Supreme Court highlights risks of relying on commercial common sense

The recent decision of the Supreme Court in Arnold v Britton and others [2015] UKSC 36 has seen the Court return to its traditional approach of interpreting the provisions of a contract. The case concerned the interpretation of service charge provisions in a lease.

The decision will have a significant impact on how the Court’s will interpret contractual provisions in the future. In this article we examine the decision in Arnold, its likely impact and practical tips to be considered. In order to asses the impact of these changes it is helpful to briefly look at the position prior to the decision in Arnold.

The Court’s Previous Approach to Contractual Interpretation

Previously when interpreting contracts the Court would consider the following three factors:

  • What the contract actually says;
  • The parties intentions (assessed objectively) at the time of the agreement; and
  • Commercial common sense.

 

The Court placed particular emphasis on the third factor; commercial common sense, their attitude towards it is summarised in Antaios Compania SA v Salen AB [1985] AC 191 which held that “if detailed semantic and syntactical analysis of the words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to a business commonsense.” This no longer appears to be the approach that the Court will take.

How the Courts are likely to interpret contracts going forward

Commercial common sense now takes a back seat and unless terms are ambiguous, it is not the role of the Court to save parties (or their lawyers) from bad bargains.

If the meaning of the terms in the agreement are clear then the Court will not interfere. In Arnold, despite the fact that the literal interpretation of the provision led to the bizarre result that tenants would pay over half a million pounds in service charges per year by 2072. The Supreme Court was firm in its conclusion that the words of the agreement must be given their ordinary meaning and if a party wishes to argue that an agreement does not reflect the subjective intention of the parties at the time of entering into agreement then they ought to bring a claim for rectification and be wary of the arduous evidential burden that such a claim carries.

Practical tips going forward

In light of this decision, parties and their lawyers should consider the following when drafting commercial agreements:

  • Contractual obligations and their implication must be clear and understood from the outset.
  • The natural, ordinary meaning and purpose of clauses needs to be discussed.
  • Where possible, lawyers should use hypotheticals to run through the practical effect of contractual terms.
  • Clear language ought to be used and the parties should not expect to be able to challenge it in the Courts without compelling evidence.

James Taylor – Second Year Trainee

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s