28 Apr 2021
Parties to a commercial arrangement should always have in mind what will happen if things go wrong when drafting a contract, writes Carly Stewart.
But expressing that in writing is not always an easy task, and it can be difficult if not impossible to envisage every eventuality before a commercial relationship has even begun. Sometimes, parties and their legal advisers will try to express what has been agreed, but when things do go wrong, how will the court interpret those provisions?
At one, more traditional, end of the spectrum is a more literal approach, looking only at the “four walls” of the contract, giving the words used their ordinary meaning and applying them to the circumstances. At the other, arguably more modern, end of the spectrum is looking at the wider context, the purpose of the contract and have regard to commercial (or business) common sense.
Here we take a whistle-stop tour of seven key cases in the judicial journey to a more “purposive” approach to contract interpretation.
The court revisited the rule in Prenn v Simmonds that pre-contractual negotiations should not be taken in to account and then, in this case, went on to do so.
Baroness Hale said of the evidence about pre-contract discussions: “.. I have to confess that I would not have found it quite so easy to reach this conclusion [about the meaning of the clause in question] had we not been made aware of the agreement which the parties had reached on this aspect of their bargain during the negotiations which led up to the formal contract. On any objective view, that made the matter crystal clear.”
The judge in the lower court, had stated that there was no limit to the amount of "red ink" or verbal rearrangement or correction which the court was allowed when determining whether there was a clear mistake. All that was required was that it should be clear that something had gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.
It was not clear which earlier clauses in a contract “such sums” referred to. Each party contended for a different meaning of “such sums”. The court held that where there two possible meanings, the court could have regard to which of the alternative meanings made the most commercial sense.
Lord Clarke: “The issue between the parties in this appeal is the role to be played by considerations of business common sense in determining what the parties meant…The language used by the parties will often have more than one potential meaning….If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”
The decision in this case was regarded by some as a step from a commercial or contextual approach to contract interpretation, back towards a more traditional approach. The wording of a long-term lease of a holiday let, given its ordinary meaning, meant the service charge increased from £90 in 1980 to over £500,000 per year in 2070. One might think that does not make a great deal of “commercial sense” but the court held the words used were clear. It is not the court’s job to save a party from what transpires to be a bad bargain.
The guidance from Lord Neuberger was that “… meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions. ….”
He stated that the better or clearer the drafting, the less need there is to look beyond the contract; conversely the worse the drafting, the more likely the court might be to depart from the ordinary meaning of the words.
This is the case that reconciles the more “commercial” approach in Rainy Sky and the more “literal” approach in Arnold. The court made clear that those two authorities were not mutually exclusive. Lord Hodge gives, arguably, the authoritative statement on contract interpretation in modern practice.
“The court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. ….
Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance.”
This is a further leaning by the Scottish court, in particular by Lord Drummond Young, to a contextual or purposive interpretation when considering the rent review clauses of a lease.
“…First, a contract must invariably be construed contextually. This is an elementary point. Language is inherently ambiguous, and in no serious field of discussion is it possible to reach an intelligent view on the meaning of a particular passage without placing that passage in context. … Secondly, the exercise of construction is objective: the meaning of any particular provision is what a reasonable person in the position of the parties would have understood it to be. … Two further principles of construction are important. First, in interpreting a contractual provision the court should adopt a purposive approach. What this means is that in construing a contract the court should have regard to the fundamental objectives that reasonable persons in the parties’ position would have had in mind. ..>
Secondly, in construing a contract a court may have regard to what is generally referred to as commercial (or business) common sense.”
This is the Supreme Court decision in the “test case” for business interruption claims under policies of insurance in light of the Covid-19 pandemic. A policy of insurance is of course still a contract and the decision (paras 61-79) gives a very thorough summary of the cases discussed above and others on contract interpretation in recent years.
This is another insurance case. As stated in the judgement “the policy, like any other contract, is to be interpreted in accordance with the principles discussed and set out by Lord Hodge in Wood v Capita Insurance Services Ltd”.
The purser is the widow of the deceased. A door steward employed by a security company had been tried on a charge of murder and was convicted of assaulting the deceased by seizing him by the neck, forcing him to the ground, placing him in a neck hold and restricting his breathing. The widow later brought a personal injury claim against the public liability insurers of the security company. The insurance policy excluded liability arising out of "deliberate acts" by the insured or their employees. The question for the court was whether the deceased’s death was caused by a deliberate act, and therefore the policy excluded insurance.
The Supreme Court decision on the point is somewhat brief but it upheld the decision of the court immediately below, who had said: “The other important contextual element is that the policy was undoubtedly intended to cover the acts and omissions of the door stewards who were employed by the second defenders. The second defenders were engaged in the business of door security. The actions of their employees were thus largely those of their door stewards. Although some purely accidental incidents might occur as a result of carelessness, the public liability cover which would obviously be required was that which would deal with incidents at the doors of bars. These would commonly involve acts preventing persons entering, or removing them from, the premises; all of which would be almost bound to involve deliberate physical acts of one kind or another.”
As put by Lord Hamblen: “Another relevant aspect of context is that the policy is provided in respect of the second defender’s business of “Manned Guarding and Door Security Contractors”. There is a clear risk that door stewards will use a degree of force in carrying out their duties and that vicarious liability for their tortious acts may result. That is a public liability which is inherently likely to arise in connection with such a business.”
In short, what would be the purpose of the insurance policy if it excluded all or many of the acts likely to be carried out by doormen?
If the words used in a contract are perfectly clear and well drafted, they will be given their natural meaning. It is not for the court to save a party from a bad bargain. If however, as is frequently the case, there is more than one possible meaning the court will look at the information the parties had at the time they concluded the deal, consider what makes commercial sense, and look at the wider context or overall purpose of the contract.
The reality is the courts have lots of tools in their arsenal when it comes to figuring out what a particular clause in a contract means, and they can use whichever of them best suit the circumstances of any given case.