Construction of Commercial Contracts Richard Hooley.

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 Opholdco

19 subsidiaries

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