A Unified Approach to Contract Interpretation

Ryan Catterwell

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509927586
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto contrattuale

Interpretation or construction is central to the operation of contract law. Despite the fundamental role it plays, there have been limited attempts to explain construction in holistic terms. This important book aims to fill that gap by offering a systematic exposition of the iterative process. It also goes further, suggesting practical solutions to disputes regarding questions of interpretation. The book argues that construction is not simply about establishing what words mean; it is a process through which objective intention is inferred from the choice of words in a contract. The interpretive process involves four steps: formulate the question of interpretation in dispute; explore competing answers to the question; analyse the admissible material supporting each interpretation; and weigh and balance the competing considerations. By so doing, the book offers a simple yet sophisticated framework for interpreting/constructing contracts.

1

Introduction

1.1.An Overview

[1-01]This book advances a unified approach to contract interpretation. It claims that interpretation is a four-stage process – a process through which objective intention is inferred from the choice of words in a contract. The proposed approach is a unified one for at least three reasons: it fits as a matter of theory; it can be seen in action in seminal cases; and it defines the role of interpretation in contract law. In essence, the aim of the book is to explain the cognition of interpretation, that is, what is actually involved in construing a contract.¹

[1-02]As established in this book, contract interpretation (also described as contract construction) is a technique employed to infer objective intention. The intention is ‘objective’ because it is inferred from the choice of words in a contract, taking into account background, purposive, consequentialist and normative considerations. The interpretive process consists of four steps:

1.The definition of a question regarding the agreement made by the parties (the ‘question of interpretation’ or ‘question of construction’).

2.The identification of competing answers to the question (each being a potential ‘interpretation’ or ‘construction’).

3.The formulation of arguments in support of each interpretation from the admissible materials, namely, the potential meanings for the words, the contract as a whole, the background to the transaction, the objects served by the contract, the consequences of the competing interpretations, and normative factors, such as business common sense.

4.The evaluation of the competing arguments to arrive at the interpretation that was probably intended.

The product of the interpretive exercise is the definition of the agreement. What is usually defined is in the nature of a rule – a rule that is subsequently applied, in accordance with contract doctrine, so as to define rights and obligations.

[1-03]Interpretation is a practical exercise. Hence, the easiest way to explain interpretation is to describe how it works in action. For example, consider a simple contract:

Party A agrees to sell 50kg of apples to party B for $100.

If party A delivers green apples and party B claims that the contract was for sale of red apples, the question of what type of apples was sold is resolved through interpretation. Party A’s construction is that a sale of any type of apple was intended. Party B’s construction is that a sale of red apples was intended. Party A can point to a simple linguistic argument: the word ‘apples’ denotes any kind of apple. Party B can also point to a linguistic argument, namely, ‘apples’ can denote red apples. Without more, party A would probably succeed: the parties objectively intended a sale of any type of apple. However, interpretive disputes are not resolved purely by reference to linguistic considerations.² ‘[T]here is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning’.³ Hence, party B may prevail if it advances a convincing argument by relying on either the contract as a whole or the background to the transaction.⁴ For example, looking to background, party B could argue that a sale of red apples was objectively intended if, at the time of sale, the market price of red apples was $2 per kg and green apples were much cheaper. However, party B’s interpretation is more persuasive if it is grounded in the contract text. Hence, if the contract stated that ‘A and B are committed to local fruit production’ and if red apples were the only locally produced apples, party B could advance a rather convincing purposive argument – one that is derived from the contract text, taken as a whole.

[1-04]An interpretive dispute is determined by evaluating the arguments advanced in favour of each construction. The court assesses the strength of each argument, that is, the extent to which each argument establishes the objective intention of the parties. The court then weighs and balances the arguments as a whole so as to arrive at the construction that was probably intended. It follows that an interpretive dispute can be understood in terms of the composition of arguments in favour of each interpretation. Some disputes are one-sided: all or most arguments point in favour of one interpretation, or a particularly persuasive argument clearly dictates the outcome. Other disputes are more finely balanced because one party can reasonably rely on the meaning of a key word or phrase and the other can reference the object of the transaction or the practicalities of the competing interpretations. Often, in such a dispute, the interpretation that succeeds is the one that fits best with the contract as a whole. Hence, referring back to our hypothetical sale of apples, party B succeeds if it can rely on a purposive argument drawn from the contract text. But, short of absurdity, party B fails if party B merely relies on a coincidence between the contract price and the market price of apples at the time of sale. The parties are bound by the choice of words in the contract.

[1-05]The role of interpretation in contract law is that of a technique employed to define what was agreed in a contract. Usually, what is defined is in the nature of a rule. For example, in the hypothetical above, interpretation is employed to define the rule dictating the type of apples to be delivered under the contract of sale. The problem is that the terms ‘interpretation’ and ‘construction’ are used interchangeably in contract law, and the term ‘construction’ is also used to denote techniques other than the interpretive technique that is the focus of this book. By defining interpretation, this book differentiates between the range of ‘constructional’ techniques that are employed in contract law. It shows that each technique is engaged to apply contract doctrine – each technique fulfils a particular purpose. Interpretation is the most prominent technique: it is the tool engaged to infer what was agreed from the choice of words in a contract. It is the central means through which the court gives effect to the principle of freedom of contract. However, other techniques are also employed to define the content of a contract, namely, implication, rectification and the unique approach applied in the case of oral or partly oral contracts. In addition, contract law involves a number of techniques that are not directed to the definition of rules in a contract, but nonetheless resemble interpretation, namely: the approach applied to identify a party to a contract or the capacity in which a party has contracted; the processes of factual and legal characterisation, which determine whether factual or legal components in a rule (once defined) are satisfied; and the non-interpretive means through which intention is established for the purpose of applying doctrinal rules, such as the rules regarding termination for breach at common law. In short, this book not only explains the nature and cognition of contract interpretation – it also defines the role of interpretation in contract law.

1.2.The Problems

[1-06]There are two related problems regarding contract interpretation. The first is that the nature of interpretation itself is unclear. The second is that interpretation is often confused with other techniques in contract law.

The Nature of the Interpretive Task

[1-07]Contract interpretation is commonly cited as a critical component in the law of contract.⁵ It is ‘a topic of vital importance’:⁶ ‘the most important part of contract law’.⁷ This is demonstrated by the fact that it is constantly the subject of litigation⁸ (albeit on the facts rather than principles).⁹ ‘[M]ost contractual disputes turn on [the interpretation of the contract]’.¹⁰ As McMeel notes, ‘issues concerning construction represent an unavoidable source of potential dispute’.¹¹ To similar effect, McLauchlan remarks:

Contract interpretation disputes continue to take up more judicial time than all other areas of the law of contract put together. A perusal every few weeks of the main English, Australian and New Zealand databases will reveal scores of new cases.¹²

In fact, in the month of June 2017 alone, the ‘construction’ or ‘interpretation’ of a contract featured in 18 decisions of the High Court of England and Wales and 21 decisions of the Supreme Court of New South Wales (including decisions of the Court of Appeal).

[1-08]Despite its ubiquity, the essential character of interpretation remains a matter of debate.¹³ It is often said that the principles of interpretation are well established.¹⁴ However, as Calnan has noted, ‘[f]or practically every statement about how to interpret contracts, you will find a contradictory one’.¹⁵ For this reason, along with the vague nature of the rules themselves, ‘the principles are not as clear or as easy to apply as is sometimes hoped’.¹⁶ As a result, ‘judges regularly disagree’ on points of interpretation.¹⁷ ‘[C]ourts at various levels often repeat a similar list of principles of construction, yet reach radically different results when these are applied to an individual document’.¹⁸ As McLauchlan remarks:

The different opinions concerning core principles of the law of contract interpretation … might reasonably be viewed with some alarm. There surely ought to be more agreement by now as to the basic approach to the interpretative task.¹⁹

In short, three decades after Atiyah’s Essays on Contract, there is still no clear answer to the critical question: ‘What is it that a court does when it embarks on the process of construction?’²⁰

[1-09]This book advances a unified approach to contract interpretation. This is a lofty objective.²¹ For some, it is viewed as impossible.²² For example, Lord Steyn, writing extra-curially, has stated that ‘[t]he subject is too elusive to be encapsulated in a theory’.²³ To similar effect, Carter, Courtney and Tolhurst deny that a ‘“one size fits all” approach’ is viable ‘[e]xcept at the highest level of generality’.²⁴ However, a unified approach to contract interpretation, expressed with some degree of sophistication, is clearly warranted considering the everyday applicat...