Contract Interpretation: Supreme Court

There some very interesting issues in the UK Supreme Court’s recent judgment in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2?.

The Court was to required to interpret the following provision:

“The landlord shall on each occasion furnish to the tenant as soon as practicable after such total cost and the sum payable by the tenant shall have been ascertained a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive.”

The landlord issued a certificate claiming that the amount stated therein was conclusive. The tenant sought to contest the amount.

In essence, and using the words of Lord Hamblen, the landlord was arguing that the provision?created a??“pay now, argue never” regime. Conversely,??the tenant contended that the provision meant?“argue now, pay later”.?

The Court of Appeal held that the natural meaning of the provision meant that the certificate is conclusive as to “the amount of the total costs” and “the sum payable by the tenant” . So, the meaning is "pay now, argue never"

The role of commercial purpose

The Supreme Court (by 4 to 1) disagreed with the Court of Appeal.

The judgment of Lord Hamblen is based on the majority's notion of commercial purpose, commercial logic and commercial reality even though he agreed with the lower courts?that the “natural and ordinary meaning” of the words “sum payable by the tenant”??were clear.

Lord Hamblen [46]:?I agree with the Court of Appeal that the natural and ordinary meaning of the certification provision supports {the tenant's] case.

This resort to commercial purpose to override the natural and ordinary meaning should perhaps raise a few eyebrows given the emphasis in previous judgments of the importance of giving words their natural meanings. See Lord Neuberger in Arnold v Britton [2015] UKSC 36:

17.???First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case,?that meaning is most obviously to be gleaned from the language of the provision.?Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

20.????Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract,?a court should be very slow to reject the natural meaning of a provision?as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed.”?

(emphasis added)

It would seem that the practical application of the principles set out in Lord Neuberger’s judgment leads to the starting point, in any exercise of contractual interpretation, being “the natural meaning of the words used”, Arnold v Britton.

Lord Briggs dissented, and did not consider that commercial purpose should be used to override the ordinary language of the clause, stating [61]:

“But it is well-settled that the uncommerciality of the prima facie meaning of contractual words only yields to a more commercial alternative if there is some basis in the language of the contract as a peg upon which that alternative can properly be hung”

In disagreeing with the interpretation of the majority, Lord Briggs states [62]:?

“In my view the whole structure of the service charge regime in the lease, as well as the ordinary meaning of the words used, is irreconcilable with that interpretation.”

Is this a new approach to interpretation?

Is this judgment a significant departure as to the application of commercial purpose in interpreting a contract, a different approach?

Or is a just an example of?the Supreme Court’s endorsement of both the literal and contextual approaches?in interpreting contracts. See Lord Hodge in?Wood v Capita Insurance Services Ltd?[2017] UKSC 24:

10.??????????????The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.

13.??????????????Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance.

An alternative interpretation not argued for by the parties - rewriting the agreement?

Another interesting issue in Sara & Hossein Asset Holdings Ltd v Blacks is that the Supreme Court held that the provision has a meaning that neither the landlord nor the tenant argued for and one that did not apparently occur to the lower courts.

As stated above, the landlord contended that the provision created a regime of “pay now, argue never”. Conversely, the tenant argued that the regime was one of “argue now, pay later”.

In order to give the provision a commercial purpose for both parties, the majority held that there was an alternative interpretation.??The wording required the tenant to pay now, but to also allow to contest arguable claims later. The landlord is therefore assured of payment without protracted delay or dispute, but it entitles the tenant to raise arguable claims later.??In essence, the meaning of the provision is “pay now, argue later”

Did the Supreme Court rewrite the contract to give the provision a meaning that the Court considered equated with commercial common sense”???To do so would, of course, be contrary to accepted principles of interpretation. As stated by Lord Briggs at [61]:

The court does not in such circumstances have carte blanche simply to make up a solution of its own. It must choose between genuinely available constructions, rather than mending the parties’ bargain.

In relation to the ‘pay now, argue later’ interpretation, Lord Briggs states:

It is not a construction thus far identified by any of the courts below, or proposed by either of the parties. It is an imaginative creation which the parties could sensibly have agreed to meet most of their respective concerns. But in my view it is not to be derived by any process of construction of the terms of Schedule 6 actually agreed.