Disputes arising under technology contracts frequently involve differing interpretations of the wording of particular contract clauses. Until recently, the latest authority on contract interpretation was Rainy Sky SA v. Kookmin Bank1, in which the Supreme Court favoured a commercial common sense approach to interpreting ambiguous contract provisions. However, the Supreme Court’s latest judgment in Arnold v. Britton2 makes clear that where the parties have used unambiguous language a Court will not re-write the contract, even if a literal reading could have disastrous consequences for one party.
Arnold v. Britton concerned the interpretation of service charge provisions in leases for a number of chalets in a caravan park in South Wales. Each chalet was let on a lease for a term of 99 years from December 1974 and included a covenant, “to pay to the lessors ....a proportionate part of the expenses and outgoings incurred by the lessors in the repair maintenance renewal...and the provision of services hereafter set out the yearly sum of £90 plus VAT (if any) for the first year of the term hereby granted increasing thereafter by ten pounds per hundred for every subsequent year...thereof”.
The owner of the caravan park considered that the service charge provision required the tenants to pay an initial annual service charge of £90 increasing at a compound rate of 10% in each succeeding year. The owner’s interpretation meant that the annual service charge payable by each of the tenants would be over £500,000 by 2072. The issue on appeal was whether the landlord’s interpretation of the service charge clause was correct. The tenants argued that the clause, properly read, required them to pay a fair proportion of the owner’s costs of providing the services, subject to a maximum of £90 in the first year and increases every year by 10% on a compound basis. In other words, they contended that the words “up to” should be read into the clause before ‘the yearly sum of £90’.
The Supreme’s Court judgment
The tenants were initially successful in the Swansea County Court but the Cardiff District Registry and the Court of Appeal found in favour of the owner on appeal. The tenants were granted permission to appeal to the Supreme Court.
In reaching its decision, the Supreme Court considered the correct approach to be adopted to contract interpretation or construction of contracts (most recently considered in Rainy Sky SA v. Kookmin Bank). When interpreting a written contract, the court is concerned to identify the intention of the parties 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”3 . The meaning of the relevant words in the service charge clause had to be assessed in light of:
- the natural and ordinary meaning of the clause;
- any other relevant provisions of the lease;
- the overall purpose of the clause and the lease;
- the facts and circumstances known or assumed by the parties at the time that the document was executed; and
- commercial common sense; but
- disregarding subjective evidence of any parties’ intentions.
Lord Neuberger was quick to point out that the reliance placed in some cases on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed. While commercial common sense is a very important factor to take into account when interpreting a contract, a court should be slow to reject the natural meaning of the provision as correct simply because it appears to have been a very imprudent term for one of the parties to have agreed. The purpose of interpretation is to identify what the parties have agreed, not what the Court thinks that they should have agreed. Commercial common sense is not something to be invoked retrospectively – it 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 the contract was made.
The Supreme Court dismissed the tenants’ appeal on grounds that it was clear that the purpose of the service charge clause was to quantify the sum payable by the tenants and there is no principle of interpretation which entitles the Court to re-write a contractual provision simply because the fact to which the parties cater for does not seem to be developing in the way in which the parties may well have expected.
So, where does the Supreme Court’s judgment in Arnold leave us? Arnold has not created any new law but does serve as a useful reminder of how parties should approach matters of contract interpretation. It is important to note that the Supreme Court considered that the wording of the service charge clause was unambiguous and that there was no basis from the factual matrix and in the words used for identifying a ‘rival meaning’. Accordingly, there was, in the court’s view, no justification for the court departing from the natural meaning of the words which the parties had agreed. However, it remains the case (as set out in Rainy Sky) that if there are two possible constructions of a clause (that is, the wording is truly ambiguous), a court may still prefer the construction which is consistent with business common sense.