Contractual precision …. a stitch in time

We’ve all been there. Rushing to get the deal done amidst increasingly fraught calls and emails between the client and other side.

Mistakes can happen when the pressure is on.

All too often commercial lawyers focus on making sure the contract they have drafted works well enough to get the deal through. However, transactional lawyers should not be afraid of putting on their ‘litigators hat’ well before the ink dries and terms are put to the test. Litigators often have to analyse contractual terms and wording when relations go sour.

So, understanding the principles of contractual interpretation are just as important to the transactional lawyer as they are to the litigator.

A recent Court of Appeal decision has re-stated the principles of contractual interpretation (Andrew Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd). In this case, Capita Insurance Services Ltd acquired the entire shareholding of Sureterm Direct Ltd, of which Mr Wood was a majority shareholder.

In the sale and purchase agreement, the sellers agreed to indemnify Capita in respect of losses relating to the misselling of insurance products prior to the share sale. A dispute arose about that very point and the scope of the indemnity clause was called into question.

(Subscribers to Lexis®PSL can click here for the full version of the news analysis on this case.)

In his judgement, Clarke LJ set out some useful reminders of how the court will go about interpreting a contract. It is helpful for the commercial lawyer to bear these points in mind from the outset of negotiations and when drafting the contract itself:

1. Take a step back. Consider what a reasonable person would understand the parties to mean at the time the contract is made. The reasonable person is one who has all the background knowledge that would reasonably have been available to the parties at the time of the contract;
2. Consider different interpretations of the clause/wording. Are there any obstacles to a particular construction? How do differing interpretations fit with other provisions in the contract/clause?; and
3. Although the court is entitled to apply 'business common sense' when assessing the meaning of a contract, Clarke LJ provided a word of warning on its application: if bad decisions have been made by a party during negotiations, it is not the job of the court to rewrite the contract to improve the position of one party.

So how can commercial lawyers ensure that their drafting is up to scratch?

Think: how will that clause or this wording work in real life? Pay particular attention to the boilerplate/miscellaneous provisions in the contract.

It is all too easy as a transactional lawyer to focus on getting the deal done, in doing so missing key points and exposing their client, their firm and potentially themselves to avoidable risk.

By their very nature, contracts cannot be completely watertight. However, as a bare minimum, the lawyer should look at each provision and ask: is this subject to risk, misinterpretation or ambiguity?

When a compromise is made during negotiations, consider the impact on both parties when drafting the provision. Discuss any risks and pitfalls with the client and ensure that a written note of those discussions, together with any advice given, is made.

Remember: clear and unambiguous language is key. Clauses should follow a logical pattern, headings should be clear and consistent, and the intention of the parties should be as clear as possible.

So what do you think? Do you have any useful drafting tips for our readers? Do let us have your thoughts below.