Trying to understand what the words in a contract mean is what we do every day. Lord Goff said that:
“In point of fact, if not the meat and drink, then at least the staple diet, of the Commercial Court can be summed up in one word – ‘construction’. Commercial lawyers, Solicitors, Barristers and Judges spend a very substantial part of their time interpreting contracts.” (Commercial Contracts and the Commercial Court (1984) L.M.C.L.Q. 382)
Funnily enough, he then went on to draw a distinction with the construction industry, where he observed that un-amended standard forms are often used. Construction was clearly not his specialty; we all know that construction standard forms are often subject to numerous amendments and it is not unusual to find wholly bespoke contracts being used. So when we need to sit down and think about the correct way to interpret words, what do we do?
What are the rules?
There are some general principles, known as the “cannons of construction”, but when it comes to substantial issues and interpretation, Lord Hoffmann is your man. He set out his views on interpretation so very clearly in Investors Compensation Scheme v West Bromwich and again, more recently, in Chartbrook v Persimmon, using the opportunity to dismiss any attempts to move away from his original principles.
The problem is that while nobody expects rules that will give a definitive answer to every problem, the current position is unclear, some might even say confusing. For example:
- What is the factual background that we can take into account and how is it separate from the pre–contract discussions that we cannot take into account?
- If the words are clear, to what extent can the court adjust them to ensure they make commercial sense?
- What can you look at to decide what the commercial aim is?
Do we now have different rules?
In an attempt to help, the Supreme Court waded into the debate in Re Sigma Finance, in one of its first reported decisions. This was not a construction case. It involved the interpretation of a complex document that decided how the assets of an investment vehicle (US$450 million) would be distributed to satisfy liabilities (US$2.6 billion). It was a significant shortfall and so not a happy situation. The Supreme Court had the benefit of several eminent QCs arguing the case before it. As it happened, the Supreme Court (by a majority of four to one) reached the opposite view from the trial judge and Court of Appeal.
As Lord Mance said in the Supreme Court:
“…the conclusion reached below attaches too much weight to what the courts perceived as the natural meaning of the words… I also think that caution is appropriate about the weight capable of being placed on the consideration that this was a long and carefully drafted document… even the most skilled drafters sometimes fail to see the wood for the trees…”
Lord Collins agreed, observing that such complex documents were bound to have ambiguities and inconsistencies, and that an over-literal interpretation of one provision without regard to the whole may distort or frustrate the commercial purpose. Interestingly, Lord Collins suggested that this was a case where the background or factual matrix would not be very relevant. He suggested that the commercial aim should be inferred from the face of the document and from the nature of the debtor’s business.
What does it all mean?
This all sounds very sensible. It should not be (hopefully) controversial that lawyers are not perfect and complex documents may well contain mistakes. It also makes perfect sense that the commercial purpose should be more important than the words used.
However, the problem is that the same uncertainties remain. The Supreme Court has suggested that the natural meaning of the words may carry too much weight but this seems to create a wide opening to introduce all sorts or arguments and background matters. Identifying the commercial intention is not easy, bearing in mind that each party may have very different ideas. Indeed, one suspects that very often what the courts declare with great confidence as the clear intention of the parties may never have been in the minds of the persons involved.
Interpreting words will always depend on the specific facts of a case. Nobody expects the courts to provide rules that will solve everything; after all, this is probably impossible. It would, however, help if the courts could be clearer as to what they consider is the correct approach to interpretation. The current uncertainty is unhelpful. I will be watching how the Supreme Court takes this forward with great interest.