The term "preferred supplier status" is common in commercial circles but what does it mean?
The recent case of Proforce Recruit Limited v Rugby Group Limited [2007] EWHC 1621 (QB) clarified the law with the High Court conferring "preferred supplier status” does not mean exclusive or priority rights to the supplier. Similarly it does not impose obligations on the customer. Instead it indicates a supplier who has been approved by the customer and therefore does not need to be subjected to further checks or an evaluation process in the future by the customer.
In the case, the Claimant, Proforce Recruit Limited ("PRL") entered into a contract with the Rugby Group Limited ("RGL") for the supply of cleaning services. The dispute centred round the following clause:
"This Contract will be of a minimum two year period and will be re-negotiable at the end of that period. During that period Proforce will hold preferred supplier status."
There was no definition in the contract of "preferred supplier status", and RGL began to use other agencies to supply it with staff. PRL sued for breach of contract. PRL argued that the clause above should be construed as meaning:
1) that PRL would be offered the first opportunity to supply labour staff and hire equipment in preference to any other supplier; and
2) that RGL would not obtain contract labour or hire equipment from another supplier without first giving PRL a reasonable opportunity to meet RGL’s requirements.
RGL disputed this construction of the words in question and argued that they did not agree to such obligations, and that they had merely agreed to confer the status of "approved supplier" on PRL as a marketing tool for PRL’s use.
When interpreting a written term in a contract the Court will not generally look to the pre-contractual negotiations to determine the meaning behind a term. This is because at that time nothing is agreed and the position of the parties could alter. Only in exceptional circumstances will the Court consider the admissibility of pre-contract negotiations. These arise in circumstances where a term has more than one meaning and the Court will look to evidence from the negotiations to determine whether the parties had agreed their own dictionary meaning of the term (the private dictionary test) and had then progressed the negotiations on that understanding. In assessing the pre-contractual negotiation evidence in this case, the Court held that the parties did not come to an agreed interpretation of "preferred supplier status", and therefore the private dictionary exception was not applicable. Put simply, there had been no agreed understanding as to what the term had meant.
As a result, the contract in this case was construed according to established principles, which include the meaning that the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties at the time the contract was made. The Court will also consider the commercial context in which the contract was made and will favour a commercially sensible construction wherever possible.
The Court’s findings
The Court held that "Preferred" in this context did not mean "exclusive", as in "preferred above all others". Nor did it mean "preferred choice" or "preferred over others", as in "you can expect us to approach you first"; or "all other tenders being equal, we will prefer yours over anyone else’s"; or as in "you will get the contract if you can match the highest bidder’s". It meant only "approved", in the sense that the supplier has been approved as being a supplier which the customer is happy to use.
The background correspondence in this case referred to two distinct matters, 1) a tendering exercise and 2) a "preferred supplier list" / "approved supplier list". The words "preferred" and "approved" were used interchangeably and as such there was nothing to indicate that any particular meaning had been given to them. Terms and conditions were attached to the contract but they had no bearing on the definition of these words. If these words were to have a meaning of exclusivity or priority and impose obligations on RGL and rights on PRL, it would have been commercially acceptable to expect that those obligations and rights should be set out. The Court held that a reasonable person having all the knowledge available to the contract parties at the time would adduce that the words "preferred supplier status" would have the same meaning as it did in the pre-contract correspondence — and because there was no agreed "dictionary definition" meaning arising out of the pre-contract correspondence, the meaning of the relevant words would be determined by the Court based on what it thought a reasonable person would think they meant-the objective man/woman test-what the average person on the bus/train might have thought.
COMMENTARY
The decision in this case suggests that unless there is evidence to the contrary "preferred supplier" denotes an "approved supplier" and does not confer any rights or obligations on a party. It does not oblige the customer to give a first (or last) right of refusal to the supplier nor does it give it an exclusive right of supply. Put simply it does not mean “exclusive”, “priority” or “sole” supplier.
A well drafted contract will define what is meant here and the obligations on each party in “plain English” terms that are not ambiguous or leave things open to doubt.
