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Contractual interpretation: the court will not step in to re-write a bad bargain

26 June 2015

Arnold v Britton and Others [2015] UKSC 35

Insurance policy wording must be clear and unambiguous – the court will not re-write a contract to save a party from a bad bargain even if the consequences are ‘disastrous’ for one party.

Headline points

  • Supreme Court placing greater emphasis on ‘words used’ rather than their context.
  • Courts should interpret contracts, not re-write them, even if this has disastrous consequences for one party.
  • It will be rare for commercial common sense to override the natural meaning of the words used.

The exercise of interpreting insurance policies can be difficult. In cases where there is a dispute over the meaning of a particular clause, the court will look at two things: the words used, and the context of those words. The inevitable battle is in finding the balance between those two elements: do the words used take precedence over the commercial context in which they were drafted, or does the context outweigh the words? Since the 2011 Supreme Court decision in Rainy Sky v Kookmin Bank [2011] UKSC 50, many commentators have felt that context has reigned, and Rainy Sky was hailed as a triumph of commercial common sense over literalism.

That trend has been halted somewhat by the recent Supreme Court decision in Arnold v Britton. This case concerned the interpretation of service charge clauses in 25 long leases of holiday chalets in a leisure park, granted between 1974 and 1991. Those clauses provided for the tenants to pay a fixed sum in respect of service charges, rather than a charge reflecting the actual cost of those services. The sum was set at £90 per annum, compounded annually at 10%. The effect of this clause (known as a geometric progression) was that by 2015, a tenant of a lease granted in 1980 was liable to pay £2,500 annually for service charges, increasing to a staggering £550,000 by 2072.

By a four to one majority, the Supreme Court refused to re-write the bargain. They held that the natural meaning of the words used in the service charge clauses was that the tenants had to pay £90 per year, compounded annually at 10%. The words were sufficiently clear and unambiguous that their meaning was not in doubt. Further, the dramatic escalation in payments was not enough to allow the court to depart from that natural meaning.

Of perhaps more far-reaching importance than the decision itself, are Lord Neuberger’s comments in relation to the interpretation of contracts generally. He said:

“… commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, even disastrously, for one of the parties is not a reason for departing from the natural language.”

and:

“Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of the court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid rewriting it in an attempt to assist an unwise party or to penalise an astute party”

As a result, it can be seen that insurers and brokers should be more prudent than ever in ensuring that policy wording is clear and unambiguous. Except in very rare circumstances, the court will not intervene to re-write the contract if one party’s intentions have not been properly reflected, resulting in a bad bargain.

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Jonathan Newbold

Jonathan Newbold

Partner and Head of Financial Services & Insurance

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