Scotland’s Court of Session has ruled that contracts should be read as “what people say, not what they think in their inmost minds”.
The ruling centred on interpretations of the English Law joint venture contract for the Scot Roads Partnership Project, which delivered the flagship M8/M73/M74 design, build, finance and operate project undertaken under a non-profit distributing (NPD) contract.
The dispute was centred on the now-defunct contractor Lagan, which was attempting to recoup money paid to the joint venture, an entity that is now controlled by partner Ferrovial Agroman.
The judgement turned on the interpretation of the word ‘contractor’, with a clause in the contract stating that monies should be returned to the ‘contractor’. Lagan argued that the term refers solely to itself and so monies paid to the joint venture should have instead been transferred to that company. A commercial judge had originally supported that position.
However, the Court of Session has now overturned that earlier decision, saying that Ferrovial can keep the £1m that Lagan had attempted to recover, stating that the ‘contractor’ is in fact the joint venture and is “expressly not” the component companies.
While these readings may seem very detailed and esoteric, they could have wider implications for the UK’s PPP/PFI industry, particularly as the handback and project expiry approaches.
In his judgement, Lord Caroloway said: “Where a contract is a complex and sophisticated one prepared and negotiated by skilled professionals [...] it may be successfully interpreted principally by textual analysis.”
During PFI expiry, industry conversation often takes for granted some kind of ‘spirit of the contract’ context when interpreting the contract - particularly when some contracts feature words like ‘spotless’ in their drafting.
Should courts continue to go down this textual analysis route, those on the hook for contracts drafted under a different legally interpretative time could be in for a rough ride.
Furthermore, the ruling mentions that the contract has the “air of being stitched together from similar contracts, rather than being bespoke”.
With PPP/PFI projects often utilising templates and standardisation, this problem could end up being wider than many had envisaged when the contract was first put together. This ruling is just the latest in a long line of court decisions that have moved the dial on contract interpretation, away from a focus on the ‘spirit’ of the agreement towards a reliance on the specific words used.