Fri 12 Jun 2015

Supreme Court update: A line in the sand for commercial common sense

Those of you who attended our annual conference on 21 May 2015 will have heard me talk on the role that commercial common sense has to play when interpreting commercial contracts.

I expressed concern that the courts, in certain cases, were interpreting unambiguous provisions in a way contrary to their ordinary and natural meaning simply because these provisions were not commercial and did not accord with the court's view of common sense. A line of Court of Session authority in relation to dilapidations provisions in leases - 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 - raises particular issues for discussion in that regard.

There was a suggestion in the recent Inner House decision of Global Port Services (Scotland) Limited v Global Energy (Holdings) Limited and others that the Inner House was also concerned about the way in which commercial common sense was being used in contractual disputes. In that case, the Inner House over-turned the decision of the Temporary Judge on the basis that he had wrongly invoked commercial common sense in the interpretative exercise where the contractual provision in question was not ambiguous.

Earlier this week the Supreme Court had the opportunity to clarify the law in relation to the use of commercial common sense in contractual disputes and it grasped the opportunity with both hands. The case in question is Arnold v Britton & Others [2013] EWCA Civ 902 which concerned the interpretation of a provision in a 99 year lease which provides for the calculation of a service charge. The natural and ordinary reading of the clause was that the initial service charge would be £90 per year but that was to be increased on a compound basis by 10 per cent every three years, which is roughly equivalent to a compound rate of 3 per cent per year. The effect of that interpretation, however, was that by the 99th year, the annual service charge was £1,025,004 which was, according to the tenants, clearly not the intended consequence of the clause. Rather, the clause should be taken to read that they are required to pay a fair proportion of the lessor's costs of providing the services subject to a maximum of £90 in the first year and increasing  every year by 10 per cent on a compound basis. That, the tenant said, was the commercially sensible interpretation of the clause.

In giving the main judgement in the Supreme Court, Lord Neuberger emphasised several important factors including the following which are relevant to commercial common sense:

  • The reliance placed on commercial common sense and surrounding circumstance should not be invoked to undervalue the importance of the language of the provision being construed. Unlike with commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. Save in very unusual cases, the parties must have been specifically focussing on the issue covered by the provision when agreeing its wording.
  • The worse the drafting, the more ready the court can properly be to depart from the natural meaning of the words. That does not justify the court, however, embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning of the words.
  • Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. So, the fact that a natural reading of the contract will work out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.
  • A court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed. People often enter into agreements that are ill-advised and it is not the court's function to relieve a party from the consequences of poor or imprudent advice. Accordingly, when interpreting a contract, a judge should avoid re-writing it in an attempt to assist an unwise party or penalise an astute party.

On that basis, with Lord Carnwath dissenting, the majority of the court held that the clause should be interpreted as it read, unfair and uncommercial as that reading may be. Indeed, Lord Neuberger went as far as to say that Lord Carnwath's conclusion was "a much more satisfactory outcome in common sense terms" but that these considerations should not disturb the decision that the contract should be read according to its unambiguous and clear wording.

This is an important decision and will hopefully re-focus the courts in Scotland on the objective interpretative exercise which they are tasked with when interpreting contracts of any kind, and particularly commercial contracts. Lord Neuberger's warning in relation to undervaluing the language actually used is particularly significant. It is important that parties are able to rely on the express terms of contracts and also important for legal certainty.

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