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Contract Interpretation Essay Plan
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INTERPRETATION ESSAY PLANSDEBATE ONE: HOW SHOULD CONTRACTS BE INTERPRETED?
Current Test
Leading authority = Lord Hoffman in ICS v West Bromich Building Society
“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the
background knowledge which would reasonably have been available to the parties”
In that case, the parties couldn’t have intended the literal meaning of the contract since it made no legal or commercial sense
Hoffman’s emphasis on contextual interpretation reflects linguistic philosophy; the intelligibility of what is said depends on shared
background of knowledge and understanding of context
Lord Diplock: interpretation must be made to yield to business common sense
Criticisms of Modern Approach
Contextual/purposive interpretation is less predictable than a textual/literal approach
- Makes contractual planning more hazardous because it’s harder to see meaning the courts will assign to words
Mitchell’s important criticism: which context is the court talking about? May choose to place the contract in broad context of
commercial purpose. Or might view contract as technically drafted instrument, written by lawyers for lawyers, and to be understood
accordingly
- Example: Union Eagle v Golden Achievement; 10 minute delay in completing a land sale meant purchaser forfeited deposit
So the question becomes: when should courts use a formal context and when is a broader contextual interpretation appropriate?
- Pure formalism would fail; supposes words had self-announcing meanings not requiring interpretation at all
- So contextual interpretation is the current default in England.
- BUT in ICS, Lord Lloyd dissented. He suggested Hoffman crossed the line from purposive into ‘creative’ interpretation
Neuberger LJ warns - reference to surrounding circumstances shouldn’t encourage the courts to re-write a contract ‘merely because
its terms seem somewhat unexpected or not commercially wise”
- He says judges are not most commercially-minded/commercially experienced people; we must beware over-confident
determinations of what is commercially reasonable
Calnan (partner at Norton Rose)
- Shows dismay at willingness of court to ignore what contract said and to impose its own view of what it thought was meant
since ICS
- Broad contextual approach makes it difficult to draft contracts and advise clients. It increases complexity, cost & time of
litigation
- This practical perspective is an important counterweight
There is the same issue when trying to decide what the purpose of the contract was
- There is room for a lot of disagreement between parties and judges. E.g. in Rainy Sky SA, there was a disagreement within the
CoA, and between the CoA and SC over a guarantee’s applicability upon insolvency of the guaranteed company
The wording indicated that it didn’t apply, but the SC decided this made no commercial sense and the guarantee was
enforceable
Patten LJ disagreed – said the words were clear and rational. The purposive approach risked the court substituting its
own commercial judgement
- Also – Chartbrook case; HoL found that definition clause made no ‘commercial sense’. But the CoA decided the words of the
contract were clear and shouldn’t be departed from
- Davies: this is an unsettling effect of ICS on contract law
Framing the Context
If parties don’t want prevailing contextual/purposive interpretive approach to apply to their contract, they will have to say so expressly.
If they do – courts should respect this
If courts don’t respect this and insist on the contextual approach, ICS would be truly damaging because it doesn’t reflect commercial
intentions of parties
Limiting the Context: Prior Negotiations
Lord Hoffman in ICS; ‘factual matrix’ includes absolutely anything that is relevant for interpreting the contract except negotiations preceding the
agreement
Lord Wilberforce in Prenn v Simmons: prior negotiations = irrelevant not on convenience grounds but simply because they were
unhelpful
Lord Bingham (extra-judicially) agreed for 2 reasons:
1. It would undermine objective approach to contract
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