News & Insights

A significant proportion of legal disputes between parties involve the meaning of contracts made between them.  Often, the dispute concerns the meaning of standard terms which have been incorporated into the contract.  But do the words actually used mean what the parties intended them to mean, and how do the courts approach the issue of interpretation when there is a dispute about meaning?

Traditionally, English law has adopted a purposive and commercial approach to the interpretation of written contracts.  This is an objective exercise.  The words used are key and the courts have no interest in what the parties thought they had agreed.  Therefore pre-contractual negotiations are irrelevant.  The courts will seek to identify the parties’ intentions by considering the meaning that the contract would have to a reasonable person having all the background knowledge that would have been available to the parties at the time the contract was made.

However, in Arnold v Britton [2015] UKSC 36 the Supreme Court placed more reliance on the literal meaning of the words used.  The court was dealing with the interpretation of a service charge provision in a lease of a holiday home.  The clause in question provided for the tenant to pay a proportionate part of the expenses and outgoings incurred by the landlord to repair, maintain and renew facilities and provide services.  The service charge in the first year was £90 but the lease provided for that to be increased by 10% per year on a compound basis.  The consequence of that increase would mean the tenant would be paying £3,366 per year by 2012, and £1,025,004 per year by 2072.

The tenant argued that this was not the intention, and that the clause should have had the effect of imposing a maximum on the service charge recoverable from them.  The Supreme Court disagreed.  The court held that there was only one literal interpretation of the wording which had been used, and that it had to be given effect to.  The court also held that the purpose of interpretation is to identify what the parties have agreed, not what the court considers they should have agreed, and the court will be slow to reject the meaning of a provision because one of the parties made a bad bargain.

The main learning from Arnold is the importance of careful drafting of any document which is going to create a legally binding relationship between parties so as to ensure that the words used mean what they are intended to say.

If you would like any further information with regard contracts please contact Rob Kelly on r.kelly@laceyssolicitors.co.uk or 01202 755980.