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A Fresh Look At Standard Contractual Terminology – Do You Really Know What It Means?

A Fresh Look At Standard Contractual Terminology – Do You Really Know What It Means?

Jenny Baker

Think about the last contract you drafted or negotiated and answer the following questions:

  1. Did you spend more time agonising about (a) the liability provisions and service levels, or (b) the “not to be unreasonably withheld” qualification to the requirement to provide consent?   
  2. If you were able to agree on “all reasonable” instead of “best” endeavours in relation to a particular objective, was that the end of the discussion or was the provision qualified in any way? 

Now fast forward two years after the contract start date and answer two further questions:

  1. Providing the required consent is likely to place the consenting party’s business at a commercial disadvantage - would it be reasonable to refuse consent?
  2. If the steps required to meet the objective referred to at 2 above would cause the obligant to incur significant costs, or otherwise be to its commercial detriment, would this be outside the scope of using “all reasonable endeavours”?

A number of recent cases have involved disputes about familiar and seemingly non-controversial contractual phrases and concepts, such as obligations to act “diligently” or “in good faith”, and endeavours clauses.  The courts’ interpretations have highlighted some useful drafting tips and pitfalls to avoid.  Some key messages are:

  • Endeavours obligations - Refer to a clear, definite objective, and ideally set out steps an obligant must take/ is not required to take.  Using “all reasonable endeavours” may require a party to incur costs and act against its commercial interests, so it can be useful to expressly provide for limitations in the contract.
  • Withholding of consent  - Consider setting out any relevant conditions/ factors that a party would be entitled to take into account when deciding whether to provide consent.
  • Subject to contract - If the parties do not intend to be legally bound until a formal contract is drawn up and executed, state this expressly and clearly (not just in any drafts, but also in correspondence when negotiating).  Parties may be deemed to have waived an earlier requirement for a formal contract, if they informally indicate agreement then start to perform the “agreed” terms without finalising/ executing the contract.

Speakers from Burness Paull's Commercial team (David Goodbrand, Katy Low, Ross McKenzie and I) recently delivered a seminar across all three offices, which took a practical look at the courts’ current interpretation of some of this standard contractual terminology.  If you were not able to attend but would like to know more about the issues covered,  you can access a copy of the slides here.  If you would like further information, or a bespoke session for your organisation, please do not hesitate to get in touch.

Jenny Baker
Solicitor

LChalmers