Neil Kelly looks at the Scottish Appeal Court decision in Lagan Construction Group Limited (In administration) v Scot Roads Partnership Project Limited and Ferrovial Construction (UK) Limited and the difficulties which can arise in construing contractual terms against a background of complex rules developed by the courts.
Lagan Construction Group Limited (In administration) ('Lagan') v Scot Roads Partnership Project Limited ('SRPPL') and Ferrovial Construction (UK) Limited ('FCUK')
This recent decision of the Scottish Appeal Court (18 July 2023) overturned the decision of the judge at first instance that, essentially, certain contractual terms properly construed meant that the words 'the Contractor' didn't actually mean 'the Contractor'. The Appeal Court decided that the words meant what they said: 'the Contractor' meant 'the Contractor'.
Background
The litigation concerns construction of a provision in a contract which contained a defined term. The relevant contractual provision states –
'Project Co shall return to the Contractor by transfer into a bank account specified by such Contractor, an amount equal to such Contractor Company Contractor Security Account Balance ...... as soon as reasonably practicable following: (a) Confirmation from Project Co that it has received an Acceptable Letter of Credit procured by such Contractor Company in replacement of its previous Letter of Credit; or (b) The Letter of Credit Discharge Date.'
Project Co was defined as SRPPL. The term 'the Contractor' was defined as a joint venture entered into between Lagan and FCUK (the JV). The term 'Contractor Company' was defined as 'any company forming part of the Contractor'. It was made clear that 'Contractor' and 'Contractor Company' meant different things for the purposes of the contract.
The Letter of Credit Discharge Date having passed, a dispute arose between the parties about whether the balance of monies (over £1 million), paid by a bank under a letter of credit procured by Lagan and called upon by SRPPL, fell to be returned to either Lagan or the JV from which Lagan had, by virtue of its insolvency, been excluded by FCUK.
SRPPL had paid the monies to the JV, but Lagan sued SRPPL for the monies, claiming that it was a debt due to Lagan, failing which Lagan sought recovery from FCUK on the basis that it had been unjustly enriched by payment of the monies to the JV.
The dispute centred on who is meant by 'the Contractor' in the first line of the contractual provision above.
Is it the JV, as SRPPL and FCUK contended? Or, as Lagan argued, is it the Contractor Company which procured the letter of credit which was called upon and which gave rise to the monies in question?
The judge, at first instance, asked himself, first, whether the language of the clause admitted of two possible constructions? Only then could he have regard to commercial common sense as he had been urged to do by Lagan. He considered that confusion and hence, ambiguity had been created by the two further references to 'such Contractor Company'. Having regard to commercial common sense, he considered that the purpose of the account was to provide security for Project Co. Each Contractor Company had an obligation to the Bank, which had provided the Letter of Credit, to account for the balance. It did not make sense to pay the balance to the JV which had no such obligation.
Court of Appeal
The approach of the Appeal Court makes it clear that a court should not normally search out drafting infelicities in order to justify a departure from the natural meaning of the language. It should identify what the parties agreed, not what it thinks that common sense may otherwise have dictated. Contracts are made by what people say, not what they think in their inmost minds. Where a contract is a complex and sophisticated one prepared and negotiated by skilled professionals, as was the case here, it may be successfully interpreted principally by textual analysis. The Appeal Court decided that, in this case, 'the Contractor' meant 'the Contractor' i.e., the JV.
Even if it had been necessary to pay regard to commercial common sense, the Appeal Court said it '....... would have struggled to find that it favoured [Lagan's] construction. Where there is an agreement between two persons, one of whom is a joint venture, and surplus funds exist at the end of the contract, the obvious consequence is that those funds be returned by the party holding them (Project Co) to the other party i.e., the JV. What might happen to them thereafter is something which ought to be regulated by the joint venture agreement between the Contractor Companies, which failing by the general law'.
Comment
The Courts, including our highest civil court, the UK Supreme Court, have developed what some people consider to be complex rules which they apply in construing contractual terms.
It is argued that those rules allow courts to discern what the parties actually meant, sometimes in very difficult cases. Some argue, however, that the rules have become too complex, which leads parties to argue that the contract terms are ambiguous and require the application of 'commercial common sense'. This case highlights the difficulties that can arise in trying to apply those rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
