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Words, Not Intention, Determine Meaning of Contract

When disputes arise over the meaning of a contract, it is usual for the court to look first at what the wording of the contract means and then at the commercial logic of that wording.

In a recent case, the dispute essentially turned on whether two transactions for the sale of assets between a company in administration and two other companies that took place within ten days of each other should be regarded as a single agreement or not, given that the two companies which purchased the assets were owned separately by former directors of the company in administration.

Under the first transaction, certain intellectual property (IP) rights belonging to the vendor company were sold to one of the companies, which then licensed them to the other.

The second company's agreement to purchase assets from the vendor company was a quadripartite agreement including the vendor, its administrators, and the first purchaser company as well as itself.

The two purchaser companies had a confidentiality agreement between them that allowed either party to give notice to the other if there was a breach of the confidentiality agreement.

When the second company was subsequently being sold, the licensing agreement was disclosed and the first purchaser company claimed that this was a breach of the confidentiality agreement. This in turn led to a dispute over precisely which IP assets the vendor company had transferred to which company.

The second company argued that, in the circumstances, it made commercial sense for the two sales contracts to be read together as one. The first company claimed that each contract had to be read on its own merits.

In the Court of Appeal's view, the fact that the two contracts were clearly separate – having been entered into ten days apart – meant that each had to be considered independently.

The larger point is that a well-written contract should not leave matters of significance unclear: what each side is bargaining for should leave no room for dispute. If the result of failure to draft the contract well is a bad bargain, that will not be sufficient ground for the court to substitute a more commercial view based on what should have been agreed.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.