The words actually used in commercial contracts will usually be decisive if disputes arise. However, as a High Court case showed, judges will apply business common sense if a literal interpretation results in an unjust windfall to one side or the other.
The case concerned a department store which had licensed a company to occupy part of its premises for the purposes of operating a hairdressing/beauty salon and spa. An agreement to bring the licence to an end was signed about a month before the date of termination. Post-termination, the store ran the business directly, taking on many of the company’s former staff under the Transfer of Undertakings (Protection of Employment) Regulations 2006.
A dispute later arose as to whether the store, or the company, bore responsibility for covering the employment costs of the business’s staff in the interim period between the date of the agreement and the date of termination. The sums at stake, including salary, holiday pay and commission payments, totalled £387,303.
In ruling on the matter, the Court noted that the agreement stated that the company would indemnify the store against any employment liabilities that ‘fell due’ prior to termination. With salaries and other benefits paid to employees monthly in arrears, the company argued that none of the disputed sums had fallen due during the interim period and that those liabilities thus fell upon the store.
In ruling on the matter, the Court accepted that, in common parlance, the phrase ‘fall due’ generally imports an obligation to pay that has been triggered and is not, on the face of it, apt to cover a situation where a liability has arisen, but the date on which payment is required to be made has not yet passed.
In upholding the store’s case, however, the Court noted that such an interpretation would result in the company receiving a surprising windfall. It would, in effect, derive a free benefit from the revenue generated by its staff during the interim period, plus some previous income on which commission was payable.
The Court found that ‘fall due’ was capable of bearing a wider meaning, embracing obligations which have arisen, even though the payment date or obligation has not yet arrived or crystallised. To that extent the phrase was ambiguous, enabling the Court to arrive at an interpretation which accorded with commercial common sense. The company was thus obliged to indemnify the store in respect of the disputed sums.
Urban Retreats Limited v Harrods Limited. Case Number: LM-2018-000012