The Construction of Commercial Contracts

JW Carter

• Publisher: Hart Publishing
• Year: 2013
• ISBN:
  9781782250579
• Edition: 1
• Topic: Jura
• Subtopic: Vertragsrecht

This book adopts a principled approach to the law applied in the construction of commercial contracts. This approach is presented as part of a coherent theory of the law of contract construction which makes a unique contribution to scholarship and understanding of the most important aspect of the practice of commercial lawyers.
The law is explained by reference to three stages in construction. It distinguishes the preliminary stage in which context is established, from the 'meaning' and 'application' stages of contract construction. The approach provides insights both into the practical problems that lawyers face, in particular in relation to admissibility of extrinsic evidence, and the theoretical underpinnings of the subject. The book also explains the relationship between intention and construction, and discusses general and specific rules that determine the results of construction disputes.
Each chapter is introduced by statements of its objectives and the book includes simple definitions of key concepts, as well as summaries of the complex principles which comprise the law of construction.
In illustrating construction principles and their application, the exposition of the law draws on the author's knowledge of Australian contract law and the influence and role of the UNIDROIT principles, CISG and the American Restatement (Second) Contracts.

PART I

Introduction

1

What Is Construction?

General	[1-02]
Stages in Construction	[1-08]
General	[1-08]
Preliminary Stage	[1-11]
Meaning Stage	[1-13]
Application Stage	[1-16]
Legal Effect	[1-18]
Raw Material	[1-20]
Commercial Construction	[1-22]
Introduction	[1-22]
Evolution	[1-24]
Policy, Certainty and Predictability	[1-27]
Introduction	[1-27]
Certainty and Predictability	[1-30]
Uniformity and Neutrality	[1-35]
Problems and Fallacies in Construction	[1-39]
Problems with Construction	[1-39]
Construction Fallacies	[1-49]
Construction and Statute	[1-53]

---

[1-01] Objects. The objects of this chapter are to explain the thesis and themes of this book as a whole, and to describe briefly the concept of construction and how construction issues are resolved. This includes a description of the concept ‘commercial construction’.

This chapter also explains some of the problems of contract construction and certain fallacies about construction.

GENERAL

[1-02] Purpose of this book. Since ‘construction’ is the process by which the intention of the parties in relation to a contract is determined and given effect to, construction is the most important component of contract law. The significant role of construction reflects the fact that freedom of contract still occupies a central place in modern contract law. In addition, documents, words and conduct have to be interpreted, so that principles of construction are applied not just to contracts but also to communications between parties negotiating contracts, as well as to their subsequent communications.

Although the process is well understood, it can be extremely complex. Any theory of construction must explain three things:

(1) the concept of ‘construction’;

(2) the legal rules which are applied in the construction of contracts, including to define the raw material which can be used to construe a contract; and

(3) the role of construction in the resolution of the wide variety of issues which are said to depend on ‘intention’.

As its title implies, this book seeks to explain the concept of commercial construction as applied to commercial contracts. Since there is generally a document to construe, this book is principally about how documents are construed in the commercial context. This book is not concerned with the interpretation of wills or statutes and proceeds on the basis the principles of commercial construction are distinctive principles. The primary focus is on documents which state or evidence contracts. However, the principles applied to contracts are also applicable, directly or by way of close analogy, in relation to documents brought into existence in connection with a contract, or contemplated contract.

[1-03] Concept. ‘Construction’ describes the process by which the intention of the parties to a contract is ‘constructed’, or ‘built up’, from legally available material. That intention may be in relation to the meaning of a contract, its legal effect or its scope of application.¹ The process is an objective one carried out on the basis that the document gives effect to a common intention. In determining that intention the emphasis is on what has been communicated to the other party, that is, what one person has led the other reasonably to believe.²

Although the mechanics will vary according to the extent to which the contract is in writing (or evidenced by writing), the process is in all cases the same.

[1-04] Definition.

Article 1.1 — ‘Construction’ defined.

‘Construction’ is the process by which the intention of the parties to a contract is determined and given effect to.

Most general definitions of construction revolve around the idea that it has a particular objective. That objective, as expressed by Lord Bingham in Homburg Houtimport BV v Agrosin Private Ltd (The Starsin),³ is to ‘ascertain and give effect to the intentions of the contracting parties’. Similar statements can be found in many other cases.⁴ Effect is given to intention by applying the contract to the facts. Although, temporally, that suggests a distinct process, that is not always the case.

The definition is perhaps open to the objection that not all issues of intention are resolved by construction. However, where a contract is in writing or evidenced by writing, construction must always play a role. Subject to statute and public policy, the contract is the source of the parties’ rights and obligations, and those rights and obligations are, ultimately, determined by construction.

[1-05] ‘Interpretation’. Generally, no distinction is drawn between the ‘construction’ and ‘interpretation’ of contracts. The modern approach is to treat the one as synonymous with the other. However, at times, courts have sought to draw a distinction.⁵ Attempts to carve out a different sphere of concern for ‘construction’ on the one hand and ‘interpretation’ on the other, probably have their origin in attempts to delineate the respective functions of judge and jury. On that basis alone, they must lack utility today. However, the origin may help to explain use of the distinction in the United States. Thus, §200 of the Contracts Restatement 2d (1979) defines the ‘interpretation’ of a promise, agreement or term as the ‘ascertainment of its meaning’. Under United States law the concept of ‘construction’ is often taken as including matters of policy not overtly treated as relevant to construction in English law.⁶

There is something to be said for distinguishing between the linguistic meaning of a contract and its legal effect, as §200 of the Contracts Restatement 2d (1979) illustrates.⁷ The function of construction in relation to the former is clearly interpretative. However, since legal effect is determined with the aid of contract doctrine, construction is not purely interpretative. It is more dynamic than that. From that perspective ‘construction’ involves the application of the linguistic meaning as determined by interpretation. Although intention and meaning may well be coincident for the layperson at the linguistic level, there is usually a discontinuity for such a person at the level of legal effect. But since even a decision on the linguistic meaning of words may determine the legal rights of the parties, there seems little point in seeking to distinguish between a process called ‘interpretation’ and one which is termed ‘construction’.⁸

[1-06] Construction as a tool. As a process, construction is not merely the way in which the meaning of a contract is determined, it also describes the tool by which, in many cases, contract doctrine is applied. To take two obvious examples, whether a promissory term is a condition, warranty or an intermediate term and whether a contract is frustrated are both resolved by construction.

That does, however, pose something of a problem in the exposition of construction principles. Detailed analysis of the content of contract doctrine, in relation to matters such as frustration and the classification of contractual terms, is not the province of a book on the construction of contracts. Accordingly, although issues such as those often provide useful contexts in which to analyse the process of commercial construction, the analysis must be understood as purely illustrative.

[1-07] Scope.

Article 1.2— What is determined by ‘construction’?

The intention of the parties, determined by construction, may relate to the meaning of the contract, its legal effect or the scope of its application to a given set of facts.

Conventionally, ‘construction’ is spoken of as the process by which the ‘meaning’ of a contract is determined. However, that is only part of the story. Where a contract is construed, the construction of the contract may determine the meaning of the contract, its legal effect or the scope of its application to a given set of facts.

Therefore, a conception of construction in terms of a search for ‘meaning’ is apt to lead to confusion between issues and conclusions in construction. Construction is often also the process by which doctrine is applied, and the basis on which the legal effect of a contract is determined. And it is also the process by which contracts are applied to facts. It is well established that the meaning of a contract must be distinguished from its effect in law. But the distinction between the ‘meaning’ of words and the scope of their application is also significant.

STAGES IN CONSTRUCTION

General

[1-08] Introduction. As a legal subject, ‘construction’ does not have an established structure. There is therefore a contrast with the law of contract as a whole, which has a traditional analytical structure, to which authors of general texts tend to conform. It is relatively easy to use such books, because readers come to the work with a perspective which is similar to that of the author. The chief reason why it is difficult to formulate a theory of construction is that it does not have a traditional analytical structure.⁹ That is due, primarily, to a variety of purpose, and the fact that a large number of variables operate. This book attempts to organise those variables by recourse to a theory based on the ‘stages in construction’.

Although it is hardly ever necessary to come to terms with the details of a theory of construction, an understanding of the stages in construction is vital to an appreciation of how to deal with the general and specific issues which arise, not only in the construction of contracts, but also in the construction of documents in general. In order to undertake a systematic analysis of the law of construction it is necessary to assume a paradigm case.

[1-09] Derivation and basis. The paradigm case is a contract to which construction rules are employed in three stages:

(1) the preliminary stage;

(2) the meaning stage; and

(3) the application stage.

The idea that there are, potentially, three stages in construction is a deduction from the approach taken in all the recent cases. From that perspective, it can be traced back to Reardon Smith Line Ltd v Yngvar Hansen-Tangen.¹⁰ Lord Wilberforce drew attention¹¹ to the important distinction between ascertaining the meaning or legal effect of the words used (stage two) and how the words of a contract apply to a factual situation (stage three). He was concerned to make this distinction because of a difference between admissible (and relevant) evidence in each of the two stages. The evidential inquiry is much narrower in resolving meaning or legal effect than when applying the contract to the facts which emerge in its performance. In stage three, the evidence is as broad as is necessary to apply the contract. Lord Wilberforce also considered that, as a preliminary¹² to construction, the contract must be placed in its context (stage one).

The distinction which Lord Wilberforce made was not a new one. He traced it back to Charrington & Co Ltd v Wooder.¹³ The ultimate source is perhaps Parke B’s opinion in Shore v Wilson,¹⁴ although the analysis was at...