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11 November 2020 – 10 February 2021

UNIVERSITY COLLEGE LONDON

FACULTY OF LAWS

INTERPRETING COMMERCIAL CONTRACTS

OUTLINE

Richard Calnan

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PRINCIPLES OF CONTRACTUAL INTERPRETATION

(Taken from Calnan, Principles of Contractual Interpretation (Oxford University Press, 2nd edition. 2017)

Principle 1: The purpose of contractual interpretation is to establish the intention of the parties to the contract. This is done objectively: what would a reasonable person understand their common intention to be from what they have written, said and done?

Principle 2: Where the contract is in writing, it is the writing which is the primary source of the parties’ objective intention.

Principle 3: Contracts are read as a whole.

Principle 4: Contracts are read in the context of their background facts. These are the facts reasonably available to the parties which are relevant to establishing how a reasonable person would understand what the parties intended by the contract when it was entered into.

Principle 5: Words are nearly always given their ordinary meaning in their context.

Principle 6: If words are ambiguous in their context, they are given the meaning the parties are most likely objectively to have intended.

Principle 7: Very occasionally, it is clear that the parties cannot objectively have intended words they have used to have their ordinary meaning. If so, they are given the meaning which the parties must objectively have intended. The more unreasonable the result, the more unlikely it is that the parties can have intended it.

Principle 8: Words are implied into a contract if the parties must objectively have intended them. This will be the case either if they are so obvious that there was no need to express them, or if they are necessary to make the contract work in a business context.

Principle 9: If a written contract does not record the parties’ common intention at the time it was entered into, it will be amended to reflect that intention.

Principle 10: If the parties to a contract have dealt with each other on the basis of a common understanding about the meaning or effect of the contract, that interpretation will bind them if it would be unjust to go back on it.

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SEMINAR ONE

11 November 2020 at 12.45-14.00

What is contractual interpretation, why is it important and why is difficult?

1 What is contractual interpretation?

Principle 1: The purpose of contractual interpretation is to establish the intention of the

parties to the contract. This is done objectively: what would a reasonable person

understand their common intention to be from what they have written, said and done?

The common law approach is described by Lord Steyn in Deutsche

Genossenschaftsbank v Burnhope [1995] 1 WLR 1850 at 1587:

“It is true the objective of the construction of a contract is to give effect to the

intention of the parties. But our law of construction is based on an objective

theory. The methodology is not to probe the real intentions of the parties, but to

ascertain the contextual meaning of the relevant contractual language. Intention

is determined by reference to expressed rather than actual intention.”

This can be contrasted with Article 4.1 of the Unidroit Principles of International

Commercial Contracts (2010 edition), which says:

“(1) A contract shall be interpreted according to the common intention of the

parties.

(2) If such an intention cannot be established, the contract shall be interpreted

according to the meaning that reasonable persons of the same kind as the

parties would give to it in the same circumstances.”

2 Why is contractual interpretation important?

Didymi Corporation v Atlantic Lines (The Didymi) [1988] 2 Lloyd’s Rep 108

Didymi Corporation owned a bulk carrier which they chartered to Atlantic Lines for five

years at a daily hire of $5,800 during the first year, rising to $7,000 during the last

period of the charter.

Clause 30 of the charterparty provided:

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(1) The …. speed and fuel consumption of the vessel as stipulated in this charter-

party are representations by the owners. Should the actual performance of the

vessel taken on an average basis throughout the duration of this charter-party

show any failure to satisfy one or more of such representations, the hire shall be

equitably decreased by an amount to be mutually agreed between owners and

charterers ….

(2) The owners stipulate that the vessel is capable of maintaining in good weather

conditions and shall maintain throughout …. this Charter … a guaranteed

average of 15.5 knots … on a guaranteed daily consumption of 40/41 long

tonnes of best grade fuel oil …..

(3) …. if it is found that the vessel has failed to maintain as an average … the speed

and/or consumption stipulated …. the charterers shall be indemnified by way of

reduction of hire in accordance with paragraph 1 …

(4) Similarly if it is found that the vessel has maintained as an average … a better

speed and/or consumption … owners shall be indemnified by way of increase of

hire, such increase to be calculated in the same way as the reduction provided in

the preceding sentence …

The owners claimed that the vessel had maintained a better speed and consumption

during the charter than stipulated in clause 30(2). Are they entitled to an increase in

the charter hire?

3 Why is contractual interpretation difficult?

Fitzhugh v Fitzhugh [2012] 2 P & CR 14.

This was a family dispute. Harry and Anthony were brothers and were the surviving

administrators of the estate of the their late father. They granted a licence to Anthony

and his partner Karen to use various farm outbuildings and fields in consideration for

an annual licence fee of £1.

The licence was a short document. It defined the “Licensor” to mean Harry and

Anthony, and the “Licensee” to mean Anthony and Karen. Under clause 4(b), the

licence immediately terminated if:

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“the Licensee commits any grave or persistent breaches of this Licence and the

Licensor having given written notice to the Licensee of such breach or breaches

the Licensee fails… to rectify such breaches…”.

Anthony and Karen failed to pay the annual licence fee of £1 for seven years.

Solicitors acting for Harry served a notice on Anthony and Karen requiring them to

remedy those persistent breaches by paying the arrears of £7. Anthony and Karen

failed to do so. Harry therefore contended that the licence had terminated under clause

4(b).

Anthony argued that the notice was not a valid notice under clause 4(b) because that

could only have been given by both Harry and Anthony as the “Licensor”.

Harry argued that, in clause 4(b), “Licensor” must exclude Anthony because he was the

Licensee.

Is the notice valid?

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SEMINAR TWO

18 November 2020 at 12.45-14.00

Interpretation and rectification: what is the difference and why does it matter?

1 What is contractual interpretation?

Principle 1: The purpose of contractual interpretation is to establish the intention of the

parties to the contract. This is done objectively: what would a reasonable person

understand their common intention to be from what they have written, said and done?

2 What is rectification?

Principle 9: If a written contract does not record the parties’ common intention at the

time it was entered into, it will be amended to reflect that intention.

3 Example: Chartbrook v Persimmon Homes [2009] 1 AC 1101

Chartbrook owned a development site, and entered into an agreement with Persimmon

for the development of the site. Persimmon would obtain planning permission,

construct the development and sell the properties on long leases and, from the

proceeds, pay Chartbrook an agreed price for the land. The main element of the price

was to be established by a simple formula. There was also a provision for the payment

of an additional residential payment, and the question in dispute was the amount of that

payment.

The additional residential payment was expressed to be:

“23.4% of the price achieved for each residential unit in excess of the minimum

guaranteed residential unit value less the costs and incentives.”

Chartbrook argued that what this meant was that you took the price achieved,

deducted the minimum guaranteed residential unit value and the costs and incentives

and then calculated 23.4% of the result.

Or: ARP = 23.4% x (PA – (MGRUV + C & I))

Persimmon argued that you deduct the costs and incentives from the realised price to

arrive at the net price, then calculate 23.4% of that price, and the additional residential

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payment is the excess of that figure over the minimum guaranteed residential unit

value.

Or: ARP = (23.4% x (PA – C & I)) – MGRUV

Who is correct?

Chartbrook also claimed rectification of the contract. By exchange of letters, the

parties had agreed the basis for the calculation of the additional residential payment,

and those provisions were then drafted into the written contract. Persimmon argued

that rectification was not possible because the document as drafted represented their

understanding of the exchange of letters. So there was no mistake. Chartbrook

argued that the agreement did not reflect the agreement objectively reached in the

exchange of letters. In other words, they argued that a subjective mistake was not

necessary – all that was required was that the agreement as signed did not reflect the

objective agreement previously entered into.

Who is correct?

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SEMINAR THREE

25 November 2020 at 12.45-14.00

Freedom of contract: penalties, entire agreement clauses and variation clauses

1 Principle 2: Where the contract is in writing, it is the writing which is the primary source

of the parties’ objective intention.

2 Entire agreement clauses

As its name suggests, an entire agreement clause is intended to put beyond doubt the

question as to what constitutes the contract between the parties. At its simplest (and

most are more complex than this), it will state that the document is the entire agree-

ment between the parties, and therefore that any prior written or oral arrangements be-

tween the parties do not form part of the contract. In addition, it will also normally seek

to ensure that any such statements will not give rise to any liability as non- contractual

representations, whether in equity (to rescind the contract) or in tort.

If a clause states that the document is to be the entire agreement between the parties,

then that is what it is. The agreement is what the parties intend it to be, and the entire

agreement clause makes it very clear what their intention is. In Inntrepreneur Pub Co v

East Crown [2000] 2 Lloyd’s Rep 611 at 614, Lightman J said: ‘Such a clause

constitutes a binding agreement between the parties that the full contractual terms are

to be found in the document containing the clause and not elsewhere …’

3 Variation clauses

MWB Business Exchange Centres v Rock Advertising [2018] UKSC 24

MWB operated managed office space in London. Rock occupied part of the space as

a licensee. The licence agreement contained a provision which said:

“All variations to this Licence must be agreed, set out in writing and signed on

behalf of both parties before they take effect.”

Rock owed £12,000 arrears of licence fees. MWB exercised a contractual power to

terminate the licence and locked Rock out of the premises. MWB then brought a claim

against Rock for the arrears.

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Rock had made an oral agreement with MWB’s credit controller to re-schedule the

licence fee payments to clear the arrears and it had paid the amount required in order

to comply with the revised payment schedule. Rock therefore denied liability.

What is the position?

4 The rise and fall and resurrection of freedom of contract

Cavendish Square Holding v Makdessi; ParkingEye v Beavis [2016] AC 1172

Makdessi

This case involved the sale of shares by a seller to a buyer, the effect of which was to

give the buyer control of the company. The agreement provided for further

consideration to be paid at various stages after completion, including an Interim

Payment and a Final Payment.

Clause 5.1 provided that:

“If a Seller becomes a Defaulting Shareholder he shall not be entitled to receive

the Interim Payment and/or the Final Payment which would other than for his

having become a Defaulting Shareholder have been paid to him and the

Purchaser’s obligations to make such payment shall cease.”

A Seller became a Defaulting Shareholder if he breached various provisions of the

agreement, including a restrictive covenant.

The question was whether clause 5.1 was void as a penalty.

ParkingEye

A motorist parked his car in a car park, the terms of which provided for free parking for

2 hours and then the payment of £85 if the car over-stayed the period. The question

was whether this was a penalty.

Were they penalties?

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SEMINAR FOUR

December 2020 at 12.45-14.00

How do you read a contract as a whole?

1 Principle 3: Contracts are read as a whole.

2 Example 1: Thorney Park Golf v Myers Catering [2015] EWCA Civ 19

Myers agreed to provide catering services at Thorney Park’s golf club. It was a short

contract, drafted by a non-lawyer.

Clause 4 said that: “In order for this contract to be reasonable for both parties to

develop and invest in a viable business development plan an initial term of three

years…must be agreed.”

Clause 6 provided that the club could terminate the agreement immediately on certain

breaches by Myers. “Otherwise either party may terminate this agreement without

given reason in writing giving four months notice or any such period that is mutual to

both parties.”

Can the club terminate the agreement by giving four months notice during the first

three years?

3 Example 2: Re Sigma Finance [2010] 1 All ER 571

Sigma was a structured investment vehicle which got into financial difficulties, as a

result of which receivers were appointed over all of its assets under a security trust

deed. Unusually, the company’s obligations were not accelerated on the appointment

of the receivers. Instead, the trustee had a sixty day period to realise the companies

assets and to divide them into pools for the benefit of its secured creditors. This was

because the secured creditors were divided into various classes – including a short

term class and a number long term classes.

Under clause 7.6 of the security Trust Deed, the trustee had to use its reasonable

endeavours to establish pools of assets to represent the various classes, and it had the

power to deal with the charged assets in order to do so. The last sentence of clause

7.6 said:

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“during the Realisation Period the Security Trustee shall so far as possible

discharge on the due dates therefor any Short Term Liabilities falling due for

payment during such period, using cash or other realisable or maturing Assets of

[the company].”

It proved impossible to save the company, and the short term creditors argued that

they were entitled to be paid before the long term creditors in accordance with the final

sentence of clause 7.6. The long term creditors argued that the trust deed envisaged

that all the secured assets would be segregated into the various pools and then

applied, pari passu within those pools, and that a literal reading of the last sentence of

clause 7.6 would cut across that intention.

Who is correct?

4 Example 3: Orion Finance v Crown Financial Management [1986] BCC 621

Orion Finance made computers available to Atlantic Computers on hire purchase on

the basis that the computers would be leased by Atlantic Computers to Crown

Financial Management. The hire purchase agreement between Atlantic and Orion

provided that Atlantic would assign the benefit of the lease rentals to Orion by way of

security for Atlantic’s obligations under the hire purchase agreement. Atlantic entered

into an assignment which was, on its face, absolute. The assignment was not

registered at Companies House.

Atlantic subsequently went into liquidation and Orion claimed the rentals from Crown.

Atlantic’s liquidators claimed that the assignment was by way of security and therefore

void for non-registration. Is the assignment effective?

The Court of Appeal held that the assignment was void because it has not been

registered. Although it was expressed to be an absolute assignment, in the context of

the transaction documents as a whole, it was clearly intended to be a security interest.

Who is correct?

5 Is there is a presumption against superfluity?

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SEMINAR FIVE

9 December 2020 at 12.45-14.00

To what extent are surrounding circumstances used in the interpretation of a

contract?

1 Principle 4: Contracts are read in the context of their background facts. These are the

facts reasonably available to the parties which are relevant to establishing how a

reasonable person would understand what the parties intended by the contract when it

was entered into.

2 Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building

Society [1998] 1 WLR 896 at 913 said:

“The principles [of interpretation] may be summarised as follows:

(1) Interpretation is the ascertainment of the meaning which the document

would convey to a reasonable person having all the background knowledge

which would reasonably have been available to the parties in the situation in

which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce at the

“matrix of fact”, but this phrase is, if anything, an understated description of what

the background may include. Subject to the requirement that it should have been

reasonably available to the parties and to the exception to be mentioned next, it

includes absolutely anything which would have affected the way in which the

language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous

negotiations of the parties and their declarations of subjective intent. They are

admissible only in an action for rectification. The law makes this distinction for

reasons of practical policy and, in this respect only, legal interpretation differs

from the way we would interpret utterances in ordinary life. The boundaries of

this exception are in some respects unclear. But this is not the occasion on

which to explore them. ……………….

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3 But some background facts are excluded from the available evidence.

These include:

prior negotiations: Chartbrook v Persimmon Homes [2009] 1 AC 1101. Lord

Hoffmann said (at [42]):

“[t]he rule excludes evidence of what was said or done during the course of

negotiating the agreement for the purpose of drawing inferences about what the

contract meant. It does not exclude the use of such evidence for other purposes:

for example, to establish that a fact which may be relevant as background was

known to the parties ….”

subsequent conduct: Schuler v Wickman Machine Tools Sales [1974] AC 235.

The courts are also less ready to accept detailed evidence from outside the written

contract in circumstances where people are likely to have interests in the contract who

were not involved at the time it was entered into.

4 Example 1: Bank of Scotland v Dunedin Property Investment Company 1988 SC

657

A company raised money by issuing fixed rate loan stock to a bank. In order to protect

itself against interest rate fluctuations, the bank entered into a swap contract with a

third party. The loan stock deed enabled the company to redeem the stock early,

subject to reimbursing the bank for all expenses incurred by it “in connection with” the

stock.

The company gave notice to redeem the stock early. The bank therefore terminated

the swap contract and then claimed the (substantial) cost of doing so from the

company, on the basis that it was an expense incurred “in connection with” the stock.

Is the company entitled to the money?

5 Example 2: BNY Mellon v LBG Capital [2016] 2 Lloyd’s Rep 119

In this case, the court had to consider the extent to which background facts can be

used when interpreting transferrable bonds. When interpreting a bond, is the court

entitled to look at associated documents which were issued at the same time? And,

because the instrument was intended (and this was clear from its face) to count as part

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of the capital of the issuer, could the court look at the regulations which prompted it and

the regulatory policy of the relevant financial regulator?

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SEMINAR SIX

13 January 2021 at 12.45-14.00

What do words mean?

1 Principle 5: Words are nearly always given their ordinary meaning in their context.

2 Example 1: The Aragon [1977] 1 Lloyd’s Rep 343

The parties entered into a charterparty to carry out a round trip from Europe to the east

coast of North America and then back. The charterparty only allowed the charterer to

use the vessel within “USA East of Panama Canal”. The question at issue was

whether the US Gulf was within that limit. By referring to an atlas, it transpired that the

US Gulf is in fact to the west of the meridian of longitude on which the Panama Canal

stands. Is a trip to the US Gulf within the charterer’s limits?

3 Example 2: Enviroco v Farstad [2011] 1 WLR 921

The case involved a dispute between the owners of a vessel and a charterer, the

outcome of which depended on whether a company described as the contracts was –

or was not – a subsidiary of a plc. In the Contract, “subsidiary” was defined by

reference to the Companies Act. There is no doubt that the contractor was a

subsidiary of the plc until such time as it created security under Scottish law over its

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shares in the contractor in favour of the bank as security for a loan. Under Scottish

law, the security had to be effected by the entry of the bank’s nominee on the register

of members of the contractor.

The owners accordingly argued that the contractor was not a subsidiary of a the plc

because the relevant provisions of the Companies Act only applied where the plc was a

“member” of the contractor, and the plc had ceased to be a member of the contractor

when it created security over the shares and the bank’s nominee was entered on the

register. That nominee was the member, not the plc.

The charterer argued that, on any sensible view of the facts, the charterer remained a

subsidiary of the plc even though it had created security over the shares in favour of

the bank.

Who is correct?

4 Canons of Construction:

eiusdem generis

contra proferentem.

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SEMINAR SEVEN

20 January 2021 at 12.45-14.00

How do we deal with ambiguity?

1 Principle 6: If words are ambiguous in their context, they are given the meaning the

parties are most likely objectively to have intended.

2 Two questions:

What do we mean by ambiguity?

How do we deal with it?

3 Example 1: Rainy Sky v Kookmin Bank [2011] 1 WLR 2900:

The case concerned the interpretation of an advance payment bond issued by a bank

to the buyer of a vessel. The buyer had contracted with a shipbuilder for the

construction and purchase of the vessel. It had to pay instalments of the purchase price

during construction of the vessel. The purpose of the advance payment bond was to

secure the repayment of the instalments. The shipbuilder got into financial difficulties

during the construction of the vessel, but it refused to repay the instalments paid by the

buyer; and the buyer therefore claimed repayment from the bank. The bank denied

liability.

Paragraph 1 of the bond referred to the shipbuilding contract. Paragraph 2 then said

that pursuant to the terms of the shipbuilding contract:

you [the buyer] are entitled, upon your rejection of the vessel in accordance with

the terms of the contract, your termination, cancellation or rescission of the

contract or upon a total loss of the vessel, to repayment of the pre-delivery

instalments of the contract price paid by you prior to such termination or a total

loss of the vessel (as the case may be) . . .

Paragraph 3 then said that ‘In consideration of your [the buyer’s] agreement to make

the pre-delivery instalments under the contract . . . we [the bank] hereby, as primary

obligor, irrevocably and unconditionally undertake to pay to you [the buyer] . . . all such

sums due to you under the contract . . .’

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There was no reference in paragraphs 1 or 2 to any ‘sums’ due under the contract. The

buyer argued that the reference to ‘such sums’ in paragraph 3 must be to the ‘pre-

delivery instalments’ referred to in the opening words of paragraph 3, and that the bank

was therefore liable to repay all pre-delivery instalments which the buyer had paid. The

bank argued that the reference to ‘such sums’ must have been to the ‘pre-delivery

instalments’ referred to in paragraph 2. The importance of this was that paragraph 2

only referred to some of the circumstances in which pre-delivery instalments could be

recovered under the shipbuilding contract. Importantly, it did not refer to the ability of

the buyer to recover pre-delivery instalments under the shipbuilding contract in the

event of financial difficulties of the shipbuilder. The bank argued that paragraph 2 must

have been inserted for a purpose and therefore it was intended to limit the amount of

recovery under paragraph 3. Although the shipbuilder was liable to repay the

instalments in this event under the shipbuilding contract, the bank was not liable to do

so under the bond.

Who is right?

4 Example 2: Multi-Link v North Lanarkshire Council [2011] 1 All ER 175

This case involved the interpretation of an option clause in a lease under which the

landlord granted the tenant an option to purchase the property. The landlord was a

local council. The tenant was a commercial company. The tenant exercised the option

to purchase, and there was a dispute between the parties as to the amount payable.

The lease provided that the option price would be “equal to the full market value of the

subjects hereby let as at the date of entry for the proposed purchase… of agricultural

land or open space suitable for development as a golf course…”

The tenant argued that the option price was therefore the value of the land as

agricultural land or as a golf course. The landlord argued that it was entitled to the full

market value of the land, taking account of its potential for development.

Who is correct?

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SEMINAR EIGHT

27 January 2021 at 12.45-14.00

Judicial distortion of the English language: general issues

1 Principle 7: Very occasionally, it is clear that the parties cannot objectively have

intended words they have used to have their ordinary meaning. If so, they are given

the meaning which the parties must objectively have intended. The more

unreasonable the result, the more unlikely it is that the parties can have intended it.

2 Contrasting approaches:

Lord Mustill in Charter Re v Fagan [1997] AC 313 at 387

“I would hesitate long before giving [words in a document] any [meaning

other than their ordinary meaning in the context of that document], just

because the result would be extraordinary. The words of Lord Reid [in

another case] do, of course, reflect not only a method of construing

contracts but also the common experience of how language is understood:

The fact that a particular construction leads to a very unreasonable

result must be a relevant consideration. The more unreasonable the

result the more unlikely it is that the parties can have intended it, and

if they do intend it the more necessary it is that they shall make that

intention abundantly clear.

This practical rule of thumb … must however have its limits. There comes a point

at which the court should remind itself that the task is to discover what the parties

meant from what they have said, and that to force upon the words a meaning

which they cannot fairly bear is to substitute for the bargain actually made one

which the court believes could better have been made. This is an illegitimate role

for a court. Particularly in the field of commerce, where the parties need to know

what they must do and what they can insist on not doing, it is essential for them

to be confident that they can rely on the court to enforce their contract according

to its terms. … In the end…the parties must be held to their bargain.”

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Lord Hoffmann in ICS v West Bromwich [1998] 1 WLR 896 at 912

“The principles [of interpretation] may be summarised as follows:

………………. [the first three principles are set out under Principle 4.]

(4) The meaning which a document (or any other utterance) would convey to a

reasonable man is not the same thing as the meaning of its words. The meaning

of words is a matter of dictionaries and grammars; the meaning of the document

is what the parties using those words against the relevant background would

reasonably have been understood to mean. The background may not merely

enable a reasonable man to choose between the possible meanings of words

which are ambiguous but even (as occasionally happens in ordinary life) to

conclude that the parties must, for whatever reason, have used the wrong words

or syntax …

(5) The “rule” that words should be given their “natural and ordinary meaning”

reflects the common sense position that we do not easily accept that people have

made linguistic mistakes, particularly in formal documents. On the other hand, if

one would nevertheless conclude from the background that something must have

gone wrong with the language, the law does not require judges to attribute to the

parties an intention which they plainly could not have had. Lord Diplock made

this point more vigorously when he said [in another case]:

“if detailed semantic and syntactical analysis of words in a commercial

contract is going to lead to a conclusion that flouts business commonsense,

it must be made to yield to business common sense.”

3 The test:

Something has clearly gone so wrong with the language used in the document

that the parties cannot objectively have intended it.

It is clear to a reasonable person what the parties actually objectively intended.

4 Correcting clear drafting errors:

In Fitzgerald v Masters (1956) 95 CLR 420. Dixon CJ and Fullagar J in the High Court

of Australia said (at pages 426-7):

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“words may generally be supplied, omitted or corrected, in an instrument, where it

is clearly necessary in order to avoid absurdity or inconsistency.”

5 “Judicial distortion of the English language”: a brief selection of some recent decisions

of the House of Lords and the Supreme Court:

1996: “the sum actually paid by the reinsured” does not require the reinsured to

pay anything.

Charter Re v Fagan [1997] AC 313, HL.

1997: “Any claim (whether sounding in rescission for undue influence or

otherwise)” means: “Any claim sounding in rescission (whether for undue

influence or otherwise)”.

ICS v West Bromwich [1998] 1 WLR 896, HL.

2009: “23.4% of the price achieved for each residential unit in excess of the

minimum guaranteed residential unit value less the costs and expenses” requires

the reader to deduct the costs and expenses from the price achieved for each

residential unit, then calculate 23.4% of that figure, and then deduct the minimum

guaranteed residential unit value from the result.

Chartbrook v Persimmon [2009] 1 AC 1101, HL.

2009: “During the Realisation Period the Security Trustee shall so far as possible

discharge on the due dates therefor any Short Term Liabilities [of a company]…”.

This clause does not apply if the company is insolvent.

Re Sigma Finance [2010] 1 All ER 571, SC.

2010: “the full market value of [the property] as at the date of entry for the

proposed purchase… of agricultural land or open space suitable for development

as a golf course” does not require the property to be valued only on the basis that

it is agricultural land or open space suitable for development as a golf course.

Multi-Link v North Lanarkshire Council [2011] 1 All ER 175, SC.

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6 Example 1: Rice v Great Yarmouth Borough Council [2002] All ER (D) 902

Great Yarmouth Borough Council entered into a contract with Mr Rice by which Mr

Rice was to provide leisure management and ground maintenance services to the

council for a period of four years.

The relevant provision of the contract provided as follows:

“23.2 If the Contractor:

23.2.1 commits a breach of any of its obligations under the Contract;

… the Council may, without prejudice to any accrued rights or remedies under

the Contract, terminate the Contractor’s employment under the Contract by notice

in writing having immediate effect.”

Mr Rice, the Contractor, was a small-time horticultural contractor. The contracts were

entered into on 14 February 1996. On 9 May 1996 the council served the first of many

default notices under the contract. Particularly important were a series of default

notices issued on 24 June 1996 requiring the claimant to complete the summer

bedding within 5 days. Other important complaints concerned the state of the cricket

pitches and bowling greens and the failure to renovate certain football pitches in time

for the start of the new season in September 1996.

The council claims to terminate the contract. Can it do so?

7 Example 2: Arnold v Britton [2015] 2 WLR 1593

From 1974 the then owners of an area of land granted a number of 99-year leases of

plots on which holiday chalets were to be built, the preamble to each lease stating that

it would be granted “upon terms similar in all respects” to the other leases, the

introductory words of clause 3 providing that each lessee's covenants as to use and

repair of chalets were, inter alia, for the benefit of other lessees, and clause 4(8)

containing a covenant by the lessors that the covenants imposed on other lessees

were to like effect.

Seventy chalets were the subject of leases granted in the early 1970s. In each of

these leases, clause 3(2) contained a covenant by the lessee:

“To pay to the lessors without any deduction in addition to the said rent a

proportionate part of the expenses and outgoings incurred by the lessors in the

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repair maintenance renewal and the provision of services hereafter set out the

yearly sum of £90 and VAT (if any) for the first three years of the term hereby

granted increasing thereafter by ten pounds per hundred for every subsequent

three year period or part thereof.”

A further twenty-one leases were entered into between 1977 and 1991. Clause 3(2) of

those leases provided for the lessee:

“To pay to the lessors without any deductions in addition to the said rent a

proportionate part of the expenses and outgoings incurred by the lessors in the

repair maintenance renewal and renewal of the facilities of the estate and the

provision of services hereafter set out the yearly sum of £90 and VAT (if any) for

the first year of the term hereby granted increasing thereafter by ten pounds per

hundred for every subsequent year or part thereof.”

The tenants of those chalets, whose annual service charge had risen to over £2,700

(as opposed to £282 for the chalets subject to the earlier leases) claimed that an

interpretation of the clause which required a fixed sum payment resulted in such an

absurdly high annual service charge that it could not be right. They claimed that clause

3(2) should be read as requiring them to pay a variable sum, being a fair proportion of

the cost of providing the services, with the specified sum being no more than a cap on

the maximum sum payable. Are they correct?

8 Wood v Capita [2017] UKSC 24

This is the most recent decision of the Supreme Court on contractual interpretation, but

it adds little to Arnold v Britton.

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SEMINAR NINE

3 February 2021 at 12.45-14.00

Judicial distortion of the English language: specific clauses and contracts

Exclusion clauses

1 Canada Steamship v R [1952] AC 192

The Crown leased a freight shed to the company. Whilst repairing the shed, one of the

Crown’s employees was using an oxyacetylene torch and, because of his negligence, a

fire broke out which destroyed the shed and its contents. The company claimed

damages from the Crown on the basis of the negligence of its employee.

The Crown denied liability on the basis of clause 7 of the lease which provided:

“That the lessee shall not have any claim or demand against the lessor for

detriment, damage or injury of any nature to the said land, the said shed, the said

platform and the said canopy, or to any motor or other vehicles, materials,

supplies, goods, articles, effects or things at any time brought, placed, made or

being upon the said land, the said platform or in the said shed.”

Is the Crown liable?

2 Persimmon v Ove Arup [2017] EWCA Civ 373

Ove Arup were engaged as consulting engineers by Persimmon in relation to the

redevelopment of certain old industrial land in South Wales. One of Ove Arup’s tasks

was to investigate the site for possible contamination and to advise on it.

The contract contained the following clause:

“[Ove Arup’s] aggregate liability under this Agreement whether in contract, tort

(including negligence), for breach of statutory duty or otherwise (other than for death or

personal injury caused by [Ove Arup’s] negligence) shall be limited to £12,000,000

(twelve million pounds) with the liability for pollution and contamination limited to

£5,000,000 (five million pounds) in the aggregate. Liability for any claim in relation to

asbestos is excluded.”

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Persimmon alleged that Ove Arup had been negligent in failing to spot asbestos. Ove

Arup denied negligence but argued that, in any event, any liability was excluded by the

contract.

At first instance, Stuart-Smith J decided that liability was excluded by the contract.

Persimmon appealed arguing essentially two things:

As a matter of interpretation of the clause, Ove Arup had only excluded liability in

relation to asbestos where it was Ove Arup itself which had caused the problem.

In any event, Ove Arup could not rely on the exclusion clause because of the

contra proferentem rule and the rule in Canada Steamship v R [1952] AC 192.

Who is correct?

Guarantees

3 Egan v Static Control [2004] EWCA Civ 392

For several years, Static Control had regularly supplied components to TBS. Mr Egan

was a director of TBS. He personally signed four successive guarantees under which

he guaranteed payment to Static Control of certain of the debts of TBS. The first two

guarantees were issued for successive periods of six months. The third guarantee was

unlimited in time, but was limited as to £75,000 in amount.

By September 1999, TBS owed Static Control over £143,000. Static Control required

TBS to clear the overdue balance and for Mr Egan to increase his guarantee to

£150,000. Mr Egan therefore entered into a fourth guarantee on 2 September 1999.

He guarantee provided that Mr Egan “shall be responsible to [Static Control] for the

price of all trade goods that [Static Control] may supply to [TBS] but so that [Mr Egan’s]

liability to [Static Control] shall be in respect of the whole debt but shall in no event

exceed the sum of £150,000”. The guarantee was expressed to be a continuing

guarantee and the liability was not be affected by the giving of time or any other

indulgence to TBS.

In May 2000, TBS went into an insolvency process. At that time, TBS owed Static

Control £111,000, the vast majority of which debt related to goods supplied before 2

September 1999 (ie. before the fourth guarantee was entered into).

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Mr Egan contended that the guarantee only extended to the price of goods supplied

after the date on which the guarantee was entered into – which was about £14,000.

Static Control argued that Mr Egan was responsible for the full amount of the debt of

£111,000.

Who is correct?

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SEMINAR TEN

10 February 2021 at 12.45-14.00

Implied terms and drafting

1 Principle 8: Words are implied into a contract if the parties must objectively have

intended them. This will be the case either if they are so obvious that there was no

need to express them, or if they are necessary to make the contract work in a business

context.

2 Example: Marks and Spencer v BNP Paribas [2016] AC 742

A landlord demised commercial premises to a tenant “for a term of years starting on 25

January 2006 and ending on 2 February 2018”. The rent was to be “paid yearly and

proportionately for any part of a year by equal quarterly instalments in advance on the

[usual] quarter days”.

The lease contained a break clause. The tenant could determine the lease by giving

the landlord six months prior written notice to take effect on 24 January 2012. A break

notice would only have effect if on the break date there were no arrears of rent. The

tenant also had to pay a premium.

The lease was a full and detailed document, running to some 70 pages.

On 7 July 2011, the tenant served a break notice on the landlord to determine the lease

on 24 January 2012. Shortly before 25 December 2011, the tenant paid the next

quarter’s rent due for the period up to and including 24 March 2012. (They needed to

do this in order to ensure that the break notice was valid.) The lease determined on 24

January 2012.

The tenant sued the landlord for a refund of rent for the period from 24 January 2012

until 24 March 2012.

Morgan J allowed the claim, but the Court of Appeal allowed the appeal. The tenant

appealed to the Supreme Court, claiming that there should be implied into the lease a

term that, if the tenant exercised the right to break the lease and the lease determined

on 24 January, the landlord ought to pay back that proportion of the rent which related

to the period after the lease terminated.

Should such a term be implied?

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Drafting

3 How do the principles of contractual interpretation affect the way in which we draft

commercial contracts?

Should we use entire agreement clauses?

Should we use variation clauses?

How should we deal with termination of the contract?

Should we contract out of eiusdem generis and contra proferentem?

How should we deal with good faith?

Should we use an interpretation clause?

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4 A suggested interpretation clause:

Interpretation

1.1 This agreement will be interpreted in accordance with the provisions of this

clause.

1.2 The words and expressions used in this agreement will be given their

ordinary meaning in the context of the Transaction Documents as a whole.

1.3 This is the case irrespective of any commercial or other considerations; and

it applies to all the provisions of this agreement, whatever their nature.

1.4 The only exception is where there is a typographical error and it is clear

what was intended by the parties, in which event effect will be given to that

clear intention.

1.5 If a particular word or expression is reasonably capable of more than one

ordinary meaning, it will be given the meaning which is most consistent with

the Transaction Documents as a whole.

1.6 Apart from the Transaction Documents, no other background or context will

be taken into account in the interpretation of this agreement.

1.7 The Transaction Documents means this agreement and [others].

1.8 No term will be implied into this agreement which requires a party to act in

good faith.

1.9 If a provision of this agreement has the effect of conferring a discretion on a

party, that party may (except to the extent that the provision expressly

provides to the contrary) exercise that discretion in its own unfettered

interests, take into account anything it considers appropriate, and ignore

anything else.

1.10 The contra proferentem and eiusdem generis rules will not be used in the

interpretation of this agreement.

1.11 Nothing in this clause affects the law concerning rectification, estoppel by

convention or fraud.