#16756 - Terms Of The Contract Essay Plans - Contract Law

Thesis: I argue, in agreement with Lord Hodge, that interpretation is not the same as implication; the two have different roles in the law of contract. (1) I begin by acknowledging conceptual similarities between the two exercises: in particular, as O’Sullivan notes, to give effect to the intentions of the parties, judged objectively – so that at a high enough level of abstraction the difference between them is merely one of degree. (2) It does not follow, however, that they are so similar as to justify assimilation. I argue that it is possible to articulate a stable conceptual distinction between interpretation and implication: in brief, as Davies argues, interpretation is concerned with ascertaining the meaning of words which are contained in a written document; implication is to supplement the document with terms that are additional to the express terms chosen by the parties. (3) It follows that interpretation and implication must remain distinct in two senses. First, they should be sequentially differentiated: the terms of the contract must first be interpreted before the court can sensibly decide whether additional terms should also be implied. (4) Second, different rules should apply to each exercise: because they are not identical in character, anomalies would result if implication is seen merely as an aspect of, and controlled by the same principles as, interpretation. (5) In particular, I demonstrate that implication is a more intrusive power than interpretation, and should be governed by more stringent rules out of respect for the freedom of contract.

(1) Conceptual similarities between interpretation and implication

• Lord Hoffmann in AG of Belize v Belize Telecom argued: “In every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean… There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”

• Expressing support for this approach, Arden LJ remarked in Stena Line Ltd v Merchant Navy Ratings Pension Fund Trustees Ltd: “This development promotes the internal coherence of the law by emphasizing the role played by the principles of interpretation not only in the context of the interpretation of documents but also in the field of the implication of terms…. The internal coherence of the law is important because it enables the courts to identify the aims and values that underpin the law and to pursue those values and aims so as to achieve consistency in the structure of the law.”

• Finally, in Trump International Golf Club Scotland Ltd v The Scottish Ministers, Lord Mance resisted the retreat from Belize in Marks & Spencer plc v BNP Paribas Securities, saying: “I would not encourage advocates or courts to adopt too rigid or sequential an approach to the processes of consideration of the express terms and of consideration of the possibility of an implication… It appears to me helpful to recognise that… the processes of consideration of express terms and of the possibility that an implication exists are all part of an overall, and potentially iterative, process of objective construction of the contract as a whole”.

• This raises the question as to whether conceptual similarities between interpretation and implication can be identified.

• According to Kramer, linguistic philosophy suggests that in the same way that meaning can be inferred, by reference to context, from words, meaning can be inferred, by reference to context, from silence. Much of interpretation is about supplementing the linguistic meaning of the words used by a process of pragmatic inference, against the broader context, because it is prohibitively costly (and probably impossible) to convey all intended meaning by “encoding” it linguistically. In particular, a communicator can intend what goes without saying and what does not cross his mind. As Lord Hoffmann puts it, “We use words in daily life against a background of knowledge which we assume that our listeners share and we need not therefore specifically mention”. This does not even depend on conscious thought. The formulation of thoughts into words is an unconscious, reflex process. Kramer uses a famous example of the philosopher Ludwig Wittgenstein: if someone asks me to “teach the children a game” they do not intend me to show them how to gamble with dice. This is true even though excluding unsuitable games with die was not present in the speaker’s mind when he made the request. Every communicator intends his utterances to be interpreted using the background of social norms, understandings and expectations. Accordingly, the distinction between interpretation and implication breaks down. Both set out to ascertain what would reasonably be intended in the situation that has arisen, which is what the parties’ (objectively ascertained) intention is.

• Hooley also argues that there is a clear linkage between interpretation and implication. Whether you are interpreting the express words of a contract, or whether you are interpreting the gaps between the words of the contract as a whole, you are, in both cases, seeking to identify and give effect to the meaning or intention of the parties. Interpretation is the process by which the court identifies the common intention of the parties. This is an objective process. Interpretation is a necessary prerequisite before implication can take place. Implication of terms is a means (but not the only means) by which effect is given to the parties’ intention once identified by the court. The basic principle that runs through interpretation and implication is the same: the need to identify and give effect to the meaning or intention of the parties. The better approach is for the court to jettison the distinction between interpretation and implication. Lord Hoffmann did this in Belize when he decided that the implication of terms is, in essence, an exercise in interpretation. By doing this Lord Hoffmann has placed the common intention of the parties centre stage. This is what links interpretation and implication. It is the common thread. Interpretation is used to identify the common intention of the parties and implication gives effect to that intention. There is no other basis for implying terms in fact into the contract. The whole process is informed by objectivity, which means that the “same background material that is admissible and relevant in aid of construction of the express terms of the [contract] may also be admitted in aid of the determination of the existence of an implied term”.

• Lord Hoffmann in Belize also made the argument from principle that “[t]he proposition that the implication of a term is an exercise in the construction of the instrument as a whole is… a matter of logic (since a court has no power to alter what the instrument means)”.

(2) Conceptual distinction between interpretation and implication

• Notwithstanding the similarities between interpretation and implication, it is important to acknowledge that there are significant differences between the two so that it is possible to articulate a conceptual distinction.

• According to Davies, as a matter of logic, implication and interpretation are distinct. Interpretation is concerned with ascertaining the meaning of words contained in the written agreement. By contrast, implication acts to supplement that instrument with terms additional to those expressly chosen by the parties. If the contract is silent on a point, by implying a term the court is supplementing, or replacing, this silence. Indeed, a term which is implied into a contract still, strictly, needs to be interpreted.

• In Marks & Spencer plc v BNP Paribas Securities, Lord Neuberger lent support to this view. He said: “I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. However, Lord Hoffmann's analysis in Belize could obscure the fact that construing the words used and implying additional words are different processes governed by different rules… Of course, it is fair to say that the factors to be taken into account on an issue of construction, namely the words used in the contract, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties, are also taken into account on an issue of implication. However, that does not mean that the exercise of implication should be properly classified as part of the exercise of interpretation, let alone that it should be carried out at the same time as interpretation. When one is implying a term or a phrase, one is not construing words, as the words to be...