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Articles | Fri 21st Jul, 2017
There have been several decisions in the Supreme Court in recent years which consider the proper principles applicable to contractual interpretation. The recent decisions of the Supreme Court, particularly those in Rainy Sky SA v Kookmin Bank  1 WLR 2900 and Arnold v Britton  AC 1619, were intended to clarify the law. However, they arguably led to a degree of confusion in the lower courts and a greater perceived scope for argument among solicitor and advocates. The principles were revisited in Wood v Capita Insurance Services Limited and the Supreme Court has now clarified the issue.
In Rainy Sky, Lord Clarke held that where there were competing interpretations of a contractual clause the court was entitled to choose the interpretation which aligned most closely with commercial common sense. That decision did not appear to present a change in the law, practical commercial considerations have always been a factor courts have considered. However, the decision occasionally led to courts below approaching the exercise of interpretation the wrong way. As soon as a clause was ambiguous, which most disputed clauses will involve to some degree, commercial common sense was seen to be the starting point – in some cases overriding the natural meaning of the contract phrasing.
Thus in Arnold the Supreme Court tried to provide guidance on the matter. Unfortunately, the judgment from Lord Neuberger led practitioners to argue that courts should focus on a more literal approach to contractual interpretation, and less emphasis be placed on commercial common sense.
Lord Hodge appears to have put the matter to rest in his judgment in Wood v Capita Insurance Services Limited  UKSC 24. Lord Hodge rejected the idea that Arnold and Rainy Sky say different or conflicting things. He stated “textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation in the field of contractual interpretation”. Instead they are tools to understand the “objective meaning of the language which the parties have chosen to express their agreement”. This confirms that, while there are principles of construction, there are no rules, as such, as to which take precedence. The court must consider the contract as a whole (textualisation) and give more or less weight to elements of the wider context (contextualisation) in reaching its view as to that objective meaning.
It may be that greater emphasis is given to textual analysis in complex, detailed contracts and commercial context will play a greater role where the agreement is more informal or lacks detail and thus the court has to consider what the parties intended by looking at the wider context. Ultimately, Lord Hodge has made clear that every case will be decided on its own facts regarding interpretation.
In Woods the Supreme Court had to consider competing interpretations of an indemnity provision in a shared purchase agreement. Capital bought Sureterm Direct Limited under a sale and purchase agreement (SPA), Mr Wood had been a majority shareholder and was a Director of Sureterm. Under terms of the SPA the Sellers gave warranties to:
“The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service.”
Following the acquisition, Capita discovered that Sureterm had possibly mis-sold insurance to customers. The FSA was informed and a remediation scheme was put into place for customers affected. Capita subsequently sought to recover this sum from Wood under the indemnity above. Wood disputed the claim on the basis that the indemnity did not apply because the compensation resulted from Sureterm self-reporting of mis-selling to the FSA, as opposed to a claim or complaint by Sureterm’s customers to the FSA.
The Supreme Court held that the natural meaning of the language used in the contract and the overall context of the agreement favoured a more restrictive interpretation of the clause. The indemnity provision as drafted was part of an overall risk allocation regime within the SPA and as such had to be read in conjunction with the extensive warranties in the document. Therefore, a narrowly construed indemnity was not contrary to commercial common sense when considered in light of those wider, but time limited, warranties.
This decision emphasises the importance of interpreting provisions for warranties, indemnities, limitation and exclusion clauses/provisions alongside each other and in the broader commercial context of the bargain. Further, this case demonstrates the importance of precise and careful drafting and ensuring a contract works as a cohesive whole.