Clear But Inconsistent Contract Terms: A Fair Interpretation
It’s always a challenge for commercial parties caught in a dispute where apparently conflicting terms in business agreements exist. Though robust and careful drafting will minimise the risks, there can never be a guarantee that disagreements will never arise.
A recent dispute concerned a lack of clarity even though the contract (a lease) included express language. The sticking point was that the clause, though in itself clear, was inconsistent with other terms. The outcome is particularly important coming from the Supreme Court.
What’s the background
A clause in the lease provided for the landlord's certification of the service charge sum payable by the tenant. Under the clause, the landlord’s certificate “as to the amount of the total cost and the sum payable by the tenant” was expressed to be “conclusive” in the absence of “manifest or mathematical error of fraud”.
At issue was the extent to which it was to be conclusive: the tenant argued that certification was conclusive only as to the amount of costs incurred by the landlord - not as to the tenant’s service charge liability.
The landlord contended that the certificate was to be conclusive, except for the permitted defences, as to the costs and expenses it has incurred.
The SC found the word "conclusive" did not state how the landlord’s certificate was to be conclusive. It considered not only the usual approach to the interpretation of commercial contracts, but also the challenge of aligning such interpretation with the remainder of the contract terms.
Applying the general principles of contractual interpretation to the clause in question led the SC justices to conclude that neither party’s arguments were satisfactory, given the wider contractual context. Particularly, upholding the landlord’s argument would produce “unsurprising and uncommercial consequences”.
The SC found an alternative interpretation to avoid the difficulties: the landlord’s certificate was conclusive as to the service charge sum payable, subject only to the permitted defences. This interpretation protected the landlord’s cashflow position - but did not preclude the tenant from being able to dispute the underlying liability for the service charge.
Key takeaway
Ensuring contractual provisions are clearly stated and unambiguous is an obvious point, but it’s not necessarily the end point in determine their meaning. It’s vital to ensure there is no risk of ambiguity or inconsistency with other terms that could prompt a potentially costly dispute later on.
Always take specialist advice from commercial solicitors.
1Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd
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