Seminar Presentation - Allen & Overy Seminars > What`s new?

Did you mean to say that? How will the
Court interpret your contract?
Richard Farnhill and Rainer Evers
Senior Associates, Litigation
Allen & Overy LLP
 The terms of the contract
 Express
 Implied – to be covered in the next talk
 Express terms
 Why are they important?
 How do you locate them?
 How you interpret them in theory?
 Intention, Interpretation and Construction in practice
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Why are they important?
 Necessary for the contract to be formed
 "If parties have shown an intention to be contractually
committed… then the court will recognise a contract
unless what remains outstanding is not merely
important but essential in the sense that without it the
contract is too uncertain or incomplete to be
enforced." Bear Stearns Bank plc v Forum Global
Equity Ltd at para 155
 Necessary to define the obligations
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Why are they important?
 Necessary to define the recovery for any breach
 "In [the case of express and implied terms], the
consequences for which the contracting party will be
liable are those which “the law regards as best giving
effect to the express obligations assumed” and “[not]
extending them so as to impose on the [contracting
party] a liability greater than he could reasonably
have thought he was undertaking”." Transfield
Shipping Inc v Mercator Shipping Inc [2008] 3 WLR
345 per Lord Hoffmann at para 16
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How do you locate them?
 Incorporation
 By signature
 By reference
 By course of dealing
 The pitfalls
 Suites of agreements
 Part oral – part written agreements
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How you interpret them?
 As object – to ascertain the intention of the parties
To be objectively assessed
Words to be given their ordinary and natural meaning
Assessed against the “factual matrix”
But is that
 Imputed knowledge – “Subject to the requirement that it
should have been reasonably available to the
parties … it includes absolutely anything which would
have affected the way in which the language of the
document would have been understood by a
reasonable man.” ICS v West Bromwich [1998] 1 WLR
896 per Lord Hoffmann at 912-913
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How do you interpret them?
 Or actual knowledge “…all the relevant facts
surrounding the transaction so far as known to
the parties.” BCCI v Ali (No 1) [2002] 1 AC 251 per
Lord Bingham at 259
 In either case, communication is key
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The Search for Meaning
“Somewhere between the writer and the reader
The meaning floats” Roger McGough
“dans la langue il n’y a que des differences sans
termes positifs” Ferndinand de Saussure
“Interpretation creates intent”
“The imperfection of human language renders it…
absolutely impossible to define the word ‘building’”
Byles J Stevens v Gourley (1859) 7 CBNS
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Construction + Intent 1
“Rules of construction are… merely guidelines to the
presumed intention of the parties in the light of events which
have occurred.” Kerr LJ Mitchell v Finney Stock Seeds [1983]
Intention is approached objectively; courts have no access to
private thoughts, negotiators may be dead, intentions can be
misremembered, contract may be inherited by new parties.
“One must consider the meaning of the words used, not what
one may guess to be the intention of the parties” Jessel MR
Smith v Lucas [1881] 18 ChD
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Construction + Intent 2
Construction aims at effectuating “the intention of the parties, to
be collected from the whole of the agreement” Ford v Beech
[1848] 11 QB
“every portion of a document must be fully considered ere any
portion of such document be interpreted” McCardie J SS
Magnhild v McIntyre Bros [1920] 3 KB
If “a particular construction leads to a very unreasonable result
[that] must be a relevant consideration. The more unreasonable
the result, the more unlikely it is that the parties can have
intended it, and if they do intend it, the more necessary it is that
they shall make that intention abundantly clear.” Lord Reid
Schuler (L) v Wickman Machine Tool Sales [1974] AC
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Construction + Intent 3
If ambiguous/more than one construction, take one which saves the
contract rather than one which makes it void, even if it is linguistically
less likely – see Simon Brown LJ in Lancashire CC v Municipal Insurance
[1996] 2 All ER.
Words or conduct after formation are irrelevant:
“is it not legitimate to use as an aid in construction… anything
which the parties did or said after it was made.” Lord Reid James
Miller & Partners v Whitworth Street Estates [1970] 2 AC
“it is to be presumed that it was not the intention of the parties that
either party should be entitled to rely upon his own breaches of his
primary obligations as bringing the contract to an end” or to get a
benefit under it. Lord Diplock Cheall v Apex [1983] 2 AC
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Construction + Intent 4
Contracts are formed in a legal context:
“the law being well settled, when you have a contract of that kind you apply
the understood law, and you hold that the parties, knowing what the law was”
intended a partnership. Cairns LC Llanelli Railway v London & NW Railway
[1875] 1 App Cas.
“once a phrase has been authoritatively construed by a court in a very similar
context… a reasonable businessman must more naturally be taken to [intend]
that the phrase should bear the same meaning… It would… take very clear
words to allow a court to construe the phrase differently” Waller LJ British
Sugar v NEI Power Projects [1997] 87 BLR
Starting with assumed purpose, and reading the words in the light of that purpose,
is circular.
“questions of construction are frequently matters of impression and are not
readily susceptible of precise explanation”. Walker LJ Welsh v Greenwich
LBC [2001] 81 P & CR
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Being told what you meant: Entire Agreement Clauses (i)
Thomas Witter v TBP Industries [1994] Tr. L.R: exclusion for misrepresentation
unreasonable as it didn’t say exclusion did not apply to fraudulent
misrepresentation, and would not be reasonable to exclude liability for fraud:
“if a clause is to have the effect of excluding or reducing remedies for
damaging untrue statements, then the party seeking that protection cannot be
mealy-mouthed in his clause”
“I cannot think it is reasonable to exclude liability for fraudulent
misrepresentation” Jacob J.
Fell foul of s3 of Misrepresentation Act 1967, requiring exclusion for
misrepresentation to satisfy reasonableness test in s11 UCTA 1977. Clause did
not distinguish between fraudulent, negligent and innocent misrepresentation and
was struck out entirely:
“It is not for the law to fudge a way for an exclusion clause to be valid” Jacob
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Being told what you meant: Entire Agreement Clauses
“it is reasonable to assume… the parties desire commercial certainty. They
want to order their affairs on the basis that the bargain between them can be
found within the document which they have signed. They want to avoid the
uncertainty of litigation based on allegations as to the content of oral
discussions at pre-contractual meetings… it is reasonable to assume that the
price to be paid reflects the commercial risk which each party… is willing to
accept [in this instance] it would be bizarre… to attribute to them an intention
to exclude a liability which they must have thought could never arise.”
Chadwick LJ Watford Electronics v Sanderson CFL [2001] EWCA Civ 317
Peart Stevenson Associates v Brian Holland [2008] EWHC (QB), Judge Richard
Seymour QC held non-reliance clause unenforceable against fraudulent
misrepresentation, but did not say if this was because clause failed to create an
estoppel, preventing claimant from saying a misrepresentation had been made, or
because exclusion was unreasonable.
Why should parties find it unreasonable to exclude liability for fraud? On LJ
Chadwick’s analysis, this would be part of risk-allocation.
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Being told what you meant: Settlement Agreements and
Future Claims
BCCI v Ali [2001] UKHL 8: claimant could not have renounced right to bring future claims if he
did not know he had the right to bring them, unless agreement specifically stated this.
“a long and… salutary line of authority shows that, in the absence of clear language, the
court will be very slow to infer that a party intended to surrender rights and claims of
he was unaware and could not have been aware.” Lord Bingham
Court is inferring intention, but not from the contractual language. In Ali, Lord Hoffmann said,
of his reference to the background which may be taken into account in ICS, that:
“I was… saying that there is no conceptual limit to what can be regarded as background.”
With disarming candour, he also noted that:
“When judges say that ‘in the absence of clear words’ they would be unwilling to construe
a document to mean something, they generally mean… that the effect of the document is
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Being told what you meant: Settlement Agreements and
Fraud Claims
Satyam Computer Services v Upaid Systems [2008] All ER, Collins LJ, basing
himself on Ali, stated:
“the same principle must apply to claims based on fraud… express words
would be necessary for such a release” “If a party seeking a release asked the
other party to confirm that it would apply to claims based on fraud, it would
not, in most cases, be difficult to anticipate the answer.”
Collins LJ has assumed intent. In fact, we often deal with settlements where the
parties intend a release from claims based on fraud. Before Satyam, settlement
agreements typically did not refer specifically to fraud.
As “claim” in such agreements was often very widely drafted, the agreements
arguably already covered fraud - judiciary has reversed its rules of construction by
assuming parties’ intentions were not reflected in their words.
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Construing Settlement Agreements
Evidence of intent by the back door?
Tomlin v Standard Telephones [1967] 1 WLR, Court of Appeal admitted without
prejudice correspondence in order to interpret a settlement agreement:
“the point was whether there had been a concluded agreement of any kind
between the parties in accordance with that correspondence and it would be
impossible to decide [that]… unless one looked at the correspondence.”
Danckwerts LJ
How far this stretches is unclear. Tomlin says you can admit without prejudice
evidence to show there was an agreement, but not whether such material can be
used to show its content.
Once agreement has been found, its meaning in terms of e.g. releases from
claims based on fraud, is now settled by judicial dicta, not by evidence about
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Construction today
“(i)… in construing the contract, the court must look at the
circumstances surrounding its making in order to see what
was the objective that the parties had in view;
(ii)… a prior agreement is at least admissible as a guide to
construction; and…
(iii) the following are inadmissible (a) the content of prior
negotiations; (b) communications between the insured and its
broker which were not communicated to the reinsurers and (c)
the subjective views of the parties as to what they thought they
had achieved.”
Clarke J Mopani Copper Mines v Millennium Underwriting
[2008] EWHC 1331
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How not to do it
“X may at any time… assign…all or any of its rights
and/or obligations… provided such assignment… is
to its successors in title or to its ultimate parent
“I would confirm that in return for your full
cooperation with our investigations… we will not,
based on the information currently available to us,
bring claims against you in relation to fees received
by you in respect of bona fide property transactions
or compensation for loss of office”
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These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The
term partner is used to refer to a member of Allen & Overy LLP or an employee or
consultant with equivalent standing and qualifications or an individual with
equivalent status in one of Allen & Overy LLP's affiliated undertakings.
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New York CLE
 In order to comply with regulations for New York
CLE, delegates must note the following code to
claim hours under this jurisdiction if viewing this
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