It is common practice in commercial agreements for parties to use the word “shall” where they intend to impose a binding contractual obligation to do, or not to do, something. However the recent decision of the Court of Appeal in PM Law Ltd v Motorplus Ltd  EWCA CIV 1730 highlights the importance of assessing the relevant factual matrix (including any prior dealings) when interpreting contractual obligations.
The case itself concerned a referral agreement entered into between the parties which contained a provision which stated that the insurance intermediary Motorplus Ltd “shall” refer “a quantity” of legal claims (such as road traffic claims) for compensation to the law firm PM Law Ltd. The court ruled that, in this instance, the word “shall” was not a binding promise or obligation to deliver a specific number, a reasonable number, or indeed any number of claims, but was merely an expression of the parties’ present intention.
The court considered the following in reaching its decision:
- There was no need to interpret “a quantity” as meaning “a reasonable quantity” or another previously discussed quantity (an estimated 100 claims per month had been discussed) for the agreement to make sense.
- The bargain struck between the parties did not depend upon a guaranteed level of referrals for its business efficacy. Having just an estimated number of referrals made commercial sense as a calculated commercial risk, the like of which businesses take on a regular basis.
- The agreement did not contain references to the number of claims to be referred, despite the fact that it would have been easy for the parties to include a figure or formula.
- The charging structure was based on the payment of referral fees on a referral by referral basis as opposed to a minimum quantity of referrals which was more consistent with an agreement to pay a referral fee if and when a claim is referred.
- The previous agreement reached between the parties did not contain a guaranteed number of referrals and the number of referrals under that agreement had fluctuated.
Parties may wish to consider the following when drafting their agreements:
- Although much has been made of the word “shall”, the overall effect of having a clause that referenced unspecified quantities was the real issue – sufficient certainty is needed to create a binding commitment.
- Inevitably, the use of the word “shall” is not in itself conclusive evidence of the parties’ intention to impose a binding contractual obligation and its meaning will depend on the rest of the agreement and the relevant factual matrix.
- Where the language used is clear, as in this case, the courts will not rewrite a deal where a party takes a calculated commercial risk just to make it “fairer”. However, where the deal struck between the parties requires a particular interpretation to be given to a clause in order for it to make any commercial sense, then the courts will look for that alternative interpretation – this was not the case here.