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Interpretation of Contracts


Arnold (Respondent) v Britton and others (Appellants) [2015] UKSC 36 The Supreme Court recently decided upon a landlord and tenant dispute and emphasised the importance of the language set out in a contract. On the face of it, this seems like common sense but the decision is important because the Court placed more emphasis on the words than on the context (a slight deviation from previous decisions some would say). When interpreting a written contract, a court will try to identify the intention of the parties at the time the contract was formed. If the language of the contract is clear, then such language will suffice to determine the mutual intent of the parties.

In the above case, four out of the five judges upheld a clause in a 90 year lease which provided for an annual 10% increase in the cost of the service charge. They arrived at this decision even though a £2,500 service charge in 2015 would amount to £550,000 by 2072 if the annual increase was applied! The court recognised that this was an unsatisfactory outcome for the tenants but the four judges felt that the wording in the lease was clear. The fact that an arrangement has worked out badly or even disastrously is not a reason for departing from the natural meaning of the language. Neither is the fact that a certain term appears to be very imprudent.

General Rules for Interpretation

The courts will:

  1. look at the intent of the parties at the time of the contract;

  2. look at the language of the contract first to ascertain ‘intent’;

  3. where the language is clear (regardless of whether it makes commercial common sense) ‘intent’ will be derived from the contract;

  4. only look outside the contract where the language is ambiguous.

Conclusion

The Arnold decision emphasises the importance of having clearly drafted contracts, terms and conditions etc. Businesses which enter into contracts without reviewing them properly or those that copy terms and conditions from others, thinking one-size fits all, are exposing themselves to greater risks.

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.

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