Interpretation of Commercial Contracts: Beware
Much of my commercial work relates to the interpretation of contract clauses. I am, in almost every case, asked how the court will interpret clause X.
Over the years the courts have changed how they view commercial contracts.
In Arnold v Britton [2015] 2 WLR 1593 the Supreme Court has, it would seem, reverted to the ‘traditional’ approach of contract interpretation. It was held that it is the parties themselves who have the greatest control over the words used in the contract and those words should not be undervalued or forced to defer to “business common sense”.
The parties have the greatest control over the words that they have used in their contract and those words should not be undervalued or forced to defer to “business common sense”.
In plain English, it looks as though the court will be moving away from the common sense approach, and looking instead to interpret the contract in strict adherence to the words and terms used.
Previously, the starting point for interpreting clauses would often be Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. Following this case, the court would consider what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood the clause to mean, using the language in the contract. This led to arguments of “business common sense”, which were given judicial support in the case of Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900: if there were two (or more) possible interpretations of a clause, the most attractive to the court would be the one closest to business common sense.
It seems that arguments for business common sense, in the hope of avoiding unfavourable interpretations at court, are going to become more difficult. Correct drafting in the first instance has always been important, but may now become even more critical.
For contract assistance – drafting or interpretation – the Becket Chambers Commercial Team can assist.
Please contact [email protected] for further information.