Commercial contracts often refer to provisions in statutes. However, because so much legislation had been enacted over the past few years, these references may quickly become outdated. How will the courts interpret a contract that refers to legislation that was amended before or after the date on which the contract was made?
The answer will depend on the interpretation of the words in their context. In some cases, a reference to a statute may be interpreted as a reference to the amended legislative provision; in others, the agreement will be more strictly construed.
William Hare Ltd v Shepherd Construction Ltd [2009] EWHC 603 (TCC); [2009] PLSCS 226 reminds draftsmen that legislative changes can significantly affect contractual arrangements. The case concerned the meaning of a “pay-when-paid” clause, which explained in detail when a party would become “insolvent”. The clause did not reflect the changes amde to the Insolvency Act 1986 by the Enterprise Act 2002, even though the parties’ contract was made some time after the amendments came into force.
The judge ruled that the Interpretation Act 1978, which contains provisions to assist with interpretation where legislation has been amended, was ineffective because the law had changed before – and not after – the contract was made. Traditionally, “pay-when-paid” provisions are strictly construed; the clause was not engaged, and the contractor was entitled to be paid because the insolvency that occurred was not within the ambit of the clause.
Most contracts contain boilerplate provisions that specifically provide for what should happen if legislation is amended after the date of the contract. However, such provisions would not have assisted on this occasion because the contract was made after the law was changed.
Practitioners face a difficult decision when drafting contracts that refer to statutes that are liable to change. Unforeseen changes could have a significant effect on the parties’ rights and obligations. Consequently, it is not always easy to decide whether the contract should provide that references to statutes are to be treated as references to legislation in the form enacted at the date of an agreement or, alternatively, that such references are to include changes made while the agreement is in force.
This dilemma is particularly acute when granting or accepting leases that contain user covenants describing permitted use by reference to use classes defined by planning legislation. In such cases, it is important to state whether a reference to a use class is to be “set in stone” for the duration of the lease or whether the permitted use will alter to reflect statutory changes made during the term of the lease.
Parties that want to take account of minor changes without adopting substantive legislative change should modify the interpretation provisions in their contracts accordingly. Alternatively, parties could include an option to terminate agreements in the event of adverse legislative changes (if they can persuade counterparties to accept this).
Allyson Colby is a property law consultant