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Sutton V Rydon: Literal V commercial common sense

The recent judgment in the case of Sutton Housing Partnership Limited v Rydon Maintenance Limited [2017] EWCA Civ 359 showed that there will be times when commercial common sense should override the literal meaning when it comes to contract interpretation.

Background

In May 2013 Sutton Housing Partnership (“Sutton”), who manage the housing stock of the London Borough of Sutton, entered into a contract with Rydon Maintenance Limited (“Rydon”), a contractor which specialises in the maintenance and repair of housing, where Rydon would maintain and repair Sutton’s Housing stock (“the Contract”). The Contract permitted Sutton to give notice of termination to Rydon should certain minimum acceptable performance levels (“MAPs”) not be met. Incentives for Rydon were also provided in the Contract where Rydon would be entitled to further payments from Sutton should the MAPs be exceeded.

On 12 November 2014, Sutton served notice to Rydon asserting that they had failed to achieve the contractual MAPs and consequently terminated the Contract in December 2014. Rydon argued that this termination was invalid as the MAPs were merely examples as opposed to being contractually binding.

During the subsequent adjudication, the adjudicator decided that the MAPs were in fact purely illustrative and awarded damages in favour of Rydon for wrongful termination. Sutton appealed this decision and the case went to the Court of Appeal. 

Judgement

The Court of Appeal overturned the judgement and held that the MAPs were contractually binding. Applying Arnold v Britton [2015] UKSC 36, the judge, Mr Justice Jackson, stated that by having termination provisions for Sutton’s benefit and by having incentivisation clauses in favour of Rydon, then the parties must have intended for the Contract to specify MAPs or otherwise these clauses would be inoperable. His reasoning was that commercial common sense needed to prevail as any reasonable person acting for either side would have also intended for the MAPs to be specified in the Contract. He also rejected Rydon’s argument that even if the MAPs were binding, then this should only be for the years stated in the example (2014-2015) as it would be “absurd” in allowing Sutton to terminate and Rydon to claim bonuses in just the first year but not thereafter. Jackson LJ stated that this view was “the only rational interpretation of the curious contractual provisions into which the parties have entered”.

Conclusion                                                                                                                                                                     

Although this case did not set a precedent for a new law, Jackson LJ’s reasoning in his judgment is well worth reading as he suggests that where a contract is unclear, common sense will prevail in interpreting it.

This case showed that in interpreting contracts, there needs to be a balance between taking a literal approach and applying simple commercial sense. Taken literally, the Contract would have contained no MAPs but the whole of Jackson LJ’s reasoning was based on the premise that there needs to be some degree of common sense that needs to be applied in order to prevent any absurd results.  

Therefore, we need to ensure two main factors are considered when dealing with potentially unclear contracts:

  • whether either parties’ interpretation of the contract produce absurd results; and
  • whether either of these interpretations would deprive a party of a valuable benefit that they would not have reasonably wanted to give up.

Ultimately, his reasoning reinforces Arnold v Britton where Lord Neuberger emphasised certain factors that should be considered when interpreting a contract. These included:

  • the natural and ordinary meaning of the clauses (the worse the drafting, the more readily the courts can depart from their natural meaning);
  • any other provisions of the contract that would provide more clarity to the meaning of the unclear clause;
  • the overall purpose of the clause and the contract;
  • the facts and circumstances which existed at the time that the contract was made and which were known or reasonably available to both parties; and
  • applying simple “commercial sense”.

There is a lot of guidance at present derived from a range of case law on how to interpret unclear contracts and Jackson LJ himself said “lawyers are now lucky enough to live in a world overflowing with appellate guidance on how to construe contracts.” but this case is a good reminder that sometimes we can just apply a bit of common sense.

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Murugan Kanagasapay