Manifest Error in a Contract

How will the courts interpret the meaning of ‘manifest error’ in the performance of contractual responsibilities? The Court of Appeal has given important guidance for businesses on what amounts to manifest error, and the risks of straying from the requirements of the contractual terms. What’s the background? The claimant had agreed, under a Private Finance Initiative (PFI) contract with Birmingham City Council (BCC), to maintain, manage and operate Birmingham’s road network for a 25 year period. Under the terms of what the court described as a ‘formidable’ contract document, Milestone Certificates were to be issued, by an independent third party, on completion of Milestones.  In the absence of fraud or manifest error, these were to be final and binding on the Parties. The contract set out the test procedure which the independent certifier was to follow. The question for the Court was the correct interpretation of the PFI contract, including whether four completion certificates could be set aside for “manifest error”. On the facts, the court agreed with BCC that the independent certifier issued the four milestone certificates in dispute on dates when everyone in the certification process knew they would be based upon erroneous calculations.  Those four certificates should therefore be set aside. What guidance did the Court give? The Court agreed with previous rulings that defined ‘manifest error’ as ‘one that is obvious or easily demonstrable without extensive investigation’. The court can consider extrinsic evidence when deciding whether there has been a manifest error. Lord Justice Jackson found it particularly relevant that this PFI contract was a ‘relational’ contract.  Whether or not relational contracts should be subject to special rules was not an issue, but Jackson LJ said: “Any relational contract of this character is likely to be of massive length, containing many infelicities and oddities. Both parties should adopt a reasonable approach in accordance with what is obviously the long-term purpose of the contract. They should not be latching onto the infelicities and oddities, in order to disrupt the project and maximise their own gain.” In this case, the contract worked fine for the first three and a half years,  but when the claimant “thought up an ingenious new interpretation of the contract” (including relying on data that it had not updated, but should have been updating) things started to go wrong. What does this mean? This ruling emphasises that the importance of clear and concise contractual drafting is critical in the case of lengthy, relational contracts that are intended to last for a lengthy period.  It is also a salutary warning to the parties that they must conduct their contractual obligations in accordance with the terms of the contract because the courts can, where the contract provides for it, set aside activity flowing from the contract where there is ‘manifest error’. How can we help? If you have any concerns about your contractual arrangements, or need expert advice in drafting or interpreting your commercial agreements, contact the experienced commercial solicitors at Herrington Carmichael for specialist advice as early as possible.