Speak to our friendly staff directly  +44 (0)20 7242 2523

A leading set specialising in commercial, construction, insurance and property law

Insights

It Means What It Says on the Tin: Contract Interpretation in a Post-Arnold v Britton World

For a number of years it seemed as if the law had gone soft in its old age. It began by telling us that, when construing the terms of a contract, we shouldn’t allow the literal words to mask the true objective intention. As Lord Steyn said (in Sirius International v FAI):

“[T]he tyrant Temures promised the garrison of Sebastia that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried them all alive. This is literalism. If possible it should be resisted in the interpretative process.”

And before we knew it, by relying on such decisions as Chartbrook v Persimmon and then Rainy Sky v Kookmin, some were saying that the law now allowed you to read in to the contract whatever made the most commercial sense.

Traditionalists therefore rejoiced at the perceived return to orthodoxy provided by Arnold v Britton. As Lord Neuberger pointed out:

“…save perhaps in a very unusual case [the objective intention of the parties] is most obviously to be gleaned from the language of the provision.”

This approach, traditionalists hoped, would help avoid the problem that arose when the judges couldn’t agree between themselves as to what the commercial common sense construction actually was.

In truth, as many have noted, the shift was more in mood music than jurisprudence. Arnold sought to apply Chartbrook and Rainy Sky, not distinguish them. So, the real question was how the strictures of Arnold would be interpreted at the coal face of first instance decisions.

As a quick reminder, the key point in Arnold was that commercial common sense – the panacea put forward in Chartbrook and Rainy Sky – was only to be considered if the court was faced with an ambiguity it could not otherwise resolve by normal rules of construction.

Scottish Power UK plc v BP Exploration Operating Company Ltd

Recently, in Scottish Power UK plc v BP Exploration Operating Company Ltd, Leggatt J was faced with two competing interpretations of a clause. The clause stipulated a specific remedy (a compensation scheme) “in respect of an underdelivery of gas” by the suppliers to Scottish Power during the term of a contract for the delivery of oil and gas from a North Sea platform. The parties said that the clause either:

  • Provided a sole remedy wherever there was an underdelivery (that is, whether it was simply that there was less gas delivered than expected on any operating day or whether, as in the case, because the suppliers had voluntarily shut the platform down for 3½ years); or
  • The clause allowed room for Scottish Power to bring an additional damages claim for losses related to the underdelivery but not strictly contemplated and compensated by the contractual scheme.

Leggatt J’s view was that both interpretations were equally plausible and so the apparent ambiguity could not be resolved by looking at the natural meaning of the language. The judge’s approach was therefore that the more commercially sensible interpretation would prevail in line with Rainy Sky. On that basis, he decided that it was unlikely that the parties had intended to agree a very specific remedy to deal with the underdelivery of a specific quantity of gas, while also allowing Scottish Power to be free to pursue a claim for another remedy (damages) for the failure to deliver that very same quantity of gas.

That view is underpinned by the further principle found in Arnold, that commercial common sense was not to be invoked retrospectively as a way to help one party out of what had transpired to be a bad bargain.

It seems unlikely, then, that the court would have come to a different decision pre-Arnold. However, the case identifies a shift in emphasis, in that Leggatt J was very careful to go through a process of considering, firstly the natural meaning of the clause, if it could be ascertained. Only then did he go on to look at the effect of commercial common sense on that interpretation.

Indeed, it is interesting to compare his approach to another clause in the contract relating to the gas suppliers’ obligation to operate the facilities and whether they were in breach of that obligation. He first asked himself whether the language of that clause lent itself to a particular “natural” interpretation, which he said it did. He then only really looked to whether that interpretation made “commercial common sense” by considering various hypotheticals as a check on the initial test of whether the clause had the natural meaning contended for. Such would be a paradigm of the approach required by Arnold.

Honeyrose Bakery Ltd v Lola’s Kitchen Ltd (t/a Lola’s Cupcakes)

In the non-construction case of Honeyrose Bakery Ltd  v Lola’s Kitchen Ltd, which concerned a contract for the supply of cupcakes (a matter close to many judicial hearts), the court took a similar approach:

  • Lola’s case was that a clause saying that it could manufacture certain products for itself (cupcakes and cakes in the shape of cupcakes) should be interpreted on its face.
  • Honeyrose’s case was that such an interpretation must be incorrect when looking at the agreement as a whole and it was only intended that Lola’s should be allowed to manufacture products for itself for the first two months of the agreement.

The judge first ascertained the “natural meaning” of the relevant clause (which was Lola’s interpretation) and then considered whether there was any reason to find that the natural meaning of the clause should be displaced on the basis that it lacked commercial common sense. He said that Honeyrose’s allegedly commercial interpretation amounted to an attempt to add words to the clause by interpretation. This would “do extreme violence to the language” of the actual clause in the process. Its argument therefore failed.

In Lola’s Cupcakes, the judge was perhaps more willing, post-Arnold, to stick to the language of the clause as giving rise to the correct interpretation, even though that would, at least in Honeyrose’s view, be an interpretation with little commercial common sense.

R (on the application of Robert Hitchins Ltd) v Worcestershire CC

In R (on the application of Robert Hitchins Ltd) v Worcestershire CC, the issue was how to interpret the word “implementation” in a clause contained in a planning permission. The parties agreed that the term was ambiguous in that it could be used to refer to:

The beginning of a development.
More broadly, to the carrying out to completion of the entire development works.

The respondent contended that “implementation” should be construed, in common with its use in the recital of the document, to mean “begin” (even though such an interpretation would render the covenant ineffective).

On the basis of the agreed ambiguity, the court proceeded to take a commercial view of the clause and found that “against the documentary, factual and commercial background, and to give it a meaning that avoids ineffectiveness, paragraph 1.2 should plainly be interpreted” so as to mean the “carrying out” of the whole works.

It can be seen that Arnold will necessarily have less of an impact where the “natural meaning” of the words in question do not have a clear meaning, since the court will necessarily have to look at commercial common sense (and all attendant factors) to resolve the dispute over interpretation.

The tension facing the courts

In the end, these cases reveal, or rather confirm, that there is always a tension for the courts when interpreting a contract in that they must decide whether they can stick with what the words say (despite the consequences) or whether they need to go further and decide what the words must mean (because of the consequences).

This difficulty was succinctly expressed by Moore-Bick LJ in PST Energy 7 Shipping LLC v OW Bunker Malta Ltd (where the court was asked to consider whether a contact for the supply of bunker fuel was a contract for the sale of goods within the meaning of the Sale of Goods Act 1979):

“I entirely accept that it is no part of the court’s function in the guise of interpretation to remake the parties’ contract in a way that seems to improve its operation or mitigate unfortunate consequences for one or other party. However, that is not what the court is being invited to do in this case. The question is simply whether the characterisation by the parties of the contract as one of sale adequately reflects the substance of the obligations to which it gives rise. Just as it is no part of the court’s function to remake the parties’ contract in the guise of interpretation, so it is no part of the court’s function to shoehorn their contract into a category to which it does not properly belong in order to impose on them consequences which they did not intend.”

Moore-Bick LJ concluded that the judge at first instance had been correct to say that no matter how:

“…the parties have described the transactions, it is necessary to ascertain what each of them has actually undertaken to do.”

Arnold v Britton is a shot across the bows

Looking at the initial post-Arnold decisions, it is difficult to say that any of them would have been decided differently in a pre-Arnold world. While the courts will no doubt be careful to ensure that they limit their commercial common sense arguments to only those terms that are ambiguous, it is of course still up to them to decide if an ambiguity exists in the first place. That said, Arnold v Britton is a shot across the bows likely to reign in enthusiastic lawyers from running arguments purely based on commercial common sense.

Published on the Practical Law Construction Blog.