Arnold v Britton (2015) – A holiday from hell in the land of contractual interpretation

Arnold v Britton & Others [2015] UKSC 36

Summary

The Supreme Court found that contracts should be interpreted according to the ordinary meaning of the words, if they are unambiguous. This applies even if this involves an absurd outcome. It is for contracting parties to draft and review their contracts to ensure that the language does not result in absurd or injurious situations, as the Court will not wish to step in to interpret away from the clear language of the contract.

The judgment can be found here.

Facts

The case related to a service charge covenant on 25 holiday chalets on the Gower Peninsula in South Wales. In the lease document contracted between the landlord and the individual lessees, clause 3(2) is a covenant for the payment of an annual service charge. This charge, starting at £90 per annum, increases by 10% compound interest each year. This quickly becomes unsustainable, and over the course of the 99 year lease would run into the hundreds of thousands of pounds per annum.

Judgment

Lords Neuberger, Sumption, Hodge and Hughes formed the majority in dismissing the appeal. Lord Carnwath dissented. The Court held that the service charge should be interpreted as per its ‘natural meaning’ rather than reading an alternative meaning into it to that which was intended by the parties. This contractual interpretation should hold even if it is unfair to one party (and, on the topic of unfair terms, the Unfair Contract Terms Act 1977 does not apply to interests in land), as the language was unambiguous and could not be construed another way. Lord Neuberger, giving the lead judgment, applied greatest significance to the specific words used in the contract.

Lord Neuberger mentions the ‘Chartbrook principle’ as established by Lord Hoffmann in Chartbrook v Persimmon Homes. This principle states that a court is unlimited in rearranging contracts to give a commercially sensible meaning while construing a contract. Within the confines of the Chartbrook principle, the language in this case is legally sensible, if not practically (or morally) sensible. Lord Neuberger prioritises the ‘importance of the language of the provision which is to be construed’.

Lord Carnwath’s dissenting opinion prefers a proportionate approach to the issue, with a commercially improbable contractual outcome allowing for a more flexible approach to interpretation.

The Court notes that the landlord understands the legal predicament that the judgment places the tenants in, and would be willing to re-negotiate the leases for ‘pragmatic if not for legal reasons’, linking the service charge to the Consumer Price Inflation index instead of the current fixed 10% per annum increase. While the judgment itself would be injurious to the appellants, at least in reality they will have avoided bankruptcy.

Application

Courts will not always intervene in a contract to interpret the parties’ actual meaning, just because a contract was poorly made. If a clause has an absurd result, but cannot be construed any other way because it is written in plain language, then parties are unlikely to be able to avoid their obligations under it – even if, as Lord Neuberger puts it, the arrangement ‘has worked out badly, or even disastrously, for one of the parties’.

This is really a case that writes its own commercial conclusion – read your contracts! If your contract contains a calculation, please check it before you sign it. Otherwise, as Lord Carnwath puts it, you may find yourself in a situation that ‘can hardly be conductive to the atmosphere appropriate to a holiday location’.

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