When drafting business contracts, is it important to ensure the wording is clear to both parties. If a problem arises and the contract is consulted, ambiguous wording could cause a problem. This could result in the courts using ‘business common sense’ to decide the meaning, which may not work in your favour.
The recent case, Ace Paper Ltd v Fry and others  EWHC 1647, concerned an appeal on the proper construction of a provision of one letter, terminating a contract.
The Supreme Court had to use business common sense in order to come to a decision, because the words used could have more than one meaning.
Ace and the third respondent, RBS Invoice Finance Limited, were in an agreement whereby Ace assigned all debts that were owed by its customers over to RBS Invoice Finance Limited.
They agreed in principle to terminate this agreement, which was confirmed by an exchange of letters. The appeal that followed concerned the proper construction of one of these letters, relating to the re-assignment of a debt that had already been paid in full.
The High Court expressed the view that the re-assignment required clearer words than had been used, especially because the document had been drafted by the complainant and should therefore be construed ‘contra preferentum’ – when the meaning of the contract is in doubt, it should be decided against the person who wrote it.
In its judgment the court followed Rainy Sky SA v Kookmin Bank  UKSC 50 and quoted the principle that “the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant.”
If words only have one meaning, there is no need to look further. However, when the meaning is ambiguous, the court has to choose between the meanings, “the court is entitled to prefer the construction more consistent with business common sense, if that can be determined”.
This serves as a reminder of how important it is to carefully draft all contracts or business agreements to prevent the courts having to interpret your words.