#19863 - Interpretation Notes & Debates - Contract Law

Interpretation – Textbook

Interpretation is finding the meaning of a contract. Also known as ‘construction’, but it has nothing to do with the formation of a contract. The judge has no jurisdiction to change the terms, but merely describe their meaning.

Judges give effect to the parties’ intentions when interpreting. Objective test for those. The best evidence of intentions is the contract. Been a shift – courts are now more willing to depart from the plain meaning of a written contract. This is the ‘modern approach’. The ‘traditional approach’ simply gave effect to the plain language.

External considerations were only taken into account if the meaning of the contract was unclear (Shore v Wilson). In the case In the Goods of Peel, a testator wrote the wrong name when appointing his executor. There was coincidentally a 12 year old boy with the name written in the contract, so Lord Penzance held the boy was the executor.

Originated in Investors Compensation Scheme v West Bromwich Building Society. Elderly investors entered into ‘home income plans’ with a building society on the advice of a financial advisory firm. This involved investors remortgaging their homes and investing in bonds. Investments failed and advisors were bankrupt. Investors sued the building society which had provided the mortgages. The claim was actually brought by the Investors Compensation Scheme who said they’d compensate the investors in return for their rights to legal action. Building society argued ICS couldn’t bring a claim for damages because the contract had a term saying you can’t give rights to sue to someone else – this was the ‘natural meaning’.

‘Any claim (whether sounding in recission for undue influence or otherwise) that you have or may have against West Bromwich Building Society…’

Above was the original term. The HL felt able to interpret it to mean that only ‘any claim sounding in rescission (whether for undue influence or otherwise)’. In effect, although the natural meaning appeared to block any transfer of the right to sue, the HL interpreted it to allow the right to claim for damages. This is what the parties must have intended. Lord Hoffmann said the purpose of the agreement between ICS and investors was for the investors to be compensated and ICS to have the right to sue for damages. If the investors could sue the building society, they would be overcompensated. Hoffmann set out these principles:

1. Interpretation is about ascertaining a meaning clear to a reasonable person who had background knowledge of all the things reasonably available to the parties at the time of contract

2. ‘background’ means anything that could have affected the way the language of the document was understood by a reasonable man, as long as the parties reasonably could have known it

3. Previous negotiations and declarations of subjective intent are not ‘background’ and are only relevant for rectification. This is for practical policy reasons

4. The meaning a document would convey to a reasonable man the meaning of the words. Background may allow a reasonable man to choose between possible meanings of ambiguous words, and also sometimes to conclude the parties must have used the wrong words or syntax

5. The traditional approach reflects the fact we don’t often make allowances for mistakes in formal documents. But if you conclude from the background the language is wrong, the law says judges shouldn’t attribute an intention clearly not there.

In ICS v West Bromwich, Lord Lloyd dissented saying the interpretation did violence to the language. We start with the words to ascertain what the parties meant. There is no principle of construction to reach the opinion of the majority.

In Arnold v Britton there was a clause which plainly said landlords must pay 90/year maintenance rising by 10% each year. UKSC by majority gave effect to this. Neuberger said when interpreting a written contract, the court identified the intention of the parties. It does this by focusing on the meaning of the words, bar very unusual cases. The meaning is most obviously gleaned from the language of the provision. UKSC discouraged parties from citing ‘business common sense’ to support a strained reading of the words used.

Later in Wood v Capita Insurance Services Lord Hodge said Arnold v Britton was consistent with ICS v West Bromwich. He said the method of looking at the text and the method of looking at the context were two tools, each to be used to varying degrees depending on the circumstances of the agreement. Davies thinks Lord Hodge is right to say there’s a spectrum of approaches, but he didn’t say where English law is. It’s artificial to say the cases were saying the same thing. Lord Sumption, writing extra-judicially, said in Arnold v Britton, the UKSC were retreating from the modern Hoffmann approach. In Wood v Capita, the UKSC refused to depart from the language on the basis of ‘business common sense’.

In ISC, Lord Hoffmann said there is a ‘matrix of fact’ which judges should take into account beyond the words of the contract. He said it’s important legal principles match common sense. The theoretical basis is sound: we need to know the context to properly understand the wording. It’s more likely to give effect to what the parties really wanted, whilst still focusing on their objective intention. Sir Kim Lewison objects: in everyday life a listener can ask for clarification where there’s ambiguity. In those situations is where a court ‘interprets’ a contract, with no possibility of clarification. In everyday life a speaker might say he’s been misunderstood, even if the reasonable listener understood a different meaning to what the speaker intended. This cannot happen in contract law.

It has been argued commercial contracts should not need recourse to context: businessmen enter into a written contract to provide certainty as to their rights/obligations and don’t want to litigate to find out. So, the court should not interpret the bargain in a way not available to them, as they did in ICS (Staughton).

Because parties can introduce a wide range of background material to support a particular interpretation of a contract, lawyers can’t really say what a contract means (Berg). Lord Hoffmann in ICS said admissible background material was absolutely anything which would’ve affected the way the language would have been understood by a reasonable man. In Bank of Credit and Commerce International v Ali he clarified this means the material had to be relevant to the interpretation point. Neither pre-contractual nor post-contractual negotiations count.

In Chartbrook v Persimmon Homes Lord Hoffmann accepted there may be too much material to look at if the court allowed pre-contractual negotiations, and the statements about those negotiations would be ‘drenched in subjectivity’ (i.e. lies). It might also have an adverse effect on third parties and encourage parties to lay a paper of self-serving documents. But these reasons apply equally to other material admissible.

A drive to widen the factual matric might allow post-conduct to be taken into account when determining the objective meaning. Traditionally, English courts have excluded thus (James Miller Partners v Withworth Street Estates). Lord Reid said otherwise a contract might mean one thing when it was signed, but mean something else a year later because of subsequent events. This would be bad – commercial certainty demands otherwise

Post-conduct might be relevant to estoppel. If X misunderstands the agreement and misleads Y as to its meaning, and Y acts to his detriment in reliance on that misinterpretation, X will be estopped from denying that is the true meaning of the contract. The meaning of the contract will have effectively changed from the original meaning. Where there is no misrepresentation but the parties have mutually agreed an interpretation of the contract, they will be estopped from denying that was the meaning assumed: estoppel by convention.

In Amalgamated Investment and Property v Texas Commerce, A guaranteed T’s loan to a subsidiary of A. The wording of the guarantee only covered loans made by T personally, but this particular loan was made by T’s subsidiary. CA said A was estopped from denying it had guaranteed the loan, since all the parties acted on the understanding A was guaranteeing that particular loan, so it would be unfair to depart from that promise.

ICS draw on business common sense as being relevant in interpreting the contract – this is vague. Neuberger LJ in Skanska Rashleigh Weatherfoil v Somerfield Stores said courts should take care in departing from the provision’s natural meaning just because it conflict of what the court thinks is commercial common sense. Judges are not always the most commercially-minded or experienced of people and should involve imposing themselves thus. Arden LJ in Re Golden Key said the line between giving weight to the commerciality of a provision and writing a provision into an agreement can become a fine one. Ward LJ said the higher you go in the judiciary, the less the essential oxygen of common sense is available to you (Oceanbulk Shipping & Trading v TMT Asia. The distinction between holding that an agreement makes no commercial sense and that one of the parties just made a bad deal is fine. There was even a split about whether the plain meaning of the...