How should the courts interpret a contract with ambiguous wording?The answer is that the courts will prefer an interpretation that makes ‘commercial sense’.

This was confirmed by the HL in a case involving a property development where the landowner claimed a very large overage payment from the developer of his land. The formula for the overage provision had been expressed in words, but it would have been much clearer had figures (or examples) been given. In essence, the court had to choose between ‘23.4% of (A-B)’ which was the literal wording of the phrase, or ‘(23.4% of A)-B’, which was the wording that made commercial sense. In the court’s view, the drafting ‘was careless and no one noticed’ and ‘something had gone wrong with the language’. The HL said that the issue had to be resolved by determining what a reasonable person, having all the background knowledge which would have been available to the parties, would understand them to be using the language in the contract to mean. In this case, to interpret the contract with a literal interpretation made no commercial sense, and thus it was the commercial interpretation that should prevail.

In deciding whether there has been a mistake in the drafting, the court is not confined to reading the document without regard to its background or context. But, this does not mean that evidence of pre-contractual negotiations is admissible as an aid to the interpretation of the contract; it is not.

This HL case decides nothing new. But, its significance lies in the logical and sequential approach adopted by the HL, and it can thus be seen as a guide to be adopted in similar cases of ambiguity. Chartbrook v Persimmon [2009] UKHL 38 (access free at ).