Supreme Court approach to contractual interpretation
In Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2, the Supreme Court appear to have signalled a change in their approach to contractual interpretation.
Background and Court’s decision
The dispute concerned the interpretation of a clause providing that a certificate by the landlord “as to the amount of the total cost and sum payable by the tenant” in respect of service charge was “conclusive” in the absence of limited defences, including manifest error. The Supreme Court held that this clause should be interpreted to mean that the certificate was conclusive as to the amount that the tenant had to pay immediately but not as to its ultimate liability, so that it could later argue for a repayment even though it did not fall within the limited defences.
The interpretation that the Supreme Court adopted was not one that had occurred to any of the courts below or to the parties. Lord Briggs, in a detailed dissent, argued that the Schedule containing the certification clause was the only place in the contract that dealt with the service charge and so it had to be interpreted as determining the liability for that charge and not just a temporary mechanism for its payment. The majority argued that other provisions in the lease dealing with detailed items in the service charge and rights to inspect service charge documents weighed against the construction of the certification clause as conclusive as to liability. Lord Briggs’s dissent points out that these provisions are entirely consistent with the certification clause as it expressly excludes certain defences to which those provisions could apply.
Analysis
The decision could simply be seen as the majority detecting an ambiguity in the wording that allowed them to pick the most commercially attractive interpretation, whereas the dissenting construction of the wording failed to detect any ambiguity. But the admission by the majority that there was ‘a natural and ordinary meaning’ of the clause which they nevertheless rejected in favour of an interpretation that had not occurred to the parties or any other court suggests a more profound change.
The approach set out previously in Supreme Court cases such as Arnold v Britton [2015] UKSC 36 only allows commercial imperatives to determine construction when there is ambiguity in wording – that is, where there is more than one construction available. Here, the majority set out different possible constructions and evaluated each of them for commercial consistency, even though there was one ‘natural and ordinary meaning’ and it was difficult to find support for any other meaning in the words of the contract. The difference might end up being only one of degree. But the risk – expressly recognised in Arnold v Britton, which was cited by Lord Briggs but not by the majority – is that an overly permissive approach leads to a court re-writing the bargain, substituting its interpretation of a fair bargain for what the parties actually agreed.
Key takeaways
The reaction to this decision is likely to depend upon the reader’s perspective. It opens up room for a commercial interpretation of a contract that appears to depart from the literal wording, which may help in a dispute. On the other hand, the drafting of commercial contracts may become more prescriptive (and longer) as practitioners seek to pre-empt any such debate. Whatever your view, it will be interesting to see whether this trend continues in further cases and is adopted by the lower courts.