Wed 05 Aug 2015

Interpretation of contracts - it's all in the words

There have been lots of cases decided in the courts recently which involve interpretation of contracts - where the parties to the contract can't agree on what the document they carefully negotiated between them actually means.

A theme of some of the more recent cases has been that the court is capable of deciding the outcome based on what it considers to make the most commercial common sense, even if the words in the contract seem to point to an altogether different construction.

My colleague Richard McMeeken has recently written about a Supreme Court decision in which Lord Neuberger, as president of the Supreme Court, seemed to warn against the over-reliance on commercial common sense and emphasised the importance of the words used in the contract. In Richard's post he commented that the decision in that case would hopefully re-focus the minds of the Scottish courts on the objective interpretative exercise which they are tasked with when interpreting contracts. 

We now have the first Scottish case to consider interpretation of commercial contracts since Lord Neuberger made his comments. The case is the Petition of Kennedy and others for suspension and interdict and arose from service of a charge for payment following on an extract registered agreement.  

In the case, a sale of land had been concluded between the seller and the buyer. The buyer intended to build houses on the land. However, the buyer later pulled out of the deal and paid a contractually agreed 'abort fee' to the seller. Sometime after that, the same buyer and seller entered into a new contract which provided for payment to be made by the seller to the buyer of abortive costs incurred by the buyer. The new contract provided that payment was to be made where there was a new sale of the land to a third party "during the shorter of the period when the planning consent obtained or to be obtained by [the buyer] for the development of the [land] remains extant and the period of 5 years from the date of [the agreement]." Importantly, there was no obligation on the buyer to secure planning permission.

The land was duly sold to a third party developer within 5 years of the date of the agreement. The buyer had never obtained planning permission but sought payment of the abortive costs (circa £165,000). The seller denied payment was due because planning permission had not been obtained. The buyer argued that planning permission was not necessary and payment was due as a result of the sale being achieved within 5 years of the date of the agreement. 

The court heard lots of evidence around the intention of the parties at the time the new agreement was entered into. Ultimately, the court wasn't terribly interested in that.  The seller tried to argue that their interpretation was the only possible interpretation of the clause. The court also disagreed with that and pointed to the lack of clarity of the words used in the contract. Although the court confirmed it was bound by the test set down in Grove Investments Ltd v Cape Building Products Limited (which provides that if there is a choice over how a clause should be interpreted, the interpretation should favour a commercially sensible outcome), it said that "the words of a contract are to be read as a whole, and if possible meaning given to all of them. I am not concerned to find out what the parties intended to agree, but rather what in the context of the facts agreed or proved, their words show that they did agree. "

Acting on those words, the court decided that it was not possible to interpret the words of the contract to mean that payment was only due if planning permission was obtained. As a result, the court found that payment was due to the buyer.

The moral of this story is that you can't rely on the courts to re-write a bad bargain and it's crucial that the agreement is drafted correctly at the outset. 


If you'd like to speak with us, please contact a member of our team.

Make an Enquiry

From our offices we serve the whole of Scotland, as well as clients around the world with interests in Scotland. Please complete the form below, and a member of our team will be in touch shortly.

Morton Fraser MacRoberts LLP will use the information you provide to contact you about your inquiry. The information is confidential. For more information on our privacy practices please see our Privacy Notice