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Interpretation of Contractual Documents, Principles of
Last updated: 06-Oct-2014

Stadhard v Lee and Another [1863] EngR 209; (1863) 3 B S 364 per Cockburn CJ at p.372:

But we are equally clear that, where from the whole tenor of the agreement it appears that however unreasonable and oppressive a stipulation or condition may be the one party intended to insist upon and the other to submit to it, a Court of justice cannot do otherwise than give full effect to the terms which have been agreed upon between the parties. It frequently happens in the competition which notoriously exists in the various departments of business, that persons anxious to obtain contracts submit to terms which, when they come to be enforced, appear harsh and oppressive. From the stringency of such terms escape is often sought by endeavouring to read the agreement otherwise than according to its plain meaning. But the duty of a Court in such cases is to ascertain and give effect to the intention of the parties as evidenced by the agreement; and though, where the language of the contract will admit of it, it should be presumed that the parties meant only what was reasonable, yet, if the terms are clear and unambiguous, the Court is bound to give effect to them without stopping to consider how far they may he reasonable or not.

Per Lord Atkinson in Houlder Bros. v The Commissioners of Public Works [1908] AC 276 at pp.290 - 291:

It may well be that the contract, as interpreted by both Courts of Appeal, would be more equitable as regards the respondent than if interpreted as their Lordships think it must be; but the answer to that is that the parties must be bound by their own words, that the language they have chosen to employ is too precise and unequivocal and their course of action too suggestive and uniform to permit a modification of the respondent’s obligations in the direction desired.

Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 re-stated principles of interpretation of contractual documents in the following words:

I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds, [1971] 1 WLR 1381 at 1384-1386 and Reardon Smith Line Ltd v. Hansen-Tangen [1976] 3 All ER 570, Hansen-Tangen v Sanko Steamship Co [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles maybe summarised as follows.
(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood bya reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] 2 WLR 945)
(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. [1985] AC 191, 201:

"… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."

Lord Lloyd of Berwick  in his dissenting speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 stated that the meaning of the terms agreed by the parties was to be derived from the words they had used:

I know of no principle of construction (whether by reference to what Lord Wilberforce said in Prenn v Simmons [1971] 1 W.L.R. 1381, 1384-1386 or otherwise) which would enable the court to take words from within the brackets, where they are clearly intended to underline the width of "any claim," and place them outside the brackets where they have the exact opposite effect. As Leggatt LJ said in the Court of Appeal, such a construction is simply not an available meaning of the words used; and it is, after all, from the words used that one must ascertain what the parties meant. Purposive interpretation of a contract is a useful tool where the purpose can be identified with reasonable certainty. But creative interpretation is another thing altogether. The one must not be allowed to shade into the other.


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