Defined terms are a regular occurrence in day-to-day contracts and at first glance act as an aid for lawyers and contractual parties alike. However, in the recent case between GB Building Solutions Limited (GB) and SFS Fire Services Limited (t/a Central Fire Protection) (SFS), it was evidenced that an inconsistent use of these key terms may result in a serious discrepancy of interpretation and can result in unpredicted outcomes in court.
The key issue in this case revolved around the interpretation of a particular term, “Practical Completion”, in a modified sub-contract. This was between the design and build contractor, GB, and the sub-contractor, SFS, who was responsible for the implementing of a sprinkler system in the building being developed. Unfortunately, a flood occurred in the building and GB sought to claim for the loss and damage of the incident, alleging fault to lie with SFS.
It was at this point that the importance of the wording of the sub-contract was highlighted. In the agreement it was clearly specified that both parties would be held responsible for “specified perils”, which included flooding, until the “Terminal Date” was reached. The definition of “Terminal Date” was located under Clause 6.1 and stated that “Terminal Date” was “the date of practical completion of the sub-contract works”. Should the flood be held to have occurred prior to the Terminal Date, then a claim against SFS would not be possible. On the other hand, GB would be able to pursue the claim provided it was found the flood occurred following the Terminal Date.
In addition to the standard form contract, further documents were involved in the final completion of the contractual agreement. This included a Schedule of modifications which outlined how the sub-contract was to be interpreted and the all-important definition of “Practical Completion”. In regards to the interpretation of the sub-contract it noted that this particular Schedule was the most important document to refer to when considering the contract as a whole. The key point to take away here is the definition of “Practical Completion”: “the issue of the Certificate of Practical Completion pursuant to the Main Contract”. This automatically highlights a confusion in different definitions.
The High Court judge found in favour of GB, following their preferred argument. Due to the capitalisation of the words in the Schedule, they argued that this definition only applied where in the sub-contract it could be found that the term was also capitalised. This view was endorsed in the case, with further argument that for the capitalised term to have applied to the meaning of Terminal Date, the parties should have amended this meaning during modification.
How does this decision affect my business?
- The importance of capital letters: as recognised in this High Court decision, it is evident that a consistency of terminology, including all grammatical traits, is of vital importance in ensuring a clear and certain interpretation of the contract in question. Ensuring this consistency will provide more certainty in outcome, should a legal issue arise.
- Including an Order of Precedence: as highlighted under the sub-heading “Significant modifications”, while creating their contractual agreement, GB and SFS included a Schedule which was to be regarded as priority when interpreting the documents. Including an order of precedence, which highlights which documents should be regarded with utmost importance in court, can aid in ascertaining which clause to prevail in the case of conflicting definitions or statement.
- Consistent Modification: when modifying contractual terms, make sure to ensure changes are made to all terms throughout all documents. This will avoid varying definitions to arise in the case of a dispute.
Here at Hybrid Legal we are committed to ensuring all our clients receive high quality analysis of contracts, agreements and similar legal documents. If you believe your contractual template or trading agreement and its defined terms require a review, please get in touch!
By Rachel O’Rourke.
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