In the case of Pease v Henderson Administration Ltd [2019] EWCA 158 the parties performed their contract under a different scheme to how they had intended when their contract was formed. The Court of Appeal was faced with the task of interpreting a clause in these unanticipated circumstances. In doing so, the court has provided helpful insights into its application of established rules of interpretation.

Facts

The respondent (Pease) agreed to set up an investment fund with the claimant (Henderson) acting as his employer and as manager of the fund, provided that Pease would be entitled to replace Henderson as manager of the fund when Pease retired. In return for Pease taking the benefit of the fund with him, Henderson would receive 50% of the management fees generated by the fund in the 12 months following Pease’s retirement.

The clause in the employment contract specified that the fund would be set up as a standalone company. Instead, the parties set up a bundled sub-fund under an umbrella company which was part of other sub-funds. When Pease retired it became necessary to unbundle the fund by transferring the assets to a different fund under a scheme of arrangement, rather than to simply change the management of the original fund. Pease claimed that this put Henderson in breach of its obligations to permit Pease to change the fund’s management and argued that this deprived Henderson of its right to receive the additional management fees.

Decision

The court did not consider that Henderson was in breach of its obligations as the clause under review did not specify the method by which the fund’s management was to change. While the court acknowledged the different characteristics of the fund set up from the fund specified in the clause, it was clear from the context that the intention of the parties at the time the contract was formed was to pass on the benefit of the fund after Pease had retired. As the new fund was managed by Pease’s company, this objective had been fulfilled and Pease was liable to Henderson for the additional management fee payment.

The court considered the principles in Arnold v Britton [2015] UKSC 36 and Wood v Capita Insurance Services Limited [2017] UKSC 24 on the rules of interpretation and noted that it will conduct a “unitary exercise”, checking each suggested interpretation against the provisions of the contract and investigating its commercial consequences, per Mr Justice Nugee [2019] EWCA 158 at 71:

“As I have sought to explain I do not accept that the construction I favour involves scrapping or departing from the language of the clause in favour of a supposed commercial purpose. What it involves is interpreting the language of the clause, in its commercial and factual context, as not mandating any one specific mechanism for Henderson to deliver the rights which it conferred on Mr Pease”

Practical points

A court will interpret clauses in a way which best reflects the intention of the parties and having due regard for the wider context. Contracts should always seek to reflect factual reality as closely as possible. If the performance of the contract no longer reflects the original intention of the parties, it should be considered whether entering into renegotiations or varying the agreement is required.

If a clause is drafted such that an outcome can be achieved in a number of ways, it is for the performing party to choose the method of performance most advantageous to that party, unless the provision provides for a specific method of performance. In such circumstances, it is recommended that particular methods of performance are specified, to avoid a party being given a wider discretion than originally intended.