Can I be rescued from a bad bargain? - Quick reads - Gateley
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Can I be rescued from a bad bargain?

Gateley Legal

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Will the Courts ever rescue a party from a bad bargain? This blog looks at this question, and in particular some interesting comments made on it made by Lord Sumption, one of the highest judges in the land.

There is an old legal adage that the Courts will not rescue a party from a bad bargain. What this means is that even if the drafting of a contract produces a patently unfair result, the Courts will be very reluctant to interfere.

The rationale behind this is that Courts do not see it as their place to interfere with bargains made by willing parties.

Historically, this has meant that the Courts will look at what the contract actually says, and will rarely depart from the “natural and ordinary meaning” of the words of the contract. They will be not look at what the parties actually intended the contract to mean. This has become known as the “literal approach”, and has been applied by the Courts, even where it produces a result that does not make commercial sense.

The literal approach can produce some very unfair results, and about thirty years ago the Courts began to take a more commercial approach, taking into account not just the meaning of the words, but also the commercial background of the transaction. Indeed, there was a shift of emphasis from the literal meaning of the words contained in the contract, to the wider commercial context.  This enabled the Courts to take a more flexible approach, such as:

  • interpreting an express termination clause providing that a contract could be terminated for “any breach”, to mean that the contract could only be terminated if the breach was sufficiently serious[1]; 
  • interpreting a formula for calculating an additional payment to be made by a developer to a landowner which, if read literally, produced an unexpectedly high figure, to produce a more sensible “commercial” figure [2]; and 
  • interpreting a guarantee provision requiring a bank to repay certain advance instalments to mean that the bank should pay all advance instalments[3]. 

No doubt the judges in those cases wouldn’t have regarded themselves as rescuing parties from bad bargains, but in reality that is what they were doing,

In the last couple of years, however, the Courts seem to be rowing their way back to the old literal approach. A stark illustration of this was where the Supreme Court famously upheld service charge provisions in leases relating to holiday chalets, even though they produced grotesquely high charges[4] (£1.025 million per chalet by the end of the lease term). Here, the Supreme Court restated the important of following the natural and ordinary meaning of words, even if it produced unfair or absurd results.

One of the judges in that case was Lord Sumption, who recently delivered a talk outlining his preference for a return to the literal approach[5]. In his talk, he emphasised the importance of the language used by drafters of contracts. The concept of “commercial common sense” should not override the words used. This may produce unfair results, but, as Lord Sumption points out, by their very nature contractual negotiations always produce contracts that are more favourable to one side than the other.

Conclusion

So it looks like the Courts will be moving back to the old position, and will be extremely reluctant to rescue a party from a bad bargain- however bad that bargain may be. With this in mind, it is more important than ever for contractual terms are carefully considered and drafted.

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