Two recent Supreme Court cases represent a stark warning against liberal interpretation of contracts and serve as a reminder that the plain meaning of the words is likely to be the starting point.

For implied terms, the Courts will respect the parties' freedom to set their own terms and will not lightly interfere with them, even if this results in a bad bargain for one of the parties.

Express terms

The case of Arnold v Britton and others [2015] UKSC 36, concerned the service charge payable for a selection of static caravans on the Gower peninsula in South Wales. The caravans were occupied under various leases granted between 1974 and 1991, each for a period of 99 years. Each lease contained a service charge for the upkeep of the caravans. Most of the leases granted in the 70s provided for a service charge of £90 subject to compound interest at 10% every 3 years, roughly equivalent to 3% per annum.

However, for an unfortunate few, the leases provided for the same £90 service charge to be subject to 10% compound interest each year. This would mean by the determination of the lease, the service charge would be £1,127,504.65!

Not unexpectedly, the caravan owners contended that to interpret the lease literally would give an absurdly unfair result. They argued either:

  • They should only have to pay a "fair proportion" of the service costs capped at a maximum of £90 plus the 10% interest; or 
  • That there was an implied term that the service charge should be the same as the other properties (i.e. 10% every 3 years)

In a majority of 4-1, the Supreme Court agreed with the landlord's interpretation. These were the key findings:

  • Clear and certain language should not be disregarded in favour of perceived "commercial common sense"
  • The meaning of express wording will be considered in light of the documentary, factual and commercial context of the words used rather than any subjective evidence of a party's knowledge.
  • The clear language of a clause should not be altered merely because it results in a disadvantageous- or even terrible- commercial bargain for one party.

Implied terms

In contrast to express terms, implied terms are those that have not been expressly agreed by the parties but are implied into the contract.

In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72, now the leading authority on implied terms, the Supreme Court took the opportunity to put a stop to an expansive role for implied terms and clarified that such terms will only be implied if necessary to make a contract workable or coherent.

Marks & Spencer's lease with BNP provided for rent to be paid in advance in quarterly payments. It also contained a break clause. M&S exercised this break clause, and then brought a claim to recover pro rata the rent paid in advance post the termination date.

At first instance it was held that a term could be implied to permit recovery, however, this was overturned by the Court of Appeal.

The Supreme Court agreed with the Court of Appeal and has now unanimously held that no such term should be implied. Whilst acknowledging Marks & Spencer's "bad luck", the Supreme Court ruled that "a term will only be implied if it satisfies the test of business necessity or it is so obvious that it goes without saying; it will be a rare case where only one of those two requirements are met".

Practical lessons

The overwhelming lesson from these two cases is that, when drafting contracts, nothing should be treated as being "unsaid", regardless of how obvious it might seem.

It is only once the express terms of a contract have been construed, that the courts will consider the question of implied terms. Parties need to ensure that they take the time to express their contractual obligations as clearly as possible at the outset. Failure to do so could result in a costly legal battles.

The courts' reluctance to simply "fill in the gaps of a contract" means that it is not safe for businesses to assume that the law will assist them to a common sense interpretation of a contract when the agreement remains coherent and workable (even if unfavourable) as written.