Defined terms can greatly simplify contract wording but equally, if used inconsistently, such terms can lead to ambiguity and the risk of costly disputes.
In the recent case of GB Building Solutions Limited (GB) v SFS Fire Services Limited (t/a Central Fire Protection) (SFS) [2017], the court considered:
- the case law as to the meaning of "practical completion"; and
- in a wider context - how defined terms will be interpreted in the context of multiple contract documents.
Drafting for clarity - practical points
The take-aways from this case are clear and important for those drafting contracts, so we summarise them at the outset. The detail of the background and judgment puts these points into context and is set out below.
- The case provides an example of the risks of the inconsistent use of defined terms. In this contract, "Practical Completion" appeared as a defined term, but later references to "practical completion" were not consistently capitalised.
- This may seem pedantic (and indeed, this is only one aspect of the judgment) but if a contract states that a definition will apply where relevant words are capitalised, a court may well conclude that capitals (or not) were used intentionally within the contract wording. Intentional or not, the result in this case was that the phrase "practical completion" did not have the same meaning throughout the subcontract and the consequence is that SFS has been left open to a claim by GB.
- Be specific when using defined terms - if a term needs to be capitalised, then capitalise it. Do a word search for defined terms during the drafting process to ensure that all instances of the terms are picked up. This is a straightforward and relatively swift task that may prevent your business becoming embroiled in a dispute that could have been avoided.
Background
GB was the design and build main contractor on an office development in Manchester. SFS was its design and build subcontractor responsible for the sprinkler system of the building under an amended JCT Design and Build Subcontract 2005. Following flooding of the project before practical completion of the main contract works, GB brought a claim against SFS alleging that it (SFS) was responsible for the flooding.
Various issues were to be resolved, but the key point was whether the flood occurred before or after the "Terminal Date", which was defined (insofar as relevant to this dispute) in clause 6.1 of the subcontract as "[t]he date of practical completion of the Sub-Contract Works…"
If the flood occurred before the Terminal Date, the parties were in agreement that GB would be precluded from pursuing a claim against SFS for losses arising from the flood on the basis of other terms of the subcontract.
Conversely, if the flood had occurred after the Terminal Date, GB could in principle advance a claim against SFS for losses incurred.
As is common on construction projects, the subcontract documents as a whole comprised the standard form along with various other contract documents. The standard form subcontract was expressed as being modified by a schedule of modifications (the Schedule) which formed one of the contract documents.
Clause 1.3 of the Schedule required the subcontract to be read as a whole but set out an order of precedence in the event of a conflict between provisions of the contract documents, with the Schedule taking priority. Where there is an inconsistency between contract documents, an order of precedence clause can be key in ascertaining which is to prevail.
The definition of Terminal Date in the Schedule (in this context) turned on the "date of practical completion of the Sub-Contract Works".
The Schedule also included a definition of "Practical Completion": "the issue of the Certificate of Practical Completion pursuant to the Main Contract". There were clearly, therefore, potentially different definitions of practical completion depending on the terminology used and capitalisation (or not).
In brief, the parties took the following positions:
- GB argued that where the term "Practical Completion" was capitalised, it was to be used as a defined term as set out in the Schedule. Where it was not capitalised, it was not assigned the meaning of the defined term (and so simply meant practical completion, as a matter of fact).
- SFS argued that the definition of "Practical Completion" should extend to every mention of practical completion, whether capitalised or not.
Approach to interpretation
His Honour Judge Stephen Davies, sitting as a Judge of the High Court, reviewed leading case law and confirmed that when considering or interpreting contract provisions:
"[t]he court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement."
In his view, the exercise of interpreting a contract is not solely an analysis of the words of the contract but rather, the contract is to be considered as a whole. Referring to an "iterative process", he stated:
"… There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type."
The Judge ultimately preferred GB's argument. The definition of Terminal Date in the Schedule referred to practical completion without capitalisation and the definition of Practical Completion in Section 1 did not apply. The Terminal Date was to be ascertained using other specified clauses in the subcontract.
In view of this, the Judge held that the flood occurred after the Terminal Date and so GB could in principle pursue a claim for the losses against SFS.
In reaching this conclusion, the Judge was satisfied that there was no inconsistency in the contract wording in this respect - where "Practical Completion" was capitalised, its definition in the Schedule would apply; otherwise, it would not. The Judge noted that the parties could easily have amended the meaning of Terminal Date to refer to "Practical Completion" but they had not. The definitions of Practical Completion and Terminal Date were granted equal precedence and it was held that each clause simply applied in different circumstances.
Practical completion
The case also provided a helpful review on the position as to practical completion.
In assessing whether the certificate of practical completion was in fact a valid certificate of practical completion, the Judge considered the substance of the document and relevant facts, such as the state of the works and payment at the time.
Even though the certificate of practical completion in this case labelled itself an "installation completion certificate", it was held to be a practical completion certificate in respect of all of the subcontract works.
The fact that an application for payment as at the time of issue of the certificate of practical completion recorded some work as outstanding did not prevent the certificate from in fact certifying practical completion.
The existence of some outstanding work has never prevented practical completion and in referring to some older authorities, the Judge reiterated the following guidance:
"(a) Practical completion means completion for all practical purposes, and what that completion entails must depend upon the nature, scope and contractual definitions of the Works, as they may have developed by way of variation or architect's instructions.
(b) De minimis snagging should not be a bar to practical completion unless there is so much of it that the building in question cannot be used for its intended purposes.
(c) Practical completion requirements can be relaxed by agreement between the parties. "