Interpretation of contracts

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  • Created by: Nikki
  • Created on: 14-04-16 20:09

Contractual construction

Ambiguity - how to interpret an ambiguous contract?

Mistake - rectification; interpretation

Incompleteness: what to do when a probelm arises not apparently covered by the contract?


  • termination
  • implied terms 
    • a term which would spell out in express words what the instrument, read against the relevant background woul reasonably be understood to mean (AG Belize)
    • not an addition, but an exercise in construction - Hoffmann in AG Belize
    • construing words used and implying additional words are different processes governed by different rules --> Neuberger in Marks and Spencer v BNP Paribas 
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Interpretation: traditional approach (1)

'when any contract is reduced to writing, the interpretation of that contract is to arise form the words tehrein comprised, and not from any verbal averment to be taken from the memory of witnesses only, because that were again to introduct the inconvenience which the written contract was made to avoid' - J Gilbert


  • presumption that parties write down whole contract
  • judges interpret contract as a matter of law from written words alone
  • judges cannot consider oral evidence which might vary the meaning of the written contract (parole evidence rule)


  • jury decided waht contract was as a matter of fact
  • jury therefore considered much more evdience
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Interpretation: traditional approach (2)


  • presumption that a written contract contains all the terms, but the presumption can be rebutted (Gillespie Bros v Cheney, Eggar & Co (1896)
  • not a written agreement so not osbuject to such rules --> all circ may be taken into consideration to determine the matter of it and even to modify the part which is in writing (Leake, 1867)
  • parole evidence rule does not prevent evdience that parties' agreement was not contained in the written document (Walker J, 2008)
  • court can consider evdience of prior conduct and subsequent conduct 
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Collateral contracts and warranties

Courts can find that there were collateral contracts or terms 

To overriding inconsistent terms in teh main written contract --> circumvents the parole evidenc erule to allow a party to add to, vary or contradict a contract document 

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Entire agreement clauses

Aim to ensure that judges only look at written agreement 

Functions as an expressly agreed parole evidence rule


Exclud liability for breach of collateral terms or agreements outside written contract, but may not exclude liability for misrepresentation

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Parole evidence rule

'where the words of any written instrument are free from ambiguity in themselves, and where external circumstances do not create any doubt or difficulty as to the proper application of those words to claimants under the instrument, or the subject-matter to which the instrument relates, such instrument is always to be construed in according to the strict, plain, common meaning of the owrds themselves; and that in such case evidence [outside] the instrument, for the purpose of explaining it according to the sumrised or alleged intention of the parties to the instrument, is utterly inadmissible' (Tindal CJ in Shore v Wilson (1839))

3 features:
(1) Look for the intention of the parties when they made the contract, objectively ascertained. Do not look for subjective understandings or secret intentions
(2) Look at the plain natural meaning of the text
(3) Do not look at matters outside the 'four corners of the contract'

Long list of exceptions --> in practice rule will rarely prevent a party from adducing the osr tof evdience that the rule theoretically prohibits --> better understood as an easily rebuttable presumption that a documetn purporting to be teh contract contains the whole contract 

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Canons of construction

(1) The document must be construed as a whole: do not look at clauses in isolation but interpet them in light of the whole document

(2) IN construing a contract, all parts of it should be given effect where possible, and no part should be treated as inoperative

(3) Where a contract contains special provisions as well as general ones, specific provisions will be given greater weight

(4) Where a contract is a standard form contract to which the partis have added special conditions, then (unless the contract provides otherwise), greater weight will be given to the special provisions

(5) The reasoanbleness of the result of any particular construciton is a relevant consdieration when choosing between rival constructions 

(6) Where there is a doubt about the meaning of a contract, the words will be construed contra proferentem - against the person putting them forward, or the party in whose favour it was made 

This is less important in consumer contracts (because of CRA) but may still be important in commercial contracts 

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Contra proferentem

Canada Steamship Lines Ltd v The King --> 3 guides

(1) If the clause contains language which expressly exempts the 'proferens' from liability for neglgience, then effect must be given to the provision

(2) If there is no express reference to neglgience the court must ask if the owrds are wide enough in their ordinary meaning to cover neglgience. In case of doubt,the clause will not be effective

(3) If the words are wide enough tto include negligence, the court must ask wehter the head of damage may be based on some other ground than negligence. This 'otehr ground' cannot be 'remote or fanciful'. If the proferens could only be liable for negligence, the clause is effective, but if the porferens could be liable on other ground, the clause will not be read to cover negligence'

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Interpreting terms in a contract

Condition (allowing termiantion for breach)

Warranty (damages only)

'innominate term' --> Hong Kong Fir Shipping v Kawasaki 

Many terms are defined as conditions:

  • by law
  • by precedent
  • by specification of parties
  • nature of circ of contract may suggest parties itnended a condition
  • if a term no so 'pre-defined' as a condition, it may be treated as one if the breach deprives party of 'a substantial part of the benefit' - HK Fir 
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Looking beyond the 4 corners of the contract

Extrinsic evidence could also be used under the traditioanl approach in a number of situations:

  • where the parties contract on teh basis of a custom or trade practice
  • where there was latent ambiguity in the contract (Raffles v Wichelhaus)
  • but not where the ambiguity was patent
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Modern 'contextual' approach

Two central ideas

  • court will seek a 'common sense' interpreation of the contract, considering what an ordinary reasonable person would understand it to mean
  • courts will look at the legal, factual and regulatory 'surrounding circ' of the contract in all cases, not just where there is an ambiguity
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Lord Hoffmann's 5 principles (1)

Investors Compensation Scheme 

(1) Interpretation is the ascertainment of the meaning which the documetn would convey to a reasonable person having all the background knowledge which would reaosnably have been avialbe to the parties int eh situation inwhich they were at the time of the contract

(2) The background 'matrix of facts' includes aboslutely anything which would have affected teh way in which teh language of the document would have been understood by a reaosnable man' - subject to its being reasonably available to the parties --> also qualified by next rule

(3) The law excludes evidence of the parties' previous negotiations and their declarations of subjective intent. This information can only be obtained in an action for rectification

(4) The meaning a document would convey to a reasonable man is not the same thing as the dictionary meaning of its words: it 'is what the parties using these words against the relevant background would reasonably have understood them to mean.' This might lead tot he conclusiont hat the parties had even used the wrong words or syntax to express their true meaning

(5) The rule that one applies the 'natural and orinary meaning' or words just means that we take the common sene view that people tend to say what htey mean. However, 'if one would nevertheless ocnclude form the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which plainly they could not have had' 

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Lord Hoffmann's 5 principles (2)

The 'matrix of facts'

  • courts may look a the context in which the contract was made

'Absolutely anything'

  • Hoffmann explained this phrase in BCCI v Ali 
  • background factors must be 'relevant' --> could have made a reasonable person think that the parties must have departed from conventional usage' 
  • Hoffmann abandons the distinction between latent and patent ambiguity: Mannai Investments
  • in the case of commercial contracts, the restriction on use of background has bee quietly dropped

Pre-contractual negotiations

  • court continue to hold that one cannot look at pre-contractual neogtiations between the parties when interpreting the contract --> also cannot look at parties subsequent conduct

Meaning of the words

  • a reasonable person may understand the words differently from their literal sense
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Application in case law (1)

Investors Compensation Scheme Ltd v West Bromwic Building Society 

  • 'Any claim (whether sounding in rescission for undue influence or othwerise) that you have...' read to say 'any claim sounding in rescission (whether for undue influence or otherwise) that you have...'

Chartbrook Ltd v Persimmon Homes Ltd

  • interpreating a term relating to an 'additioanl residential payment', the Lords held:
  • if the context and background drove the court to conclude that something had gone wrong with the language of a contract, the law did not require it to attribute to them an intention which a reasonable person would not have understood them to have had
  • where it was clear that there was a mistake on teh fact of the document and what the correct version should be, in that it was clear what a reasonble person who had all the background knowledge of the parties would have understood the language to have meant, the court could, as a matter of construction, correct the mistake
  • but the court could not take into account evidence of previous communications or pre-contractual neogtiations, since that would create uncertainty of outcome and would add ot the cost of advice 
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Application in case law (2)

Cherry Tree Investments Ltd v Landmain Ltd 

  • Landmain were registered proprietors of property over which Dancastle Associates Ltd had a registered charge
  • LPA 1925 s101 (1) allows mortgagor to sell charged property when payment due; s101(3) allows mortgage deed to vary the power of sale
  • Any variation must be done effected by the mortgage deed: here, Dancastle and Landmain vary it in a separate (contemporary) facility agreement. Dancastle sell the property to Cherry tree who seek to become registered owners
  • Question: can teh court use the 'background knowledge' of the facility agreement to interpret the meaning of the registered document? Or would this need rectification?
  • majority decides:
    • court can hear evdience of background amterial as aid to construction
    • but court must ask what a resonable person with background knowledge would make of it
    • wehre a documetn is a public one, like a registered charge, addressed to all those inspecting the registere and who do not have nowledge of the private agreement, that private knowledge should not influnce interpretation: look rather at waht the document means
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Application in case law (3)

Arnold v Britton and Others

Neuberger addresses the topic --> endorses Hoffmann's dictum in Chartbrook --> court must look at 'what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean'

  • (1) reliance on commercial common sense and surrounding circ shouldn't be invoked to undervalue importance of language of provision --> should identify what parties meant through eyes of a reasonble reader --> that meaning to be gleaned from language of provision except in very unusual cases
  • (2) the less clear the central words are the more likely a court may have to depart from their natural meaning --> but court should not embark on a search for a way to depart form their actual meaning
  • (3) commercial common sense is not to be invoked retrospectively
  • (4) a court should be very slwo to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed
  • (5) can only take into account facts or circ which existed at time of formation and which were known or reasonably available to both parties
  • (6) in some cases an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the languag eof their contract. In such a case if it is clear what the parties would hav eintended,t he court will give effect to that intention
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