Contract- Interpretation Notes
Cases
Charter Reinsurance v Fagan: Reinsurance case (traditional approach of contractual interpretation)
Lord Mustill- the inquiry will start and finish by looking at the ordinary meaning of the word. Natural meaning-
this is the primary meaning of the word in ordinary speech- this is where you begin the process of
interpretation. But, he agrees there can be complexity in the natural meaning of the word. You begin with the
presumption that the parties use English world in their natural meaning. He says the context can take you
away from the natural meaning. This can mean in some way that there is not a total departure from
accounting the context or factual matrix.
The word actually paid was the issue of interpretation- They deviated from the natural meaning of the word
actually paid as this was a contract of reinsurance.
Lord Hoffman- disagrees with the use of natural meaning of words at page 391. He claims natural meaning
depends on the context you are using the word in. He sounding some caution in respect of the use of the
natural meaning of the word first when interpreting.
For my part, I adopt and apply recent guidance given in the Court of Appeal in the unreported authority in
Arbuthnott v. Fagan (unreported), 30 July 1993; Court of Appeal (Civil Division) Transcript No. 1024 of 1993
where a similar issue about the correct approach to construction arose. The context was the wording of the
standard form of agency agreement prescribed by Lloyd's byelaw prior to 1989; the language made it,
according to the underwriting agencies, a condition precedent to the accrual of any cause of action against a
particular agency in respect of a particular syndicate and year that the Name must first pay all calls made *326
upon him or her for underwriting expenses or liabilities in respect of that syndicate and year. This defence
failed. Sir Thomas Bingham M.R. said, on construction:
"Courts will never construe words in a vacuum. To a greater or lesser extent, depending on the subject matter,
they will wish to be informed of what may variously be described as the context, the background, the factual
matrix or the mischief. To seek to construe any instrument in ignorance or disregard of the circumstances
which gave rise to it or the situation in which it is expected to take effect is in my view pedantic, sterile and
productive of error. But that is not to say that an initial judgment of what an instrument was or should
reasonably have been intended to achieve should be permitted to override the clear language of the
instrument, since what an author says is usually the surest guide to what he means. To my mind construction is
a composite exercise, neither uncompromisingly literal nor unswervingly purposive: the instrument must
speak for itself, but it must do so in situ and not be transported to the laboratory for microscopic analysis."
Steyn L.J. said:
"I readily accept Mr. Eder's submission that the starting point of the process of interpretation must be the
language of the contract. But Mr. Eder went further and said that, if the meaning of the words is clear, as he
submitted it is, the purpose of the contractual provisions cannot be allowed to influence the court's
interpretation. That involves approaching the process of interpretation in the fashion of a black-letter man.
The argument assumes that interpretation is a purely linguistic or semantic process until an ambiguity is
revealed. That is wrong. Dictionaries never solve concrete problems of construction. The meaning of words
cannot be ascertained divorced from their context. And part of the contextual scene is the purpose of the
provision. In the field of statutory interpretation the speeches of the House of Lords in Attorney-General v.
Prince Ernest Augustus of Hanover [1957] A.C. 436 showed that the purpose of a statute, or part of a statute, is
something to be taken into account in ascertaining the ordinary meaning of words in the statute: see Viscount
Simonds's speech, at p. 461, and Lord Somervell of Harrow's speech, at p. 473. It is true that such a purpose
may also be called in aid at a later stage in the process of interpretation if the language of the statute is
ambiguous but it is important to bear in mind that the purpose of the statute is a permissible aid at all stages
in the process of interpretation. In this respect a similar approach is applicable to the interpretation of a
contractual text. That is why in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (Trading As H.E. Hansen-
, Tangen) [1976] 1 W.L.R. 989, 996 Lord Wilberforce, speaking for the majority of their Lordships, made plain
that in construing a commercial contract it is always right that the court should take into account the purpose
of a contract and that presupposes an appreciation of the contextual scene of the contract. Corbin on
Contracts (1960), vol. 3, section 545, explains the role that the ascertainment of the purpose of a contract
*327 should play in the process of interpretation: 'In order to determine purposes we are obliged to interpret
their words in the document of agreement and their relevant words and acts extrinsic to that document. It
may seem foolish, therefore, to say that the words of a contract should be interpreted in the light of the
purposes that the parties meant to achieve, when we can turn on that light only by process of interpretation.
Nevertheless, it is believed that such an admonition serves a useful purpose. As the evidence comes in and as
interpretation is in process, the court may soon form a tentative conviction as to the principal purpose or
purposes of the parties. As long as that conviction holds (and the court must be ready at all times to be moved
by new evidence), further interpretation of the words of contract should be such as to attain that purpose, if
reasonably possible.' In the same section of this seminal work the author added that if the court is convinced
that it knows the purpose of the contract, however vaguely expressed and poorly analysed, it should be loath
to adopt any interpretation of the language that would produce a different result. In my judgment these
observations accurately state the approach to be adopted.
Finally, Hoffmann L.J. said:
"It seems to me legitimate to test the plausibility of a given construction by examining what the consequences
would be.”
In Toomey v. Eagle Star Insurance Co. Ltd. [1994] 1 Lloyd's Rep. 516 Hobhouse L.J. giving the judgment of the
court referred to Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (Trading As H.E. Hansen-Tangen) [1976] 1
W.L.R. 989 for the relevance, in the context of a commercial contract, of its commercial purposes objectively
ascertained, and then said, at p. 520:
"It is also necessary that the court should have regard to previous decisions of the courts upon the same or
similar wording. Parties to a commercial contract are to be taken to have contracted against a background
which includes the previous decisions upon the construction of similar contracts."
Mr. Kentridge further referred me to Black King Shipping Corporation v. Massie [1985] 1 Lloyd's Rep. 437, 462-
467 for authorities on the principles determining whether a stipulation will be treated as a condition
precedent. Hirst J., at p. 462, cited words of Lord Denning M.R. in Attica Sea Carriers Corporation v. Ferrostaal
Poseidon Bulk Reederei G.M.B.H. [1976] 1 Lloyd's Rep. 250, 253:
"The parties can, by clear words, provide that complete performance of a particular stipulation can be a
condition precedent. But, in the absence of clear words the court should look to see which of the rival
interpretations gives the more reasonable result."
Staughton L J:
Approach to interpretation of the contracts
Like the judge I take this topic first. It is now well settled that no contract is to be construed in a vacuum.
Although we may start with the literal meaning of the words, they should not be considered in isolation, but
rather in the light of the surrounding circumstances (or, if one prefers it, the background, context or matrix)
when the contract was made. That process may even, on occasion, lead one to reject the literal meaning of the
words and to adopt some other interpretation.
So too it may be appropriate to consider whether the literal meaning of the words leads to a result that is
unreasonable or even absurd. The classic exposition of that doctrine is, in my opinion, to be found in the
speech of Lord Reid in Wickman Machine Tool Sales Ltd. v. L. Schuler A.G. [1974] A.C. 235, 251:
