Rules on Interpretation of Contracts confirmed

Facts

Mr Arnold owned a leisure park and brought proceedings against Mr Britton, and other tenants of holiday chalets in his leisure park, who were refusing to pay a maintenance charge.  All the properties were let upon the terms of 99 year leases which provided for a 10% annual increase in the service cost.  This meant that every year the cost was a lot higher than the year before.  The tenants said that was an absurd outcome which nobody could have intended.  Mr Arnold asked the court for a declaration that the sum was payable upon the proper interpretation of the clause.

Held

The Supreme Court held the meaning of the words was plain and clear.  Consequently there was no justification for applying either the concept of business common sense or indeed of looking at the intention of the parties.  Those rules only come into place where the meaning of the contract is not clear from the language used.  The declaration was accordingly granted.

Comment

Lord Neuberger said that recent cases involving the application of business common sense, and looking at the intention of the parties, could not be used to undervalue the importance of the language of the contractual term which had to be interpreted.  It was fundamentally important that the parties must be free to negotiate their contracts, and to use whatever language they wish. Without the risk, the Court will simply disapprove of the deal that has been done and set it aside for some reason.

Lord Neuberger remarked that the mere fact that a contractual arrangement, interpreted according to its plain and natural meaning, had worked out badly (or even disastrously!) for one of the parties was not a reason for departing from the natural language as the primary test.

Lord Neuberger said while business common sense is a very important factor to take into account, when determining a contract, a Court should be slow to reject the natural meaning of the provision is correct simply because it appeared to be imprudent.  The purpose of interpretation is to identify what the parties have agreed, not what the Court thinks they should have agreed.

This case began in the County Court where the tenants won.  It then went to the High Court, the Court of Appeal and the Supreme Court and in each case the Landlord won.  The sum concerned was £2,720.

This is a very traditional judgment which re-affirms the primacy of parties' freewill and the interpretation of contracts by reference to the plain and natural meaning of the words.  We have it now, on the highest authority, that the Courts will not depart from their centuries old tradition of looking at what the words meant rather than what the parties ought to have decided.  This is in stark contrast to the approach brought to bear upon the interpretation of contracts by judges in Europe under civil law systems.

For more information, help or advice please contact Rob Langley on 0191 211 7975 ore email [email protected].