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26 September 2013

Contractual interpretation: literal interpretation or just business common sense?

Contractual disputes can often boil down to differing interpretations of a specific clause within a contract.  The parties' differing interpretations are usually entirely self-serving.

If the parties cannot resolve the issue, it is the court's job to decide how to interpret that contract and rule accordingly.

In a leading decision in 2011, the Supreme Court held that where the parties use ambiguous language, the courts should look to commercial common sense to determine the true construction of that contract (Rainy Sky SA and others v Kookmin Bank [2011] UKSC 50).  This allows the Court to interpret the contract such that it makes commercial sense and even use its discretion to choose between two differing interpretations, both of which may make commercial sense.

In that case, because there was ambiguity in the wording of the contract, the bank's interpretation would have led to a "surprising and uncommercial result" (as the Court put it).  Since the bank could not suggest any commercial reason as to why the other party would have agreed to it, the Court found in Rainy Sky's favour because it was consistent with the commercial purpose of the parties' contract.

In a recent case (Fons HF (in liquidation) v (1) Corporal Ltd (2) Pillar Securitisation SARL (2013) EWHC 1801 (Ch) (28 June 2013), the High Court provided confirmation of this approach and clarified that the Court will only look at the commercial purpose of the contract if the contract is ambiguous.  If the court considers that the wording of the contract is clear then it will not need to consider whether that interpretation makes business common sense.  In other words, it could still lead to a result which makes no common sense at all.

This case highlights the fact that the courts will not simply interpret contracts so that they will make commercial sense.  It will look at the wording first and, only if that is not clear, will it then consider business common sense of the different interpretations.

These cases highlight the importance of professionally drafted contracts that are clear and unambiguous.  Otherwise, the parties might be left at the mercy of the court's interpretation of what it thinks makes the most commercial common sense.

The Litigation and Dispute Resolution team at B P Collins are experts at resolving contractual disputes in an efficient and cost-effective manner. Please contact the team for legal advice surrounding this issue.

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