Interpretation of Contracts

Catherine Mitchell

• Publisher: Routledge-Cavendish
• Year: 2018
• ISBN:
  9781317645979
• Edition: 2
• Topic: Law
• Subtopic: Contract Law
• Index: Law

This book is a second edition of Interpretation of Contracts (2007).

The original work examined various issues surrounding the question of how contracts should be interpreted by courts, in particular focusing on the law of contract interpretation following Lord Hoffmann's exposition of the principles of contextual interpretation in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. As with the original, this new edition provides an overview of the subject, concentrating on elements of controversy and disagreement, rather than a detailed analysis of all the contract law rules and doctrines that might be regarded as interpretative in one sense or another. The book will be concerned with interpretation of contracts generally (following the rule that there are not different rules of interpretation for different kinds of contracts), but with reference to commercial contracts in particular, since this is the area in which the contextual interpretative approach was developed, and where it has most relevance.

The overall aim of the second edition remains the same as the first – to produce an accessible and readable guide to contract interpretation for law students, scholars and practitioners.

1The nature of contract interpretation

Introduction

What is contractual interpretation and why does it matter how courts carry it out? This book examines these related questions against a backdrop of continuing disagreement over how we should ascribe meaning to contracts in English law. Despite the practical importance of interpretation in contract disputes, the subject was largely ignored by contract scholars prior to Lord Hoffmann’s restatement of the principles in Investors Compensation Scheme Ltd v West Bromwich Building Society.¹ Since this pivotal judgment, academic interest in contract interpretation has grown exponentially.² Judges have added to the rich scholarly literature, not only by way of court rulings on interpretation disputes,³ but by presenting their personal perspective on this essential, but elusive, aspect of their role via extrajudicial commentary.⁴ Yet the increased effort spent on explaining contract interpretation has not necessarily yielded greater clarity concerning how judges should conduct the process, nor rendered any more transparent the values – both practical and normative – that it should serve. This book hopes to shed some light on this complex and controversial phenomenon, primarily by tracing and critiquing the shifts in contract interpretation methods employed by courts. It does not aim to resolve conclusively the continuing debates surrounding how contracts should be interpreted (what could?); rather, it seeks to identify what the lines of debate are and the implications of favouring one side over another.

Controversy is characteristic of contract interpretation. When handed down in 1997, Lord Hoffmann’s Investors principles drew considerable attention, not so much for their novelty,⁵ but for their clear articulation of the shift away from literalism in contract interpretation towards a broader contextualist approach.⁶ Lord Hoffmann’s method is variously described as involving reference to the ‘background’ or ‘factual matrix’ of the contract text, the ‘reasonable expectations of the parties’, the ‘commercial purposes’ of the agreement, or ‘business common sense’. Although emphasising slightly different aspects of interpretation, these different labels all attest that contract interpretation is not just a process of unreflectingly grasping the plain meaning of the words of the contract text, but involves a wider examination of almost any information relevant to understanding the agreement (with one or two notable exceptions). In later judgments, Lord Hoffmann followed through on some of the natural implications of his brand of contextualism for other contract law doctrines operating on the periphery of interpretation.⁷

The common law does not remain static, and just as Lord Hoffmann’s Investors restatement was not the first word on contract interpretation, neither was it the last. His retirement from the House of Lords, along with the other chief exponent of contextualism, Lord Steyn, marked a transition in the judicial approach to contract interpretation. The departure of these highly influential law lords coincided with the transfer of the judicial work of the House of Lords to the new Supreme Court. While outwardly remaining committed to the basic contours of Lord Hoffmann’s contextualism, recent Supreme Court decisions on contract interpretation have signalled a retreat from Lord Hoffmann’s expansive method in favour of a more limited approach to determining contract meaning. While one would not go so far as to say we are witnessing a turn towards literalism in interpretation, higher courts have reasserted the importance of upholding the plain meaning of language in contract interpretation⁸ and have sought to curb reliance on commercial common sense as a general interpretative criterion.⁹ A similar degree of back-pedalling from Lord Hoffmann’s position can be observed in relation to his recasting of some contract law doctrines – notably implied terms, rectification and the principles of remoteness of damage¹⁰ – as aspects of interpretation, although the response to these innovations was always mixed at best.¹¹ The extent of the judicial turn away from contextualism is disputed amongst both judges and scholars. Gerard McMeel, for example, has written that what appear to be new directions are ‘merely unbalanced applications of flexible principles developed by others’.¹² Some judges have been quite candid about the change in direction;¹³ others a little more circumspect, or in outright denial.¹⁴ In light of some of the decisions on interpretation coming out of the courts, the ‘no change’ view appears difficult to sustain. Its advocates are perhaps too focussed on what judges say about interpretation, rather than what they do.¹⁵

The reorientation back to plain meaning approaches in interpretation may give comfort to those practitioners and academics who fear that English contract law has demonstrated an increasing tendency to stray beyond upholding the parties’ agreement to improving it, or imposing reasonable outcomes that appear to be only obliquely derived, and very occasionally not at all derived, from the words of the contract text. The interpretative shift has also coincided with the re-emergence of a formalist line of thinking in academic scholarship that calls for the law to return to classical contract values, notably freedom of contract and the restriction of judicial activism.¹⁶ It is argued that formalism keeps faith with the philosophy that contractual obligations are fundamentally self-imposed and voluntary, and also upholds more pragmatic values such as certainty and predictability in enforcement of the rules, whilst also reducing costs for both the parties and the courts.¹⁷

That courts should review and revise their methods of contract interpretation, and provoke debate by doing so, is scarcely surprising. Should we be concerned about the rise, fall, and rise again of different contract interpretation methods? Is interpretation worth all the attention we give it? A general scepticism has been expressed by Richard Posner. In his view, there is a meagre pay-off from scrutinising interpretation theory in law, since one does not improve on one’s interpretative efforts by becoming more self-conscious about how the process is conducted. He writes, ‘interpretation … is a natural, intuitive, “instinctive” human … activity, rather than one performed by consciously following rules’.¹⁸ Evidently, an admission that interpretation is a wholly impressionistic activity is problematic for contract law. A further concern has been expressed that examining the nature of interpretation is distracting, since the debates are ‘ultimately insoluble, because the fact that our system requires unaccountable persons to make binding legal decisions will forever remain in tension with our commitment to democracy and the rule of law’.¹⁹

Warnings against becoming ensnared in the minutiae of current legal interpretative method, at the expense of the bigger picture, appear apt. Despite all the judicial and academic effort spent on explaining and justifying the process, we seem no closer to agreeing the answers to some basic questions about how contract interpretation should be conducted.²⁰ Nevertheless, one could argue that this only demonstrates the significance of the topic. It is not just an arid theoretical endeavour. It matters how courts interpret contracts, not least because contract interpretation increasingly forms the bulk of contract legal practice and, to a large extent, contract law itself. The English law of contract is composed of more default than mandatory rules (that is, contracting parties have wide powers to contract around the legal rules), and in complex commercial contracts it may be expected that most of the answers to contract problems will be found in the express terms, rather than in legal doctrine. But those terms are composed of language which can be ambiguous, mistaken and equivocal in communicating the obligations undertaken and the features of the deal. Contract interpretation is thus unavoidable. The process also has implications stretching beyond the parties to the immediate dispute. Three observations in particular are appropriate here.

First, for most legal scholars and judges, how courts resolve contract interpretation disputes is a specific aspect of a more general issue touching on the relationship between contract law and commercial activity. Judicial views on whether commercial contract law is facilitative or regulatory, or whether judges should pursue a more active role in commercial matters, are made manifest in cases that are ostensibly concerned with working out what a contract means. A judge’s decision to take a plain meaning approach to contract interpretation is not likely to be grounded in a commitment to a particular linguistic philosophy, but in an adherence to the principle of freedom of contract. Commitment to freedom of contract in turn results from a conglomeration of judicial ideologies and views, not only on what the right legal principles are, but also on such matters as who uses contract law and for what purposes; assumptions concerning what commercial contracting parties want from a system of contract law; the point of the dispute resolution process; and the efficiency, or otherwise, of litigation. Interpretation method is a conduit through which these wider considerations – often appearing in the guise of ‘commercial expectations’ or ‘commercial reasonableness’ – can be channelled and applied to particular agreements. Dispute outcomes, while seemingly wholly interpretation-led, are thus to a large extent policy- and value-led.²¹

Second, the applicability of English contract law chiefly to commercial agreements creates a number of recurring pressure points for any interpretative approach. On the one hand, commercial contracting takes place against a rich normative background, particularly evident in complex or long-term business relationships. Not all the understandings generated by this background may be reflected in the contract text, yet they may exert a profound influence on the meaning that a commercial contract has between the parties to it.²² The role that these background understandings should play in contract interpretation is a matter of controversy. For those scholars and practitioners sympathetic to the argument that ...