We are there to oil the wheels of commerce, not to put spanners in the works, or even grit in the oil.Footnote 1
I. Introduction
The broad notion of “commercial common sense” is prominent in the modern law governing the interpretation of written contracts. For example, in Prenn v Simmonds (1971),Footnote 2 Lord Wilberforce said that a suggested interpretation could be tested by considering whether it would “correspond with commercial good sense”. Lord Steyn said in Mannai Investment Co. v Eagle Star Life Assurance (1997): “Words are … interpreted in the way in which a reasonable commercial person would construe them.”Footnote 3 In the “Rainy Sky” case (2011), the Supreme Court held that: “If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”Footnote 4 Furthermore, Lord Neuberger in Arnold v Britton (2015)Footnote 5 placed “commercial common sense” within the list of relevant factors to be applied during the process of interpretation (see Section II for the full quotation). Most people will instinctively nod approval to these important judicial statements. But to what, precisely, are they assenting? It is the aim of this paper to explain both the growth and versatile operation of commercial common senseFootnote 6 (CCS) within the law concerning interpretation and to take stock of the concerns expressed by some judges that this notion should not be overplayed.
There is more than one idea at play here. Thus, CCS is a factor which is variously described as requiring the court to produce a “commercial solution”Footnote 7 or “commercial result”Footnote 8 or a “commercially sensible result”, to promote the parties' “commercial aims and objectives”,Footnote 9 to display “commerciality”,Footnote 10 to take account of “the commercialities”,Footnote 11 to have regard to “commercial and factual background known to both parties”,Footnote 12 to consider the perspective of a “reasonable commercial reader”,Footnote 13 to prefer an interpretation which has a “greater degree of common sense”Footnote 14 than another and to avoid a result which is “unworkable”Footnote 15 or (as we shall see extensively in Section IV) “obviously absurd”.Footnote 16
On closer inspection, this notion of “commerciality” covers at least six different points: (1) commercial documents are to be read from the perspective of commercial users; in particular, the commercial reader abhors pedantry, including excessive technicality or semantic logic; (2) the court should avoid frustrating the parties' commercial object or purpose revealed by the contractual text and its factual matrix; (3) the adjudicator must understand the trade practices and market assumptions within the relevant contractual pigeonhole; (4) inapt words can be overridden when manifestly inconsistent with business common sense (this overlaps with both “corrective construction”; see nn. 41–47, and Rectification, nn. 38–40); (5) absurd constructions are to be avoided; (6) CCS can be used as a compass to point the way when the court is confronted by rival meanings (points (1) to (6) are developed in Section III below).
In Section II, we begin by noting the central features of the English rules governing interpretation of written contracts.Footnote 17 Beatson L.J. in the Globe Motors case (2016)Footnote 18 conducted a thorough review of the modern English authorities and Christopher Clarke L.J.’s earlier encapsulation in Wood v Sureterm Direct Ltd. & Capita Insurance Services Ltd. (2015) has been described as “lucid” and “concise”.Footnote 19 The position in Australia,Footnote 20 Canada,Footnote 21 Hong Kong,Footnote 22 New Zealand,Footnote 23 SingaporeFootnote 24 and the USFootnote 25 would require extensive further discussion. Section III contains analysis of judicial statements concerning CCS. Those statements reveal three main points, which will be developed in Sections IV to VI: (1) CCS not only precludes “absurdity” (Section IV), but (2) it enables the court to select the superior interpretation, when there are rival meanings available (Section V); however, (3) there are four dangers, or causes for concern, which have emerged within the cases (Section VI). First, “CCS” can be used as camouflage for partisan arguments which are really pleas for advantage not truly supported by the document. This card is too often played, sometimes by both sides. Judges should not be beguiled by forensic rhetoric. Secondly, judges should know when they are venturing perilously beyond their mercantile comfort zone: they should not pretend to greater experience than they in fact possess. Thirdly, CCS should not become a pretext for rewriting the text in order to “improve” it. Fourthly, a transaction's curious or tough wordingFootnote 26 might be the direct product of close negotiation. That possibility looms large under the English arrangements because courts cannot lift the lid on negotiations (text at nn. 35–36 below).Footnote 27 In the face of that possibility, judicial humility and restraint must be shown.
II. Interpretation: The Modern English System
In his latestFootnote 28 “restatement” of this topic, Lord Neuberger in Arnold v Britton (2015)Footnote 29 placed CCS fifth in his list of factors which supplement the major criterion of “objectivity”:
When interpreting a written contract, the court is concerned to identify…“what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”…And it does so by focussing on the meaning of the relevant words…in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [document], (iii) the overall purpose of the clause and the [document], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions.
The common law system of interpretation starts and endsFootnote 30 with “objectivity”,Footnote 31 which is one of only a handful of leading principles in English contract law.Footnote 32 Investors Compensation Scheme Ltd. v West Bromwich Building Society (No. 1) (“ICS”) (1998)Footnote 33 requires the court to adopt the perspective of an objective reader, independently of each party's particular perspective, and so without reference to (1) each party's declarations of subjective intent,Footnote 34 (2) the parties' actual negotiationsFootnote 35 (unless they disclose objective background facts)Footnote 36 or (3) their post-formation dealings.Footnote 37
As for (2) (the bar on evidence of the parties' actual negotiations), the equitable doctrine of Rectification allows a party to place in evidence drafts or other negotiations in order to cure a mismatch between the parties' pre-formation settled intention and the wording adopted in the text of their final agreementFootnote 38 (objectivity also applies to determine whether there was a prior common intention).Footnote 39 Rectification can also be invoked to reflect one party's mistaken assumption concerning the contents of the proposed contract if the other party in bad faith had failed to point out that mistake before formation.Footnote 40 But, even without resort to Rectification, the ICS (1998)Footnote 41 and Chartbrook (2009)Footnote 42 cases confirm that the process of construction requires the courts to reconstruct phrases if it is obvious that something has gone wrong in the contractual formulation and it is also clear how the textual defect is to be put right (so-called “corrective construction”). However, a clear case must be established because Lord Hoffmann in the ICS case noted the presumption against linguistic mistakes.Footnote 43 This “something has gone wrong” (patent defect/obvious fix) ruleFootnote 44 has been applied many times.Footnote 45 But it is controversial,Footnote 46 not least because it substantially duplicates the traditional function of Rectification.Footnote 47
Although the main focus of this discussion is written contracts, it should be notedFootnote 48 that similar, if not identical, principles apply to the construction of other legal documents, such as patents,Footnote 49 planning agreements,Footnote 50 trust deedsFootnote 51 and unilateral notices.Footnote 52
III. Six Manifestations of “Commercial Common Sense”
Commercial common sense began its resurgence in Lord Wilberforce's speech in Prenn v Simmonds (1971),Footnote 53 where he rejected the losing party's rival interpretation in these terms: “[that suggested] construction does not fit in any way the aim of the agreement, or correspond with commercial good sense, nor is it, even linguistically, acceptable.” Lord Wilberforce returned to these issues in his speech in the Reardon case (1977).Footnote 54 As we shall see in this section, the root idea of a business-like approach to interpretation has produced six types of emphasis: (1) anti-pedantry; (2) regard for a transaction's commercial purpose; (3) consideration of trade practices and market assumptions within the relevant contractual pigeonhole; (4) overcoming drafting slips; (5) avoiding absurdity; (6) and, most significantly, CCS can be used as a compass to guide the court when it encounters rival meanings.
A. Anti-Pedantry and Anti-Literalism: Contracts Are Written to Be Read by Businessmen and Not Monopolised by Lawyers
Commercial common sense requires the judge to consider how the document would be read by businessmen positioned in the relevant market or commercial context. In “The Starsin” (2003), Lord Bingham noted that “business sense is that which businessmen, in the course of their ordinary dealings, would give the document”.Footnote 55 Judges have protested at over-refined and nit-picking semantic analysis, because this distracts from the task of viewing the relevant phrase within the whole document and against its commercial background.Footnote 56 There is also the potential embarrassment that a lower court's confident reliance on grammatical rules, such as the nature of a particular use of the past tense and whether it lacks any “continuous” connotation, might be convincingly falsified on appeal.Footnote 57 Lord Steyn said in Mannai Investment Co. v Eagle Star Life Assurance (1997) that “Words are … interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language”.Footnote 58 Jonathan Parker L.J. said in “The Seaflower” (2001) that CCS is an antidote to “minute textual examination and analysis”.Footnote 59 Another protest against over-refined semantic analysis is Lord Collins's remark in Re Sigma (2009): “This is one of those too frequent cases where a document has been subjected to the type of textual analysis more appropriate to the interpretation of tax legislation which has been the subject of detailed scrutiny at all committee stages than to an instrument securing commercial obligations.”Footnote 60 In the Hong Kong Court of Final Appeal, in Jumbo King Ltd. v Faithful Properties Ltd. (1999), Lord Hoffmann said pithily that “the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean”.Footnote 61 More recently, Beatson L.J. in the Globe Motors case (2016)Footnote 62 approved this elegant statement by Sir Thomas Bingham M.R.:
To seek to construe any instrument in ignorance or disregard of the circumstances which gave rise to it or the situation in which it is expected to take effect is in my view pedantic, sterile and productive of error. … To my mind construction is a composite exercise, neither uncompromisingly literal nor unswervingly purposive: the instrument must speak for itself, but it must do so in situ and not be transported to the laboratory for microscopic analysis.Footnote 63
Furthermore, some texts are simply unfit to be placed under the semantic microscope. As Lord Bingham said in “The Starsin” (2003): “to seek perfect consistency and economy of draftsmanship in a complex form of contract which has evolved over many years is to pursue a chimera …. If an obviously inappropriate form is used, its language must be adapted to apply to the particular case.”Footnote 64
This emphasis upon adopting a business-like approach to reading commercial agreements is no novelty. In McCowan v Baine (1893),Footnote 65 the House of Lords held, construing an insurance contract, that a maritime collision between one vessel and The Niobe extended to the present case where a vessel collided with a tug pulling The Niobe (Lord Bramwell dissented).Footnote 66 In the majority, the Earl of Selborne referredFootnote 67 to the need to avoid “extreme literalism”.Footnote 68 Lord Morris construed the contract as “as an insurance against … liability for payment by collision to be incurred by ‘The Niobe’ while in tow …. I consider the tug part of the apparatus for moving the ship …, and that a collision by the tug while so towing … was a collision of ‘The Niobe’ within the meaning of the … policy”. Similarly, in the Southland Frozen Meat case (1898), Lord Herschell said that written provisions “must be construed in a business fashion, and that the words must not be applied to everything that might be said to come within a possible dictionary use of them, but must be interpreted in the way in which business men would interpret them, when used in relation to a business matter of this description”.Footnote 69
B. The Transaction's Commercial Purpose or Object
The document's commercial “purpose” or “object” can be used, according to Lord Herschell L.C. in Glynn v Margetson & Co. (1893), “in limiting the general words used”Footnote 70 and, according to Lord Halsbury, to “reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract”.Footnote 71 In this case, the House of Lords held that the written terms of a contract for carriage of oranges from Malaga to Liverpool did not entitle the shipowner to make deviations to remoter ports in the Mediterranean, because the consequent delay would obviously imperil a perishable cargo. This was so even though words had been introduced into the contract which appeared to grant the shipowner free rein to adopt an erratic route. Lord Herschell L.C. said that the contract needed to be construed “in a business sense”Footnote 72 and Lord Halsbury said that “[a person construing the contract] must consider whether mercantile men when they do business in this form do not recollect that a business sense will be given to business documents”.Footnote 73 This was echoed by Lord Wilberforce in Prenn v Simmonds (1971): “the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact …. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found.”Footnote 74
The document's “purpose”, “object”, “aim”Footnote 75 or “intended commercial result”Footnote 76 must be divined by reference to the contested portion of the agreement, the whole text, and relevant background facts and context.Footnote 77 The “purpose” or “object” should not be the judge's personal fantasy of how that type of transaction might ideally be reconstructed. As Lord Grabiner notes: “It is critically important that the ‘commercial purpose’ of the transaction is derived from the contract as a whole and from an accurate understanding of the way in which the various provisions interact.”Footnote 78 And Lewison (2015) comments that courts must not adopt “a preconceived idea of what contracts of that description generally seek to achieve” and then “force the words of the particular contract to fit that preconception”.Footnote 79 As Lord Wilberforce explained in the Reardon case (1976):
the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating … [When] one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties.Footnote 80
C. Trade Practices and Market Assumptions within the Relevant Contractual Pigeonhole
The adjudicator must be made aware of relevant commercial usages, which might vary from locality to locality. For example, in Jacobs v Scott & Co. (1899),Footnote 81 the House of Lords held that hay imported from Canada to Glasgow had to contain no more than 20% clover and that the supplier, although not based in Scotland, was subject to that implicit specification. A higher percentage was tolerated in the other main UK hay markets, namely London and Bristol. The decision illustrates the variability of market standards within different parts of the UK.
Other usages might be “market-wide”. And so, in Tidal Energy Ltd. v Bank of Scotland plc (2014), the Court of Appeal held that, when construing the contractual words “to the beneficiary”, it was legitimate to impute to a bank customer the fact that bank transfers by the CHAPS system (clearing house automated payment system) do not require the transferor's bank to check the name of the intended transferee.Footnote 82 Lord Dyson M.R., with whom Tomlinson L.J. agreed, said that “a customer who uses CHAPS is taken to contract on the basis of the banking practice that governs CHAPS transactions. On the evidence which the judge accepted, there is a clear and settled practice that the receiving bank in a CHAPS transaction does not check the beneficiary's name for correspondence with the other identifiers”.Footnote 83 Lord Dyson M.R. went onFootnote 84 to consider numerous points of “business common sense” which supported his conclusion that a bank is not under an obligation to check the accuracy of the transferor's naming of the intended recipient of the funds. These comments are a convincing demonstration of the importance and analytical power of opening up issues of interpretation to full examination of the “commercial matrix”Footnote 85 – that is, the exigencies and realities within which the relevant transaction is placed.
Another example of the court bringing to bear its informed knowledge of the nature of a transaction in a particular market is PST Energy 7 Shipping LLC v OW Bunker Malta Ltd. (“The Res Cogitans”) (2016).Footnote 86 Here, the Supreme Court held that a contract for the supply of bunkers (ship fuel) required the recipient to pay for fuel in fact used for ship propulsion even though, for technical reasons, the transaction fell outside the sale of goods legislation.Footnote 87 In the following passage, Lord Mance in the Supreme Court began by noting the wording: “After going on to provide that the buyer ‘shall not be entitled to use the bunkers', the terms introduce the qualification ‘other than for the propulsion of the vessel’.”Footnote 88 He then explained the commercial context:
The qualification clearly reflects a reality. Bunker suppliers know that bunkers are for use. If they grant relatively long credit periods combined with a reservation of title pending payment in full, it is unsurprising that they do so combined with an express qualification authorising use in propulsion, since standard terms prohibiting any use would be uncommercial or in practice, no doubt, simply ignored …. [Those terms] – together with an admissible modicum of commercial awareness on the court's part about how ships operate (and in particular how owners strive to keep them operating) and about the value of credit and the likelihood that full advantage of it will be taken – all point in one direction. They demonstrate that the liberty to use the bunkers for propulsion prior to payment is a vital and essential feature of the bunker supply business.Footnote 89
As for the contention that the transaction was labelled for the “sale” of goods and could not, therefore, be given effect outside the scheme of the Sale of Goods legislation, in the Court of Appeal, Moore-Bick L.J. persuasively dismissed this argument as follows:
The question is simply whether [in the language of the transaction] the characterisation by the parties of the contract as one of sale adequately reflects the substance of the obligations to which it gives rise. … [It] is no part of the court's function to shoehorn their contract into a category to which it does not properly belong in order to impose on them consequences which they did not intend.Footnote 90
The Court of Appeal then analysed the transaction as essentially hybrid. Although not a sale stricto sensu, it did give rise to a duty to pay for bunkers actually consumed, as well as those left unconsumed. This decision was upheld by the Supreme Court, as mentioned in the text above.
Of course, sometimes the court's judgment will itself directlyFootnote 91 prescribe or adjust the relevant market practice or assumption, such as when the court authoritatively interprets a phrase contained in an industry-wide standard formFootnote 92 or the judgment defines a commercially significant type of obligationFootnote 93 or implies a term on the basis of law.Footnote 94
D. Commercial Common Sense Applied to Overcome a “Fairly Small Mistake” in Drafting
Lord Neuberger M.R. said in Pink Floyd Music Ltd. v EMI Records Ltd. (2010):
[here] commercial sense means that one … should conclude that the parties made a mistake in referring to “Records” in [the relevant clause] when [more accurately] they [in fact] intended to refer to the music, lyrics and performance which were recorded on … the Master Tapes. This is a fairly small mistake … and the contention that it was made is not only supported by business common sense, but also by [consulting the rest of the agreement].Footnote 95
If this is an independent manifestation of “commercial common sense”, it overlaps with both “corrective construction” (see nn. 41–47) and Rectification (nn. 38–40).
E. Commercial Common Sense as a Check against Absurdity
In Antaios Cia Naviera S.A. v Salen Rederierna AB (“The Antaios”) (1985), Lord Diplock said: “If detailed and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense it must yield to business common sense.”Footnote 96 See Section IV for expansion of this subtopic.
F. Commercial Common Sense Can Be Used as a Compass to Point the Way when Considering Rival Meanings
Lord Clarke in the “Rainy Sky” case (2011) made it clear that a court need not wait until confronted by an extremely unreasonable or absurd construction before adopting a commercial perspective: “It is not in my judgment necessary to conclude that, unless the most natural meaning of the words produces a result so extreme as to suggest that it was unintended, the court must give effect to that meaning.”Footnote 97 He added: “If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”Footnote 98 Lord Clarke continued: “where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense.”Footnote 99
IV. Absurdity
A long-standingFootnote 100 application of CCS is to avoid a construction which would “flout business common sense”,Footnote 101 or would be “commercially irrational”,Footnote 102 or something “no businessman in his senses” would acceptFootnote 103 or a “plainly ridiculous” result.Footnote 104 An influential statement is by Lord Diplock in “The Antaios” (1984): “…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 commonsense.”Footnote 105 And he cited himself in Miramar Maritime Corporation v Holborn Oil Trading Ltd. (1984) where he had adopted the following formulation: “no business man who had not taken leave of his senses would intentionally enter into a contract which exposed him to a potential liability of this kind.”Footnote 106 Similarly, Lord Mustill said in Torvald Klaveness A/S v Arni Maritime Corporation (1994): “no judge will favour an interpretation which produces an obviously absurd result unless the words used drive him to it, since it is unlikely that this is what the parties intended.”Footnote 107
However, suggestions concerning “absurdity” soon shade into contentions based on extreme unreasonableness. As Christopher Clarke L.J. noted in Wood v Sureterm Direct Ltd. & Capita Insurance Services Ltd. (2015), there can be a range of meanings:
The more unbusinesslike or unreasonable the result of any given interpretation the more the court may favour a possible interpretation which does not produce such a result and the clearer the words must be to lead to that result. Thus if what is prima facie the natural reading produces a wholly unbusinesslike result, the court may favour another, even if less obvious, reading.Footnote 108
Lord Reid championed the criterion of “a very unreasonable result” in Schuler (L) AG v Wickman Machine Tool Sales Ltd. (1974) (although not explicitly tied to the world of business or commerce): “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.”Footnote 109 However, Lord Mustill in Charter Reinsurance Co. Ltd. v Fagan (1997)Footnote 110 was underwhelmed by this “criterion”, relegating it to a mere “rule of thumb”.
As one passes along the spectrum from absurdity, and beyond “very unreasonable” results, one eventually arrives at much less demanding criteria: an “unusual” or “commercially surprising” construction. That degree of disquiet will not move the court. As Andrew Smith J. noted in the BP Oil case (2012), both parties' contentions had fallen short of establishing interpretations which would flout CCS, and they amounted merely to arguments that the opponent's interpretation would “produce a result that businessmen would consider unusual and would be commercially surprising”.Footnote 111
Another problem is that language which might seem absurd to one judge might not cause even a flicker of concern to another.Footnote 112
Although the case law continues to acknowledge the need to avoid an interpretation which would produce “absurdity”, Briggs L.J. noted in Sugarman v CJS Investments LLP (2014)Footnote 113 that this type of argument can overlap with the technique of “corrective construction” (see text at nn. 41–47 above):
Sometimes, as in the ICS case (1998),Footnote 114 this … is described as a case where the parties must have used the wrong words or syntax, or where something must have gone wrong with the language: see Chartbrook Ltd v Persimmon Homes Ltd [2009] A.C. 1101. Sometimes, as in Antaios Cia Naviera SA v Salen Rederierna AB (1985), the [court approaches the matter by] recognising a requirement for the analysis of words to yield to business common sense, where it would otherwise flout it.
V. A Guide at Every Contractual Fork in the Road
A. Choosing between Rival Meanings
As we have seen in Section IV, CCS is sometimes invoked as a criterion to avoid absurdity. But (as noted in Section III(E)), CCS has a wider operation.Footnote 115 A fundamental statement is made by Lord Clarke in the “Rainy Sky” case (2011): “where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense.”Footnote 116 This means that, where it is clear that one (tenable) meaning is powerfully, or at least clearly, supported by commercial considerations, and a rival (also tenable) argument is not, the court should adopt the first meaningFootnote 117 (unlessFootnote 118 perhaps there is another countervailing factor, such as the internal structure of the relevant contract, which fortifies the latter construction).
The intellectual stimulus for this broader function of CCS is Lord Wilberforce's discussion of commercial background and purpose in both Prenn v Simmonds (1971)Footnote 119 and the Reardon case (1976).Footnote 120 Those speeches triggered a judicial chain reaction.Footnote 121 Thus, 10 years after the Reardon case, but a quarter of a century before the “Rainy Sky” (2011), Hoffmann J. in 1986 had captured the spirit of the new approach: “if the language is capable of more than one meaning, I think the court is entitled to select the meaning which accords with the apparent commercial purpose of the clause rather than one which appears commercially irrational.”Footnote 122
B. Commercial Common Sense Forms Part of the Overall Objective Inquiry
However, as Lord Neuberger's “restatement” in Arnold v Britton (2015)Footnote 123 (quoted in Section II above) makes clear, CCS is not an independent criterion operating in tandem with the foremost criterion of objectivity (the two lens theory). Instead, CCS is merely part of the objective inquiry to discover the legally operative meaning of the document (the one-lens theory). CCS sits alongside other sources of information used by the reasonable reader (in whose imaginary shoes the adjudicator must stand) when construing the document. Similarly, in Pink Floyd Music Ltd. v EMI Records Ltd. (2010), Lord Neuberger M.R. said that the adjudicator, as a reasonable reader of the contested document, must be commercially informed: “The words must be interpreted by reference to what a reasonable person (who is informed with business common sense, the knowledge of the parties, including of course the other provisions of the contract, and the experience and expertise enjoyed by the parties, at the time of the contract) would have understood by the provision.”Footnote 124 In practice, this will be the product of both the court's pool of commercial experience (as it were, “commercial judicial notice”)Footnote 125 and specific information acquired during the course of the case, notably when dealing with a “niche” transaction.
And so there is only one endeavour or exercise, which is the “unitary”Footnote 126 task of constructing the objective meaning, using the following four main tools or instruments: (1) the words immediately in issue must be read against the whole text (or set of documents),Footnote 127 it being “very dangerous to construe an expression in isolation”Footnote 128 and the focus on the immediately disputed portion can cause the reader to fail to see the wood for the treesFootnote 129 (earlier concluded documents, but not the parties' negotiations, can become accessible under the factual matrix principle);Footnote 130 (2) the document's purpose(s); (3) surrounding facts and assumptions, to which the parties are deemed to have been privy at the time of formation; and (4) CCS can be used to avoid absurdity (Section IV above) and it can operate, still more frequently, as a compass to point the way when considering rival meanings (see Section III(F)). However, for all these purposes and at all stages, the adjudicator is denied access to, and must exclude consideration of, declarations of subjective intent and evidence of negotiations or post-formation conduct (for those evidential exclusions, see the text at nn. 34–37 above).
C. Commercial Common Sense Not to Be Overplayed
Lord Neuberger in Arnold v Britton (2015)Footnote 131 urged caution against being influenced by contentions founded on CCS if the text itself seems clear and unproblematic. Those comments were scrutinised in Carillion Construction Limited v Woods Bagot Europe Limited (2016).Footnote 132 That case concerned interpretation of a clause which regulated the extension of time for completion of work under a subcontract (the building project in question is now the Rolls Building, London, which accommodates parts of the High Court). The judge (Nerys Jefford Q.C.) adopted, as a matter of ordinary construction, the subcontractor's suggested interpretation. Having listed the salient points made by Lord Neuberger in Arnold v Britton,Footnote 133 the judge in the Carillion case formulated this summary:
the court should first look for the natural meaning of the words used in the contract and not be too ready to depart from the natural meaning on the basis of the meaning the court thinks accords with commercial common sense. However, the more unclear the words or the worse the drafting, the more ready the court should be to do so. When considering the parties' intended commercial meaning of the words used, the court should be careful to have regard only to what the parties knew or could reasonably have known at the time of entering into the contract.Footnote 134
The judge, Nerys Jefford Q.C., then explained that, in her view, the present clause was unproblematicFootnote 135 and “clear” (noting that a court should then be slow to deviate from that view reached by textual examination and regard to the factual matrix).Footnote 136 But, in any event, the judge added, the interpretation adopted was not commercially objectionable: “I do not, however, consider that this meaning does not accord with commercial common sense. [The subcontractor's] interpretation … is practicable and workable and is what a reasonable person with all the background knowledge of the parties would have thought the clause meant at the time the contract was entered into.”Footnote 137
The text is the primary source of guidance. It might emerge from the forensic debate that there is more than one possible construction. But the document cannot be tortured, in the name of CCS, into yielding a “rival” meaning which has no support at all in the text. A choice can be made, but only if there are genuine rivals. Commercial common sense is not a magician capable of pulling rabbits out of thin air. To quote again from the “Rainy Sky” case (2011), Lord Clarke made it clear that CCS enables the judge to umpire as between “two [or more] possible constructions”Footnote 138 – that is, “where a term of a contract is open to more than one interpretation”.Footnote 139 Even then, CCS does not command the whole field. Instead it remains important to keep in view the entire document. As Lord Clarke explained, the court is engaged in “an iterative process, involving checking each of the rival meanings against other provisions of the document and investigating its commercial consequences” (emphasis added).Footnote 140
Even before Arnold v Britton (see discussion in the previous paragraphs), the post-“Rainy Sky” case law had made clear that a putative “rival” meaning must be tenable, having regard to the text and its factual matrix. In Procter & Gamble Company v Svenska Cellulosa Aktiebolaget SCA (2012), Moore-Bick L.J. said that, if the language is “reasonably capable of being given two possible meanings”, then, but only then, “the court should prefer that [meaning] which better accords with the overall objective of the contract or with good commercial sense”.Footnote 141 Similarly, other cases have referred to “genuinely alternative meanings of an ambiguous provision”,Footnote 142 or “language capable of bearing” different meanings,Footnote 143 or a “material ambiguity”Footnote 144 (Akenhead J. noting in the RWE Npower case (2013): “Often, on analysis, apparent ambiguities are not ambiguities at all”Footnote 145 ). The court is required to conduct a “holistic” or “global” examination of the whole contract in order to determine whether real ambiguity exists or whether the suggested doubt is in fact a mirageFootnote 146 (although, it is suggested, the betterFootnote 147 usage is not “ambiguity”, but “alternative reading”Footnote 148 or lack of clarity). Lewison L.J. expressed the issue clearly in the Napier Park case (2014): “Once an alternative reading emerges as a possible meaning, the interpreter must go on to consider which of two or more possible meanings is the more commercially sensible.”Footnote 149 As Lord Hodge put it crisply in Arnold v Britton (2015): “there must be a basis in the words used and the factual matrix for identifying a rival meaning.”Footnote 150
D. Clear Language Causing Countervailing Commercial Common Sense Points to Melt Away
No lack of clarity was discerned in Edgeworth Capital (Luxembourg) SARL v Ramblas Investments BV (2015). And so Hamblen J. concluded that arguments based on “commerciality” had failed to reach the target.Footnote 151 Similarly, Henderson J. in the Flanagan case (2015) held that a notice period specified in a limited liability partnership agreement contained no ambiguity and so it was unnecessary for him on that occasion to consider arguments founded on CCS.Footnote 152
In Cottonex Anstalt v Patriot Spinning Mills Ltd. (2014), Hamblen J. suggested that there is no mechanical rule of construction that the court will accede to an interpretation just because one party has sought to bolster it by an appeal to business sense.Footnote 153 Everything must depend on the lack of clarity of the text: “The more ambiguous the meaning and the stronger the business common sense arguments the more likely it is to be appropriate to do so.”Footnote 154 These comments indicate that an argument founded on CCS will not induce the court to adopt a disputed construction in one party's favour if that argument has only “marginal” weight and there is little ambiguity.Footnote 155 A fortiori, Hamblen J. is making it clear that CCS should not tip the balance when the court is satisfied that the text, construed in context, provides a clear answer.Footnote 156
Similarly, Leggatt J. said in Tartsinis v Navona Management Co. (2015): “There is…a need for caution in relying on arguments of ‘commercial common sense’, particularly when they conflict with the intention naturally to be inferred from the language which the parties have chosen to express their bargain.”Footnote 157
VI. “There May be Trouble Ahead”Footnote 158
It is clear that CCS must not get too big for its boots. The main problems arising under the post-“Rainy Sky” (2011) regimeFootnote 159 will now be presented under these headings: (1) confusion: the battle of party assertion; (2) competence: judges should know the limits of their commercial experience; (3) textual fidelity: parties make contracts and not judges; (4) courts are not to be swayed by “sympathy” for one side.
A. Confusion: The Battle of Party Assertion
Judges are wary of parties who present exaggerated or flimsy appeals to CCS. Often, each party seeks to “trumpet”Footnote 160 CCS with more or less equal plausibility, so that they are in truth engaged in making rival assertions of commercial attractiveness or reasonableness, and presenting arguments which “fly in different directions” or are “not clear-cut”.Footnote 161 One party's CCS is an opponent's commercial nonsense. DeadlockFootnote 162 can be produced by the collision of “reasonable arguments both ways”.Footnote 163 Intellectually honest judges must then admit that they cannot “conclude with confidence that there is an interpretation which makes more business common sense” and that, in such a situation, it is “often difficult for a court of law to make nice judgments as to where business common sense lies”.Footnote 164 As Lord Mustill warned, “where there is no obvious difficulty, and simply assertions by either side that its own interpretation yields the more sensible result, there is room for error”.Footnote 165
A controversial resort to notions of “commercial common sense” is the Court of Appeal's difficult decision in Rice v Great Yarmouth Borough Council (2000).Footnote 166 This was a four-year contract for the maintenance by the claimant of the defendant's sports and parks facilities. The written contract gave the defendant the right to terminate for “breach of any of [Rice's] obligations under the Contract”. But it was held that “any” (a short word which means “any”) should not be taken to mean “any at all”, otherwise the parties would have created a “draconian” contractual regimeFootnote 167 and that would “fly in the face of commercial sense”. Instead, “any” was construed as code for “any repudiatory” breach.Footnote 168 The Court of Appeal, therefore, concluded that termination would be justified only if there had been “repudiation” by a pattern of breaches.Footnote 169 But the breaches had not been cumulatively serious enough on these facts. The case has excited much critical comment.Footnote 170
B. Competence: Judges Should Know the Limits of Their Commercial Experience
Civil judges must not assume that they are masters of all trades, including “fishmongers and carriers of fish”Footnote 171 or experienced mariners, etc. Unlike specialist arbitrators chosen for specific market experience (e.g. as engineers or commodity traders), civil judges are not selected as possessing hands-on mercantile experience.Footnote 172 Instead, judges are mostly generalist civil practitioners. In the Skanska case (2006), Neuberger L.J. warned: “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.”Footnote 173 And, in an extra-judicial speech, Lord Neuberger said in 2014 that “judges should be diffident before pontificating about the commercial realities of any particular interpretation … [It] does not seem obvious that a judge, who is normally fairly remote from business matters, would be particularly good at identifying the commercial common sense of any conclusion, let alone what a reasonable person might regard as commercially sensible”.Footnote 174 As Lewison (2015) comments, “neither the advocates who argue points of construction nor the judges who determine them are commercial men” and so they should refrain from latching on to “a preconceived idea of what contracts of that description generally seek to achieve” and then trying to “force the words of the particular contract to fit that preconception”.Footnote 175
However, in some contexts, it is clear that judges have acquired profound and secure understanding of a particular type of transaction. A good example is Hoffmann J.’s treatment of a rent review clause in MFI Properties Ltd. v BICC Group Pension Trust Ltd. (1986).Footnote 176 His judgment is a magisterial analysis of the commercial background to such a clause. His commercial understanding of this type of clause legitimately influenced his appreciation of its legal effect. And it is salutary to recall that, in the “Rainy Sky” litigation, the Supreme Court's decisionFootnote 177 vindicated Simon J.’s first-instance conclusion,Footnote 178 and that, in the Court of Appeal, Sir Simon Tuckey, the dissenting judge, had favoured this same analysis, commenting that: “As an experienced commercial judge [Simon J.’s] conclusion … should be given considerable weight by this Court.”Footnote 179
C. Textual Fidelity: Parties Make Contracts and Not Judges
Richard Calnan, a London practitioner and leading commentator, has said: “Business people from all over the world choose English law because English law holds the parties to their bargains …. The courts enforce what has been agreed, not what they think might better have been agreed. It is the great strength of English commercial law.”Footnote 180
Commercial common sense is not an “overriding criterion”Footnote 181 and should not become an incantation deployed simply to “to undervalue the importance of the [contractual] language”.Footnote 182 The court lacks the power to “rewrite”Footnote 183 the language “merely because its terms seem somewhat unexpected, a little unreasonable, or not commercially very wise”Footnote 184 or, as Lord Mustill famously stated in Charter Reinsurance Co. Ltd. v Fagan (1997), “to substitute for the bargain actually made one which the court believes could better have been made”.Footnote 185 The courts must not fall into the “trap” of rewriting the contract to achieve a more “reasonable meaning”.Footnote 186 As Rix L.J. said in the ING case (2011), “construction cannot be pushed beyond its proper limits in pursuit of remedying what is perceived to be a flaw in the working of a contract”, unless the solution, on the basis of “corrective construction (see text at nn. 41–47 above) to the flaw can be found “within the four walls of the contract itself”,Footnote 187 or unless, based on evidence extrinsic to the document, the doctrine of Rectification can be invoked (on which see text at nn. 38–40 above). Commercial common sense must not be used to “subject the parties to the individual judge's own notions of what might have been the most sensible solution to the parties' conundrum”.Footnote 188 As Lord Neuberger commented in Arnold v Britton (2015): “The clearer the natural meaning the more difficult it is to justify departing from it.”Footnote 189
There are many examples of strong appellate courts refusing to be blown off course by appeals to the allegedly “uncommercial” nature of the contractual language, notably Deutsche Genossenschaftsbank v Burnhope (1995),Footnote 190 concerning the scope of an insurance contract, and City Alliance Ltd. v Oxford Forecasting Services Ltd. (2001), concerning a corporate share option.Footnote 191 Nor can CCS justify inserting an implied term into a commercial document when the suggested revision is contestable and not supported by the traditional yardsticks of obviousness and commercial necessity.Footnote 192
Furthermore, courts should keep open the possibility that a difficult, odd, obscure or tough point of drafting is the result of give-and-take, and thus a compromiseFootnote 193 (a transactional “trade-off”Footnote 194 or “quid pro quo”),Footnote 195 or simply a case of deliberate obfuscation.Footnote 196 On this last point, Lord Wilberforce noted in Prenn v Simmonds (1971): “The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning.”Footnote 197 In Re Sigma (2009), Lord Neuberger captured well the reality of many professionally drafted documents:
they often have different provisions drafted inserted or added to by different lawyers at different times; they often include last-minute amendments agreed in a hurry, frequently in the small hours of the morning after intensive negotiations, with a view to achieving finality rather than clarity; indeed, often the skill of the drafting lawyer is in producing obscurity, rather than clarity, so that two inconsistent interests can feel satisfied with the result.Footnote 198
In the absence of a concurrent Rectification claim (see text at nn. 38–40 above), these matters are concealed behind the curtain of the pre-contractual negotiation evidence bar (see text at nn. 35–36 above): “the reasonable addressee of the instrument has not been privy to the negotiations and cannot tell whether a provision favourable to one side was not in exchange for some concession elsewhere or simply a bad bargain.”Footnote 199 The court will not engage in “guessing”Footnote 200 what the negotiations might have been: that would be “pure speculation”Footnote 201 because it is “impossible, and in any event impermissible, to try to recreate the thinking of either party in the negotiations”.Footnote 202
For this reason, the Court of Appeal in Wood v Sureterm Direct Ltd. & Capita Insurance Services Ltd. (2015)Footnote 203 reversed the first-instance judge, who had given a wide scope to an indemnity clause in a share purchase agreement. The Court of Appeal said that the judge's decision to fill a so-called “gap” in the scope of an indemnity was unsafe. The very question of whether there was a gap was contestable. Even if truly there had been a gap, this might not have been the result of an oversight in the drafting, but instead the conscious outcome of hard-fought negotiation. However, the court cannot probe these uncertainties. As Christopher Clarke L.J. said: “the court will not be aware of the negotiations between the parties. What may appear, at least from one side's point of view, as lacking in business common sense, may be the product of a compromise which was the only means of reaching agreement.”Footnote 204
On the other hand, the court might conclude that the contract is simply “incoherent”Footnote 205 or “badly constructed”.Footnote 206 As Lord Neuberger admitted in Arnold v Britton (2015): “when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning.”Footnote 207 If, despite earnest attempts to find linguistic clues, the relevant text does not provide a reliable answer, the court can appropriately abandon “semantic niceties” and instead concentrate on trying to achieve a business-like construction.Footnote 208 This is not uncommon, as Arden L.J. explained in the Golden Key case (2009):
The court can spend a great deal of time immersed in the detail of lengthy contractual documents searching for clues. That task has to be carried out but if, despite a thorough search, the position is still unclear, and more than one meaning is properly available, the right approach is surely to give greater weight to the presumption that the parties must have intended some commercial result than to the textual clues if the latter yields an uncommercial result.Footnote 209
However, judges should not despair too quickly. The courts must not be linguistically over-fastidious. Judges might trip themselves up by latching onto the fact that the document contains “flaws”Footnote 210 or textual “infelicity” or that it is badly structured. Nearly every great work of literature is flawed and business is often conducted in a hurry. Commercial documents will not have been proofread by Ezra Pound. The court will take into account the fact that the contract has been composed by lay persons without legal assistance,Footnote 211 or at least that it was “not finalised by lawyers”.Footnote 212 Even when considering professionally drafted documents, courts should not become fixated by tautologyFootnote 213 or erratic punctuation.Footnote 214 Furthermore, in the case of complex documents, even if they have been composed with the assistance of lawyers, “there are bound to be ambiguities, infelicities and inconsistencies”.Footnote 215 It is also possible that a document's stylistic or textual shortcomings are in fact irrelevant to the disputed portion of text under consideration.Footnote 216
D. Courts Are Not to Be Swayed by “Sympathy” for One Side
“Bad bargains cannot be mended”Footnote 217 by the court, even if they have turned out to work “disastrously”Footnote 218 for one party. In Arnold v Britton (2015), Lord Neuberger said that “while commercial common sense is a very important factor, … it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice”.Footnote 219 Similarly, in Wood v Sureterm Direct Ltd. & Capita Insurance Services Ltd. (2015), Christopher Clarke L.J. said: “Businessmen sometimes make bad or poor bargains for a number of different reasons such as a weak negotiating position, poor negotiating or drafting skills, inadequate advice or inadvertence. If they do so it is not the function of the court to improve their bargain or make it more reasonable by a process of interpretation which amounts to rewriting it.”Footnote 220
Interpretation should be conducted in an even-handed manner, from “the perspective of both parties”, and issues of commercial purpose must reflect joint aims “and not just one party's”.Footnote 221 Lord Hoffmann said in Chartbrook Ltd. v Persimmon Homes Ltd. (2009) that “the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says”.Footnote 222 The court must not be “swayed by sympathy for one side”.Footnote 223
It is also a fallacy to suppose that the contract must be read as an expression of equal entitlement. As Beatson L.J.’s cogent analysis of a long-term exclusivity supply agreement in the Globe Motors case (2016)Footnote 224 demonstrates, judges must be attuned to the internal structure of the transaction and the balance of forces which that structure reveals. In that case, the Court of Appeal overruledFootnote 225 the judge who had unacceptably “read in” words and reached a conclusion which was at odds with the true balance of interests reflected in the document. Although the trial judge had said that it is not the province of the court to re-make the contract by devising “a reasonable and appropriate contract term to suit the judge's view of the circumstances”Footnote 226 and instead the judicial task is to show fidelity to the text, the judge was shown by the Court of Appeal to have fallen into this very trap. His decision was reversed because he had injected, under the guise of interpretation, an obligation which was not supported by the text.Footnote 227
In Arnold v Britton (2015), the Supreme Court emphasised that CCS is not an ex post facto release mechanism capable of responding “retrospectively”Footnote 228 to one party's “regrets” that the contract has worked out badly.Footnote 229 It would be wrong to rewrite a clear clause in the interest of abstract fairness: “[construction is not intended] to rewrite the parties' agreement because it was unwise to gamble on future economic circumstances in a long term contract or because subsequent events have shown that the natural meaning of the words has produced a bad bargain for one side.”Footnote 230 The Supreme Court instead suggested that the cure on those facts, which concerned “wretchedly conceived clauses”,Footnote 231 might be either mediationFootnote 232 or legislation,Footnote 233 but not verbal manipulation or textual reconstruction by a court.
In MSC Mediterranean Shipping Co. S.A. v Cottonex Anstalt (2016), Moore-Bick L.J. roundly declared that there is no general principle of good faith “in matters of contract”.Footnote 234 This is not the occasion to enter into the merits of that traditional position.Footnote 235 At first instance in that case, Leggatt J. had held that it was against good faith for an owner of sea cargo containers to sue the hiring party for demurrage charges exceeding the value of the hired goods.Footnote 236 For present purposes, the Court of Appeal's non-recognition of a general concept of “good faith” “in matters of contract” is notable because of Moore-Bick L.J.’s expression of concern that this concept could subvert the process of contractual interpretation:
There is in my view a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement. The danger is not dissimilar to that posed by too liberal an approach to construction, against which the Supreme Court warned in Arnold v Britton [2015] UKSC 36, [2015] A.C. 1619.Footnote 237
VII. Concluding Remarks
The only interpretative endeavour (under English contract law) is objective ascertainment of the document's legal meaning. For this purpose, the reasonable reader (who must be commercially sensitive and astute) will consider everything which the law permits him to take into account, assessed at the time of formation. This objective search is illuminated by (1) the relevant background of the contract, to which both parties are deemed to be privy, including the commercial setting of the contract and (2) the parties' shared objective(s) under the transaction. But, necessarily, the objective construction cannot be contaminated by reference to the unilateral, particular and subjective intentions of each party.
Commercial common sense is a versatileFootnote 238 element within the interpretative process: (1) it forms part of the overall framework within which the adjudicator construes the document; as such, it is a member of an interpretative team of relevant factors which, sensitively applied, increase the chances of adjudication regularly yielding sound results; (2) CCS also operates as a “safety valve” criterion to guard against absurdity; (3) furthermore, whenever rival meanings genuinely emerge, even if absurdity is not in prospect, CCS comes into play as a potentially decisive factor.
The case law emphasises the need for a moderate and cautious use of CCS, for the following reasons:
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(1) Partisan arguments are often dressed up as issues of CCS: judges should not be beguiled by forensic rhetoric which is a barely disguised plea for a favourable revision or gloss to suit one party but which is not truly supported by the document.
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(2) Judges should not pretend to greater commercial or trade or “street” experience than they in fact possess.
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(3) Textual fidelity should be maintained: CCS should not become a promiscuous pretext for rewriting the text in the name of abstract “improvement” of the contract; nor is it a red pen to be used to reconstruct a better contract in favour of one party, thereby saving that party from hardship.
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(4) Courts are alive to the chance that a transaction's odd, curious or tough wording is the result of compromise or even deliberate obfuscation; because English courts cannot lift the lid on the negotiations, this possibility must act as a powerful constraint against over-confident rewriting of contracts in the name of “commercial common sense”.
