The importance of reviewing schedules to an agreement - a timely reminder from the UK High Court

Substantial commercial agreements are typically structured to include:

• Head terms – dealing with "substantive legal" matters, and usually handled by lawyers (in their drafting and negotiations).

• Schedules to (and incorporated as part of) the head terms – dealing with "commercial" matters (e.g. scope of work, pricing, governance, employee transfer), and usually handled by the relevant commercial teams (with variable levels of input from lawyers).

This distinction usually arises for good reason, including:

• Allocating documents and provisions to those who are best qualified and placed to drive them.
• Bandwidth/capacity considerations – particularly if members of the commercial team continue to have "day to day" job responsibilities in addition to working on the particular project.
• Team dynamics and wider company considerations.
• External spend and cost considerations.

If correctly managed - well-drafted Schedules can be a powerful tool for ensuring effective post-execution implementation of the agreement. However, if not carefully managed – the above distinction can lead to miscommunication between legal and commercial teams, misalignment between provisions and documents, and contractual interpretation and implementation problems.

Many of us may remember situations where lawyers will spend a lot of time poring over the head terms, getting them just right for execution, only to find, close to the day of signing, that the Schedules are not close to being finalised, for many reasons – from the less serious to egregious mistakes. This usually leads to a last-minute scramble to get the Schedules in shape in order to meet the signing deadline, which in turn frequently leads to post-execution issues and disputes, given Schedules usually contain a lot of information that may be vital to how deals are implemented and executed.

In the recent case of Dynniq UK Ltd –v- Lancashire County Council [2017] EWHC 3173 (TCC), the UK High Court (Technology and Construction Court) reminds us of the substantial risks if Schedules are overlooked when reviewing an agreement, and why commercial lawyers should remain diligent in reviewing and tracking their progress, including by working closely with the wider commercial team.

Background and facts to Dynniq v Council

Dynniq UK Ltd ("Dynniq") is a traffic lights equipment and services supplier. Dynniq signed a five year contact with Lancashire County Council ("Council") in September 2015, for the provision of various equipment and services to the Council (the "Contract").

The Contract used the NEC3 standard contract as the starting point, and incorporated:

• Task Order provisions – setting out how services will be ordered and performed.
• Units and Method of Measurement Schedule (Schedule 9) – setting out how services will be measured and paid for.
• Price List (Schedule 11) – setting out pricing for the equipment and services.

Schedule 9 included the following provisions (the bold highlights are mine):

"In the Price List the sub-headings and item descriptions identify the work covered by the respective items, read in conjunction with the matters listed against the relevant marginal headings "item coverage" in Chapter IV of the Method of Measurement for Highway Works, these Preambles and the amendments to the Method of Measurement immediately following these Preambles. The nature and extent of the work is to be ascertained by reference to the Drawings, Specification and Conditions of Contract. The rates and prices entered in the Price List shall be deemed to be the full inclusive value of the work covered by the several items including the following, unless expressly stated otherwise: ...

(xxviii) Traffic safety and management within and/or adjacent to the Affected Property as described in clause 117 of MCHW Traffic safety and management shall only be separately measured under Series 100 [sic] when instructed on a Task Order by the Overseeing Organisation for the exclusive use by or for the benefit of the Overseeing Organisation or one or more third party…

The Price List was separated by a number of "Series" documents. Series 100 was titled "Traffic Safety and Management", and started with the following terms:

"Traffic safety and management shall only be measured under Series 100 when instructed on a Task Order by the Overseeing Organisation for the exclusive use by or for the benefit of the Overseeing Organisation or one or more third party."

Critically, industry practice is that traffic safety and management services are measured and paid for separately, and not as part of the other services on the Price List. The above terms (among others) therefore represents bespoke amendments to the standard NEC3 contract.

The parties disagreed on the interpretation of the above pricing provisions. Dynniq argued that traffic safety and management services are to be measured and paid for separately in every case, and sought declarations in the High Court to that effect.

Coulson J rejected Dynniq's arguments. In particular, Coulson J interpreted the above provisions' clear meaning to be:

• in respect of the usual Task Order, there cannot be a separate measurement and charge for traffic safety and management, because that work will be deemed to have been included in the other prices in the Price List; except that
• traffic safety and management will be separately measured and payable only where it is not incidental to the work in the Task Order, but is instead the substantive subject of the Task Order itself.

Given the clear and unequivocal meaning of the above provisions, Coulson J did not consider "that the proper interpretation of this contract gives rise to any real difficulties at all", and in particular that this did not lead to an inconsistent interpretation between different parts to the Contract.

Relevant extracts from the case for commercial lawyers

Of particular interest to commercial lawyers:

• Coulson J (at paras 10 to 13) restated the current principles of contractual interpretation:

"What matters is the objective meaning of the language used, to be derived from the natural usual meaning of the words in the contract, when seen against the background/context of the contract. Where there are rival interpretations, one test is to consider which interpretation is more consistent with business common sense… It is a well-established principle that the court should endeavour to give effect to all parts of the contract and to treat no part of it as inoperative or surplus."

• Coulson J noted the above in rejecting Dynniq's argument for rectifying or deleting the relevant provisions in the Schedules due to inconsistent language in the head terms – any argument that agreed contractual provisions should be deleted or ignored because they are unworkable "faces a high hurdle in law".
• Coulson J also restated the current principles for interpreting inconsistent provisions – as originally stated by Hamblen LJ in Alexander –v- West Bromwich Mortgage Company [2016] EWCA Civ 496:

"Where there is an inconsistency clause, one should therefore approach the question of inconsistency without any pre-conceived assumptions. One should not strive to avoid or to find inconsistency. Rather one should 'approach the documents in a cool and objective spirit to see whether there is inconsistency or not'…"

• The below extract (at para 23) highlighted why the provisions in question were included within the agreed document – and why lawyers should be diligent in reviewing the Schedules:

"It may be that one explanation for the difficult task that the claimant has set itself can be found in paragraph 15 of the witness statement of Mr Leighton Williams, a member of the claimant's Legal Department. He states quite candidly in his witness statement that:

'There is no indication that the content of the Note was noted by the claimant during the tender period, and no query or clarification was raised. There was no indication from the defendant that it was going to rely on the Note to refuse to pay for traffic safety and management measured against the 81 line items which the defendant had insisted be completed for traffic safety and management, or that it would insist that the cost of traffic safety and management was to be treated as included within the price for non-routine traffic maintenance.'

In my view, this comes as close as can be to an admission that, at the time of the tender, the claimant simply failed to read the relevant provisions, and so simply assumed that this was a standard form of contract without these bespoke amendments. There is a vague suggestion that the defendant did not emphasise this change. All of that may be unfortunate, and may explain how and why the dispute arises at all, but it cannot affect the interpretation of the words used."

What does this all mean for you?

This case is an example of a party not reviewing the Schedules to an agreement, and suffering a substantial loss as a result. Dynniq legal department's above statement effectively amounts to an admission in this regard. Coulson J enforced the clear meaning of the words in the agreement, notwithstanding Dynniq's arguments around inconsistent provisions and industry practice.

From personal experience of catching and fixing similar issues in agreement negotiations and drafting – they do frequently arise, and hence I generally insist on regularly tracking and reviewing the Schedules to any agreement. Here are a few examples of such issues that I have encountered and caught, some more serious than others: