltd v The Environment Agency [2017] and consider how far the courts will go to 'fill in' the blanks or overlook a failure to comply with a fully drafted contract.

We also provide some practical points to help ensure costly and disruptive disputes over contract interpretation and compliance can be avoided.

Sutton Housing Partnership Ltd v Rydon Maintenance Ltd [2017]

Background

  • In 2013, Sutton appointed Rydon to carry out repair and maintenance works to Sutton's housing stock for a period of five years - the contract wording was an amended form of the National Housing Federation contract 2011.
  • The contract included key performance indicators (KPIs) and minimum acceptable performance levels (MAPs) which were of significance to both parties: to Rydon's entitlement to additional incentivisation payments, and to Sutton's right of termination if Rydon failed to achieve the MAPs.
  • The pivotal issue in the dispute related to the MAPs which should have been specified in the contract but were not, although (query draft) MAP figures were included in three "example" tables.
  • In due course, Sutton sought to terminate the contract alleging that Rydon had failed to achieve the MAPs. Rydon challenged the validity of the termination arguing that the contract did not specify any MAPs, and went on to win an adjudication on that basis.
  • Sutton challenged the adjudication decision by seeking declaratory relief in the Technology and Construction Court (TCC) - for these purposes, we focus on just one of the issues raised: whether or not the contract specified any MAPs. At first instance, the TCC held in favour of Rydon (ie, upholding the adjudication decision) that the contract did not provide for MAPs - one of the reasons given for this decision was that the absence of MAPS "[did] not render the Contract unworkable".
  • This left Sutton unable to terminate for failure to achieve the MAPs, so it appealed to the Court of Appeal (the CA) arguing that the MAPs were either expressly or impliedly specified in the contract.

CA decision

In summary, Sutton won - the CA held that:

"the contract properly construed must mean that the MAP figures set out in [the] examples.... are the actual MAPs for the year 2013/ 2014, not hypothetical MAPs by way of illustration. ... The ... examples make it abundantly clear that in every instance the MAP is 3% lower than the target figure. That is obviously the ratio which the parties intended and agreed. Accordingly the MAPs for 2014/ 2015 must be 3% lower than the target figures set out in paragraph 5 of the [KPI Framework]."

In reaching this decision, the CA was quite clear in its view (based on a consideration of relevant case law on the construction of contracts), as exemplified in some extracts from Lord Justice Jackson's judgment below:

  • "both parties must have intended (and any reasonable or indeed unreasonable person standing in the shoes of either party would have intended) the contract to specify MAPs..."
  • The decision reached by the CA "is the only rational interpretation of the curious contractual provisions into which the parties have entered."
  • If Rydon's contention, that the contract specified no MAPS was correct, "the consequences would be extraordinary ... That would, with all due respect, be an absurdity, which no-one could have intended."

The Manchester Ship Canal Company Ltd v The Environment Agency [2017]

Background

  • In 1963, the Mersey River Board (the MRB) entered into a contract with the Manchester Ship Canal Company (the MSCC) whereby the MSCC agreed to improvement works to the River Irwell.
  • Those works had the potential to increase siltation in the canal (ie, to the MSCC's detriment) during high flows. The agreement therefore provided for particularised levels of compensation that would be payable to the MSCC if river flows exceeded specified amounts.
  • At clause 4, the contract provided for a site to be agreed (or determined by an arbitrator appointed by the President of the Institute of Civil Engineers) where the flows would be measured. The MRB were obliged to keep and produce records of those flow measurements at that site - those measurements would then determine whether and to what extent compensation was due to the MSCC.
  • In simple terms, this is what then happened: after the high flows during the floods of Boxing Day 2015, the MSCC claimed compensation of around £13 million. The difficulty faced by the MSCC was that no specific site for measurements had been agreed (or determined by an arbitrator) for the purposes of clause 4. The Environment Agency (the EA), being the statutory successor to the MRB, refused to pay compensation on the basis that no site had been agreed for the purposes of clause 4 and therefore no compensation was due under the contract.
  • The MSCC commenced proceedings and the EA applied to strike out the claim.

Decision

To summarise, the EA were successful and the Mercantile Court (the Court) held that the MSCC had no real prospect of success. Relevant considerations in reaching this decision are set out below.

  • Amongst various other contentions, the MSCC argued that flows were as a matter of fact being (and historically always had been) measured at two sites: at the Manchester Racecourse since 1941 and at the Adelphi Weir since 1935 - and it could be inferred that the MRB was happy to use data from those (or either of those) existing sites, rather than seek to agree a further site (or trigger the appointment of an arbitrator in this regard). This was not accepted by the Court, and it was noted that those two sites were being monitored well before the date of this contract and that the parties could easily have specified one of them to be used if they had wanted, but did not.
  • The MSCC also argued that the site could be agreed or determined by arbitration retrospectively. The Court considered the case law on the construction of contracts in the context of the entire contract, and concluded on this point as follows:

    "it is clear that the objective meaning of the language is that there was a sequence of events: and the new gauges were to be constructed contemporaneously with the commencement of the works and not at any point subsequent to that. This is entirely consistent with the commercial purpose of the Agreement which was to ensure that the claimant would be compensated for any additional costs which it incurred following the improvement works carried out by the Board. ...the conclusion, that the agreement was to be reached at the outset of the works, is consistent with business common sense."

    Where a contract is clear on its face, as here, the task of the court is to ascertain the objective meaning of the language of the contract and not to seek to improve or change the bargain by imposing an alternative solution for a scenario which was not in the contemplation of the parties at the time they entered into the agreement.
  • Another key argument put forward by the MSCC was that the requirement for agreement/ arbitration in respect of the site (under clause 4) could be regarded as a "non-essential part of the [contractual] machinery" meaning that the court could substitute its own decision as to the machinery to be used in the calculation of any compensation due. The Court rejected this argument: it considered that the measurement site had to be identified by a civil engineer, rather than a lawyer - so the location of the site could not be determined by the court.
  • Additionally, the Court did not consider that the contract was unworkable (on the basis of the EA's argument); rather, the mechanism in clause 4 had simply not been activated.

Different approaches or not?

At first glance, it may seem that these approaches are inconsistent - Sutton maintained a remedy; the MSCC did not - so Sutton had what perhaps looked at first blush like a contract omission remedied, but the MSCC was left without remedy.

But in fact, the context of each decision is significantly different. By a comparison, the alignment of the courts can be seen.

In one case, the problem arose out of a drafting mistake; whereas in the other case, there had been an oversight in complying with the terms of the fully drafted contract.

  • In Sutton v Rydon, there had been a slip-up in the preparation of the contract document and the error was not in dispute. Both parties agreed that the clear intention had been for the means of calculation of the MAPs to be specified and this had not been done.

    The focus of the CA therefore was on the intention of the parties and that of "at the time the contract was finalised. It was also significant that without MAPs, key provisions of the contract were inoperable - and were so to the detriment of both parties (Rydon as to its incentivisation payments).
  • By contrast, in MSCC v EA, there was no comparable oversight in drafting. In the Court's view, there was a clear and sequential mechanism in the contract for the ascertainment and assessment of any compensation due; this had simply not been activated by the parties as they had failed to agree a measuring site as required by clause 4.

    Effectively therefore, most of the arguments before the Court centred around the MSCC's contentions that the requirement in clause 4 to identify a site had been satisfied - almost an attempt at reverse engineering. The Court was (some might think harshly) not prepared to allow a late confirmation of the measurement site (as one of the two existing measurement sites) - adjudging that it should not go beyond that which was in the contemplation of the parties at the time they entered into the contract (which was an express agreement on the issue between the two).

    At the least, the MSCC should have sought to agree the measurement site at the time, and sought its remedy if agreement could not be reached at the time.

We set out below practical points arising out of these decisions which will help to avoid costly and disruptive disputes over contract interpretation and compliance.

Practical points

  • Check the contract carefully before finalisation, with particular focus on blank sections "to be completed", so that areas left in draft during initial negotiations are not left unspecified by mistake. This applies particularly to schedules. In the Sutton case, this was on the MAPs (and fortunately there were draft numbers that the Court could adopt); but in a case we are currently advising on, the schedule that was forgotten to be completed was the Work Specification schedule (so quite important, really).
  • As part of a checklist before execution, include a review of all cross references - this can avoid consequential errors and key omissions which could render parts of the contract inoperable.
  • Be aware of key contractual provisions that impact on your area of work - if there are specified procedures and processes for the work you are involved in, make sure you know what is required, and plan for when and how this is to be undertaken.
  • It the contract provides for items still to be agreed, make sure a checklist of those is both prepared and actioned - a good example is an "Exit Programme": frequently the supplier's obligation to prepare, but really to benefit the buyer, and come the time that something has gone wrong and the buyer wants to force a termination, there is no Exit Programme, so that how handover will be effected is wholly uncertain.
  • Keep a clear note of the steps that were taken in order to comply with the specified steps, to include dates and relevant notes, in case you need to evidence compliance in due course.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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