Arnold v Britton and others

A written contract is interpreted objectively, through the eyes of a reasonable person possessing the background knowledge reasonably available to both parties. The court considers the language, related provisions, contractual purpose, contemporaneous circumstances and commercial common sense. Subjective intention is excluded.

Clear contractual language should not be displaced merely because it later produces an imprudent or disastrous result. Commercial common sense is assessed at the date of contracting and does not authorise the court to rewrite a bad bargain.

A fixed service charge subject to a clear annual escalator remains payable according to its terms, even if it eventually exceeds the cost of the services. Neither an interpretative insertion nor an implied term may contradict the express charging formula.

The appellants held long leases of holiday chalets containing service charge clauses which referred to a proportionate part of the landlord’s expenditure and then specified £90 for the first year, increasing by 10% each year. The respondent landlord contended that the clauses imposed fixed annual charges. The appellants contended that the escalating figures were only caps on proportionate contributions to actual expenditure.

HHJ Jarman QC accepted the appellants’ construction. Morgan J reversed that decision, and the Court of Appeal upheld Morgan J in [2013] EWCA Civ 902. The appellants appealed to the Supreme Court.

The principal question was whether the contractual words imposed a fixed, annually escalating charge or a proportionate contribution subject to an annually escalating maximum. A secondary question concerned whether provisions intended to produce similar leases across the estate implied a limit derived from the earlier leases.

1. Appeal dismissed by a majority of four to one. Lord Neuberger, with whom Lord Sumption and Lord Hughes agreed, held that the clauses imposed fixed annual charges beginning at £90 and increasing by 10% each year on a compound basis. Lord Hodge agreed and supplied additional reasons. Lord Carnwath dissented.

2. Contractual interpretation identifies what a reasonable person possessing the background knowledge reasonably available to both parties would understand the language to mean. The inquiry considers the natural meaning, related provisions, contractual purpose, contemporaneous circumstances and commercial common sense, while excluding subjective intention. The majority applied the objective approach stated in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 and the unitary inquiry described in Rainy Sky SA v Kookmin Bank [2011] UKSC 50.

   Language remains the principal indication of the parties’ agreement. The clearer its natural meaning, the more difficult it is to justify departing from it. Commercial common sense must be assessed as at the date of contracting. It does not permit a court to relieve a party from an imprudent bargain merely because later events make the consequences alarming.

3. The first part of clause 3(2) identified the character and purpose of the payment as a service charge. The second part quantified it. The language did not support inserting “up to” or treating the specified sum as a cap. The 10% escalator represented a bilateral allocation of inflation risk. Its later severity did not justify rewriting the leases. The circumstances also disclosed neither a clear linguistic mistake nor a clear correction of the kind required for correction by construction.

4. The provisions intended to produce similar leases across the estate did not reduce the express service charge. Any suggested implication that earlier leases contained the lower triennial escalator would contradict clause 3(2). A term cannot be implied if it is inconsistent with an express term. The fixed charges also fell outside the statutory protection for service charges varying according to relevant costs. Any extension of that protection was a matter for Parliament.

5. Lord Carnwath would have allowed the appeal. He considered the clause inherently ambiguous and the fixed-charge construction commercially nonsensical when applied over the full term. In his view, the reasonable observer would understand the escalating figure as a cap on each lessee’s proportionate share of actual expenditure, particularly in the context of a residential letting scheme intended to distribute service costs fairly.

1. United Kingdom Supreme Court: By a majority of four to one, dismissed the lessees’ appeal and affirmed the construction upheld by the Court of Appeal.
2. Court of Appeal: In [2013] EWCA Civ 902 , upheld Morgan J’s decision that the leases imposed fixed annual service charges subject to compound increases of 10%.
3. Morgan J: Allowed the landlord’s appeal from the county court and held that the escalating sums were fixed charges rather than caps.
4. County Court: HHJ Jarman QC held that the stated sums operated as upper limits on proportionate contributions to the landlord’s expenditure.