The recent Supreme Court decision in Arnold v Britton and others  UKSC 36, concerning the interpretation of service charge contribution provisions in leases, is a reminder of the approach an English court will take when interpreting or construing a written contract (see paragraphs 14-23 of the judgment).
The starting point is that the court will 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” (Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38). It does so by focusing on “the meaning of the relevant words… in their documentary, factual and commercial context”. In this case that meaning had to be assessed “in the light of (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.” The court emphasised a number of factors including:
- the importance of the language used. It noted that reliance “on commercial common sense and surrounding circumstances… should not be invoked to undervalue the importance of the language” used. Except in a “very unusual case” the “meaning is most obviously to be gleaned from the language of the provision”;
- the less clear the drafting is the more ready the court can be to depart from the words’ natural meaning. However that “does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning”;
- commercial common sense cannot be invoked retrospectively, it applies at the date the contract was made;
- the purpose of interpretation is to identify what the parties have agreed. The court cannot substitute what it thinks the parties should have agreed because the parties agreed an imprudent term; and
- the court can only take into account facts or circumstances known, or reasonably available, to both parties (not just one party) at the time the contract was made.
Impact – the judgment is a clear sign that the role to be played by business common sense in interpreting a contract does not enable the court to rewrite a bad bargain. In this case the Supreme Court ruled in favour of the landlord. The leases the subject of interpretation were 99-year leases on a number of chalets in a caravan park in South Wales, granted between 1978 and 1991. The leases required tenants to pay a fixed service charge of £90 for the first year of the term, increasing by 10 per cent per annum on a compound basis. This resulted in the tenants being liable for significant service charges by the end of the term. The fact that inflation in the late 1970s and much of the 1980s was much higher than today (over 15 per cent in several years) was highly relevant, and persuaded the court that it was not inconceivable that a tenant would have entered into the lease in full knowledge of the effect of the service charge clause.