When conclusive isn't quite conclusive: Sara & Hossein v Blacks

Contractual interpretation

As set out in our article on Maranello Rosso Ltd v Lohomij BV & Ors [2022] EWCA Civ 1667, the general principles of contractual interpretation are detailed in Wood v Capita Insurance Service Ltd [2017] AC 1181; [2017] UKSC 24 which the Supreme Court cited with approval. The court identifies the objective meaning of the contractual language by:

1. identifying what the reasonable person, with the knowledge reasonably available to the parties when they entered into the contract, would have understood the language to mean.
2. considering the contract as a whole, giving appropriate weight to its constituent elements depending on the nature, formality and quality of its drafting.
3. checking each suggested interpretation against the provisions of the contract and investigating its implications and consequences.

Background

Blacks rented retail premises from Sara & Hossein (“S&H”). The leases included a provision that each year S&H should provide "a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive”. Blacks refused to pay the service charge for 2017 – 2018 and 2018 - 2019, arguing that it was excessive and included items that were not properly due.

S&H therefore issued proceedings and applied for summary judgment on the basis that, under the leases, the certificate was conclusive, subject only to manifest error, mathematical error or fraud (which were not alleged here). A Deputy Master of the High Court dismissed S&H’s application for summary judgment and held that the certificate was conclusive as to the sum spent by S&H, but not as to Blacks' liability to pay. The Deputy Master considered it unlikely that the parties would have intended that the landlord should be able “to decide conclusively the significant issues of law and principle which might arise in the course of determining the service charge payable”, becoming “judge in his own cause”. This was particularly so where the lease provided for independent expert determination of the, arguably less important, proportion of S&H's total costs payable Blacks.

S&H appealed. A Deputy Judge of the High Court dismissed S&H’s appeal and agreed with the decision and reasoning of the Deputy Master. She too considered that it would be inconsistent with “the carefully-defined dispute mechanism” apportioning the costs payable by Blacks if “the (potentially far more significant) question of the headline figure of the total costs and services was construed as falling to be determined conclusively by [S&H]”.

S&H appealed further. The Court of Appeal allowed S&H’s appeal and awarded summary judgment in S&H’s favour. The Court of Appeal held that the natural meaning of the words meant that the certificate was conclusive, both as to the total costs and the sum payable by Blacks: “Treating the categorisation of the relevant services and expenses as not being conclusively determined by the landlord’s certificate (subject to mathematical or manifest error or fraud) would require express words to that effect or a necessary implication. There are no such express words, and, in my judgment, there are no grounds for a necessary implication to that effect”.

Blacks appealed to the Supreme Court.

The Supreme Court's decision

The Supreme Court considered the competing interpretations put forward by each party:

• S&H argued that the certificate was conclusive as to Blacks’ liability, subject only to manifest or mathematical error or fraud. The majority of the Supreme Court considered that S&H's interpretation was inconsistent with other provisions in the leases, in particular (i) a detailed dispute mechanism to assess the proportion of the total service charge that Blacks was obliged to pay, and (ii) Blacks' right to inspect S&H’s receipts, invoices and other evidence relating to the service charge after receiving the certificate.
• Blacks argued that the certificate was conclusive only as to S&H's costs. However, the Supreme Court found that Blacks' interpretation contradicted the natural and ordinary meaning of the language used: the certificate was said to be conclusive both as to the “amount of the total cost” and “the sum payable by the tenant”. The majority also saw force in S&H’s submission that allowing Blacks to challenge payment of the service charge would undermine the commercial purpose of the provision: to enable the landlord to recover costs and expenses with minimal delay and dispute.

The majority¹ held that neither party's interpretation was satisfactory. Instead, they preferred a third, alternative interpretation: S&H’s certificate is conclusive as to what is required to be paid by Blacks, subject only to manifest or mathematical error or fraud. That means S&H can be certain of payment of the service charge without protracted delay or dispute. But it does not stop Blacks from later disputing liability for that payment. They considered that this interpretation is consistent with the contractual wording, enables all the provisions of the leases to work together satisfactorily and avoids surprising implications and uncommercial consequences. They concluded that the Court of Appeal was correct to award summary judgment to S&H but noted that it does not prevent Blacks from pursuing its counterclaim.

Lord Briggs however dissented. He would have found in favour of S&H's interpretation. Whilst the majority's “pay now, argue later” solution is the "plainly commercial solution", and both interpretations offered by the parties are uncommercial for different reasons, a more commercial solution can only come about "if there is some basis in the language of the contract as a peg upon which that alternative can properly be hung".

He noted that the “pay now, argue later” interpretation was not identified by any of the lower Courts or proposed by either party. Instead, it was "an imaginative creation which the parties could sensibly have agreed ...But in [his] view it is not to be derived by any process of construction of the terms … actually agreed."

Comment

Our real Estate colleagues' recent article provides insight into the impact of the Supreme Court's decision in the landlord and tenant context. The decision is also likely to have wider impact on disputes involving questions of contractual interpretation. Rather than adopt the more orthodox literalist approach to contractual interpretation favoured by Lord Briggs, the majority chose a contextual interpretation that neither party had contended for, which had not been identified by any of the lower courts and which did not reflect the express wording of the clause in issue. This more subjective approach to construction seems likely to lead to greater uncertainty and, accordingly, to more disputes. However, it is apparent from the Supreme Court's decision that the scope for such disputes is likely to be more constrained where contracts are clearly drafted, internally consistent, and onerous clauses, such as the one in issue here, are clear when they apply and their effect.