Cutting costs with contractual clarity

For every business, it remains important to consider and draft commercial agreements carefully. A coherent and precise contract results in all parties involved knowing the intentions of the agreement. If a contract is clear, there is usually far less room for disputes over contractual terms and clauses, saving both time and money.

In a recent case concerning a lack of clarity surrounding a contract, Lord Neuberger stated that “The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from consequences of his imprudence or poor advice.”

Interpretation is the objective exercise of establishing the meaning that a contractual document would convey to a reasonable person. However, the meaning of an agreement can be distorted when wording is not clear.

Lord Neuberger stressed the importance of ensuring contractual certainty as when the court decides on the interpretation of clauses in a contract, the original intentions can be altered or misunderstood. He disapproved of an approach where as a result of poor certainty, the court makes their decision based on what they think ought to be in the contract or what should have been agreed. That deprives the parties of an ability to record their own intentions. If a contract is not worded clearly, according to Lord Neuberger, whoever drafted it should face the consequences.

Businesses should therefore take greater care to ensure their contract drafting is clear. There is no merit in rushing the terms and conditions of a contract or allowing a poorly written contract to cost a business its intended outcome. If a quick turnaround is required on a deal, good legal advice should be sought to avoid mistakes.