Case No. IP-2014-000051

SA v Kookmin Bank [2001] UKSC 50, [2011] 1 WLR 2900. In paragraphs 20 and 21 he stated: “[21] The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.” 69.Lord Clarke went on to say in paragraph 22: “Where the parties have used unambiguous language, the court must apply it” and quotes with approval the statement of Hoffman LJ at p99 of Co-operative Wholesale Society Ltd v National Westminster Bank plc [1995] 1 EGLR that: “This robust declaration does not, however, meant that one can rewrite the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument, and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement.” 70.The Supreme Court has considered the subject more recently in the case of Arnold v Britton & Ors [2015] UKSC 36, in which Lord Neuberger expanded on the guidance given in Rainy Sky, in paragraphs 14 – 23 of his judgment, with which Lord Sumption, Lord Hughes and Lord Hodge agreed. Lord Carnwath produced a dissenting judgment, but did not take issue with Lord Neuberger’s discussion of the law. I will not reproduce those paragraphs in full here, but I highlight a number of points. 71.Lord Neuberger made it clear in paragraph 15 that in interpreting a contract, the court must focus on the meaning of the relevant words (in that case in a lease, in this case in the Oran Release) in their documentary, factual and commercial context. The meaning must be assessed in light of: (i) the natural and ordinary meaning of the relevant clause; (ii) any other relevant provisions of, in this case, the Compromise Agreement; (iii) the overall purpose of the clause and, in this case, the Compromise Agreement; (iv) the facts and circumstances known or assumed by the parties at the time the document was executed; and (v) commercial commonsense; but (vi) disregarding subjective evidence of any party’s intentions.72.At paragraph 17 Lord Neuberger makes clear that what the parties meant is most obviously to be gleaned from the meaning of the language used, and at paragraph 18, he emphasises that the clearer the natural meaning the more difficult it is to justify departing from it. In relation to ‘commercial common sense’, Lord Neuberger stated in paragraph 19 that it was not to be invoked retrospectively: “It is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made.” In paragraph 20 he cautioned that: “While commercial commonsense is a very important factor to take into account, a court should be slow to reject the natural meaning as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed.” In paragraph 21 he reminds us that when considering what facts are known to the parties, that means those which were “known or reasonably available to both parties… it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties.”