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Contract Law, Basic Principle of

Obligation Qualified


Rights and Obligations
Last updated: 28-Nov-2015

Hyundai Merchant Marine Co Ltd v Gesuri Chartering Co Ltd (The Peonia), [1991] 1 Lloyd’s Rep 100, per Mr. Justice Saville:

English common law contains a number of principles or rules to be applied when seeking to ascertain the rights and obligations of the parties to commercial contracts of the present kind. The basic principle or starting point for the Court or other tribunal is to examine the words and phrases which the parties have chosen to use in the context in which they were used in order to seek to determine on an objective basis what the parties intended their bargain to be. In general terms words and phrases are taken to bear their natural or ordinary meaning on the not unreasonable hypothesis that the parties probably meant that meaning; though in cases where the meaning of words or phrases is ambiguous or uncertain, or leads to apparent absurdity, regard can be had to the context, including the type of bargain made, in order to resolve the ambiguity or uncertainty or to find a meaning which removes the absurdity. Frequently, of course, the words and phrases which the parties have used do not expressly or fully cover every eventuality or every aspect of their bargain. In such cases the approach of English law is not simply to impose on the parties what the Court or tribunal conceives with hindsight to be a just or reasonable solution. Instead the starting point is again to examine in context the words and phrases used by the parties. In some cases the context will show that the parties must have contracted in the knowledge of some mercantile practice or usage so obvious that it went without saying that it formed part of their bargain. In other cases, where the contract will simply not work or make sense unless further terms are implied, the Court will regard such terms as forming part of the bargain. This is not done merely because it is thought that such terms would be reasonable, but only if they are needed to give business efficacy to the bargain. In a yet further class of case the Court will imply terms where the nature of the contract itself indicates that, as a matter of necessity, this must be done to make the bargain complete. These principles are well settled and are to be found, for example, in cases such as Liverpool City Council v Irwin, [1977] AC 239 and Harmony Shipping Company S.A. v Saudi Europe Line Ltd., [1980] 1 Lloyd’s Rep. 44.

Over the course of the years the English Courts have dealt in this way with many disputes over the meaning and effect of commercial bargains. As a result there exists a large body of case law which not only authoritatively reaffirms and from time to time refines the applicable principles, as in the cases cited above, but also provides authoritative guidance on the meaning and effect of common types of commercial bargain, both generally and with regard to the words and phrases commonly used in such bargains. It follows that if in one case a Court concludes that a particular type of commercial bargain gives rise, or indeed does not give rise, to particular express or implied rights or obligations, another Court or tribunal is likely (or, if required by the laws of precedent, bound) to take the same view of another like bargain, unless there are significant differences in the words or phrases used, or in the context in which they are used. The approach, however, always remains the same. The starting point must be to examine in context the words and phrases used in the case under consideration. If this is not done, then there exists the risk that the law will start dictating to the parties what their bargain should be, the antithesis of the philosophy and principles of English common law on this subject.


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