Interpreting contracts in English law is an area of English contract law, which concerns how the courts decide what an agreement means. It is settled law that the process is based on the objective view of a reasonable person, given the context in which the contracting parties made their agreement. This approach marks a break with previous a more rigid modes of interpretation before the 1970s, where courts paid closer attention to the formal expression of the parties' intentions and took more of a literal view of what they had said.
The process of interpretation was often skewed by courts who tried to construe contracts in a way that was fair. Before the Unfair Contract Terms Act 1977, the courts had not developed a jurisdiction to strike down unfair terms. When faced with harsh exclusion clauses they would often "interpret their way out" of the plain meaning of the clause through a process of strict construction against the party relying on a clause (in Latin, contra proferentem). This would often run contrary to the common sense meaning of a contractual document, and embodied a strained approach.
Interpretation
Objectivity For some time it had been orthodox to take an objective view of interpretation, best demonstrated by Smith v Hughes.(1871) LR 6 QB 597 Where Mr Smith thought, after testing a sample, he was buying old oats but in fact was buying green oats, he was not able to assert that he was unbound by his agreement. Blackburn J said:
A remarkable example of the objective approach to interpreting a contract is found in Thake v Maurice. QB 644 A couple were assured by a private doctor that Mr Thake's vasectomy would work. They were not explicitly informed there was a small risk of it not working. They had a healthy child. They sued Dr Maurice (and his clinic) for damages to pay for bringing up the child, arguing that his failure to properly perform the operation was a breach of contract which had resulted in great financial burden for them. But the Court of Appeal held that there was no entitlement to damages because a reasonable person knows that there is inherent risk in medical operations, and the chance it could go wrong (now compare Chester v Afshar in tort law). A reasonable person knows that people providing services contract to provide the service, but do not necessarily guarantee the outcome of the service will be fool proof.
Proforce Recruit Ltd v The Rugby Group Ltd EWCA Civ 69 Chartbrook Ltd v Persimmon Homes Ltd EWCA Civ 183 Attorney General of Belize v Belize Telecom Ltd UKPC 11
Purpose and context
The move to a contextual, or purposive approach to construing contracts is a recent feature of English contract law. For instance in 1911, in Lovell & Christmas Ltd v Wall Lord Cozens-Hardy MR stated,(1911) 104 LT 85
it is the duty of the court… to construe the document according to the ordinary grammatical meaning of the words used therein.
Notably the move away from a literal approach came only after the courts pronounced that in interpreting statutes, they had moved from a literal to a purposive approach (see Pepper v Hart AC 593). Now, the leading statement of interpreting contracts is found in Lord Hoffmann's decision in Investors Compensation Scheme Ltd v West Bromwich Building Society. 1 WLR 896, 912-13 He referred to changes in approach led by Lord Wilberforce in cases such as Rearden Smith Lines Ltd v Hansen Tangan 1 WLR 989 and said the courts should follow five general principles. When interpreting contracts courts ask,
what the document conveys to a reasonable person with regard to all relevantIn BCCI v Ali Lord Hoffmann clarified that it was not all conceivable background circumstances, but only the relevant background circumstances. background circumstances, or the "matrix of fact" except prior negotiationsThis qualification has been criticised, see, Lord Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 LQR 577, which argues that the courts already do take negotiations into account that the meaning of words is not their literal, dictionary meaning, but one that would be understood from the context that the meaning construed should not run contrary to a common sense viewpoint.
In ICS Ltd v West Bromwich BS 1 WLR 896, 912-13 itself, a group of investors had been given negligent advice by various building societies (including West Bromwich BS), financial advisers and solicitors, and so had potential claims for breach of statutory duty. Under the government's Investors Compensation Scheme, the investor could simply get money from the Scheme directly, and the Scheme would carry through the expense of litigation on their behalf. However, in the contract to assign the claims, it said there was an exclusion for,
"Any claim (whether sounding in rescission for undue influence or otherwise)"
Taking a literal approach, this could mean - and the building societies were trying to argue - that any claim to rescind a contract (i.e. have it made void) would not be assigned by investors to the Scheme, whether it was for rescission based on a claim in undue influence, or any other claim. The building societies were trying to argue this, because if there was no valid assignment, then ICS would not be empowered to sue them. ICS Ltd was arguing that in fact (probably through unclear drafting) the clause was really intended to mean that claims for rescission based on undue influence would not be assigned. But others would. Lord Hoffmann and the House of Lords unanimously accepted this interpretation, since it was the correct one given the context in which the contract was signed.
Staffordshire Area Health Authority v South Staffordshire Waterworks Co 3 All ER 769, per Lord Denning MR Rainy Sky v Kookmin Bank UKSC 50
Negotiations? One point of controversy was Lord Hoffmann's acceptance that the courts would not look at negotiations prior to the contract as an aid to interpretation. Professor G McMeel has argued that, "The best way forward is for the matter to be one of weight rather than admissibility."‘Prior Negotiations and Subsequent Conduct - the Next Step Forward for Contractual Interpretation’ (2003) 119 LQR 272, 296 In other words, that evidence of negotiations may not necessarily weigh very heavily in the face of contradictory evidence in a contract itself, but it should not be barred entirely. Declarations of subjective intent, prior negotiations and subsequent conduct should not be ruled out as irrelevant where they could be a valuable aid to interpretation. Lord Nicholls has also been supportive of this view, and has argued that in fact evidence of prior negotiations and conduct subsequent to the conclusion of a contract are already admissible for cases on rectification (e.g. The Karen Oltman 2 Lloyd’s Rep 708). He argues the courts are well accustomed to determining what weight should be place on admissible evidence.Lord Nicholls, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 LQR 577 Finally, the absolute bar on admissibility on prior negotiations also stands at odds with art 5-102(a), Principles of European Contract Law. This document, which draws on principles found across most European Union member states that preliminary negotiations are relevant to interpretation.Art 5-102(g) so is good faith and fair dealing The exclusion may also be seen to be at odds with the leading case on statutory interpretation, Pepper v Hart, AC 593 in which the House of Lords held that it would have recourse to authoritative statements of purpose by ministers or promoters of Bills in Hansard when ascertaining the meaning of a statute.
Chartbrook Ltd v Persimmon Homes Ltd UKHL 38
Mistake and rectification
The general rule in English law is that if one party to the contract is mistaken about the terms of the contract, this is not an excuse to fail to perform, the classic case being Smith v Hughes.(1871) LR 6 QB 597 There has been debate about whether at any point courts do in fact have regard to the subjective intentions of the parties. In Scriven Bros & Co v Hindley & Co 3 KB 564 Scriven Bros made a bid at an auction (the auctioneer was trading as Hindley & Co) for bales of hemp and tow. The auction catalogue suggested that one of the batches contained both hemp and tow. But it only contained tow. When the auctioneer tried to enforce the high bid by Scriven Bros, Lawrence J held he could not, because the sale had been procured by the auctioneer's own negligence. Guenter Treitel has argued that the case is best explained on the basis that the court will have regard to the subjective intentions of the parties - that in fact hemp and tow was being contracted for. But Ewan McKendrick argues that this case is still explicable through taking an objective approach to the parties expressed wishes: a reasonable person in Hindley's position would not have thought there was a contract with someone misled by their negligently prepared auction catalogue.McKendrick (2007) 25
A mistake about the contract's terms will also entitle a party to the contract to escape when the other side may have unfairly "snapped up" an offer. In Hartog v Colin & Shields 3 All ER 566 Colin & Shields mistakenly advertised Argentine hare skins for 10d per pound, instead of per piece (i.e. they had made them much cheaper). In the trade, such skins were always sold by the piece. So when a Belgian called Hartog ordered the skins, Singleton J held that Colin & Shields did not need to deliver. A reasonable person could not have believed the price was not mistaken.
Rectification It may however be that a contractual document has failed to adequately reflect the intentions of the parties, in which case they can ask the court to "rectify" the agreement (i.e. pretend the words written down were different and give an order accordingly). Asking a court to rectify a document does not mean asking for the contract to be changed. It just asks for the recording of the document to be changed. Rectification is an equitable discretionary remedy, and therefore unavailable to claimants who delay excessively and it has no effect against a bona fide purchaser for value without notice. There is a fine line between interpretation and rectification, since evidence assisting in interpretation is also evidence which can give rise to rectification.In Nittan (UK) Ltd v Solent Steel Fabrication Ltd 1 Lloyd’s Rep 633 ‘Sargrove Electronics Controls Ltd’ was held to mean ‘Sargrove Automation’, without ‘rectification’. Claimants can ask for both.e.g. Lovell & Christmas Ltd v Wall (1911) 104 LT 85
But the order for rectification is rare. The reason for this is the necessity of promoting certainty. In The Olympic Pride Mustill LJ remarked,Etablissements Levy (Georges et Paul) v Adderley Navigation Co Panama SA 2 Lloyd’s Rep 67, 73
The Court is reluctant to allow a party of full capacity who has signed a document with opportunity of inspection, to say afterwards that it is not what he meant. Otherwise, certainty and ready enforceability would be hindered by constant attempts to cloud the issue by reference to pre-contractual negotiations. These considerations apply with particular force in the field of commerce, where certainty is so important. Various expressions have been employed in the reported cases to describe the standard of proof required of the person who seeks rectification. Counsel in the present case were agreed that the standard can adequately be stated by saying that the Court must be "sure" of the mistake, and of the existence of a prior agreement or common intention before granting the remedy.