The Court of Appeal’s judgment in Sutton Housing Partnership v Rydon Maintenance Ltd has the quality that I value most in any judgment: it is a triumph of common sense.
Sutton Housing Partnership Ltd v Rydon Maintenance Ltd
In May 2013, Sutton entered into a five-year contract with Rydon to maintain and repair Sutton’s housing stock. Sutton was permitted, after giving the requisite notice, to terminate the contract if minimum acceptable performance levels (MAPs) were not met. There was also an incentivisation scheme that resulted in extra payments to Rydon if the MAPs were exceeded. In the contract’s definitions section, it was noted that MAPs were to be set out in the Key Performance Indicator (KPI) Framework.
So far, so good. Even if it contains a few too many acronyms, it at least seems clear what the contract means.
Unfortunately, Sutton soon became dissatisfied with Rydon’s service. In December 2014, after following the notice procedure, Sutton terminated the contract. This was on the basis that Rydon had failed to meet the MAPs.
During the subsequent adjudication, the contract’s drafting swiftly unravelled and it became obvious that it made little sense. It was the KPI Framework that caused the difficulties. The only possible MAP figures included were in tables specifically called “examples” and which only related to the first year of the contract (2014-15).
Rydon argued that the contract did not specify MAPs (only examples, which were not binding). Therefore, Sutton had no right to terminate on the basis of a failure to meet MAPs.
Sutton argued that, as the MAPs in the three examples were always 3% less than the target KPI figure, the MAPs could be derived arithmetically for the rest of the contract period.
Arnold v Britton orthodoxy
There is nothing new in the judgment. Like most other cases on contractual interpretation after 2015, it restates the Arnold v Britton orthodoxy. Any contractual clause has to be construed in light of:
- The “natural and ordinary” meaning of the clause.
- Any other relevant provisions of the contract.
- The overall purpose of the clause and the contract.
- The facts and circumstances known or assumed by the parties at the time the contract was executed.
- “Commercial common sense”.
- But disregarding subjective evidence of any party’s intentions.
On a practical level, those six factors should be the start of any submission on contractual interpretation.
Two key points: reciprocity and common sense
Despite making no new law, I think there are two really useful points to take away from the judgment.
The first is reciprocity. In my view, this was at the heart of Jackson LJ’s reasoning. A finding that there were no MAPs in the contract would not only mean that Sutton would lose its right to terminate on this basis, it would also mean that Rydon would be deprived of bonuses under the incentivisation scheme. This could not have been a result that either party intended.
It is well-established that the court, through a strained reading of a contract, will not rescue a party from a bad bargain. This was perhaps most recently underlined in the now famous Balfour Beatty Regional Construction Ltd v Grove Developments Ltd, where Balfour Beatty found themselves without any interim payments after the anticipated date of practical completion until the conclusion of the project. The Court of Appeal refused to rescue Balfour Beatty from its own bad bargain of only agreeing interim payments until the anticipated practical completion date.
However, as in Sutton, where one proposed interpretation would be a bad bargain for both parties, that is a different matter. Practically, it is well-worth considering in any case whether the other side’s interpretation would, in a different set of factual circumstances, deprive them of a contractual benefit that they would not reasonably have wanted to give up. If so, this will be a powerful factor as to why their interpretation is not correct.
The second point to take away is the primacy of common sense. It underlies the whole of Jackson LJ’s reasoning. For instance, he rejected Rydon’s submission that, even if the example MAPs were binding, they were only binding for the year stated in the examples (2014-15). He said that would be an “absurdity” as it would allow Sutton to terminate and Rydon to claim a bonus on the basis of MAPs in the first year of the contract but not thereafter. As all of the MAPs were 3% lower than the target figure, that was “obviously the ratio which the parties intended and agreed”.
Although an obvious point, in any case it is worth testing the rival contractual interpretations against hypothetical facts (both run-of-the-mill facts and more unusual situations) to make sure they don’t lead to absurd results.
Where a contract is unclear, Jackson LJ’s reasoning suggests common sense prevails. His judgment was the “only rational interpretation of the curious contractual provisions” the parties had entered into.
Practically, Sutton suggests that there are two useful questions to ask in any case involving contractual interpretation:
- Do either of the rival interpretations produce absurd results?
- Does the other side’s interpretation deprive them of a valuable contractual right or benefit which, in different factual circumstances, they wouldn’t have reasonably wanted to give up?