UK versus Swiss law on contract interpretation: which approach is ...

Privity of contract

in the UAE:more

power to third

parties

International

contracting:

Shona FrameCMS CameronMcKenna, Glasgow

Sam MossLalive, Geneva

Workers with a hydraulic digger on a highway at Bissone, Switzerland.

U K versus Swiss law oncontract interpretation:which approach is bestsuited to internationalconstruction contracts?In this article, the authors take a deliberately adversarial approach to theabove question in order to fuel debate, with Shona Frame arguing the casefor UK law, and Sam Moss arguing the case for SWISSlaw. *

IntroductionThe differences between the approaches

to the interpretation of contracts in the twosystemsare, at first glance, marked. The UKlaw approach, and more generally that ofcommon law systems,is often characterisedas an 'objective' approach, which is focusedon the terms of the contract and shunsextrinsic evidence. In contrast, Swiss law,along with other civilian systems, is usuallysaid to adopt a 'subjective' approach, whichfocuseson the real intentions of the parties.

English and Swisslaw are, respectively, thefirst- and second-most frequently chosengoverning lawsin international contracts, atleastaccording to the International Chamberof Commerce (ICC)'s statistics on contractsgivingrise to arbitration under the ICCRulesof Arbitration.' A study on choice of law ininternational construction contracts wouldalso likely show that English and Swisslaware predominant.

CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 3 September 2015 9

UK VERSUS SWISS LAW

However, the distinction between the UKand Swiss approaches, and more generallybetween common and civil law systems, ismorenuanced than the subjective versus objectivedichotomy would suggest. Nevertheless, thereremain differences between the systems, whichgive rise to the question of which approach isbetter suited to the realities of internationalconstruction contracts.

Outline of UK positionShona Frame

The general rule in the UK, as expressedby the leading Scottish textbook The Lawof Contract in Scotland.' is that a contract isinterpreted by considering the whole expressterms of the contract and any admissiblesurrounding circumstances.The value of the surrounding circumstances

is that these allow an interpretation based onthe meaning of the document to a reasonableperson having all the background knowledgeavailable to the parties at the time of thecontract, the first of the principles set out byLord Hoffman in I~tor'S CompensationScheme v West Bromwich Building SoCîety.3 ,

This rule of fr¡.terpretation recognises thatcommercial contradts are not made in avacuum and that id order to aid

Iinterpretation, the court is entitled to be-.. .::\placed in the same posi-tion as the partieswho enteJed into the contract. In otherword~_the[e is recognition that the contextof the agreement is importãnt.Th I l ....;, le courts a so req1-ure to app y a

. III ìblei i . 1...commercia y sensu e m terpretauon, on tnebasis that it is considered ~t0 -be theinterpretatiorrmost likely~togive-effect to theintention of'th~ parties. . _ 'ILwhere th.t;.J::eare problems in tlfêlanguagerl h . "" ....~-- . ke i h d af .useq tr at po_mt.to a mista e m t e r tmg,

___;;;;.. ....,.-; - - _;-.- • • \dtlre~ court does not reqUIre to Impose onparties an intentiõn -tney ~learly woulg nothave -had. ~Bearill'g in min~ the overridingobjectite of gi0ng effect to what a 'reasonableperson' as opposed to a 'pedantic laV\ryer'would have understood the parties to mean(as Lord Hoffman put it in Jumbo King vFaithful Properties (1999) HKCFAR 279), thecourts will interpret contracts in such a wayas to achieve that aim.That has involved the courts in reading

words into a shipping lcontract where it was'clear both that words had bern omitted-andwhat those omitted words wer¿¡- and beingprepared to substitúte the right word for a

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VVhat business needs is certainty, predictability,expeditious progress and proportionate costs inresolving disputes, when and where these arise

wrong one or disregard words or insertmissing words."In other cases, however, the courts have

sounded words of caution in doing so, urgingjudges to guard against' excessive confidencethat [their] view as to what might becommercially sensible necessarily coincideswith the views of those actually involved incommercial contracts'." The starting pointremains the words of the contract and this'reading in' exercise is only embarked uponwhere it is clearly required in order to give asensible meaning to the contract.The use of evidence as an aid to

interpretation is an important consideration,Evidence of the subjective intention, bf aparty to the contract, ëvÍdence ofpre-contract negotiations and etidence of

Ji!circumstances since the contract cannot beused in interpretation of con'rracts.Of these; perhaps the most.controversial

- and where the biggest difference liesbetween the UK position and that in othe~J'urisdiài~n~s - is in:ì¡@,rati0ntoevidenceo'f

." . l¡' . " J! • --pre-contract negouations, In relation tothis,' a distinction nee~s~tõbe drawn between'd :, f' nri ~I t·· d f heVI ence q. pnor negotiatlOllS-an o ·-t e

subiective 'intention lof the par(ìës;~whichJ Il ~

are not admissible, and facts 'thar bothparties- \tiould h~te had in. minCl at::'t:he:time~ - ',... _ ¡:j,I_ _,..""'f!F .......01 the, contract= - -tne backgr'ound'brs..ûmst~~cëS - whic~ are a~m~~sible-\The rationale behmd this IS that l.such- -

evidence iSI considered to be generally'-unhelpful, .~FeflectiI¡g_only [ "..changingp-ositiD~theñe"gotiation pr,oceed-s andnot a consensus8 and that negntiãti9hs canoften involve a compromise.9 Pre~c~ntractcommunications may simply reflect Rkrties'

-~ ~aspirations and intentions ¡¡.fid· not thereality of what is achieved in the ultimatelyagreed cbntractual wording. .If. :;:...Further, it is thought that aH6wiñg such

- ,~evidence would lead to ,great@p uncertaintyf Ll .rl d' .Y_~ Id/'o outcome m lspl,ltes re ate. _to. l0ntrªct

ipterpretation ar¡.d a'dd to the cost of ad¥iceand of litigation. I,D

In the Scottish Appeal Court, the Fu1e-isjustified on two grounds: namely irrelevanceand pragmatism.ll Irrelevance on the grounds

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CONSTRUCTION LAW INTERNAl'IONAL Volume 10 Issue 3 September 2015

that consideration of previous formulations ofwhat one or other party was seeking innegotiations may have no bearing on theinterpretation of the words finally agreed; andpragmatism on the basis of considerations ofpredictability of the outcome and economy inreaching that outcome.This is not to say that parties are denied a

remedy in the event that the intention of theparties has not been accurately expressed inthe contract language. Where this cannot beremedied by means of interpretation oncommercially sensible grounds, as describedabove, there is the possibility of the courtsrectifying the contract. That involves revisingthe words of the contract to reflect thecommon intention of the parties.A rectification action will, in contrast with a

case based on interpretation, allow evidenceof pre-contract negotiations. In appropriatecases then, parties have recourse to a remedythat allows them to take advantage ofevidence available, which goes. above and'I 1,beyond that which could be used simply as amatter of interpretation! .I

I

Outline of Swiss position51mM0SS,' (

AS is the case in other civilianjurisdictions, thestarting point of contractual ifiterpretationunder SWisslawdiffers signìfìcantlyfrom thatin common ~awjurisdictions: a court or arbitraltnibùrîal applying Swisslaw must first seek to, determine the real and common intentionof the parties," which may 'be inconsistent

nwith the wording of the contract. The startingpoint far seeking the parties' real and common

Iintention willbe the wording of the contract,which is referred to as the 'primary' meansôf interpretation." However, the parties mayadduce any form of evidence that sheds lighton their intentions, including evidence of theirnegotiations and subjective declarations ofintent, the circumstances inwhich the contractwasconcluded, the parties' respectiveinterests,the purpose or object of the contract, usage ina specific industry, and the parties' conductafter the contract wasconcluded.If the real and common intention of the

parties cannot be established, a judge orarbitrator will resort to an 'objective' or'normative' interpretation, based on theso-ca!lled'principle of trust' ('Vertrauensprinzip'or 'principe de la confiance'). Interpretation inaccordance with the principle of trust, which isbased on the general duty of good faith

CONSTRUCTION LAW IN;FERNATIONAL1Volume 10 Issue 3 September 2015

enshrined in Article 2 of the SwissCivilCode,consistsof establishinghoweach of the parties''declarations' of intent could and should havereasonably been understood, in good faith, bythe other party under the circumstances.As is the casefor subjectiveinterpretation, the

starting point for the analysisis the text of thecontract. However,a court or tribunal cannotadopt a purely literal interpretation of the text,even if it may appear to be clear," It mustexamine the wording of the contract in itscontext, taking into account 'all thecircumstances'whichpreceded or accompaniedits conclusion.IS These circumstances includethe other clausesof the contract, itspurpose, theparties' interests, usage in the parties' industryor field,and the parties' negotiations."The Swisscourtswill,in particular, givemore

or lessweight to the apparently clear meaningof the text of the contract depending OR thebackground of the parties. A stricterinterpretation of the text of a contract can, forinstance, be appropriate if the parties arecommercially experienced and familiar withthe type of transaction and the meaning of the~ermsused in the' contract." However,a morecareful analysis of the other circumstancessurroundirg a contract may be necessary, forjnstp.l'ld!, if a party is foreign or if the party'sdeclaration of intent is made in a foreignlanguage.IS Nevertheless, the text of thecontract is considered to have priority overother evidence, and a court or tribunal willnotmoveawayfrom the literalmeaning of the textif there isno 'seriousreason' to think that it doesnot correspond with the parties' intention.'?Despite the nominal primacy of subjective

interpretation in the two-tiered approach tothe interpretation of contracts under Swisslaw,'objective' (or 'normative') interpretationispredominant from both a legal and practicalpoint of view.In practice, the two tiers,overlapand can be difficult to distinguish." From alegal point of view,a party seeking to rely onan alleged real and common intention of theparties has the burden of proving it.Under Swisslaw,the burden of proof, which

is a substantive rather than proceduralquestion, falls on tile party seeking to rely onan alleged intention of the parties that divergesfrom the 'normal' or 'objective' meaning ofthe text of the contract." This rule emphasisesboth the importànce of the text of the contractas the 'p>rimary'means of interpretation, as,well as the practical importance under Swisslaw of objective interpretation in comparisonto subjective interpretation, despite the

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UK VERSUS SWISS LAW

nominal primacy of the latter. Objectiveinterpretation might even be said to have, ineffect,priorityoversubjectiveinterpretation inlight of the allocationof the burden of proof,given that it willbe determinativeunless anduntil a real and common intention of thepartiesisallegedand proven."As a result, the Swissand UKlawapproaches

to contract interpretation are far closer thanthey appear to be at first sight. In fact, themodern, contextual approach tointerpretation under UK law is, to a largeextent, indistinguishable from thepredominant form of interpretation underSwiss law. In particular, the 'backgroundknowledge' referred to by Lord Hoffman inInvestors Compensation Scheme v West BromwichBuilding Societj3 is similar to the set ofcircumstancesthat mustbe taken into accountin objectiveinterpretation under Swisslaw.Inaddition, as under UK law, the text of thecontract will have priority over any suchcircumstances, and a court or tribunal willonly move awayfrom the literal meaning ofthe text of the contract if there is a 'seriousreason' to do so.

Which position is more suited tointernational construction contracts?

Arguments for the UKpositionSHONAFRAME

The Swissposition, in taking as its startingpoint the ascertainment of the 'real andcommon intention of the parties' - even ifthis is at odds with the contract wording -and not the expressed intention ascontainedin the contractual language, opens up thepossibility of wide-ranging evidence on allaspects of the contract.Where a party submits evidence that the

contract wording does not reflect thatparties' intentions, Swissjudges may takeaccount of any form of evidence that shedslight on these intentions. This allowsfor avery wide-ranging and almost unlimitedenquiry to be undertaken. This is the caseeven in circumstances.where the contract isclear and unambiguous.This, it is considered, can lead, in those

cases, to uncertainty and unpredictability ofoutcome in contractual matters whereinternational business has a preference forcertainty and predictability.Further,it seemsanomalousin the contextof

the construction industry where contractsregularlyrun to manyhundreds .ofpages and

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are often negotiated overextended periods oftimetoensure that the finallyagreeddocumentisone that hasbeen agreed to byboth parties.It can also lead to significantly increased

costs. The consideration of all draftcontracts and correspondence during thenegotiation phase of a construction contractwould be onerous involving voluminousdocumentation, often running to manythousands of pages exchanged over anextended period of time.ln a court hearing, the evidence on this

could take many days, if not weeks, and it isdifficult to know what a court could makeof the huge volume of potentiallyconflicting material it might then bepresented with. Witness evidence mayprove unreliable or incomplete given thepassage of time. Such evidence might noteven assist since disputes often arise due tocircumstances that no one anticipated atthe time of entering into the contract.Even if the focus was on one or two key

provisions, the remainder of the materialwould still need to be considered since it isoften the case in a negotiation that a partywilltake a commercial decision to giveawayapoint on one clause in order to secureadvantage on another.It iseasyto seehowthisapproach could lead

to a disproportionateamount of time, effortand costbeingexpendedto reach a conclusion.It is also an approach

that could result in thecreation of disputesthat may not otherwisearise. For example, aparty may see a tacticalbenefit to raisingarguments averinterpretation, thustaking advantage of thelack of predictability ofoutcome or the hugecosts of such a wide­ranging enquiry. This isin contrast to theapproach in manyconstruction contractsthat contain provisionsaimed at disputeavoidance throughmechanisms such asmediation, adjudicationand dispute boards. Lake Emoss,

CONSTRUCTIONLAW INTERNATIONAL Volume 10 Issue3 September 2015

Swisslaw goes even further, however, and ifthe parties' intentions cannot be established,it allows the court to establish the presumedintention in accordance with the principle oftrust, basically an application of the principlesof good faith to parties' declarations ofintention, which must surely lead to furtheruncertainty for parties.It is true that in the final analysis, having

been presented with all of the evidence, theSwiss courts must have a 'serious reason' tomove away from the literal meaning of thetext. However, the route to that conclusionappears circuitous and painstaking.It may be said that, despite the differences

in the UK and Swiss approaches, there maynot be, in practice, wildly diverging outcomes.However, this then begs the question of whatbest serves the needs of internationalconstruction contracts.It is considered that what business needs is

certainty, predictability, expeditious progressand proportionate costs in resolving disputes,when and where these arise. The restrictions onevidence available to parties to interpretcontracts in the UK are arguably more likely toachieve these aims than the much wider enquiryavailable under the Swissrules. In those caseswhere the contract wording does not in fact

match parties' intentions,rectification (along withwider evidence of pre­contract negotiations)remains possible.

Arguments for theSwisspositionSAM MossAs already mentionedabove, the UK andSwisslawapproaches tocontract interpretationare far closer than theyappear at first sight. Inparticular, an 'objective'in terpretation similarto the modern UKlaw approach is thepredominant form ofinterpretation underSwiss law, and courtsor tribunals applyingSwisslawwillonlymoveaway from the text of

l and a hydroelectric dam near the village of Chatelard, Switzerland. the contract if there is

CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 3 September 2015

[The UK] rule of interpretationrecognisesthat commercialcontracts are not made in avacuum ... there is recognitionthat the context of theagreement is important

compelling evidence that it does not reflectthe intentions of the parties. Therefore,the argument that the Swisslaw approachcould lead to greater uncertainty andunpredictability has no basis.Nevertheless,there are differencesthatmake

the Swiss law approach better suited tointernational constructioncontracts.The mostsignificantof these is that Swisslawdoes notimposeanyrestrictionson the typesofevidencethat canbe adduced in aidof interpretation.Incontrast, while the modern approach tointerpretation under UKlawallowsajudge orarbitrator to look to a broad range ofcircumstances,twoimportantformsofextrinsicevidenceremain excluded,namelythe parties'negotiationsand subsequentconduct.Both of these types of evidence can be

important tools to interpret a contract, andthis is particularly true of internationalconstruction contracts, as they are often:• concluded between parties that havedifferent cultural, commercial andlegal backgrounds (unlike domesticconstruction contracts);

• concluded by party representatives withan imperfect command of the language ofthe contract, which can lead to imperfectlyworded clauses, with misused words andconnectors,grammaticalerrors, convolutedor unusual sentence structures, and literaltranslations that the parties mayor maynothave understood in the sameway;

• basedon standardformcontractswithwhichone or both of the parties are not familiar,and that are sometimes mechanicallyadopted without anysignificantnegotiationor afullunderstandingoftheir requirementsand implications;and

• governed by lawsthat are at odds with theorigins of the contractual terms the partieshave negotiated.

For instance, when faced with a clausecontaining misused terms, it may only bepossibleto shed light on the parties' intention- and therefore to avoid holding them to

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UK VERSUS SWISS LAW

an interpretation which is contrary to theirintention - byresorting to their negotiations.UKlawyersoften argue that admitting such

evidence would lead to uncertainty in theinterpretation of contracts, and to longerand costlier proceedings as a result of courtsand tribunals being facedwith large volumesof extrinsic evidence. However,the outcomeof contract interpretation cases are in anyevent difficult to predict, and the exclusionof certain evidence may in fact promoteuncertainty by allowing a party to argue foran interpretation that it knows was notintended. The floodgates argument is alsolargely speculative, especially taking intoaccount that the admission of such evidencefor the purposes of interpretation is 'perfectlyworkable+' in civilianjurisdictions. Even anumber of prominent common lawcommentators argue that there are noconvincing reasons for the exclusion of theparties' negotiations and subsequentconduct, and predict that UK law willultimatelyshed the exclusion."The utility of evidence of the parties'

negotiations and subsequent conduct isalso recognised by UK practitioners whooften seek to invoke myriad exceptionsunder UK law to introduce such evidence,for instance, by relying on the doctrine ofrectification. While these exceptions openthe door to such evidence in certaincircumstances, they are complex and theirscopes are often uncertain. As a result,they can lead to disputes over theadmissibility of evidence, potentiallyadding to the costs of proceedings, andrequire judges and arbitrators to makedifficult and seemingly artificialdistinctions to decide whether or notevidence is admissible. In contrast,' theSwiss approach is simple and eschewsdisputes over the admissibility of evidence,as there are no restrictions on admissibility.Finally,the abilityunder Swisslaw to look

to the parties' real intentions allows for agreater flexibility and sensitivity to therealities of international constructioncontracts. In addition, despite the similaritiesbetween Swiss law and the modern UKapproach to contract interpretation, Swisslaw is not burdened by the heritage of aliteralist approach, which has an impactmore generally on the flexibility of itsapproach to interpretation.

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Shona Frame is a partner at CMS CameronMcKenna and can be contacted at [email protected]. Sam Moss is at Lalive in Genevaand can be contacted at [email protected]

NotesThis article is based on the authors' presentations atthe ICP Committee's session entitled 'Saywhat?Therules of interpretation at civiland common law' at the2014 IBAAnnual Conference in Tokyo.ICC International Court of Arbitration, '2013Statistical Report' (2013) 25(1) ICC InternationalCourt of Arbitration Bulletin 5. The ICC's statisticsshow that, in the cases submitted to ICC arbitration,15.64 per cent of contracts that contained a choiceof law provided for the application of English law,while 10.09 per cent provided for the application ofSwisslaw.

2 William WMcBryde, The Law of Contract in Scotland(3rd edn, W Green/Scottish Universities LawInstitute, 2007).

3 Investo-rsCompensationSchemev WestBromwichBuildingSociety[1997] UKHL28.

4 The Starsin [2003] UKHL 12.5 Credential Bath Sheet v Venture Investment Placement

[2007] CSOl-l208.6 Ibid.7 Bank of Scotlandv Dunedin 1998SC657.8 PrennvSimrnons[1971]l WLR1381 (HL).9 TheRio Assu (N02) [1999] lLloyd's Rep 115.10 ChartbrookHomesvPersimmonHomes[2009]1 AC1101.Il Luminar Lava Ignite v Mama Group [2010] CSIH 01.12 Art 18(1) CO (unofficial translation): 'In order to

decide on the form and clauses of a contract, it isnecessary to seek the real and common intentionof the parties, instead of relying on the incorrectexpressions and terms that the parties used in erroror with the aim of dissimulating the real nature ofthe contract.'

13 See Bénédict Winiger, 'Des obligations resultant d'uncontrat', in LucThévenoz & FrankWerro, CommentaireRomand.' CodedesobligationsI -Art. 1-529CO(2nd edn,Basel:Helbing Lichtenhahn. 2012) Art 18,N 32-41.

14 DIT 136III 186,para 3.2.1;DIT 130III 417,para 3.2.15 DIT 140V 145, para 3.3; DIT 132V 286, para 3.2.1;

DIT SJ 1996549, para 3 (emphasis added). See alsoDIT 125 III 435, para 2(a) (aa); 129 III 118,para 2.5;DIT 123 III 165, para 3(a).

16 They do not, however, include the conduct of theparties after the conclusion of the contract, which,according to the SwissSupreme Court, only providesan indication of the parties' real intentions at thetime of concluding the contract, but not of theirobjective intentions (DIT 133 III 61, para 2.2.1;DIT5A_204/2009, para 4.2.3).

17 DIT 129 III 702, at para 2.4.2.18 DIT 129 III 702, para 2.4.1.19 DIT 5C.21/2007 dated 20Apri12007, para 3.1.20 See Wolfgang Wiegand, 'Erster Abschnitt: Die

Entstehung durch Vertrag' inHeinrich Honsell,NedimPeterVogt&WolfgangWiegand, eds.,BaslerKommentar- Obligauonenreclü1- ATt. 1-529OR (5th edn, Basel:Helbing Lichtenhahn. 2011),Art 18,N. 14.

21 DIT 121 III 118, para 4(b) (aa); Wiegand, Art 18,N.16;Bénédict Winiger, 'Des obligations résultant d'uncontrat', in LucThévenoz& FrankWerro, Commentaire

CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 3 September 2015

Romand: Code des obligations 1- Art. 1-529 CO(2nd edn,Basel:Helbing Lichtenhahn, 2012) Art 18,N 24. SeePeter Jäggi & Peter Gauch, Zürcher Kommentar- ATt. 18OR, Auslegungder Verträge (3rd edn, Zurich: Schulthess,1980) at N 33, 42, 46.

22 Peter Gauch, 'Auslegung, Ergänzung und Anpassungschuldrechtlicher Verträge', in Die Rechtsentwichlungand der Schwelle zum 21. Jahrhundert: Symposiurn zumSduS�ixerisdienPnuatredü (Zurich:2001)209,at para 3(b).

23 See n3 above.24 Stefan Vogenauer, 'Interpretation of Contracts:

Concluding Comparative Observations' in Andrew

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Burrows & Edwin Peel (eds), Ctmtracl Tenns (Oxford:Oxford University Press, 2007) 123, at 138.

25 DonaldNicholls,'MyKingdomfor aHorse:TheMeaningof Words' (2005) 121 Law Quarterly Review 577, at582-583;DavidMcLauchlan, 'Contract Interpretation:What Is ItAbout?' (2009) 31(5) SydneyLawreview5, at8;Gerard McMeel,'Prior Negotiations and SubsequentConduct: The Next Step Forward for ContractualInterpretation' (2003) 119LawQuarterly Review272;Andrew Burrows, 'Construction and Rectification' inAndrew Burrows & Edwin Peel (eds), Contrnci Terms(Oxford: Oxford UniversityPress,2007) 77, at 84.

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