In the case of Kason Kek-Gardner Ltd v PCL  EWCA Civ 2132, the Court of Appeal has highlighted the importance of interpreting a contract based on the language of the agreement, and not clouding its meaning with background knowledge of the parties.
KPCL was in administration and entered into two asset sale agreements with two separate companies, each of which were created by former directors of KPCL. In the first agreement, KPCL sold its intellectual property rights and assets from two of its divisions to PCL, and ten days later in a second agreement, the remaining two divisions and assets were sold to Kason Kek-Gardener Ltd (KK-G). These two agreements suffered from lack of clarity.
PCL then licensed some of its acquired intellectual property rights to KK-G under a third agreement, however this agreement was terminated due to a purported breach of confidentiality by KK-G, who had disclosed the agreement to a prospective buyer during the due diligence process.
PCL and KK-G then disputed what each party had acquired under the first and second agreements respectively. KK-G argued that the parties had acquired the intellectual property for the divisions they had each acquired. One of the intellectual property rights in question was a trade mark numbered '46553 KEK' which PCL had acquired under the terms of the first agreement, however that trade mark had been removed from the register. There was, however, a 'live' KEK trade mark registered under a different number.
The High Court decided that the first agreement had transferred only the intellectual property rights from the divisions PCL had obtained, but the judge then went on to say PCL had acquired the intellectual property rights. Key to this decision were background facts which were not known to both parties. As this judgement was contradictory in places, KK-G appealed the decision to the Court of Appeal.
The Court of Appeal dismissed the appeal and approved High Court's second decision, however the Court of Appeal applied different reasoning, rejecting the reasoning of the High Court. It held the second agreement with KK-G, which was entered into ten days after the first agreement, could not be used to interpret the first agreement, as the conduct of the parties after agreements are concluded does not affect the interpretation of the agreement.
The court also confirmed that admissible background knowledge was limited to facts that were known or reasonably available to all parties at the time of entering into the relevant contract. Accordingly, it was concluded that PCL had acquired all the intellectual property rights of KPCL under the first agreement, and KK-G had not acquired the intellectual property rights in the divisions it had purchased under the second agreement.
Regarding the incorrectly numbered trade mark, the number and description were inconsistent and could not stand together, so the court was entitled to apply the principle that 'a plain misdescription does no harm' and imply the 'live' 'KEK' trade mark to PCL's agreement.
Impact of the case on contract drafting and interpretation
This case highlights the importance of interpreting a contract based solely on the express language of the contract, and not clouding the position with background knowledge.
However, where it is not possible to interpret a contract based solely on the express language of the contract, it can be interpreted by objectively identifying what a reasonable person, in possession of all the background knowledge that would have been available to both parties, would have understood the language in the contract to mean (Investors Compensation Scheme Ltd v West Bromwich Building Society  UKHL 28).
The decision is also a useful reminder that only contracts concluded at the same time between the same parties forming a single composite transaction can be read together, which was not the case here.
Our top tip for draftsmen is therefore to always remember to make use of the recitals as a tool where there are additional documents, facts and circumstances which have relevance to the interpretation of a contract (or certain of its provisions).
The benefits of this practice are two-fold. Firstly, setting out the context of the agreement helps to focus the minds of both parties at the outset and cement their commercial goals (consider for example, drawing attention to the parties' longer term trading objectives, such as a broader roll-out of successful services across the customer's portfolio). Secondly, the recitals can be used to sign-post significant matters, so that there is no doubt that they can be borne in mind by any court one day tasked with interpreting the contract.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.