Disputes over interpretation of a contract essentially concern a disagreement between what the parties intended to say, and whether the language used reflects that intention. Whilst the courts will rely to some extent on commercial common sense when determining the parties’ intentions, the Supreme Court decision in Arnold v Britton provides a good example of how the courts will not allow this to trump the unambiguous language of the contract, even if this may have disastrous consequences for one party.
What has happened?
Britton and others were tenants of 25 chalets at Oxwich Leisure Park, occupying under various leases granted between 1974 and 1991, each for a period of 99 years. Each lease contained a service charge covenant relating to matters such as common grounds maintenance.
Although the language differed slightly between various of the leases, a typical example was a covenant to pay “a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year”.
Arnold, the current landlord, contended that this is a clear obligation for the tenants to pay an initial annual service charge of £90, increasing by 10% per annum thereafter. Britton and the other lessees argued that the covenant was only intended to cover each tenant’s proportionate contribution to the maintenance and related costs; and that the “£90 plus 10% per annum” calculation was only intended as a cap to the covenant.
The distinction between these two interpretations is dramatic, as a consequence of the rapid growth potential of compound increases to the service charge. For a lease granted in 1980, the current annual service charge would be £2,500; and by 2072 would reach £550,000.
What did the Supreme Court decide?
The Supreme Court agreed with the landlord Arnold’s interpretation, by a majority of 4-1. Lord Neuberger, giving the leading judgment, observed the following:
- That meaning was to be interpreted in light of the documentary, factual and commercial context of the words used. However, subjective evidence of either party’s intentions was to be disregarded.
- when interpreting a written contract, the court must identify the parties’ intentions by reference to “what a reasonable person would have understood them to be using the language in the contract to mean”
- Whilst some reliance should be placed on commercial common sense, that could not override the clear language used. The fact that the consequences of the language used worked out badly – or even disastrously – for a party was not a reason for departing from their natural meaning. The court is not responsible for saving a party from an imprudent miscalculation, or from poor advice.
On the facts of this case, the tenants had struck a very bad bargain, by failing to appreciate the compounding effect of the 10% per annum increase. But that was unambiguously the deal they agreed, and so they were bound by it.
In a typical contractual interpretation dispute, one party contends that the language used is clearly in their favour; the other party claims that the language is ambiguous, and that commercial common sense favours their interpretation. The critical question often becomes: is the language used truly ambiguous, or is it simply hard to reconcile with a more commercial desirable outcome?
The 2011 Supreme Court decision in Rainy Sky v Kookmin was held up as a triumph of commercial common sense over literalism. Many commentators went even further, stating that the court showed a clear willingness to deviate from a strict and literal reading of the drafting. However, as this latest Supreme Court decision in Arnold v Britton shows, this is not the case. The rules of contractual interpretation have consistently demonstrated that the courts will uphold unambiguous drafting, even if this means reaching a commercially disastrous outcome.
Many of us may see this as a worrisome conclusion, which requires an unrealistic degree of perfectionism and foresight in the drafting process. But perhaps it is better seen as prioritising clarity and predictability over equity. If the language used by the parties is deemed unambiguous, why should one party be able to resile from that position simply because the consequences are unfavourable? On the other hand, where there is uncertainty in the drafting, the courts will absolutely take into consideration what would be a more commercially logical interpretation.