Drawing the line between interpreting and re-writing contractual provisions

Background

At the heart of the development of modern case-law on contractual interpretation is the conflict between the words used and the context in which they are used. Determining which should take precedence is not always an easy exercise, particularly given that interpretation is subject to broad principles rather than strict rules. Recently, the courts have tended to give priority to context over words, but in the recent decision of Arnold v Britton and Others, the Supreme Court may have begun to swing the pendulum towards the latter.

Facts

The case centred on a dispute between various tenants and the landlord of holiday chalets in a caravan park. The 99-year leases in question each included a service charge to cover matters such as maintenance and common services. Under the terms of the service charge, the tenants were required to pay to the landlord a fixed sum of £90 which would increase at a compound rate of 10% for each subsequent year of the lease. The tenants argued that the rate was designed to act as a cap rather than a fixed amount due and that to compound the rate every year would lead to an absurdly high charge in the later years of each lease (over £1 million each year by the time the leases came to an end). The landlord maintained that the charge was entirely reasonable given that though inflation is now much lower than the rate of compound interest in the leases, at the time they were entered into, it was above 10%.

Decision

The case went all the way to the Supreme Court, which dismissed the tenants' appeal by a majority of 4:1 and held that the tenants had contracted to pay £90 a year, compounded annually at 10%. Despite being aware of the “unattractive consequences” for the tenants of such an interpretation, the dramatic escalation in price was not sufficient to enable the court to depart from the natural and unambiguous meaning of the words used. The parties were effectively taking a gamble on inflation; if the inflation is higher than 10%, the lessee benefits and where it is lower, the lessor benefits. The court stated that its role was to identify the intentions of the parties by reference to what a reasonable person would have understood them have intended by the language used. The court made clear that the principles of contractual interpretation do not extend to a situation whereby the court would effectively be re-writing a contractual provision simply because the factor which a party was relying on failed to materialise in its favour.

Comment

While this is an English case (and, as such, is only persuasive in Scotland rather than legally binding), it reinforces the principles that parties in both jurisdictions should consider when entering into negotiations and subsequently contracting. The case makes clear that the courts are not willing to re-write a contractual provision to step in and save one party from a bad bargain or the consequences of poor advice. Ultimately, courts deal with the interpretation of contracts; they are not in the business of rewriting them. They will not consider what makes commercial sense retrospectively but will assess what was reasonable at the time the contract was made. More generally, courts' willingness to apply the principle of commercial common sense will only apply where there is ambiguity in the drafting and will not be deployed where the natural meaning of the language is clear.

While some may welcome the decision due to its prioritisation of clarity, it serves as a reminder that the negotiating process can have consequences in the long-term. Parties should, therefore, exercise as much foresight as possible during the negotiation stage and in the ultimate wording of their contracts.

Co-author'd by: David Fitzpatrick.