What principles should the courts apply in the event of a dispute over the interpretation of an agreement, in circumstances where the meaning suggested by one of the parties to the contract would involve a commercial outcome that is unusual? A recent High Court decision reminds us that clear words are required before the courts will interpret a contract to produce a result that would be contrary to normal commercial expectations.
The dispute in Oliver v RSN Ltd [2007] EWHC 320 (Ch); [2007] PLSCS 39 turned on the construction of a lease of an apartment in a nursing home, which contained a pre-emption clause whose interpretation was open to question. The property passed to the tenants’ executors, who were advised to market the apartment for £165,000. However, the landlord argued that it was entitled to re-purchase the property for £57,500, which had been the premium paid by the tenants on the grant of the lease. The dispute was, therefore, about who should benefit from the substantial rise in the value of the property after the lease was granted.
The judge applied the following principles of contractual interpretation to help him reach his decision. When deciding on the meaning of a contractual provision, it was relevant to consider whether a particular construction would lead to an unreasonable result; the more unreasonable the result, the more unlikely it was that the parties could have intended it. Importantly, the courts were entitled to make their own assessment of the ordinary commercial expectations that the parties in a particular market might reasonably be thought to have had when they entered into the contract.
The judge believed that it would be unusual to incorporate a pre-emption clause that allocated the entire increase in the market value of a lease, which had been purchased for a substantial premium, to the landlord rather than the tenant. Nothing in the lease suggested that the original purchase price had been adjusted to take account of the effect of an unusual pre-emption provision, and the court was not required to conduct a detailed assessment of the market value of the premises on the grant of the lease to establish whether the price had been discounted to reflect any depressive effect upon value that a clause like this would have had. So, if the parties had intended to cap the pre-emption price by reference to the original purchase price, much clearer language would have been required to confirm their intentions.
Finally, if the court had remained in any doubt about the meaning of the provision, it would have applied the contra proferentem rule. This rule applies where a contractual term put forward by one party to protect its interests is ambiguous or uncertain and operates to resolve the ambiguity or uncertainty in favour of the other. The pre-emption provision was inserted for the landlord’s benefit and would, therefore, have been construed in the tenant’s favour.
Allyson Colby is a property law consultant
