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Contract Interpretation

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Contract Interpretation

Contract Interpretation

The UK courts have recently decided on two cases of disputed contract interpretation, but with different outcomes.

In the case of Ace Paper Limited v Fry and others [2015] EWHC 1647 (Ch) 'genuine ambiguity' in the language of the contract was the distinguishing factor that resulted in the High Court relying on the more uncommon principle of interpretation: commercial common sense. This article looks at when and why the courts will depart from the usual rule.

Firstly, to give context to the High Court's recent decision in Ace Paper Limited v Fry and others, it is necessary to look at the three distinguished principles of interpretation. The Supreme Court recently applied the rule of interpretation in the case of Arnold v Britton and others [2015] UKSC 36, a case relating to the service charge provision in a 99 year lease. The court held that it was irrelevant, when applying the usual rule, that the tenant would end up paying £550,000 of service charge by 2072 - the court was simply giving effect to the natural meaning of the words.

The three principles of contract interpretation are:

  • Start with what the contract says by applying the natural meaning of the words;
  • Assess the parties' intention objectively; and
  • Apply commercial common sense.

The over-arching principle is to apply the natural meaning of the language. If the wording of a contract is clear, the court will apply that wording despite the fact that it may have a detrimental effect for one of the parties. Applying commercial common sense is irrelevant where the wording is clear and unambiguous.

In Ace Paper Limited v Fry and others, the court determined that, where there is genuine ambiguity in the contract, it will be necessary to depart from the over-arching principle of giving effect to the natural meaning of the words. In this case, the two possibilities of interpreting the words naturally were either so absurd or highly unlikely in the commercial context that the court was obliged to apply commercial common sense to give effect to the parties' true intentions.

These cases illustrate that the court will not use commercial common sense to rectify a bad bargain. Moreover, it is crucial that, when drafting a contract, the parties' establish what their intentions are in all possible outcomes under a contract.

For more information, contact Jan Marzec.