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Key factors to consider when interpreting/construing commercial contracts

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Home Perspectives Key factors to consider when interpreting/construing commercial contracts

The recent English Supreme Court decision in Arnold v Britton provides important clarification of the correct approach to adopt when interpreting commercial contracts.

The court reiterated that when interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”1.

The court summarised that the meaning must be determined having regard to:

  • The natural and ordinary meaning of the clause
  • Any other relevant provision in the contract
  • The overall purpose of the clause and the contract
  • The facts known or assumed to be known by the parties at the time of entering the contract
  • Commercial common sense
  • Disregarding subjective evidence of the parties’ intent

Importantly, the court identified a number of factors to consider when carrying out this task:

  1. The most obvious meaning of a contract provision should be gleaned from the language of the provision itself.
  2. Only where the meaning of the relevant language is ambiguous or unclear should the court look to the ‘commercial common sense’ and ‘surrounding circumstances’.
  3. The fact that the natural meaning of a provision subsequently proves disastrous for one of the parties is not a reason for departing from the natural meaning of the language and invoking ‘commercial common sense’ retrospectively.
  4. The court should be slow to reject the natural meaning of a provision merely because one of the parties was ill-advised to enter into the contract on such terms, even ignoring the benefit of hindsight.
  5. Only facts known or reasonably available to both parties at the time a contract was entered into should be taken into account when interpreting a contract.
  6. If a subsequent event occurs which, judging from the language of the contract, was not clearly intended or contemplated by the parties, then the court should give effect to the parties’ intention.

The clarification provided by the English Supreme Court judgement, while not game-changing, should be carefully considered when a party seeks to construe the meaning of its contract.

  1. Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14

 

Client Alert 2015-211