The Supreme Court has made it clear in its decision in Arnold v Britten1 that where the natural meaning of contract wording is clear it should not seek alternative interpretations that might appear more in accord with commercial common sense or might rescue a party from a bad bargain.
It is well understood that the aim of interpreting a provision in a written contract is to determine what the parties meant by the language used. This involves ascertaining what a reasonable person would have understood the parties to have meant. The relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract2.
In recent years a tension has arisen between interpretation based on the natural meaning of the contractual wording under consideration and interpretation based on commercial common sense. In an earlier decision3 the Supreme Court had indicated that where two interpretations were available the court was entitled to accept that interpretation which accorded with commercial common sense.
The decision in Arnold v Britten confirms that where natural meaning of wording in a contract is clear there is little scope thereafter for the courts to arrive at an alternative interpretation based on commercial common sense.
The facts in Arnold v Britten
The case concerned 21 leases of chalets each for 99 years granted between 1978 and 1991. Each lease included provision for the lessee to pay a service charge in addition to the rent. The relevant provision provided for the service charge to be the yearly sum of £90 increasing by tem pounds per hundred for every subsequent year.
The Lessor argued that this should be interpreted to mean that the original £90 should compound at 10% every year. This would result in a liability that was totally out of proportion to the original £90 figure. The judgment stated that for a lease granted in 1980, the service charge would be over £2,500 in 2015, and over £550,000 by 2072.
Despite the unattractive consequences the court accepted that the parties’ intentions were to be derived from the natural meaning of the contract wording as set out above and that being so it was not open to the court to arrive at a different interpretation on the grounds that this was more in keeping with commercial common sense.
In the course of the judgment the court referred to the following factors that provide a useful insight into its thinking:
- Reliance on commercial common sense should not be invoked to undervalue the importance of the language of the provision which is to be construed.
- The clearer the natural meaning of the wording the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning.
- Commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made.
- 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. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.
1 Arnold v Britten  UKSC 36
2 Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38,  1 AC 1101
3 Rainy Sky SA v Kookmin Bank  UKSC 50