Legal Highlights Interpreting contracts commercially: recent developments in the UK and Singapore In 2015, the apex courts in the United Kingdom and Singapore issued decisions which provide guidance on the use of commercial context and commercial common sense in the interpretation of contracts. This article examines and analyses the approaches taken by the UK Supreme Court and the Singapore Court of Appeal. English Position – Arnold v Britton  2 WLR 1593 (UKSC) In Arnold v Britton  2 WLR 1593;  UKSC 36, the dispute involved a maintenance charge clause in 99 year leases, which were granted over some chalets in Wales (the “Maintenance Clause”). While there were slight variations in the Maintenance Clause, its effect was to oblige a tenant to pay the landlord a service charge of £90 in the first year with an increase of 10% per annum thereafter. These chalets were let from 25 December 1974. The landlord commenced proceedings seeking a declaration that under the Maintenance Clause, each tenant was obliged to pay a fixed annual charge of £90 for the first year, increasing by 10% per annum on a compound basis. The tenants contended that they were only obliged to pay a fair proportion of the landlord’s costs of providing the relevant services, with the sum specified in the Maintenance Clause being no more than a cap on the maximum sum payable – the effect of which, would be to significantly reduce their liability to the landlord under the Maintenance Clause. The UK High Court, disagreeing with the UK County Court, held in favour of the landlord, and observed that the tenants’ construction would re-write the parties’ bargain, which may have had some commercial purpose given the prevailing high levels of inflation when those leases were made in 1974 onwards. The UK Court of Appeal affirmed the UK High Court’s reasoning. The UK Supreme Court by a 4-1 majority (with Lord Carnwath dissenting) dismissed the tenants’ further appeal. Principles governing the interpretation of a contractual provision Lord Neuberger’s leading judgment set out the principles for contractual interpretation. The learned Law Lord cited Lord Hoffmann’s dictum in Chartbrook Ltd v Persimmon Homes Ltd  AC 1101 and noted that the English courts’ role is to identify the parties’ intentions by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean". The English courts would focus on the documentary, factual and commercial context. Specifically, the Legal Highlights English courts would consider “(i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions”. Lord Neuberger made the following comments in respect of relying on business common sense and commercial context to interpret a contract. 1. They should not be invoked to undervalue the importance of the language of the provision which is to be construed. 2. The clearer the natural meaning of the wording, the more difficult it would be to justify departing from that meaning. 3. Commercial common sense is not to be invoked retrospectively. 4. While commercial common sense was a “very important factor”, the English courts should be slow to reject the natural meaning of a provision simply because it appeared to be a very imprudent term for a party to be bound by with the benefit of hindsight. 5. The English courts can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. 6. There might be subsequent occurrences which were plainly not intended or contemplated by the parties as determined by the text of their contract. But where it is clear what the parties would have intended, the English courts will give effect to that intention. The natural meaning of the Maintenance Clause was clear and the Court will view commercially-grounded arguments with caution Lord Neuberger found that the natural meaning of the Maintenance Clause was clear, and effect thus ought to be given to the same. The tenants submitted that the parties could not have intended the landlord’s interpretation of the Maintenance Clause as it could result in “an increasingly absurdly high annual service charge”. The service charge would almost double every 7 years and by 2072, it was calculated that the service charge payable would have been GBP 1,025,004. Notwithstanding the “unattractive consequences” that could follow, Lord Neuberger rejected the tenants’ submission. He noted that the tenants’ interpretation would involve “departing from the natural meaning …, and it involves inserting words which are not there”. Further, Lord Neuberger noted that the tenants’ commercially-grounded argument was equivocal. A Tenant could have thought that the increase of 10% per annum under the Maintenance Clause was acceptable given that inflation in UK had exceeded 10% per annum in the 1970s and much of the 1980s. Legal Highlights Accordingly, the UK Supreme Court preferred the Landlord’s interpretation, and found in favour of the Landlord. Singapore Position – Y.E.S. F&B Group Pte Ltd v Soup Restaurant Singapore Pte Ltd  SGCA 55 In Y.E.S. F&B Group Pte Ltd v Soup Restaurant Singapore Pte Ltd  SGCA 55, both parties had leased neighbouring units in a shopping mall from the landlord. Concurrently, under a sub-lease agreement, the appellant (“Y.E.S.”) had also agreed to sub-lease, on similar terms, a part of the premises that the respondent (“Soup”) had leased from the landlord. Clause 4 of the Sub-Lease Agreement (“Renewal Clause”), which referred to Soup as “the Company”, and the landlord as “the Landlord”, provided that, “This agreement shall survive as long as the Company’s lease with the Landlord is not terminated” (emphasis in bold and underline). Soup contended that pursuant to the Renewal Clause, the sub-lease agreement would be terminated upon the termination of the lease that was in force between the Main Landlord and the Lessor when the sub-lease agreement was made (“Initial Lease”). Y.E.S. took the view that under the Renewal Clause, Soup was obliged to continue with the sub-lease agreement, as long as it continued to lease its own premises from the Main Landlord. When the Initial Lease expired, Y.E.S. refused to deliver vacant possession of its premises. Soup thus commenced proceedings against Y.E.S.. The Singapore High Court held in favour of Soup, preferring its construction of the sub-lease agreement. However, the Singapore Court of Appeal allowed Y.E.S.’s appeal. Principles governing the interpretation of a contractual provision In its judgment, the Court of Appeal set out the principles governing the interpretation of contracts. It reiterated from its earlier decisions that a Court must, in giving effect to the objective intentions of the contracting parties, consider the “fundamental principle”, this being, “text and context”. In that regard, while the relevant context is important, “the text ought always to be the first port of call”. If the text is ambiguous, it is “clear that the relevant context will generally be of the first importance”. The Court of Appeal did note, however, that in some cases “the extrinsic evidence leads to possible alternative interpretations of the written words (ie, the court determines that latent ambiguity exists)”. In other words, context might demonstrate that what appears to be clear and unambiguous language is actually not clear and unambiguous. That said, the Court of Appeal cautioned against using the context as an “excuse by the court concerned to rewrite the terms of the contract”, and that while there is a need to avoid an absurd result, “this aim cannot be pursued at all costs”. In that regard, the SGCA pointed out that avoiding an absurd result was only a starting point in the Court’s process of interpretation. If the objective evidence bears out that that absurd result was what the parties had intended, the Court would be Legal Highlights “compelled” to give effect to the same. Further, the Court in examining the contract in its relevant context, is only to “place [itself] in the position of the party which drafted the instrument and not the drafter’s subjective intention as such”. The contextual approach was relevant because the Renewal Clause was unclear The Court of Appeal found that when the sub-lease agreement was construed as a whole, it was not clear that the Renewal Clause and its reference to “the Company’s lease” was in actual fact a reference to the Initial Lease. This was because the Initial Lease was defined elsewhere as the “Agreement”. The Court of Appeal thus found that the context surrounding the making of the sublease agreement would aid in construing the Renewal Clause. Having regard to that context, the Court of Appeal preferred the Y.E.S.’s interpretation, which reflected the business expectations of the parties when the sub-lease agreement was entered into. In coming to its decision, the Court of Appeal took into account the following context: 1. The sub-lease agreement was drafted by laypersons in the business context. Accordingly, it was more appropriate to adopt a “more common-sense approach that considers the reasonable and probable expectations that the parties would have had”. 2. When the sub-lease agreement was made, Soup and Y.E.S. were part of the same group of companies. Thus, it was reasonable to infer that the parties would have expected their commercial relationship to continue for the foreseeable future. 3. The evidence showed that the parties were aware of the Y.E.S.’s intended use of its premises, and that it would invest large sums of monies to carry out the necessary renovations. The Court of Appeal found it “incongruous” that the parties had expected, at the time the sublease agreement was entered into, that Y.E.S. could simply be “forced out” of the sub-leased premises at the expiry of the Initial Lease in light of the “fairly drastic commercial consequences” for Y.E.S.. Comment The Singapore Court of Appeal in Y.E.S. discussed the UK Supreme Court case of Arnold and emphasised that each court’s respective approaches in those cases were consistent. While the UK Supreme Court in Arnold gave effect to the plain and natural meaning of the contractual text, two points should be noted. First, the majority of the UK Supreme Court found that the Maintenance Clause was in fact clear and unambiguous. Second, a “very limited factual matrix” was placed before the UK Supreme Court. Indeed, the Singapore Court of Appeal observed that it was not the case that the UK Supreme Court did not refer to the context; but rather, “the context was looked at but it did not change anything with regard to the text”. Legal Highlights The Court of Appeal also left open for future consideration, whether the seemingly blanket exclusionary rule against the admissibility of prior negotiations ought to be reconsidered as being inconsistent with the Singapore Evidence Act (Cap. 97). Or alternatively, whether such evidence should nonetheless be excluded as “irrelevant or unhelpful for…policy reasons”. On that note, commercial parties should therefore consider the following two takeaways when it comes to drafting commercial contracts or disputes over the same. First, draughtsmen should ensure that their contractual provisions are drafted plainly and unambiguously, as the Court may give effect to the same even if a commercial absurd result ensues. And where a commercial absurd result is foreseen or intended by the parties, this should be acknowledged by parties to avoid future disputes. As Lord Neuberger observed, “parties have control over the language they use in a contract”. Second, where a dispute arises, all available evidence in support of the context which a party pleads the contract ought to be interpreted in, should be placed before the Court. The Singapore Court of Appeal has iterated that parties who wish to rely on such extrinsic evidence must plead that factual matrix with sufficient particularity and identify the effect that such facts will have on the contended construction of the contract. Mohammed Reza Director 168 Robinson Road, #11-01 Capital Tower Singapore 068912 T +65 6831 5582 E email@example.com Shaun Lee Supervising Associate 168 Robinson Road, #11-01 Capital Tower Singapore 068912 T +65 6831 5597 E firstname.lastname@example.org Legal Highlights Justin Kwek Associate 168 Robinson Road, #11-01 Capital Tower Singapore 068912 T +65 6831 5598 E email@example.com JWS Asia is a boutique Singapore law practice that provides a one-stop service to the asset management and investment funds sector in Singapore, offering a full range of legal services to clients across all stages of development - from fund structuring formation and marketing, to advisory services such as licensing, corporate structuring, transactional and dispute resolution services. JWS Asia offers clients deep local knowledge combined with access – through our ‘best friends’ referral relationship – to the wide network and global expertise of Simmons & Simmons, a leading international law firm.