Commercial Common Sense Again: What Role in Contract Interpretation?

Document Cited in Related
DOI10.3366/elr.2021.0674
Published date01 January 2021
Date01 January 2021
Pages89-94
Author

In Ashtead Plant Hire Co Ltd v Granton Central Developments Ltd,1 the Inner House had a further opportunity to set out the principles of contractual interpretation. In doing so the court gave significant prominence to the role of commercial common sense in the interpretive exercise. The case concerned a dispute regarding the meaning of a “disregard” in a rent review provision of a commercial lease. The focus of this article is on the court's views on the correct approach to contractual interpretation, rather than a focus on the dispute between the parties.

Lord Drummond Young delivered the opinion of the Inner House. He began by noting that the general principles of construction were well established and that the important principles were found in a number of cases2 including Rainy Sky SA v Kookmin Bank,3Grove Investments Ltd v Cape Building Products Ltd,4Arnold v Britton,5HOE International Ltd v Andersen6 and Wood v Capita Insurance Services Ltd.7 He summarised the correct approach, beginning with Lord Clarke in Rainy Sky that:

The ultimate aim of interpreting a provision in a contract, especially in a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant… The relevant reasonable person is one who has 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.8

For Lord Drummond Young, two important principles were apparent from that passage. First, a contract invariably had to be construed contextually. Language was, he said, inherently ambiguous. It was not possible to reach an intelligent view on the meaning of a particular passage without placing the passage in context. Secondly, the exercise of construction was objective. The meaning of a provision was what a reasonable person in the position of the parties would have understood it to be.9

Two further principles were important: (1) in interpreting a provision the court should take a purposive approach, having regard to the fundamental objectives that reasonable people in the parties' positions would have had in mind. The central provisions of a contract should, where there was any doubt, prevail over subsidiary clauses. The substance of the parties' agreement had to be construed objectively and should prevail over “niceties of wording, and in particular over clauses that have not been well drafted”;10 (2) The court could have regard to commercial common sense. He noted that reference to commercial common sense had attracted criticism in recent years. However, the authorities supporting it were quite clear and included most of the recent cases where the approach to interpretation had been discussed. Disputes frequently involved wording that could have more than one meaning. This could involve a conflict between the most literal meaning of a phrase and an alternative that made better commercial sense in context and according to the fundamental purposes of the contract. It was not necessary to conclude that unless the most natural meaning produced a result so extreme as to suggest it was unintended, that the court had to give effect to that meaning. If there were two possible constructions the court was entitled to...

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