UK: Contract Flash Points - Part 1 : Drafting Your Contract

Last Updated: 17 April 2009
Article by Simon Tolson

Click here to read Part 2 in the series.

In the first in a series of four articles looking at key issues that arise when neogtiating contracts, Simon Tolson begins by reviewing some of the problems that can arise when drafting your contract.

Drafting your contract

The most important features of the legal relations between the contractor and the employer are defined and governed by a contract; well that is the intention of good contract drafting. Construction contracts tend to be highly specialised and comprehensive documents. They are unlike most other commercial contracts, since they generally govern a continuing relationship rather than a more fleeting transaction like buying or selling a commodity.

As is well known Contract law in England is based upon a series of doctrines, notably the idea that the two parties negotiate an agreement, they agree the terms (usually after some haggling) and then they execute a contract. The transaction i.e. 'the business' can then take place. The fact that construction contracts take place over extensive periods, 5 years is not unusual, is not a feature that always enables the easy application of general contract law. Many aspects of contract law are inadequate for dealing with the inevitable tensions which arise as a consequence of the contract adjustments made and the conflict processes without renegotiation – and that is where much of the heat is generated in the engine room of the dispute machine.

How often is it that the deal is closed but then on closer scrutiny one sees it is not articulated as the courts might presume of businessmen, and the perceptions of the parties continuously change as the work progresses. The reality is that there will be a steady flow of information between employer, consultants and contractor. This results in incremental changes to the original contract until the signed contract documents (as a snapshot) no longer reflect the real situation. In other words, the essential conflict within the process renders the agreements dynamic and well transient. Moreover, as work proceeds the relative bargaining potency of the parties are constantly adjusting. Standard approaches to contracting simply take no account of this that is why sometimes one or other party can have the upper hand at a given time during the currency of the contract.

This might all be down to one symptom, after all it has been said: 'Lawyers have two common failings. One – they do not draft well. Two – they think they do' (ALA, 1970). Or, put another way, "One man's meat is another man's poison" in many contracts;

It can take a few sweet words to turn the contract into Armageddon. Is it in arcane language? Is it bad drafting or a blend of both?

Twenty-five years ago, the National Consumer Council was advocating plain language in consumer contracts and even drafted a bill – the Plain Language Act 1985. Consumers at least are now protected against obscure language to some extent; one need only look at car rental agreements, HP Agreements, passports, driver's licences etc.

In the past 25 years since I came into this profession the English has become plainer, standard forms have become clearer, Parliamentary drafting has improved (except in cases such as the new Construction Act where we seem to be going backwards), and standard precedents produced by major law firms show plain language influence – logical order, indexes, good layout, short paragraphs. However, bespoke drafting has improved little.

The causes are not hard to deduce:

  1. Fear of negligence – let us use what is 'tried and tested' (though that may be a myth).

  2. 'It's not safe' – but are archaic words and structures safer?

  3. Time pressure – repeat what was done last time, use precedents.

  4. Laziness – it takes effort to draft well.

  5. Education – grammar has not been taught well to the children since the 1960's (my opinion) save in the public school sector.

  6. Training – those who train young lawyers pass on their own drafting styles.

Here are some non exhaustive explanations/examples for bad drafting.

What do words mean?

Queen Elizabeth's School Blackburn Ltd & ors v Banks Wilson Solicitors (A firm) [2001] (PNLR 14 CA) this case concerned the following covenant:

The Transferee will not construct any building on the Property, which shall be ..., greater in height than the buildings now existing on the Property. [It begs the questions why the phrase 'greater in height' was used instead of 'higher'.]

The transferee, a school, gave the covenant when they bought the land and started to build a new building higher than the ridge of the roof of the existing buildings but lower than the chimney tops. Their solicitor advised that this did not contravene the restrictive covenant. The Court of Appeal held that this was negligent advice as there was no decided case on what 'highest' meant in the context of a building.

The real failure, though, was in drafting. The parties had agreed the words, but not the underlying concept.

AIB Group (UK) Plc v Martin & anor [2001] (TLR CA 17.12.01)

Mr Gold was a dentist. Mr Martin was a property trader. The two of them did some joint property development and entered into a joint mortgage to secure lending on 14 jointly owned properties.

Here are the relevant clauses:

  • 'Mortgagor' means [Mr Gold and Mr Martin].
  • If the expression 'the mortgagor' includes more than one person it shall be construed as referring to all and/or any one of those persons and the obligations of such persons hereunder shall be joint and several.
  • The mortgagor... charges... the [14 properties] as a continuing security with payment to the bank... of all monies covenanted to be paid under clause 2 hereof.
  • Clause 2

The mortgagor hereby covenants with... the bank... that it will on demand pay or discharge to the bank...

(1) all sums of money which have been or are now or may hereafter at any time or from time to time be advanced to the mortgagor by the bank...

(2) all other indebtedness and/or liabilities whatsoever of the mortgagor to the bank... present, future, actual and/or contingent and whether on any banking or other account or otherwise in any manner whatsoever.

Mr Gold also separately charged two of his own properties, and Mr Martin 28 of his. Each of these mortgages, the joint one and the two separate ones, were in the same standard form. The bank called in its loans. There was a substantial shortfall. The question was whether Mr Gold was personally responsible for Mr Martin's private debts, and the question turned totally on the interpretation clause. There were two possible interpretations.

(1) The literal one. 'Mortgagor' meant Mr Gold and Mr Martin jointly and each of them severally. That turned clause 2 into nine separate covenants. They were jointly, and each of them separately, liable for their joint debts and for their separate debts. Therefore, Mr Gold was liable for Mr Martin's personal debts.

(2) The 'distributive' one. If one says Mr and Mrs Jones took their children to school one understands that to mean they are the parents. However, if one says Mr Jones and Mrs Smith took their children to school one understands that to mean 'their respective children'.

Their Lordships were divided. Only one of the five Law Lords supported the 'distributive' approach. Nevertheless, he agreed with the others, so the House unanimously decided that the words meant literally, what they said.

Smith v Garrard [2004] ([2004] EWCA Civ 1655)

The covenant: 'Not at any time to park vehicles upon or place any articles upon or in any way obstruct the free passage of any part of the Roadway over which other persons have rights of way', did not stop car parking.

'Other persons', as a matter of law, did not have right of way over the whole of the roadway, so parking a car did not obstruct that right. This is an example of trying to say too much in one sentence – and of succeeding. The following points arise:

(1) It would have been better simply to refer to the road. No need to mention the right of way.

(2) 'Any part' suggests there might be parts over which persons did not have right of way.

(3) Why 'vehicles' and 'articles' (plural)? Why 'upon' rather than 'on'? Why 'roadway' rather than 'road'?

The following would probably have worked – and it is shorter:

'Not at any time to –

(1) park a vehicle on the road; or

(2) place any other article on the road.'

Conditional contracts, options and overage

The greatest precision is required in framing conditions, particularly as the courts often construe them literally. Like the example in the case of Freund v Charles Scott Developments (South Devon) Ltd [2002] (2 P&CR 31 (CA))

Freund agreed to sell land to T, 'hereinafter called "the Purchaser"'. The sale was conditional on planning permission being obtained within a stated period. The agreement defined 'Planning Permission' as permission obtained 'following a planning application... made by or on behalf of the Purchaser'.

T assigned the agreement to Charles Scott, who applied for and obtained planning permission. T then notified Freund of the assignment. Freund refused to complete the sale. The condition had not been fulfilled, as the permission was not granted on T's application, so was not 'Planning Permission' as defined. The judge at first instance and the Court of Appeal unanimously agreed.

Ministry of Defence v Country & Metropolitan Homes (Rissington) Ltd & anor [2002] ([2002] 44 EGCS 170)

Here, developers bought a large area of land that included a 'hatched area' on which 37 houses stood. Overage was payable on implementation of planning permission. However, the hatched area was excluded from the overage obligation if the 37 houses were demolished. The developers got planning permission for the hatched area, demolished 35 houses, built 26 new ones and converted the remaining two houses into shops.

They had to pay over £800,000 overage. Had they demolished the last two houses and built new shops there would have been no liability for overage. Even though the conversion was sensible, it was no part of the court's business to rewrite the parties' bargain.

Chartbrook Ltd v Persimmon Homes Ltd & anor [2007] ([2007] EWHC 409)

A rather recent first instance decision, here everything turned on a classic ambiguity in drafting, which an algebraic formula should have avoided. Where do the notional brackets go? Overage was expressed to be: '23.4% of the price achieved for each residential unit in excess of the minimum guaranteed residential unit value [i.e. land value] less the costs and incentives'.

So, was it:

(1) '23.4% of (price minus land value)', giving a result of £4.6m; or

(2) '(23.4% of price) minus land value', giving a result of £900,000?

On all the evidence, the judge held that overage should be the higher figure, dismissing Persimmon's case both on how the clause should be construed and on rectification. Words can be ambiguous. Formulae may contain mistakes. It is always worth including worked examples to demonstrate the parties' intentions.

Conclusions

Think carefully about the meaning and intention and draft clearly to attain the end desired; strive to avoid unintended consequences that closer scrutiny could have circumvented. It is a case of construing what is drafted in the context of the closer setting and the contract as a whole. Words we take an instant to draft in the middle of a busy practice may be meticulously dissected in a court hearing lasting days. How could we possibly have meant that? We all make mistakes, but following some good practice, one hopes this will reduce the likelihood of our creation featuring in someone else's action.

To see further articles on matters relating to construction, engineering and energy projects, please visit www.fenwickelliott.co.uk.

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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This article is part of a series: Click Contract Flash Points - Part 2 : Amending Standard Contracts – Why Do It for the next article.
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