Interpretation of contract: look at the quality of the drafting

There cannot be a lawyer in the land who is not, from time to time, confronted with the problem of the interpretation, construction, and meaning of a contract. The canons of construction are well known. They often conflict. Interpretation may not be so easy.

The issue in Wood v Capita Insurance Services Ltd [2017] UKSC 24 was the interpretation of an indemnity clause in a commercial contract between commercial parties. In a lucid and elegant judgment Lord Hodge summed up the principles, such that in many cases there will be no need to go further:

‘The court invited [counsel for Capita] to present his case without having to refer to the well-known authorities on contractual interpretation, with which it was and is familiar’.

‘The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning’.

The factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations, is potentially relevant.

Which construction is more consistent with business common sense? In striking a balance between competing interpretations the court must consider the quality of the drafting of the clause. With the benefit of hindsight one party may have agreed to something which does not serve their interest. Possibly in the course of negotiating a compromise agreement the negotiators were unable to agree more precise terms.

Both textualism – the actual text – and contextualism – the context in which the contract was made – are likely to be in play. Both approaches should be applied and balanced.

Textual analysis may predominate because the contract was complex and sophisticated, and negotiated and prepared and drafted with the assistance of skilled professionals.

Conversely, contextualism may predominate because of the informality of the situation and the absence of skilled professionals.

Sometimes even the skilled professionals do not achieve a logical and coherent text, perhaps because of the different aims of the parties, failures in communication and understanding, different drafting practices, deadlines, or pressures to compromise and to agree. So even the professionally drawn contract may require reference to the context.

Lord Hodge added: ‘The recent history of the common law of contractual interpretation is one of continuity rather than change. One of the attractions of English law as a legal system of choice in commercial matters in its stability and continuity, particularly in contractual interpretation’.

Wood involved an indemnity clause, and the problems were the nature of the loss and damage for which there was liability, who was liable, and for which period of time. The relevant factors were:

• Pre-contract negotiations were to be ignored.

• The contract was a commercial contract.

• Business common sense should be applied.

• In an indemnity clause the party giving the indemnity will be seeking minimum exposure.

• The parties were knowledgeable and sophisticated in the industry.

• The contract should be looked at as a whole.

• The drafting was not precise, but avoidably opaque, indeed tautologous in places, and the punctuation erratic. ‘Verbal exuberance’ and ‘torrential drafting’ were not inappropriate descriptions.

• An advocated remarkable interpretation would be seen as unlikely to be correct.

• The correct interpretation of the contract may mean a poor bargain for one party, but they are nonetheless bound.

A comparable problem arose over a contract for an advance payment bond in Rainy Sky SA v Kookmin Bank [2011] UKSC 50:

• The judge must apply business common sense, looking for a commercially sensible interpretation.

• What did the parties intend to mean by their language?

• What was the context?

• What would a reasonable informed person have understood the words to mean?

• Businessmen may not be too bothered by the niceties of language.

Unambiguous words mean what they say, whatever the improbable or surprising consequences. It is not for the court to rewrite the contract.

The leaseholder

A similar problem has arisen over a formula in leases providing for huge accelerating service charges and ground rents imposing cruel burdens on the leaseholders.

The purchasers of long leases on new houses are finding the accelerating ground rents render the opportunity to acquire the freehold reversion impossible.

In a brave attempt to interpret the lease in a less unfavourable way to the leaseholder Lord Carnwath found himself in a minority of one in Arnold v Britton [2015] UKSC 36. Remedial legislation is necessary.

Alec Samuels is a barrister and former reader at Southampton University