Most Read Contributor in New Zealand, September 2016
A long-running dispute in a Welsh caravan park is the
unlikely catalyst for a UK Supreme Court judgment that will have
far-reaching ramifications for the interpretation of commercial
contracts, including in New Zealand.
Arnold v Britton may mark a shift away from liberal
recourse to a court's view of "business common sense"
in contractual construction, in favour of a more traditional
What price tidy lawns?
In dispute was a service charge for lawn mowing, rubbish removal
and general site maintenance in 99-year leases of 25 chalets at a
leisure park in South Wales.
The leases stated that the service charge would be £90 in
the first year of the lease and that it would increase each year
after that at a compound rate of 10% per annum. Assuming a lease
granted in 1980, the 2015 service charge would be over £2,500
and, continuing on its skyward trajectory, would rocket up to
£550,000 by the end of the lease – well in excess of
any realistic estimate of the actual service costs to the
The tenants argued that this was uncommercial and could not be
right. The Supreme Court disagreed. The words of the contract were
Commercial common sense: a more limited approach
Lord Neuberger (for the majority of the Court) began by
reiterating the familiar touchstone of contractual interpretation;
that the court should look to identify the parties' intentions
by reference to what a well-informed reasonable person would
understand the language of the contract to mean.
His Lordship then emphasised that the central indicator of
meaning is the words the parties have used. He noted that, unlike
with factors such as "commercial common sense" or the
surrounding circumstances, parties to an agreement have control
over the particular words they employ. Commercial common sense does
have a place in contractual interpretation, but only in the case of
true ambiguity. It is not to be invoked to draw attention away from
a contract's words or natural meaning.
The Court also warned that commercial common sense cannot be
brought to bear retrospectively. This is true regardless of whether
a contract has worked out "badly or even disastrously"
for a contractual party.1
Chapman Tripp comment
Arnold v Britton indicates a shift back towards
traditional reliance on the natural meaning of the words of an
agreement, and highlights the importance of clear drafting. The
decision is very much in line with the New Zealand Supreme Court
judgment in Firm PI 1 v Zurich Australian Insurance, which came
out last year. Both cases indicate a judicial desire to put some
boundaries around the increasing recourse to ideas of commercial
common sense or fairness when interpreting bargains.
Commercial parties should be pleased that the highest courts in
both New Zealand and the United Kingdom have taken a more literal
approach to contractual construction. We see it as increasing
certainty for contracting parties.
Those who have negotiated an agreement on favourable terms
should take particular comfort from the ruling. It should now be
less likely that the counterparty will be able to slip out of a bad
bargain by calling on "business common sense".
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Hon'ble High Court of Bombay has held that where a Scheme of Amalgamation is executed between two companies registered in two different states [...], then the said two orders are two independent instruments.
Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).