Case law: Court ruling summarises new approach to interpreting commercial contract terms in contract disputes
Businesses arguing over the meaning of clauses in their commercial contracts will welcome a High Court ruling summarising the new approach to interpreting contractual terms recently established by the Supreme Court.
This update was published in Legal Alert - May 2016
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The Supreme Court ruled in 2015 that clear, unambiguous words in a contract should not be overturned merely because they are not commercially sensible – even if the outcome is commercially disastrous for one of the parties. It set out principles to be applied when interpreting commercial contract clauses.
These have recently been summarised and clarified in a recent legal ruling, as follows:
- The aim of the court in construing a commercial contract is to ascertain, objectively, the intention of the parties.
- For this purpose, the court must put itself in the position of a reasonable person in possession of all background information reasonably available to both (not just one of) parties at the time the contract was entered into.
- When unambiguous, ordinary language has been used in a contract, the court will normally give effect to that language. It will not rewrite a bad bargain, or change what was agreed just because it was imprudent, unwise or even if the outcome is disastrous for one of the parties. Particularly, it will not apply hindsight to determine whether or not an agreement is commercially sensible, and rewrite it.
- However, if words are not clear, the court may properly consider alternatives to the natural meanings of words used – although it should not specifically search for 'drafting infelicities'.
- When there are two (or more) possible interpretations of a word or phrase in a contract, the court will prefer that which made the most commercial sense at the time. However, commercial common sense and surrounding circumstances should not be used to override the importance of the words specifically chosen by the parties at the time.
- If a contract defines a word or phrase used, the court will usually take that definition as the meaning of the word or phrase whenever it is used in the contract. However, if it is clear that a defined term is intended to have a different meaning in one or more places in the contract, the court may deviate from that practice.
- Particularly, by testing the defined meaning of a word or phrase against the commercial consequences and the background facts, it may be open to the court (whether or not the contract was drafted by lawyers) to properly decide that the parties did not intend the definition in the contract to apply to the word or phrase in one particular part of the contract.
These principles show that, wherever possible, the courts will give words in a contract their natural meaning, whether or not it is commercially sensible.
- Businesses entering into commercial contracts should be aware of how the courts will now interpret them in the event of a dispute, and draft them accordingly to avoid uncertainty.
Case ref: Europa Plus SCA SIF & Anor v Anthracite Investments (Ireland) Plc  EWHC 437
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.
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