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Interpretation of contracts, a hangover from the House of Lords

 

 


 

 

 

When parties to a contract disagree on the meaning of the contract they have entered into, judges may have to interpret the unclear wording of the contract in order to establish its ‘true meaning’.

 

 

 


 

 

In Investors Compensation Scheme Ltd v West Bromwich Building Society1, Lord Hoffman summarised the principles upon which contracts are interpreted as follows:

 

1. Interpretation is the meaning a document conveys to a reasonable person possessing all the background knowledge.

2. Background includes absolutely anything affecting a reasonable man’s understanding of the document. 

3. previous negotiations and declarations of intent are excluded

4. The meaning of a document to a reasonable man is not the same as the meaning of its words as found in dictionaries. 

5. Although words should reflect their natural and ordinary meaning, if it can be concluded from the background that there are linguistic mistakes in the document, judges are not required to attribute to the parties an intention they could not have had

 

The law excludes previous negotiations and declarations of intent.

 

There is no doubt that this is probably the most fervently supported but also the most criticized point! The exclusion of documentation referring to prior negotiations and parties intentions contrasts with principles that are applied worldwide2 when it is necessary to interpret the true meaning of a contract (inspired from the French understanding of a contractual relationship).

 

Following Pepper v Hart3, public law documents can be interpreted by a judge and: ‘reference to Parliamentary material should be permitted as an aid to the construction of legislation which is ambiguous’.

 

In My Kingdom for a horse: the meaning of words4, Lord Nicholls favoured rejection of the exclusionary rule. He argued that ‘exclusion of relevant evidence means that at times justice may not be done’ and warned against the consequence of an ‘Adherence to exclusionary rule as an absolute rule [that] would risk [the United Kingdom] becoming isolated on this point in the field of commercial law

 

 

contrat le petit juriste

 

 

The roots of this exclusion could be attributed to the English understanding of contract based on the objective agreements and not on subjective intentions. Accordingly Judges will look at the word and determine their true meaning from the viewpoint of a reasonable person understanding. In Prenn v Simmonds5 Lord Wilberforce gave a more practical justification to the exclusion of previous negotiations: ‘the reason for not admitting evidence of these exchanges… is simply that such evidence is unhelpful. By the nature of things… parties’ positions… are changing… It is only the final document which records a consensus. In Britoil plc v Hunt Overseas Oil6, Hobhouse LJ stated that it would simply not be right to give more importance to pre contractual contract than to the contract itself.

 

In Chartbrook Ltd v Persimmon Homes Ltd7, Lord Hoffman held that: ‘The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract mean… It does not exclude the use of such evidence for other purposes…’

 

Lord Hoffman also questioned the possibility for the law commission for England and Wales to study non-use of pre contractual negotiations stating: It is possible that empirical study (for example, by the Law Commission) may show that the alleged disadvantages of admissibility are not in practice very significant or that they are outweighed by the advantages of doing more precise justice in exceptional cases or falling into line with international conventions. 

 

It would appears that Lord Hoffman re-affirms the principle of the exclusionary rule when it comes to the interpretation of contracts, he also alluded to the possibility of using pre-contractual negotiations to establish a relevant background fact. As lord Diplock once remarked: ‘the law is nearly always most obscure in which judges say the principle is plan but the difficulty lies in its application to the particulars facts8. Distinguishing between documents that establish relevant background facts (misrepresentation or estoppels for instance) and those that interfere with the interpretation process might be a complex issue that will ‘keep the undoubted talents of Her majesty’s Judges fully employed9.

 

The ongoing disparity of opinion within the English judicial system regarding the exclusion of previous negotiations and declarations of intent ensures debates will continue and law students still have interesting issues to discuss for next contract law essays!

 

 

Edouard Raffour

 

 

[1] [1997] UKHL 28

[2] United  Nations Convention on the International Sales of Goods 2008 Part I Chapter 2 article 8.3, UNIDROIT Principles of International Commercial Contracts 2004 Chapitre 4 article 4.3(a), Principles of European contract law 1999 Chapitre 5 article 5:102(a)

[3] [1992] UKHL 3’. Note evolution of this case law has been fluctuating and after being considerably restricted, it could be a phoenix case

[4] [2005] 121 LQR 577

[5] [1971] 1 WLR 138

[6] [1994] CLC 561

[7] [2009] UKHL 38

[8] Ilkiw v Samuel [1963] 2 All ER 879 at 889

[9] Christopher Nugee QC. Chancery Bar Association Seminar – Lincoln’s Inn – 15 june 2010

 

 

Further reading


Chartbrook Ltd v Persimmon Homes Ltd and Others2 [2009] UKHL 38

 

Quaterly Review : Trashing through the undergrowth by A. Berg (2006) 122  LQR 354

 

Lord Nicholls of Birkenhead : My kingdom for a horse : the meaning of words [2005] 121 LQR 577

 

Investor compensation Scheme Ltd v West Bromwich Building Society [1997] ukhl 28



 

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