Arnold v Britton
Citations:  UKSC 36;  AC 1619;  2 WLR 1593;  1 All ER 1;  HLR 31;  2 P & CR 14;  CLY 1606.
The owners of land granted several 99-year leases to plots so that holiday chalets could be built. Each lease stated that it was granted ‘on terms similar in all respects’ to the others. One clause dealt with service repairs. That clause was worded differently in two groups of leases.
- For both groups, the first half of the clause stated that the lessees had to pay ‘proportionate’ fees towards repairs.
- In the first group, the clause went onto set that the fee started at £90 and increased at a three-year compound rate of 10%.
- In the second group, the second half of the clause said that the fee started at £90 and increased at a rate of 10% a year. At the time, inflation rates were very high. They subsequently lowered.
The lessees in the second group contested their service charge. They argued that the clause should be interpreted so that the payable rates were not out of proportion with the costs of repairs.
- How should the service repairs clause be interpreted?
The House of Lords held that the lessees were bound to pay the service fees. The proper meaning of the clause was its natural reading. That meaning had commercial sense at the time the contract was made due to the high contemporary inflation rates.
The reference to ‘proportionate fees’ did not change the meaning of the clause. Rather, the second part of the clause set out how ‘proportionate’ was defined – as a fixed fee escalating year-on-year. The court had no power to reinterpret the contract to save the lessees from what turned out to be a bad bargain.
This Case is Authority For…
The Supreme Court set out the principles of contractual interpretation:
- Interpreting contract clauses should be done from the perspective of a reasonable reader at the time the contract was made.
- Usually, the court does not need to go beyond the natural meaning of the clause. However, the more ambiguous or unclear the natural meaning, the more the court can depart from that meaning. However, the court should not seek out ambiguity just because the natural meaning seems unfair.
- Commercial common sense is relevant to how a reasonable person would understand a contract. However, the courts can only assess whether the contract made sense at the date it was made. The fact that a contract no longer makes commercial sense due to later developments is irrelevant.
Lord Hodge noted that this was not an appropriate case for the ‘obvious mistake’ method of interpretation set out in Chartbrook Ltd v Persimmon Homes Ltd  AC 1101. That only applies where the mistake and how to correct it is obvious. In this case, if the service fee clause was a mistake then it was not clear what the parties intended otherwise.
Lord Carnwath dissented. He argued that clause was inherently contradictory. The first part seemed to anticipate the lessees paying a proportionate part of the service costs, while the second part set the fees without any reference to that cost. With inflation rates falling, it was possible for the lessees to end up paying more than the landlord had actually spent on repairs. He thought that the commercial unfairness of majority’s interpretation was so extreme that the court could not conclude the parties had intended it without the clearest of language.