In Patersons of Greenoakhill Ltd v Biffa Waste Services Ltd [2013] CSOH 18 Lord Hodge considered that the approach to interpreting ambiguous contractual terms was so well established that it hardly required restating. He summarised it at follows:
The court, when construing a contract, considers the language that the parties have used. It uses the concept of a reasonable 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. It ascertains what that reasonable person would have understood the parties to have meant by their use of that language. In doing so, the court has regard to the relevant surrounding circumstances, being the circumstances which were reasonably within the knowledge of both parties, or all of the parties in a multilateral contract. (Paragraph 14)
The Inner House of the Court of Session has recently reiterated the appropriateness of adopting a commercial common sense approach in the case of Grove Investments Limited v Cape Buildings Products Limited 2014 CSIH 43.This case involved a dispute about the construction of a lease. When the lease expired the tenants had not carried out works set out in a schedule of dilapidations which had previously been served on them together with a notice requiring them to carry out the works. The landlords therefore raised an action for damages.
However the parties disagreed about how the lease should be construed. The landlords argued that the tenants were obliged to make payment of the total value set out in the schedule of dilapidations, subject only to any challenges which the tenants had as to the proper ascertainment of that value. However the tenants argued that they were only liable to make payment of the loss which the landlords actually suffered as a result of the tenants' failure to implement their repair and maintenance obligations and make good the removal of any alterations and additions as required under the lease.
The tenants claimed that the landlords' interpretation could result in a recovery which did not represent the true loss suffered by them (for example, if the property was let to another tenant who required substantial alternations to be carried out, most of the reinstatement work included in the schedule of dilapidations might not be carried out and this would reduce the loss suffered by the landlords). This construction, they argued, would not give the lease the business common sense which the parties intended it to have. At first instance the Sheriff had found against the tenants and their first appeal to the Sheriff Principal had been unsuccessful. So the tenants appealed again to the Inner House.
The decision of the Inner House sets out a helpful review of the approach which should be taken when considering the construction of a contract and reaffirms that, where a contractual provision is capable of more than one meaning, the court should adopt the meaning that best accords with commercial common sense.
The Inner House referred to the approach set down by Lord Clarke in the Supreme Court case of Rainy Sky SA v Kookmin Bank [2011] UKSC 50 that a contract must be construed contextually. If a clause is capable of two meanings and neither will flout common sense, it is more appropriate to adopt the more commercial construction.
The Inner House also held that when construing a contract, courts should bear in mind that it is a cooperative enterprise entered into by parties for their mutual benefit. Contracts should be construed in such a way as to avoid excessive or disproportionate burdens falling on one party and so that parties receive benefits which might reasonably be expected. However, the courts cannot correct a bad bargain. Commercial predictability is usually an important feature. Therefore approaches which would impose arbitrary or unpredictable burdens and arbitrary or unpredictable benefits should also be avoided.
The rules of common law may be important to the contextual interpretation and they will usually achieve a result which accords with common sense. They can therefore serve as a benchmark for measuring considerations of fairness.
If parties to a contract become involved in a dispute about the correct interpretation where there is ambiguity in its terms, they should be mindful of which interpretation best accords with commercial common sense. The parties' views as to what this is may differ in the circumstances. However, the courts will look at the matter objectively considering the context of the contract.
