Importance of commercial common sense in contract interpretation?

Since the Supreme Court’s decision in Arnold v Britton & Ors [2015] UKSC 36, there have been a number of cases generated about the natural meaning of commonly used provisions or phrases in contracts.

The first step in interpreting a contract is always to ascertain the natural and ordinary meaning of words. The fact that the ordinary and natural meaning makes little commercial common sense is not a good enough reason to depart from that interpretation. However, the more unclear the natural meaning of the words are, the more scope there is for taking into account the wider context of the provision, including commercial common sense.

In the M&A sphere, a number of recent cases have focused on the interpretation of limitation and notification provisions in Sale and Purchase Agreements (SPAs). By way of example, in Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128, the Court of Appeal considered what level of knowledge about a possible warranty claim triggered the Buyer’s notification obligations to the Seller. This was important as the Seller was only liable under the SPA if the Buyer complied with the notification provisions. As the provision limited the Buyer’s ability to pursue the Seller for a breach of warranty, the Court of Appeal was willing to resolve the ambiguities in the drafting in a way more favourable to the Buyer and more in accord with what it considered to be commercial common sense. Nobahar-Cookson and other cases (such as Ipsos S.A. v Dentus Aegis Network Limited [2015] EWHC 1171) also give helpful guidance as to the general purpose of notification provisions in SPAs, which should be taken into account when resolving ambiguities in drafting.

We consider in this publication some other recent cases which involve an analysis of some common provisions found in SPAs and other corporate documents. What is somewhat surprising about some of the cases is the Court’s willingness (despite Arnold v Britton) to depart from what would appear to be the natural and ordinary meaning of words in order to give effect to the perceived commercial intention of the parties. This underscores the importance of clear and precise drafting if certainty is to be achieved.