Contractual interpretation – striking a balance between the language used and business common sense In Wood (Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24, the UK Supreme Court earlier this year unanimously dismissed an appeal relating to the construction of an indemnity clause. The Court emphasised that it was not appropriate in this case to reformulate the guidance on contractual interpretation given to the legal profession in Arnold v Britton [2015] AC 1619 and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900. Lord Hodge gave the lead judgment, with which Justices Neuberger, Mance, Clarke and Sumption agreed. His Honour stated that the court’s task is to ascertain the objective meaning of the language the parties have chosen to express their agreement. It must consider the contract as a whole and, depending on the nature, formality and quality of its drafting, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. Where there are rival meanings, the court can reach a view as to which construction is more consistent with business common sense. However, in striking a balance between the indications given by the language and the practical implications of competing constructions, the court must consider the quality of the drafting of the clause. It must be alive to the possibility that one side may have agreed something which in hindsight did not serve its interest, or that a provision may be a negotiated compromise. It does not matter whether the detailed analysis commences with the factual background and the practical implications of rival constructions or with an examination of the contractual language, so long as the court balances the indications given by each. The court observed that textualism and contextualism are not conflicting paradigms in a battle for the exclusive occupation of the field of contractual interpretation and, on the approach to contractual interpretation, Rainey Sky and Arnold were saying the same thing, namely that interpretation is a unitary exercise involving an iterative process by which a balance must be struck between the indications given by the language used (in both the clause under scrutiny and the remainder of the contract) and the implications of rival constructions (which is usually thought of as the business common sense approach). Interestingly, Lord Hodge said that in striking a balance between these two tools to construction it does not matter which way round they are used, so long as the court balances the indications given by each, although the weight to be given to each tool will depend on the circumstances. Some agreements may be successfully interpreted by textual analysis because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals, whereas others may require a greater emphasis on the factual matrix and commercial background and implications to interpret a disputed provision because of their informality, brevity, lack of clarity, or the absence of skilled professional assistance.