UK: Clear language trumps common sense in: Arnold v Britton [2015] UKSC 36: Contractual interpretation

Construction Law Update - October 2015

KEYWORDS: CONTRACTUAL INTERPRETATION

KEY TAKEAWAY

This decision serves as a reminder that parties to a commercial agreement will be held to the clear language of their written bargain, rather than an interpretation that makes commercial common sense. Courts will not impute an alternative meaning if this would undermine the clear language of a contract. In Arnold v Britton, the parties were therefore confined to the terms of the agreement, even though the ramifications were unjust.

The facts

The Appellants in Arnold v Britton were tenants of 25 holiday chalets in the Respondent landlord's leisure park. A dispute arose concerning a service charge provision of the contract. Clause 3(2) required the Appellants:

"to pay ... a proportionate part of the expenses ... incurred ... and the yearly sum of Ninety Pounds and value added tax (if any) for the first three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent three year period or part thereof."

The Respondent contended that clause 3(2) had the effect of providing for a fixed annual charge of £90 for the first year of the term, with a yearly increase of 10% on a compound basis. The Appellants argued that this interpretation resulted in an absurdly high service charge.

A literal reading of the clause shows a tension, between requiring the payment of a "proportionate part" of expenses for maintenance renewal and the payment of a fixed sum, increased by fixed proportions. The Appellants contended that the service charge clause required the lessee to pay a "fair proportion" of the costs, "subject to" the maximum of £90 in the first year of the term, and increases every year by 10% on a compound basis. The Appellants argued that the clause was ambiguous and only a "proportionate part" should be paid, thus, in effect, adding the words "up to" before the words "the yearly sum of Ninety Pounds."

In the alternative, the Appellants argued that the clause's effect was limited by clause 4(8), which required the obligations in all leases to be "as similar as the circumstances permit." The charge should, on this argument, not be higher than that of previous 70 leases entered into for similar holiday chalets, which had a slightly different and less controversial service charge provision.

The decision

The Supreme Court dismissed the appeal by a majority of four to one, finding that the natural meaning of the two parts of the service clause provision was clear.

In delivering the lead speech, Lord Neuberger stated that the Court must identify the intentions between the parties by reference to what "a reasonable person having all the background knowledge ... would have understood them to be using the language in the contract" [at 15]. In doing so, his Lordship emphasised several factors relevant to the appeal.

  • Reliance on commercial common sense should not be invoked to undermine the importance of the natural language of the provision. The court cannot embark on an exercise of searching for ambiguities in order to depart from the natural meaning. While commercial common sense is important, the court should be slow to reject the natural meaning of a provision, simply because it seems imprudent.
  • Commercial common sense should not be invoked retrospectively. 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.
  • In some cases, an event will subsequently occur which was plainly not intended by the parties, judging from the language of the contract. In such cases, if the alternative intention is clear, the court will give effect to it.
  • While reference was made to service charge clauses being construed "restrictively", there is no indication they are subject to special rules.

The majority found that even though the Appellants would be paying £550,000 by 2072, it was not inconceivable that this was intended. The court should not invent a lack of clarity in order to depart from the natural meaning. Lord Neuberger emphasised that people entered into all sorts of contracts on the basis of reasons that no professional would consider prudent [at 37].

Lord Carnwath's dissenting speech highlighted that the intention was for all leases to be on similar terms, based on clause 4(8). Further, his Lordship emphasised the commercial purpose of clause 3(2), being purely for the recovery of maintenance costs. Lord Carnwath found that there was no grammatical connection between the two parts of clause 3(2) and found the parts were mutually inconsistent [at 125]. He therefore concluded that the clause resulted in commercial nonsense and was ambiguous. Interestingly, the Respondent recognised the unsatisfactory situation in which the Appellants found themselves, and was prepared to agree to appropriate amendments to the leases.

Australian contractual interpretation

The High Court articulated the Australian approach in Australian Broadcasting Commission v Australasian Performing Right Association Ltd. 144 In this case, the Association claimed that a provision on licence payments had been miscalculated under the agreement, and did not reflect the parties' intention. It also argued that the term "rate applicable" in the provision was ambiguous. Applying the provision as it stood led to extremely low licence payments.

The majority, Barwick CJ and Stephen J, held that the language of the provision calculating the licence fee was plain and unambiguous. While the amount calculated by the current provision did not produce commendable results, it was not the role of the court to attribute an intention which did not reflect the express words.

Justice Gibbs agreed on the law but not on the facts, finding a lack of grammatical exactitude in the provision. Justice Gibbs held that if the words used are unambiguous, the court must give effect to them, even if the result may appear capricious or unreasonable, despite the suspicion that the parties intended something different. If the language is, however, open to two constructions, the interpretation that avoids unreasonable or unjust consequences should be preferred even if another construction may be more obvious [at 109]. Further, Gibbs J held it is permissible to depart from the ordinary meaning of words of one provision as far as is necessary to avoid an inconsistency with the rest of the agreement.

Gibbs J's judgment has since been approved and applied in a range of cases including Bytan Pty Ltd v BB Australia Pty Ltd145 and the recent case of Fitzroy River Corporation Ltd v Buru Energy Ltd. 146

Arnold v Britton is a significant example of contractual interpretation that highlights the courts' preference for strict linguistic interpretation. The decision thus reiterates the vital importance of certainty in drafting.

http://www.bailii.org/uk/cases/ UKSC/2015/36.html

Footnotes

144 (1973) 129 CLR 99
145 [2012] VSCA 223
146 [2015] WASC 143

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