Contract terms and bad bargains – goodbye to commercial common sense?

Fri 19th Feb 2016

Two recent Supreme Court decisions have shown a marked shift away from the Court stepping in to achieve a result that reflects commercial common sense.

The first case (Arnold v Britton and others [2015] UKSC 36) involved the interpretation of a service charge clause in a lease of a holiday chalet. Each lease was for a term of 99 years from 25 December 1974. The annual service charge was stated to be an initial £90 (in 1974), increasing at a compound rate of 10% every year. The effect of this was that by 2072, the tenants would be paying a service charge of around £550,000 per annum.

The tenants argued that, on its literal construction, the clause made no commercial sense. They relied on previous cases which had held that if a literal analysis of the words used would lead to a conclusion that flouts business common sense, the clause should instead be interpreted so as to lead to a commercially sensible result.

The Supreme Court disagreed. It held that the wording used in the service charge clause was clear. A reasonable person would understand exactly how the amount of the service charge would be calculated each year. It did not matter that this led to disastrous consequences for the tenants. The language used in the contract should not be diluted or construed in order to yield to commercial common sense. Commercial common sense should in any event be judged at the date that the contract was entered into, not by reference to events as they subsequently unfolded (and some readers will recall the high inflation of the 1970s and 1980s when a 10% annual increase would not have raised many eyebrows). The natural meaning of the words used in the drafting therefore prevailed. The Court made it clear that it would not step in to save a party from imprudence or poor advice, even if that meant a harsh result for the chalet tenants. The Court’s reluctance to step in and save a party from a commercially undesirable result was seen again in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72.

Once again, the Supreme Court refused to throw a lifeline to save a party from a bad bargain. Marks and Spencers served a break notice pursuant to a lease and then sought to recover from the landlord rent that it had paid quarterly in advance. Marks and Spencers argued that such a term should be implied in order to give the lease business efficacy.

Again, the Supreme Court disagreed. It looked at the express words used in the lease and found that these were clear. The intention of the parties could be discerned from reading the language the parties had chosen to use, notwithstanding that this would yield an uncommercial result for Marks and Spencers. It was not therefore necessary to consider whether a further term should be implied – the Court will only do so if the meaning of the contract is not clear having construed the express words and without such an implied term the contract would lack commercial or practical coherence. The Court will not step in and imply a term merely because it looks fair with the benefit of hindsight.

The lesson to be learnt from these cases is that care must be taken to get the wording of a contract right in the first place. Make sure that terms are drafted clearly and unambiguously. The Court will no longer interpret a badly drafted clause in a way that leads to a commercially sensible outcome or imply a term to achieve such a result. Parties will instead be held to bad bargains that they have made.