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Should contracts be read literally?

Should contracts be read literally?

The court’s approach to interpretation of contracts

A lay person might be forgiven for thinking that a contract should “say what it means” and “mean what it says”.   If that is the case, surely it is right that contracts should be read literally?  At least that approach would give everyone certainty, wouldn’t it?

Well, the Court of Appeal sees it rather differently and here’s an example.

In Grimes v The Trustees of the Essex Farmers & Union Hunt [2017] EWCA Civ 361, the Court of Appeal considered (in a case relating to an agricultural holding) the validity of a notice to quit where the relevant clause relating to notices stated:

“Either party may serve any notice (including any notice in proceedings) on the other at the address given in the Particulars [at the beginning of the tenancy agreement] or such other address as has previously been notified in writing.”

The question here was whether the landlord could serve notice to quit on the tenant at the tenant’s address shown in the Particulars, even though the tenant had moved away from that address and had, many years previously, notified the landlord of that fact and given a new address.

In the County Court, the judge found that the literal meaning of the words were clear.  The landlord could serve either at the address stated in the lease or at the new address supplied by the tenant.  The tenant could make appropriate arrangements for forwarding from the old address to the new one.  The parties could have, if they wished, drafted the clause differently so that, on notification, the new address would be substituted for the old one, but they had not done so here.  In such circumstances, the County Court judge felt that:

“What is not permissible in my firm conclusion is to take a clause which on its face says clearly that the lease address is a good address for service and interpret it as meaning that in some circumstances that address is not good for service, that it has ceased to be good for service. That would be going beyond the proper limits of an exercise of construction and going into the forbidden territory of re-writing a contract in different, perhaps fairer, terms. That is not a permissible exercise except where the alternative interpretation is a commercial absurdity, which for the reasons I have stated I do not consider to be the position here.”

Luckily for the tenant, the Court of Appeal disagreed with this approach, highlighting a couple of recent cases on interpretation of contracts that are highly relevant.

Firstly, in Arnold v Britton [2015] UKSC 36, [2015] AC 1619, the Supreme Court had held that:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “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”, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, para 14. And it does so by focusing 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 lease, (iii) the overall purpose of the clause and the lease, (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.”

In addition, in the very recent case of Wood v Capita Insurance Services Ltd [2017] UKSC 24, the Supreme Court put it like this:

“The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.”

The upshot was that the Court of Appeal reached the following conclusions.

The landlord could have served a notice to quit at the old address at any time before the tenant notified the landlord of the change. That was the case, even if the tenant had moved out and even if the landlord knew that the tenant had moved out. The onus is on the tenant to notify of his change of address and if he fails to do so, he takes the risk of a notice not reaching him.

However, the Court of Appeal could not accept that it was still open to a landlord to serve at the old address, after notification by the tenant of the new address, despite the literal words of the clause in question.

In reaching that conclusion, it was considered that the normal meaning of “or” is disjunctive i.e. expressing a choice between two mutually exclusive possibilities.  In a suitable context, it can be read as equivalent to “and”, or as expressing a non-exclusionary alternative equivalent to “and/or”.  It was therefore natural to begin with a rebuttable presumption that the clause provides for service either at the address given in the Particulars or at such other address as has previously been notified in writing, but not at both. In this case, “or” was not intended by the parties to mean “and” or “and/or”.  This meant that there could be only a single address for service: either the address in the lease or (instead of that address) a new address notified to the landlord.

To conclude, this case is one of a number over recent years that shows a shift away from literal interpretations of contracts, in favour of a more purposive approach. The objective meaning, following analysis of the background facts, holds the key to interpretation.

If common sense dictates otherwise, rely upon the literal words of a contract at your peril!

William Lawrence