Written contract terms are supposed to provide certainty for the parties, writes Sue Lindsey.
Where there is doubt as to what they mean, to reach an interpretation the court grapples with what intentions the parties had when the contract was made. That can involve taking into account the background knowledge reasonably available to the parties when they reached agreement. This approach applies in all contractual areas, not least building. But to appreciate how practical and basic the analysis can be, it is informative to look at an example from another field which arose in the Court of Appeal recently (judgment 8 March 2005).
Manchester City football club played its last match of the 2000-01 season on 19 May. It lost.
Having ended up third from the bottom of the Premier League, relegation to the First Division was the result. On 21 May the club sacked its manager, Joe Royle. Under the terms of his contract of employment, the club had to pay him 12 months' basic salary if, when he was sacked, the team was in the Premier League, or six months' salary if the club was in the First Division. As his Premier League and First Division annual salaries were fixed at £750k and £300k respectively, the pay-off was either £750K or £150k, depending on which division the club was in on 21 May.
At trial, the judge had awarded Joe Royle £750k. Behind that decision lay the Rules of the Premier League, which determine membership.
The clubs in the league are, for the time they are in it, members of a company. Rule B3 says a relegated club is obliged to transfer its share in that company to a promoted club. Although that provision distinguishes relegation from share transfer (relegation coming first), the rules go on to say that a club ceases to be a member of the league on transfer of the share.
By 21 May Manchester City had not transferred its share. So, argued Mr Royle, when he was sacked the club was still in the Premier League. The judge liked this argument as it gave certainty - the date of a share transfer could be fixed precisely.
But Manchester City appealed. It asked the Court of Appeal to reconsider the interpretation of the contract by reference to what these contracting parties would have thought being 'in the Premier League' really meant. It did not mean, the club said, holding a share certificate.
It meant that when the last match of the season had been played, and the club was third from the bottom, it had been relegated.
Manchester City argued that its interpretation of the agreement made commercial sense, and it reflected what the parties had intended. The pay, and pay-off, structure was that the manager was to be rewarded for success, not failure.
The arguments in front of the Court of Appeal went one step further. The question was raised whether the pay-off provision was meant to act as a substitute for the damages that would have been assessed at common law if there had been no contractual provision fixing them.
Such damages are usually assessed by considering the future loss of earnings resulting from premature sacking.
Manchester City argued that its interpretation of the contract meant that the pay-off provision did provide a compromise formula in place of common-law damages. If sacked at the end of the season, the manager's future loss of earnings would depend on the division the club would be playing in next season.
This, the club said, supported its argument that the parties had intended the payment provisions to reflect 'footballing realities', rather than depend on the technicalities of a share transfer.
The Court of Appeal concluded that the pay-off provision was ambiguous. It did not clearly state that the division the club was in was defined by formal membership. It looked, therefore, in the words of Lord Justice Sedley, for 'a tie-breaker'.
It found it in both the distinction in the Premier League rule B3 between 'relegation' and 'share transfer', and by concluding that the parties had intended the pay-off clause to compensate the manager for future loss of earnings. So a win for Manchester City, and an object lesson in contractual construction for the rest of us.
Susan Lindsey is a barrister at Crown Office Chambers. Visit www. crownofficechambers. com