Over the years a strict approach to the interpretation of contractual terms has been favoured, particularly in the context of notice provisions in commercial contracts. However, the Court of Session recently ruled on the interpretation of a notice given in terms of a commercial contract in Hoe International Ltd v Andersen [2017], holding that the notice was valid, despite the fact it was not served by the method required by the contract.
Does the decision mark a general shift in approach to contract interpretation with ramifications for individuals and businesses across the board, or is it a specific response to a particular case?
Setting a new scene for commercial contract interpretation
The court’s approach to the interpretation of the terms of commercial contracts was most authoritatively set out by the Supreme Court in Arnold v Britton [2015]. In that case, the court took a strict approach to interpretation, focussing on the wording of the relevant clause as opposed to the mind of the contracting parties. The approach is succinctly set out in the leading judgement by Lord President Neuberger at paragraph [20]:
“The purpose of interpretation is to identify what the parties have agreed, not what the court thinks they should have agreed.”
It is against this background that the decision of the Court of Session in Hoe International Ltd v Andersen is set giving rise to the question as to how it sits with Arnold v Britton and the extent to which it alters the status quo, if at all.
In Hoe the Court of Session, sitting on appeal, adjudicated on a term in a commercial contract which stated that any notice “shall be sent by pre-paid first-class post or recorded delivery”, marked for the attention of a named individual and sent in an envelope marked with the full postal address of the other party’s solicitors. The notice sender was an agent acting for Hoe International, and they failed to meet these conditions; however the notice was indirectly delivered to the intended recipient. In overturning the decision of the judge at first instance, the appeal court held that the sender’s failure to adhere to the conditions did not mean the notice was invalid.
The case is notable for the court’s comments on the general interpretation of notice provisions in commercial contracts. They summarised previous cases and noted that when deciding whether or not a notice had been served properly, the fundamental question is:
“…if a particular formal requirement [for service] is not complied with, is the would-be recipient prejudiced, in a practical sense? If there is in fact no prejudice, the court should in our opinion be slow to hold that failure to comply with a formal requirement is fatal. That is so even in cases where the purpose of the notice is drastic, as with a notice invoking a break clause or an option to purchase. If there is no prejudice, insisting on strict compliance for its own sake serves no useful purpose.”
The Court also noted, however, that whether or not any particular notice was or was not served properly depends upon several factors, including:
the purpose of the notice: the more drastic the consequences of the notice, the more likely it is that strict compliance with the letter of the contract is required;
the purpose of the notice term in the contract: it will be important why the notice has to be served in a particular way;
whether the notice term in the contract covers more than one type of notice: if the term governs service of several different types of notice, it will be more appropriate to interpret the term flexibly rather than strictly;
whether the notice ended up in the hands of the correct recipient: if in fact it did, the sending of it is more likely to be found to be valid; and
whether the recipient experienced any prejudice due to how the notice was served: the more the recipient was prejudiced by the method of sending, the more likely it is that the notice wasn’t validly sent.
Reference was also made to commercial factors and the pressures of business as providing a basis for the proposition that the court:
“…should be slow to adopt an especially strict approach to contractual requirements governing the sending of notices”.
In justifying this approach, the court noted, among other factors, that it was important to have certainty over when a notice was or was not valid. Ironically, however, the court’s decision may in fact have introduced more uncertainty. Formerly, if a notice did not comply with the strict contractual terms, one was certain it was not valid. On the other hand, as notices can now be valid without conforming to the terms of the contract, it is difficult to know how far from the contract it may deviate before it becomes invalid. The result of the case may in fact be more litigation; not less.
While the court held that a particular notice was valid despite not conforming to the strict terms of the contract, this may not always be the case. It is therefore always advisable to review the contract before sending any notice, and to comply with the strict terms of the contract if at all possible, in order to be absolutely certain that the notice is valid.
It is also worth clarifying that had the notice been held to be invalid, the sender of the notice (an agent) may potentially have been liable to their client in a claim of negligence. Anyone who is sending notices on behalf of their clients should be aware of the requirements for doing so, and in addition should either ensure they have professional indemnity insurance in place to cover any errors or take external advice on the content and sending of the notices.
The decision is quite clearly of relevance in relation to the court’s approach to contract interpretation generally but seemingly marks a departure from what was becoming settled ground following Arnold v Britton. Although part of the decision was based on commercial factors, the court may have muddied the waters for commercial entities and legal practitioners seeking predictability in relation to what was becoming a more settled area of law, with clear ramifications for everyday business.
What should those dealing with commercial contracts do?
Individuals and commercial entities encountering commercial contracts in the course of their business, whether commercial leases or other contracts, ought to seek legal advice at the earliest opportunity.
Our experts offer a comprehensive range of services from drafting and negotiating the formation of contracts to advising on the implementation and termination of contracts (including serving notices). In addition, we have Dispute Resolution and Litigation specialists with the expertise to assist clients when disputes do arise.
Gregor MacEwan and Brian Pollock, who produced this article, are Senior Solicitor and Solicitor respectively in Dispute Resolution and Litigation.