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McMeel on The Construction of Contracts, 3rd Edition by McMeel, Gerard (12th October 2017)

Part I The General Part, 3 The Objective Principle of Construction

From: McMeel on The Construction of Contracts (3rd Edition)

Gerard McMeel

Subject(s):
Formation of contract — Interpretation of contract — Performance of contract

(p. 135) The Objective Principle of Construction

Overview

3.01  The appropriate test for ascertaining the intentions of the parties to a transaction is a fundamental question for courts undertaking the task of construction of a contract. Every legal system faces a choice as to how those intentions are to be judged. A layperson may think that the easiest course is to ask the parties themselves. Such an approach concerns itself with the actual or subjective intentions of the parties. A principal reason why we give effect to promises or (p. 136) agreements is because a promisor has undertaken to be bound. Therefore it might be thought that the parties’ actual intentions are crucial. This is especially so if the parties’ actual intentions more or less coincide. However, another rationale for the enforcement of contracts is the reasonable expectation of the community in general, and individual contractors in particular, that promisors will perform in accordance with their undertakings. The justifiable reliance of the recipients of promises on the apparent meaning of the words used requires protection. This favours an objective approach, concentrating on the question of how the promisor manifested its intentions. The issue is not what the promisor meant to say or write, but what the promisor said or wrote. English law is firmly committed to this latter, objective approach. A further matter of policy is the desire for certainty in commercial transactions. Especially where standard transactions, forms, and clauses are concerned, the desire for certainty and predictability tends to reinforce the commitment to objectivity. The argument for objectivity is further reinforced when contractual documents are intended for commercial circulation (such as bills of lading) or it is intended that rights may be assigned.

Formation and construction

3.02  English contract law’s objective principle was first worked out in detail in the context of formation cases where the courts had to construe the language of negotiations to determine whether statements or correspondence had crystallized into a bargain.1 Whilst the story is not easy to trace it seems that in some nineteenth-century cases a more subjective approach to formation prevailed. This was likely to have been influenced by continental writings on civil law,2 where a more subjective approach based on the ‘will theory’ held sway, and may have been the (p. 137) source for references to consensus ad idem and ‘meeting of the minds’ in the case law.3 However by the late nineteenth century, and certainly by the time of the leading case of Smith v Hughes,4 the objective approach was firmly entrenched in the context of contract formation. At the same time, where it was not the existence of the contract but rather determining its content that was in issue, there were clear statements of principle during the nineteenth century that an objective approach was also applied to construction. More recent authority has explicitly extended the objective principle to the related doctrines of implication of terms and the rectification of documents.

‘Promisee objectivity’ and ‘detached objectivity’

3.03  Having stated that English law adopts an objective approach to ascertaining intention, it is necessary to analyse further what that entails. Academic analysis distinguishes a number of different formulations of the objective principle, but it is submitted that in the result there are two principal formulations, namely promisee objectivity and detached objectivity.5

3.04  ‘Promisee objectivity’ construes the language of the promisor from the perspective of a reasonable person in the position of the promisee. That is, words are to be construed as reasonably understood by the person to whom they were addressed. ‘Detached objectivity’ or ‘fly-on-the-wall objectivity’ adopts the perspective of a reasonable bystander, or eavesdropper on the parties. It may be doubted whether a different result would obtain in practice in many instances. Where the courts have addressed the issue of the precise formulation of objectivity in the context of contract formation, the general trend of authority favours the ‘promisee objectivity’ approach.

3.05  With respect to the construction of contracts, whilst some authorities in the context of contractual interpretation favour promisee objectivity,6 the predominant trend in the English cases appears to signal a preference for detached objectivity. (p. 138) Indeed recent judgments of Lord Hoffmann appear to have entrenched what appears to be the ‘fly-on-the-wall’ theory in respect of both interpretation and implication of terms, and also as having a role to play in respect of rectification.

Lord Denning and ‘fly-on-the-wall objectivity’

3.06  The judgments of Lord Denning emphatically endorsed ‘detached objectivity’.7 For example, in the well-known rectification case concerning horsebeans and feveroles— Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd 8—Denning LJ expressed forcibly his ‘fly-on-the-wall’ theory of the objective principle of contract formation, insisting that the courts do not ‘look into the inner minds of the parties—into their intentions’.9 That approach was criticised by Glanville Williams, who described Denning LJ’s remarks, which were not necessary for the decision in the case, as ‘probably the most forcible expression of the “objective” theory of contract that have yet fallen from an English judge’. Williams suggested that if both parties had testified that they used the term ‘horsebeans’ to mean ‘feveroles’ then the contract would have been for feveroles.10

Objectivity and the construction of contracts

3.07  Whilst Denning LJ’s endorsement of ‘detached objectivity’ in Rose v Pim had been viewed as controversial, it now has the imprimatur of Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd.11 That endorsement requires further analysis. The division of objectivity into the ‘promisee’ and ‘detached’ species may be more difficult to apply to construction disputes, where usually there is single document, and both parties are treated as co-authors. Some of the early modern case law favours ‘promisee objectivity’. Such a perspective appears clearly in The Nema12 where Lord Diplock said:

The object sought to be achieved in construing any commercial contract is to ascertain what were the mutual intentions of the parties as to the legal obligations each assumed by the contractual words in which they (or brokers acting on their behalf) chose to express them; or, perhaps more accurately, what each would have led the other reasonably to assume were the acts that he was promising to do or to refrain from doing by the words in which the promises on his part were expressed.13

(p. 139) However the formulation of Lord Hoffmann in the first of his five principles in the leading case of Investors Compensation Scheme Ltd v West Bromwich Building Society appears to endorse the ‘fly-on-the-wall approach:14

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.

It can be argued that Lord Hoffmann’s approach is not wholly detached. Whilst the ‘reasonable person’ represents neither of the parties, this may be to emphasize that in most construction disputes it is the document which is speaking (and therefore both parties are uttering). Two aspects of the formulation may be seen as favouring a characterization of this as ‘promisee’ rather than ‘detached’ objectivity. First, Lord Hoffmann prefaced his principles by commenting on the assimilation of ‘the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life’. Utterances in everyday life are interpreted by the intended recipient. Secondly, equipping the reasonable man with ‘all the background knowledge’ reasonably available to the parties ‘in the situation in which they were at the time of the contract’ places him in the shoes of the party or parties to which the document is addressed, rather than detaching him from the process, or requiring him to climb the walls. Nevertheless the safer view appears to be that the trend of this and other recent authorities is to commit English law to a detached theory of objectivity in respect of contractual construction, even though ‘promisee objectivity’ has clearly been adopted for questions of contractual formation. The autonomy of the document, the need for certainty, and the distrust of recourse to subjective intentions are all suggestive that such a policy choice has been made. It can also be argued that detached objectivity is particularly appropriate for commercial contracts, especially where standard forms are employed or where third parties may have acquired rights.

Objective test of formation is an amalgam of objective and subjective

3.08  The cases on formation make it clear that the principle is not unqualified. Where the rationale of the objective approach—the reasonable expectations or justified reliance of the other party—are not a factor in a particular case, the rule does not apply. In the context of contract formation, the recipient of the offer who knows that its terms do not reflect the actual intention of the offeror cannot insist on accepting it. This is the ‘promisee objectivity’ principle, and cannot be reconciled with the theory of ‘detached objectivity’.

(p. 140) Does the objective test of construction have a subjective element?

3.09  The question whether the objective principle of construction on occasion gives way to a subjective understanding, or at least a shared or mutual subjective understanding, is controversial. In the context of contractual interpretation, where the parties have a shared understanding of the meaning or significance of particular words which differs from their conventional meaning, the question arises whether the parties’ own understanding prevails. The commentary of Glanville Williams on Rose v Pim favours the objective approach yielding to a common subjective approach in such situations.15 This would accord with ‘promisee objectivity’: where the reason for the objective principle—the protection of the reasonable expectations of the other party—is not in play, there is no need to apply the objective test. If both parties actually understood ‘horsebeans’ to mean ‘feveroles’ then the contract should be for feveroles.

3.10  However it is submitted that as a matter of policy English law is now committed to ‘detached objectivity’. Evidence of the parties’ actual intentions will not be admissible to affect the construction of their document. However, such evidence is admissible with respect to the legitimate escape routes of rectification and estoppel by convention. As a matter of authority and policy, English law will only consider evidence of a common subjective understanding for the purposes of these distinct doctrines.

The role of the ‘intentions of the parties’

3.11  As a result of the objective principle the concept of the ‘intention of the parties’ is often dismissed as a legal fiction. It is submitted that such an approach goes too far. In the vast majority of cases a party’s actual intention does coincide with the manifestation of that intention. When it does not, public policy usually favours the expression of intention to govern to protect the other party’s reasonable expectations or actual reliance. Similarly it is clear that at the moment of formation both parties are united in doing a deal on the terms agreed. However, the prevalence of disputes does suggest that parties may not always be of one mind as to the implications of each provision. In these circumstances it makes more sense to resort to the concept of the ‘reasonable person’ in the position of the parties to reconcile the differences which arise. The more recent pronouncements on construction have witnessed greater prominence for the concept of the reasonable person over the more traditional intention of the parties. For example, in Investors Compensation Scheme Ltd v West Bromwich Building Society Lord Hoffmann’s first principle—the concept of the ‘intentions of the parties’—is noteworthy by its absence.

(p. 141) The Objective Principle in Contract Formation

3.12  The principle of objective construction of the language of contract negotiations may in some cases heavily qualify the proposition that contract law is based upon promises or agreements, or involves obligations which are voluntarily undertaken. Broadly speaking, if the judges were concerned with the subjective intentions of negotiating parties they would be entering into an inquiry as to what a person meant to say or write, which may not necessarily correspond to the external outcome. In contrast, English law has always concerned itself with discerning what was actually communicated by a party during negotiations.

3.13  Most obviously, this principle applies where a party is merely dissembling and whilst appearing to be serious about an undertaking has no genuine intention of complying with it. Nevertheless such a party would be bound by his outward behaviour. As Hobhouse LJ stated in Bowerman v Association of British Travel Agents Ltd: ‘A contracting party cannot escape liability by saying that he had his fingers crossed behind his back.’16 It is not just the two-faced negotiator who is bound, however. Where a party makes a mistake in expression and is unable to correct any resulting misunderstanding before a proposal is accepted, that party will be bound by what was said or written regardless of his actual intended meaning. It is the outward appearance of contractual intention, at least if relied upon in good faith by either party, which binds. In everyday life, most commonly the subjective intention of a party and its outward manifestation will coincide; however where they do not it is the latter external manifestation of intent which prevails. The reason for the objective principle is usually said to be commercial convenience in that busy people cannot concern themselves with going behind the apparent intentions of those with whom they are dealing.

3.14  The objective principle is itself qualified by a subjective requirement. If it can be shown that the other party to the contract knew or ought to have known that the objective appearance of intention did not in fact coincide with the subjective intentions of the party then no contract will result. The rationale of the objective principle is that it has a protective function with respect to people who rely in good faith upon the words or utterances of others. This protective function is redundant where the other party appreciates that a mistake has been made. For example, if a company posts on its website that it is selling the latest specification of DVD player at a price of £10 when its intention was to sell at a price of £100, the question as to whether any contract results will depend upon the state of mind of the company’s potential customer. If such a customer genuinely believes that the company intends to be bound on the terms actually expressed (p. 142) then a contract is formed in English law despite the fact that the company never intended to deal on such terms. In contrast, if such a potential customer knows, despite outward appearances, that the company does not intend to be bound on these terms then no contract will result. A more difficult question arises where such a customer has not formed any conclusion about the company’s intentions. The general view appears to be that such a customer must actually hold the belief that the company intends to be bound, and that therefore there would be no contract on these facts.

3.15  There are accordingly two questions which must be asked before it can be said whether a contract has been formed. First, how would a reasonable person construe the offer made? Secondly, how does the actual recipient of the offer construe the other’s intentions? If the answers to these two questions coincide in the sense that both the reasonable and the actual recipient identified the same terms then a contract will result. If the answers do not coincide there will be no contract.

Two nineteenth-century perspectives

Raffles v Wichelhaus

3.16  At one stage in the nineteenth century there was some authority suggesting that a subjective approach was adopted in the context of contract formation, perhaps influenced by the civil law approach. The principal case is Raffles v Wichelhaus17 in 1864. It concerned an import sale of Surat cotton from India to Liverpool. The seller argued that he had sold a commodity ‘ex ship’, called Peerless, which had sailed from Bombay in December, and the buyer had wrongfully refused to accept delivery. The buyer insisted that the contract referred to another ship also ironically enough called Peerless which had sailed in October, from which he was willing to take delivery. The case was argued by way of demurrer, or in effect a preliminary issue as to whether the buyer could raise a defence based on his alleged mistake. It is often incorrectly assumed that the buyer won the case, rather than just this preliminary argument, in many of the juristic discussions of it.

3.17  The report of the case simply records counsels’ argument and the occasional judicial intercession. In essence the plaintiff seller was relying on the parol evidence rule— ‘I have a cargo of that description on a ship bearing that name. You cannot go outside the four corners of that agreement’. However Pollock CB’s interventions suggest that he considered it to be a jury question whether both parties meant the same ship. Further, argument was stopped soon after the buyer’s counsel insisted that parol evidence should be admissible to show that the two parties meant two different things. He further submitted if that were so there would be (p. 143) no binding contract. The seller lost, although in effect only on the preliminary issue as to whether he could succeed on the written contract alone.18 It would be interesting to know what kind of ‘parol evidence’ the buyer was intending to lead at trial. If it was evidence of manifested intention at the time of the negotiations on the part of the buyer identifying or suggesting that the subject matter of the contract was the earlier shipment the case may be reconcilable with orthodox objective theory. In contrast, if it was simply a statement that the buyer meant a different ship to the seller (but no communication to that effect had crossed the line between the parties) it appears to require an actual consensus. The case yields little textual material evidencing whether a subjective or an objective approach was to be adopted.19 It probably proceeded on a subjective approach, if the court had any regard to theory. It therefore runs counter to the next case which marginalized Raffles. Indeed with English law’s subsequently expressed firm commitment to objectivity it is difficult to find any progeny of Raffles in the law reports. The case tends to reside in the books as one of a handful of instances of the parties being at such cross-purposes that no contract can be discerned deploying the ordinary rules of contract formation.

Smith v Hughes

3.18  In Smith v Hughes,20 the leading case on mistake as to terms, the plaintiff was a farmer and the defendant was the owner and trainer of racehorses. The plaintiff farmer offered to sell the defendant oats and gave him a sample. The next day the defendant trainer agreed to buy the corresponding bulk of oats. Subsequently the defendant trainer refused to accept the oats on the ground that they were new oats, and he thought he was buying old oats. There was conflict of evidence at the Surrey County Court in Epsom. The plaintiff farmer’s evidence was that oats were scarce. He testified that he had told the defendant trainer that he had some ‘good oats for sale’. When cross-examined the plaintiff farmer said ‘I did not know that trainers never use new oats … Nothing was said about it: The word “old” was not mentioned by either of us’. In contrast, the defendant trainer’s evidence was: ‘I said I was always a buyer of good old oats … Trainers, as a rule, use old oats.’ When cross-examined the defendant trainer hesitated and contradicted himself somewhat as to whether the word ‘old’ was used at the time of making the contract. The judge asked the jury two questions. First, if the word ‘old’ was used he directed that there should be judgment for the defendant trainer. Secondly, if the word was not used (p. 144) the question was whether the plaintiff farmer believed the defendant trainer to believe that he was contracting for old oats. In that situation there should also be judgment for the defendant. The jury gave judgment for the defendant. However we do not know which of the two questions they were purporting to answer. The plaintiff farmer appealed to the Court of Queen’s Bench, which ordered a new trial.

3.19  Hannen J’s direction to the jury was that it had to find not simply that the farmer believed the trainer to believe that he, the trainer, thought he was buying old oats, but that the farmer should believe that the trainer believed that the farmer was contracting to sell old oats. This distinction between a mistake as to the nature or quality of the subject matter (in this case the age of the oats), which would not exculpate the trainer from the apparent contract, and the mistake as to the terms of the contract, which would, is a subtle one but is often described as fundamental. Accordingly a unilateral mistake by one party to a contract as to the quality of the subject matter is irrelevant. The plaintiff farmer was entitled to keep the defendant trainer to the apparent bargain providing the farmer was unaware of the trainer’s mistake as to what the terms of the contract were. Therefore there could be a contract although there was no actual agreement and no coincidence of the subjective intentions of the party. However if there was a unilateral mistake as to terms by one party, and the other knew of that mistake, there would appear to be no contract. This appears to be one of only two situations in English contract law in which a unilateral mistake may exculpate a party.21

3.20  Most significantly, in Smith v Hughes Blackburn J, the leading light of Victorian judges in the contractual field, famously entrenched the objective approach:

If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.22

3.21  The approach is not purely objective as the other party must also share the understanding of the reasonable man. If his subjective understanding does not coincide with the reasonable view there is no need to extend the protective rule of the objective principle to him.23

(p. 145) Twentieth-century case law: qualified objectivity

The Hannah Blumenthal

3.22  This and the next case concerned stale arbitration agreements.24 In The Hannah Blumenthal 25 the problem for the court was that an agreement to refer a commercial dispute to arbitration, as an alternative means of dispute-resolution to a claim in the courts, had ground to a halt. The dispute arose out of a contract entered into in 1969 between the parties for the sale of a ship, which contained an arbitration clause specifying that arbitration would be in London. The buyers complained of engine defects in the vessel in 1972. Accordingly both buyer and seller each appointed an arbitrator, but did not agree upon the appointment of the third arbitrator as required by the contract. The parties exchanged pleadings, describing the dispute in 1974. Nothing then happened for three years when the solicitors for the parties exchanged documents relating to the dispute, including the ship’s logbook. In 1980 the buyer’s solicitors served an expert’s report and at the same time the seller’s solicitors sought to trace witnesses. In 1980 the sellers sought a declaration that there had been an implied contract between the parties to abandon the arbitration. The House of Lords unanimously rejected a cross-appeal by the sellers, arguing that the contract was abandoned by agreement.

3.23  According to the principal speech of Lord Brandon of Oakbrook the issue whether there was an implied contract of abandonment was a question of fact:

The concept of the implied abandonment of a contract as a result of the conduct of the parties to it is well established in law. … Where A seeks to prove that he and B have abandoned a contract in this way, there are two ways in which A can put his case. The first way is by showing that the conduct of each party, as evinced to the other party and acted on by him, leads necessarily to the inference of an implied agreement between them to abandon the contract. The second method is by showing that the conduct of B, as evinced towards A, has been such as to lead A reasonably to believe that B has abandoned the contract, even though it has not in fact been B’s intention to do so, and that A has significantly altered his position in reliance on that belief. The first method involves actual abandonment by both A and B. The second method involves the creation by B of a situation in which he is estopped from asserting, as against A, that he, B, has not abandoned the contract …26

Efforts, however protracted, by the sellers’ solicitors to trace witnesses were inconsistent with any such intention.

(p. 146) 3.24  According to Lord Diplock:

To the formation of the contract of abandonment, the ordinary principles of the English law of contract apply. To create a contract by exchange of promises between two parties where the promise of each party constitutes the consideration for the promise of the other, what is necessary is that the intention of each as it has been communicated to and understood by the other (even though that which has been communicated does not represent the actual state of mind of the communicator) should coincide. That is what English lawyers mean when they resort to the Latin phrase consensus ad idem and the words that I have italicized are essential to the concept of consensus ad idem, the lack of which prevents the formation of a binding contract in English law.27

3.25  Furthermore, in his Lordship’s view:

The rule that neither party can rely upon his own failure to communicate accurately to the other party his own real intention by what he wrote or said or did, as negativing the consensus ad idem, is an example of a general principle of English law that injurious reliance on what another person did may be a source of legal rights against him. I use the broader expression ‘injurious reliance’ in preference to ‘estoppel’ so as to embrace all circumstances in which A can say to B: ‘You led me reasonably to believe that you were assuming particular legally enforceable obligations to me,’ of which promissory or High Trees estoppel[28] … affords another example; whereas ‘estoppel,’ in the strict sense of the term, is an exclusionary rule of evidence, though it may operate so as to affect substantive legal rights inter partes.29

3.26  Lastly, according to Lord Brightman, rejecting a submission by the sellers: ‘The test in my opinion is not wholly objective.’ His Lordship formulated the test as follows:

To entitle the sellers to rely on abandonment, they must show that the buyers so conducted themselves as to entitle the sellers to assume, and that the sellers did assume, that the contract was agreed to be abandoned sub silentio. The evidence which is relevant to that inquiry will consist of or include: (1) What the buyers did or omitted to do to the knowledge of the sellers. Excluded from consideration will be the acts of the buyers of which the sellers were ignorant, because those acts will have signalled nothing to the sellers and cannot have founded or fortified any assumption on the part of the sellers. (2) What the sellers did or omitted to do, whether or not to the knowledge of the buyers. These facts evidence the state of mind of the sellers, and therefore the validity of the assertion by the sellers that they assumed that the contract was agreed to be abandoned. The state of mind of the buyers is irrelevant to a consideration of what the sellers were entitled to assume. The state of mind of the sellers is vital to a consideration of what the sellers in fact assumed.30

(p. 147) Both the former category of evidence and the latter negated any contract in this case.

3.27  It is submitted that all the formulations of the three Law Lords are reconcilable. However Lord Diplock’s formulation of the test is the easiest to apply. There are two questions which must be asked. First, how would a reasonable person construe the offer made? Secondly, how does the actual recipient of the offer construe the other’s intentions? If the answers to these two questions yield the same answer, in the sense that both the reasonable and the actual recipient identified the same terms, then a contract will result. If the answers do not coincide there will be no contract in English law. If that two-stage test is followed, English law is clear. However the next case unfortunately muddies the water.

The Leonidas D

3.28  In The Leonidas D31 another dispute arose from an arbitration clause contained in a charterparty of a vessel entered into in April 1975. There were disputes between the parties and in April 1976 each party appointed an arbitrator, but no third arbitrator was ever appointed as required by the agreement. No further steps were taken to pursue the arbitration until August 1981 when the charterers’ solicitors requested the ship owners to admit liability, and, no admission being forthcoming, it served its points of claim on the other party. At first instance Mustill J granted an injunction restraining the charterers from taking any further steps in the arbitration because he held that the charterers’ silence amounted to a tacit representation that they did not intend to pursue the claim and that the owners by their inactivity had accepted that tacit offer.

3.29  The Court of Appeal allowed an appeal and held that there was no contract of abandonment. Robert Goff LJ (giving the judgment of the court) considered that ‘three distinct views’ emerged from the decision of the House of Lords in The Hannah Blumenthal and that the ‘three approaches are not identical’. Curiously his Lordship suggested: ‘Lord Diplock’s formulation … appears to us to involve the requirement that the actual intentions of both parties should in fact coincide.’32 On the basis of the alleged inconsistency of approach the Court of Appeal preferred the approach of Lord Brightman.

3.30  Another fundamental objection in the view of the Court of Appeal was the rule that silence is equivocal: ‘We have all been brought up to believe it to be axiomatic that acceptance of an offer cannot be inferred from silence, save in the most exceptional circumstances.’33

(p. 148) 3.31  Professor Atiyah correctly observes that the Court of Appeal in The Leonidas D misunderstood the three speeches of the House of Lords in The Hannah Blumenthal. In particular, Lord Diplock’s speech does not require the actual intentions of both parties to coincide.34 Lord Diplock’s speech clearly required a coincidence between the intentions of a party as ‘communicated to’ the other (the objective dimension to the test) to correspond with the intention of that party as ‘understood’ by the other (the subjective dimension to the test). The case should be treated with circumspection and the formulations adopted by the House of Lords in the earlier case should be followed.

Centrovincial Estates v Merchant Investors Assurance

3.32  One should treat with caution, however, Professor Atiyah’s comments35 about the case of Centrovincial Estates plc v Merchant Investors Assurance Co Ltd,36 a case which is often misunderstood if it is considered outside of its procedural context. In Centrovincial, a landlord let commercial premises to a tenant at an annual rent of £68,320. The lease contained an upwards-only rent review clause allowing for increases in rent on a periodic basis. The landlord’s solicitors wrote to the tenants inviting them to agree to a new figure of £65,000 as the current market rental value. The next day the tenants replied accepting that figure. Almost immediately the landlord’s solicitors telephoned to say that its letter had contained an offer, and that they had intended to propose the figure of £126,000. The tenants insisted there was a binding contract at £65,000. The landlord sought a declaration that there was no legally binding agreement between the parties.

3.33  The landlord sought summary judgment under RSC Order 14.37 There was a dispute of facts as to whether the tenants knew or ought reasonably to have known of the alleged mistake made by the landlord. Accordingly the Court of Appeal refused to award summary judgment and referred the question as to what the tenants knew or ought to have known to a full trial. Slade LJ stated:

In the absence of any proof, as yet, that the defendants either knew or ought reasonably to have known of the plaintiffs’ error at the time they purported to accept the plaintiffs’ offer, why should the plaintiffs now be allowed to resile from that offer? It is a well-established principle of the English law of contract that an offer falls to be interpreted not subjectively by reference to what has actually passed to the mind of the offeror, but objectively, by reference to the interpretation which a reasonable man in the shoes of the offeree would place on the offer.38

(p. 149) 3.34  For the purposes of the application the landlord had to accept that it had not yet proved that the tenant either knew, or even ought to have known, of the error in the terms of the offer; it was not possible to say that the tenants would be unable to establish an agreement based on the exchange of correspondence. The decision of the Court of Appeal in Centrovincial is consistent with the principles stated in The Hannah Blumenthal. The necessary knowledge of a mistake was still a question of fact which required proof at trial. It simply could not be resolved on a summary procedure.

Hartog v Collin & Shields

3.35  In practice the principal consequence of the objective principle is that it is not possible for one person to ‘snap up’ a mistaken offer and insist that a contract has resulted. A famous example is Hartog v Colin & Shields39 in which the plaintiff, a Belgian merchant, claimed damages for breach of contract for a failure by the defendant to deliver goods. The defendant said that there was no contract. There had been discussions between the parties for the sale from the defendant to the plaintiff of 30,000 Argentinian hare skins. The price had always been discussed in terms of a price per piece, not a price per pound. There was expert evidence suggesting that such skins were generally sold as price per piece. Three pieces corresponded to a pound. The defendant had made an offer stating a price per pound which the plaintiff had immediately accepted. Singleton J was satisfied on the evidence that the plaintiff ‘must have realised, and did in fact know, that a mistake had occurred’.40 In this case the judge seemed content to question the good faith of the plaintiff in seeking to hold the defendant to the terms of the bargain.

3.36  The formulation of the test for the offeree’s state of mind requires careful handling. It is clear that there is no resulting contract if the offeree knew that a mistake had been made. It is less clear whether it is sufficient that the offeree ought to have known. It is submitted that actual knowledge (including blind eye knowledge) should be necessary. Formulations which extend situations when the offeree ought to have known that the offeror had expressed himself incorrectly involves an objective element in the second limb of the test. It is submitted that this limb should be concerned with subjective or actual knowledge.

OT Africa Lines v Vickers

3.37  A modern illustration is provided by OT Africa Lines Ltd v Vickers plc.41 Settlement negotiations were progressing between lawyers in respect of a commercial dispute relating to the shipment of four tanks to Nigeria. A settlement figure in the region (p. 150) of $155,000 had been discussed. All the previous correspondence, expert reports, and witness statements referred to the sums in the dispute in the American currency. The solicitors for the defendant sent a letter by fax offering £150,000 which the plaintiff accepted.42 The offer was accepted—by both fax and couriered letter—later that day. On these facts Mance J held that on the objective approach there was a settlement at £150,000.43 The agreement made sense in its context. Earlier offers had contained no element to include the plaintiff’s costs, and, following discussions, the defendant’s representatives expected a contribution in respect of them. Furthermore, Mance J considered that it is not to be envisaged that the solicitors for the defendant, who were a major City firm, would make two mistakes (as to amount and as to currency) in one short letter on such an important topic. The case further makes clear that the burden of proof is on the party alleging that no contract has resulted to demonstrate that the other party knew or ought to have known of any mistakes.

Conclusion

3.38  In the principal judgment of Lord Phillips in Shogun Finance Ltd v Hudson,44 having discussed Smith v Hughes,45, his Lordship summarized the position:

If the offeree knows that the offeror does not intend the terms of the offer to be those that the natural meaning of the words would suggest, he cannot, by purporting to accept the offer, bind the offeror to the contract … Thus the task of ascertaining whether the parties have reached agreement as to the terms of the contract can involve a quite complex amalgam of the objective and the subjective and involve the application of a principle that bears close comparison with the doctrine of estoppel.46

This is a clear statement of principle that the approach to formation is not exclusively objective. English law has not adopted ‘detached objectivity’ for contractual formation disputes.

The Objective Principle in Interpretation

3.39  The objective principle in the construction of contractual documents47 is one of the distinguishing features of the common law of contract. On this it stands (p. 151) apart from civil law systems and various international restatements of contract law which, at least as a starting-point, seek to ascertain the subjective intentions of the parties.48 According to Isaacs J in the High Court of Australia in 1925: ‘Few principles are more firmly entrenched in the law.’49 Whilst accounts of the traditional approach to construction often prominently feature statements about ascertaining the intentions of the parties, that rationale is almost immediately disclaimed. Either we are then told that the only sure guide to the intentions of the parties are the actual words they have chosen to deploy, or it is accepted that frankly the courts are not in the least concerned about their actual intentions. This is reflected most prominently in the unchallenged rule that the parties themselves may not give evidence of their actual intentions on questions of construction.

As stated above,50 there are two principal formulations, namely promisee objectivity and detached objectivity.51 It is submitted that contractual construction (in contrast to contractual formation) generally employs the detached objectivity formulation.

Victorian origins of the objective principle

3.40  During the nineteenth century, in relation to contractual construction, just as in relation to contractual formation, it is possible to find statements favouring both a subjective and an objective approach to discerning intention. An example of the subjective approach is the judgment of Sir Thomas Plumer MR in 1820 in Marquis of Cholmondeley v Lord Clinton52 where it is said: ‘The real intention of the framer of the deed, the written declaration of those whose mind it is always considered to be, is the end and object, to the discovery and effectuating of which, all the rules of construction, properly so-called, are directed.’53 However over the course of the century the objective principle of construction was firmly established in respect of all legal documents. That is, that the task of the court was not to probe the actual intentions of any author(s) of the text, but rather to ascertain the meaning of the words which they had employed to express their intentions. The principle appears first to have been clearly articulated by Lord Denman CJ and Sir James Parke in two cases decided the year after Queen Victoria came to the throne. The same formulation was then echoed by other (p. 152) distinguished judges, including Lord Esher MR and Sir George Jessel MR later in the century.

3.41  The seminal statement appears in Rickman v Carstairs, where in the context of the construction of a marine insurance policy, Lord Denman CJ pronounced:

The question in this and other cases of construction of written instruments is, not what was the intention of the parties, but what was the meaning of the words they have used.54

3.42  In the context of the construction of a will in Doe d Gwillim v Gwillim, also in 1833, Parke J (later Parke B) opined: ‘In expounding a will, the Court is to ascertain, not what the testator actually intended, as contradistinguished from what his words express, but what is the meaning of the words he has used.’55

3.43  In 1842, providing his opinion before the House of Lords in Shore v Wilson,56 a case concerning the construction of deeds of trust, Parke B described the duty of the court as being ‘to declare the meaning of what is written in the instrument, not what was intended to have been written’.57

3.44  In the second half of the nineteenth century, in Grey v Pearson58 in 1857, Lord Wensleydale (as Parke B had become) observed that reference to intention was ambiguous in the legal context:

The expression that the rule of construction is to be the intention of the testator is apt to lend into error, because that word is capable of being understood in two senses, viz, as descriptive of that which the testator intended to do, and of that which is the meaning of the words he has used. The will must be in writing, and the only question is, what is the meaning of the words used in that writing.59

3.45  In 1879 Ex p Chick; In re Meredith Brett LJ (later Lord Esher MR), dissenting, was dismissive of invocations of Cicero as a source of principles for English statutory construction, and pronounced: ‘I am disposed to follow the rule of construction which was laid down by Lord Denman and Baron Parke … They said that in construing instruments you must have regard not to the presumed intention of the parties, but to the meaning of the words which they used.’60

(p. 153) 3.46  Similarly in 1881, Brett LJ’s predecessor as Master of the Rolls, Sir George Jessel MR, in Smith v Lucas, was emphatic that ‘one must consider the meaning of the words used, not what one may guess to be the intention of the parties.’61

Twentieth-century statements of principle

3.47  References to construction being an objective exercise are legion in recent English case law.62 In Ashington Piggeries Ltd v Christopher Hill Ltd 63 Lord Diplock was emphatic that the exercise of construction in English law was objective and ‘impersonal’:

In each of the instant appeals the dispute is as to what the seller promised to the buyer by the words which he used in the contract itself and by his conduct in the course of the negotiations which led up to the contract. What he promised is determined by ascertaining what his words and conduct would have led the buyer reasonably to believe that he was promising. That is what is meant in the English law of contract by the common intention of the parties. The test is impersonal. It does not depend upon what the seller himself thought he was promising, if the words and conduct by which he communicated his intention to the seller would have led a reasonable man in the position of the buyer to a different belief as to the promise; nor does it depend upon the actual belief of the buyer himself as to what the seller’s promise was, unless that belief would have been shared by a reasonable man in the position of the buyer. The result of the application of this test to the words themselves used in the contract is ‘the construction of the contract’.64

3.48  In the leading case of Reardon Smith Line Ltd v Hansen-Tangen (trading as HE Hansen-Tangen) (The Diana Prosperity),65 Lord Wilberforce was emphatic that:

When one speaks of the intention of the parties to the contract, one is speaking objectively—the parties cannot themselves give direct evidence of what their intention was—and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties.66

(p. 154) 3.49  Similarly, in the High Court of Australia in Codelfa Construction Prop Ltd v State Rail Authority of New South Wales67 Mason J stated:

[W]hen the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it tends to give too much weight to these factors at the expense of the actual language of the written contract.68

3.50  In Deutsche Genossenschaftsbank v Burnhope Lord Steyn was emphatic:

It is true [that] the objective of the construction is to give effect to the intention of the parties. But our law of construction is based on an objective theory. The methodology is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language. Intention is determined by reference to expressed rather than actual intention.69

3.51  To similar effect, in Sirius International Insurance Co (Publ) v FAI General Insurance Ltd 70 Lord Steyn stated the common law approach:

The aim of the inquiry is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language. The inquiry is objective: the question is what a reasonable person, circumstanced as the actual parties were, would have understood the parties to have meant by the use of specific language. The answer to that question is to be gathered from the text under consideration and its relevant contextual scene.71

3.52  In Zurich Insurance (Singapore) Pte Ltd v B-Gold Design & Construction Pte Ltd 72 V K Rajah JA, delivering the judgment of the Singapore Court of Appeal, was emphatic that:

[I]t must always be borne in mind that the purpose of interpretation is to give effect to the intention of the parties as objectively ascertained. Objective ascertainment of the parties’ intentions (known as ‘the objective principle’) is the cornerstone of the theory of contract and permeates our entire approach to contractual interpretation.73

(p. 155) 3.53  More colourfully, the great American jurist, Learned Hand J, proclaimed:

A contract has, strictly speaking, nothing to do with the personal, or individual intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes on them, he would still be held, unless there were some mutual mistake, or something else of that sort.74

3.54  It has been objected that Learned Hand J’s approach is too objective, and that much work would need to be done by the proviso.75 Nevertheless the sentiments have been echoed by many common law judges.

The interplay of the objective principle and the available background

3.55  The objective principle has the potential of leading to unreasonable or capricious results if it is deployed purely in respect of the language of a contract within the four corners of the document. An excessive focus on the meaning of words as such, as opposed to their effect in the real world, can lapse into literalism. In contrast, where the objective principle is properly deployed in tandem with the available background to the contract, being such background facts as were reasonably available to all the parties, commercially sensible results should generally be achieved. The point was well made by Lord Hoffmann in 1997 in an important passage in Mannai Investments Ltd v Eagle Star Assurance Co Ltd:76

[T]he law is not concerned with subjective intentions. All that matters is the objective meaning of the words which he has used.

It is of course true that the law is not concerned with the speaker’s subjective intentions. But the notion that the law’s concern is therefore with the ‘meaning of his words’ conceals an important ambiguity. The ambiguity lies in a failure to distinguish between the meanings of words and the question of what would be understood as the meaning of a person who uses words. The meaning of words, as they would appear in a dictionary, and the effect of their syntactical arrangement, as it would appear in a grammar, is part of the material which we use to understand a speaker’s utterance. But it is only a part; another part is our knowledge of the background against which the utterance was made. It is that background which enables us, not only to choose the intended meaning when a word has more than one dictionary meaning but also, in the ways I have explained, to understand a speaker’s meaning, often without ambiguity, when he has used the wrong words.

(p. 156) When, therefore, lawyers say that they are concerned, not with subjective meaning but with the meaning of the language which the speaker has used, what they mean is that they are concerned with what he would objectively have been understood to mean. This involves examining not only the words and the grammar but the background as well.77

Personification of the objective principle: the ‘reasonable person’

3.56  Eventually in the other leading case of 1997 the objective principle was transmuted into the modern principle that the standpoint adopted in construction questions is that of a ‘reasonable person’. Lord Hoffmann’s seminal first principle in Investors Compensation Scheme Ltd v West Bromwich Building Society entrenched the role of this legal, fictional character, where he defined interpretation as ‘the ascertainment of the meaning which the document would convey to a reasonable person’.78 More recently, this character is accorded the same role in relation to the implication of terms, as a result of Lord Hoffmann’s advice in Attorney-General for Belize v Belize Telecom Ltd 79 which deploys the reasonable person or ‘the reasonable addressee’.80

Rational choice theory

3.57  Most recently, Sir George Leggatt, writing extra-judicially, has argued that even this description of the approach of the courts is insufficiently objective and too psychological. He prefers a rational choice theory posited on the assumptions that the parties have deliberately chosen their contractual language to express a certain meaning and that they are to be assumed to be reasonable people with the knowledge and aims of reasonable persons in their position.81 In Tartsinis v Navona Management Co Leggatt J instanced both the objective principle and the exclusion of prior negotiations and echoed his rational choice theory:

These rules have many advantages. Such advantages include … respecting the autonomy of the contracting parties by treating them as rational agents who have chosen the words of their document to give appropriate expression to their bargain.82

(p. 157) The objective principle and standard form contracts

3.58  In respect of standard forms the importance of the objective principle is even greater. For example, in The General Capinpin,83 in the context of the construction of a laytime clause in a standard form of charterparty, Lord Goff of Chieveley stressed the importance of objective principle to the users of such forms. Accordingly he refused to enter into speculation about the motives of the commercial actors for selecting a particular form of clause. Lord Goff stated:

I must confess however that I am reluctant to speculate on the motives of a party for adopting a clause in any particular form. For once a clause is embodied in a commercial contract, it has simply to be construed in its context, from the objective point of view of reasonable persons in the shoes of the contracting parties. Of course it has to be construed sensibly, and regard has to be had to its practical effect. But the objective interpretation is of paramount importance in commercial affairs; commercial men have frequently to take important decisions with some speed, and it is of great importance that they all know that they can rely on Courts and arbitrators, if any dispute should later arise, to adopt the same objective approach as they themselves have to adopt in the daily administration of their contracts.84

Contract binding on its true construction even if parties were not in agreement

3.59  It is clear that the objective principle of construction may entail that there is a binding contract recorded in a document, although there may be extrinsic evidence that the parties did not mean the same thing by a particular clause. In one case, where prior correspondence evinced a difference of opinion as to the scope of a particular clause, Lord Denning observed that the parties had nevertheless failed to clarify the difference. His Lordship rejected any suggestion that there was no binding contract in such circumstances:

There was, to all outward appearances, agreement by the parties on the one thing that really mattered—on the terms that should bind them. In case of difference as to the meaning of those terms, it was for the court to determine it. It does not matter what the parties, in their inmost states of mind, thought the terms meant. They may each have meant different things. But still the contract is binding according to its terms—as interpreted by the court.85

3.60  More recently Arden LJ has stated: ‘Interpretation is not the process of ascertaining the parties’ intentions as regards the meaning of the document.’86

(p. 158) Objectivity and ‘presumed common intention’

3.61  Once a written contract is entered into it can provide the solution to disputes which the parties may never have anticipated. To that extent it transcends the parties’ actual intentions. The solution to unexpected events or circumstances which the contract does not explicitly provide for is sometimes said to be determined by reference to the ‘presumed common intention’ of the parties. Ex hypothesi, the contract is the governing document. This may be done by interpretation of the express terms, or by deployment of the related technique of implication. It might involve a determination that, in the light of the contract and the admissible background, the contract does not apply to the events which have arisen. Conversely, it might lead to the application of the contract’s provisions to the unexpected event. The locus classicus is the speech of Viscount Simon in British Movietonews v London and District Cinemas:87

The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate—a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point—not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.88

3.62  It can obviously be said that this approach involves a legal fiction, but it is one that is inextricably tied up with the process of construction, and in particular the objective principle. A more recent statement to like effect is that of Chadwick LJ in Bromarin v IMD Investments,89 who acknowledged the criticism that this approach can be castigated artificial:

It is not, to my mind, an appropriate approach to construction to hold that, where the parties contemplated event ‘A’, and they did not contemplate event ‘B’, their agreement must be taken as applying only in event ‘A’ and cannot apply in event ‘B’. The task of the court is to decide in the light of the agreement that the parties made, what they must have been taken to have intended to the event, event ‘B’, which they did not contemplate. That is, of course, an artificial exercise, because it requires there to be attributed to the parties an intention which they did not have (as a matter of fact) because they did not appreciate the problem which needed to (p. 159) be addressed. But it is an exercise which the courts have been willing to undertake for as long as commercial contracts have come before them for construction.90

A different approach in New Zealand: Professor McLauchlan, Thomas J, and ‘common actual intention’

3.63  In New Zealand, Professor McLauchlan, in his academic writings, and Thomas J, in his judgments, have consistently argued that the objective principle should defer to common subjective intention where such intention can be established. McLauchlan has consistently argued for a subjective qualification to the objective principle on the basis of the contract formation cases:

Accepting and giving to, an actual mutual intention of the parties is not inconsistent with, and hence does not require the making of an exception to, the objective approach. To the contrary, I suggest that an objective approach, at least as properly understood, requires the implementation of a proven actual mutual intention. That intention is the objective intention, although it would appear simpler to say that the objective principle has no application where actual mutual intention is established. In other words, while a meeting of minds or consensus ad idem is not necessary for contract formation, it is surely sufficient.91

3.64  In Gibbons Holdings Ltd v Wholesale Distributors Ltd 92 Thomas J, without avowedly abandoning the ‘objective principle’, offered a different perspective on the ascertainment of intention for the purposes of construction. Thomas J disclaimed any investigations into the ‘subjective intentions’ of any party, but contended that the search must be for ‘actual intent’. This appears to equate to ‘common subjective intention’ of the parties. This is certainly a rejection of ‘detached objectivity’ or the exclusively objective pronouncements of some English authority. If the approach to intention occupies a spectrum from ‘detached objectivity’ to ‘pure subjectivity’, Thomas J’s pronouncements are much closer to the subjective end of that spectrum than many English judges.

3.65  Thomas J’s reasoning commences with a critique of excessive recourse to the doctrine of ‘presumed common intention’:

[C]are must be taken not to destroy the utility of the law relating to the interpretation of contracts. Much of that utility stems from the readiness of judges at times to accept a fiction, that is, that the parties have addressed the situation which has arisen and formed an intention in respect of it. More often than not the parties have not contemplated the circumstances which have developed. In such cases the (p. 160) courts construe a contract in such a way as to arrive at the presumed intent of the parties.

The notion of presumed intent has been popular ever since Viscount Simon, referring to the fact parties to a contract are often faced with a turn of events which they did not anticipate, expressly enunciated the doctrine in British Movietonews v London and District Cinemas. The doctrine has necessarily had an impact on the way judges and lawyers approach contractual interpretation in general. Aware that in many, if not most, cases the parties did not, because of unforeseen events, have an actual intention in respect of the particular clause in issue, the doctrine permits judges and lawyers to arrive at an interpretation without compromising the basic premise that the contract must not be interpreted subjectively. The presumed intent is imputed to the parties. Inevitably, and understandably, judges and lawyers come to impute an intention to the parties without questioning the process. The imputation becomes a habit of thought or attitude of mind.93

3.66  His Honour considered that ‘presumed common intention’ must yield to the parties’ actual common intention, where cogent evidence existed of that intention.94 In summary Thomas J considers: ‘the proper task of the court is to construe the contract objectively with the aim of discerning the actual intention of the parties.’95 A key passage in Thomas J’s reasoning states:

Much of the judicial reluctance to admit evidence of subsequent conduct has been due to an inability to distinguish between the objective task of giving effect to the mutual intention of the parties and the misguided exercise of seeking to ascertain the subjective intention of the parties. The latter exercise is illegitimate and will remain illegitimate. Evidence of subsequent conduct is admitted, not for the purpose of importing an intention which was not expressed in the contract, but with a view to elucidating the meaning which the parties intended their contract to have when they entered into it. The reasonable expectations of the parties to the contract should not be defeated by attributing a meaning to it which their subsequent conduct demonstrates they did not intend.96

3.67  The indiscriminate use by Thomas J of the phrases ‘mutual intention’ and ‘the parties’ actual intention’, whilst disclaiming recourse to ‘subjective intention’, is not without the danger of causing confusion. The better view is that Thomas J subscribes to the civil law approach of ascertaining the parties’ common subjective intention, as demonstrated by his reliance on provisions of continental codes.97 As such, it is not consistent with the objective approach adopted in the recent English cases, which appears to be detached objectivity. It is unlikely that English law would at present subscribe to such a significant subjective qualification to the objective principle of construction.

(p. 161) Objectivity and contracts partly oral or partly by conduct

3.68  In respect of contracts which are oral, or partly oral, whilst an objective approach is still adopted, evidence of subjective intention is admissible. In Carmichael v National Power plc98 the Court of Appeal had insisted on the objective test, and had rejected evidence of what the parties thought their agreement was. Ward LJ had stated: ‘What they thought they had achieved is of no importance.’99 In stark contrast, Lord Hoffmann insisted that in this context, whilst the test remained objective, subjective understandings could be relevant to that determination:

The evidence of a party as to what the terms he understood to have been agreed is some evidence tending to show that those terms, in an objective sense, were agreed. Of course the tribunal may reject such evidence and conclude that the party misunderstood the effect of what was being said and done. But when both parties are agreed about what they understood their mutual obligations (or lack of them) to be, it is a strong thing to exclude their evidence from consideration.100

A subjective coda?

3.69  Mason J in Codelfa Construction Prop Ltd v State Rail Authority of New South Wales101 suggested that evidence of deletions and similar evidence may preclude (by way of an argument which resembles an estoppel) a party from advancing as an argument a construction which was rejected in negotiations:

There may perhaps be one situation in which evidence of the actual intentions of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry out that exercise to the point of placing on the words of a contract a meaning which the parties have united in rejecting.102

3.70  This suggested subjective qualification to the objective principle of construction would therefore operate analogously to the subjective coda to the objective principle of formation. However so far as construction is concerned, English law now appears to be committed to detached objectivity. Accordingly the relevant evidence could only be admitted and effect given to Mason J’s proposal through the doctrines of estoppel or rectification.

(p. 162) The law of agency

3.71  A further qualification to objective construction of documents arises in dealings with intermediaries. Venerable authority in the law of agency suggests that if an agent is faced with ambiguous instructions and in good faith adopts one of them he is nevertheless acting within the scope of his actual authority. It need not be the objectively ascertained true construction of the instructions. According to Lord Chelmsford in Ireland v Livingstone: ‘if a principal gives an order to an agent in such uncertain terms as to be susceptible of two different meanings, and the agent bona fide adopts one of them and acts upon it, it is not competent to the principal to repudiate the act as unauthorized.’103 This charitable principle permits an agent to adopt any reasonably available construction of a principal’s unclear instructions. Nevertheless in the world of modern communications, it may still be incumbent on an agent to seek clarification if possible where he is aware of ambiguity in the instructions, rather than simply acting.104

The Objective Principle in Implication

3.72  The synergy between the objective principle and English law’s default regime of implied terms by law ensures that it is usually difficult to argue that no contract has been formed. The doctrine of implication supplies the detail of the obligations undertaken. Implication is also an objective process.

3.73  In Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association Diplock LJ stressed that the objective principle had to operate in tandem with the usual process of implication of terms:

The task of ascertaining what the parties to a contract of any kind have agreed shall be their legal rights and liabilities to one another as a result of the contract is a familiar one in all systems of law. It is accomplished not by determining what each party actually thought those rights and liabilities would be, but by what each party by his words and conduct reasonably led the other party to believe were the acts which he was undertaking a legal obligation to perform. There are some rights and liabilities which arise by implication of law from the nature of the contract itself such as a contract of sale of goods or land, a contract of carriage or bailment, a contract of service or a contract of insurance. In offering to enter into a contract of a particular kind a party leads the other party reasonably to believe that he undertakes a legal obligation to perform all those acts which a person entering (p. 163) into a contract of that kind usually performs, unless his words or conduct are such as would make it reasonably clear to the other party that this is not so and also makes it clear which of those acts he does not intend to undertake to perform and which of them he intends to undertake to perform only in some other and specified manner.105

This was described by Donaldson J in SIAT di del Ferro v Tradax Overseas SA as a ‘variant on the officious bystander test’.106 This approach was reinforced by the decision of the Privy Council in Attorney-General for Belize v Belize Telecom Ltd 107 which deploys the reasonable person or ‘the reasonable addressee’.108 However that case needs to be treated with some caution in the wake of the decision of the Supreme Court in Marks & Spencer.109

The Objective Principle in Rectification

3.74  It is a commonplace observation in comparative law that many civil law systems start from the theoretical perspective that common subjective intentions should be ascertained, and, only if that exercise fails, should an objective test be applied. It can also be observed that such systems do not have a separate technique of rectification of documents. In English law it was traditionally assumed was that whilst the technique of construction was exclusively objective in its approaching to discerning contractual intention, it was qualified by the ‘safety valves’ of rectification and estoppel by convention, which adopted a subjective theory of intention, where such intention could be ascertained. That understanding is reflected, for example, in Lord Steyn’s extra-judicial pronouncements: ‘leaving aside rectification and estoppel by convention, the subjective views of the parties are irrelevant.’110 However in Chartbrook Ltd v Persimmon Homes Ltd 111 Lord Hoffmann, whilst accepting that evidence of subjective intentions were admissible where rectification was in issue, nevertheless adopted an objective approach to intention in respect of the rectification of contracts on the ground of common mistake. It was held that what was required was a mistake as to whether the document correctly reflected the prior consensus. In accordance with the objective principle the terms (p. 164) of the prior consensus were what a reasonable observer would have understood them to be and not what one or even both of the parties believed them to be.112 Strictly this was obiter dicta, but has been followed in subsequent cases, albeit not without hesitation. The better view is that Lord Hoffmann was wrong to extend the embrace of the objective principle from the construction of contracts, where it forms to the cornerstone of the law, to the equitable rectification of documents. As a matter of both principle and authority the law of rectification can only be coherent and just if it addresses the common subjective intentions of the parties to a document. This debate is addressed in detail in Chapter 17.

Footnotes:

1  See generally G Williams, ‘Mistake and Rectification in Contract’ (1954) 17 MLR 154; E A Farnsworth, ‘ “Meaning” in the Law of Contracts’ (1967) 76 Yale LJ 939, 942–52; J R Spencer, ‘Signature, Consent, and the Rule in L’Estrange v Graucob’ [1973] CLJ 104; W Howarth, ‘The Meaning of Objectivity in Contract’ (1984) 100 LQR 265; P Atiyah, ‘The Hannah Blumenthal and Classical Contract Law’ (1986) 102 LQR 363; J Vorster, ‘A Comment on the Meaning of Objectivity in Contract’ (1987) 103 LQR 274; W Howarth, ‘A note on the objective of objectivity in contract’ (1987) 103 LQR 527; D Goddard, ‘The myth of subjectivity’ (1987) 7 LS 263; A De Moor, ‘Intention in the Law of Contract—Elusive or Illusory?’ (1990) 106 LQR 632; T Endicott, ‘Objectivity, subjectivity and incomplete agreements’ in Jeremy Horder (ed), Oxford Essays in Jurisprudence, 4th series (2000) 151–71; J M Perillo, ‘The Origins of the Objective Theory of Contract Formation and Interpretation’ (2000) 69 Fordham L Rev 427; M Chen-Wishart, ‘Contractual Mistake, Intention in Formation and Vitiation: the Oxymoron of Smith v Hughes’ in J Neyers, R Bronaugh and S Pitel, Exploring Contract Law (2009), 341.

2  The most influential text in this regard was Sir William Evans’ translation of Robert-Joseph Pothier’s Traité des Obligations: R-J Pothier, A Treatise on the Law of Obligations or Contracts (1806, trans W Evans,); W Cornish et al, The Oxford History of the Laws of England—Volume XII: Private Law (2010), 300–5. See Sir Johan Steyn, ‘Written Contracts: To What Extent May Evidence Control Language?’ [1988] CLP 23, 23–4 for an orthodox view of the contrasting approach of common law and civil law systems. Contrast S Vogenauer, ‘Interpretation of Contracts: Concluding Comparative Observations’ in A Burrows and E Peel (eds), Contract Terms (2007), 123, 125–9 suggesting the differences may be over-stated. See also C von Bar and E Clive (eds), Principles, Definitions and Model Rules of European Private Law—Draft Common Frame of Reference (DCFR) (2009), Art I-4:102 and Art I-8-101. See 2.28.

3  A W B Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91 LQR 247, esp 257–67; W Cornish et al, The Oxford History of the Laws of England—Volume XII: Private Law (2010), 334–9.

4  (1871) LR 6 QB 597.

5  Accordingly in terms of the debate between Howarth and Vorster in the Law Quarterly Review, I generally adopt the position of Vorster and reject the suggestion that promisor objectivity, if the concept has meaningful content, has any role to play: W Howarth, ‘The Meaning of Objectivity in Contract’ (1984) 100 LQR 265; J Vorster, ‘A Comment on the Meaning of Objectivity in Contract’ (1987) 103 LQR 274; and W Howarth, ‘A note on the objective of objectivity in contract’ (1987) 103 LQR 527. Whilst Howarth in particular stresses the importance of objectivity to both contractual formation and contractual construction, both authors focus almost exclusively on the former topic.

6  For example, Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724, 736, HL (Lord Diplock).

7  J R Spencer, ‘Signature, Consent, and the Rule in L’Estrange v Graucob’ [1973] CLJ 104, 108.

8  [1953] 2 QB 450, CA.

9  Ibid, 461.

10  G Williams, ‘Mistake and Rectification in Contract’ (1954) 17 MLR 154, 155. This is reminiscent of the question posed in Partenreederie MS Karen Oltmann v Scarsdale Shipping Co Ltd, The Karen Oltmann [1976] 2 Lloyd’s Rep 708, 712. However in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 the House of Lords disapproved of The Karen Oltmann approach. See further 5.87.

11  [2009] UKHL 38, [2009] 1 AC 1101, para [60].

12  Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724, HL.

13  [1982] AC 724, 736 (emphasis added).

14  [1998] 1 WLR 896, 912, HL.

15  G Williams, ‘Mistake and Rectification in Contract’ (1954) 17 MLR 154.

16  [1996] CLC 451, 643, CA.

17  (1864) 2 H & C 906, 159 ER 375. See W Cornish et al, The Oxford History of the Laws of England—Volume XII: Private Law (2010), 445–7.

18  H Beale, Chitty on Contracts (32nd edn, 2015), para 13–127.

19  Contrast two venerable American lawyers: Oliver Wendell Holmes, The Common Law (1881) 310–11 (objective explanation of Raffles) and G Gilmore, The Death of Contract (1974), 39–42: ‘the courts, well past the mid-point of the nineteenth century, were approaching the problem of contract formation from a purely subjectivist point of view’ (at 39).

20  (1871) LR 6 QB 597. See W Cornish et al, The Oxford History of the Laws of England—Volume XII: Private Law (2010), 451–2.

21  The other is ‘unilateral mistake’ rectification, where one party is aware that the other party mistakenly believes that a document which purports to record their agreement is consistent with that agreement, when in fact it does not. See 17.81 following.

22  (1871) LR 6 QB 597, 607; following Freeman v Cooke (1848) 2 Ex 654, 662, 145 ER 652 (an estoppel case).

23  Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Blumenthal) [1983] AC 854, 915–16 (Lord Diplock), suggesting that the basis of the rule is the protection of ‘injurious reliance’.

24  Section 41(3) of the Arbitration Act 1996 now gives a tribunal power to dismiss an arbitration claim if there is ‘inordinate or inexcusable delay’.

25  Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Blumenthal) [1983] 1 AC 854, HL.

26  [1983] 1 AC 854, 914.

27  [1983] 1 AC 854, 915–16 (emphasis in original).

28  Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130, QBD.

29  [1983] 1 AC 854, 916.

30  Ibid, 924.

31  Allied Marine Transport Ltd v Vale Do Rio Doce Navegacao SA (The Leonidas D) [1985] 1 WLR 926, CA.

32  [1985] 1 WLR 926, 936. See a similar criticism of Lord Diplock’s formulation in Food Corp of India v Antclizo Shipping Corp (The Antclizo) [1987] 1 Lloyd’s Rep 130, 146, CA (Nicholls LJ).

33  [1985] 1 WLR 926, 937.

34  P S Atiyah, ‘The Hannah Blumenthal and Classical Contract Law’ (1986) 102 LQR 363.

35  (1986) 102 LQR 363, 365, 368.

36  [1983] Commercial Law Reports 158: an unsatisfactory report (Court of Appeal, 4 March 1983).

37  The precursor to CPR Pt 24.

38  [1983] Commercial Law Reports 158.

39  [1939] 3 All ER 566, KBD.

40  Ibid, 568.

41  [1996] 1 Lloyd’s Rep 700, [1996] CLC 722, QBD; applied in Champion Investments Ltd v Eatisham Ahmed [2004] EWHC 1956 (QB), paras [33]–[35] (W Blair QC: contract of compromise).

42  The fax was sent at 14:41 hours on 22 December 1995.

43  Applying the Centrovincial case and Food Corp of India v Antclizo Shipping Corp (The Antclizo) [1987] 1 Lloyd’s Rep 130, 146, CA (Nicholls LJ).

44  [2003] UKHL 62, [2004] 1 AC 919, para [123]. For further discussion see Chap 19.

45  (1871) LR 6 QB 597.

46  [2003] UKHL 62, [2004] 1 AC 919, para [123].

47  For discussion see D W McLauchlan, ‘Objectivity in Contract’ (2005) UQLJ 479; T Endicott, ‘Objectivity, subjectivity and incomplete agreements’ in Jeremy Horder (ed), Oxford Essays in Jurisprudence, 4th series (2000), 151–71

48  See S Vogenauer, ‘Interpretation of Contracts: Concluding Comparative Observations’ in A Burrows and E Peel (eds), Contract Terms (2007), 123 for a careful account, which seeks not to overstate the differences.

49  Life Insurance Company of Australia Ltd v Phillips (1925) 36 CLR 60, 76.

50  See 3.03.

51  See J Vorster, ‘A Comment on the Meaning of Objectivity in Contract’ (1987) 103 LQR 274.

52  (1820) 2 Jac & W 1, 91, ER 1, Ch.

53  (1820) 2 Jac & W 1, 91, ER 1, Ch; recently relied on in Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277, para [94] (Thomas J).

54  (1833) 5 B & AD 651, 663, 110 ER 931.

55  (1833) 5 B & Ald 122, 129, 110 ER 737 (Parke J: more famously known as Parke B. James Parke was first appointed to the Court of King’s Bench in 1828 (Parke J). In 1834 he was made a Baron of the Exchequer (Parke B). He resigned in 1855, angered by the passing of the Common Law Procedure Acts, but was subsequently ennobled as Baron Wensleydale of Walton and sat in the House of Lords on judicial business until his death in 1868.)

56  (1842) 9 Cl & F 355, 8 ER 450, HL. See also Smith v Jeffreyes (1846) 15 M & W 561, 153 ER 972 (sale of potatoes).

57  (1842) 9 Cl & F 355, 556, 8 ER 450.

58  (1857) 6 HLC 61.

59  Ibid, 106.

60  (1879) 11 Ch D 731, 739.

61  (1881) 18 Ch D 531, 542.

62  For example, Prenn v Simmonds [1971] 1 WLR 1381, 1383–4, HL (Lord Wilberforce). See 1.120.

63  [1972] AC 441, HL.

64  Ibid, 502 (reference to conduct was relevant because issues arose under s 14 of the Sale of Goods Act 1893). In the context of implied, resulting, and constructive trusts, Lord Diplock was even more emphatic in Gissing v Gissing [1971] AC 886, 906: ‘As in so many branches of English law in which legal rights and obligations depend upon the intentions of the parties to a transaction, the relevant intention of each party is the intention which was reasonably understood by the other party to be manifested by that party’s words or conduct notwithstanding that he did not consciously formulate that intention in his own mind or even acted with some different intention which he did not communicate to the other party. On the other hand, he is not bound by any inference which the other party draws as to his intention unless that inference is one which can reasonably be drawn from his words or conduct’ (emphasis added).

65  [1976] 1 WLR 989, HL.

66  Ibid, 996.

67  (1982) 149 CLR 337.

68  Ibid, 352; see also Toll (FGCR) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, para [36].

69  [1996] 1 Lloyd’s Rep 113, 122 (a dissenting judgment); cited with approval in Zurich Insurance (Singapore) Pte Ltd v B-Gold Design & Construction Pte Ltd [2008] SGCA 27, [2008] 3 SLR (R) 1029, para [126], Sing CA (V K Rajah JA).

70  [2004] UKHL 54, [2004] 1 WLR 3251.

71  Ibid, para [18]; followed in The Asia Star [2007] SGCA 17, [2007] SLR (R) 1, para [30], Sing CA (Belinda Ang Saw Ean J).

72  [2008] SGCA 27, [2008] 3 SLR (R) 1029, Sing CA (Chan Sek Keong CJ, Andrew Phang Boon Leong JA, and V K Rajah JA).

73  Ibid, para [125]. See also paras [1] and [132](b).

74  Hotchkiss v National City Bank of New York 200 F 287, 293 (1911) SDNY; affd 231 US 50 (1913).

75  It is attacked as ‘largely discredited’ by Professor McLauchlan: D W McLauchlan, ‘Objectivity in Contract’ (2005) UQLJ 479, n 6.

76  [1997] AC 749, HL.

77  [1997] AC 749, 775.

78  [1998] 1 WLR 896, 912. Reference to ‘reasonable persons’ also appeared in Lord Goff’s formulation in President of India v Jebsens (UK) Ltd (The General Capinpin, Proteus and Free Wave) [1991] 1 Lloyd’s Rep 1, 9, HL (quoted at 3.58).

79  [2009] UKPC 10, [2009] 1 WLR 1988, PC (Belize). See also Lord Hoffmann, ‘Anthropomorphic Justice: The Reasonable Man and His Friends’ (1995) 29 Law Teacher 127.

80  [2009] UKPC 10, [2009] 1 WLR 1988, paras [17]–[18]. But note the reception of Belize Telecom by the majority of the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742. See para 1.26 and Chap 11.

81  Sir George Leggatt, ‘Making Sense of Contracts: the Rational Choice Theory’ (2015) 131 LQR 454.

82  [2015] EWHC 57 (Comm), para [11].

83  President of India v Jebsens (UK) Ltd (The General Capinpin, Proteus and Free Wave) [1991] 1 Lloyd’s Rep 1, HL.

84  [1991] 1 Lloyd’s Rep 1, 9.

85  London County Council v Henry Boots & Sons Ltd [1959] 1 WLR 1069, 1077, HL.

86  Smith v Royce Properties [2001] EWCA Civ 949, para [32].

87  [1952] AC 166, HL. The language of ‘presumed common intention’ goes back at least to Lord Sumner deploying it as the theoretical basis for the doctrine of frustration in Bank Line Ltd v Arthur Capel & Co [1919] AC 435, 455, HL. Cited in British Movietonews v London and District Cinemas [1952] AC 166, 186.

88  [1952] AC 166, 185.

89  [1999] STC 301, CA.

90  Ibid, 301, 310. For discussion see G Virgo, ‘Contract Construction and Risk Allocation’ [1999] CLJ 273.

91  D W McLauchlan, ‘The “Drastic” Remedy of Rectification for Unilateral Mistake’ (2008) 124 LQR 608, 610; see also D W McLauchlan, ‘Objectivity in Contract’ (2005) UQLJ 479.

92  [2007] NZSC 37, [2008] 1 NZLR 277, NZ Sup Ct. This echoes his earlier judgment in the New Zealand Court of Appeal in Attorney-General v Dreux Holdings Ltd (1997) 7 TCLR 617, CA.

93  [2007] NZSC 37, [2008] 1 NZLR 277, paras [95]–[96].

94  [2007] NZSC 37, [2008] 1 NZLR 277, paras [97]–[110].

95  [2007] NZSC 37, [2008] 1 NZLR 277, para [97].

96  [2007] NZSC 37, [2008] 1 NZLR 277, para [114].

97  [2007] NZSC 37, [2008] 1 NZLR 277, para [99].

98  [1999] 1 WLR 2042, HL.

99  [1998] ICR 1167, 1185.

100  [1999] 1 WLR 2042, 2050–1.

101  (1982) 149 CLR 337, HCA.

102  Ibid, 352–3.

103  (1872) LR 5 HL 395, 416.

104  Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741, 772, HL (Lord Salmon); European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 WLR 642, 656, CA (Robert Goff LJ). See also in the context of customers’ instructions to banks to countermand payment: Westminster Bank v Hilton (1926) 35 TLR 142, 126; see also the Canadian cases of Shapero v Toronto-Dominion Bank (1970) 17 DLR (3d) 122; Giordano v Royal Bank of Canada (1973) 38 DLR (3d) 191; and Remfor Industries Ltd v Bank of Montreal (1978) 90 DLR (3d) 316.

105  [1966] 1 WLR 287, 339, CA.

106  [1978] 2 Lloyd’s Rep 470, 490.

107  [2009] UKPC 10, [2009] 1 WLR 1988, PC (Belize). See also Lord Hoffmann, ‘Anthropomorphic Justice: The Reasonable Man and His Friends’ (1995) 29 Law Teacher 127.

108  [2009] UKPC 10, [2009] 1 WLR 1988, paras [17]–[18]. For more detail see Chap 10.

109  Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742. See para 1.26 and Chap 11.

110  Lord Steyn, ‘Interpretation: Legal Texts and their Landscape’ in B S Markesinis (ed), The Clifford Chance Millennium Lectures (2000), 79, 80–1.

111  [2009] UKHL 38, [2009] 1 AC 1101. For discussion see D W McLauchlan, ‘Commonsense Principles of Interpretation and Rectification’ (2010) 126 LQR 8; D W McLauchlan, ‘Interpretation and Rectification: Lord Hoffmann’s Last Stand’ [2009] NZ L Rev 431.

112  For further discussion see Chap 17.