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The Dangers of Failing to Accurately Define the Terms Under which Contractual Payments are to be made

In contracts where payment is intended to be made upon the occurrence of specific events or the satisfaction of certain conditions it is paramount, for any payment claim to be successful, that such events and conditions be clearly defined, as well as convincingly proven to have occurred.

In a recent arbitration concerning a claim by a contractor against a property developer for payment of its profit element, housed under a UAE law governed profit agreement, separate from the main construction contract, it was held by the tribunal that the terms under which profit payment was to be made were not sufficiently defined and consequently not proven, by the contractor, to have been fulfilled.

Specifically, the contractor’s profit was stated, in the profit agreement, to have been payable upon completion of the shell and core element of the underlying project or upon the occurrence of a material breach of the profit agreement.

The difficulty that the contractor faced in an arbitration where it sought to recover its profit, was that neither the term ‘shell and core’ nor the term ‘material breach’ were sufficiently defined in the profit agreement for it to prove that the profit was due and payable.

In the absence of a clear definition within the profit agreement of what constituted completion of the shell and core (and what evidence of its completion would be considered as acceptable) it was held that the contractor did not prove that mere completion of what is commonly understood to constitute shell and core would suffice for the profit payments to be triggered.

Equally, in the absence of a clear definition within the profit agreement of what constituted material breach of this (and again of what evidence of its occurrence would be considered as acceptable) it was held that the contractor did not prove that the property developer’s conduct in generally delaying or mismanaging the project necessarily constituted a material breach of the profit agreement, such as to trigger payment of the profit claimed.

This decision, although not binding or constituting any form of precedent, is nevertheless indicative of the fact that tribunals are often reluctant to delve into the intentions of the parties and decipher the meaning of an otherwise unclear or poorly drafted contract.

Rather, the stance commonly adopted by arbitrators is to listen to the parties’ position, review the evidence adduced and consider if this fits into the plain wording of the contract under which the dispute arises, exactly as such wording is drafted and agreed to by the parties.

It is uncommon for tribunals to interpret the parties’ intentions, consider their overall contractual conduct and add meaning and purpose to a contract that is otherwise devoid of or deficient in these.

This general stance, adopted by most tribunals, emphasises the need for contracts to be drafted in plain language that is beyond subjective interpretation and contains a clear list of agreed definitions that sufficiently describe the term referred to.

Ideally, such plain language should also refer to the type of evidence that would be required to prove the existence of a condition or the occurrence of an event.

In short, parties, especially seasoned commercial ones, are normally held by tribunals to their bargain and it is unlikely, regardless of the surrounding circumstances adduced, that a tribunal will infer or introduce additional terms, words or intentions that are not clearly adopted by the parties themselves.

Authored by Partner and Head of Arbitration & Dispute Resolution, Antonios Dimitracopoulos
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