Month: May 2016

The decision of the Supreme Court last year in Arnold v Britton hinted at a shift in the thinking of the current Supreme Court justices in relation to the proper approach to the interpretation of contracts. In marked contrast to the scepticism of the Lord Hoffmann dominated House of Lords in relation to using the natural meaning of words as the starting point when interpreting a contract, the justices in Arnold showed themselves to be much more open to the utility of using natural meaning as an interpretative tool, and to not artificially creating ambiguities in the text of a contract in order to justify deviating from the natural meaning. Lord Neuberger referred in Arnold to the “sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it”, adding that this did not “justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning” (para 18). Since Arnold, there have been signs that there is also a receptiveness in the Scottish bench to a shift away from the choppy waters of Lord Hoffmann’s wide matrix of fact approach to the safer harbours of a more traditional approach. Such signs have manifested themselves again in the latest decision of the Inner House of the Court of Session on the subject, Hill v Stewart Milne Group Ltd [2016] CSIH 35 (in which the bench comprised Ladies Smith and Clark and Lord Brodie, the latter delivering the most substantial judgment).

Hill concerned a dispute about the interpretation of a clause (2.13) in a contract entitling the pursuers, the Hill brothers, to a stipulated monthly penalty (not challenged as unenforceable under the penalty rule) to be paid by the defenders, Stewart Milne Group Ltd and Gladedale (Northern) Ltd, for each month after March 2008 in which certain sewerage works of the defenders, to which a development of the pursuers’ was to be connected, remained to be “completed and commissioned”. The defenders argued that the works had been completed, while the pursuers denied this, the issue between the parties turning on the proper interpretation of the phrase “completed and commissioned”. The pursuers’ principal argument was that the proper interpretation of that phrase fell to be made by reference to another clause (2.9) in the parties’ agreement, which referred to a requirement falling on the defenders to notify the pursuers within twenty-one days of the sewerage system having “been fully completed to the satisfaction of all relevant statutory authorities”. Because the relevant statutory authority, Scottish Water, had identified snagging issues with part of the works remaining for some considerable time after March 2008, despite those works being otherwise operational, the pursuers contended that this meant that, under clause 2.13, the works remained incomplete and un-commissioned (and thus that the monthly penalty sum continued to be owed). At first instance, the Sheriff had found in the pursuers’ favour, holding that they were owed £345,000 for the ongoing delay in the completion of the works. On appeal, the Inner House overturned this finding, holding that the Sheriff had approached the interpretation of clause 2.13 incorrectly.

A number of points are noteworthy in the substantive judgment of Lord Brodie on the interpretative question:

(1) The starting point: Lord Brodie takes as his starting point on contract interpretation the succinct summary of Lord Neuberger in Arnold:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101,para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.”

Lord Hoffmann is quoted in this summary of Lord Neuberger, but it is noticeable that the summary also makes express reference to the “natural and ordinary meaning of the clause”, a concept for which Lord Hoffmann had no time whatsoever. There is also reference to “commercial common sense” (language described by Lord Hope in another case involving Stewart Milne as a “makeweight”), a concept to which further reference is made below. The mention of the idea of the natural meaning of the words of the contract as the very first of the matters listed by Lord Neuberger makes for a striking contrast with the approach of Lord Hoffmann, and the reference by Lord Neuberger to Lord Hoffman looks, in that light, to be something of a polite piece of judicial realpolitik, intended to recognise the extent to which the Hoffmann approach has bedded in, before his Lordship sets out a new, preferable approach, one in which the natural meaning of words figures prominently (albeit as only the first consideration among a number of others). That Lord Brodie should begin his own comments on interpretation by referring to Lord Neuberger’s views looks to this blogger to be a clear sign of receptiveness in the Inner House to the shift away from the Hoffmann approach.

(2) The order of the words used: A further sign of the somewhat more traditional approach favoured by Lord Brodie is that he makes use of the order in which words appear in the contract as signifying temporal succession. His Lordship takes the view that the phrasing “completed and commissioned” suggests that completion is to be understood to be a temporally prior event to that of commissioning:

“… looking to the natural and ordinary meaning of the phrase, it can be said that the systems were “completed and commissioned” by December 2008. That conclusion is reinforced if it is to be inferred from the order of the words that commissioning is something that comes after completion, as would seem to make sense. What I mean by that is that the word order suggests the stage indicated by “completed” is a stage necessarily prior to the stage indicated by “commissioned” (para 31).

This approach places store on the importance of the text of the contract as drafted, suggesting that it is entirely legitimate to view the words chosen by the drafters of the contract as the best evidence of the underlying intention of the parties. We are some way, in such an approach, from the liberal “red pen” attitude to drafting of Lord Hoffmann.

(3) Unconnected clauses – independent meanings: The most significant piece of traditional thinking is seen in Lord Brodie’s attitude to the relationship between the wording in clauses 2.9 and 2.13. The Sheriff had taken the view that, because the word “completed” appeared in both clauses, the concept of completion was to be interpreted in a “unitary” fashion (and therefore that completion could not be taken to have occurred until the conditions required for notification in clause 2.9 were met). While Lord Brodie agreed with the Sheriff that
“construing any particular contractual provision requires examination of the other provisions and that, as a matter of generality, it would be wrong to read a particular provision (here clause 2.13) in isolation”, his Lordship took the view that a unitary interpretation was not appropriate in the context of this contract. He notes that:

“the result of such an examination may be to find that the various provisions inter-relate to a greater or lesser degree. Some may be inter-dependant [sic]. Some may be free-standing. It will be more readily apparent that provisions are inter-dependant where their drafting is coherent and consistent.” (para 33)

This is an important point. Merely because a similar phrase is used in different clauses does not mean that it serves the same purpose and hence warrants the same interpretation. Clauses in a contract may well serve independent purposes, and thus ought to be interpreted in a way which does not presume that a similar phrase in them was necessarily intended to convey the same meaning in one context as in another. Summing up this point, Lord Brodie comments:

“… any expectation of coherence in a contract may have to give way before the actual wording used by the parties to it. Where the wording is consistent then it may be assumed that the meaning is intended to be consistent. It is different where the wording is not consistent.”

In this contract, the wording was not consistent: cl 2.9 spoke of a date when the works “have been fully completed to the satisfaction of all relevant authorities”, and tied the concept of “completion” in that clause to this date; cl 2.13 spoke of the works being “completed and commissioned”. The wording and the purpose of each clause was different.

Building on this analysis, Lord Brodie sums up with a very clear defence of the importance of treating different wording differently, in accordance with the natural meaning of the phrase in question (emphasis added):

“Generally, when one is construing a text of any sort, if different words or combinations of words are used then it is to be presumed that different meanings are intended. I accept that if the words used are unclear or the drafting is otherwise poor, the more ready the court can properly be to depart from their natural and ordinary meaning. However, that does not justify the court in searching for or constructing drafting infelicities in order to justify a departure from the natural meaning: see Lord Neuberger in Arnold at paragraph 18. The language of the provision being construed is of prime importance and its meaning is most obviously to be gleaned from that language: see Lord Neuberger in Arnold at paragraph 17. In other words the meaning of a provision is primarily to be understood from the natural and ordinary meaning of the actual words used.” (para 34)

The message is very clear, and the supporting reference to Lord Neuberger in Arnold very pointed. Lord Brodie adds a remark which will be of particular interest to those drafting contracts:

“If the intention was to link 2.13 back to 2.9, the draftsman could have used that expression again to import “fully completed to the satisfaction of all relevant statutory authorities” into the Longstop clause. The draftsman did not, however, do so. Whilst that may not be determinative, it certainly puts in question the sheriff’s “unitary” construction of the paragraphs under consideration.” (para 34)

So, if a similar though not identical phrasing is to be used in different parts of a contract, and a drafter wishes the phrases to bear the same meaning despite the difference in wording, a clear link will need to be made between the clauses to show that the same meaning is intended. Going further, of course, one might suggest that providing a definition clause in which the phrase in question is defined would be the surest way of preventing any dispute from arising in the first place.

(4) Commercial common sense: Lord Brodie undertakes a short discussion of the idea of the “commercially sensible” approach to contract interpretation. This blogger has shown a degree of scepticism in the past of the extent to which this concept may prove helpful to courts (given that parties will often be able to adduce perfectly reasonable but opposing commercially sensible considerations, which courts may not be best suited to arbitrate), and to some extent Lord Brodie’s judgment also reinforces the risk in using such a concept to reach a preferred interpretation of a contract. First, he notes that:

“The sheriff saw what she considered was the commercial purpose of the agreement as supporting her construction of clause 2.13 … With all respect to the sheriff, this seems to amount to no more than an assertion on her part with nothing much by way of underpinning in the findings-in-fact (presumably because no relevant evidence was led).”

To this blogger’s mind this criticism highlights that the perennial trotting out of the idea by courts in support of preferred outcomes may have created a culture where it is used in an unreflective way. If “commercial sense” is indeed a makeweight, as Lord Hope previously suggested, it is nonetheless one which, if referred to, will require some support from an analysis of the commercial considerations underpinning the contract.

Second, in discussing the parties’ conflicting suggested interpretations of clause 2.13, Lord Brodie appears to this blogger to suggest (in para 37) that the differing outcomes deriving from each interpretation might each be argued to have some commercial sense underpinning them. That being so, it is unsurprising that he appears ultimately to place no reliance on the conflicting arguments about commercial sensibility in reaching his preferred interpretation. In this blogger’s eyes, we have another example of a case where the vague concept of “commercial sensibility” has been shown to be of elusive assistance in a court’s deliberations.

Overall, this is an interesting and noteworthy decision of the Inner House. The result reached by Lord Brodie and his judicial colleagues looks to this blogger to be the right one. The decision does a number of things: (1) in general, it sets down a marker that the Court of Session appears to be receptive to the flow of contract interpretation doctrine in the Supreme Court away from the Hoffmann “wide matrix of fact” approach (in which interpretation and rectification became so blurred as to be almost indistinguishable) towards a more traditional approach in which the courts begin from the natural meaning of the words used, in the expectation that the parties intentions will usually best be found within the context of the words of the written contract; (2) it reminds us that, while the entire contract forms the context in which words in particular clauses are to be interpreted, similar phrases in unconnected clauses need not be interpreted in a uniform way; and (3) it also reminds us that citing commercial common sense is not some totem which can magically justify a specific interpretation. If commercial common sense is to be cited in support by a court, that court must explain clearly what the commercial factors at play are, and why they support a particular outcome; even then, when commercial common sense is examined, it may be found that equally plausible arguments can be advanced on each side of the debate, so that the concept furnishes no support to the interpretative task of the court.