Supreme Court on contractual interpretation: striking a balance between the language used and the commercial implications

In a judgment handed down yesterday (29 March), the Supreme Court has unanimously dismissed an appeal relating to the construction of an indemnity clause: Wood (Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24.

The Supreme Court emphasised that it did not seek, once again, to reformulate the guidance to the legal profession, noting that its judgments in Arnold v Britton [2015] AC 1619 (considered here) and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 (considered here) provide sufficient statements of this nature.

Rainy Sky and Arnold are often seen as pulling in opposite directions, with the former having given a greater role to commercial common sense in interpreting contracts, while the latter re-emphasised the importance of the natural meaning of the words used.

The present judgment, however, emphasises the common ground, commenting that they were in fact saying the same thing – namely that interpretation is a unitary exercise, in which a balance must be struck between the indications given by the language used (in both the clause under scrutiny and the remainder of the contract) and the implications of rival constructions (which is usually thought of as the business common sense approach). Interestingly, Lord Hodge said that in striking a balance between these two tools to construction it does not matter which way round they are used, so long as the court balances the indications given by each.

The decision does however emphasise that the weight to be given to each tool will depend on the circumstances. Some agreements may be successfully interpreted by textual analysis, eg because they have been professionally drafted and their meaning is clear. Others may require a greater emphasis on the commercial background and implications to interpret a disputed provision. It also emphasises, in line with Arnold, that business common sense can only be taken so far, remembering that one side may have agreed to something which with hindsight did not serve his interest. It is not the role of the court to save the parties from a bad bargain.

For more detail on the decision, see our Banking litigation e-bulletin, or for more on contractual interpretation see What does your contract mean? How the courts interpret contracts from our Contract disputes practical guides series.

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