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Contract Law Update:
Contract "does exactly what it
says on the tin"
Jane Randell | 17 September 2015
Rules of interpretation underpin much of English contract law. While not making new
law, in a recent and helpful judgment the Supreme Court has reviewed (again) the
issue of contract interpretation and provided some clarity on the role to be played by
"commercial common sense". The Court held that commercial common sense and
the desire to provide a just and reasonable outcome for one party should not allow
courts to read ambiguity into unambiguous language. In our view this is a welcome
restatement of the current approach and it is useful to have this now because the
courts were starting to get themselves into a bit of a tailspin, taking a flexible (some
might say far too flexible) approach to contractual interpretation.
The case of Arnold v Britton [2015] UKSC 36 is of particular interest to me as it
concerns one of my favourite corners of the world: the Gower peninsular in Wales.
Other contract lawyers less moved by the Gower's charms can instead take pleasure
in Lord Neuberger's helpful seven point summary of things to bear in mind when
considering whether to apply "commercial common sense" to contractual
interpretation.
The brief facts of the case are these. Oxwich Leisure Park contained 91 holiday
chalets, each of which was let on broadly similar terms. A dispute arose between the
landlord and the tenants on the proper construction of the clause relating to the
calculation of the annual service charge. Although the language differed slightly
between several of the leases, a typical example was a covenant to pay:
“in addition to the said rent a proportionate part of the expenses and
outgoings incurred by the Lessor in the repair maintenance renewal and the
provision of services hereinafter set out the yearly sum of Ninety Pounds and
value added tax (if any) for the first year of the term hereby granted
increasing thereafter by Ten Pounds per Hundred for every subsequent
year”. (emphasis added)
The landlord sought to interpret this as requiring the tenants to pay an initial annual
service charge of £90 which would increase at a compound interest rate of 10%
every year. This meant that by 2072 each tenant would be paying a whopping
service charge of over £550,000 per annum!
The Court
held that
commercial
common
sense and
the desire to
provide a just
and
reasonable
outcome for
one party
should not
allow courts
to read
ambiguity
into
unambiguous
language
In contrast the tenants argued that, properly read and applying commercial common
sense, the clause in fact required the tenants to pay a fair proportion of the landlord's
costs in maintaining the site, subject to a maximum of £90 for the first year, with that
maximum increasing by 10% each year. That interpretation, in effect, meant that the
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words "up to" should be added between the words "the provision of service
hereinafter set out" and "the yearly sum of Ninety Pounds".
The Supreme Court, agreeing with the Court of Appeal, rejected the tenants'
argument and found in favour for the landlord (by a 4-1 majority). In doing so, Lord
Neuberger set out seven key factors that were relevant when considering whether to
use commercial common sense to interpret a contract. Of particular relevance, he
observed that:

when interpreting a clause, one must start with the words as written.
Commercial common sense and the surrounding circumstances should not be
invoked to undervalue the importance of the language used;

the worse the drafting, the more readily a court can properly depart from
their natural meaning. But, courts cannot embark on an exercise for searching
for drafting infelicities in order to facilitate a departure from the natural meaning
of the words;

courts cannot reject the natural meaning simply because it appears an
imprudent term for one of the parties to have agreed – ie, because it reflect a
bad bargain. They should avoid re-writing the contract in an attempt to assist an
unwise party or to penalise an astute party; and

one can only take into account facts or circumstances which existed at the
time the contract was made and which were known or reasonably available to
both parties.
Applying these rules to the facts it was clear that the tenants had struck a bad
bargain from which the courts would not save them. The language used was
unambiguous, there was no obvious term that could be implied and no clear mistake
in the drafting to be corrected.
Although it does seem harsh to the poor chalet owners of Oxwich Bay (and note that
in passing Lord Neuberger urged the parties to come to an amicable agreement on
varying the onerous clause), the judgment must be right and puts the final nail in the
coffin on the liberal approach to contract interpretation most evident in recent times
in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38.
It is tempting to see this judgment as something as a departure from the more
practical judgment in Rainy Sky v Kookmin Bank, which some critics saw as judicial
willingness to deviate from a strict and literal reading of the drafting. However, even
in the Rainy Sky judgment, the court made it clear that interpretation must always
start with, and be grounded in, the actual words used by the parties in the contract.
Where the parties used unambiguous wording the courts must apply it. Only where
there are two or more tenable readings of a provision will the interpretation most
consistent with commercial common sense be preferred. This was clearly not the
case in Arnold v Britton and so could not be relied upon. In contrast, see the
judgment of Ace Paper v Fry in which the High Court applied the business common
sense meaning to a clearly ambiguous clause.
The judgment in Arnold v Britton is a clear reminder – if one was needed – of the
importance of clarity in contract drafting and the onus on each party to a contract to
read and understand the implications of the contractual provisions as written. Of
course, conversely, if you or your client is subject to a genuinely imprecise and
If you require further
information on anything
covered in this briefing
please contact Jane
Randell (jane.randell@
farrer.co.uk; 020 3375
7198), or your usual
contact at the firm on
020 3375 7000. Further
information can also be
found on the Intellectual
Property page on our
website.
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ambiguous obligation then it may be of some comfort to know that the courts may be
more able and inclined to read the obligation in a commercially reasonable way.
This publication is a
general summary of the
law. It should not replace
legal advice tailored to
your specific
circumstances.
© Farrer & Co LLP,
September 2015
www.farrer.co.uk