UK: When Will The Courts Apply "Business Common Sense" In Contract Interpretation?

Ace Paper Ltd v Fry and others [2015] EWHC 1647 (Ch), 18 June 2015

Summary

Where wording in a contract was genuinely ambiguous causing one interpretation to be absurd, and another to be unlikely in the commercial context, the contract was interpreted to reflect business common sense.

Background

To what extent should the courts apply commercial reasonableness or apply the natural meaning of the wording as drafted and agreed by the parties? It is not always clear what is meant by wording in a contract. Courts have to, in such an instance, interpret the meaning.

The Supreme Court recently placed emphasis on giving effect to the natural meaning of wording, in Arnold v Britton and others [2015] UKSC 36, where it was reasoned that the fact that an arrangement has worked out badly or even disastrously is not a reason for departing from the natural meaning of the language.

There may be instances however, where the words used are capable of more than one meaning and it would seem that, in such a case, the approach in Arnold v Britton cannot always be directly applied.  

Facts

Ace and the Third Respondent, RBS Invoice Finance Limited were parties to an invoice discounting agreement under which Ace assigned to RBS Invoice Finance Limited all debts owed to it by its customers under sale contracts.

The parties agreed in principle to terminate the invoice discounting agreement. This termination was confirmed by an exchange of letters. The appeal concerned the proper construction of a provision of one of these letters, in particular relating to the re-assignment to the appellant of a debt for which it had already received the full value from the respondent.

Decision

The High Court expressed the view that the re-assignment was counterintuitive and would require clearer words than what was used in the agreement, particularly as the document containing the provision in question had been drafted by the appellant and should therefore be construed 'contra preferentum' - the rule which broadly states that where there is doubt about the meaning of the contract, the words will be construed against the person who put them forward.

In its judgment the court followed Rainy Sky SA v Kookmin Bank [2011] UKSC 50 and quoted the principle that "the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant."

If words are only capable of one meaning then it is not necessary to look beyond the words used. The court in the present case suggested that it should not impose its own view of "commercial reasonableness" or "business common sense" when unnecessary. However, these concepts may have to be applied for the purposes of interpretation in instances where the words used are capable of more than one meaning and as a result of ambiguity the court is required to choose between the meanings. Where that is the position, the Judge in the present case was of the opinion that "the court is entitled to prefer the construction more consistent with business common sense, if that can be determined".

Comment

After the strict approach taken by the Supreme Court in Arnold v Britton, this case goes to show that the courts will still, in necessary circumstances, apply the concept of business common sense if required to interpret a contract.

This also serves as a reminder that careful drafting to avoid ambiguity can help prevent the courts from having to apply methods of interpretation to the wording of a contract.

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