Interpreting contracts in English law
It is settled law that the process is based on the objective view of a reasonable person, given the context in which the contracting parties made their agreement.
This approach marks a break with previous a more rigid modes of interpretation before the 1970s, where courts paid closer attention to the formal expression of the parties' intentions and took more of a literal view of what they had said.
They sued Dr Maurice (and his clinic) for damages to pay for bringing up the child, arguing that his failure to properly perform the operation was a breach of contract which had resulted in great financial burden for them.
But the Court of Appeal held that there was no entitlement to damages because a reasonable person knows that there is inherent risk in medical operations, and the chance it could go wrong (now compare Chester v Afshar in tort law).
For instance in 1911, in Lovell & Christmas Ltd v Wall Lord Cozens-Hardy MR stated,[3] it is the duty of the court… to construe the document according to the ordinary grammatical meaning of the words used therein.
Now, the leading statement of interpreting contracts is found in Lord Hoffmann's decision in Investors Compensation Scheme Ltd v West Bromwich Building Society.
[5] He referred to changes in approach led by Lord Wilberforce in cases such as Rearden Smith Lines Ltd v Hansen Tangan[6] and said the courts should follow five general principles.
ICS Ltd was arguing that in fact (probably through unclear drafting) the clause was really intended to mean that claims for rescission based on undue influence would not be assigned.
Declarations of subjective intent, prior negotiations and subsequent conduct should not be ruled out as irrelevant where they could be a valuable aid to interpretation.
Lord Nicholls has also been supportive of this view, and has argued that in fact evidence of prior negotiations and conduct subsequent to the conclusion of a contract are already admissible for cases on rectification (e.g.
[11] Finally, the absolute bar on admissibility on prior negotiations also stands at odds with art 5-102(a), Principles of European Contract Law.
This document, which draws on principles found across most European Union member states that preliminary negotiations are relevant to interpretation.
[12] The exclusion may also be seen to be at odds with the leading case on statutory interpretation, Pepper v Hart,[13] in which the House of Lords held that it would have recourse to authoritative statements of purpose by ministers or promoters of Bills in Hansard when ascertaining the meaning of a statute.
Guenter Treitel has argued that the case is best explained on the basis that the court will have regard to the subjective intentions of the parties - that in fact hemp and tow was being contracted for.
But Ewan McKendrick argues that this case is still explicable through taking an objective approach to the parties expressed wishes: a reasonable person in Hindley's position would not have thought there was a contract with someone misled by their negligently prepared auction catalogue.
It may however be that a contractual document has failed to adequately reflect the intentions of the parties, in which case they can ask the court to "rectify" the agreement (i.e. pretend the words written down were different and give an order accordingly).
Rectification is an equitable discretionary remedy, and therefore unavailable to claimants who delay excessively and it has no effect against a bona fide purchaser for value without notice.
In The Olympic Pride Mustill LJ remarked,[20] The Court is reluctant to allow a party of full capacity who has signed a document with opportunity of inspection, to say afterwards that it is not what he meant.
Counsel in the present case were agreed that the standard can adequately be stated by saying that the Court must be "sure" of the mistake, and of the existence of a prior agreement or common intention before granting the remedy.
[21] An exception, however, is made where it is proven beyond reasonable doubt that one party is aware of the other's mistake and idly stands by as the wrong details are recorded.
[23] So for instance, in George Wimpey UK (Ltd) v VI Construction Ltd[24] a land buyer misunderstood the formula for assessing extra payments if the sale price of flats exceeded a particular figure.
But apart from Lord Denning, courts are still unwilling to reserve for themselves an explicit role to regulate contractual terms that could result in manifest unfairness.
Lord Denning wanted a ‘rule of law’ approach so that liability for some fundamental breaches of contract could never be excluded no matter how widely the clause was drafted.
But Suisse Atlantique Societe d’Armament Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 held that the preferable ‘rule of construction’ approach was to interpret the clause against the party relying on it.
In Harbutt's Plasticine Ltd v Wayne Tank Pump Co Ltd [1970] 1 QB 477, Lord Denning MR seized on the judgments ambiguities and resurrected his own rule.
