Did I agree that?!
In a series of five articles Stephen Brown and Sappho Dias of 4-5 Gray's Inn Square will look at the principles of interpretation of contracts, consider the pitfalls and provide some drafting tips.
Whether one is drafting contracts, approving them, acquiring them, advising on what they mean or disputing them, understanding how the courts find the meaning of an agreement is essential. The courts (and within that we include any arbitration concerning an agreement subject to English law) will determine what the parties agreed by reference to a set of principles and it naturally makes sense for anyone involved in creating or interpreting contracts to apply the same principles.
This series of short articles will examine the principles as enunciated in four leading cases, all from the Supreme Court (in one or other guise), which between them spell out very clearly the principles to be applied. These are:
- Investors Compensation Scheme LTD v West Bromwich Building Society and others [1998] 1 WLR 896 which sets out the basic rules on how the court goes about construing a contract and includes consideration of the terms read as a whole against the factual background;
- Rainy Sky S.A. and others v Kookmin Bank [2011] UKSC 50 which deals with the role played by business common sense in the interpretation of a contract;
- Attorney General of Belize and others v Belize Telecom Ltd and another [2009] 1 WLR 1988, which deals with implied terms; and
- Chartbrook Limited v Persimmon Homes Limited & others [2009] UKHL 38, which deals with rectification.
(There are cases which add refinements, but these are the main authorities.)
How the problems arise
Before we look at the solutions in subsequent articles, in this article we look at how the problems can arise in the first place. As we know, all manner of things give rise to disputes over the meaning of contracts.
The inescapable ambiguity of language is the main culprit. "Dogs must be carried on the escalator." Does that mean: (i) if you have a dog you have to carry it, or (ii) you are not allowed on the escalator without a dog? It's capable of both meanings but in context we all know that it means the former. Mrs Malaprop refers to "allegories on the banks of the Nile". In context we all know she means alligators, not a narrative symbolising an abstract meaning. Unfortunately, when it comes to contracts, it is quite often not so easy.
We will look at how the court deals with ambiguity and context when we consider West Brom in the second article in this series. We will look at the role played by business common sense when we consider Rainy Sky in our third article.
Perhaps in modern times, another common reason for disagreement is the complexity of the contract. This can lead to inconsistency but also, quite often, the parties were simply unable to contemplate at the outset the issues that would arise during the life of the contract, particularly a relational contract. The contract simply omits to deal with a particular set of circumstances. We will look at the implication of terms when we consider Belize Telecom in our fourth article.
Thirdly, despite the large teams of expert draftsmen who often apply their skills to capturing the agreement, there is quite often something that gets left to the last minute or agreed in order to get the deal done. Sometimes it is not properly documented, other times it is not properly thought through. Sometimes it is deliberately left vague. We will look at this in the context of mistake and its remedy, rectification, when we consider Chartbrook v Persimmon in our final article.
In the next article we look at the construction of agreements, including the Court's approach to factual background and the meaning of words.
Stephen Brown and Sappho Dias are barristers at 4-5 Gray's Inn Square.
