Developments in contract: The importance of grammar

The principles

• The process of contractual interpretation requires a court to identify the intention of the parties by reference to what a reasonable person, having all the background knowledge the parties had at the time of contracting, would have understood the parties to mean by the wording of the contract.

• The meaning of a contractual provision is determined by the language that the parties choose to use; therefore a court’s starting point is the natural meaning of the words chosen by the parties.

• Whilst it is open to a court to construe ambiguous contractual positions commercially, it will not disregard the literal meaning of a phrase where that meaning is clear and obvious, even if it appears that the parties would not have intended that obvious meaning commercially. This includes where the grammar used may give a meaning to the words that one party did not intend.

• The recent approach of the courts highlights the importance of accurate and unambiguous drafting (as discussed in our recent article). Judges have made quite clear that they are unwilling to re-write or correct a contractual provision, even grammatically, to effect commercial rationale.

Recent developments

• The High Court decision in Dooba Developments Ltd v McLagan Investments Ltd [2016] EWHC 151 (Ch) shows that the courts’ literal approach to contractual interpretation includes consideration of the parties’ use of grammar.

• The case involved parties who, upon entering into a contract relating to the purchase of land and its development as a superstore, agreed that the respondent had a right to rescind the contract “if all of the Conditions have not been discharged […] by the Longstop Date”. The respondent served notice to rescind the contract a day after the Longstop Date, seeking to rely on the clause as having a catch-all meaning that the respondent’s entitlement to rescission arose where any of the Conditions had not been discharged.

• The High Court agreed with this interpretation in granting summary judgment. However, on appeal, the applicant argued that the Court should interpret the term literally as meaning that the respondent’s entitlement to rescission arose only where none of the Conditions had been discharged. The appeal was upheld and the Court applied a more literal approach based on the true grammatical reading of the term. In other words, the buyer was not entitled to rescind the contract unless it could show that all four of the Conditions set out in the contract remained unsatisfied.

• The Court therefore gave the term its grammatically correct meaning, notwithstanding the fact that this rendered the contract at least to a degree commercially incoherent, given that the Conditions related, in part, to the applicant obtaining planning consents necessary for the respondent to develop the land as the contract intended.

What this means

• This case would seem to suggest that the trend towards a literal approach to contractual interpretation indicated by Arnold v Britton is continuing, though a more recent decision of the Supreme Court has sought to suggest that Arnold v Brittan represents no real break from past authorities - see our article in this series on that case here.

• Whilst it still remains open for a court to depart from the natural meaning of contractual wording in situations where there is manifest ambiguity or incoherence, the courts have shown that they will adopt the literal meaning of contractual language even where this produces a commercially unsatisfactory result.

• Unambiguous drafting is crucial. Care must be taken not just with the words that the parties use but also with the grammar that they adopt. Any potential ambiguity that may arise should be cured at the drafting stage.

• Parties should be cautious of bringing or defending any claims on the basis that the wording of a contract represents an unfeasibly bad commercial bargain. If the relevant wording of the contract is clear, then the court is likely to give effect to that wording according to the reasonable person test, even if its literal meaning was not in fact intended by the parties entering into the contract.