EngCourtsContractInterp

26 February 2002

Mark O'Conor




Recent case law suggests that in certain situations the Courts are taking a more commercial approach than a literal approach to contract interpretation. Specifically with regards to the interpretation of Clauses attempting to deal with the termination of a contract, the Courts now appear to be taking the view that an attempt to draft a contract which imposes harsh termination provisions on a contractor will be held unacceptable if there is no bona fide commercial justification for the provision.

Specifically the recent case of Great Yarmouth Borough Council v Rice T/A The Guard and Guardian (2000) [CA] highlighted that where a contract on its literal meaning would have allowed termination of the contract for any breach, the Courts will take a commercial/common sense perspective and conclude that this could not have been the intention of the parties. In this case, the appeal judge stated that to take a literal line would be to impose draconian consequences upon any breach, however small, of any obligation, however small. Given that the contract between Rice and the Council involved a range of obligations of differing importance and varying frequency, any approach to the termination provision other than a commercial one would have flouted principles of business common sense.

Therefore, the implications of this recent case for organisations contracting in the ITC sphere (and others) are that precedent, or "tried and tested" clauses, may not have the desired effect in all circumstances. As such, it is important to ensure that a contract entered into reflects the actual circumstances at hand and, specifically with regards to termination, provides the desire result.