The Court of Appeal in New Zealand Carbon Farming Limited v Mighty River Power Limited [2015] NZCA 605 has affirmed, and clarified, Lord Neuberger's critique of the imperial march of 'commercial common sense' as a default way in which to interpret contracts.

The modern approach to contractual interpretation is an objective one, which seeks to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract": Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912.

However, the courts have increasingly invoked 'commercial common sense' as means of contractual interpretation, which Lord Neuberger was keen to caution in Arnold v Britton [2015] 2 WLR 1593 (UKSC), covered in our September 2015 update.

Carbon Farming concerned an emissions reduction purchase agreement between New Zealand Carbon Farming Ltd (NZCF) (as seller) and Mighty River Power Limited (MRP) (as buyer).  The agreement contemplated that NZCF might be obliged to sell (and MRP to buy) a different number of carbon credits than those fixed by the agreement at the date of execution.  Under the agreement, that turned on whether there had been a change in the accounting mechanism approach in operation under the Climate Change Response Act 2002.  NZCF claimed there was such a change - in the vicinity of double the amounts of carbon credits to be sold.  MRP, predictably, denied such a change.

The Court rejected NZCF's argument: "we consider it cannot have been the common intention of the parties to contract on a basis that would almost double the number of units…well beyond the expected capacity of the forest".  In doing so, the Court noted, that while commercial common sense cannot be definitive, it is still a "very important factor", such that it cannot be entirely ignored if an absurd result were to otherwise arise.

See Court decision here.