Mind the gaps

The case of J Murphy & Sons Ltd vs Beckton Energy Ltd earlier this year was, on the face of it, just another failed attempt by a contractor to prevent its employer making a call on an “on demand” performance bond. However, the judgment raises interesting points about the interpretation of contracts, especially as to whether a court can take into account the fact that the parties have chosen to delete words from a standard form of contract.

The standard form used in this particular case was a FIDIC Yellow Book (Design and Build) 1999 with amendments – which was appropriate for the construction of a combined heat and power plant. The Yellow Book has a clause that requires the employer to notify the contractor if it considers itself to be entitled to any payment under any of the conditions. It is usually the contractor who uses this clause but the employer may also have claims, not least for liquidated damages (LDs) for delay. If notice is given, the engineer, as the employer’s agent, must make a fair determination of what is due (Hamish Lal discussed what a fair determination is in his Building column – Engineering anxiety, 6 May 2016, page 40).

In the Murphy case, a key question was whether Beckton’s right to deduct LDs first required notice to be given, and the “engineer determination” procedure to be gone through. If not, Beckton could undoubtedly go ahead and call the bond.

Historically, the courts did not allow deleted words to be considered in interpreting contracts at all. You could only look at what was there, not at what was not there

The unamended FIDIC contract specifically says that if an employer wants to deduct LDs, it must first give a notification and, if necessary, have the matter referred to the engineer. But in the Murphy contract, that part had been deleted. Did that mean that the parties must have positively intended that the employer need not bother with all of that?

A non-lawyer looking at this might say: “Yes, surely that is exactly what they must have meant. Why else delete the words?” However, things are not that simple. Historically, the courts did not allow deleted words to be considered in interpreting contracts at all. You could only look at what was there, not at what was not there.

More recently, this approach has changed a little. In a non-construction case a few years ago (Mopani Copper Mines plc vs Millennium Underwriting Ltd), the judge decided that he could take into account the deletion of words in a reinsurance policy. He held that, particularly in the context of emails that formed part of the contract, the deletion showed what the parties were not agreeing – and why. So it seems that if the court is faced with an ambiguity and if the deletion can be said to show what the parties did not want, then the court can look at deleted words to see whether they shed any light on matters.

The judge in Murphy was persuaded by Beckton’s arguments on various grounds. The regime about notification and “engineer determination” did not easily tie in with the LDs clause, she said. Also, the requirement for Beckton to notify Murphy before claiming “any payment” did not, in context, cover claims for LDs. But the judge was also cautiously prepared to consider the deletion in coming to her decision. She said it was consistent with the parties’ intention to give Beckton a standalone right to deduct and that it was also relevant as background. So Beckton was entitled to deduct LDs and call the bond.

It may seem that considering what has been deleted is common sense. Why should a court shut its eyes to something? However, there are at least two problems

It may seem that this trend towards considering what has been deleted as well as what has been left in is only common sense. Why should a court shut its eyes to something? However, there are potentially at least two problems.

First, if a deletion is relied upon by one party, the other may want to start calling some evidence about the reasons for the deletion. That could lead courts down the road of discussing pre-contract negotiations – and evidence about those is very definitely off-limits.

Secondly, suppose a standard form contract has simply been retyped without any reference to the deleted words at all (as opposed to saying “delete sub-clause 2(3)”, for example). This ought to make no difference, of course. But then the signed document would not refer to the deleted words at all, and referring to a deletion would seem uncomfortably like using one contract (the standard form) to help interpret another.

Standard building contracts are very often amended. It is unfortunate that the law on reviewing deletions, much of which dates from the 19th century, is still unclear.

Ian Yule is a construction partner at Weightmans