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Court of Appeal Applies Commercial Clarity to Contract Terms

Large construction or maintenance projects rarely proceed without at least a few surprises and the contracts for such projects are generally drafted with such eventualities in mind. One often-used technique is to use minimum performance level agreements, which set out performance targets that must be reached. These are often accompanied by compensation clauses to apply where the performance targets are not met.

It is essential to draft such clauses with great care so that if performance is below the targets set, the situation is clear and the question of the appropriate compensation is an easy one to answer. Failure to do so can cause significant disputes to arise.

When work on a long-term maintenance and repair contract between a council and a contractor fell into arrears, a dispute arose over the performance measures specified in the related 'key performance indicator (KPI) framework'. These did not tie in precisely with the minimum defined performance levels as specified in the contract, although the contract did have three examples in which the minimum performance standard was defined as being '3 per cent below the KPI'.

When the service delivery failures became more than the contracting council would accept, it terminated the contract. The contractor claimed that the termination was invalid because the KPI framework contained 'illustrations' and was insufficiently precise to justify the termination of a long-term contract.

The case eventually landed in the Court of Appeal, which took a commercial approach. The contract was clearly intended to be terminable if minimum acceptable performance standards were not met. The performance standards set out in the contract had to be capable of enforcement and the failure to specify the precise performance standards, whilst regrettable, could not frustrate that. Accordingly, the termination was valid.

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