New Zealand: Contract interpretation – the pendulum swings back

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 approach.

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 landlord.

The tenants argued that this was uncommercial and could not be right. The Supreme Court disagreed. The words of the contract were unambiguous.

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".

Footnotes

¹At [19].

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.