I mentioned in an earlier note, the idea of “business common sense” as a legal concept. The case was one in the UK Supreme Court – Rainy Sky SA.
In Rainy Sky, the Supreme Court confirmed the purposive approach in cases where there are multiple interpretation and said “…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”.
I want to try and explain what this means in the context of contractual construction although I am not, not, not a litigator and I have no specific litigation skills in understanding how courts look at these matters although I have an idea.
What is a “perfect” commercial agreement and starting with the understanding there is no such thing as “perfect”. One that’s not only sufficiently clear for a person reading in good faith to understand but also sufficiently precise that a person reading in bad faith cannot misunderstand (see the case of re: Castioni in 1891). However, as we all know as commercial lawyers, few commercial contracts are perfect and some degree of “crystal ball gazing” is usually involved. The issue of when courts can and should take into account considerations of business common sense in interpreting commercial contracts forms part of the wider debate as to when a court will go beyond, what we can describe as a literal interpretation of contractual wording and take a “purposive” approach to its construction –so taking into account the purpose behind the provision in its surrounding context.
One basic rule of contractual construction is that words must be given their natural ordinary meaning. However, another is that the parties’ contractual intentions should be assessed by reference to what a reasonable observer with all the relevant background knowledge available to the parties would have understood the parties to have agreed by the words they used. We, therefore, have two differing ideas of contractual interpretation “literal –v- purposive”. They reflect the tension between (i) the basic principle that courts should only enforce what the parties are found to have, in fact, agreed and should not rewrite their bargain into something the courts think would have been commercially more sensible or fairer and (ii) the argument that the commercial purpose of a contractual provision is useful and relevant in trying to decide what the parties meant by the words they used. Indeed, to ignore that context is to risk misinterpreting the intentions of the parties.
We also need to distinguish between the following:-
Non-ambiguous provisions –where there is only one clear literal meaning of the language used, but one-party states that the parties themselves did not, in fact, intend it to have that meaning and, in support, tries to rely on the non-commerciality of the literal meaning. What the courts are, therefore, being asked to do in this case is to correct a drafting mistake.
The other is ambiguous provisions– where the words used are, on their natural and ordinary meaning, reasonably capable of having more than one interpretation. So, for example, this could occur when the meaning of a provision depends on how it is read together with other clauses. In these cases, the question is whether, to choose between the two interpretations, the court should limit itself to assessing which meaning is the more natural, or whether it can also consider which of the two would make the most sense from a commercial perspective.
In respect of non-ambiguous clauses, we should probably start with the comments of Lord Hoffman in Investors Compensation Scheme Limited – 1998 – where he said “the rule “that words should be given their natural and ordinary meaning” reflects the common sense proposition that we do not easily accept, that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.”
It was the Rainy Sky case, mentioned above, that definitively settled, in the case of ambiguous provisions, how matters should be dealt with when there is more than one available construction of the language.
In Rainy Sky only one of the two competing interpretations made any sense from a commercial perspective. The Defendant did not even try to put forward any commercial explanation of its interpretation –it just argued that those commercial factors were irrelevant.
While some judges have questioned the weight to be given to business common sense, the Supreme Court has confirmed the relevance of the guidance in Rainy Sky:
“where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause.”
Fourth article by Nick Gould on Contract, Deals and everything else in corporate legal practice
