22 April 2022

Most solicitors will at some stage have heard a client declaring the law (or the judge) to be an ass and decrying the general failure of the legal system to apply the concept of “common sense” when interpreting a contract. The underlying purpose of contractual interpretation is to give effect, so far as the legal system can do so, to the intention of the parties. It is their autonomous agreement which makes the contract binding and determines its interpretation. In theory, it is the courts’ role to maintain that notional contractual freedom of the parties by preserving “a bargain” that they themselves negotiated and in order to do so, judges are required to deploy the most appropriate interpretative methodology.

Although, the fundamental principles of contractual interpretation can seem to be relatively well established by case law, there can still exist tensions where the courts and legal practitioners attempt to rationalise the interpretations in light of, perhaps, somewhat subjective instincts.

Contractual Interpretation

Essentially, contractual interpretation is an objective exercise, which is neither purely textual nor wholly contextual.[1] In short, context is always relevant, but the words the parties have chosen should be given their primacy. As such, the courts will not, generally, resort to wider contextual considerations as an aid to construction of a contract. Unless… the natural meaning of the word is not clear - then and only then (in theory at least) the courts will resort to additional external considerations such as the factual background and, more importantly, the commercial common sense.

Little wonder, therefore, that questions of interpretation are often described as ‘matters of impression’[2] or ‘educated intuition’.[3] The difficulty is that reasonable views will often differ not only as to whether the language used in a contract is clear and unambiguous, but whether a particular interpretation is arguable at all, or perhaps as to which competing interpretation is most commercially sensible.

Commercial Common Sense

Commercial common sense is an interpretation tool, which requires courts to produce a commercially sensible result having regard to commercial and factual background known to both parties.[4]

This seems straightforward enough. However a problem with this approach, which essentially is rooted in judicial value judgement, is that “Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood”.[5] Needless to say, commercial reasonableness and commercial standards are irregular, that is, that they are not expressed as uniform values. Instead, they vary across different commercial contexts and across judicial opinion. This, in turn, gives room not only for a wide range of judicial outcomes, possibly even errors, and also makes the whole exercise of judicial interpretation less certain - one judge’s commercial common sense might be the other’s commercial absurdity.

Recent Case Law

In Ashtead Plant Hire v Granton Central Developments,[6] the Inner House focused on the importance of context and purpose as part of the iterative process of construction. In particular, the importance of commercial common sense which according to Lord Drummond Young, seemingly serves as a fundamental factor in the interpretative exercise (an “invaluable guide” – Para [17]). The approach adopted in Ashtead, was subsequently followed by Lord Tyre in the Coal Pension Properties Ltd v Technip UK Ltd,[7] as well as the Inner House in 3639 Ltd v Renfrewshire Council (albeit not explicitly).[8] All of these decisions seem to follow the same pattern of giving commercial considerations greater importance than the language used in the contracts.

To the contrary, Dragados (UK) Limited v DC Eikefet Aggregate[9] AS represents a slightly more conversative approach, with Lord Braid emphasizing the importance of objective meaning of the words of contract.

Conclusion

The courts are generally wary of the extent to which they will allow commercial common sense to determine contractual interpretation, though it is a consideration. However, a unified theory of contractual interpretation is still hard to find in Scotland at least. Given the uncertainty as to the weight given to particular factors used as an aid in contractual interpretation, the contracting parties should always ensure that they:

1. Continue to scrupulously examine the wording used in contracts. It is not the court’s role to save parties from a bad bargain and any possibility of this should be dealt with at the drafting stage.
2. Take great care throughout the drafting stage to ensure that the meaning intended by the parties would be objectively clear to an objective reader, independent of each party’s subjective perspective.
3. Use clear and straightforward language to minimise the risk of misunderstandings arising as a result of ambiguity and differing interpretations.

Sandra Jurak is a Solicitor with the Dispute Resolution Team at BTO Solicitors LLP. She regularly assists clients with a variety of contractual disputes. 

Sandra Jurak, Solicitor: sju@bto.co.uk / 0131 222 2939