| Date | 24 January 2007 |
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| Judgment | Skanska Rashleigh Weatherfoil v Somerfield Stores Ltd, 22 November 2006 (CA) |
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| The Issue | Interpreting the intent of parties to an agreement. |
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| Implication |
In situations where there remains doubt over the precise terms of the contract, or when work commences in the absence of a formalised agreement it will fall to the courts to interpret the intention of the parties when deciding the extent to which any agreement exists between them. |
printBack in September of last year I reported on the case of Skanska Rashleigh v Somerfield. That case, concerning the interpretation of a letter of intent, has recently been overturned by the Court of Appeal which offers some interesting comments on the methods used, and the difficulties faced, when interpreting contract terms. Firstly a brief reminder of the facts. In July 2000 Somerfield Stores sought tenders to carry out maintenance works at its stores. Skanska was one of the successful tenderers and on 17 August 2000, Somerfield wrote to Skanska confirming the appointment. The letter enclosed a draft Facilities Management Agreement (FMA) but was headed ‘subject to contract’. The letter also stated that “whilst we are negotiating the terms of the agreement, you will provide the services under the terms of the contract from 28th August 2000… until 27th October 2000” Skanska returned a signed copy of the letter, confirming acceptance of the letter’s terms and commenced work on the stores. The initial period expired on 27 October 2000 but was extended until 21 January 2001 to allow Skanska and Somerfield time to conclude their negotiations. This final deadline passed without agreement having been reached, but Skanska continued to perform the services contained within the August 2000 letter. By the end of 2002, a dispute had arisen over payment and the case was brought to the Technology and Construction Court. Before Mr Justice Ramsey, Somerfield argued that all of the terms of the Facilities Management Agreement were incorporated in the temporary agreement. Skanska however claimed that the terms of the agreement were only incorporated to the extent that it defined the essential services which Skanska was required to provide. Mr Justice Ramsey accepted Skanska’s position that only the provisions that defined the “Services” were to be treated as incorporated within the temporary agreement. The matter was appealed and came before LJ Neuberger, LJ Richards and LJ Leveson for their further consideration. LJ Neuberger firstly considered the expression “to provide the services under the terms of the contract” and found that using their natural meaning the ‘terms of the contract’ could only relate to the draft FMA. He acknowledged that whilst the use of the expression “the services under the terms of the Contract” could be interpreted as identifying only the services required to be provided, this was not the natural or primary meaning the words convey to an ordinary speaker of English, whether that be a layman, a businessman or a lawyer. It is however trite law that when interpreting the terms of a contract, any word or expression used has to be construed in its overall context. In the present case this required consideration of not only the other parts of the August letter but the “surrounding circumstances and commercial commonsense”. In respect of the August letter, LJ Neuberger found that there were other terms that reinforced the position that the draft FMA was included in the temporary agreement. He then went on to consider the role that commercial common sense should play in the interpretation of contracts, finding that: “… it seems to me right to emphasise that the surrounding circumstances and commercial common sense do not represent a licence to the court to re-write a contract merely because its terms seem somewhat unexpected, a little unreasonable, or not commercially very wise. The contract will contain the words the parties have chosen to use in order to identify their contractual rights and obligations.”and: “… the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may must or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood.”LJ Neuberger also found that, given the complex nature of the works, it was more likely that the parties had agreed fairly detailed provisions, as contained within the draft FMA, rather than very few express terms (as contained in the August letter). Furthermore, whilst it was clear that Skanska and Somerfield were not prepared to be bound by the June FMA for the full period of three years, they were prepared to be bound by it for the brief period while they negotiated their long term agreement. LJ Neuberger did accept that some of the terms of the June FMA would be inconsistent with the temporary agreement and referred the matter back to the Judge in the TCC to decide which terms of the June FMA were indeed included. In closing LJ Neuberger offered the following comments on the difficulties involved in cases involving interpretation: “I think the Judge extracted the main relevant factors and set them out in his admirably clear Judgment, although I have reached a different conclusion from him in what is not a wholly easy case and which, as with many interpretation issues, is to an extent a matter of impression”. |
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