Devant’s working mantra is that clear and unambiguous contract drafting following a fair negotiation will make for a successful contractual relationship. It means both parties are clear on what they want and what they must do.
That said, it’s possible that you’ve heard about a few cases coming out of the courts recently that seem to undermine this concept, and the premise of ‘freedom of contract’ generally.
So, what’s going on?
Well, a few different things. In commercial agreements, we’re seeing the courts beginning to apply methods that have previously been reserved to the application of EU Law and Public Law – most notably, a concept known as ‘proportionality’.
In commercial contracts, a large number of the terms will relate to one party being given the power to dictate the actions of another, such as the right to require a specific remedy. This is simple enough, but trouble arises when a party is handed a ‘genuine discretion’ by a term. For example, the right to choose from a range of possible remedies of varying severity.
Why can discretion in a contract be a problem?
English Contract Law has been developing an implied term to qualify the empowered parties right to choose in an attempt to mitigate the possibility of a vengefully inclined party – the implication of ‘good faith’.
The implication of good faith is not deeply entrenched in Contract Law, but the rate and variety of cases that it is being applied to is growing, with everyone from Director Shareholders to Local Authorities being made subject to it. Not only this, but the way in which it is being deployed is also changing.
Recently, the court moved beyond considering whether a discretion was exercised merely in ‘good faith’ to performing a full analysis of a party’s decision that was strikingly similar to the Public Law doctrine mentioned earlier. So, the question becomes: if a court is going to choose a ‘proper’ outcome, is the granting of discretion still a useful tool?
When it comes to civil litigation more generally, there have been some recent instances where the courts have shown willing to go against the wording of a contract in favour of what a contract was presumed to have meant. This also appears in contradiction to traditional Contract Law principles.
There are a number of reasons why the courts have avoided such a method in the past. Mainly as there’s a risk that a court retrospectively deciding what the parties wanted is unlikely to yield positive results.
Where do we stand now?
Ultimately, trying to say exactly what we mean, unequivocally, and aiming to perform each contract in accordance with its terms is the best safeguard to court intervention.
Similarly, considering all of the factors likely to arise in contract, and setting out exactly how they should be dealt with, will deliver more predictable results than giving a party discretion to act, that might be disputed in the future. As your in-house contract support, we’re here to help you create clear contracts.
Junior Commercial Contracts Consultant