Contractual disputes often involve a disagreement about what the parties intended to say and whether the contract reflects that intention. The Supreme Court decision in Arnold v Britton provides a reminder that the courts will not necessarily step in and allow commercial common sense to prevail over the language in the contract, even where this results in a bad bargain.
The unfortunate tenants in this case had long leases of 25 chalets. The leases required the tenants to pay a service charge to cover the upkeep of the chalet park. The wording used to set the level of service charge stated that the tenants must pay “…£90 plus VAT for the first year of the term … increasing by £10 per hundred for every subsequent year.”
What did this mean?
The landlord said it meant the service charge was to increase by 10% every year. If the landlord was right, the service charge contributions would increase to £550,000 by 2072, far in excess of the costs likely to be incurred.
The tenants argued that the 10% per annum was only intended as a cap on the annual increase and not a formula for calculating an increase each year.
The court agreed with the landlord’s interpretation. The court must identify the parties’ intentions by reference to “what a reasonable person would have understood them to be using the language in the contract to mean”. While some reliance can be placed on commercial common sense, this cannot override the language used in the contract. The court is not responsible for saving a party from a bad bargain, or from poor advice.
It is vital that contractual provisions reflect the parties’ intentions accurately and that legal advice is taken to ensure this is the case. Parties entering into long term contracts need to carefully consider the future implications of the deal they are making when the contract is signed.
This case is a reminder that the courts will not step in where the contractual provisions are clear, even if it is a disastrous outcome for one of the parties.