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Recent Developments in Interpretation of Contracts: a welcome message of certainty in a time of change

Given Brexit and now COVID-19 clients are looking at how they can adapt to changes in the commercial, political and legal context.  Approaches to working and the nature of the obligations parties assume may evolve.  However one matter that is likely to stay a constant is that parties involved in commercial and construction ventures will want to set out their respective obligations in a contract at the outset of any project.  They will also want to have confidence as to how their contract will be read afterwards by those seeking to perform it or to resolve disputes in relation to it.

So how are the courts in this jurisdiction interpreting contracts? Is there sufficient certainty as to their approach to give confidence to those advising on either present disputes or those considering an English choice of law clause in future contracts?

The general principles of how a court interprets a contract might be expected to be long settled.  Courts have been asked to decide the question of what a contract means for centuries.  Back in 2009 Lady Hale said in Chartbrook Limited v Persimmon Homes et al [2009] UKHL 38 at paragraph 101: ‘It is perhaps surprising that questions of such practical and theoretical importance in the law of contract should still be open to debate and development.’  There has been considerable debate and development since then.

The Supreme Court has however recently both clarified the principles and confirmed that the ‘position is one of continuity rather than change’.  The Court of Appeal in a judgment handed down on 7 April 2020 in Teesside Gas Transportation Limited v (1) Cats North Sea Limited et al [2020] EWCA Civ 503 stated:

The court’s approach to the construction of commercial contracts is now well known and was not in dispute. Absent further intervention by the Supreme Court, the principles can now be taken as settled. They have been re-stated in Arnold v Britton [2015] UKSC 36[2015] AC 1619 and Wood v Capita Insurance Services Ltd [2017] UKSC 24[2017] AC 1173 and need not be repeated here.

At paragraph 15 of his judgment in Arnold v Britton Lord Neuberger summarised the principles as follows:

‘ [the meaning of a clause] ‘has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [agreement] (iii) the overall purpose of the clause and the [agreement] (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 …’

Given the judgment in Teesside, the longer narrative discussion of the principles in Wood v Capita is to be read alongside and consistently with this summary.

Importantly the Supreme Court took the opportunity in Wood v Capita to address concerns that Arnold v Britton presented a departure from a more business-minded approach adopted by a differently constituted Supreme Court in Rainy Sky SA v Kookmin Bank [2011] UKSC 50 (in which the leading judgment was given by Lord Clarke).  In a judgment, with which both Lords Neuberger and Clarke agreed, Lord Hodge in Wood v Capita stated that there was no inconsistency between Arnold v Britton and Rainy Sky, and confirmed that commercial common sense ‘is a very important factor to take into account when interpreting a contract’ although it ‘should not be invoked to undervalue the importance of the language of the provision which is to be construed’.

The concern as to whether there had been a difference of approach in Arnold v Britton and Rainy Sky had not just been an academic one.  Clearly aware of the impact of perceived uncertainty or lack of clarity on commerce and legal services the judgment in Wood v Capita continues ‘one of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation’.  In short no uncertainty and no lack of clarity: parties are safe to adopt an English law clause knowing that the court or arbitrator will be applying clear and unchanging principles in interpreting their contract.   Each case is fact specific but how those facts are to be assessed is not in doubt.

A welcome message in the current situation.

A full paper by Isabel, ‘Recent Developments in Interpretation of Contracts: A Picture of Consistency and Clarity?’ has been published by The Society for Construction Law (paper 233 April 2020) paper exploring the principles in those Supreme Court cases and focusing on two recent Court of Appeal decisions, Triple Point Technology Inc v PTT Public Co Ltd and Teesside Gas Transportation Ltd v Cats North Sea Ltd, to understand how the courts are approaching the exercise of interpretation in the TCC field.

Isabel has lectured and written on the topic of contractual interpretation for many years.  She is the joint editor of Emden on Construction, the author of the chapter on ‘Incorporation, Interpretation and Implication of Contract Terms’ and is a former lecturer at Christ Church, Oxford.

She is frequently instructed in cases raising points of interpretation of contracts including PFI contracts, banking facilities, insurance policies and a range of standard term and bespoke construction contracts. She appeared in the first case to be decided in the Supreme Court on adjudication, considering issues of interpretation and implied terms Aspect v Higgins [2015] UKSC 38.

Written by Isabel Hitching KC.

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