Supreme Court rules on principles of contractual interpretation
June 25, 2015
The Supreme Court has provided important guidance on the application of the principle of commercial common sense when interpreting written contracts.
The case involved the disputed interpretation of a clause dealing with service charges in the leases of chalets in a caravan park.
The Supreme Court held as follows:
- The natural meaning of the words used was clear. The first half of the clause stipulated that the lessee was to pay an annual charge to reimburse the lessor for the costs of providing the services which he covenanted to provide, and the second half of the clause identified how that service charge was to be calculated.
- The fact that the service charge was a fixed sum which increased at a compound rate of 10% per annum, meaning that by 2072 each tenant would be paying in excess of £550,000 per annum, did not justify departing from the natural meaning of the clause.
- While commercial common sense was an important factor to take into account when interpreting a contract, a court should be slow to reject the natural meaning of a provision as correct simply because it appeared to be a very imprudent term for one of the parties to have agreed. The mere fact that a contractual arrangement, if interpreted according to its natural language, had worked out unfavourably for one of the parties was not a reason for departing from the natural language. Commercial common sense was 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.