4 September, 2019
In University of Warwick v Balfour Beatty Group Ltd [2018] EWHC 3230 (TCC) England’s Technology and Construction Court had to determine whether the liquidated damages provisions in a building contract between the Claimant and Defendant were operable. That depended upon whether, on the proper construction of the definition of “practical completion” under the contract, the entire works were to be complete before a single Section could be certified as complete. On the Court’s interpretation, it held that the ordinary meaning of the words used in the contract did not render the provisions inoperable.
The Contract
The Claimant engaged the Defendant contractor under a JCT 2011 Design and Build form of contract with bespoke amendments, to construct the National Automotive Innovation Centre on the Claimant’s campus (the Contract).
The Contract divided the works into four Sections. The completion date for Sections 1 to 3 was 10 April 2017, and for Section 4 was 5 July 2017. The Contract provided for different rates of liquidated damages if the works or a Section did not attain ‘Practical Completion’ by the relevant completion date.
‘Practical Completion’ was defined in Clause 1.1 of the Contract as “a stage of completeness of the Works or a Section which allows the Property to be occupied or used …” “Property” was defined as “the property comprised of the completed Works”. “Works” was defined as “the works briefly described in the First Recital, as more particularly shown, described or referred to in the Contract Documents…”
Clause 2.27.1 of the Contract provided that when, Practical Completion of the Works or a Section is achieved, the Employer shall issue a statement of Practical Completion for the Works or that Section.
Adjudication
The Defendant contended that on a proper interpretation of the Contract, it was impossible to achieve Practical Completion of one Section prior to the completion of the whole of the works and that the liquidated damages provisions were therefore rendered inoperable.
The Defendant commenced adjudication and the adjudicator found for the Defendant on this issue, applying a literal interpretation. The adjudicator found that since the definition of “Practical Completion” stipulated that an individual Section only achieved Practical Completion at a stage of completeness which allowed the completed Works to be occupied and used, all Sections must achieve Practical Completion for any Section to meet the definition of “Practical Completion”, although the adjudicator also said the definition on the face of it may seem illogical.
The Claimant sought final determination of the issue by the court.
Court’s Decision
General principle on contractual construction
There was no dispute between the parties that the applicable law for construction of a contract is found in Lord Neuberger PSC’s judgment in Arnold v Britton [2015] UKSC 36. In paragraph 15 of the judgment, His Lordship set out the following general principle:
“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”… And it does so by focussing on the meaning of the relevant words … , in their documentary, factual and commercial context. That meaning was to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions”
Then His Lordship emphasized the following factors (rather than principles) which were important in this case:
|
(i) |
the reliance placed in some cases on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed; |
|
(ii) |
when it comes to considering the centrally relevant words to be interpreted, it is accepted that the less clear they are, or, to put it another way, the worse the drafting, the more ready the court can properly be to depart from their natural meaning; |
|
(iii) |
commercial common sense is not to be invoked retrospectively to save a contractual arrangement which, according to its natural language, has worked out badly or even disastrously for one of the parties; |
|
(iv) |
while commercial common sense is a very important factor to be considered when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed; |
|
(v) |
when interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties; |
|
(vi) |
in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention; |
Application of principle to present case
The court held that the Defendant’s interpretation of the Contract did not accord with the ordinary meaning of the words used. It overly focused on the meaning of “Property”, without regard to other provisions of the Contract and the background because:
|
(1) |
|
The Contract provided for different completion dates for Sections 1 to 3 and Section 4 and different rates of liquidated damages for each of Sections 1 to 4 works. This showed an intention of the parties to permit completion of one or more Sections before the completion of the whole of the works. |
|
(2) |
|
The ordinary meaning of Clause 2.27.1, when construed with the Contract as a whole, was that Practical Completion of the Section could be achieved if the works in that Section complied with the criteria in Clause 1.1, without the whole of the works being complete because:- |
|
|
(i) |
The use of the word “allows” suggested that “Practical Completion” did not require the whole of the Works to be complete, but something less which enabled a final stage of completion to be achieved in due course. |
|
(ii) |
The use of the words “the Works or a Section” in Clause 2.27.1 and the definition of “Practical Completion” suggested that they were alternatives and not linked together. |
Comments
This case serves as a helpful reminder of the application of Arnold v Britton in contractual interpretation. Some view Arnold v Britton as advocating an approach to contractual interpretation where the language of the contract trumps commercial common sense by relying on the factors mentioned above. However, this is simply not the dicta of Arnold v Britton.
It appears that the factors (rather than principles) are only a particular application of the general principles of interpretation of contracts set out in paragraph 15 of the judgment mentioned above.
Here, the court relied on the language of the contract to reach its conclusion after considering the principle in Arnold v Britton. However, it also emphasized that this is not a case where it had to ascertain the intention of the parties by looking beyond the Contract, as the ordinary meaning of the language reflected the parties’ intention clearly and unambiguously. In fact, the court stated that even if it was wrong about the absence of ambiguity in the language, business common sense would have supported its construction.
Therefore, Arnold v Britton, as applied correctly in this case, is far from suggesting that the language of the contract trumps commercial common sense in contractual interpretation. Rather, it advocates an approach where the ordinary meaning of the language of a contract is clear and consistent with commercial common sense, it shall be the primary basis for interpretation.
For further information, please contact:
