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Commercial common sense: Does it have the same ordinary meaning in a contract?

Written by Mark Reed on 10 May 2017

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Wood v Capita Insurance Services Ltd [2017] UKSC 24

Facts

The interpretation of an indemnity clause costing a purchaser £1.5 million of customer compensation through a sale and purchase agreement for an insurance broker was questioned. Although the purchaser was covered for loss suffered, the actual loss was because of a remediation scheme imposed by the regulator (rather than through claims or complaints of customers).

The question by the Supreme Court was whether the interpretation of the ‘admittedly opaque’ language used in the indemnity meant that the loss fell outside the indemnity clause. It was held that it was paramount to consider the wording itself as well as the circumstances triggering the indemnity were to be explored. Essentially, it was decided not to extend the interpretation to allow for the particulars within the loss covered, so in ther end the courts favoured with the seller.

Historical approach on interpretation

The case of Arnold v Britton had, in the Supreme Court, cautioned against commercial common sense overriding the natural meaning of a provision. Another case known as Rainy Sky SA v Kookmin Bank, provided that if there were two possible constructions, the court was entitled to prefer the construction consistent with business common sense.

Other considerations

It is worth noting that it may not matter whether the process starts with a factual background, or even a scrutiny of the relevant language, provided that the court balances the indications given by each method through a frequentative process. Where there are different meanings, the court is more likely to lead towards the construction which is more consistent with 'business common sense', which ostensibly would require more of a sophisticated level of common sense than the level expext from the average person, and answering the question of whether commercial common sense is to be given the same meaning.

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