Construction of Commercial
Contracts
Richard Hooley
Investors Compensation Scheme
Ltd v West Bromwich BS
Lord Hoffmann:
‘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 the situation in which they were
at the time of the contract.’
Exclusion from assignment
‘Any claim (whether sounding in rescission for
undue influence or otherwise) that you have or
may have against (the building society) in which
you claim an abatement of sums which you
would otherwise have to pay to that society in
respect of sums borrowed’
Read as: ‘Any claim sounding in rescission
(whether for undue influence or otherwise)…’
Principle 1
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 the situation in which they were
at the time of the contract.
Principle 2
The background was famously described by
Lord Wilberforce … as the ‘matrix of fact’, but
this phrase is, if anything, an understated
description of what the background may
include. Subject to the requirement that it
should have been reasonable available to the
parties and to the exception to be mentioned
next, it includes absolutely anything [relevant]
which would have affected the way in which
the language of the document would have
been understood by a reasonable man.
Principle 3
The law excludes from the admissible
background the previous negotiations of the
parties and their declarations of subjective
intent. They are admissible only in an action
for rectification. The law makes this distinction
for reasons of practical policy and, in this
respect only, legal interpretation differs from
the way we would interpret utterances in
ordinary life. The boundaries of this exception
are in some respects unclear. But this is not
the occasion on which to explore them.
Principle 4
The meaning which a document (or any other utterance)
would convey to a reasonable man is not the same thing
as the meaning of its words. The meaning of words is a
matter of dictionaries and grammars; the meaning of the
document is what the parties using those words against
the relevant background would reasonably have been
understood to mean. The background may not merely
enable the reasonable man to choose between the
possible meanings of words which are ambiguous but
even (as occasionally happens in ordinary life) to
conclude that the parties must, for whatever reason,
have used the wrong words or syntax.
Principle 5
The ‘rule’ that words should be given their
‘natural and ordinary meaning’ reflects the
commonsense proposition that we do not easily
accept that people have made linguistic
mistakes, particularly in formal documents. On
the other hand, if one would nevertheless
conclude from 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 they plainly could not
have had.
HHY Luxembourg SARL v
Barclays Bank plc
DH6
sale
DH7
19 subsidiaries
Opholdco
Clause 15.2
(b) if the asset which is disposed of consists of
all of the shares (which are held by an Obligor or
European Directories (DH5) BV…) in the capital
of an Obligor or any holding company of that
Obligor, any release of the Obligor or holding
company from all liabilities it may have to any
Lender, Subordinated Creditor or other Obligor,
both actual and contingent in its capacity as a
guarantor or borrower … and a release of any
Transaction Security granted by that Obligor or
holding company over any of its assets under
any of the Security Documents; and
Longmore LJ (at [25])
‘If a clause is capable of two meanings, as
on any view this clause is, it is quite
possible that neither meaning will flout
common sense. In such circumstances, it
is much more appropriate to adopt the
more, rather than the less, commercial
construction.’
Chartbrook Ltd v Persimmon
Homes Ltd
• Lord Hoffmann said that it clearly required a strong case
to persuade a court that something must have gone
wrong with the language.
• The fact that the court might have to express that
meaning in language quite different from that used by
the parties was no reason for not giving effect to what
they appeared to have meant.
• All that was required was that it should be clear that
something had gone wrong with the language and that it
should be clear what a reasonable person would have
understood the parties to have meant
Commercially acceptable
solution
• State Street Bank & Trust Co v Sompo
Japan Ins Inc [2010] EWHC 1461 (Ch):
‘Financial Guarantee Floating Amount’
• Kookmin Bank v Rainy Sky SA [2010]
EWCA Civ 582: ‘upon termination,
cancellation or rescission’, ‘all such sums
due to you under the contract’
HHR Pascal BV v W2005 Puppet
II BV
Simon J:
‘A commercially sensible construction
does not mean that the court disregards
express and clear terms in order to give
effect to a conception of what might be fair
and reasonable’.
Market practice
Thomas Crema v Cenkos Securities plc
[2010] EWHC 461 (Comm)
GPV
Cenkos
Crema
Pre-contractual negotiations
Chartbrook Ltd v Persimmon Homes Ltd [2009] 3
WLR 267 (obiter):
• There is no clearly established case for
departing from the rule excluding evidence of
pre-contractual negotiations for the purpose of
interpreting a contract.
• The rule does not exclude use of such evidence
for other purposes, eg to support a claim for
rectification or estoppel.
Oceanbulk Shipping & Trading SA v
TMT Asia Ltd [2010] UKSC 44
Lord Clarke at [45]:
‘… evidence of what was said or written in the
course of without prejudice negotiations should
in principle be admissible, both when the court is
considering a plea of rectification based on an
alleged common understanding during the
negotiations and when the court is considering a
submission that the factual matrix relevant to the
true construction of a settlement agreement
includes evidence of an objective fact
communicated in the course of such
negotiations.’
Post-contractual conduct
• Evidence of the conduct of the parties after the
making of the contract is not generally
admissible when construing a contract.
• But there are exceptions to this general rule, eg
see ING Bank NV v Ros Roca SA [2010] EWHC
50 (Comm) at [17] (tentative opinion).
• Use of subsequent conduct for other purposes,
eg National Westminster Bank plc v Spectrum
Plus Ltd [2005] 2 AC 680 at [140]
Third parties
• Re Sigma Finance Corp [2010] 1 All ER
571
• Dominion Corporate Trustees Ltd v
Capmark Trust Ltd [2010] EWHC 1605
(Ch)
Boilerplate clauses
The Starsin [2004] 1 AC 715, Lord
Bingham said: ‘that greater weight should
attach to terms which the particular
contracting parties have chosen to include
in the contract than to pre-printed terms
probably devised to cover very many
situations to which the particular
contracting parties have never addressed
their minds’.
Ravennavi Spa v New Century
Shipbuilding Co Ltd
Moore-Bick LJ:
‘I am unable to accept the suggestion …
that clauses of this kind can be construed
by reference to their supposed purpose or
that their significance is diminished if they
are found among what are sometimes
called the ‘boilerplate’ provisions of a
formal contract of this kind.’
Exclusion clauses
BCCI v Ali, Lord Hoffmann (dissenting):
‘The disappearance of artificial rules for the
construction of exemption clauses seems to me
in accordance with the general trend in matters
of construction, which has been to try to
assimilate judicial techniques of construction to
those which would be used by a reasonable
speaker of the language in the interpretation of
any serious utterance in ordinary life.’
KG Bominflot v Petroplus Marketing
AG [2010] EWCA Civ 1145
‘There are no guarantees, warranties or
representations, express or implied, [of]
merchantability, fitness or suitability of the
oil for any particular purpose or otherwise,
which extend beyond the description of the
oil set forth in this agreement.’
Conclusion
• Opinions can differ
• Transparency is essential
• Broad, all-embracing wording but not too
one-sided
• Don’t ‘bury’ important provisions: see the
wood for the trees