Dooba Developments Ltd and McLagan Investments Ltd (a subsidiary company of Asda) entered into a £12 million sale and purchase agreement for the construction of an Asda Superstore and other ancillary retail units, which was conditional on four conditions relating to planning permission and consent to highways works being satisfied.
The contract also contained the following catch all right to rescind the contract:
“if all the Conditions have not been discharged...by the Longstop Date, then either Asda or Dooba may rescind this Agreement”.
Although 3 of the 4 conditions were satisfied, a dispute arose as to whether the highways condition had been met. Asda tried to rescind the contract on the basis that not all of the conditions had been satisfied, but Dooba argued the rescission based on the catch all right was invalid.
Asda applied for summary judgment on the basis that the rescission was valid if any of the conditions remained outstanding at the longstop date. However, Dooba argued the catch all right to rescind meant the parties could only rescind the contract if none of the four conditions had been met by the longstop date.
The High Court agreed with Asda and applied a commercial, common sense interpretation based on the principles set out in the Supreme Court case of Arnold v Britton  UKSC 36. In Arnold v Britton it was stated that the meaning of a contract must be assessed by reference to:
“what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”.
The Court therefore decided that the clause entitled Asda to rescind the contract, as one of the conditions had not been satisfied.
On appeal the High Court acknowledged that either interpretation was possible, however it overturned the previous decision and held that the parties could only rescind the contract if none of the conditions had been met by the longstop date. It was not enough that only one condition had not been satisfied.
The judge felt this was the natural and ordinary meaning of the words used and therefore interpreted the catch all right very literally, choosing not to apply commercial common sense.
As was made clear in Arnold v Britton, judges should not disregard the literal meaning of a phrase where the meaning is clear, which the judge thought it was. The commercial common sense interpretation should only be applied where the meaning is ambiguous, and should not attempt to re-write a provision because it creates an unsatisfactory result.
It is common for contracts to contain conditions which need to be satisfied, with the contract giving each condition its own deadline for satisfaction, along with a sweep up clause stating the contract can be rescinded if any of the conditions are not satisfied. Because there was an alternative method of rescinding the contract, for not satisfying the planning condition, the judge relied heavily on this as a reason for not applying commercial common sense to the contract.
The judge therefore felt no benefit could be obtained from looking at the overall purpose of the contract or applying a purposive construction taking into account commercial common sense.
The longstop date of the catch all right was also the same longstop date of the planning condition. Asda argued the planning right would never be operable if the catch all right was operable, as the catch all right would be used to rescind the contract and not the right to rescind which arose under the planning condition.
However, Dooba argued that if a party could rescind under the catch all right because any one of the conditions remained outstanding, the need for the planning right would be redundant.
The judge decided that either interpretation left the planning right redundant
The judge’s logic in this case is questionable. He relied heavily on there being an alternative method to rescind the contract as a reason for not taking a commercial common sense approach. However, in the scenario where there was no alternative method for rescinding the contract, it is difficult to see how a judge could depart from the position that the wording is clear and that the contract cannot be rescinded by this catch all condition. This could potentially leave a party with no right to rescind the contract if the other party does not comply with any of the conditions under the contract. The judgment failed to consider what would happen in this situation.
The case also appears to fall short in giving effect to the intention of the parties in including a longstop date at all. The judge was able to choose which interpretation he favoured and chose to ignore the commercial common sense approach and leave Asda without a catch-all right to rescind, which must have been intended by the parties.
Both parties interpretations of the of the relationship between the catch all right and the planning right meant that if the catch all right could be relied upon, the planning right became redundant. The planning right would need to have an earlier longstop date than the catch all longstop date to avoid becoming redundant.
The bottom line which this case illustrates is that any contract should be as accurate and unambiguous as possible with clear deadlines. Asda has been left without the ability to rescind the contract via the catch all right. This may be a surprise and unwelcome outcome for those involved in development work.
For further information contact Joe Taylor on 01223 532723 or click here to email Joe.