Lord Neuberger, President of the UK Supreme Court, has offered useful insight into his intentions behind the controversial Arnold v Britton judgment that left holiday chalet leaseholders facing bills adding up to millions of pounds for services (critiqued here: Neuberger abolishes common sense).
In a talk to members of the Leasehold Valuation Tribunal* he underlined his commitment to a literal approach to be taken by courts when reading contracts, leases and legislation. But he rejects any suggestion that he has “changed the law” with the Arnold judgment. He considers the judicial art of “construction” – construing the true meaning of the document in question – and sets his judgment within the context of 40 years of judicial contractual interpretation.
A judge’s role in “construction” or interpretation of contracts, is to identify the intention of the parties “by interpreting the words used in their documentary, factual and commercial context”, Neuberger said [referring to a case on wills in which he had made this point last year, Marley v Rawlings.]
The principles for construing contracts and legislation were similar and leases should be treated no differently since, like contracts, they have “commercial consequences”.
“A lease is just like any other contract, so it is hard to see why it should be construed on any other different principles from a commercial contract,” he said. [Indeed he treated the lease in Arnold v Britton as in part a commercial gamble – which the leaseholder had lost since a term that entitled the landlord to a 10% per annum increase in service charges had led to prohibitive bills.]
He acknowledges a lease gives an interest in land but that just means it will refer to technical land law concepts and to provisions relating to land and buildings. “I don’t see why that should justify special rules of construction so far as principles are concerned” any more than, for example, for a charter party or a patent where the contract contains words special to ships and to science.
It is argued that leases are also unusual because they involve a term and a reversion that are almost always assignable [ie to someone other than the original parties] – which means they can be in the hands of someone not a party to the negotiations when the lease was originally drawn up. Such a party to the lease would therefore not be aware of the surrounding circumstances of the creation of the lease “giving rise to the possible argument that the surrounding circumstances of the execution of the lease should be given less prominence”.
But many contracts affect third parties and some commercial contracts are assignable, Neuberger said. This suggests “the purchaser of a lease or the purchaser of a reversion to a lease … should take extra care to find out what went on when the lease was executed in case some important fact known to the parties originally executing the lease would have influenced or could have influenced a court in interpreting the lease”.
It had also been argued that service charges in a lease should be construed restrictively [that the court should not “bring within the general words of a service charge clause anything which does not clearly belong there” – Rix LJ in McHale v Earl Cadogan  EWCA Civ 14, para 17] but the majority in Arnold was “unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation” – nor for the clauses in leases in general. It is the case that leases have covenants and provisos crafted specifically for the premises to which they relate [eg about their upkeep]; they have to take account of legislation; and the landlord formally parts with possession for a period – but none of this justified the suggestion that different principles of interpretation should apply to leases.
A lease should be construed in the light of the factual situation at the date it was executed – in contrast with a will, which “speaks from death”, or a notice, which should be “interpreted probably not as at the date it was signed but at the date it was received”. In each case “you are asking what a reasonable person clothed with the knowledge of the relevant parties or party would understand about the relevant document at the relevant time”.
In passing Neuberger noted that the rules of construction for Acts of Parliament are not really different from those for contracts. For a statute, even though the surrounding circumstances “are likely to be different in nature very often … the basic principles are the same or, it is fair to say, very similar, though some more purist academics will undoubtedly point out some technical differences”.
Neuberger addresses the issue of whether his judgment in Arnold was intended to change the law. He doesn’t think it was. There was nothing new in Arnold to say about the interpretation of contracts. The established principles were interpretation looking at:
• the natural and normal meaning of the words;
• the overall purpose of the document;
• other provisions in the document;
• facts known or assumed by the parties at the time it was executed;
• common sense
A judge should ignore subjective evidence of the parties’ intentions [meaning what the parties now say they meant at the time of drawing up the contract]. The courts had laid down the correct approach over the last 40 years starting with Lord Wilberforce’s judgment in Prenn v Simmonds in 1971 (3 All ER237) [in which Wilberforce said: “The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations” (at 239)]. Judges may even be giving too much unhelpful over-analysis now.
Neuberger particularly noted Hoffmann’s contribution in Mannai and Investment Co v Eagle Star Assurance in 1997 (AC 749). He questioned whether Hoffmann had actually intended to change the law – and the same could be said of his own judgment in Arnold. “I do wonder how much more judicial guidance can usefully be given,” Neuberger said, suggesting any “change in the law” that people might perceive in Arnold was merely restating well worn principles.
In an analysis of how judges reach their conclusions he takes on board the notion that they may “come to a conclusion in their own mind and then have to clothe that conclusion with convincing reasons which are generally retrospectively concocted in order to make what is little more than a gut reaction intellectually respectable”. This is “something of a caricature, a somewhat loaded and derogatory way of making what is in a way a fair point”.
Judges do form preliminary views based on incomplete information and incomplete argument and then “if he or she is a good judge, reconsidering that view as new information or new argument come to his or her attention”. It’s an iterative process, a matter of checking rival meanings against other provisions of the document and investigating the commercial consequences (as noted by Lord Mance in Re Sigma Finance  UKSC 2)
On the issue of literal interpretation Neuberger said: “Of course people differ as to how easy it is to move from the natural primary meaning of the words of a contract if they are inconsistent with, say, common sense. But nobody doubts that the natural meaning of the words and commercial common sense are highly relevant. There may be a difference between judges in that one is inclined to be more literalist than the other – in the sense that one judge may be less ready temperamentally to depart from the natural meaning of the words and to accept that they are commercially not very attractive; another judge may be more ready to depart from the natural meaning of the words for the same reason. But it is hard to spell out any great general principles beyond the factors I have identified.”
Interpretation is a value judgment; opinions differ and “no amount of analysis can tell you why one reading is right and another wrong, in many cases”:
“One judge may perfectly reasonably say the words are too clear while another may think that they are capable of being, as it were, bent or fashioned or adjusted to achieve a secondary meaning, a more commercially sensible meaning although not the primary meaning when one looks at the words.”
[Neuberger is alluding to”commercial common sense”, held to be a useful tool in construing commercial contracts when the wording is ambiguous or irrational. Arguably, Arnold unseated “commercial common sense” except in very limited circumstances.]
Even an appelate court may simply have a different view from the judge at first instance thinking the judge too literal or giving more weight commercial common sense. “But I do think myself that it is very important to pay particular attention to the words the parties have used,” Neuberger insisted. [In Arnold he had said that a judge should look at “what the parties meant through the eyes of a reasonable reader”.] “That meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense, unlike the surrounding circumstances, the parties have control over the language they use in the contract.”
Commercial common sense
He told LVT members that “When it comes to commercial common sense, I would suggest that judges should be a little diffident when it comes to pontificating about the commercial realities of a particular situation or particular interpretation. It does not seem obvious to me that a judge, who is normally fairly remote from business matters would be particularly good at identifying the commercial common sense of any conclusion.”
The Supreme Court Justices in Arnold, he acknowledged, had reluctantly agreed with the landlord despite the result being so penal for the tenants [with service charges for 21 leases rising 10% a year from a notional £90 in 1976 to half a million pounds a year per chalet during the final years of the lease 99 years later. The tenants argued this was so absurd it could not have been intended since costs were nowhere near so high].
“We agreed with the landlords because we thought the language of the clause was simply too clear to admit of a different result.” This approach gave rise to “a very commercially surprising result being arrived at and justified because the words were so clear”.
Commercial common sense “was helpful to the tenants case but not as obviously helpful as it might seem. As we said in that case, commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement has worked out badly – or even disastrously – for one party is not a reason for departing from the language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties at the date the contract was made.”
The majority of Supreme Court judges in Arnold were not convinced the tenants would not have entered into the 10% per annum provision in the 1970s when inflation was running at 15% – this even though other leases issued for the chalet park limited the increase to 10% every three years – and there was a clause that the same terms should apply to all the chalets. “We decided this didn’t run and we had to bite the bullet.”
The majority had rejected the view of fellow Justice Lord Carnwath, who saw “the consequences of the lessor’s interpretation as so commercially improbable that only the clearest words would justify the court in adopting it”. Carnwath had added: “the limited addition proposed by the lessees [seeing the 10% as a potential maximum] does not do such violence to the contractual language as to justify a result which is commercial nonsense”.
Neuberger told the leasehold tribunal members: “I wish I could have agreed,” and accepted that the issue was a matter of opinion with no “mathematically provable right or wrong answer – it’s not an area where one can be ultimately certain”.
Construction or rectification
Neuberger referred to Lord Hoffmann’s view in Chartbrook v Persimmon Homes  UKHL 38 that, in cases of clear mistake: “there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.” (Para 25)
It had since been argued that this suggested “the difference between construction and rectification [a judicial process of putting right clear errors in contracts] had been reduced almost to vanishing point”. [See para 38 and 40 of Marley]. But there is a distinction:
“If it is a question of interpretation then the document in question has and has always had the meaning and effect determined by the court and that is the end of the matter. On the other hand if it is a question of rectification then the document as rectified has a different meaning from that which it had on its face.”
The court would therefore have the jurisdiction to refuse rectification or allow it on terms, for example if there had been delay, change of position or third party reliance. Neuberger acknowledged that the Justices in Marley ducked the issue, leaving open the question of whether they agreed with Hoffmann. [He added no more on this matter in this speech either, though the implication is that he prefers less red ink and a clearer distinction between construction and rectification – and that Arnold is an example of that.]
Neuberger recommends that his approach to construction of contracts and legislation should be extended to his own judgment. He introduced his speech by saying modestly: “Probably the most unreliable analyst of any judgment is the judge who wrote it. He knows what he meant but that blinds him to an unbiased reading of what he said.” Later he added: “What I intended to say in Arnold is irrelevant. It is what I actually said that matters … until a colleague in a later judgment says it was wrong.”
Mannai Investment company v Eagle Star  3 All ER 352;  UKHL 19
Marley v Rawlings and another  UKSC 51
McHale v Earl Cadogan  EWCA Civ 14
Prenn v Simmonds  3 All ER 237: Swarb report here
Chartbrook v Persimmon Homes  UKHL 38
*Note: The Leasehold Valuation Tribunal is now the First-Tier Tribunal (Property Chamber – Residential Property)