In Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2, the Supreme Court considered, and extended, the ambit of contextual analysis in contractual interpretation to advance a meaning that was not advocated by either party.
Blacks rented retail premises from Sara & Hossein (“S&H”). The dispute concerned the interpretation of the service charge provision in the commercial lease. Each year, S&H should provide Blacks with “a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive” (under paragraph 3 of Schedule 6). In particular, the clause stated that the certificate would be “conclusive” as to both amounts. Other relevant paragraphs under Schedule 6 include:
- paragraph 6 which stipulates the method of expert determination as it relates to disputes concerning the proportionate allocation of service charges between tenants; and
- paragraph 8 which gives tenants the right to inspect invoices and receipts for the period of 12 months.
The issue before the courts was whether the certificate was “conclusive” as to (1) the costs incurred by S&H, and (2) the sum payable by Blacks.
Lord Hamblen, leading the majority, introduced a novel approach to construction. Considering the contextual factors, His Lordship formulated a “middle ground” construction which favoured S&H’s interpretation, but which granted Blacks a means of contesting the extent of their liability at a later point following payment.
Lord Hamblen’s approach is highly problematic and is emblematic of a difficulty in the development of the law as it relates to contractual interpretation. There have been a multitude of cases going all the way to the Supreme Court and Court of Appeal in the past two decades. We can probably expect more in the future now.
The two approaches to contractual interpretation
Since ICS v West Bromwich [1997] UKHL 28, the prevailing theory of contractual interpretation is that the meaning of a provision may be discoverable by reference to its context (as opposed to the quondam literal approach). Following West Bromwich, there are now two rival approaches to modern contractual interpretation with respect to contextual evidence. For the purposes of this analysis, I have described these as either the “textualism-focused” approach in Arnold v Britton [2015] UKSC 36 or the “unitary” approach in Wood v Capita Insurance [2017] UKSC 24.
The “textualism-focused” approach starts, as Lord Neuberger explained in Arnold (at [15]), by “focussing on the meaning of the relevant words” such that the “clearer the natural meaning the more difficult it is to justify departing from it” (at [18]). This is because, as Lord Sumption explained (in the 2017 Harris Society Annual Lecture), “the language of the parties’ agreement, read as a whole, is the only direct evidence of their intentions which is admissible.” Once the courts have weighed the viability of the parties’ competing constructions vis-à-vis the plain meaning of a provision, then the courts will consider the three contextual factors. In Arnold, Lord Neuberger (at [15]) listed the factors in a specific order to assess the objective intention of parties. They include (1) the contractual context (i.e. other provisions and overall object), (2) the factual context (i.e. the surrounding circumstances) and (3) commercial common sense. Indeed, Lord Neuberger noted in Arnold (at [17]) that “commercial common sense and surrounding circumstances ... should not be invoked to undervalue the importance of the language of the provision which is to be construed.”
The “unitary” approach in Wood postulated that ascertaining the objective intention required both the plain meaning and the contextual factors to be considered together (i.e. not sequentially) and their weight and importance was dependant on the particular case. In Arnold, Lord Hodge explained (at [76]) that contractual interpretation was “not a matter of reaching a clear view on the natural meaning of the words and then seeing if there are circumstances which displace that meaning.” As such, Lord Hodge held, in Wood (at [13]), that “textualism and contextualism are not conflicting paradigms in ... the field of contractual interpretation”. They were, His Lordship argued (at [13]), simply “tools to ascertain the objective meaning.”
The problems in the Blacks judgment
It was accepted by Richards LJ (as he then was) in the Court of Appeal (in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWCA Civ 1521) and Lord Briggs in his dissent in the Supreme Court that S&H’s interpretation was the natural and ordinary meaning. This seems a plain and obvious conclusion. Indeed, Richards LJ commented (at [21]) that the strained formulation of Black’s meaning required “express words to that effect or a necessary implication”. Under Arnold, the court would have assessed the meanings advanced by the parties, and only then balance the contextual considerations (if necessary). Since the weight of the contractual agreement and language used has been relegated post-Wood, a meaning need not necessarily be advanced by the parties. In my view, this is a logical corollary.
This in turn raises a number of problems.
Firstly, it is not at all clear that something has gone wrong in the drafting. In Blacks, Lord Hamblen argued (at [48]) that the language of the relevant provision was inconsistent with paragraphs 6 and 8. However, it is fallacious to assume that the mere existence of a dispute resolution mechanism in respect of the apportionment of the service charges among tenants would necessarily entail a similar mechanism for everything else in the landlord’s certificate. This point was made by Lord Briggs (at [67]) in his dissent in Blacks, and Lord Hamblen never engaged with that argument in explaining why that assumption was correct or appropriate. A further purported inconsistency by Lord Hamblen (at [48]) was that it would “be most surprising for the parties to agree that they could be determined conclusively by the landlord without representation or recourse.” However, it is not at all “surprising” when one considers, as Lord Briggs explained (at [69]), that “it is not at all uncommercial that the landlord should have wished, and insisted, on limiting the available grounds for such disproportionate litigation.” Richards LJ made a similar point in the Court of Appeal (at [24]) that “a tenant would be well advised to consider very carefully before agreeing a lease in these terms.” Instead, Lord Hamblen simply wrote-off S&H’s approach as being uncommercial (at [48]). It is worth recalling a point made by Lord Sumption (in his Harris Society Annual Lecture) that what the courts regard as commercial common sense can merely be the court’s formulation of fairness:
... judges’ notions of common sense tend to be moulded by their idea of fairness. But fairness has nothing to do with commercial contracts. The parties enter into them in a spirit of competitive cooperation, with a view to serving their own interest. Commercial parties can be most unfair and entirely unreasonable, if they can get away with it.
Another point made by Lord Sumption is that the words of a provision can have autonomous meanings. This point is worth bearing in mind because the search for inconsistencies and an arbitrary conception of commercial common sense makes the line between rewriting the bargain very hard to pinpoint. This case seems to demonstrate that a party can, under the guise of contextual considerations, invoke possible meanings as genuine “rival” interpretations to rewrite the bargain.
Secondly, Lord Briggs criticised the majority approach of Lord Hamblen for adopting a meaning to paragraph 3 that was not advocated by either party. The problem here is that respecting party autonomy (and, thus, the objective intention) requires taking the parties’ purported intentions seriously as the logical starting point in the analysis. That is why the obligations in the written contract are so important. As Lord Briggs pointed out (at [61]) the court otherwise acts “carte blanche simply to make up a solution of its own.” In my view, the post-Wood “unitary” approach makes it much easier for the court to rewrite the bargain.
Thirdly, certainty and predictability are undermined if parties cannot be confident their bargains will be given effect - particularly with ingenious counsel. Furthermore, this evaluative process risks turning the approach to construction into a subjective assessment. In Blacks, the Court of Appeal adopted one meaning, and then the Supreme Court adopted an entirely different meaning.
Fourthly, in the Supreme Court, there was a division as to the commercial common sense factor. Lord Hamblen associated it with cash-flow exigencies for the landlord. Whereas Lord Briggs recognised the desire to avoid costly litigation instead. Lord Briggs argued that what Lord Hamblen held was uncommercial was in fact plainly commercial common sense. Since judges cannot agree on what constitutes commercial common sense, Neuberger LJ admonition in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732 is apposite:
Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood.
In conclusion, the dissent of Lord Briggs was the more preferable approach. Overall, the law is overdue a return to the methodology articulated in Arnold. It provided a more considered theoretical structure between textualism and contextualism.
