New Privy Council decision on interpretation of contract

On 19th November, the Privy Council handed down its judgment in the case of Krys v KBC Partners LP [2015] UKPC 46, available here. The Privy Council reach a decision on the complex contract provisions which accords with the natural meaning of the words, which they find to be unambiguous even if they lead to economically harsh results for one of the parties.

Worthy of particular note is a remark of Lord Sumption (for the majority) in response to an argument that the apparent language of the contract would have an extraordinary result for a class of partners, because it would leave them with nothing more than their nominal capital contributions, however valuable the investments remaining in their hands: his Lordship comments that “[e]ven if the Board regarded these consequences as absurd, such arguments have limited force in the face of the clear language of the articles” (para 15). This constitutes a clear application of the natural meaning of words in a case where the terms of the contract give no cause to doubt their apparently clear meaning.

Also worthy of note are further comments of Lord Sumption in which he observes that the idea of commercial common sense or wisdom would be hard to bring to bear on the facts of the case before their Lordships: “It is far from clear by what standards of commercial normality any particular provisions are to be measured. There is little to be gained by imagining more or less far-fetched examples of cases in which the articles of partnership would operate harshly if construed according to the ordinary meaning of the words …” (para 16).

Lord Mance dissents, believing that the majority pay too much attention to the natural meaning of the words, and not enough attention to the context as a whole (para 18). One might imagine Lord Hoffmann having made similar remarks, but it is not a view which persuades the majority.

Coming after the cautious Supreme Court decision in Arnold v Britton (the subject of analysis in the forthcoming January 2016 edition of the Edinburgh Law Review), an observer of current trends in the field of contractual interpretation might venture to suggest we seem to be seeing something of a shift away from a heavy reliance on commercial common sense and on a wider contextual approach, at least where the wording of the contract appears to be unambiguous to the court. If this is not quite a resurgence of the traditional “natural meaning” approach to interpretation, it may at least be a reining in of the Hoffmann approach developed in ICS v West Bromwich Building Society. Future decisions in this field will be watched with interest.

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