Out-Law Analysis 3 min. read
29 Jul 2022, 8:59 am
The dispute centred on the interpretation of a bespoke relational contract that was designed to govern the relationship between two businesses following a corporate reorganisation. The contract had a term of 99 years.
The court’s judgment emphasised that, when interpreting what a contract says, courts in England and Wales will focus on the language of the contract, applying the natural and ordinary meaning to the words.
The strict interpretation of the contract by the court in this case, on that basis, should serve as a warning to others who enter into long-term collaborative agreements not to expect the courts to give too much weight to the parties’ mutual intentions and the long-term purpose of the contract when interpreting the meaning of clauses.
In 2007, Quantum Advisory Ltd (Quad) and Quantum Actuarial LLP (LLP) entered into a bespoke relational contract for a term of 99 years.
It is important to create management structures within the contract to decide on the direction of the relationship once the original ‘dealmakers’ have moved on and for those to be empowered to agree change
Under the agreement, LLP, a new business, was to develop and expand by servicing Quad’s existing clients with administrative, actuarial and related services. Under that arrangement, LLP would receive 57% of the fee income, representing the cost of it providing the services. In return, LLP was able to develop new business, namely pensions and tax consulting services, both from Quad’s existing clients and new clients of its own, using the Quantum brand, Quad’s staff and Quad’s premises and equipment.
However, Quad and LLP fell into dispute over whether their agreement obliged LLP to provide tendering services for Quad.
Quad claimed it did. According to the court, it argued that “construed as a whole, the agreement makes clear that the business of Quad is to be serviced by LLP, that it was known to the parties at the time of the agreement that tendering or retendering had been and may in the future be needed to secure future business from existing as well as future clients, and that the parties may reasonably be taken to have intended from the wording they chose to adopt in the agreement, that such services includes tendering or retendering”.
In contrast, the LLP said that the agreement did not cover tendering services. The court said LLP had cited ““the parties' knowledge at the time of the agreement that tendering may be necessary, and submits that as the agreement does not expressly mention tendering, then such processes cannot be included in the services defined to be supplied by LLP under the agreement”.
The judge that considered the issue summarised what has come to be the orthodox approach when it comes to contract interpretation, drawing on principles set out in the Network Rail v ABC case in 2020.
He said: In summary, the court must ascertain the intention of the parties by reference to what a reasonable person having all the background knowledge available to the parties would have understood them to intend from the used language in the agreement. Thus the focus must be upon on the meaning of the relevant words in their documentary, factual and commercial context.”
The judge said that while consideration of the overall purpose of the agreement favoured Quad’s interpretation of the contract, the natural and ordinary meaning of the wording in the contract favoured LLP’s and carried more weight.
As a result, the judge found that the agreement did not make it sufficiently clear that tendering services were caught by LLP’s services in the agreement.
The fact that parties had entered into a long-term relational contract was taken into account. Indeed, the judge referred to and quoted from the 2016 case of Amey v Birmingham City Council where the trial judge emphasised that parties to such long-term contracts “should adopt a reasonable approach in accordance with what is obviously the long term purpose of the contract”. Nevertheless, the judge’s focus in the present case was very much on the language of the contract, and he was led by the natural and ordinary meaning of the words when reaching his judgment.
This judgment provides yet another reminder of the importance of clear drafting, especially where the contract has been professionally drafted and is between two commercial entities.
In long term contracts, parties need to keep the original scope of what was agreed under review. If there are additional services which are not covered by the scope, there should be a formal instruction or variation to ensure that the contract covers the new areas. Absent a formal instruction or variation, the risk for contractors is that they will end up carrying out additional work without being able to recover any additional payment for carrying out that work.
Long-term contracts may start out collaboratively. However, we often see that dynamic change midway through or towards the end of the contract’s term once the original ‘dealmakers’ have moved on. It is therefore important to create management structures within the contract to decide on the direction of the relationship and for those to be empowered to agree change.
Whilst long term relational contracts are about working closely together, good collaboration requires an ability to test ideas and have creative tension. The present case confirms that the terms of the contract will be construed in the same way as any other contracts. In many ways, because of the perceived, non-adversarial nature of these contracts, greater care needs to be taken in setting out what the parties will do, how they will achieve the aims of the contract and how the contract will be managed.