Commercial Sense Used to Interpret Contract
The Court was asked as to the role of commercial good sense in the construction of a term in a contract which was open to alternative interpretations.
Held: The appeal succeeded. In such a case the court should adopt the more, rather than the less, commercial construction, applying the principle that the ultimate aim in construing a contract is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant; the relevant reasonable person being one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
Lord Clarke said: ‘the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant’ and particularly approved the dissenting opinion of Sir Simon Tucker in the CA.
Lord Clarke of Stone-cum-Ebony stated: ‘[T]he exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. 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.’ and ‘that the aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant.’
Lord Phillips, President, Lord Mance, Lord Kerr, Lord Clarke, Lord Wilson
[2011] UKSC 50, [2011] 1 WLR 2900, UKSC 2010/0127, [2011] CILL 3105, 138 Con LR 1, [2012] 1 All ER (Comm) 1, [2012] ICR 1
Bailii, Bailii Summary, SC Summary, SC
England and Wales
Citing:
At first instance – Rainy Sky SA and Others v Kookmin Bank ComC 29-Oct-2009
The claimants sought summary judgment under an advance payment bond issued by the defendants in connection with certain shipbuilding contracts. . .
Appeal from – Kookmin Bank v Rainy Sky Sa and Others CA 27-May-2010
The defendant bank appealed against summary judgment given on a claim on its obligations under an advance payment bond given to support ship-building contracts.
Sir Simon Tuckey (dissenting) said: ‘There is no dispute about the principles of . .
Cited – Pink Floyd Music Ltd and Another v EMI Records Ltd CA 14-Dec-2010
The defendant appealed against an order made on the claimant’s assertion that there were due to it substantial underpayments of royalties over many years. The issues were as to the construction of licensing agreements particularly in the context of . .
Cited – Mannai Investment Co Ltd v Eagle Star Assurance HL 21-May-1997
Minor Irregularity in Break Notice Not Fatal
Leases contained clauses allowing the tenant to break the lease by serving not less than six months notice to expire on the third anniversary of the commencement date of the term of the lease. The tenant gave notice to determine the leases on 12th . .
Cited – Investors Compensation Scheme Ltd v West Bromwich Building Society HL 19-Jun-1997
Account taken of circumstances wihout ambiguity
The respondent gave advice on home income plans. The individual claimants had assigned their initial claims to the scheme, but later sought also to have their mortgages in favour of the respondent set aside.
Held: Investors having once . .
Cited – Chartbrook Ltd v Persimmon Homes Ltd and Others HL 1-Jul-2009
Mutual Knowledge admissible to construe contract
The parties had entered into a development contract in respect of a site in Wandsworth, under which balancing compensation was to be paid. They disagreed as to its calculation. Persimmon sought rectification to reflect the negotiations.
Held: . .
Cited – Prenn v Simmonds HL 1971
Backgroun Used to Construe Commercial Contract
Commercial contracts are to be construed in the light of all the background information which could reasonably have been expected to have been available to the parties in order to ascertain what would objectively have been understood to be their . .
Cited – F L Schuler AG v Wickman Machine Tools Sales Limited HL 4-Apr-1973
The parties entered an agreement to distribute and sell goods in the UK. They disagreed as to the meaning of a term governing the termination of the distributorship.
Held: The court can not take into account the post-contractual conduct or . .
Cited – Antaios Compania Naviera SA v Salen Rederierna AB (‘the Antaios’) HL 1984
A ship charterer discovered that the bills of lading were incorrect, but delayed withdrawal from the charter for 13 days. They now sought leave to appeal the arbitration award against them.
Held: Though he deprecated extending the use of the . .
Cited – Co-operative Wholesale Society Ltd v National Westminster Bank plc CA 1995
The court considered the proper construction of rent review clauses in several cases. The underlying result which the landlords sought in each case was the same.
Held: It was a most improbable commercial result. Where the result, though . .
Cited – C Hole v Garnsey HL 1930
Under Rule 64 of a Society registered under the Act, rules could be amended ‘by resolution of a three-fourths majority at a special general meeting’. Various amendments were carried by a three-fourths majority of the shareholders. The effect of one . .
Cited – Mitsui Construction Co Ltd v Attorney General of Hong Kong PC 1986
Lord Bridge said that poor drafting in a contract itself provides: ‘no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used . .
Cited – Society of Lloyd’s v Robinson and Another HL 25-Mar-1999
Damages awarded to a Lloyd’s ‘name’ compensating for negligent underwriting must be paid into the trust fund set up for this purpose on behalf of member names, even though the claim fell outside the strict ambit of the original fund because of valid . .
Cited – Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd CA 3-Jul-2001
A reinsurance contract which contained a clause which provided that no settlement or compromise of a claim could be made or liability admitted by the insured without the prior approval of the reinsurers. The court considered how the discretion to . .
Cited – Sinochem International Oil (London) Co Ltd v Mobil Sales and Supply Corporaton and Another CA 17-Feb-2000
. .
Cited – Homburg Houtimport BV v Agrosin Private Ltd (the ‘Starsin’) HL 13-Mar-2003
Cargo owners sought damages for their cargo which had been damaged aboard the ship. The contract had been endorsed with additional terms. That variation may have changed the contract from a charterer’s to a shipowner’s bill.
Held: The specific . .
Cited – Sigma Finance Corporation, Re; (in administrative receivership) SC 29-Oct-2009
The court considered how the losses of the insolvent company were to be distributed as between secured creditors and preferential creditors, given the terms of the applicable trust deed.
Held: The court considered the interpretations of the . .
Cited – Golden Key Ltd (In receivership) CA 30-Jun-2009
. .
Approved – HHY Luxembourg Sarl and Another v Barclays Bank Plc and Others CA 22-Oct-2010
Longmore LJ said: ‘when alternative constructions are available one has to consider which is the more commercially sensible . . The judge said that it did not flout common sense to say that the clause provided for a very limited level of release, . .
Cited – Rainy Sky Sa and Others v Kookmin Bank SC 2-Nov-2011
Commercial Sense Used to Interpret Contract
The Court was asked as to the role of commercial good sense in the construction of a term in a contract which was open to alternative interpretations.
Held: The appeal succeeded. In such a case the court should adopt the more, rather than the . .
Cited by:
Cited – Aberdeen City Council v Stewart Milne Group Ltd SC 7-Dec-2011
The parties disputed the construction of a contract for land intended for a business park development. It provided for an uplift to be later payable in certain circumstances, and the uplift was now claimed. The question was as to whether the uplift . .
Cited – Quirkco Investments Ltd v Aspray Transport Ltd ChD 23-Nov-2011
The defendant tenant said that it had exercised a break clause in the lease held of the claimant. The claimant said the break notice was ineffective because the defendant was in breach of the lease, not having paid an iinsurance service charge, and . .
Cited – Unique Pub Properties Ltd v Broard Green Tavern Ltd and Another ChD 26-Jul-2012
The claimant freeholder sought to install in the tenant’s pub, equipment to monitor sales. It claimed a right for this in the lease. The tenant refused access, saying that the proposed system was inaccurate. The claimant now sought summary relief. . .
Cited – CGIS City Plaza Shares 1 Ltd and Another v Britel Fund Trustees Ltd ChD 13-Jun-2012
cgis_britelChD2012
The claimants asserted a right of light either by prescription or under lost modern grant. The defendants argued that alterations in the windows arrangements meant that any prescription period was restarted.
Held: ‘the Defendant is not correct . .
Cited – AJ Building and Plastering Ltd v Turner and Others QBD 11-Mar-2013
An insurance company had engaged a main contractor to handle repairs to houses insured under its policies. The contractor had engaged the claimant subcontractor to carry out the works at the defendants’ homes, but then went into insolvent . .
Cited – L Batley Pet Products Ltd v North Lanarkshire Council SC 8-May-2014
The appellant was mid-landlord and the respondent the sub-tenant under a now-expired lease. The appellant had wanted repairs to be executed but told the tenant informally. The tenant argued that the lease required formal notice to create an . .
Cited – BNY Corporate Trustee Services Ltd and Others v Neuberger SC 9-May-2013
Potential Insolvency effect under guarantee
The various parties had entered into complex and substantial financial arrangements incorporating guarantees. The guarantees were conditional upon the guaranteed party being solvent. The parties disputed whether a party which would otherwise be . .
Cited – Marley v Rawlings and Another SC 22-Jan-2014
A husband and wife had each executed the will which had been prepared for the other, owing to an oversight on the part of their solicitor; the question which arose was whether the will of the husband, who died after his wife, was valid. The parties . .
Cited – Sugarman and Others v CJS Investments Llp and Others CA 19-Sep-2014
The parties were apartment owners in a development, each owning shares in the management company. They disputed the interpreation of the Articles as to whether the owner of more than one apartment was still restricted to one vote at member meetings, . .
Cited – Teal Assurance Company Ltd v WR Berkley Insurance (Europe) Ltd SC 31-Jul-2013
An international engineering company had several layers of professional indemnity insurance. The top later did not cover claims originating in the US or Canada. The several insurers now disputed apportionment of liability between them. The . .
Cited – B4U Network (Europe) Ltd v Performing Right Society Ltd CA 16-Oct-2013
Composers had entered an agreement with the respondent, assigning all copyrights in their works to the respondent. The respondent asserted also an equitable assignment of all future works. The appellant asserted that the rights in the particular . .
Cited – Arnold v Britton and Others SC 10-Jun-2015
Absurdity did not defeat a clear clause
A standard lease of plots on a caravan park, contained a provision which appeared to increase the rent by 10% in each year. The tenants argued that such a substantial increase could not have been intended.
Held: The tenants’ appeal failed . .
Cited – Rainy Sky Sa and Others v Kookmin Bank SC 2-Nov-2011
Commercial Sense Used to Interpret Contract
The Court was asked as to the role of commercial good sense in the construction of a term in a contract which was open to alternative interpretations.
Held: The appeal succeeded. In such a case the court should adopt the more, rather than the . .
Cited – Wood v Capita Insurance Services Ltd SC 29-Mar-2017
Construction of term of contract for the sale and purchase of the entire issued share capital of a company.
Held: The appeal was dismissed: ‘the SPA may have become a poor bargain, as it appears that it did not notify the sellers of a warranty . .
Cited – Lehman Brothers International (Europe) v Exotix Partners Llp ChD 9-Sep-2019
The parties had contracted to trade global depository notes issued by the Peruvian government. Each made mistakes as to their true value, thinking them scraps worth a few thousand dollars, whereas their true value was over $8m. On the defendant . .
Cited – Windsor-Clive and Others v Rees and Another ChD 18-Apr-2019
Claim for injunction to prevent interference with certain claimed rights over land.
Held: Some of the activities that the landlord proposed to carry out were permitted under the terms of the tenancy agreements; but others were not. . .
Cited – Barnardo’s v Buckinghamshire and Others SC 7-Nov-2018
The Court considered the interpretation of a clause in a pension scheme trust deed which defines the phrase ‘Retail Prices Index’ and which allows the trustees of the pension scheme to adopt a ‘replacement’ of the officially published Retail Prices . .
Cited – The Financial Conduct Authority (FCA) v Arch Insurance (UK) Ltd and Others ComC 15-Sep-2020
Test case to determine issues of principle in relation to policy coverage under various specimen wordings underwritten by the defendants in respect of claims by policyholders to be indemnified for business interruption losses arising in the context . .
Cited – The Financial Conduct Authority and Others v Arch Insurance (UK) Ltd and Others SC 15-Jan-2021
Many businesses, having been ordered to suspend business during the Covid-19 epidemic, sought to claim under business interruption insurance. The claims were rejected by the insurers and the insurers now appealed from a finding that they had been . .
Lists of cited by and citing cases may be incomplete.
Contract
Leading Case
Updated: 09 November 2021; Ref: scu.448090