Case concerning an agreement relating to the sale and purchase of land for development. The dispute centred on the treatment of VAT due on consultancy payments (from Maritsan to MHL) under the agreement. Having previously issued invoices and received payment, MHL was advised by professional advisors that it was liable for VAT on its services and sought to recover additional sums from Martisan in respect of the VAT.
Lord Hodge was left with the clear impression that the clause which dealt with VAT in the agreement had been lifted from another agreement and inserted in a context in which nobody had applied their mind to what the effect on VAT would be.
In construing the contract Lord Hodge found that the VAT burden ought to be shared equally between the parties. In so doing the following rules of interpretation were taken into account:
The court should
- construe individual provisions of the contract in the context of the whole contract,
- apply an objective construction by reference to the meaning which a reasonable third party, who is aware of the commercial context in which the contract occurs, would give to the words which the parties have used, and
- adopt a commercially sensible construction, when the court is faced with competing interpretations. (In this regard, the court cannot re-make the contract for the parties on what it considers would be sensible terms or disregard contractual terms. Where parties have included a provision in their contract, the court should strive to give a proper meaning to it.)
Scottish Courts, 4 March 2011