When will the courts apply ‘business common sense’ in a contract interpretation?
Careful drafting of contracts can help prevent disputes ending up in court.
Two cases of disputed contract interpretation that have come before the UK courts in 2015, have had very different outcomes because of the type of wording used.
The three principles of contract interpretation
The over-arching principle is to start with what the contract says by applying the natural meaning of the words. If the wording of a contract is clear and unambiguous, the court will apply that wording regardless of the impact on one of the parties.
The second principle is to assess the parties’ intentions objectively.
The third principle is to apply commercial common sense, which can come into force if the contract uses words that are clearly capable of more than one meaning.
In the case of Arnold (Respondent) v Britton and others (Appellants), the Supreme Court dismissed an appeal by chalet tenants against the respondents’ interpretation of clauses concerning service charges in a 99 year lease, even though the tenants would end up paying total service charges of more than £550,000 by 2072.
The court said in its judgement: “The fact that an arrangement has worked out badly or even disastrously is not a reason for departing from the natural meaning of the language; neither is the fact that a certain term appears to be very imprudent. It is not the function of the court interpreting a contract to relieve a party from the consequences of imprudence or poor advice.”
In the case of Ace Paper Ltd v Fry and others, the court took the view that there was genuine ambiguity in the contract, and therefore it overlooked the over-arching principle of applying the natural meaning of the words.
In this case, the words used, concerning an invoice discounting agreement between the two parties, could have had a range of possible interpretations, which were either absurd or highly unlikely given the commercial background.
The High Court decided that the re-assignment to the appellant of a debt for which it had already received the full value from the respondent was counterintuitive and clearer wording was needed. It also said that because the document had been drafted by the appellant, ‘contra preferentum’ should be applied, which states that where there is doubt about the meaning of the contract, the preferred meaning should be the one that works against the interests of the party who provided the wording.
What does this mean for you?
The Ace Paper Ltd case demonstrates that the courts will apply the concept of ‘business common sense’ in cases where contract wording is ambiguous, but Arnold v Britton showed that courts will adhere to the strict meaning of words in other circumstances, regardless of the outcome for one of the parties.
Else Solicitors are experts at writing strong agreements and resolving contract disputes, both inside and outside the courtroom. Contact us on 01283 807555 for advice on drafting clear and water-tight contracts.