Does “commercial common sense” play a part in the interpretation of a contract?

Phoebe Holland breaks down the key messages in a recent High Court judgment on the legal principles of good faith, implied rationality and commercial common sense.

Good faith and relational contracts

It is an established principle that there is no legal doctrine of good faith in general application within the English law of contract. However, a duty of good faith will arise under a specific class of long-term contracts, termed ‘relational’. These require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, involving expectations of loyalty outside of the specific wording of the contract (Sheihk Tahnoon [2018] EWHC 333).

In Cathay Pacific Airways -v- Lufthansa Technik [2020] EWHC 1789 (CH), Lufthansa Technik (LHT) sought to establish that the contract with Cathay Pacific Airways (CX) was relational and therefore subject to a duty of good faith. In his thorough Judgment, John Kimbell QC, sitting as a Deputy Judge of the High Court, accepts the notion of a relational contract and its interplay with good faith, however, rejects the proposition that the contract between LHT and CX was relational based on the facts relating to that contract. The circumstances where a contract will be categorised as relational are limited; far more is required than merely a lengthy term.

The duty of implied rationality

LHT also submitted that the contract with CX was subject to the “duty of rationality”, which CX had infringed. Judge Kimbell confirms the nature of an implied “duty of rationality” as an exception to the general rule that contractual rights are enforceable regardless of whether they are exercised in a reasonable manner.

Where there is a sophisticated commercial arrangement where both parties have received expert legal advice, there is no justification for the court to interfere with the nature of the bargain struck.

Commercial common sense and mutual understanding

Finally, LHT contended that the mutual understanding the parties shared during negotiations invalidated CX’s actions, as they were contrary to the true interpretation of the agreement.

Judge Kimbell did not hesitate in his Judgment to deem all evidence in support of this position as inadmissible; it is the established position of English law of contract that statements made in pre-contractual negotiations are not admissible evidence to interpret the contract. The Judgment reiterates that given the presence of an entire agreement clause, any recourse to alleged mutual understanding is prohibited.

Conclusion

This case serves as a clear reminder that where the parties are sophisticated commercial entities and are in receipt of expert legal advice at the time of entry to the contract, the Courts remain unlikely to interfere. As Judge Kimbell states, ‘English law does not easily accept that people have made linguistic mistakes, especially in formal documents drawn up by sophisticated commercial parties with the assistance of commercial law firms on both sides’ (para 117).

It is therefore important to seek expert legal advice when drafting even the simplest of legal contracts as the mere fact that the parties have consulted their lawyers continues to be a clear indication of their commercial intent regardless of their commercial common sense.

Phoebe Holland is a Trainee Solicitor in the Corporate and Commercial group at Invicta Law.