Methods of interpretation of express terms

4.4.3.1 «Purposive» or «commercial» interpretation

The approach of the courts to determining the meaning of an express term of a contract has been modified in recent years. Traditionally it was said that the courts used, particularly in relation to commercial agreements, to apply a «literal» approach, subject only to the contra proferentem rule that any ambiguity would be interpreted against the person who put the clause forward. The assumption was that contracting parties had an obligation to use the correct language to achieve their objectives, and that if they happened to have used words which bore a different meaning, then the court would not look behind those words to discover their «real» intentions.

This approach has now been clearly rejected. In Prenn v Simmonds, Lord Wilberforce recognised that agreements may need to be placed in context to be properly understood:

The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations.

Similarly, in Reardon Smith Line v Hansen-Tangen, Lord Wilberforce again referred to the need for the court to place itself in the same «factual matrix» to that of the parties when they made the contract.

The modern approach has now been set out fully by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromzvich Building Society. He commented that «almost all the old intellectual baggage of «legal» interpretation has been discarded» in favour of an approach which generally relies on «the common sense principles by which any serious utterance would be interpreted in ordinary life». He then identified five relevant principles. First, he defined the overall approach in these terms:

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 they were in at the time of the contract.

Secondly, Lord Wilberforce’s «factual matrix» should be extended to include «absolutely anything which would have affected the way in which the language of the document would have been understood by the reasonable man». Thirdly, and as a restriction on the second principle, prior negotiations and expressions of subjective intent may only be used in an action for «rectification». Lord Hoffmann did not go into detail as to the reasons for this restriction, but Lord Wilberforce in Prenn v Simmonds dismissed such evidence as simply being «unhelpful». Statements made during negotiations will frequently be made in a situation where the parties’ positions are changing and are therefore not good evidence of the «final» agreement. Moreover, statements about one party’s objective may be dangerous», since there is no guarantee that this objective is accepted by the other side. This does not, however, preclude consideration of evidence of the «genesis» and the objectively determined «aim» of the transaction.

Lord Hoffmann’s fourth principle is that «the meaning which a document... would convey to a reasonable man is not the same thing as the meaning of its words». This is because the background may enable the reasonable person not only to resolve any ambiguity as to the meaning, but to conclude that the parties must have used the wrong words or syntax. As McMeel points out, when Mrs. Malaprop refers to a headstrong «allegory» on the banks of the Nile, no reasonable person would misunderstand her, because the context or «background» makes it clear that she is intending to refer to an «alligator».

The fifth and final principle identified by Lord Hoffmann recognises that, although there is a proper reluctance to accept that, particularly in formal documents, people have made linguistic mistakes, 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.

The same point had been made previously by Lord Diplock:

... if detailed semantic and syntactical analysis of words in a commercial contract are going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.

The approach embodied in Lord Hoffmann’s five principles has the laudable aim of trying to ensure as far as possible that the agreed aims of contracting parties are not thwarted by an over-literal or blinkered approach by the courts. The court must pay attention to the surrounding context and, so far as it can be identified, the objective purpose of the agreement in deciding what the words of a written contract should be taken to «mean».

It should not be thought, however, that these principles are necessarily easy to apply to actual cases. In the case of Bank of Credit and Commerce International SA v AH, the House of Lords were considering an agreement by employees as part of a redundancy arrangement that they would not pursue any further legal claims against their employers. It was later established, in other litigation, that former employees of the company could claim «stigma damages» as a result of their innocent association with an organisation that had been found to be carrying out its business in a corrupt and dishonest manner. The question in the present case was whether the agreement entered into by the claimants precluded them for pursuing an action for «stigma damages». The majority of the House of Lords held that on its proper construction the agreement should not be taken to cover a form of action which had not even been recognised as possible at the time the agreement was made. In coming to this conclusion, Lord Bingham, who gave the leading speech, referred specifically and approvingly to Lord Hoffmann’s summary of the relevant principles in Investors Compensation Scheme Ltd v West Bromwich Building Society. Lord Hoffmann himself, however, was in a minority of one in the House of Lords in holding that the agreement should on its proper construction be held to preclude any action by the claimants. Both the majority and the minority purported, therefore, to be operating on the same principles, and to be taking into account the context of the agreement. Nevertheless, they came to different conclusions. This suggests that the process of interpreting contracts will continue to be a matter where there will be much scope for the particular opinions of individual judges, and that the modern «contextual» approach will not be likely to lead to an increase in certainty, at least in the short term.

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