The recent Supreme Court case of Wood v Capita Insurance Services Limited [2017] UKSC 24, has provided welcome guidance in the area of contractual interpretation. Dismissing an appeal against the Court of Appeal's findings, the court emphasised that where there are rival meanings to a clause, consideration of the words of the contract and commercial common sense both have a role to play in the interpretation.

  • The 2016 case of Arnold v Britton placed emphasis on the literal interpretation of the words of the contract, and cautioned against using 'business sense' to relieve a party of a bad bargain
  • Many commentators understood this to mark a move away from the seminal case of Rainy Sky v Kookmin Bank which emphasised the role of commercial common sense in the interpretation of contracts
  • This produced a worrisome conclusion, requiring an unrealistic degree of perfectionism and foresight in the drafting process.

In the March 2017 case of Wood v Capita however, the court emphasised that contrary to commentators' view, "on the approach to contractual interpretation, the Rainy Sky and Arnold cases were saying the same thing." Providing clarification, the court stated that when there are two rival interpretations of a clause:

  • It will check these against the whole contract and an investigation of the commercial consequences
  • It can give weight to the implications of rival constructions by reaching a view that is more consistent with commercial common sense
  • It must also consider the quality of drafting of the clause in order to strike the balance between the implications of rival constructions
  • It must be alive to the possibility that a party may have agreed a clause that does not serve its interests.
  • There is no substitute for clear and unambiguous drafting
  • Technical drafting presumptions and canons of construction to narrow the language or exclude what its natural sense might have been will fare less well in the context of a sophisticated mutually-balanced contract
  • However, a court can resort to what is a commercial solution, even where a contract has been professionally drafted and heavily negotiated, where the language, approached textually in the factual matrix, really permits two results.
  • If the parties have not catered for it, they are likely to be fixed with the meaning which made sense at the time the contract was made.

When drafting governing law and jurisdiction clauses, Settlement Agreements etc.:

  • Make crystal clear when the provisions are to apply, i.e. in all circumstances or only in limited circumstances/in a non-breach situation.
  • Do not leave anything for assumption; ensure that defined terms have a clear meaning.
  • Include cross-referencing and/or an explanation of the relationship of clauses if it will assist with the interpretation.
  • Include the commercial intentions of the parties in the recitals of any contract, for the court's reference should there be two rival interpretations of a clause.