Insurance claims and contractual
interpretation – a seminar by the
Hailsham Chambers Commercial
Group
Thursday 17 June 2010
Claims against insurers and
insurance brokers: problems and
pitfalls for claimants, insurers, and
insurance brokers
Simon Wilton
Construction of Contracts
Dan Stacey
Hailsham Chambers
Commercial Group Seminar, 17 June
2010
ICS v West Bromwich principles
• ICS v West Bromwich [1998] 1 WLR 896
(in particular the well-known rules set out
by Lord Hoffmann at p 912 - 913) still
apply.
But:
– Negotiations.
– Implied terms.
– Exclusion clauses.
– Deleted words.
Contractual Interpretation: ICS v West
Bromwich
• Per Lord Hoffmann in Chartbrook v Persimmon [2009] 1 AC 1101.
“there is no dispute that the principles on which a
contract (or any other instrument or utterance) should be
interpreted are those summarised in ICS v West
Bromwich. They are well known and need not be
repeated. It is agreed that the question is what a
reasonable person having all the background knowledge
which would have been available to all the parties would
have understood them to be using the language in the
contract to mean.”
Negotiations (a little background)
• It had usually been understood that negotiations were inadmissible
(with exceptions of rectification/estoppel by convention and “private
dictionary” principle). See Prenn v Simmonds [1971] 1 WLR 1381.
• But:
– In ICS v West Bromwich [1998] 1 WLR 896 Lord Hoffmann stated that
(p 913)
“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.”
Negotiations (cont.)
• In his Chancery Bar Association lecture of 2005, Lord
Nicholls of Birkenhead stated that: “The preferable
approach is to recognise that pre-contract negotiations
are relevant and admissible if they would have
influenced the notional reasonable person in his
understanding of the meaning the parties intended to
convey by the words used.”
• With such encouragement…
• Number of cases (e.g., Proforce v Rugby Group [2006]
EWCA Civ 69) attempts made to put negotiations in front
of the court in the context of interpretation.
• Something of a split amongst first instance judges.
Negotiations in HL (Chartbrook v
Persimmon Homes)
• Huge dispute about a development
agreement.
• Usual allegations: contractual
interpretation; use of pre-contractual
negotiations; and rectification.
• Went on appeal from Briggs J to CA to HL.
Chartbrook v Persimmon Homes
• Lawrence Collins LJ (dissenting in CA) in
Chartbrook v Persimmon Homes:
As to negotiations
– Bound to accept exclusionary rule as the starting
point.
– But policy reasons for strict application of rule are not
compelling (e.g., commercial uncertainty; international
private law and US law (depending on State) does not
exclude negotiations where some ambiguity).
– Court can use “private dictionary” and “agreed basis”.
Chartbrook v Persimmon Homes
• Other judges in CA in Chartbrook less
convinced:
– “I would reject any suggestion that this is a
case in which it is legitimate as part of the
construction exercise to have recourse to the
precontract negotiations. The basic rule is
that they are out of bounds” (per Rimer LJ).
• Tuckey LJ: “…like Rimer LJ I agree with
Lawrence Collins LJ’s conclusion”.
Chartbrook v Persimmon (HL)
• HL held (obiter but unanimously) that negotiations were not
admissible as matter of construction.
• Lord Hoffmann:
“no clearly established case for departing from the exclusionary
rule. The rule may well mean as Lord Nicholls has argued that
parties are sometimes held bound by a contract in terms which,
upon a full investigation of the course of negotiations, a reasonable
observer would not have taken them to have intended. But a
system which sometimes allows this to happen may be justified on
the more general interest of economy and predictability in obtaining
advice and adjudicating disputes. It is after all usually possible to
avoid surprises by carefully reading the documents before signing
them and there are the safety nets of rectification and estoppel by
convention.”
Chartbrook: The Karen Oltmann
• In The Karen Oltmann [1976] 2 Lloyd's
Rep 708 issue whether “after 12 months
trading” meant that break clause could be
operated only at end of 1st year or at any
time during the second year.
• Judge (Kerr J) stated that he was entitled
to look at telexes created when fixture was
negotiated to see whether they meant “at
expiry of” or “at any time after expiry of”
Chartbrook: The Karen Oltmann
• Private Dictionary Principle: where parties
habitually use words in an unconventional
sense, evidence of negotiations may be used to
support argument that words should bear similar
unconventional meaning.
• So where “cider” was by the custom of the place
where a contract for sale of cider entered into
meant “juice of apples as soon as juice pressed”
it was given that meaning: Studdy v Saunders
(1826) 5 B&C 628.
Chartbrook: The Karen Oltmann
• Kerr J stated that if it is alleged that parties have
negotiated on the basis of one of two agreed
meanings then permissible for the court to
examine the extrinsic evidence relied upon.
Merely an extension of the private dictionary
exception.
• HL in Chartbrook held that this was an exception
which swallowed the rule. There was no private
dictionary meaning in this case, and The Karen
Oltmann should be overruled.
Without Prejudice Negotiations
• Plainly inadmissible as a general rule.
• Unilever v Proctor & Gamble [2000] 1 WLR 2436.
• When question is as to whether a concluded contract
has been reached then admissible. So the open
acceptance of a “without prejudice” offer can be read
with the “without prejudice” offer by the court.
• Can they be used in order to assist construction of a
contract?
Oceanbulk Shipping v TMT Asia
(CA, 15/2/10)
•
General rule against without prejudice admissibility applied here.
•
Evidence of without prejudice negotiations cannot be received by the Court
(Longmore LJ and Stanley Burnton LJ, Ward LJ dissenting).
“In Unilever Plc v Proctor and Gamble Co. Ltd ….Robert Walker L.J. set out
instances when the without prejudice rule does not prevent the admission into
evidence of what one or both of the parties said or wrote. His non-exhaustive list
included the without prejudice communications which result in a concluded
compromise agreement, the negotiations which showed that an agreement
apparently concluded between the parties during the negotiations should be set aside
on the ground of misrepresentation, fraud or undue influence; and also, even if there
is no concluded compromise, a clear statement which is made by one party to
negotiations and on which the other party is intended to act and does in fact act so as
to give rise to an estoppel. It is common ground that one can add rectification to that
list. So, if you can use the antecedent negotiations to prove the agreement, to rescind
it, or to rectify it, why on earth can you not use the negotiations to establish the truth
of the what the concluded contract means? Not to do so would strike my mother as
"barmy". Perhaps I should simply say it strikes me as illogical.” – per Ward LJ
Implied Terms: AG of Belize v
Belize Telecom
• AG of Belize v Belize Telecom [2009] 1 WLR
1988.
• Lord Hoffmann emphasised that the test for an
implied term is “an exercise in the construction
of the instrument as a whole”.
• The traditional tests: The Moorcock (business
efficacy) or the “officious bystander” were in
essence examples of what a reasonable person
would understand the contract to mean.
Implied Terms
• Mediterranean Salvage v Towmar [2009] 2
Lloyd's Rep 639.
• Still need to show that the term sought to be
implied is both reasonable and necessary (per
Sir Anthony Clarke MR).
“…as I read Lord Hoffmann’s analysis
although he is emphasising that the process of
implication is part of the process of construction
of the contract he is not in any way resiling from
the often stated proposition that it must be
necessary to imply the proposed term. It is
never sufficient that it should be reasonable.”
Post-Chartbrook
Exclusion/Limitation Clauses
• William Hare & others v CR Reynolds [2010] EWCA Civ 283
• CA asked to construe a “pay when paid” clause which were illegal
under s 113 of the Housing Grants (Construction and Regeneration)
Act 1996 unless third party could be shown to be insolvent. In effect
they were exclusion clauses.
• Case turned on whether the contract covered the particular type of
financial difficulties which the company had encountered (self
certified administration)
Exclusion/Limitation Clauses
• Held, per Waller LJ “very doubtful” that Chartbrook
principles applied to an exclusion clause inserted by one
party entirely for his own benefit.
• “The principles which the courts have always applied to
clauses by which a party seeks to relieve itself from legal
liability... i.e., plain words… should in my view be the
dominant principle”
• Citing Lord Bingham in Dairy Containers v Tasman
Orient Line [2005] 1 WLR 215 if a party otherwise liable
is to exclude or limit his liability he must do so in plain
words: “unclear words do not suffice; any ambiguity or
lack of clarity must be resolved against that party”
Bad Bargain
• Courts remain resolutely against the interpretation of a
clause to be affected by considerations of bad
bargain/unfairness.
• See, e.g., Patten LJ in Kookmin v Rainy Sky & ors [2010]
EWCA Civ 582
“there is no support for the reformulation by the court of
contractual provisions which are relatively clear in their meaning
simply because they balance the interests and obligations of the
parties in a way which the judge considers to be one-sided or
unfair. The starting point has to be that commercial parties can
look after themselves and are sufficiently organised and well
advised as to be able to ensure that the contractual documents
which they sign accurately reflect their intentions”
Deleted Words
• When can you be guided by words in a
contract which have been deleted?
• There is a “pleasant diversity of authority
on this subject”: Louis Dreyfus v Parnaso
“The Dominator” [1959] 1 QB 419 per
Diplock J.
Deleted Words: Mopani Copper
Mines v Millennium Underwriting
• Mopani v Millennium (Christopher Clarke J)
[2008] EWHC 1331 (Comm) examination of the
deleted words rules.
• Traditionally (and unsurprisingly) deleted
sentences could not be looked at for the
purposes of construing an agreement: “it is not
in the power of any court to look at words for any
purpose whatever connected with the
construction of the contract of which they form
no part whatsoever”: Inglis v Buttery [1878] 3
App Cas
Deleted Words
• For much of 20th Century settled law that effect is the
same as if deleted words had never formed part of the
agreement.
• Yet subsequently in The Dominator this was described
as unrealistic by Diplock J:
“while I think that I must first look at the clause in its actual form
without the deleted words if I find the clause ambiguous I think that I
am entitled to look at the deleted words to see if any assistance can
be derived from them in solving the ambiguity bearing in mind the
prima facie rule I have indicated.”
Deleted Words
• Christopher Clarke J:
– In general recourse to deleted words is illegitimate.
– Deleted words in a printed form may resolve the ambiguity in a
neighbouring paragraph that remains.
– Deletion of words in a contractual document may be taken into
account if:
• deletion shows what it is the parties refused to agree.
• There is ambiguity in the words that remain.
• Is this any different from looking at negotiations?
Deleted words are merely the result of negotiations.
Insurance claims and contractual
interpretation – a seminar by the
Hailsham Chambers Commercial
Group
Thursday 17 June 2010