Contract disputes - drafting lesson take-aways - Clark Sargent - ThinkHouse September 2015

Michael Luckman: Clark Sargent is a commercial litigator who sweeps up the messes of poor drafting. I am going to talk to him about the lessons learnt and how we can all draft correctly. Clark, there was once a view that in drafting we should use the minimum of punctuation, does that still hold true in 2015?

Clark Sargent: Well, personally, I think that it cannot. We live now in a purposive interpretation of contracts environment so the Courts do feel that they have a fair amount of ability to stray from the literal words on the page and so it is important to flag and signpost exactly what it is that you were intending in the contract at the time of the contract and punctuation allows you to develop meaning and therefore it is a tool, a useful tool in telling the Courts, telling the other side what you mean by the contract so I think it should be deployed more rather than less.

Michael: How does purposive interpretation work after Rainy Sky?

Clark: Well, as you know, Rainy Sky was the cumulative point after that long chain of cases sort of through Mani Investments up to Investor Compensation Scheme and we have now arrived very clearly at a point where we do have a purposive objective interpretation of contract, what do the words mean, that means what does the reasonable man think that the words meant, done as at the time of the contract and where the reasonable man is a person who has the background knowledge that the parties themselves had. That, of course, doesn't mean knowledge by the way of pre-contract negotiations, Chartbrook is the very clear authority on that. Because we are taking this purposive interpretation the Courts in Rainy Sky did also confirm this rule that where there is ambiguity in the drafting, reasonably ambiguity in the drafting, then the Court will look to the business common sense of what was intended and pick the most likely to align with business common sense solution.

Michael: How important now is business common sense in interpreting contracts?

Clark: Well, you would think after Rainy Sky it had become more important, but of course actually as the Courts have come to grapple with this they started to rain back a bit on that actually and that is because the parties are coming to the Courts using and deploying business common sense arguments to get them out of what is in hindsight a bad deal and the Courts therefore are stepping back from business common sense a little bit. So, we had Jackson and Dear where the Judge said that he couldn't actually tell which one of two solutions was likely to have had the most business common sense so he retracted a bit back to the actual words that were used to come to his decision.  And the same again in the very interesting Arnold and Britton case earlier this year about service charges and whether it was business common sense that in the 1970's, 1980's leases were being granted with service charge provisions in them for £90 plus 10%25 a year service charges.  And that arrives at the point on a 99 year lease where you would be paying over a million pounds in 2070. Now that looks like nonsense, and that was the argument that was of course run, that was too much money, it couldn't have been what was intended at the time. But the Court in a 4:1 majority decision, it was a Supreme Court case, said look you do have to think whose business common sense are you thinking about here, it's all too easy to come along and say I am looking at this 40 years after the event so I am now saying that did not make any business common sense then. But thinking about it obviously from the tenant's perspective, a million pounds is a massive sum of money and does look like nonsense, but from the landlord's perspective in 1980 when we had inflation running up in the sort of 10-15%25, actually a 10%25 a year accumulator might not have been out of kilter and had that carried on the Court noted, you know, it might have been the landlord who is coming back to Court in 2015 not the tenant saying this deal doesn't make any sense.

Michael: Are there any pitfalls when it comes to exclusions and liability?

Clark: Lots of pitfalls around exclusions and liability. I am just going to mention two, ok. So in relation to limitations and liability, absolutely fine but very frequently you see the contract price. Always worth thinking whether the contract price is enough because frequently of course you are spending X amount of pounds in order to lever more value than X into the business. So if you put that cap in a contract price there is an argument that automatically you have undervalued what your loss might be and a good example of that might be the Cadbury and ADT case from a couple of years ago where there was a fire suppression system went into a factory, popcorn factory, the popcorn did explode, there was a fire, the factory burnt to the ground, that was £110m but the limit of liability in the contract could have been, could have been if ADT had incorporated their terms and conditions, just four times annual service charge costs and that would have been thirteen and a half thousand pounds so £109,900,000 less than Cadburys actually wanted so quite a big gap. And then in relation to exclusions I think it's always worth saying very important now to be very, very clear in your drafting about what categories you are actually excluding and I do think a sort of listing system here is worthwhile. You should not tie all of this list into one sentence, you want to make it clear that you are talking about separate categories so that you don't get caught into this are you talking about direct or indirect losses. So you should be having we are excluding loss of profits, one line, new sub-paragraph, loss of revenue, new sub-paragraph, loss of business, loss of goodwill, and then at the bottom indirect and consequential losses and important not to use the word "other" there, you don't want to say "other indirect and consequential losses" thereby almost giving the other side the opportunity to say that all of these are examples of indirect and consequential losses. So that "other" word is a bad word.

Michael: How should term and termination be addressed to avoid potential disputes?

Clark: There have been a number of cases over this year where people have got into issues about their term and their termination and they have probably put into one sentence or two sentences a complicated term and termination provision which if they had taken more words to explain it to the Courts and perhaps a bit of grammar and perhaps a bit of commas etc they could have done a better job of telling the Court what they meant. So, for example, in Thornley Park, where they had a three year fixed term which they said was reasonable and required for the contract to make sense to the parties, a three year fixed term and a four month termination for convenience clause and the contract was terminated for convenience during the second year. Well was that allowed or was it not allowed? Well the parties could probably have flagged that to the Court, they could have made it clear but they didn't so that went to Court and the Court had to decide and ultimately it said that because they had said that the initial term of three years was both reasonable and required to make the contract make sense they must have meant that the contract could only terminate at the end of the third year. And there are other examples of that on rolling contracts, they are very difficult so the G&A case from a few years ago is very important on that, you must be clear, do you mean, you know when you say rolling, in that case rolling for three years, the Court said well if you just say rolling for three years that could mean eight different things, be clear which one you mean.

Michael: Is it possible to summarise three key issues that General Counsel should do when drafting to avoid potential disputes?

Clark: The first one, the clarity of drafting does come I think from this very important point about a better use of grammar and sub-paragraphs and lists etc in contract drafting to make clear what you mean. Secondly, I do think it is worth avoiding putting meaningless words into contracts because somebody will come back later on and say that they did mean something. The other side of that coin is when you are using a phrase in a contract, use that phrase consistently so that you don't use a phrase four times in a contract and then the fifth time that you use it you use slightly different words because somebody will come back and say in a few years' time that you meant the same thing on the first four examples but you must have meant something different on the last one, ok. Likewise with definitions as well I would say, if you have defined a term you must use the definition because if you then use it without the capital letter so it is not the defined term, somebody will say that you meant something else, and party and Party is a good one on that. And then the final point, I have used this in contracts before where you almost add in a number point zero introductory sub-paragraph or sub-clause to set out for the other side and for the Court purposively what it was you were intending to do with this clause and I have always found that that has then been challenged vigorously by the other side because they think that the drafting should be clear to say what it was that you intended. But by putting that drafting in to the running draft, as they have insisted that it comes out, I have always found that we have then been able to take some of that wording and some of that intent, drop it into the substantive paragraphs and therefore just tighten up the drafting a little bit, just get across that meaning, that intent and that I think is fair advice.

Michael: Clark, that was really interesting, thank you.

Clark: Thank you Michael.