You have probably heard the phrase “preferred supplier” or “preferred contractor” used in reference to contracts for services. Those phrases, while not uncommon, can be problematic, as it is not clear what the word “preferred” means in this context.

Some would assume the phrase to mean that the contractor has priority rights, that is, that the contractor is to be preferred over and above all others in terms of providing the service they have been contracted to provide. But that may not be the interpretation given to the phrase by the Courts.

In a recent English case there was a dispute over a contract to provide cleaning services where the contractor was specified to “hold preferred supplier status”. The term “preferred supplier status” was not defined in the contract. The contractor argued that the clause meant that during the contract period they would be offered the first opportunity to supply their services in preference to other suppliers, and that the company would not obtain services from any other contractors without giving them a reasonable opportunity to carry out the work first.

The company however argued that it was not intended that the contractor would have any priority or be preferred over and above other contractors, merely that they would be an approved supplier of the services.

There was nothing else in the contract or the relationship between the parties to assist the Court in deciding which meaning was to be given to the phrase. The Court held that preferred 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”. It meant only “approved” in the sense that the supplier had been approved as a supplier which the company was happy to use.

The lesson to be learnt from this is that if you intend to the use the phrase “preferred supplier” in a contract you should define what the term is to mean in the contract, rather than working on the assumption that it has a particular meaning.

If you wish to discuss any issues raised in this article, please contact Cathy Fisher on (09) 915 2412.