Interpreting contracts - No rescue from a bad bargain

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The recent case of Arnold v Britton and others [2015] UKSC (Bailii) provides useful guidance from the Supreme Court on how the principle of “commercial common sense” should be applied when interpreting a written contract.

Background

Oxwich Leisure Park (Park) let a number of chalets on broadly similar terms for 99 years (commencing in 1974). Each lease contained a covenant by the landlord to provide services to the Park, and a covenant from the tenant to pay a service charge.

A dispute arose between the landlord and a number of tenants over the meaning of the service charge clause. The landlord interpreted the service charge clause as requiring the tenants to pay an initial annual service charge of £90 which increased at a compound rate of 10% every year after the first year. This interpretation meant that by 2072, each tenant would be paying a service charge of over £550,000 per annum.

Rules of interpretation

By way of background, interpreting a written contract is in its purest form, simply the task of ascertaining the meaning that a contractual document would convey to a reasonable person.  There is extensive case law on the rules of interpretation which generally adopt the approach that contracts should be interpreted using broad principles rather than strict rules.

When interpreting a contract the words contained in the document are the starting point for ascertaining the parties’ intentions and, provided they are sufficiently clear, may very well be the endpoint. However in circumstances when the language in the contract is not sufficiently clear, the court will apply additional rules of interpretation.

It is important to note that where a contract is in writing, what the parties have written, rather than what they intended to write, will constitute the agreement. The intentions of the parties at the time of drafting the agreement are irrelevant, and an objective test will be applied as to what a reasonable businessperson understands the language to mean. Where there is more than one possible interpretation, the interpretation which is most consistent with commercial common sense will prevail.

The Supreme Court’s ruling in the case of Arnold v Britton and others [2015] UKSC (Bailii), highlights the limitations of the principle of commercial common sense when interpreting a written contract.

Decision

The Supreme Court held that the natural meaning of the service charge clause was clear and that a reasonable reader would understand that the clause required the tenants to pay an annual charge to reimburse the landlord for providing the services, and that the service charge was a fixed sum which increased at a compound rate of 10% per annum.

The fact that this meant that by 2072 each tenant would be paying a service charge of over £550,000 per annum did not justify departing from the natural meaning of the clause.

This decision acts as an important reminder that the principle of commercial common sense is not a relevant consideration where the natural meaning of the language is clear. Even in circumstances where such an interpretation leads to detrimental or distasteful consequences, it is not the role of the courts to step in to save a party from a bad bargain.

A short extract from the Supreme Court’s judgement can be viewed on YouTube below.