Ambiguity over term definition in contract

Proforce Recruit v Rugby Group, (Court of Appeal - 17 February 2006)

Two parties entered into a contract whereby the claimant would provide agency labour to the defendant. The claimant was stated in the contract to have 'preferred supplier' status.

There was no definition of the term preferred supplier in the contract. A dispute arose when the defendant sourced agency labour from suppliers other than the claimant.

The claimant alleged breach of contract since, it contended, its preferred supplier status obliged the defendant to revert, in the first instance, to it for temporary staff. The defendant submitted that preferred supplier, given its ordinary meaning, meant that the claimant was merely one of several of the suppliers of labour with which the defendant would prefer to do business; thus there was no binding right of first refusal.

The Court of Appeal held that pre-contract evidence was admissible, even allowing for an entire agreement clause that purports to exclude 'all prior representations (and) negotiations', where it clarifies the meaning of terms incorporated into an agreement.

It held that the entire agreement clause was subject to an important caveat: where extraneous evidence sheds light on the meaning of an ambiguous contractual term it should be admitted. The claimant's case was not fanciful and should proceed to trial.

Comment: The disputed term 'preferred supplier' was not defined in the agreement. This ambiguity led to the litigation. The case serves as a reminder to draftsmen not to assume that uncontroversial pre-contract terms will remain so once the ink dries on the contract. Michael Oakes, BLM Leeds.

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