The price is right – or is it?

Key pricing provisions are often hidden away in the schedules to commercial contracts. This article highlights the importance of ensuring they are properly drafted at the outset, to avoid later disputes as to how they should be interpreted.

The problem

At the heart of any contract for goods or services, is the price. This is what the contract is all about and is likely the key reason both parties are entering into it. The seller hopes that by selling its goods or services at that price it can make a profit. The buyer also hopes to make a profit by purchasing at that price (or at least, to run its business in a cost-effective way).

Despite this, pricing structures in commercial contracts are often ambiguous, and don’t necessarily reflect the agreement the parties think they have made.

Pricing is frequently dealt with by inserting a schedule at the end of the contract; this has often not been written by the lawyers who drafted the main body of the contract. This approach is common where contracts are for the purchase of goods which apply increasing discounts based on the number of goods ordered, or for contracts where the price varies depending on the service levels required.

The pricing may seem clear at the time to the individuals who have negotiated it, however, several years down the line (often with personnel changes on both sides) disputes can arise about the meaning of the words used.

We are often approached by clients who thought they had agreed one thing, only to receive an invoice for additional fees which they are not expecting because one party has re-interpreted the pricing provisions of the contract.

The law

The Supreme Court, in Arnold v Britton [2015] UKSC 36, gave guidance on how the courts will approach the interpretation of contracts, including understanding pricing terms. Lord Neuberger gives a helpful summary of the law at paragraph 14 of his judgment:
“meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions.”  

It is the actual wording of the contract, and what these words, taken objectively, mean that is central to interpreting a contract, not necessarily what the individuals negotiating the contract thought they were agreeing at the time.

Complex pricing provisions are often unclear taken on the natural and ordinary meaning of the words. They may have been understood by the individuals negotiating the commercial side of the contract, however, all too often we have seen that the wording used to capture this is capable of multiple interpretations. 

It is often only a matter of time before one party realises this ambiguity and disputes develop over the interpretation of the contract; this can even happen after the parties have both acted in accordance with one interpretation for years.

The options

These disputes are often balanced on a knife edge, with both parties having reasonable interpretations of the contract and sensible legal arguments to back them up. While the actual performance of the contract may assist one party in arguing that the other has waived its rights or is estopped from making its claim – these arguments can be difficult to make out.

The result is a situation where both parties find themselves facing significant legal costs with an uncertain outcome. Negotiation and mediation are often attractive options in these circumstances.

In these disputes the sum being claimed is usually either owed in full or not at all. This presents a challenge and an opportunity for negotiation – the only real considerations are the strength of the legal arguments and the costs of arguing about it. This limits the room to manoeuvre, but also focuses the minds of parties on achieving a workable settlement.

Of course, the best option is to ensure that pricing is dealt with clearly and unambiguously when first drafting the contract. Spending the time at the outset making sure these provisions truly reflect what the parties want to agree can save significant time (and money) further down the line.