If you agree it, incorporate it

Preliminary agreements count for nothing if they aren’t enshrined in your contract

Standard 4 of the Arb Code of Conduct expects architects to have a written agreement with their clients. Further to this expectation, it is clearly best practice to do so since oral agreements, or no agreements whatsoever, are more likely to end in disputes.

In addition to setting out the fundamental terms (such as the identity of the contracting parties, the scope of works and the fee), it is essential that the contract clearly incorporates any agreements or particular points that the parties raised during the negotiations before execution of the contract. These need to be expressly documented if the parties intend to be bound by and rely on them. 

Otherwise, one party may well find that it has contracted on very different terms to what it thought had been discussed.

The recent Court of Appeal case of Northrop Grumman Missions Systems Europe Ltd v BAE Systems (Al Diriyah C4I) is a reminder of the long-standing law on the construction and interpretation of contracts. This case concerned rather glamorous enabling and licencing contracts for computer software for a missile command and control system for the Saudi Arabian government. 

Essentially, the parties disagreed on the interpretation of certain contract terms. The court had to decide whether BAE was entitled to terminate the licence agreement pursuant to a ‘termination for convenience’ clause (see box) contained within the enabling agreement. In short, the court found that certain terms of the enabling agreement had been incorporated by reference into the licencing agreement and that BAE was entitled to terminate the licencing agreement as it had done.

Don’t rely on emails

One of the points before the court was whether Northrop was entitled to buttress its interpretation of the contracts by reference to the factual context or background during negotiations. Northrop relied on pre-contract email exchanges to show that the termination for convenience clause was not consistent with the background facts at the time the contract was agreed. Northrop therefore argued that the clause should not be incorporated.

Evidence of pre-contractual negotiations generally is not admissible to interpret a concluded written agreement

The court did not accept that Northrop could rely on these pre-contract email exchanges and reiterated the well settled law that evidence of pre-contractual negotiations generally is not admissible to interpret a concluded written agreement (most recently reaffirmed in 2009 in Chartbrook v Persimmon Homes). It is only admissible to establish that a fact was known to both parties and to elucidate the general object of the contract.

Accordingly, the general rule is that the court is limited to interpreting contracts and the expressed intention of the parties through the words actually used in the contract. The parties’ subjective statements pre-contract generally do not assist the court in objectively interpreting the contract. 

If it is apparent to the court that something went wrong with the language of the contract, then in very limited circumstances the court may be prepared to rectify or rewrite parts of the contract so that it makes commercial sense. In Northrop v BAE the court was prepared to ‘manipulate’ particular words within the contract to give effect to the parties’ intentions and overcome differences in the agreements. However, parties certainly should not rely on this and should aim to achieve clarity in their contracts. 

Therefore, if you want to rely on a particular discussion or provision raised during negotiations you must ensure that it is appropriately and clearly incorporated into your contract. Only in limited circumstances will the court look to pre-contract negotiations.