Disputes Matter – July 2015
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Contract is King, says Supreme Court
A service charge is a mechanism contained in a lease that allows the landlord to […]
A service charge is a mechanism contained in a lease that allows the landlord to recover its running costs in relation to the estate or the common parts of buildings from its tenant. Service charges can be complicated and costly and they are therefore often highly contentious. A particularly stark example of this is the recent Supreme Court case of Arnold v Britton [1]. Commercial and Real Estate Litigation specialists Malcolm Simpson and Martin McKeague explain.
As with any other contractual clause, the wording of a service charge provision is key and the starting point when a dispute arises is the wording of the clause itself. The general rule is that the contract is king.
Arnold v Britton concerned the service charge provisions in 25 holiday chalet leases. In accordance with the ordinary natural meaning of the wording of the relevant clause [2], both the High Court and the Court of Appeal had previously agreed with the landlord that the provisions obliged the tenants to pay a fixed yearly service charge amount which rises at the rate of 10% per annum, irrespective of the cost to the landlord of providing services. This interpretation meant, however, that service charges payable per year would top over £½ million by the end of the leases, which are of modest holiday chalets, the use of which is restricted to half of each year only. The economic consequences of this interpretation were devastating for the tenants, hence the appeal to the Supreme Court.
The appeal was dismissed and the highest court in England and Wales took the opportunity to clarify the correct approach to contractual interpretation.
Correct approach to contractual interpretation
Whilst consideration of commercial common sense can, in the right circumstances, be taken into account, it should not undermine the importance of the clear language of a clause.
- The starting point is the wording of the contract itself.
An objective test – that of what the reasonable businessperson would understand the clause to mean – is applied to ascertain the parties’ intention at the time the contract was entered into. - Commercial common sense can be a consideration, but:
– it cannot be invoked ‘after the fact’ – it is only relevant to ascertaining how matters would or could have been perceived when the contract was made;
– where there are two or more tenable interpretations, the most commercially sensible option will be preferred;
– it is not for the court to depart from clear contractual wording even where that represents a bad bargain for any party.
- There is no general rule that service charge clauses should be interpreted restrictively to reflect a tenant’s limited interest in the property – such clauses are simply to be determined in accordance with general principles of contractual interpretation.
WM Comment
This decision was awaited with interest. The big question was whether commercial efficacy would become enshrined in service charge provisions and other commercial contract clauses. Despite a dissenting judgment [3], however, the law is now very clear as to the extent to which commercial common sense will influence interpretation.
The question now is what you can do if you face an unfavourable outcome in any of your commercial contracts.
- Consider carefully the wording in the clause itself. If there is real uncertainty, then commercial common sense can be taken into account and may assist.
- Is there any scope for settlement? It is rare for any contractual interpretation dispute to be clear cut. Even if the odds are stacked against you, the chances are that any grey area and inevitable litigation risk can be exploited in negotiations to encourage a commercial compromise.
- In any event, it is good to talk. Interpretation disputes often arise by virtue of the fact that there is an ongoing contractual relationship between the parties. It can be in the interests of all concerned for the parties to behave in a reasonable and commercially sensible manner. We understand that, even in light of the Supreme Court’s decision, the landlord in the Arnold v Britton case has informally agreed to renegotiate the service charge provisions in question to index-link the annual increase, as this does represent reasonable modern commercial practice and it may be beneficial to all parties to help tenants to avoid future default.
- Does the clause reflect the parties’ intentions at the time the contract was entered into? If it does not, is the contract capable of being rectified?
- Alternatively, was the clause entered into in reliance on any misrepresentations? If so, the contract could be set aside and financial compensation could be payable.
- Finally, consider whether you were properly advised when the lease or contract was completed. It is possible that any losses could be recouped via a professional negligence claim.
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[1] Arnold v Britton &Ors [2015] UKSC 36
[2] The wording of the relevant clause differed very slightly between leases, but a typical example was “To pay to the Lessor without any deduction…a proportionate part of the expenses and outgoings incurred by the Lessor in the… provision of services… the yearly sum of Ninety Pounds and value added tax (if any) for the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year or part thereof”.
[3] The decision was a 4:1 majority. Lords Neuberger, Sumption, Hughes and Hodge concurred with the dismissal of the appeal. In his dissenting judgment, Lord Carnworth considered that there was an inherent ambiguity between the clause’s purpose to enable the landlord to recover a “proportionate” part of expenses incurred and its quantification calculation. That ambiguity would have given rise to him adopting commercial common sense as a reason to allow the appeal.

Interpreting contracts: An ambiguous business
The Supreme Court has confirmed that emphasis should be placed on giving effect to the […]
The Supreme Court has confirmed that emphasis should be placed on giving effect to the natural meaning of clear contractual wording as drafted and agreed by the parties, even if this has disastrous consequences for a party [1]. Recently, however, the case of Ace Paper Ltd v Fry [2] has highlighted that this approach is not always suitable where wording is genuinely ambiguous and capable of having more than one meaning. In these situations the courts may interpret a contract to reflect business common sense.
An ambiguous arrangement
The case involved an invoice discounting agreement whereby the appellant assigned all debts owed to it by its customers. On termination of the agreement via an exchange of letters, a question arose regarding the proper construction of one of these letters and whether, pursuant to that letter, a particular debt was re-assigned to the appellant. The appellant had already received full value for the debt from the respondent. The relevant contractual provisions in this case were capable of being given a range of possible interpretations, which were either absurd or unlikely given the commercial background. The High Court was of the opinion that the re-assignment was counterintuitive and clearer wording was needed. Furthermore, the letter containing the ambiguous wording had been drafted by the appellant, thus it should be construed ‘contra proferentum’ [3]. The letter was therefore interpreted in a manner which reflected commercial common sense.
Practical points
- The courts will apply the ordinary, natural meaning when interpreting a contract where words are clear.
- The courts are generally not required to look beyond the words if those words are capable of only one meaning.
- The courts will, however, apply the concept of commercial reasonableness or business common sense where it is necessary to do so – for example where there is genuine ambiguity which requires the court to choose between more than one possible meaning.
- There can be no substitute for careful drafting. Check that parties are clear about each others’ intentions; check that any contractual wording reflects their desired outcomes; and ensure that the wording is clear and not open to any other interpretation.
- If you have any queries in relation to the provisions within your own commercial contracts, please contact Walker Morris’ Commercial Dispute Resolution team.
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[1] Arnold v Britton and others [2015] UKSC 36
[2] Ace Paper Ltd v Fry and others [2015] EWHC 1647 (Ch)
[3] This general rule states that any ambiguity regarding the meaning of a provision in a contract will be construed against the person who seeks to rely upon it

Jurisdiction: The fight before the fight begins
The recent update to the Brussels Regulations [1] has highlighted the importance of a carefully […]
The recent update to the Brussels Regulations [1] has highlighted the importance of a carefully considered and well drafted jurisdiction clause in any commercial agreement, to ensure that parties are able to litigate within their favoured jurisdiction. The revised Regulations have been particularly relevant in respect of exclusive jurisdiction clauses. However, the courts have recently taken the opportunity to review the effect of non-exclusive jurisdiction clauses.
Jurisdiction clauses and forum non conveniens (FNC) waivers have long been used in commercial contracts in order to determine the countries in which parties to a contract can bring proceedings. A non-exclusive jurisdiction clause enables parties to bring proceedings either in the courts of the chosen country or in the courts of any other country which has jurisdiction over the dispute under their own jurisdictional rules. The effect of an FNC waiver, together with a non-exclusive jurisdiction clause, is that the parties agree not to challenge the jurisdiction of the court identified in the jurisdiction clause, on the basis of FNC (that is, that another jurisdiction is better placed to hear the case). Therefore, if a party were to challenge the jurisdiction of the chosen court on grounds of FNC, then that party would be in breach of contract.
In a recent case [2], the Commercial Court considered its ability to grant a stay of English proceedings in circumstances were the parties’ agreement contained a non-exclusive jurisdiction clause as well as an FNC waiver. The court concluded that there must be very strong or exceptional grounds for not giving effect to the jurisdiction clause as agreed between the parties and these grounds must be unforeseen and unforeseeable at the time the agreement was made [3].
The case itself involved multiple international companies and related to a loan agreement, made between the claimant companies and three joint venture parties, concerning a power plant in Tanzania. The loan agreement and relevant deeds were subject to English law and contained non-exclusive jurisdiction clauses in favour of the courts of England and Wales and an FNC waiver, thereby expressly accepting the possibility of parallel proceedings in different jurisdictions. Some other relevant documents, such as the charge of shares and mortgage of land, were governed by Tanzanian law (as they were concerned with Tanzanian property) but included almost identical provisions regarding the parties’ ability to bring proceedings in another jurisdiction. When the loan fell into default, proceedings were initially brought in Tanzania and New York. The claimants then brought proceedings in England claiming sums due and also seeking declaratory and injunctive relief. The defendants sought a stay of the English proceedings on the basis that Tanzania was the appropriate forum for the matter to be heard, as well as applying for the English proceedings to be dismissed as an abuse of process.
The defendants’ applications were refused. The court found that there were no very strong or exceptional grounds for granting a stay of proceedings. The defendant companies had made a bargain that they would not seek to argue that England was not an appropriate forum in which to bring proceedings and there was no convincing reason why the defendants should be able to go back on their contractual bargain and obtain a stay.
Key Points
- The case clarifies whether a non-exclusive English jurisdiction clause combined with an FNC waiver completely precludes any application for a stay on grounds of FNC: a stay of proceedings can be granted where appropriate, if there are exceptional grounds for doing so.
- The grounds relied upon when asking the court for a stay must have been unforeseeable at the time of entering into the agreement. A stay will not be granted if parallel proceedings were contemplated by the parties, even if the parties did not contemplate the particular proceedings that in fact ensued.
- An important issue that the court took into account in reaching its decision in this case was that none of the issues in the English proceedings had yet been determined by the courts in Tanzania [4]. It was therefore not contrary to the objective interests of justice to allow proceedings to continue in England.
WM Comment
This case is another recent example of the importance of a well drafted jurisdiction clause. Jurisdiction disputes can be complex, time-consuming and costly – not to mention the fact that they represent distraction and delay when it comes to resolving the substantive issues in any commercial dispute. To avoid this before the main fight even begins, it is particularly crucial that contracting parties get their drafting right when they agree to the inclusion of a non-exclusive jurisdiction clause combined with an FNC waiver, as such clauses will be open to challenge should litigation arise and the issue of the most appropriate forum come into question. For certainty, parties may wish to ensure that any agreement contains an exclusive jurisdiction clause to prevent any party from bringing proceedings in a forum other than the one stipulated in the contract.
If you have any queries in relation to the jurisdiction provisions in your commercial contracts – whether those already in place or those under negotiation – please contact Walker Morris’ Commercial Dispute Resolution team.
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[1] https://www.walkermorris.co.uk/publications/brussels-recast-importance-exclusive-jurisdiction-clause
[2] Standard Chartered Bank (Hong Kong) Ltd and another v Independent Power Tanzania Ltd and others [2015] EWHC 1640 (Comm)
[3] The court cited Cuccolini SRL v Elcan Industries Inc [2013] EWHC 2994 (QB)
[4] The court considered the case of Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460, which listed certain factors to be taken into account when deciding whether it would be contrary to the interests of justice for a stay to be granted. A lack of duplication of issues considered as between Tanzania and England and Wales was one such factor.

Part 36: The problem with time pressure
Part 36 offers are a tactical way of putting pressure on a party to a […]
Part 36 offers are a tactical way of putting pressure on a party to a settle a dispute, by virtue of the cost sanctions that can flow from failure to accept a reasonable offer. Part 36 offers must strictly adhere to a set of formal requirements in order to benefit from these consequences and a recent case, Gulati and others v MGN Ltd [1], raised the question whether placing a time limit on a settlement offer takes it outside the Part 36 regime.
Case
In Gulati, the claimants had brought proceedings against the defendant for infringement of their privacy rights, primarily through phone hacking. The defendant conceded liability. During the pre-action period, one of the claimants made a part 36 offer to settle for a given sum. The offer stated that it would be withdrawn after 21 days. The defendant made a counteroffer which was rejected and then the claimant’s solicitor made it clear that the original offer was no longer available.
The case went to court and the claimant was awarded a higher sum than either of the previous offers. The claimant then sought indemnity costs: a claimant’s crucial benefit flowing from the making of a good part 36 offer. The claimant argued, firstly, that under CPR 36.17(1) (b) she had secured a judgment that was at least as advantageous as her original offer; and, secondly, that pursuant to CPR 44.3 and 44.2(4) (c) the court could take into account the defendant’s conduct and the refused offer when using its discretion to assess costs on the indemnity basis.
Correct approach
Before the case was heard, the claimant accepted that the cost consequences of a part 36 offer will no longer apply where the offer has been withdrawn [2]. Whilst CPR 36.9(4) (b) allows for the automatic withdrawal of part 36 offers in accordance with the terms of the offer, the consequence is that the offeror is no longer entitled to automatic cost benefits as if the offer continued to exist.
The claimant therefore sought to argue that weight should be given to the defendant’s failure to accept what ultimately turned out to have been a good offer when costs were considered under the general costs rules at CPR 44 [3]. To try to bolster its case, the claimant also relied on other various alleged procedural failings and misconduct on the part of the defendant.
In the particular case, the apparent episodes of unreasonable conduct were held not to be serious enough to merit an indemnity costs award and the existence of a one-time part 36 offer that had since been withdrawn was found to be of no great significance. The judge went on to state that such an offer can play a part in a general assessment of the reasonableness or unreasonableness of a party’s conduct and the question of costs, but it cannot be treated equally to a true part 36 offer purely by virtue of the fact it has been beaten. Had the offer in the case not been withdrawn, it would have remained a true part 36 offer and, upon the claimant securing a higher amount in the court, indemnity costs would have been available.
WM Comment
Parties involved in civil ligation continue to frequently employ part 36 offers as a means of focusing the parties’ attention and efforts on settlement. It is often reasonable, and even perhaps tactically advisable, to consider placing time constraints on offers to encourage swift resolution. The Gulati case, however, serves as a warning that, in so doing, parties risk losing the beneficial cost consequences of a true part 36 offer. The case is also a useful reminder of the fact that a non-part 36 offer really does have a significantly lesser standing when it comes to the question of assessment of costs, something which can be overlooked in practice.
If you are considering making or accepting any offer or in any pre- or post- action settlement negotiations, you should take expert legal advice – both to maximise any cost protection and tactical options or advantages that might be available to you, and to ensure that any existing cost benefits are not inadvertently compromised or lost.
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[1] [2015] EWHC 1805 (Ch)
[2] CPR 36.17(7) (a)
[3] CPR 44.2(4) (c) does allow for offers that do not constitute part 36 offers to be considered on the question of costs, but this is at the discretion of the judge.

Unusual decision on UCTA unreasonableness
A recent case in the High Court decided that various limitations of liability in standard […]
A recent case in the High Court decided that various limitations of liability in standard term contracts were unreasonable under The Unfair Contract Terms Act 1977 (UCTA). Whilst all cases involving the UCTA reasonableness test turn on their own facts, this case may give suppliers and their advisors cause to consider the enforceability of certain standard terms.
Reasonable = enforceable
The UCTA reasonableness test applies to determine the enforceability of clauses which seek to restrict or exclude business liability. In the majority of supply contracts, any terms which seek to exclude or restrict liability are likely to be caught by UCTA and they will therefore only stand as enforceable if they are reasonable [1].
In Saint Gobain Building Distribution Limited (t/a International Decorative Services) v Hillmead Joinery (Swindon) Limited [2], the claimant (IDS) sued the defendant (Hillmead) to recover the price of goods sold and delivered. Hillmead served a counterclaim, alleging that certain other products (laminate sheets) supplied to it by IDS were defective, causing Hillmead to suffer even greater loss. It was for the court to decide whether various provisions within IDS’ standard terms were reasonable and therefore enforceable to exclude or limit liability to Hillmead.
Standard limitation/exclusion clauses
The clauses in question were fairly common limitation/exclusion clauses. To paraphrase, they were:
- An obligation on the customer to inspect the delivered goods and notify IDS of any visible defects, failing which IDS would have no liability for defects apparent on careful inspection. Furthermore, IDS would be under no liability unless a written complaint was delivered to IDS within three working days.
- In relation to any alleged visual defect, IDS would have no liability unless given a reasonable opportunity to inspect before the goods were modified or used.
- Subject to the above, IDS would have no liability arising from visual defects other than to replace.
- Except as above, no other terms would form part of IDS’ contract with the customer. (This was IDS’ attempt to exclude statutory implied terms of satisfactory quality and fitness for purpose).
- IDS would not be liable for any loss of profit, loss of business, loss of goodwill, loss of savings, increased costs, claims by third parties, punitive damages, indirect loss or consequential loss suffered by the customer.
- In no circumstances would IDS’ liability to the customer exceed the invoice price of the goods concerned.
Reasons for unreasonableness
The court held that all IDS’ limitation/exclusion clauses were unreasonable. The reasons for this finding were:
- No suitable alternative to the statutory implied terms as to quality and fitness for purpose was given.
- The parties were not of equal bargaining power.
- These were IDS’ standard terms and conditions – they were not negotiated provisions.
- The goods were not manufactured to the special order of the customer and there was no agreed specification for the goods.
- The exclusion of all liability was too draconian a consequence to flow from a failure to inspect and report.
- In a case where it was in the contemplation of the parties at the time the contract was made that any direct loss to the customer might exceed the cost of merely replacing the goods (here the goods supplied were a decorating component that would ultimately be incorporated into a finished product), an attempt to limit or exclude liability for additional losses is likely to be unfair – and that will especially be the case where the parties have unequal bargaining power.
WM Comment and Top Tips
Received wisdom to date has suggested that limitation of liability clauses will generally be found to be reasonable if the customer has at least has some remedy, for example, replacement of the goods or a refund. In addition, it has hitherto been considered a sensible practice for suppliers to limit liability to replacement or refund in exactly those scenarios where foresee ability of additional loss represents a real risk. The Saint Gobain case, however, calls these principles, and indeed some fairly common limitation of liability clauses, into question.
It remains to be seen whether, or how closely, this case will be followed in future, but in the meantime here are our top tips for any business seeking to limit liability in its T&Cs:
- Remember that rarely will it be possible for a limitation/exclusion of liability clause to be absolutely watertight.
- So, rather than seeking to exclude all liability in all or any circumstances (and potentially thereby rendering your clause unenforceable altogether), it may be better to accept limited liability in some circumstances to ensure that your clause will stand. Your legal advisor should be able to review and re-draft your standard terms in light of your particular business needs, so as to get the balance right.
- Where limitation of liability clauses specify time periods, ensure that a reasonable period is allowed. In Saint Gobain, three working days for delivery of a written complain may have been too short a period.
- Exclusions of statutory implied conditions of satisfactory quality and fitness for purpose might well be common, but note that they are only likely to be reasonable if adequate alternative warranties are given.
- Consider capping contractual liability.
- Investigate insuring against capped contractual liability.
- There is a fine line between: on the one hand protecting a supplier where the nature of the commercial arrangement or product inherently includes a risk that certain types of additional loss, over and above the cost of replacement or refund, may flow; and, on the other, limiting or excluding liability to an unreasonable extent. The view of a number of commentators is that, in the majority of such cases, capping liability at 125-150% of the contract value or price of goods will be appropriate. However careful consideration should be given to the particular circumstances appertaining to each contract.
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[1] See section 11 (1) and Schedule 2, UCTA
[2] [2015] EWHC B7 (TCC)