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UK – Does an iterative approach mean less contractual certainty?
UK – Does an iterative approach mean less contractual certainty?
31 January 2023
Series
Blogs
31 January 2023
The English courts’ approach to contractual interpretation drifts gently between textual and contextual approaches.
The recent high-water mark for a more textual approach is Arnold v Britton [2015] UKSC 36 in which the Supreme Court favoured strict adherence to the words of the contract, even if the results are harsh. The “mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language”.
Since then, the tide has receded. The Supreme Court’s decision in Sara & Hossein v Blacks [2023] UKSC 2 is part of a general trend towards a more contextual approach. The court used an iterative approach to interpretation – working through alternative approaches to see which was best – and ultimately alighted on an interpretation neither party had put forward. This allowed a more “satisfactory” solution that avoided a “surprising” or “uncommercial” outcome.
This opens the way for more creative and commercial approaches to contractual interpretation but comes at the cost of contractual certainty. Further details are set out below.
The dispute related to a lease of commercial premises in Whitechapel and Liverpool. The lease was coming to an end but the landlord claimed £400,000 in service charges, which was a significantly higher amount than in the preceding or subsequent year. The tenant objected, claiming that the charge was excessive and included unnecessary items and expenses which fell outside the scope of the service charge provisions.
The landlord relied on the terms of the lease which, in relation to the service charge, allowed it to certify “the amount of the total cost and the sum payable by the tenant”. That amount would be “conclusive” in the absence of “manifest or mathematical error or fraud”.
The scope of the exemption for “manifest or mathematical error or fraud” is narrow. For example, a “manifest error” is “obvious or easily demonstrable without extensive investigation”. More generally, an “arguable error [in the certificate] will not suffice, however well founded the allegation of error may ultimately prove to be”.
There were two competing interpretations of the certification provision.
The Supreme Court described both interpretations as “unsatisfactory”. One solution allows the landlord to be “judge in [their] own cause”. The other cuts across the natural and ordinary meaning of the certification provisions.
The solution comes from an iterative approach. As neither interpretation is satisfactory, the court came up with its own interpretation.
In this case, the Supreme Court concluded that the certification process imposed a “pay now, argue later” regime. The tenant must pay the certified amounts now (subject to manifest error or fraud) but is not prevented from subsequently disputing liability for that payment.
This approach is attractive but controversial. The courts are normally wary of inventing their own solutions. The risk of unforeseen consequences means those solutions might not be sensible or workable in practice. King Solomon was fortunate his wisdom led to a just result, but in other cases the baby might well end cut in two.
More fundamentally, this judicial creativity cuts against the grain of English contract law and undermines contractual certainty. Lord Briggs’ trenchant dissenting judgment notes the attractions of a “pay now, argue later” approach but concludes the service charge provisions are “irreconcilable” with that interpretation; the “court does not in such circumstances have carte blanche simply to make up a solution of its own. It must choose between genuinely available constructions, rather than mending the parties’ bargain”.
The Supreme Court was clearly perturbed by the implications of “conclusive evidence” clauses but might have been better served by limiting its judgment to those particular provisions, rather than raising broader questions about contractual certainty.
The judgment highlights a number of important practical drafting tips.
The decision in Sara & Hossein Asset Holding Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2 is available here.