Court Of Appeal Overturns High Court's Interpretation Of Deferred Consideration Clause

The decision emphasises a focus on the natural and ordinary meaning of the words used.

In overturning a first instance decision about the interpretation of a deferred consideration clause in a land sale agreement, the Court of Appealhas criticised the decision below for rejecting the plain meaning of the clause and adopting a purposive interpretation, in circumstances where there was in fact no ambiguity: Westfield Park Ltd v Harworth Estates Investments Ltd [2025] EWCA Civ 1374.

In the Court of Appeal's judgment, the judge fell into error by focusing on the pre-contractual negotiations – which, it is well-established, are irrelevant to questions of interpretation – and his erroneous conclusion on a factual issue, which was unsupported by evidence and did not form part of either party's case.

The decision suggests that the starting point for contractual interpretation should be an objective determination of the natural and ordinary meaning of the words used, both alone and in their immediate context, before considering other factors such as the factual matrix known to the parties at the time and considerations of commercial common sense. This may be thought to contrast with comments made in the leading Supreme Court decision on contractual interpretation, Wood v Capita Insurance Services Ltd [2017] UKSC 24 (considered here). In that case Lord Hodge expressed the view that, once the court had read the language in dispute and the relevant parts of the contract that provided its context, it did not matter whether its more detailed analysis started with the factual background and the implications of rival constructions or a close examination of the relevant language – so long as the court balanced the indications given by each.

In practice, however, where the language of the contract is clear and unambiguous, the courts will simply apply it – unless the surrounding circumstances suggest that something has gone wrong with the language. In most cases, therefore, where there is a professionally drafted contract, the natural and ordinary meaning of the words used will be a convenient starting point – and may, in many cases, also be the end point.

Background

The dispute arose out of the sale of a holiday park which was marketed for sale in 2021 by Harworth Estates Investments Limited ("Harworth"). The holiday park included an area known as the "Bowl", on the site of a former colliery, which had outline planning permission for static caravans. Westfield Park Limited ("Westfield") was the eventual purchaser.

The Bowl included a "zone of influence" (ie a buffer around a mine entry which could be affected in the event of a collapse) comprising a radius of 27m around the heads of two mineshafts. The zone of influence was not considered to be suitable for development.

The parties agreed a purchase price of £2.6 million, with a deferred consideration mechanism providing for an additional payment from Westfield if the Coal Authority confirmed in writing that the zone of influence was reduced within 12 months of completion. The additional payment would be calculated at a rate of £88.96 per m² released, up to a maximum of £400,000, to be payable within 30 days of demand.

Following completion, the Coal Authority confirmed that the zone of influence was reduced to a radius of 3.66m, but that the reduction only applied to the siting of static caravans and not the construction of permanent structures. On this basis, Harworth issued a demand for additional payment under the sale agreement. Westfield refused, arguing that payment was not triggered because the Coal Authority had only given permission for a particular use of the zone, and litigation ensued.

At first instance, HHJ Klein found that the deferred consideration provisions in the sale agreement could not be given their plain meaning, including because they contemplated the reduction or release of the zone of influence when it appeared from a Coal Authority Guidance Notice that it was not possible to reduce a zone of influence on a case-by-case basis. The judge therefore adopted a more purposive construction, influenced by the factual background relating to what he considered to be the parties' mistaken beliefs as to how a zone of influence might be redesignated, and the impact of those beliefs on the negotiation of the sale agreement.

The judge concluded that a reasonable reader would appreciate that the general object of the transaction was a sale of the Bowl for the siting of static caravans, and that they could not be placed in a zone of influence unless the Coal Authority did not object. They would also understand that the agreement provided for an additional payment if the Coal Authority made a written decision allowing static caravans to be sited in the Bowl.

As such, he held that payment had become due when the Coal Authority confirmed in writing that the siting of static caravans within the broader zone of influence was not objectionable. It was therefore not necessary to reach a decision on Harworth's alternative rectification claim, but he considered it unlikely to have succeeded.

Westfield appealed.

Decision

The Court of Appeal allowed Westfield's appeal.

Asplin LJ gave the lead judgment, with which Coulson and Fraser LJJ agreed.

Contractual interpretation

The Court of Appeal noted that the principles of contractual construction are very well known and were fully explained by the Supreme Court in Arnold v Britton [2015] UKSC 36 (considered here) and Wood v Capita (referred to above).

As stated in Arnold v Britton, the meaning of the relevant words must be assessed in the light of:

The principles were summarised more recently in Sara & Hossein Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2 as follows:

1. The contract must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean.
2. The court 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 its objective meaning.
3. Interpretation is a unitary exercise which involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its implications and consequences are investigated.

The Court of Appeal held that the judge in the present case had failed to apply this approach, as he did not begin his task by seeking to determine objectively the natural and ordinary meaning of the words, both alone and in their immediate context, and then proceed to consider them in the light of the other relevant provisions, the overall purpose of the agreement, the facts and circumstances known or assumed by the parties at the time, and commercial common sense.

The court noted that the judge appeared to have centred his reasoning on the pre-contractual negotiations, which were irrelevant, and his view that it was not possible to reduce a zone of influence (and that the parties had been negotiating under the influence of a mistake), which was unpleaded and unsupported by evidence.

Applying the proper approach, and assuming that the Coal Authority was able to reduce the zone of influence, the Court of Appeal held that a reasonable reader with all relevant background knowledge would have understood the disputed language to mean what it said, ie to refer to a reduction or release of the zone of influence, not permission for a particular use within the zone. On this basis, the Court of Appeal found that the deferred payment obligation was not triggered.

Rectification

In the alternative, Harworth argued that the agreement ought to be rectified because the parties shared a common intention that payment would be made if the Coal Authority did not object to the placement of static caravans in the zone of influence.

The Court of Appeal referred to well-established principles that rectification requires evidence that a document fails to give effect to a prior concluded contract, or does not accurately record the parties' common intention which was communicated between them.

Given the trial judge's primary finding on contractual interpretation, he had not made findings on common intention. The Court of Appeal rejected the suggestion that such findings could be "patched together" by reference to paragraphs of the judgment which were concerned with other matters. Absent such findings at first instance, the Court of Appeal was unable to grant rectification, and it would not be appropriate to remit the matter to the judge including because too much time had elapsed.

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