A matter of interpretation – the Supreme Court look at contractual interpretation once more

In their recent Judgment in Sara & Hossein Asset Holdings Ltd (a company incorporated in the British Virgin Islands) v Blacks Outdoor Retails Ltd [2023] UKSC 2 the Supreme Court adopted a commercially balanced interpretation of a lease; rejecting the overly textual approach of the Court of Appeal in favour of reading the relevant clause in the context of the lease as a whole. 

The dispute

 This case concerned the effect of a 'conclusive certification' clause in a lease, relating to the service charge payable by the tenant (Blacks) to the landlord (S&H).

Blacks disputed the service charge fee levied by S&H in the region of £462,000. S&H issued proceedings to claim the outstanding sums. Blacks defended the claim on the ground that the sums claimed were not properly due on the basis that works either did not, by their nature, fall within the scope of S&H's repair covenant, or if they did, they were unnecessary at the time of their commission. 

The issues in dispute primarily centred around a 'certification provision' within the lease. It provided that:

“The landlord shall on each occasion furnish to the tenant as soon as practicable after such total cost and the sum payable by the tenant shall have been ascertained a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive.”

Blacks asserted that there were several necessary steps in calculating and categorising the various services and expenses which make up the service charge (eg identifying the services and expenses provided, ascertaining the costs incurred, determining the sums payable by the tenant). Each step may give rise to a legitimate cause for dispute, but none of them were disputes which fell within the narrowly defined exception to the provision (ie they were not disputes which fell within the definition of "manifest or mathematical error or fraud" (the permitted grounds)). To interpret the lease to mean that the certificate was conclusive both as to the amount payable and liability for such payment would make S&H "judge in his own cause"; Blacks would be powerless to challenge it. 

Further, Blacks relied on the assertion that S&H's case was inconsistent with other provisions of the contract. For instance, the provisions that provided for a detailed dispute mechanism as to the proportion of the service charge to be paid and the terms that gave Blacks the right to inspect receipts, invoices and other evidence relating to the charge. 

S&H's position centred on giving full force to the ordinary and natural meaning of the clause. It also relied on, what it said, was the "substantive commercial purpose and function" of the clause. This it asserted was to protect the cash flow of the landlord and prevent it from incurring substantial costs and then being compelled into potentially protracted litigation to recover those costs. The clause intentionally limited the tenant's rights to dispute its liability for the service charge whilst allowing it to raise permitted grounds but no others. Blacks' interpretation would make the permitted grounds provision otiose.

What approach did the Courts below take?

 S&H applied for summary judgment which was heard by Deputy Master Bartlett in August 2019.  The Deputy Master found the certificate to be conclusive only to expenses paid by the landlord not as to the tenant's liability for a 'fair and reasonable proportion' of them.  The Deputy Master considered the intentions of the parties would likely not include that the landlord could “decide conclusively the significant issues of law and principle which might arise in the course of determining the service charge payable”, such that the landlord would be “judge in his own cause”. The Deputy Master also considered that the provision elsewhere in the lease for expert determination on the less important issue as to the tenant's share of the service charge was supportive of his conclusion. 

S&H appealed the decision to the High Court. Kelyn Bacon QC (now Bacon J) sitting as a Deputy High Court Judge dismissed the appeal. She agreed with both the decision, and reasoning, of the Deputy Master. She concluded that the certificate was "conclusive as to the amount of the costs incurred, absent manifest or mathematical error, or fraud, but … not conclusive as to the question of whether those costs as a matter of principle fall within the scope of the service charge payable by the tenant under the lease".

S&H renewed its appeal to the Court of Appeal. The Court of Appeal (David Richards, Newwey and Arnold LJJ) allowed the appeal and granted summary judgment in favour of S&J, remitting the remainder (if any) of Blacks' counterclaim to the High Court for determination. The Court of Appeal held, unanimously, that the natural meaning of the relevant clause was such that the certificate was conclusive as to both elements – ie "the amount of the total costs" and "the sum payable by the tenant" – not merely the first of them. To find otherwise required express words or grounds for necessary implication, of which there were none. 

The decision of the Supreme Court

Blacks appealed to the Supreme Court. Lord Hamblen gave the leading Judgment with a short dissenting Judgment from Lord Briggs. 

Lord Hamblen considered both parties to be "sophisticated commercial entities" familiar with the construction of leases. He also noted the commercial context; a landlord was obliged to incur costs and expenses under its repair covenant and had an obvious interest in being able to secure reimbursement promptly and without prolonged dispute. Cashflow was important.

He also highlighted the fact that "leases are formal legal documents prepared by solicitors" yet found neither parties interpretation of the lease, and specifically the certification clause, to be satisfactory. 

Lord Hamblen started by reciting the cornerstone of contractual interpretation, as set out by Lord Hodge in Wood v Capita Insurance Services Ltd [2017] UKSC 24. Lord Hamblen said that those principles, as relevant to this case, were as follows:

"(1) The contract must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean.

(2) The court must consider the contract as a whole and, depending on the nature, formality and quality of its drafting, give more or less weight to elements of the wider context in reaching its view as to its objective meaning.

(3) Interpretation is a unitary exercise which involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its implications and consequences are investigated."

He found the natural and ordinary meaning of the certification provision supported S&H's case. Whilst Blacks had "provided powerful reasons as to why its interpretation should be preferred", its interpretation failed to give meaning and effect to the phrase 'the sum payable by the tenant'. He found force in S&H's commercial argument that to give effect to the Blacks interpretation would undermine the commercial purpose of recovery of service charges without significant delay or dispute. This was the evident purpose of a conclusive certification clause such as this.

However, whilst S&H's case gave effect to the natural meaning, it failed to account for the inconsistent provisions elsewhere in the lease which supported Blacks' interpretation. In addition, he considered there to be force in the 'judge in his own cause' argument criticised. Finally, Lord Hamblen noted that there may be issues which the tenant can only raise at a later stage, such as in relation to insurer or third party recoveries. It is well established that in interpreting a contract one starts with the presumption that neither party intends to abandon any remedies which arise by operation of law, absent clear words to that effect.

Lord Hamblen concluded that an alternative interpretation was the solution. That is, that the landlord's certificate is conclusive as to the service charge "sum payable by the tenant", but not as to the underlying liability for that payment. This was effectively a 'pay now, argue later' approach. He concluded that this gave effect to the natural meaning of the certification clause without the unreasonable consequence of being 'judge in his own cause' as well as avoiding the contextual inconsistencies. The landlord receives payment in good time but the tenant is entitled to raise and pursue a claim for repayment of costs which it says have been improperly charged. 

Lord Hamblen therefore upheld the Court of Appeal's decision, finding that it was right to grant summary judgment in favour of S&H, but held that Blacks was entitled to challenge the amount that they were obliged to pay. 

Lord Briggs gave a short dissenting Judgment, in essence concluding the Court of Appeal was correct in its assessment. He held that "it is well-settled that the uncommerciality of the prima facie meaning of contractual words only yields to a more commercial alternative if there is some basis in the language of the contract as a peg upon which that alternative can properly be hung".  He found that there was no such peg. Further, he found that the inconsistent provisions considered by Lord Hamblen were not inconsistent, but rather provisions to facilitate the permitted grounds being pursued. 

Commentary

This was a reiteration of and application by the Supreme Court of the well-established principles of contractual interpretation laid down in Wood v Capita. The Court placed weight on both the natural meaning of words used and context in which they were used to find a commercially balanced interpretation of the relevant clause.

Interestingly, Lord Hamblen placed weight on the wider commercial backdrop, not just on the context of the clause within the particular contract. The case demonstrates how a court will be prepared to override the narrow, literal meaning of words in contracts in favour of placing the words in their appropriate context, where doing so will give effect to the full extent of the contract.

Practitioners therefore need to be acutely alive to the words used when drafting contracts but also to the wider context of particular clauses within the contract as a whole. They should also be alert to the fact that a court may take into account the wider commercial context when forming a view on the construction of the document.