In Arnold v Britton & Ors [2015] UKSC 36, the Supreme Court held that, when interpreting a contract, the words used must take precedence over what might conceivably appear to be the intended meaning.

The Court of Appeal (Arnold v Britton [2013] EWCA Civ 902) had taken a literal interpretation of the service charge clauses contained within multiple leases for holiday chalets on the Gower Peninsula, Wales. There were slight variations to the various leases but central to this case were a group of leases which, in essence, had an original service charge of £90 a year and provision for a compound 10% annual increase.

On the plain word, literal interpretation of the clause - adopted by the Court of Appeal - the original £90 annual service charge would have been hundreds of thousands of pounds by the time these leases came to an end.

Somewhat unsurprisingly, the tenants appealed this decision. They argued that reference to the 10% increase in the clause should be read as stipulating what the upper limit or cap was to the service charge. This interpretation, they admitted, required implying additional wording to the clause.

The appeal was dismissed by a majority of 4:1. Lord Neuberger, in the leading judgment, stated that, although commercial common sense may provide a more attractive interpretation, it cannot be a relevant consideration where the natural meaning of the language is clear - even when, as in this case, this had detrimental commercial consequences to a party.

As Lord Hodge put it: "The question for the court is not whether a reasonable and properly informed tenant would enter into such an undertaking. That would involve the possibility of re-writing the parties' bargain in the name of commercial good sense."

Lord Neuberger further held that there are no special principles of interpretation for service charge clauses requiring that they be construed restrictively. The usual principles of contractual interpretation will apply.

Comment

Although Arnold does not change the climate in relation to unclear drafting - where the courts are generally more inclined to take a more liberal approach to interpretation - it is clearly a stark warning that they are not prepared to step in to remedy what turns out to be a particularly bad bargain when the wording of the contract is clear. Wording is key - draftsmen beware!