Scotland's senior civil appeal court has reiterated that commercial common sense is only relevant to interpreting the terms of a contract if those terms are ambiguous.
Where the words used are clear and not open to more than one interpretation, a court must give them their natural meaning and cannot substitute what it considers a more commercially sensible outcome.
The recent judgment of the Extra Division of the Outer House of the Court of Session in Global Port Services (Scotland) Ltd v Global Energy (Holdings) Ltd  CSIH 42 has considered the question of when a court should consider what is commercially sensible when deciding what a contract means. In 2011, in the case of Rainy Sky SA v Kookmin Bank  UKSC 50, the UK Supreme Court held that, where there were two possible constructions of a contract, the court was entitled to prefer the construction which was consistent with business common sense and reject the other. Although Rainy Sky was decided on the basis of English law, it has been followed by the Scottish courts in a number of cases in recent years.
The Global Port Services case
In Global Port Services, MFS, a shareholder in Global Port Services (Scotland) Ltd (GPS), sought to raise proceedings in GPS's name against GPS's other shareholder, GMOL, and other companies associated with GMOL. MFS suspected that GMOL and its associated companies had breached the terms of a logistics contract with GPS (the "Logistics Contract"). MFS argued it had the right to raise proceedings in GPS's name (in other words, to force GPS to take court action) under the terms of a shareholders' agreement.
The shareholders' agreement provided that GPS should undertake various, specified acts without the prior written consent of MFS and GMOL, which included altering or waiving the Logistics Contract in any respect. It then stated that:
"Any action or demand by [GPS] against any or all of: GMOL [or its associated companies] . in respect of . any breach of termination of the Logistics Contract . shall require the prior written approval of MFS only."
MFS contended that this provision meant that MFS could take action on behalf of GPS against GMOL and its associated companies in respect of the suspected breach of the Logistics Contract.
While accepting that ordinary use of the English language did not support this construction, MFS argued that its interpretation of the clause applied business common sense. GMOL effectively controlled the board of GPS because, while MFS and GMOL each were entitled to appoint two directors, GMOL appointed the chairman, who had a casting vote in the event of a tie. Therefore, the GMOL-appointed directors could block (and had in fact blocked) any resolution for GPS to take action against GMOL or its associates.
MFS argued that the commercial purpose of the provision requiring the "approval of MFS only" was to stop GMOL from preventing action being taken against it by GPS. This would only work in practice, if the provision was interpreted as meaning that MFS could raise the action in GPS's name, rather than just giving MFS a right to approve any action raised by GPS itself.
At first instance, the judge agreed with MFS. However, on appeal, the Extra Division overturned that decision. Having considered the clause and the contract as a whole, Lady Smith, delivering the court's opinion, found that there was no basis to give the words used anything other than their normal meaning. The court stated that the words were not ambiguous nor open to more than one interpretation. In such circumstances, the court "must apply [the natural] meaning [of the words used], even if the result is a commercial outcome which could be considered improbable."
This case is a reminder that clarity in contracts is key.
When drafting, businesses should take care to ensure that its contractual terms actually say what they mean them to say or risk an alternative interpretation being construed when a dispute arises.
Courts will apply commercial common sense to decide contractual interpretation but will not rewrite unambiguous terms to suit a party's commercial purposes.
If a dispute arises about the interpretation of a contractual provision or if you are uncertain as to how to draft provisions in a contract to suit your business needs, please don't hesitate to get in touch.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.