A More Literal Approach to Construction

April 2016

Gavel

In the recent High Court decision of Laird Resources LLP v Aumm Holdings Ltd. & Others [2015] EWHC 2615 (Comm) [unreported] Mr Justice Flaux considered the case law on the construction of contracts and the recent departure from “commercial common sense” towards a more “literal construction” of the terms.

This marks the commercial court’s first decision applying the recent Supreme Court decision in Arnold v Britton [2015] 2 WLR 1593 on interpretation of contracts. This article seeks to summarise the more recent decisions in a succession of cases which demonstrate the evolution of the court’s approach to the construction of commercial contracts.

 

The Supreme Court Decision in Rainy Sky SA v Kookmin Bank [2011] UKSC 50

In December 2012, the Club reported the decision of the Supreme Court in Rainy Sky SA v Kookmin Bank. In the Court of Appeal Lord Patten had reached the conclusion that unless the natural meaning of the words produces a result which is considered so extreme it cannot have been intended, the court has no choice but to give effect to those terms of the contract.

The decision was reversed by the Supreme Court where Lord Clarke took the view that the ultimate aim of the judiciary is to “determine what the parties meant by the language used… where they have all the background knowledge that would reasonably have been available to the parties at the time of the contract... In the case of ambiguity the court should adopt the interpretation that is most consistent with business common sense and to reject the other”.

The Rainy Sky decision temporarily founded this “business common sense” approach. However, there has been resistance to the lower courts seeking to apply business common sense in order to ‘do justice’ between the parties by reading meaning into contracts and agreements. For example in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd. [2006] EWCA Civ 1732 Lord Neuberger commented that “judges are not always the most commercially minded, let alone the most commercially experienced, of people”.

 

The Supreme Court Decision in Arnold v Britton [2015] 2 WLR 1593

Lord Neuberger reaffirmed this view in the Supreme Court decision of Arnold v Britton where he gave effect to the literal interpretation of the words used in a contractual provision. This case involved the interpretation of a service charge provision in a long lease agreement for chalets on a leisure park.

In his decision, Lord Neuberger set out a number of guidelines courts should consider when construing the meaning of a commercial contract. The key points are as follows:

(1) The natural and ordinary meaning of the clause

Courts should not rely on commercial common sense and surrounding circumstances to undervalue the importance of the language used. They should consider what would be interpreted by a reasonable reader and, except in a very unusual case, this is most obviously gleaned from the language used.

(2) The less clear the words used the more the courts can depart from the natural meaning of those words

In other words, the clearer the natural meaning the more difficult it is to justify departing from those words.

(3) The application of commercial common sense retrospectively

Commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.

(4) Courts should seek to establish what has been agreed not what should have been agreed

Commercial common sense is a very important factor to take into account when interpreting a contract. However, a court should be very slow to reject the natural meaning of a provision simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. It is not the function of the court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. When interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.

(5) Courts should only consider the facts and circumstances that were known at the time to both parties to the contract

When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time the contract was made, and which were known or reasonably available to both parties. It cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties.

(6) The interpretation of intention in face of uncontemplated events

In some cases an event subsequently occurs which was plainly not intended or contemplated by the parties, judging by the language of the contract. If it is clear what the parties would have intended to happen in those circumstances the court will give effect to that intention.

 

The Decision in Laird Resources LLP v Aumm Holdings Ltd. & Others [2015] EWHC 2615 (Comm) [unreported]

Arnold v Britton has now been applied by the Commercial Court in Laird Resources LLP v Aumm Holdings Ltd. & Others.

The claimant had provided management services in respect of a portfolio of property assets owned by the defendant. The claimant had also created and managed a trust used to finance the portfolio. Under the terms of his engagement, the claimant was to benefit from a one third interest in the portfolio in return for his management services.

The relationship between the two parties broke down when the defendant questioned the nature and value of work undertaken by the claimant. The contract between the parties was ultimately dissolved by way of settlement which was recorded officially in “The Deed of Settlement”.

Clause 2 of The Deed of Settlement provided that capital receipts generated by the portfolio were to be paid into the trust in return for the claimant relinquishing his ongoing interest in the portfolio. It also provided that the defendant would pay the claimant the sum of £650,000 plus VAT.

Clause 2.9 provided that the defendant would pay said amount “... notwithstanding whether… any sums as referred to… above [Capital Receipts] has or have been received. by no later than 31 December 2014”.

Capital receipts were not paid into the trust and the defendant did not pay the settlement amount to the claimant. The claimant submitted that Clause 2.9 imposed an unconditional obligation on the defendant to pay the settlement sum. The defendants argued that such payment was dependant on the claimant first paying capital receipts into the trust.

In considering this case, Mr Justice Flaux applied the principles set out in Arnold v Britton. He was persuaded by the claimant’s argument and reached the decision that when giving the words their natural meaning, clause 2 made no specific requirement for capital receipts to be paid in order for the settlement sum to be paid. His view was that the wording of clause 2 was clear and that if it had been the intention for the capital receipts to be paid before the defendant was to pay the claimant the settlement sum, it should have said so.

 

Comment

This decision serves as a reminder for parties to be clear and concise in the drafting of contracts. Where wording is clear, in light of this decision, it is likely that the courts will be reluctant to depart from the natural meaning of those words even if the drafting is poor or the bargain between the parties seems to be unfair.

 

Article by Alex Towell, Claims Associate.