UK: Court of Appeal considers limitations on the principle of business common sense as an aid to contractual interpretation

The recent Court of Appeal decision in Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd [2015] EWCA Civ 839 gives further guidance on the use of business/commercial common sense as an aid to contractual construction. In reversing the decision at first instance, the Court of Appeal found that an indemnity given by a seller under a share purchase agreement did not cover the buyer's claim. The court reached this decision on the plain language used in the contract even though the effect was to make the indemnity uncommercial from the buyer's perspective.

Citing the recent Supreme Court decision in Arnold v Britton [2015] UKSC 36, the Court of Appeal emphasised that the natural meaning of a provision should not be rejected simply because it appears uncommercial, since businessmen sometimes make bad bargains. This decision follows the recent trend of cases focusing on giving effect to the natural meaning of a contract and only using commercial common sense as an aid to construction if the words used are sufficiently ambiguous. However, whilst the legal principle is relatively settled, the frequency of appellate court involvement in the application of that principle suggests that this issue will continue to provide fertile ground for dispute.

To read more about the case from our banking litigation team, click here.