The recent judgment of the Supreme Court in Arnold v Britton has slipped under the radar for many lawyers. However, it marks an interesting and potentially significant move away from “commercial common sense” as the touchstone of contractual construction. The Supreme Court concluded that arguments based on commercial common sense “should not undervalue the importance of the language of the provision which is being construed”.
The decision was applied this week by the Commercial Court in Laird Resources LLP v Alumm Holdings Ltd (unreported). Applying Arnold v Britton, Mr Justice Flaux emphasised that the purpose of interpretation is to identify what was agreed and not what the court thinks should have been agreed.
This represents a change of approach from Rainy Sky SA v Kookmin Bank, in which the Supreme Court held that when asked to interpret ambiguous contractual provisions, the courts can, and indeed should, consider the commercial purpose of the provision, holding that “if there are two possible constructions, the Court is entitled to prefer the construction which is consistent with business common sense and to reject the other”.
Although Rainy Sky did not purport to give the courts carte blanche to re-write contracts by reference to their own views as to what represented commerciality, it was perceived as having justified more of a departure from the natural meaning of the words used by the parties.
In Arnold, Lord Neuberger identified several factors which would influence the interplay between the natural meaning of a provision and its commercial and common sense meaning:
- Reliance on commercial common sense and surrounding circumstances 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 provision, the more difficult it is to justify departing from it.
- Common sense must not be invoked retrospectively.
- While commercial common sense is a very important factor, a court should be 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.
- When interpreting a contractual provision, you must not take into account a fact or circumstance known only to one of the parties.
- If an event subsequently occurs which was plainly not contemplated when the contract was drafted, provided it is clear what the parties would have intended, the court will give effect to that intention.
It is perhaps not surprising that Lord Neuberger has taken the opportunity to rein in the role of commercial common sense in the interpretation of contracts, given his view in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd that “judges are not always the most commercially minded, let alone the most commercially experienced, of people”.
