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Case law: Court gives guidance on how to interpret uncertain terms in commercial agreements

Contractual parties should ensure there is no ambiguity in the wording used in their commercial agreements, and should not assume uncertain terms will be unenforceable – or they risk the courts interpreting the agreement in a way they are not happy with.

June 2018

This update was published in Legal Alert - June 2018

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A company and a financial advisor entered into an agreement authorising the advisor to sell a third party's financial products for a commission.

The agreement said that the advisor had to pay back commission if a client bought a product but then withdrew within three years. The wording used was that ‘the amount of initial commission clawed back relates to the amount invested, length of time invested and amount withdrawn’. It was not, therefore, immediately clear how much commission the advisor had to repay if a client withdrew after, say, two years.

When two clients withdrew within the three years the company tried to reclaim commission, but the advisor argued that the clause in the agreement requiring repayment was void for uncertainty because it did not clearly set out how the amount to be repaid should be calculated.

In disputes over the meaning of a clause in a commercial agreement, an objective test is applied: what would a reasonable person in possession of all background information reasonably available to both the parties at the time the agreement was entered into think it meant? Only if there is ambiguity will other factors be taken into account.

The Court of Appeal ruled that the wording was clear enough for a reasonable person to think that the clause meant the amount of commission repaid in a particular case should be calculated as a percentage of the original commission, which reduced over time on a straight-line basis. For example, the advisor should pay back all the commission if a client withdrew immediately, half if they withdrew after 18 months and nothing if they withdrew at the end of the three years.

The Court was not substituting its own clause for the one in the agreement, it was interpreting the meaning of the words used, as they would be interpreted by a reasonable third party.

Operative date

  • Now

Recommendation

  • A party to a commercial agreement should ensure there is no ambiguity in the wording used in it, and should not assume uncertain terms will be unenforceable, or they risk the courts interpreting the agreement in a way they are not happy with

Case ref: Openwork Limited v Forte [2018] EWCA Civ 783

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