Contract round-up

Published: 21st July 2008

Recent cases have changed the construction of contracts. In summary...

Admissibility of pre-contract negotiations

Even where an entire agreement clause in a document operates to exclude additional terms from the contract, the parties' pre-contract negotiations may still be relevant in determining the meaning of the contract as drafted, eg where the parties have used a term which was not defined in the agreement, but had a clear meaning when used in their previous discussions or correspondence.

The best way to avoid subsequent disputes remains to include all key terms and definitions in the final written agreement. In fact, any hesitation in defining the elements of, for example, the price payable under the contract may point to a lack of agreement between the parties, which should be ironed out before the contract is signed.

In addition, an entire agreement clause will not provide a fallback against additional terms where the subsequent conduct of the parties effectively amends the contract, it can, by its very nature, only exclude prior understandings.

Reasonable and best endeavours

There were two interesting cases in 2007 on the meaning of the term "reasonable endeavours". The key lesson to take from them is that, where the steps to be taken by a contract party are known at the date of the contract, the most prudent course is to make these explicit requirements, rather than relying on the catch-all of "reasonable" or "best" endeavours, as these phrases require interpretation and carry uncertainty.

An obligation to use reasonable endeavours to achieve the aim probably only requires a party to take one reasonable course, not all of them whereas an obligation to use best endeavours probably requires a party to take all the reasonable courses it can.

It may be that an obligation to use "all" reasonable endeavours equates with using best endeavours.

An obligation to use reasonable endeavours does not require a party to sacrifice its own commercial interests. However, if a particular course of action is actually specified in the contract then it must be taken, even if that course of action is arguably against the party's interests.

Dispute resolution clauses

The key lesson to be learnt from the 2007 cases on dispute resolution clauses is that the courts will, wherever possible, give effect to the agreement of commercial parties that disputes between them are to be settled in a specific manner. When drafting dispute resolution clauses parties should ensure that they are happy with the specified procedure, as once a dispute resolution mechanism has been agreed a party cannot easily abandon it at will in favour of court proceedings.

The Court of Appeal stated that an arbitration clause within a contract is in fact a separate agreement between the parties. Therefore, even where an entire agreement is alleged to be invalid, the agreement to settle disputes by reference to an arbitration tribunal will still stand.