Pre-contract – and in contract – be Precise

3rd February 2021

Development contracts and disputes: What are the issues?

Contracts relating to the development of land and property commonly include promotion agreements, joint venture arrangements, overage provisions, agreements for sale and options to purchase, among others.

When negotiating any development or commercial contract, it is important to ensure that the contract ultimately entered into accurately reflects the parties’ intentions and understanding.

Development contracts, and the schemes that they underpin, are usually high value.  Each development and the issues that arise are particular to their own site and factual circumstances, and they are often complex and fraught with risk. It is notoriously tricky to cater in the contract for unknown future events; for parties with changing and potentially conflicting interests; and to cover all possible eventualities.  However the consequences of getting the contractual position wrong can be devastating, especially where planning is involved.

At the outset of any development venture, when landowners, developers, and perhaps other joint venture partners consider doing business together, a multitude of enquiries, discussions and negotiations take place before any deal is done.  Agreement of ‘heads of terms’ can, therefore, seem like the point at which most of the hard work has been done.  However, if very close attention is not paid to every iteration of every clause in every development contract, there is a risk that parties will complete contractual documents which do not actually reflect their intentions, and the obligations and protections which have been agreed and are required.  As a result, some of the most frequently encountered forms of development dispute are contractual interpretation disputes.

So, when one party believes that a clause says one thing, and another party believes the clause says something completely different, how does the law resolve the situation?

Correct approach to contractual interpretation

The starting point for a court (and therefore for any settlement discussions/negotiations) is to look at the actual wording of the contract itself.  Wherever possible, the courts will strive to uphold the clear wording of the clause, applying the natural and ordinary meaning of the words and applying the objective test of what the reasonable businessperson would understand the clause to mean, even if that results in a ‘bad’ bargain for any party [1].

The court’s task is to ascertain the meaning of the language which the parties have chosen to express in their contract when read in the context of the factual background known or reasonably available to the parties at the time of the agreement [2].

However, where a contract term might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense [3].

Alternatively, where it is commercially and practically necessary, a court may imply terms into the contract to ensure business efficacy [4].

In short, a literal approach to contractual interpretation will be adopted wherever possible. However, there may sometimes be provisions in even a detailed, professionally drawn contract which lack clarity. A court interpreting such provisions may take into account the factual matrix to ascertain the objective meaning.

In those circumstances, can records of pre-contractual communications assist?

Pre-contractual communications

When disputes as to the meaning of contractual provisions arise, parties often wish to rely on communications made during pre-contractual negotiations to evidence their intentions and understanding of the contract, so as to support their own interpretation.

However, whether evidence of pre-contractual communications is admissible is a highly nuanced legal question.  In a recent case [5], the Court of Appeal confirmed that there is a fine, but hard, line as to when evidence of pre-contractual communications will, and will not, be allowed.

The parties had entered a funding contract for land restoration following mining operations. The mining company made no payments and the council applied to court to compel payment.  A dispute as to the meaning of the relevant contractual provisions arose.  The mining company sought to rely on pre-contractual communications to argue that no enforceable payment obligation had arisen.

The Court of Appeal confirmed that pre-contractual communications may be admissible to explain how a contract came about and/or its commercial aims.  However the court also clarified that such communications may not be adduced to aid the interpretation of particular contractual provisions.

Whilst the rule may seem harsh and unhelpful in one sense, in fact significant practical difficulties, uncertainty and a lack of predictability as to contractual interpretation would inevitably arise without it.

Practical advice

Developers and other commercial contracting parties and real estate practitioners should note the following practical advice:

• Contracting parties should ensure, from the outset, that the contract is drafted to clearly and accurately reflect the parties’ intentions and understanding. Being as clear and precise as possible as to your intentions, objectives and instructions throughout both the pre-contract and contractual negotiation stages will assist.
• Where any underlying pre-contractual assumptions, intentions or other information might assist with the proper understanding of a contract, these should be included within the contract itself (rather than merely in records of pre-contract communications) – in the ‘recitals’ section.
• If a dispute does arise, the starting point must be the actual wording of the contract. If there is real ambiguity, then commercial common sense can be taken into account and may assist with the interpretation exercise.
• Remember that pre-contractual communications may be adduced to demonstrate the genesis and aim of a contract (and an understanding of that may help a court to correctly construe a contract), but they are not admissible to aid the interpretation of particular contractual provisions. This is a common misconception.
• If the wording in the contract is clear, but still it does not reflect a party’s understanding, there may have been a mistake in the drafting of the contract and there may be the potential to pursue a claim for rectification and/or professional negligence. Alternatively, if the provision was entered into in reliance on any misrepresentations, there may be some potential to have the contract set aside and financial compensation could be payable. In any of these scenarios, specialist advice will be required.
• It is rare for any contractual interpretation dispute to be clear cut, so it is always worth considering whether there is any scope for settlement. Interpretation disputes often arise by virtue of the fact that there is an ongoing contractual relationship between the parties, plus the litigation risk which is inherent in such cases can often be exploited in negotiations to encourage a commercial compromise. It is therefore usually in the interests of all concerned for the parties to an interpretation dispute to behave in a reasonable and commercially sensible manner.

How we can help

Claire Acklam advises on all forms of developer disputes, both from a pre-emptive risk-management perspective and when it comes to resolving issues after they have arisen.  If you have any queries or concerns in relation to contractual interpretation, mistake or misrepresentation, or if you would like tailored advice or assistance in relation to any development-related dispute, please do not hesitate to contact Claire, who will be very happy to help.

[1] Arnold v Britton [2015] UKSC 36
[2] Wood v Capita Insurance Services Ltd [2017] UKSC 24
[3] Rainy Sky SA v Kookmin Bank [2011] UKSC 50
[4] M&S v BNP Paribas [2015] UKSC 72
[5] Merthyr (South Wales) Ltd v Merthyr Tydfil County Borough Council [2019] EWCA Civ 526