Reconciling contractual provisions

Contracts can often be likened to complex, finely tuned engines, both in terms of their design and also in terms of their inner workings. Many individual elements need to come together and operate as one mechanism. It is sometimes a challenge to integrate all of the provisions and to ensure that that there are no internal inconsistencies. The risk of internal inconsistencies arises as a result of a number of factors. These include: (1) the need for the contract to deal comprehensively with all relevant circumstances; (2) the co-existence of general provisions and specific provisions; (3) the need to insert qualifications and exceptions; and (4) the use of boilerplate clauses.

The risk also arises as a result of the negotiations that inevitably take place between the parties and the need to make amendments and modifications during negotiations. This often results in the insertion of new provisions that require modifications to existing provisions. When all of this is taken into account, it is easy to liken the role of the lawyer to that of an engineer who designs a complex engine and is required to adjust and fine-tune the engine during the design process. In the same way as the engineer must treat the engine as one mechanism instead of a collection of individual components, the lawyer needs to look at a contract in its entirety and make sure that all of its provisions operate effectively with each other.

The lawyer’s toolkit includes a number of phrases to achieve this purpose and to reconcile potentially conflicting provisions. These include the following common phrases:

Notwithstanding…

Subject to…

Except as provided in…

Except as provided in…

In this column, I look at the ways in which these phrases are used by reference to a few examples, and make some suggestions as to which phrases should be preferred.

First, let’s assume the following clauses dealing with the payment of the purchase price that(clauses 5 and 12) appear in a contract for the sale of shares:

A close read of the above clauses indicates that there is an internal inconsistency between clause 5.1 and clause 12.2; namely, they are mutually exclusive and cannot operate together. Clause 5.1, which sets out the general rule, provides that the Purchase Price must be paid by the Purchaser within 10 Business Days starting on the date on which a certified copy of the Foreign Investment Approval is received by the Purchaser. Clause 12.2, on the other hand, operates as an exception to this general rule and imposes a different obligation on the Purchaser in the event that the Foreign Investment Approval is not obtained on or before 30 October 2010.

This inconsistency could be resolved in any one of the following ways:

• By using the phrase “Notwithstanding clause 5.1 …”
• By using the phrase “Subject to clause 12.2 …”
• By using the phrase “Except as provided in clause 12.2 …”

Let’s look at how each of these phrases would be used.

Notwithstanding

The English word “notwithstanding” is one of those words that has traditionally been much used and abused by lawyers. It means “despite” and is used to indicate which clause is to prevail in the event of an inconsistency between two clauses. In the above example, it would appear as follows:

I would suggest that the word “notwithstanding” should be avoided in favour of one of the other options set out below. Although it resolves the internal inconsistency, it is a very archaic word and is not used very much in colloquial English. In addition, it is a difficult word for non-native English speakers to understand and is easily confused with other words.

Subject to

“Subject to” is used to indicate that two clauses must be read together. In the above example, this phrase would appear as follows:

I would suggest that this approach is better than the first approach on the basis that if an exception applies to a general rule, it is better to make this clear in the provision establishing the general rule than to state in the provision establishing the exception that it applies “notwithstanding” the general rule. Otherwise, a reader is likely to read the general rule without being aware that it is subject to an exception, particularly if the exception appears much later in the contract (of course, it would probably make sense to combine these two clauses into one clause, but let’s assume for the sake of argument that they are separate).

As noted above, this approach is also preferable for the reason that “notwithstanding” is an archaic word and may not be easily understood by the non-lawyer.

Except as provided

“Except as provided” is used to indicate that a provision is subject to an exception. In the above example, it would appear as follows:

In my view, this approach is better than “subject to” for the reason that it makes it clear that an exception to the general rule exists, whereas “subject to” could simply suggest that the general rule is subject to a further condition or qualification. For example, instead of providing an exception to the payment date, clause 12.2 might provide as follows:

A further option would be to draft Clause 5 as follows:

Some people would prefer this approach on the basis that it is more consistent with “plain language” principles.

Without limiting the generality of

Let’s now consider the fourth phrase identified above; namely, the phrase “Without limiting the generality of…”. This is used to ensure that the scope of a general clause is not limited or read down as a result of the existence of another clause that governs a specific situation. For example:

In this context, the phrase makes it clear that the situation governed by Clause 10.2 is still subject to the general requirements in Clause 10.1. This would avoid any argument that Clause 10.1 does not apply to an extension request (namely, that an extension request does not need to be delivered in person or sent by certified mail).

It is important for lawyers to know how and when to use phrases such as the phrases considered above so that they can achieve two important objectives in drafting contracts: internal consistency; and readability.

A former partner at Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School and is an associate director of its Asian Law Centre.