Tue 02 Jun 2015

Commercial contracts and common sense

At our Annual Conference on 21 May 2015 I talked about the role that commercial common sense is playing in the interpretation of commercial contracts in Scotland. Since the Supreme Court's decision in Rainy Sky S.A. v Kookmin Bank in 2011 the Scottish courts have shown considerable enthusiasm for invoking commercial common sense as a means of determining contractual disputes.

There are questions about the extent of its usage. For one thing, as Lord Reed pointed out in Credential Bath Street Ltd v Venture Investment Placement Ltd, judges have to be careful to avoid thinking that they will always be the best judges of what is commercially sensible. Indeed, their idea of commercial common sense may be quite different from that of the parties to the contract. Further, the subjectivity involved in making a "commercial common sense" decision is bad for legal certainty. As lawyers, we can tell our clients what contracts mean, but we can't be expected to tell them what a particular Judge might think is commercially sensible.

However, in various recent cases including Aberdeen City Council v Stewart Milne Group; Grove Investments v Cape Building Products; @SIPP Pension Trustees Ltd v Insight Travel Services; and Mapeley Acquisitions (No 3) in Receivership v City of Edinburgh Council the Court of Session has found the contractual provision in question to be ambiguous and used commercial common sense as a reason to favour one interpretation over the other. In the Outer House, a Temporary Judge did the same in Global Port Services (Scotland) Limited v Global Energy (Holdings) Limited and others. That judgement was appealed with the Extra Division delivering its decision last week.

In over-ruling the Temporary Judge's decision, Lady Smith reiterated the rule that commercial common sense should only come into play at all where the contract is ambiguous. Where it was unambiguous (as in this case), it was not open to the court to construe it in a manner contrary to its natural meaning. The fact that its natural meaning did not make commercial sense was neither here nor there. If the court was to read the contract contrary to its natural meaning, for whatever reason, it would be re-writing the contract which is not a legitimate exercise for the court.

It is worth bearing in mind that there is one circumstance where the contract can be read as contrary to its natural meaning - where there is a mistake. Lord Reed in Credential Bath Street and Lord Neuberger in Pink Floyd Music v EMI Records made that clear. However, this case was not about mistake. It was about whether the clause was ambiguous or not. In some of the decisions outlined above, the Judges come perilously close to reading an unambiguous provision contrary to its original and natural meaning simply because the clause in question does not make commercial sense, or is unfair. The Temporary Judge in Global Port did just that. It is a timely and important judgement from the Inner House which will hopefully put the emphasis back on the objective exercise that the courts should be undertaking.

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