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Three cases decided by the Supreme Court have highlighted a trend for the court to respect the words used by the parties to effect the deal that has been agreed, even if the result may appear commercially unreasonable.

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A recent trend in the Supreme Court

21 January 2016

Three cases decided by the Supreme Court have highlighted a trend for the court to respect the words used by the parties to effect the deal that has been agreed, even if the result may appear commercially unreasonable.

Arnold v Britton and others [2015] UKSC 36 concerned a term in leases of chalets in a holiday park providing that the service charge would increase by 10% per annum. The Supreme Court upheld the term, even though the result of applying such a percentage increase, compounding annually since the 1970s, was “plainly unattractive, indeed alarming” for the lessees.

In Cavendish Square Holding BV v El Makdessi [2015] UKSC 67, the Supreme Court upheld terms in a contract for the sale of shares providing that the buyer would not have to make the interim and final payments due if the seller breached certain restrictive covenants. The value of those payments went far beyond a genuine pre-estimate of the buyer’s loss, but the court ruled that the provisions were enforceable and did not constitute a penalty.

Most recently, in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72, the Supreme Court declined to imply a term into a lease apportioning rent on exercise of a break clause. The result, which the court described as “capricious”, was that the landlord was entitled to keep rent paid by the tenant relating to a period after the lease had determined. This may seem unreasonable, but that was not sufficient for the court to imply a term to the contrary. A term would only be implied if necessary for the business efficacy of the contract.

The leading judgment in all three cases was given by Lord Neuberger, the President of the Supreme Court. His judgments may be seen as representing a move away from the more creative approach, stressing commercial reasonableness, found in the landmark judgments given by Lord Hoffmann in the 1990s and 2000s.

The court is evidently now returning to a more literal approach to contractual interpretation, especially where agreements have been negotiated and drafted by solicitors. Contracting parties should therefore ensure that their words reflect their intentions explicitly: they should not assume that the court will rewrite their contract according to what is commercially reasonable.