Commercial Law

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Ambiguous contractual terms lead to litigation headaches

Most commercial cases that pass through the courts have at their root a poorly drafted or insufficient contract.

A meticulously drafted agreement can spare your company a lot of time and money should a dispute arise, especially where the terms are clear and concise and prepare for each eventuality.

With such an agreement, disputes may be settled through the ‘summary procedures’ in the Courts, as the Defendant’s liability will be there ‘in black and white’.

However, ambiguously drafted terms will offer a defendant a bona fide defence and force the case to a full hearing at a far greater cost.

In the recent case of Pansea Limited v DID Electrical, an argument arose over a clause in a franchise agreement. Pansea argued that the literal interpretation of the contract was that they would earn 21% commission on sales, irrespective of whether the goods were sold at a discount or not.

However, DID Electrical contented that this was ‘commercially unrealistic’ and not the proper interpretation of the contract.

In deciding whether to grant summary judgment, the Court asked whether the Defendant had an arguable case. It is clear from the judgment that the standard of what constitutes an ‘arguable’ case is low, stating that in practice ‘it is only in the most straightforward cases that summary proceedings are appropriate’.

In this case it was decided that the Defendants did indeed have an arguable case and the matter should proceed to a full hearing. Evidence would need to be heard on matters such as the contractual negotiations so that the true construction of the contract could be determined.

In the circumstances, the parties’ failure to include in the contract how the commission would be affected by the sale of goods at a discount has resulted in a lengthy and costly litigation battle.