Interpretation of clause disastrous for one party
ARNOLD v BRITTON (SC) [2015]
This case involved a dispute over the interpretation of a service charge provision in some leases. The main issue resolved by the Supreme Court (SC) was whether the language used by the parties in the contract reflected what they intended to say. Whilst the Courts will rely to some extent on commercial common sense when determining the parties’ intentions, this will not override clear wording, even though applying that principle here was disastrous for the tenants.
Facts:
- Some leases of a number of chalets in a caravan park were granted for 99 years. 25 of the leases granted between 1977 and 1991 required the tenants to pay an initial annual service charge of £90, which increased at a compound rate of 10% in each succeeding year (clause 3(2)).
- Some other tenants had similar leases except their service charge was an initial £90 increasing at a rate of 10% every three years.
- The 25 leases also contained a covenant on behalf of the landlord that leases of the other chalets would contain covenants for the tenants to observe “the like obligations … or obligations as similar thereto as the circumstances permit” to those set out in the 25 leases (clause 4(8)).
- According to the landlord’s interpretation of the annual increase clause, it provided for a fixed annual charge of £90 for the first year of the term, increasing each subsequent year by 10%. This meant that for a lease granted in 1980, the service charge would be over £2,500 in 2015 and over £550,000 by 2072. The affected tenants claimed that this resulted in such an “increasingly absurdly high annual service charge” in the later years of each of the 25 leases that it could not be right.
- They maintained the obligation to pay the service charge should be construed as requiring the tenants to pay only a fair proportion of the landlord’s costs of providing the services but subject to a maximum. In effect, the tenants were saying that the clause should be understood as meaning the service charge payable for the first year was “up to Ninety Pounds plus 10%” (emphasis added).
- Alternatively, the tenants argued that the landlord could not recover more by way of service charge than could be recovered under the other leases which contained the wording for a 10% increase every three years due to the landlord’s covenant in clause 4(8).
- The Court of Appeal had agreed with the landlord’s understanding of clause 3(2). It held that the tenants’ interpretation would, “involve the court rewriting the bargain the parties have made”.
- The tenants appealed to the SC.
Decision:
- The appeal was dismissed by the SC with a majority of 4:1 despite this being “disastrous” for the tenants. The dismissing judges were unconvinced by the tenants’ argument that the £90 was a maximum figure as this, “involves departing from the natural meaning of clause 3(2) … and … inserting words which are not there”.
- The SC said the starting point when interpreting a written contract is to identify the parties’ intentions by applying an objective test to construe what a reasonable person would have understood the parties to have meant from the words actually used, taking into account the relevant background (Chartbrook v Persimmon Homes (HL) [2009]).
- The meaning of clause 3(2) had to be assessed in the light of the natural and ordinary meaning of the words used and the overall purpose of the clause, the facts known at the time and commercial common sense but without considering the subjective evidence of either party's intentions. The SC also said it was important to emphasise the following factors:
- interpreting a provision involves identifying what the parties meant from the language used. Contracting parties have control over the language they use;
- the worse the drafting of the relevant words to be interpreted, the more ready the Court can be to depart from their natural meaning. Conversely, the clearer the natural meaning, the more difficult it is to justify deviating from it;
- if interpreted according to its natural language, the mere fact that a contractual arrangement has worked out badly, or even disastrously, for one of the parties is not a reason for departing from that language;
- a Court should be very slow to reject the natural meaning of a provision simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the Court thinks that they should have agreed;
- only the facts or circumstances which existed when the contract was made, and which were known or reasonably available to both parties, can be taken into account;
- sometimes an event subsequently occurs which was plainly not anticipated or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the Court will give effect to that meaning.
- The SC commented that the 10% yearly increase in clause 3(2) was included to allow for a factor which was out of either party’s control, namely inflation. Inflation was much higher when the leases were granted than it is now and it would not have been predicted that it would have fallen to such a low rate as has been the case in recent times. However, the SC went on to say that there is no principle of interpretation which entitles a Court to re-write a contractual provision simply because the element which the parties catered for does not seem to be developing how the parties expected.
- Considering these factors, the SC concluded that the issue was not that the wording used was unclear, more that the effect of its meaning was extremely disadvantageous for the tenants – but this was not within its power to remedy.
Points to note:
- Whilst there have been cases where a disputed provision has been construed in a way which is most consistent with 'business common sense' (eg Rainy Sky v Kookmin Bank (SC) [2011]), this has been where there are two or more possible interpretations of the provision. Another example was the decision of Ace Paper v Fry [2015], in which the Court found that when read as a whole, the language used was unclear and required further explanation. It favoured the meaning that was more consistent with business common sense to give effect to the perceived intentions of the parties.
- The SC’s conclusion was that the wording was not ambiguous so the commercial common sense approach did not need to be applied. Consequently, it was not within its remit to give a different meaning to a provision just because it was a bad bargain from one party’s point of view. This emphasises the importance of getting the express wording of a contractual provision correct and ensuring that when enforced in accordance with those words, it will result in an acceptable outcome.