Prepared by Kysen PR

LSLA

Prepared by Kysen PR

Date10 August 2017
PublicationNew Law Journal

Type of publicationLegal

Some clarity on contracts

A recent Supreme Court case offers some valuable guidance on contractual interpretation, as Nikki Edwards explains

Wood v Capita Insurance Services Ltdclarifies the courts’ approach to contractual interpretation

Earlier this year the Supreme Court handed down judgment inWood v Capita Insurance Services Ltd[2017] UKSC 24, [2017] All ER (D) 182 (Mar)a case which clarified the approach of the English courts to contractual interpretation and emphasised that the recent history of the common law of contractual interpretation is one of continuity rather than change. This article considers the perceived inconsistency prior toWoodand the guidance for the legal profession which was confirmed in this case.

The need for clarification

Woodconcerned the interpretation of an indemnity clause in a sale and purchase agreement. The High Court decided the preliminary issue of the interpretation of the indemnity clause in favour of the appellant. This decision was overturned by the Court of Appeal.

In the Supreme Court, the appellant sought to argue that the Court of Appeal had fallen into error because it had been influenced by a submission thatArnold v Britton[2015] AC 1619 had ‘rowed back’ from the guidance on contractual interpretation which the Supreme Court gave inRainy Sky SA v Kookmin Bank[2011] 1 WLR 2900. The appellant’s position was that this had caused the Court of Appeal to place too much emphasis on the words of the sale and purchase agreement and to give insufficient weight to the factual matrix.

“The key is to strike a balance between the various factors”

Prior to this judgment, many commentators had suggested that the test set out by the Supreme Court inArnolddiffered from the approach inRainy. TheRainyjudgment came first and was seen to favour the ’business common sense’ approach, emphasising the importance of the commercial context in choosing between alternative interpretations. TheArnoldjudgment focused on the words used and their natural meaning, appearing to take away the emphasis from the wider factual matrix.

How has the law changed?

It hasn’t. Counsel for the appellant was not permitted to develop the point in oral submissions as the court did not accept the proposition thatArnoldhad amended the guidance given inRainy. In the judgment, Lord Hodge was very clear thatArnoldhad not altered or been a recalibration of the guidance given inRainyand in fact, on the approach to contractual interpretation, both cases were saying precisely the same thing.

What approach will the court take?

The judgment inWoodwas clear that there was no need to reformulate the guidance given inRainyandArnoldbut it does provide a useful summary of that guidance and the approach that the court will take.

When considering the meaning of a clause, the court must consider the contract as a whole. This requires reading the language in dispute and the relevant parts of the contract that provide context. The court should also look at the factual background and implications of rival constructions as well as undertaking a close examination of the relevant language in the contract. The weight given to the wider context will depend on the nature, formality and quality of the drafting.

The key is to strike a balance between the various factors. Lord Hodge refers to textualism and contextualism as tools that can be used by the legal profession and the courts to ascertain the objective meaning of the relevant clause. Importantly, he clarifies that when striking a balance between these two it does not matter which way round they are used, so long as the court balances the indications given by each. This is a message that was not clear from the apparently conflicting decisions inArnoldandRainy.

The extent to which each tool will assist with the exercise depends on the specific circumstances of the contract in question. As a general rule, with sophisticated and complex agreements that have been negotiated and prepared with the assistance of skilled professionals, the court is more likely to be assisted by a textual analysis. Conversely, informal and brief agreements that have not benefited from skilled professional assistance are likely to require a greater emphasis on the factual matrix.

However, as with all rules of thumb, there are exceptions. While the drafting of the clause is relevant, the court must also be alive to the commercial reality of the difficulties with negotiations. There are plenty of reasons why negotiators of complex contracts may not achieve logical and coherent text. Parties agree to things which with hindsight do not serve their best interests, provisions are often ambiguous because negotiators are not able to agree more precise wording and often much of a contract is a reluctant compromise. A contextual analysis will take account of all of these circumstances.

Conclusion

Although this case provides clarity in relation to the approach the court will take when interpreting an ambiguous clause, it does not provide practitioners and businesses with any greater certainty about the likely outcome of that exercise. The court will continue to use all available tools to seek to ascertain the objective meaning of the language in a contract but there is no easy-to-follow flow chart. Each case will depend on its own facts and ambiguity in contracts will continue to bring cases to the courts.

Nikki Edwardsis a partner atTemple Brighta London Solicitors Litigation Association (LSLA) committee member