What's a clause intended to do? It may take precedence over its wording

When checking a contract, a key feature to look out for is a clause containing something called a “condition precedent”. More often than not, this takes away your right to do something if you don’t do it within a certain period of time.

For example, if you do not claim for an extension of time within, say, 21 days of becoming aware that you are entitled to claim, you will lose your right to claim entirely. These clauses have to be drafted in clear terms because they take away a party’s contractual rights.

To put this into context, consider the following scenario.

After the submission of a final account, an adjudicator makes an award in a dispute between the two parties. The losing party now wishes to have that dispute determined in court. In the contract between the parties, there is a clause that states that in such circumstances either party “may commence arbitration or legal proceedings within 28 days of the date on which the adjudicator gives his decision”.

Nowhere in the clause did it say that the adjudicator’s decision was conclusive if not challenged within 28 days. The judge thought, however, that one had to look at the purpose of the clause itself

Is this a condition precedent? It does not say that a party shall commence legal proceedings within 28 days or it loses its right to do so. It does not say that if not challenged within 28 days the adjudicator’s decision is conclusive. In other words, the wording appears to be permissive, but not mandatory.

This issue was considered in the recent decision in Jerram Falkus Construction Ltd vs Fenice Investments Inc (July 2011). The clause in the contract was slightly more elaborate but its basic features were as above. These two parties had been before the court on a number of occasions already, as documented by Building. Indeed the judge in this particular case described them as having been “extraordinarily promiscuous in their attempts at dispute resolution”. In Building on 5 August, Tony Bingham considered an earlier dispute between these two parties about the adjudicator’s fees.

Jerram’s argument was that the clause was permissive but not mandatory and so the fact that it had not commenced proceedings to challenge the adjudicator’s decision within 28 days did not mean that it could not do so now. Fenice, on the other hand, argued that despite appearances the clause was in fact mandatory and that if nothing was done within the 28 day period then Jerram had lost its right to challenge the adjudicator’s decision and that decision had become final.

The judge looked at the clause and admitted that there was a gap between the language and its intended purpose. It was true, as Jerram had pointed out, that nowhere in the clause did it say that the adjudicator’s decision was conclusive if not challenged within 28 days. The judge thought, however, that this was what he called a “narrow point on the wording” and that actually one had to look at the purpose of the clause itself.

The clause was designed to provide for various circumstances in which, after the final account, the position between the parties can become conclusive. It had to provide a deadline beyond which a decision became final and if it did not do so, it appeared that the clause would essentially be entirely redundant.

The judge took the view that the clause was there to draw a line that would prevent such disputes from going on and on. It seemed to the judge that, standing back from the clause, this result made commercial common sense.

It would have been absurd for the parties to enter into a detailed adjudication on the issues between them after the final account had been provided and then allow a decision to rest unchallenged for months or even years, only to go over exactly the same ground all over again.

The clause the court considered in Jerram is not particularly unusual - very similar clauses can be found in other standard contracts. Jerram shows that the court will look at such clauses in detail to understand what their purpose was intended to be and whether applying them in such a way makes commercial common sense.

As a result, a clause may in fact be an enforceable time bar even if it does not at first appear to be so. The lesson is obvious: think very carefully about what a clause is intended to do, not just by way of its wording but also its commercial purpose and context. Relying on fine legal distinctions about the wording used will not be good enough.

Simon Lewis is a partner in the construction team at Dickinson Dees