EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Philip Lord Kingarth Lord Marnoch	[2007] CSIH 79 XA98/03   OPINION OF LORD PHILIP   in   RECLAIMING MOTION   in the cause   CITY WALL PROPERTIES (SCOTLAND) LIMITED Pursuers and Reclaimers;   against   PEARL ASSURANCE plc Defenders and Respondents:   _______

 

 

Act: Keen Q.C., MacColl; HBJ Gateley Wareing (Pursuers and Appellants)

Alt: Cullen Q.C., E.W. Robertson; Burness LLP (Defenders and Respondents

 

2 November 2007

 

[1] This is an appeal in an action arising from a dispute between the parties to a commercial lease as to the proper construction of the terms of the rent review clause.

[2] The pursuers and reclaimers are City Wall Properties (Scotland) Limited who are the landlords. The defenders and respondents are Pearl Assurance plc who are the tenants. The lease, which was entered into between the British Railways Board and Owlcastle Limited on 20 March and 19 April 1978 relates to premises which comprise thirty five car parking spaces at East Green Vaults, Aberdeen.

[3] As the Lord Ordinary records in his Opinion, in the early 1990s the parties began to discuss the possibility of varying the terms of the lease. The discussions focused on the insurance provisions, the level of the passing rent and the rent review provisions. In due course, a Minute of Amendment and Variation of the lease ("the Minute of Amendment") was entered into on 30 July and 9 August 1999. By clause 2.2 of the Minute of Amendment, the passing rent was varied with effect from 1 July 1999 ("the Effective Date") to £26,250 per annum. Clause 2.3 provided that the rent was to be reviewed on every third anniversary of the Effective Date (each such date being a relevant review date) in accordance with the provisions of clause 3 of the Minute of Amendment. Clause 3, which was headed "The Rent Review Provisions" provided:

"The rent so payable shall be subject to review at the instance of the Landlords at the relevant review date by addition per space of the product of 96 multiplied by the 'car park factor' (as hereinafter defined) applying at the relevant review date.

For the purposes of the Lease 'the car park factor' shall mean the average of increased daily rates (i.e. the 9 hour rate from 0830 to 1730 hours charged to the public) at the Trinity Centre, Bon Accord Centre and the multi-storey College Street public parks in Aberdeen PROVIDED ALWAYS that in no event shall the rent payable by the Tenants to the Landlords after the relevant review date be less than the rent payable by the Tenants to the Landlords immediately before such relevant review date."

[4] As the 3 yearly rent review approached the parties found themselves at odds as to the proper construction of the rent review clause, and the present action was raised in December 2002. In it the pursuers seek a declarator supporting their construction of the rent review provision. On 25 July 2003, after a debate, the Lord Ordinary, Lord Clarke, pronounced decree in favour of the pursuers granting a declarator supporting their construction together with decree for payment of rent in accordance with it. At the debate, the defenders conceded that the proper construction of clause 3 was that the product of 96 and the car park factor fell to be added to the passing rent to arrive at the reviewed rent, and the discussion was concerned with the meaning to be given to the words "the car park factor". The pursuers argued that, in terms of clause 3, the car park factor was equal to the average of the 9 hour rates charged to the public for a single car parking space at each of the three comparator car parks as at 1 July 2002, the first relevant review date after the Effective Date. The average of those rates was £11.26. The car park factor was accordingly £11.26. The Lord Ordinary sustained the pursuers' argument and the point is no longer in dispute. The figure 96 in the formula is not self explanatory. It represents a means of relating the figure of annual rent attributable to each space to the average daily rate per space charged at the comparator car parks. It was proposed by the pursuers and is arrived at as follows. The revised rent of £26,250 was equal to a rent of £750 per space. The average daily rate at the three comparator car parks as at 1 July 1999 was £7.83. If £750 is divided by £7.83 a figure of 95.78 is brought out, which is then rounded up to 96.

[5] After a change of representation the defenders reclaimed, and before the Inner House sought leave to amend their pleadings and to introduce a counter-claim. The Inner House granted the motion to amend and allowed the introduction of a counter-claim which sought (i) a declarator supporting the defenders' construction of the rent review clause, and (ii) an order for rectification of the Minute of Amendment and of the missives which led up to it. The conclusion for rectification was as follows.

"For an order for rectification of (1) the missives between the parties dated 15 and 16 July 1999 and (2) the Minute of Amendment and Variation of lease between the pursuers and the defenders dated 30 July and 9 August and registered in the General Register of Sasines for the County of Aberdeen on 28 September, all 1999 and that by (a) substituting for the words 'addition per space' in clause 3 thereof the words 'substituting for the rent payable immediately before the relevant review date the aggregate sum', and (b) by adding 'for each car parking space' before the full stop."

The case was then remitted back to the Lord Ordinary. The parties were agreed that in the changed state of the pleadings, and particularly in the light of the conclusion for rectification, a proof before answer was appropriate, and a proof before answer was heard by Lord Clarke in July 2005.

[6] After the amendment of the pleadings the defenders' position altered. They no longer accepted that the product of the formula required to be added to the passing rent to arrive the reviewed rent, and the focus of the dispute was shifted to the construction of the rent review provisions. The particular subject of the dispute at the proof was the opening words of clause 3,

"The rent so payable shall be subject to review at the instance of the landlords at the relevant review date by addition per space of the product of 96 multiplied by 'the car park factor'".

The position of the pursuers as to the construction of the clause remained as it had been throughout, namely that, as at 1 July 2002 (the first relevant review date), the car park factor was £11.26. On that basis the reviewed rent, in terms of clauses 2.3 and 3, was £64,083.60, that being the product of the number of car park spaces, 96 and the car park factor, added to the passing rent (35 x 96 x £11.26 plus £26,250). The position of the defenders on the other hand was that the product of 96 multiplied by the car park factor of £11.26 per space was £1,089.96, and that the rent payable after the review date was to be calculated by addition together of that amount for each of the 35 spaces, yielding a rent of £37,833.60. They contended that that sum did not fall to be added to the previous rent. Accordingly, the dispute between the parties was as to whether the figure arrived at by the formula provided for in clause 3 produced the reviewed rent, or required to be added to the rent passing immediately prior to the review date to arrive at the reviewed rent. As the Lord Ordinary pointed out, the difference between those two approaches produced a very significant difference in the rent payable as from 1 July 2002, which increased substantially at each subsequent rent review date.

[7] Following the proof before answer the Lord Ordinary pronounced an interlocutor dated 25 October 2005 assoilzieing the defenders from the pursuers' conclusion for declarator and at the same time dismissing the counter-claim. The pursuers now appeal against that interlocutor.

[8] At the proof evidence was led of the correspondence and other communications between the parties prior to the execution of the Minute of Amendment. The Lord Ordinary recounts that as far back as the early 1990s, the pursuers raised the prospect of altering the rent review provision in the lease. The defenders, who are an insurance company, were keen to have the existing insurance provisions altered, which they considered to be unduly onerous. The pursuers, whose principal shareholder and director is a Mr John Perry, through their representatives, began to raise the possibility that the rent should be "geared" to parking rates in other car parking locations in Aberdeen.

[9] There then followed an exchange of correspondence between the parties, initially sporadic and interspersed with the occasional meeting, and mainly conducted by the parties' surveyors, Mr Evans of Chesterton, Property Consultants for the defenders, and Mr Strachan of St. Quintin, Chartered Surveyors for the pursuers. This correspondence began in September 1966 and culminated in the period May to July 1999 at the end of which the Minute of Amendment was entered into. The letters and notes of meetings of the period contained references by both parties to proposals for new rent review provisions. All of them, with one exception, made reference in one form of words or another, to the rent expressed as rent per space and all spoke of the rent review being calculated by reference to the daily rate being charged at comparator car parks at the relevant review date. The following are extracts from letters exchanged or notes of meetings held during the period containing references to proposals for new rent review provisions:

(i) "A multiplier would be applied to this annual rent on the basis of for

example, the current daily rate at Trinity Centre as at the date this new lease is agreed on the current daily rate at the time of each review."

(ii) "Rent Reviews - On a 3 yearly cycle, and to be calculated on an

indexation basis taken from the average daily rate at the Bon Accord Shopping Centre ... and The Trinity Centre ... "

(iii) "Rent Review Base = % ↑ in line with change in daily rate for Bon

Accord Centre/Loch Street Car Parks."

(iv) "Rent reviews shall be on a 5 yearly cycle on an open market rental

value basis using the formula used for calculating the initial rent."

(v) "GS's (Mr Strachan's) proposal is to increase the initial rent on a 3

yearly rent review cycle based on the % increase in the average daily car parking rate between the review dates."

(vi) "The reviewed rent shall be determined in accordance with the increase

on a percentage basis calculated with reference to the increase in the average daily rates for car parking between the rent review dates at the following car parks ... "

(vii) "Rent Review Clause

Reviewed on a 3 yearly pattern upward only. A formula to be agreed based on the daily i.e. 9 hour rate ... at Trinity Centre and Bon Accord ... "

(viii) "To be reviewed on a three yearly pattern, upward only. A formula to

be agreed based upon a multiplier deriving from the average increase in the daily i.e. nine hour rate ... "

[10] These extracts are significant as much for what they do not say as for what they say. All of them appear consistent with the rent review exercise involving the application of some form of indexation process by which the rent is increased to reflect increases in the average daily rate at other car parks. None of them say that the product of any formula or rent review calculation is to be added to the passing rent. When solicitors were instructed in the days after 16 July 1999 their instructions contained no reference to the rent review provision adding the product of any formula to the passing rent. When the defenders' solicitor Miss Knox received intimation of the pursuers' version of the rent review provision (the one which ultimately found its way into the Minute of Amendment) she sought and was given an explanation by the pursuers' solicitor Mr Leishman of the formula used, including the significance of the figure 96. There was no suggestion in the explanation given that the product of the formula was to be added to the passing rent in order to arrive at the reviewed rent. The Lord Ordinary regarded the explanation as of extreme importance since it meant that the indexation process was being applied to the passing rent applicable to one parking space at the date of review.

[11] After the solicitors had been instructed, there followed a number of letters and telephone conversations between them in which the defenders' solicitors attempted to propose their own version of the rent review clause in place of the pursuers' formula. The defenders' version provided for a straightforward indexation of the passing rent to reflect the increase in the average daily rate charged at the comparator car parks. The pursuers, however, insisted on the retention of their version and the defenders ultimately agreed, apparently on the view that the two versions had the same effect. The Minute of Amendment was then executed by the defenders on 30 July and by the pursuers on 9 August 1999. It is of some significance that on 24 August 1999, Mr Leishman wrote to Miss Macphail in the following terms:

"As the review formula is calculated form the average of increased daily rates my client felt it would be useful to confirm that the nine hour rate as at 1 July 1999 for the three parks in question were as follows:-

1 Multi-storey College Street, Aberdeen - £5

2 Bon Accord, Aberdeen - £10

3 Trinity Centre, Aberdeen - £8.50

Could you please confirm that your clients agree the above figures which will then form the datum from which the increases can be determined at review."

This letter had the effect of confirming that, subject to some minor rounding up, the new rent payable under the Minute of Amendment from 1 July 1999 could be arrived at by multiplying "the product of 96 multiplied by the car park factor" as at 1 July 1999 by 35. A reasonable commercial person might infer from this that clause 3 was intended to provide for the maintenance of the same relationship between the reviewed rent and the average of the daily car park charges at future review dates. The importance of the evidence of communication between the parties to which I have referred is not as evidence of the subjective view of the parties or their representatives as to the meaning of clause 3, but as evidence of the background or context in which the parties were operating. As such it was appropriate for the Lord Ordinary to have regard to it.

[12] The only witness led by the pursuers was Mr Leishman their solicitor. Mr Evans, Mr Strachan, Miss Knox and Miss Macphail, her partner in the solicitors firm of Hardy Macphail, gave evidence for the defenders. Mr Leishman explained that the overall purpose of the formula was to avoid the need at rent review to have regard to levels of market rentals for comparable properties. The reviewed rent was to be based on the increase in daily car parking charges at other locations. The "principle" was that rent increases were to be on an indexation basis taken from the average daily rate at the other car parks. That was the agreement arrived at at the end of negotiations between parties' surveyors. He accepted that throughout the correspondence prior to the drafting of the Minute of Amendment there was no reference to the rent review exercise involving an addition to the passing rent of the figure produced by any formula. He also accepted that, when he reported to his client Mr Perry on 25 June 1999 advising him of the defenders' alternative wording there was agreement between both sides that there was no difference in the effect of the respective wordings of the clause. In the discussions between him and Miss Knox, the defenders' solicitor, they had never focused on or discussed the expression "by addition per space". His and Miss Knox's function was to give legal effect to the "in principle" agreement which had already been agreed between the surveyors, and he was not concerned with any perceived advantage having to be obtained for his client. He knew that the formula gave a significant advantage to his client in a previous case but he did not anticipate the extent of the advantage that it would produce in this case.

[13] Mr Evans said that throughout his contact with Mr Strachan in relation to the rent review provision, the pursuers were proposing the use of an index to be applied to the agreed rental based on the changes in the daily rates charged for car parking in other locations between the date of the amended agreement and each subsequent review date. The increase was to be used as a multiplier to be applied to the initial rent. That was the effect a letter from Mr Strachan to him of 16 June 1999, as a result of which he understood that "the deal was agreed". The solicitors were then to put into legal effect the terms agreed between him and Mr Strachan. He had never had any discussion with anyone on the basis that the passing rent was to be added to the figure produced by the formula. When he was shown the wording of the rent review clause proposed by the pursuers there was no discussion about the meaning and effect of the words "by addition per space". His own interpretation was that those words required an adding together of the relevant figure for each of the car park spaces at the rent review date. He did not consider that by agreeing to the pursuers' rent review clause the defenders were agreeing to anything different from what had been agreed between him and Mr Strachan. Mr Strachan said that by 17 June 1999 an "in principle" deal had been reached. The only thing left to do was to choose the exact wording of the formula.

[14] Miss Knox, the defenders' solicitor, said that she did not give particular attention to the words "by addition per space" in discussion either with Mr Leishman or with the defenders' own surveyors. The pursuers' formula was agreed to because it was thought to have the same effect as the defenders'. Having read the correspondence she considered that the rent review clause had been agreed between the surveyors. She considered that the words "by addition per space" were the words which provided the multiplier of 35. If the number of spaces changed the multiplier would change accordingly. At no point did she think that the result of the calculation fell to be added to the passing rent. It was only after judgment was issued following on the debate that she became aware of the alternative argument.

[15] In his opinion the Lord Ordinary found that the parties were not at cross purposes as to what they intended to agree, but shared a common intention. The primary argument of both parties, however, was that there was no ambiguity in the wording of clause 3, and that the court should determine that the plain meaning was in accordance with their respective interpretations. The Lord Ordinary rejected those arguments and concluded that while both parties' constructions of the wording were possible, both required a somewhat strained reading. In those circumstances he asked the question whether, having regard to the relevant context, one construction could be preferred to the other. On the evidence he found that neither Mr Evans nor Mr Strachan had ever considered that the new rent review provision should provide for an indexation type of formula to produce a figure to be added to the passing rent. He also found that neither Mr Leishman nor Miss Knox had envisaged that the wording had the effect advanced by the pursuers. The intention was that the indexation process was to be applied, at the date of the review, to the passing rent applicable to one of the thirty five spaces, and that the result of that process was not to be added to the passing rent. That, he concluded, was what the protagonists saw as the principle or purpose of the review clause. Against that background he found that the reasonable commercial person would conclude that the correct construction was the one put forward by the defenders.

[16] Before this court the pursuers submitted that the principles to be applied to the construction of a clause in a formal document had recently been set out by Lord Drummond Young in Middlebank Ltd v The University of Dundee and another [2006] CSOH202 at para.[13]. The starting point is normally the wording of the document containing the agreement. Where ordinary words are used they must be given their ordinary meaning. If their meaning is clear and unambiguous, effect must be given to the words used and there is no need for further enquiry. The court should not search for ambiguity when none truly exists. The court should give effect to the bargain made by the parties and should not substitute one which is different from the one they made. Contracts must be construed objectively according to the standards of a reasonable man who is aware of the commercial context. It is permissible for the court to have regard to the circumstances in which a contract came to be concluded in order to ascertain the facts to which the contract refers and its commercial purposes. This last principle is however subject to a number of important limitations and qualifications. Firstly, evidence of the parties' discussions while the contract is being concluded or negotiated is permissible only to establish their knowledge of the circumstances with reference to which the words are used in a contract. It is not admissible to put a gloss on the terms used by the parties. The evidence of what was said in the course of negotiations will usually be unhelpful as an aid to construction and words which have been proposed but subsequently deleted in the course of negotiations should not generally be used as an aid to construction.

[17] The pursuers argued that the Lord Ordinary was wrong to hold that the rent review provisions were ambiguous. As a result of that error he had adopted the wrong approach to the construction of the rent review clause. The clause could only be read as requiring the addition of the product of the formula to the passing rent in relation to each and every parking space. It was couched in that way because the parties envisaged changes to the number of car parking spaces. The fact that it might require to be read more than once to be understood did not mean that it was ambiguous. Although its interpretation might not be easy, the clause yielded only one meaning. The meaning proposed by the pursuers was more obvious and there was no evidence that one or other of the constructions made more commercial sense. Any alternative approach to construction required the words "by addition" to be ignored. Any addition could only be in relation to "the rent so payable".

[18] The pursuers argued further that the Lord Ordinary had erred in his approach to the resolution of the ambiguity. He had failed to construe the contract by reference to all the words used and in particular to the words "by addition". He had simply considered what the parties' surveyors thought was agreed and concluded that the contract should be construed as if that was what the contract said. He had failed to explain, on the basis of the relevant material, why the defenders' construction was to be preferred to the pursuers'. He had looked at the pre-contract discussions, identified the parties' goal and drawn the matter forward from that. That was an illegitimate use of the background material. He had sought to put a gloss on the words used rather than to explain or give content to them. The evidence of the negotiations between surveyors should have been disregarded.

[19] In any event, even if the Lord Ordinary was entitled to have regard to the prior negotiations between the parties, he had given an incomplete picture of it and had drawn the wrong inference. In particular, he was wrong to conclude that the parties had reached agreement before the matter passed from the surveyors to the solicitors. In Mr Strachan's letters to Mr Evans of 3 and 16 June 1999, the words "a formula to be agreed" appeared. Even if there had been an agreement between the surveyors, it did not find its way into the contract which the parties signed. The Lord Ordinary had failed to place weight on the fact that when the matter was in the hands of the solicitors, both parties knew that the pursuers were advancing a formula which they had used before. He found that the solicitors had not understood the effect of the wording proposed by the pursuers. If by that he meant that no thought at all had been given to the possibility that that wording involved addition of the product of the formula to the passing rent, that was a misinterpretation of the evidence.

[20] The Lord Ordinary had concluded that, had it been necessary, he would have granted decree of rectification. Before such a conclusion could be reached there had to be an earlier agreement between the parties reflecting their common intention which the subsequent formal document had failed to express. The common intention of the parties was to give effect to the formula proposed by the pursuers. Furthermore, the defenders' case in support of their conclusion for rectification was irrelevant. The evidence disclosed that the solicitors had agreed that the pursuers' wording of the rent review clause should be used. That agreement was contained in letters of 14 and 15 July and in missives of 15 and 16 July 1999, and remained valid and binding on the parties. Without a conclusion for rectification of that agreement the case for rectification was irrelevant. Prior to the exchange of correspondence between 14 and 15 July, there was no enforceable agreement.

[21] The defenders argued that the Lord Ordinary was correct to conclude that the words of clause 3 were not clear and unambiguous. It was accordingly legitimate for him to look at evidence of the genesis and aim of the contract. This was not a case in which the parties' positions were divergent and constantly changing until final agreement. Their positions remained the same throughout. The objective evidence was that they intended that the rent should be increased by an indexation formula. It made no commercial sense to add the increased rent arrived at by the indexation process to the passing rent, and there was no objective evidence of any agreement to that effect. The Lord Ordinary had found as a fact that the two solicitors agreed that the effect of the defenders' proposed wording was not significantly different from the landlord's preferred wording. That finding had not been challenged. The task of the solicitors was to implement the agreement in principle arrived at by the surveyors. It was not appropriate to focus narrowly as the pursuers had done on the letter of 16 June 1999. The words "addition per space" were unusual. Thirty five spaces had been mentioned in clause 1.7 of the Minute of Amendment. The car park factor had been calculated on the basis of a single space. Accordingly the product of the formula had to be added together thirty five times to arrive at the passing rent for the whole property.

 

Decision

[22] Neither side contended that the parties were at cross purposes as to what they intended to agree, and accordingly the construction of the clause must proceed on the basis that it expresses a common intention. That intention requires to be objectively ascertained in accordance with rules of construction which have undergone some judicial consideration in recent years. One aspect of the rules which remains clear is that evidence of previous negotiations and discussions between the parties to the contract and expressions of their subjective intentions are inadmissible as aids to construction, for the reasons explained by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1384H-135D. Such evidence is, however, admissible to establish the circumstances surrounding the formation of the contract, including the genesis and the aim or purpose of it and the parties' knowledge of them. In Reardon Smith Line v Hansen-Tagen [1976] WLR 989 at 995H Lord Wilberforce said:

"No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."

[23] The speeches of Lord Wilberforce in Prenn v Simmonds and Reardon Smith Line have been followed and explained in two later cases. In Mannai Investment Co. Limited v Eagle Star Life Assurance Co. Limited [1997] AC 749, Lord Steyn, with whom Lords Hoffman and Clyde agreed, explained at page 770F-H that in the second half of the 20th century there had been a shift towards the commercial interpretation of contracts. He went on:

"In determining the meaning of the language of a commercial contract, and unilateral contractual notices the law therefore generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language."

At page 779F Lord Hoffman said:

"In the case of commercial contracts, the restriction on the use of background has been quietly dropped. There are certain special kinds of evidence, such as previous negotiations and express declarations of intent, which for practical reasons which it is unnecessary to analyse, are inadmissible in aid of construction. They can be used only in an action for rectification. But apart from these exceptions, commercial contracts are construed in the light of all the background which could reasonably have been expected to have been available to the parties in order to ascertain what would objectively have been understood to be their intention: Prenn v Simmonds 1381, 1383. The fact that the words are capable of a literal application is no obstacle to evidence which demonstrates what a reasonable person with knowledge of the background would have understood the parties to mean, even if this compels one to say that they used the wrong words. In this area, we no longer confuse the meaning of words with the question of what meaning the use of the words was intended to convey."

Lord Hoffman took the matter further in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 at page 912F where he said:

"My Lords, I will say at once that I prefer the approach of the judge. But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds and Reardon Smith Line v Hansen-Tagen is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact,' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meaning of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words of syntax: see Mannai Investment Co. Limited v Eagle Star Life Assurance Co. Limited.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB: (supra)

'If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.'"

Both Lord Hope and Lord Clyde agreed with Lord Hoffman's reasoning. I mention this because I understood the pursuers to seek support in the words of Lord Hope, giving the judgment of the Board in Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 2 EGLR 128 at 129F, for their argument that in construing a contractual document the first task of the court was to read the words of the document, as I understood it, without reference to any background circumstances, and, if the ordinary meaning of the words was clear and unambiguous, to give effect to that meaning. In my opinion the Melanesian Mission Trust Board case can be distinguished from the present. It is clear from what Lord Hope said at page 129A-B that there was nothing in the background circumstances which had any impact on the Board's decision, and the contract was interpreted purely on what Lord Wilberforce in Prenn v Simmonds called "internal linguistic considerations." Before turning to consider the words of the contract, Lord Hope made reference to the background circumstances, but only to indicate their lack of significance.

[24] The effect of the passages I have cited is, it seems to me, that the court begins its consideration of the construction of a contractual provision already equipped with the information available as to the circumstances surrounding the contract, and that information is brought to bear on the court's consideration from the beginning. The court does not begin by looking at the words themselves, as it were in a vacuum, without reference to the surrounding circumstances, in order to ascertain whether they have a plain meaning or whether there is an ambiguity. To adopt that approach, it seems to me, is to assimilate so far as possible, the way in which the document is interpreted to the common sense principles by which any serious utterance would be interpreted in ordinary life, and to discard "the old intellectual baggage of 'legal' interpretation". If I am right in that interpretation, it was not necessary for the Lord Ordinary to decide that the words of clause 3 were ambiguous before he could deploy the evidence of the surrounding circumstances.

[25] That said, had it been necessary for me to do so, I would have agreed with the Lord Ordinary that the words of clause 3 are ambiguous. The phrase "by addition per space" is unusual and its meaning is not immediately clear. The lack of clarity is contributed to by the absence of the definite article before the word "addition", and the lack of any reference to a figure or sum to which the addition is to be made. On the other hand, the insertion of the single word "together" after the word "addition" produces the meaning contended for by the defenders.

[26] On the evidence the Lord Ordinary found that neither surveyor had ever considered that the new rent review provision should provide for an indexation type of formula to produce a figure to be added to the global passing rent. What they had in mind was an indexation of the rent to reflect directly increases in the car park factor. In evidence and in argument this was sometimes called "the principle" of the agreement. I think that it could equally be called the aim or purpose of the contract and the Lord Ordinary was correct to have regard to the evidence to which I have referred in order to identify that aim or purpose.

[27] The aim or purpose remained the same as long as the matter remained in the hands of the surveyors. The surveyors, however, did not agree on a formula by which that aim or purpose would be put into effect. That task was left to the solicitors. The Lord Ordinary found that when the matter was handed over to them neither of them directed his or her attention to the possibility of the wording having the effect contended for by the pursuers. He also found that the solicitors were at one in believing that the effect of the defenders' proposed wording was substantially the same as the wording which the pursuers inserted into the contract. There was therefore nothing to indicate that when the matter was in the hands of the solicitors the aim or purpose of the contract altered in any way.

[28] There is a further point which is relevant to the objective ascertainment of the meaning of clause 3. The formula "the product of 96 multiplied by the car park factor" represented a mechanism for applying an indexation process to the rent of a single space. As the Lord Ordinary pointed out the reference to a single space reflected the approach taken by the parties from an early stage in the negotiations when, on the evidence, a direct indexation process was in contemplation by both sides. When Miss Knox sought an explanation of the formula from Mr Leishman she was told that the figure of 96 was obtained by dividing the new rent of £26,250 by the car park factor applying as at 1 July 1999. The use of the figure 96 in the formula in clause 3 would, it seems to me, indicate to the objective reader that the rent review provision was aimed at retaining at subsequent review dates the same relationship between the car park factor and the reviewed rent as applied on 1 July 1999. In other words, the use of the formula is indicative of an indexation process which is inconsistent with the addition of the result of the process to the passing rent. If the result of the indexation process is to be added to the passing rent, more than doubling it, it is difficult to understand the justification or necessity for the use of an indexation process at all when, with each successive rent review, the reviewed rent would bear a more and more remote relationship to the car park factor to which the process was intended to relate it. In my view the pursuers' argument gives rise to a construction which is not "commercially sensible". In this connection I agree with Lord Kingarth that, in the circumstances of this case, that conclusion can be reached without the need for expert evidence.

[29] For all these reasons I have come to the view that a reasonable commercial person, looking at the matter objectively, would conclude that the wording of clause 3 properly construed does not involve the addition of the product of the formula to the passing rent at the date of each review. I would therefore refuse the appeal.

[30] In relation to the defenders' counter-claim seeking rectification, the Lord Ordinary found it unnecessary to reach a concluded view. In the light of the view I take of the proper construction of clause 3 it is unnecessary to deal with the question of the counter-claim.

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Philip Lord Kingarth Lord Marnoch	[2007] CSIH 79 XA98/03   OPINION OF LORD KINGARTH   in   RECLAIMING MOTION   in the cause   CITY WALL PROPERTIES (SCOTLAND) LIMITED Pursuers and Reclaimers;   against   PEARL ASSURANCE plc Defenders and Respondents:   _______

 

 

Act: Keen Q.C., MacColl; HBJ Gateley Wareing (Pursuers and Appellants)

Alt: Cullen Q.C., E.W. Robertson; Burness LLP (Defenders and Respondents

 

2 November 2007

 

[31] The primary issue raised in this reclaiming motion is a short question of construction of a clause in a commercial contract. The principles to be applied, derived from numerous well-known authorities, were explored fully in the debate before us, and, although certain different emphases were put upon them by each party, there was, it seemed to me, by the end of the hearing, broad agreement as to what these principles are and how they fall to be applied in the present case. In particular, as I understood it, it was agreed that, however much assistance could legitimately be gained from consideration of surrounding circumstances, the relevant clause could only properly be construed as having a meaning which the words were capable of bearing as a matter of language. It was not, for example, suggested on either side that this was a case in which the court could and should find that, having considered the surrounding circumstances, it was obvious that there had been a mistake in the language used (a possibility recognised, for example, by Lord Hoffman in the fourth and fifth of the five principles summarised by him in Investors Compensation Scheme Limited v West Bromwich Building Society; see also, for example, Holding & Barnes plc v Hill House Hammond Limited (No. 1) 2002 L and TR 103).

[32] The Lord Ordinary was of the opinion (a) that both parties' constructions of the rent review provision were at least possible as a matter of language, and (b) that that apparent ambiguity fell to be resolved (very clearly he thought) in the respondents' favour when regard was had to the background circumstances as found by him in evidence. In my view, he cannot be said to have erred in either conclusion.

[33] Looking at the words alone, there is, in my view, some uncertainty as to whether the words "by addition" fall to be read separated (as it were) from "per space" by implied insertion of words to the effect of "to the passing rent", which the reclaimers essentially contend for, or whether the phrase "by addition per space" is to be read as an uninterrupted whole, meaning in effect "by addition space by space", which is what in essence the respondents contend for. Although in the course of the debate before us the words were assessed in a number of different ways with a number of different emphases, I am not certain that much is to be gained by putting the competing positions at any greater length. At all events, for my part, I agree with the respondents' submission that both meanings are possible, and that without doing any violence to the words used. By contrast I reject the reclaimers' contention that their construction is the only one which the words can reasonably bear.

[34] If that is right, I am in no doubt that the Lord Ordinary was correct to prefer the respondents' construction.

[35] One of the background circumstances which he felt it important to take into account (indeed he considered it was of extreme importance) is the fact that, as was agreed in evidence, the figure of 96 was the figure which, if multiplied by the average daily car parking rate at the relevant comparator car parks at the effective date (i.e. 1 July 1999), produced the agreed rental for one of the (then) 35 car parking spaces - namely £750, a figure then apparently agreed and understood to represent the open market rental value per space (see e.g. the letter from Mr. Evans to Mr. Strachan dated 3 August 1998 referred to in paragraph [6] of the Lord Ordinary's Opinion at page 61 of the Reclaiming Print). Although the Lord Ordinary derived this understanding from evidence of the parties' communings, it cannot be disputed (nor was it before us) that he was perfectly entitled so to do, to establish the parties' knowledge of circumstances with reference to which they used words (and figures) in the contract (see e.g. Lord President Rodger in Bank of Scotland v Dunedin Property Investment Company Limited 1998 SC 657 at page 665). The significance of that is that, as can readily be seen, the effect of the respondents' construction would be that at every review date the figure of 96 would be used as the factor to apply to the average of increased relevant daily car parking charges to achieve a reviewed rental per parking space (and thus an overall rent for the premises) which would allow the 1 July 1999 rent for the premises to be increased from time to time in line with increases in the relevant car parking charges. By contrast, the effect of the reclaimers' construction would be that, every three years, not only would the agreed 1 July 1999 rent be indexed, as it were, in line with increases in relevant car parking charges, but the figure thus achieved would be added back to the passing rent, that passing rent, at every review date after the first, already having had that process of indexation and adding-back carried out to produce it.

[36] Without going further, it can, it seems to me, already be said that the respondents' construction is, on the face of it, a commercially sensible construction; the reclaimers' is not. It is quite understandable for the parties to a commercial lease of the type in question to have wished to avoid disputes about levels of market rentals for similar properties - at paragraph [11] the Lord Ordinary records that Mr. Leishman, the solicitor acting for the reclaimers, gave evidence that the desire of Mr. Perry, the reclaimers' principal shareholder and director, to have the rent review provision in the lease altered "arose from a wish to avoid disputes and expensive arguments about the appropriate level of rent, to be fixed at rent review. The overall purpose was to avoid the necessity of having regard to levels of market rentals for similar properties", - and for them to have provided for increases in the agreed rent to be linked directly to increases in car park charges levied at certain chosen local premises. For them to contemplate doing that on a relatively elaborate basis and then adding the figure so achieved back to the passing rent every three years makes no obvious commercial sense. That is a conclusion which, in my view, the court can readily draw, even in the absence of expert evidence. As a matter of basic arithmetic it is apparent that the reclaimers' construction would produce not only an increase at the first review date of over 100%, but would produce thereafter every three years (if there was any increase in the comparator car parking charges, however small) very significant percentage increases in the agreed rental - increases which would bear no close relationship to increases in the comparator car park charges which the parties had chosen, with some care, to include in the formula. On this view alone, it seems clear - even making full allowance for the fact that at the time the rent review clause was agreed the parties also agreed to changes in the duration of the lease and to the insurance provisions - that the reclaimers' construction is much less likely to have been that intended by the parties. As Lord Reid observed in Schuler AG v Wickman Tools 1974 AC 235, at p. 251, the more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention clear.

[37] In addition, although perhaps of less significance, some assistance can be afforded by consideration of the proviso in the clause in question. Quite simply it would have no content if the reclaimers' construction was correct, since any reviewed rent would always be greater than the passing rent (indeed, as already observed, greater by a substantial percentage even if there was only a small percentage increase in the relevant car park rates). On the respondents' approach that would not necessarily be so, if relevant comparator car park charges increased but the number of relevant car parking spaces decreased between review dates.

[38] The matter is, however, in my view, put beyond doubt by consideration of the aim and object of the clause as found by the Lord Ordinary in evidence. It seems entirely clear, from his assessment of the evidence of the parties' communings (from the outset in the hands of the surveyors and even once matters were put into the hands of solicitors), that the Lord Ordinary felt able to deduce without any real hesitation an apparently agreed aim to produce a formula to enable the rent to be reviewed in a way which would allow its level to be kept in line with increases in car parking rates (see in particular that part of paragraph [39] of his Opinion reproduced at pages 108 and 109 of the Reclaiming Print). The boundaries of the general prohibition against use of the parties' negotiations as an aid to construction may be somewhat uncertain (see e.g. Lord Hoffman's third principle in Investors Compensation Scheme Limited v West Bromwich Building Society; reference may also be made to Bank of Scotland v Dunedin Property Investment Company Limited where, at page 676, Lord Caplan, under reference to the speech of Lord Wilberforce in Prenn v Simmonds, observed

"Certainly Lord Wilberforce proceeded to explain how the substance of negotiations must be excluded from questions of construction. However I do not think his Lordship meant this to be applied too rigidly. As he states (page 1385) ... 'It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true; the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact'".)

But I see no good reason why, if the Lord Ordinary was able to reach a view from the documents as to what, at all material times, was the agreed aim and object of the rent review provision, he should not be able to use that as an aid to construction, just as if at the outset of their communings the parties had chosen to record, in a written memorandum, what that aim and object was.

[39] I would only add that it is apparent that the Lord Ordinary was able to reach a view, on the evidence, as to what the aim and object of the rent review clause was, separately from his consideration of certain evidence given of what the parties' representatives themselves thought was the appropriate construction of the clause ultimately agreed. It appears that such reference as the Lord Ordinary made to that evidence (in particular towards the end of paragraph [39] and in paragraph [40] of his Opinion) was made essentially to deal with questions of credibility which had been raised about one of the respondents' witnesses in light of subsequent events. In any event, for reasons already given, it can at least be said to be not at all surprising that the Lord Ordinary did not find any of those who were engaged in the negotiations, and from whom he heard evidence, who thought at the time that the proposed, and ultimately accepted, clause had the meaning now contended for by the reclaimers. Indeed, as the Lord Ordinary records, the only witness led in evidence by the reclaimers, Mr. Leishman, said in evidence

"My intention was not to produce the substantial benefit that my clients are now saying that they are entitled to" (page 78 of the Reclaiming Print).

[40] For these reasons, agreeing with your Lordship in the chair, I would refuse the appeal. As with your Lordship in the chair I do not think it necessary to deal with the question of the counter-claim.

 

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Philip Lord Kingarth Lord Marnoch	[2007] CSIH 79 XA98/03     OPINION OF LORD MARNOCH   in   RECLAIMING MOTION   in the cause   CITY WALL PROPERTIES (SCOTLAND) LIMITED   Pursuer and Reclaimers;   against   PEARL ASSURANCE PLC   Defenders and Respondents:   _______

 

 

Act: Keen Q.C., MacColl; HBJ Gateley Wareing (Pursuers and Appellants)

Alt: Cullen Q.C., E.W. Robertson; Burness LLP (Defenders and Respondents

 

2 November 2007

 

[41] For the reasons given by your Lordships I agree that this reclaiming motion should be refused.