Even where express language is used in one clause, the literal interpretation of that wording may not be the correct interpretation as other factors need to be considered - this was a key takeaway from the Supreme Court judgment in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd. The case serves as a useful reminder of the correct rules of contractual interpretation including the need to consider the contract as a whole and the implications of any interpretation.
A service charge certificate stating that the amount of the total cost and the sum payable by the tenant was “conclusive” was held by the Supreme Court to be conclusive as to the sum payable but not as to the underlying liability for the service charge. Accordingly, the tenant had to pay the sum specified in the certificate but was entitled to bring a claim arguing the sum was improperly charged.
Reasons for the court’s judgment included other provisions in the lease being inconsistent with the literal meaning of the service charge certificate provision, as well as the “surprising and uncommercial consequences” that would have occurred should the liability to pay the service charge certificate have been held to be conclusive.
The dispute was between Sara & Hossein Asset Holdings Ltd (S&H, landlord) and Blacks (tenant) regarding more than £400,000 unpaid service charges. The leases of the relevant properties specified that the landlord would provide an annual certificate “as to the amount of the total cost and the sum payable by the tenant” and that “in the absence of manifest or mathematical error or fraud such certificate shall be conclusive.”
According to SH’s certificate for the year 2017 – 2018, an amount in excess of £400,000 was payable. This was substantially higher than the charges for the previous year and in the context of S&H knowing Blacks would be terminating the lease in May 2019. Blacks refused to pay the full amount, claiming that the charge was excessive and included unnecessary items and expenses which fell outside the terms of the lease.
SH argued that the certificate was conclusive as to the amount of costs it had incurred and the sum payable by the tenant, subject only to the permitted defences. Blacks argued that the certificate was conclusive as to the amount of costs incurred by S&H but not as to Blacks’ service charge liability.
Rules of contractual interpretation
The Supreme Court confirmed that the correct approach to interpreting contractual provisions is to apply the principles set out by it in its past judgments including Arnold v Britton  AC 1619 and Wood v Capita Insurance Services Limited  AC 1173, summarised by Lord Hamblen as follows:
- 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.
- 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.
- 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.
Application of the rules
The Supreme Court followed the above “iterative approach” and noted the following:
- The natural and ordinary meaning of the certification provision did support S&H’s case.
- There were commercial reasons for supporting S&H’s argument, namely enabling the landlord to recover the costs and expenses it has incurred without significant delay or dispute.
- S&H’s interpretation was inconsistent with other provisions of the lease (including detailed dispute mechanism provisions and inspection rights) and the internal context of the contract.
- Finding in favour of S&H would produce “surprising and uncommercial consequences” (as it would mean the parties had agreed that the service charge could be determined conclusively by the landlord without representation or recourse, including in relation to issues as to the landlord’s own negligence).
Having considered the above points, the Supreme Court held that the certification provision should be interpreted as being conclusive as to the service charge “sum payable by the tenant” but not as to the underlying liability for the service charge. Blacks should not have withheld the sum but was entitled to bring a claim regarding repayment of the costs which it contended had been improperly charged.
Lessons from the decision
Those drafting commercial contracts would do well to:
- Draft with clear language so that the literal interpretation of provisions represents the parties’ intentions.
- Consider whether the provisions in a contract fit and work together satisfactorily. If there are any provisions that seem to contradict each other then it should be made clear in the contract how they are intended to interrelate.
- Consider any implications of the intended interpretation and whether any steps need to be taken in light of this. For example, if the contractual provisions are particularly unfavourable to one party and may have negative commercial consequences then it may be worth addressing this directly in the contract such as by expressly acknowledging the potential commercial impact and the parties’ agreement to the provisions notwithstanding that.