Whose job is it to check the contract schedules?

It is late at night. You are a lawyer, preparing the final versions of a large and complex set of contract documentation. You have asked a business colleague for the final version of a schedule to the contract, and she has provided a version. But you are not satisfied that this is the final version. You ask her to check again, and she provides another version in an email timed at 23:31 hours. You attach this version and prepare a final set of contract documents. The contract is signed. Everyone is happy.

But the schedule was not the final version that had been agreed in negotiations. The schedule attached to the contract that was signed provided for annual payments to your client of £500,000, over a 15 year period, with no provision for indexation of these payments. But the final version of that schedule, which by mistake had not beeen attached to the signed contract, provided for annual indexation of those payments, to allow for price inflation.

Is your client entitled to increase the amount of the payments each year to allow for inflation? And if not, who bears the loss?

Here are some further facts, to make the question more interesting.

  1. The contract was negotiated as part of a tender process in compliance with public procurement regulations. Your client is a local government body. Arguably a contract was formed by acceptance of a tender and before the formal contract was signed.
  2. But the signed contract included an “entire agreement” clause stating that the parties have not relied on any other documents in entering into the contract.
  3. Commercial management of the negotiations was handled, on your client’s behalf, by a management consultant, PriceWaterhouseCooper (PWC). It was a PWC representative who provided you with the version of the schedule that you attached to the signed contract.
  4. The schedule that was attached to the contract had some missing details that were still to be completed, which arguably made the schedule “inoperable”. But neither party spotted these defects before the contract was signed.

You have one hour to answer this question. No conferring.

Ah, but we have an answer, in the form of a High Court decision from last year. IP Draughts has just stumbled across the case of Borough of Milton Keynes v Viridor (Community Recycling MK) Ltd (No 2) [2017] EWHC 239 (TCC), decided by Coulson J. With some simplification, the description above summarises one of the main issues facing the judge in this case.

A recent tweet by @jamessflee alerted IP Draughts to the case. The tweet paraphrased a comment from the judgment, at paragraph 67, which reads as follows:

There is no doubt that it was sloppy work by PwC, the management consultants and, to a lesser extent, by Ms Brittlebank [of Dentons], the solicitor. PwC’s error is perhaps a sad reflection of the fact that modern day contracts of this kind are so complicated that nobody (not even the consultants) bothers to check the actual documentation being signed.

So there was sloppy work. But has there been negligence? Has any negligence caused recoverable loss? And by whom should the loss be borne – PWC or Dentons (or both), or more likely their insurers?

Fortunately for them, but unfortunately for the curious observer, Mr Justice Coulson didn’t need to answer these questions, because he was prepared to accept that the contract should be “rectified”, ie that the final version of the payment schedule should be substituted for the one that was actually attached to the signed contract.

Interestingly, on the issue of the entire-agreement clause, the judge, quoting an earlier authority, comments:

where there is a strong case for rectification, the agreement which constitutes “the entire agreement” is to be found in the contract as rectified and not in the contract which, ex hypothesi, does not reflect the true intention or agreement of the parties. I consider that that is the position here. Thus the entire agreement clause is immaterial.

But don’t take away the message that in cases of this kind, the judge will sort it all out, applying common sense. It is difficult to win cases based on rectification, and it only happened here after a very close scrutiny of the facts and the underlying law, and in the face of sustained and forceful arguments to the contrary by the other side’s QC. It will be interesting to see if the case is appealed.

Coming back to the practice point, what is the solicitor who is managing the contract documentation supposed to do? In this case, she twice asked the client’s representative to provide the correct schedule, perhaps annoying them in the process, and the representative should have been aware of the need to carefully check that she was supplying the right version. But she didn’t. And nobody noticed, from either side, before the contract was signed. Is it fair to blame the solicitor in these circumstances? Mr Justice Coulson clearly thought that the primary responsibility lay with the client representative, in this case PWC. But that doesn’t necessarily let the solicitor off the hook.

Many of us who advise on contracts are familiar with the situation where you are the only person attending to the details, in the face of pressure from commercial colleagues to “get the deal done”. Perhaps those colleagues wouldn’t even blame you if things go wrong, as they would accept that everyone wanted to close the deal and not spend further time obsessing about the documents.

Perhaps. But if losses are incurred as a result of a mistake, how likely is it that senior management will take this view?

Are you willing to make yourself unpopular to get the documents right, or do you “go with the flow”? Perhaps the answer depends in part on the scale of the deal and its risk profile. For a contract involving payments of 15 x £500,000, IP Draughts hopes he would always fall on the side of accuracy rather than expediency, unless clearly instructed to do otherwise.

 

 

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