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Oxford Law Citator

Part VI Terms and Interpretation, 20 Interpretation of Written Contracts

From: Contract Law in Practice

Neil Andrews

Content type:: Book content

Product:: International Commercial Law [ICML]

Published in print:: 27 May 2021

ISBN:: 9780192897947

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Subject(s):: Construction of contract — Interpretation of contract

(p. 421) 20 Interpretation of Written Contracts

Sir Robert Goff, ‘Commercial Contracts and the Commercial Court’ [1984] LMCLQ 382, 385: ‘the staple diet of the Commercial Court can be summed up in one word—“construction”. Commercial lawyers, solicitors, barristers and judges spend a very substantial part of their time interpreting contracts.’

Summary

Modern Influences.¹

20.01 The modern principles derive from seminal judgments by Lords Wilberforce and Hoffmann. In the 1970s, two seminal judgments were given by Lord Wilberforce, in Prenn v Simmonds (1971), HL [20.52] and Reardon Smith Line Ltd v Hansen-Tangen (‘The Diana Prosperity’) (1976), HL [20.50] and [20.55]. Lord Hoffmann then assumed prominence, notably in the ICS case (Investors Compensation Scheme Ltd v West Bromwich Building Society) (1998) [20.18] and Chartbrook Ltd v Persimmon Homes Ltd (2009), notably [20.27]. There has been revision and refinement since Lord Hoffmann’s retirement. In fact the current seminal embodiment of the law occurs in Lord Hodge’s judgment in Wood v Capita Insurance Services Ltd (2017) [20.15]. The ensuing discussion is structured as follows: a summary of the interpretation principles; exegesis by reference to the leading cases; thereafter, rectification will be explained.

Eleven Fundamental Propositions.

20.02 The following propositions will be explained in the ensuing sections of the text.

20.03 (1) The court’s duty is to interpret a written contract objectively and faithfully, that is: (a) without reference to any declaration of subjective intent made by a party (b) and without reference to the parties’ negotiations; (c) the court must refrain from illegitimately rewriting the agreement (see the Contractual Bond principle [2.40]); but (d) the court can have due regard to commercial and practical common sense where the text is fairly open to more than one interpretation. In essence, therefore, the courts must give objective effect to the language, consistent with sensible business expectations (so-called commercial common sense), but without reference to a party’s declarations of subjective intent, or the parties’ negotiations, or subsequent dealings [20.25]. Under this Common Law scheme, the pre-contractual history of the written contract is ancient history locked in the archives and hence invisible to the court. In this sense, the Common Law position is that the chosen words are king.

(p. 422) 20.04 (2) The court can construe a text so as to correct a slip or other drafting problem (so-called corrective construction), provided (a) it is clear that the text is defective and (b) it is also obvious how the text should be repaired in order to reflect the parties’ objective true meaning (this is known as ‘corrective construction’).

20.05 (3) Where there is more than one available meaning, a word or phrase or passage must be construed in the sense which better or best harmonizes with commercial common sense.

20.06 (4) The whole contract must be considered when interpreting any word, phrase, clause, or part within it (or within a set of connected contractually binding documents).

20.07 (5) The parties can produce evidence of the transaction’s background in order to illuminate the text, provided this background material was available to the parties at the time of formation, but parties should not be permitted to adduce excessive quantities of background information.

20.08 (6) When seeking to interpret written contracts, a party cannot adduce the parties’ prior negotiations.

20.09 (7) But this evidential bar does not apply if: (a) an application is made for the equitable remedy of rectification (thus Equity can have the last word by opening the doors to the archives and poring over the pre-formation drafts or other discussions: on the doctrine of rectification, see chapter 21); or (b) a mutual understanding can be substantiated on the basis of estoppel by convention, that is, a consensual understanding manifested in their interactive dealings (generally on estoppel); or (c) the parties (or a group or sect of which they are members) habitually use the relevant word or phrase in an unusual manner.

20.10 (8) A written contract should not be construed by reference to the parties’ conduct which has occurred subsequent to the contract’s formation, unless the evidence shows that:

(a) the parties had specifically agreed to vary or discharge the agreement, or
(b) there has been a waiver of a party’s rights, or
(c) the doctrine of estoppel by convention has arisen on these facts, that is, there is evidence of a consensual understanding manifested in their interactive dealings [2.58].

20.11 (9) The court must adopt an interpretation which applies the contractual text to the relevant changed circumstances in a manner consistent with the objective purposes and values expressed in that document, or implicit within it. However, the court will not apply the original language to new events if it is obvious that, at the time of the original agreement, the parties could not possibly have contemplated such a drastic alteration of circumstances.

20.12 (10) Questions of the construction and effect of written contracts are matters of law; by contrast, interpretation of contracts not wholly contained in writing (whether oral, or part written and part oral) is a ‘matter of fact’.² This distinction has been clear in England for (p. 423) a very long time. Counsel in Harcus Sinclair llp v Your Lawyers Ltd (2019) unsuccessfully contended that interpretation which hinges on appreciation of factual matrix evidence becomes essentially a ‘factual’ first instance determination, beyond appellate review, unless plainly perverse. But the Court of Appeal rejected this.³ Characterization of an issue as one of ‘law’ is especially important because section 69⁴ of the Arbitration Act 1996 allows the Commercial Court to grant permission for a point of English law (as distinct from an issue of fact, or a point of foreign law) disclosed by an arbitral award to be reconsidered on appeal.

20.13 (11) The Court will lean in favour of validity: the maxim that the courts endeavour to interpret so as to validate rather than invalidate a clause or transaction⁵ was considered by Lord Wilson in Egon Zehnder Ltd v Tillman (2019),⁶ who declared that the ‘validity principle’ is operative if there are two rival meanings, but both must be ‘realistic’.

Interpretation: Judicial Encapsulation.

20.14 The principles, or set of guidelines, governing interpretation of written contracts were authoritatively summarized by Lord Hodge⁷ in Wood v Capita Insurance Services Ltd (2017) (see text at [20.15] below for quotation). These comments are the distillation of accumulated glosses upon a passage in Lord Hoffmann’s speech in Investors Compensation Scheme Ltd v West Bromwich Building Society (1998), HL [20.18]. Thus in Wood v Capita Lord Hodge referred⁸ to leading decisions in Prenn v Simmonds (1971),⁹ Reardon Smith Line Ltd v Yngvar Hansen-Tangen (1976),¹⁰ Investors Compensation Scheme Ltd v West Bromwich Building Society (1998), the ‘ICS’ case.¹¹ In Wood v Capita Lord Hodge then asserted¹² that he did not accept the proposition that the Arnold case [20.67] involved a ‘recalibration’ of the approach summarized in the Rainy Sky case [20.59], adding¹³ ‘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’.

(p. 424) 20.15 Lord Hodge continued:¹⁴

[11] … in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause … and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: the Arnold case, paras 20, 77. Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.

[12] This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: the Arnold case, [77], citing In re Sigma Finance Corpn [2010] 1 All ER 571, [12], per Lord Mance JSC. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each.

20.16 Supplementary comments by Lord Hodge¹⁵ are omitted here, for reasons of space. Pace the suggestion made by Lord Hodge that there has been no juridical break in the post-Hoffmann era (effectively, since the Chartbrook case (2009)), and that there has been continuity,¹⁶ Sir Geoffrey Vos has contended¹⁷ that the reality is that the Supreme Court in Arnold v Britton (2015) and Wood v Capita (2017) significantly changed the mood of contractual interpretation so that, notably in commercial contexts where (except for the purpose of rectification) the ‘tug of war’ of negotiation cannot be replayed to the court, the court will be slow to construe actively using ‘commercial common sense’ or to adjust wording in the name of ‘corrective construction’.

20.17 The Arnold v Britton Summary (2015). Earlier, in Arnold v Britton (2015) Lord Neuberger provided this synopsis of the modern principles of construction:¹⁸

When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 at [14]. And it does so by focussing on the meaning of the relevant words … in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [document], (iii) the overall purpose of the clause and the [document], (iv) the facts and circumstances known or assumed by the parties at the time (p. 425) that the document was executed, and (v) commercial common-sense, but (vi) disregarding subjective evidence of any party’s intentions.

20.18 Principles in Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) (1998). The following passage in Lord Hoffmann’s leading speech in that case is seminal:¹⁹

(i) Interpretation is the ascertainment of meaning which 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. (ii) The background [has been described] as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include, subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (iii) The law excludes from the admissible background the previous negotiations of the parties and the declarations of subjective intent. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are unclear. But this is not the occasion on which to explore them. (iv) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (v) (a) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common-sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. (b) On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201, HL: ‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense’ [letters (a) and (b) added here].

20.19 Also in the Investors Compensation Scheme case, Lord Hoffmann commented:²⁰

… I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384–1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the (p. 426) common-sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded.

Whole Contract to be Considered

Established Feature of Construction.

20.20 The principle that the whole contract must be considered when interpreting a particular clause, phrase, or word is a cardinal feature of interpretation under English law. In Wood v Capita Insurance Services Ltd (2017) Lord Hodge said:²¹

[construction] is not a literalist exercise focused solely on a parsing of the wording of the particular clause but … 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.

Case Law Examples.

20.21 A striking example of the importance of considering the whole text is the House of Lords’ decision in Charter Reinsurance Co Ltd v Fagan (1997).²² Here the question was whether a reinsurer had agreed to indemnify the reinsured only if the latter’s liability had accrued, been quantified, and been discharged by payment (the so-called actual disbursement interpretation) or whether it was enough that the liability to indemnify had arisen and been quantified, without actual discharge of that liability (the liability to pay or finalized quantification interpretation). The semantic battle was fought over the words ‘actually paid’. The House of Lords held that a commercially sensitive reading of that phrase in this particular reinsurance agreement led to the conclusion that the contract did not create a condition precedent to the reinsurer’s liability that the reinsured should actually have discharged the relevant liability.

20.22 Similarly, the House of Lords in Schuler (L) AG v Wickman Machine Tool Sales Ltd (1974)²³ held that, on proper construction of the contract, the word ‘condition’ (contained in clause 7(b)) had not been intended to operate in a technical sense. This construction was based on the need to harmonize conflicting clauses. The innocent party could not invoke clause 7(b) (containing the word ‘condition’) in order to bypass clause 11(a)(1) which provided that the innocent party must first serve notice on the other party requiring the latter to take remedial steps.

20.23 Similarly, the decision in Wood v Capita Insurance Services Ltd (2017)²⁴ turned on a commercially astute comparison of the content of the contract’s set of indemnities and warranties. And Butcher J in Teesside Gas Transportation Ltd v CATS North Sea Ltd (2019)²⁵ stated (p. 427) that explicit reference to ‘good faith’ in some clauses within the contract would preclude implying a general contract of good faith within the transaction.

‘Precedence Clauses’.

20.24 Some contracts, notably those which comprise a complex and voluminous set of documents which have been stitched together to make a whole, might specify a hierarchical order of precedence between various parts of the document. Sir Rupert Jackson commented on this in Triple Point Technology Inc v PTT Public Co Ltd (2019):²⁶

Precedence clauses are of particular importance in substantial construction or IT contracts. Many people draft different sections of the contract and specification. The final contract is an amalgam of all these efforts. Sometimes … the contracts are so vast that no human being could possibly be expected to read them from beginning to end. The traditional rule that you construe a contract as a whole must now be understood in this context. Conflicts between different parts of the contract documents are almost inevitable in such cases. Precedence clauses tell the reader how such conflicts should be resolved.

Bar on Evidence of (1) Subjective Intent, or (2) Negotiations, or (3) Subsequent Conduct

20.25 The House of Lords in the ICS case (1998)²⁷ acknowledged the operation of the following three evidential bars:²⁸

(1) a party’s subjective intention;²⁹ and
(2) pre-formation negotiations evidence (except for the separate process of rectification, an independent equitable doctrine); and
(3) post-formation conduct.

The First Bar: Bar on Evidence of Subjective Intent.

20.26 There is a separate and free-standing bar on evidence of a party’s subjective intent or understanding concerning the meaning of a written contract.³⁰ It is axiomatic that the process of objective construction must be conducted without regard to such one-sided opinions, whether revealed during litigation in witness statements or testimonial evidence, or otherwise recorded earlier as a statement of a party’s personal opinion or subjective understanding.

The Second Bar: Bar on Evidence of Negotiations.

20.27 It is well-established that, when seeking to interpret written contracts (as distinct from oral or partly written contracts), a party (p. 428) cannot adduce evidence of the parties’ prior negotiations.³¹ In Chartbrook Ltd v Persimmon Homes Ltd (2009) Lord Hoffmann explained:³²

[41] The conclusion I would reach is that there is no clearly established case for departing from the exclusionary rule. The rule may well mean, as Lord Nicholls has argued [‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 LQR 577–91], that parties are sometimes held bound by a contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes. It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention …

[42] The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.

20.28 Beatson LJ in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd (2016) gave an erudite summary of the bar concerning negotiation evidence.³³

20.29 The bar on evidence of negotiations combines exclusion of both (i) subjective intent during the period of negotiation (whether such one-sided opinions or perceptions were expressed or merely internally held) and (ii) joint understandings or tentative consensus, as Leggatt LJ noted in Merthyr (South Wales) Ltd v Merthyr Tydfil County BC (2019):³⁴

[neither party can rely] on evidence of what was said during the course of pre-contractual negotiations for the purpose of drawing inferences about what the contract should be understood to mean. It is also clear from the Chartbrook case that it is not only statements reflecting one party’s intentions or aspirations which are excluded for this purpose but also communications which are capable of showing that the parties reached a consensus on a particular point or used words in an agreed sense.

Negotiation Evidence Bar and Implied Terms of Fact.

20.30 As noted at [18.47], the negotiation bar extends to the issue whether a term ‘implied in fact’ should be recognized as a feature of the relevant written agreement.³⁵

Contexts Where Negotiation Evidence Bar Does Not Apply.

20.31 However, in the Chartbrook case Lord Hoffmann noted³⁶ that it is acceptable to adduce extrinsic evidence of negotiations in the following four situations:

(p. 429)

(1) unusual usage: the contract contains words or phrases that the parties habitually use (whether or not in the course of negotiations) in a quite unusual sense, or the relevant wording is used in a special sense by, for example, members of a particular trade, etc; this category certainly includes technical language, lying outside ordinary parlance;³⁷
(2) estoppel by convention: (generally on this species of estoppel [2.58]); and
(3) rectification: (see chapter 21 on rectification);³⁸
(4) to elicit objective facts about factual matrix: in Oceanbulk Shipping and Trading SA v TMT Asia Ltd (2010)³⁹ the Supreme Court held (a) that ‘objective facts communicated by one party to the other in the course of the negotiations’ can be taken into account as background factual matrix evidence to determine the scope of the settlement agreement; and (b) that ‘without prejudice’ negotiations, which result in a settlement agreement, can be admitted for this purpose; point (a) turns on the difficult distinction between objective fact and subjective one-sided opinion; as for point (b), the decision avoids an unprincipled distinction between interpretation of all other commercial contracts and interpretation of settlement agreements.⁴⁰

Negotiations Relevant to a Different Contract.

20.32 The bar is upon evidence of negotiations which ante-dated the present contract, ‘contract 2’. It appears to be a moot issue whether the bar on negotiation evidence for the elucidation of contract 2 extends to negotiations prior to an earlier or indeed later, but different transaction, contract 1 or contract 3, between the same parties. It is submitted that such evidence, if it yields objective material, as distinct from subjective opinion, should be admissible with respect to contract 2. This is because the bar on negotiation evidence operates to immunize the text of the present contract from reference to negotiations which led to formation of that particular contract. The rationale of this bar does not extend to negotiations concerning different contracts, even if those other contracts were between the same parties, if there is insufficient contemporaneous and substantive connection between them. However, where the relevant negotiations were conjoint, in the sense that the same parties were negotiating similar and closely interconnected transactions, it is submitted that the rationale of the bar applies so as to preclude reference to negotiations relating to any of the relevant transactions.

No Bar to Considering Previous Contracts.

20.33 Another issue concerns evidence drawn from a prior contract between the same parties. Such material, if relevant, is admissible and falls outside the present bar. But, as Rix LJ suggested in HIH Casualty and General Insurance v New Hampshire Insurance Co (2001)⁴¹ if the present contract clearly supersedes the earlier agreement, the prior contract (or line of contracts) might not yield any helpful comparison. This is because, where there has been a textual change in the later contract, this will normally be the result of a deliberate change, as distinct from oversight or undetected one-sided (p. 430) opportunistic redrafting. Rix LJ concluded:⁴² ‘a cautious and sceptical approach to finding any assistance in the earlier contract seems to me to be a sound principle. What I doubt, however, is that such a principle can be elevated into a conclusive rule of law.’

Arguments Supporting the Bar on Negotiation Evidence.

20.34 Six possible rationales for this bar upon evidential use of the negotiations (for the purpose of construing written contracts) will now be listed and assessed.

(1) Certainty and Economy.

20.35 Reference to outside material or oral statements would complicate and unsettle the process of discovering the agreement’s meaning and effect. The bar is intended to promote certainty and procedural economy. The ‘message’ to the parties and their advisors is: ‘only the final written version of the contract counts; and so check and double-check the final document’. As Lord Hoffmann commented in Chartbrook Ltd v Persimmon Homes Ltd (2009):⁴³ ‘It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention.’ Lord Hoffmann supported argument (1), concerning uncertainty and unpredictability.⁴⁴ In reality, however, the ‘message’ is weakened, if not contradicted, by reference to negotiation evidence if a plea of common mistake rectification is raised. Lord Hoffmann conceded this fact:⁴⁵

when a dispute over construction is litigated, evidence of the pre-contractual negotiations is almost invariably tendered in support of an alternative claim for rectification (as in Prenn v Simmonds [1971] 1 WLR 1381 and in this case) or an argument based on estoppel by convention or some alleged exception to the exclusionary rule. Even if such an alternative claim does not succeed, the judge will have read and possibly been influenced by the evidence. The rule therefore achieves little in saving costs and its abolition would restore some intellectual honesty to the judicial approach to interpretation.

(2) Fluctuations of Negotiation.

20.36 It is notorious that some negotiations involve rapid and not always transparent shifts of position, as noted in Prenn v Simmonds (1971), where Lord Wilberforce said:⁴⁶

By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different.

(3) Subjective Material.

20.37 The negotiation bar incidentally excludes one-sided (‘subjective’) observations which would contaminate the process of objective construction of the (p. 431) document.⁴⁷ It should be recalled that there is a separate and free-standing independent bar on the use of evidence, when adduced for the purpose of construing a written contract, on a party’s subjective opinion (whether expressed during negotiations or at some other point in the transaction’s history). And so, the present rationale seems entirely parasitic upon that separate bar. On the bar upon negotiation evidence, Lord Sumption commented:⁴⁸

the reason [for the exclusionary bar] is more fundamental than [the ‘reasons of practical policy’ mentioned by Lord Hoffmann]. The exclusionary rule follows from the objective character of all contractual construction. The course of the negotiations cannot tell us what the contract objectively meant. It can tell us only what one or other of the parties subjectively thought or assumed or hoped that it meant . …

(4) Third Parties.

20.38 Third parties might have innocently relied upon the document, but they are unlikely to have been privy to the parties’ prior negotiations.⁴⁹

(5) Manufactured Material.

20.39 If the rule did not exist, parties might be tempted to manufacture ‘self-serving’ declarations of their preferred interpretation during the negotiations.⁵⁰

(6) Party Agreement to Exclude.

20.40 The parties’ decision to place their agreement in final written form implicitly excludes reference to any prior discussion:⁵¹ ‘The very purpose of a [written] contract is to put an end to the disputes which would inevitably arise if the matter were left upon verbal negotiations or upon mixed communings partly consisting of letters and partly of conversations.’ (And see the quotation from Stevens, cited at [17.30], in the context of the cognate parol evidence rule.)

20.41 Lord Hoffmann’s discussion of the evidential bar in Chartbrook Ltd v Persimmon Homes Ltd (2009)⁵² can be construed as providing support for arguments (1) to (6).

Deleted Words.

20.42 In Narandas-Girdhar v Bradstock (2016) Briggs LJ said:⁵³ ‘the relevant principle is that if the fact of deletion shows what it is the parties agreed that they did not agree and there is ambiguity in the words that remain, then the deleted provision may be an aid to construction, albeit one that must be used with care’.

(p. 432) 20.43 In Bou-Simon v BGC Brokers LP (2018)⁵⁴ Singh LJ suggested that the court would take note of the fact that, during negotiations, text had been deleted on a point which one party now suggests is subject to an implied term. Asplin LJ’s discussion⁵⁵ is more cautious (on this point see [18.50]); see also the Sparks case (2017) and the Government of Kelantan case (1923) at [18.47]).

Rectification.

20.44 This equitable remedy presupposes that there is a mismatach between shared intention and contractual express (‘common mistake rectification’) or, in the case of ‘unilateral mistake rectification’, that one party has taken advantage of the other’s known error. And so it is inevitable that any rectification claim requires the court to examine the history of the negotiations. This encourages obvious tactical resort to rectification. And so, a plea involving rectification will often be brought side by side with submissions concerning ordinary construction.⁵⁶ This was the position at first instance in Prenn v Simmonds (1971).⁵⁷ Similarly, in Chartbrook Ltd v Persimmon Homes Ltd (2009) the rectification issue had been addressed in the lower courts, but on final appeal the issue turned solely on construction. Nevertheless, in the Chartbrook case Lord Hoffmann spoke at length about rectification in considered dicta which, in earlier cases, had been treated as binding on the lower courts; but those dicta have now been repudiated by Leggatt LJ in the Court of Appeal in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd (Rev 1) (2019).⁵⁸

The Third Bar: Bar on Evidence of Post-formation Conduct.

20.45 A written contract should not be construed by reference to the parties’ conduct which has occurred subsequent to the contract’s formation.⁵⁹ But the following three⁶⁰ exceptions are recognized:

(1) that the parties had specifically agreed to vary or discharge the agreement (ie a fully fledged variation supported by consideration, or made by deed); or
(2) there has been a waiver of a party’s rights;⁶¹ or
(3) that the doctrine of estoppel by convention has arisen on these facts, that is, there is evidence of a consensual understanding manifested in their interactive dealings (generally on that doctrine [2.58]).

20.46 Earlier, expressing the general bar, but also admitting some qualifications upon it, Lord Wright said in Ottoman Bank of Nicosia v Chakarian (1938):⁶²

(p. 433)

if a contract is clear and unambiguous its true effect cannot be changed merely by the course of conduct adopted by the parties in acting under it. Such conduct, if it is clear and unambiguous, may in certain events raise the inference that the parties have agreed to modify their contract, but short of that such conduct cannot have the effect of changing the operation of an unambiguous agreement, though it might possibly in special cases support, along with other appropriate evidence, a claim for rectification.

20.47 The point concerning an agreement to ‘modify’ is sound, see exceptions (1) and (2) above. But as for rectification, Lord Wright’s comment is Delphic, even curious, or perhaps it is simply a slip. The difficulty in accepting his point regarding rectification and post-formation evidence is that, ex hypothesi, the conduct in issue is post-formation, whereas rectification looks to pre-formation evidence.

Factual Matrix Evidence (Background to the Transaction Other than Negotiations)

Lord Wilberforce’s Seminal Discussion.

20.48 This topic is dominated by Lord Wilberforce’s analytical discussion in Prenn v Simonds (1971)⁶³ and Reardon Smith Line Ltd v Hansen-Tangen (‘The Diana Prosperity’) (1976)⁶⁴ (and it is surprising that neither of these decisions was considered important enough to be elevated from the first volume to the ‘Pantheon’ of volumes 2 or 3 of the Weekly Law Reports, which would earmark them for eventual reporting in the Appeal Cases volumes of the law reports). Lord Wilberforce’s significant contribution to the development of contractual interpretation in Prenn v Simmonds (1971) and Reardon Smith Line Ltd v Hansen Tangen (1976) was acknowledged three times by Lord Hoffmann in the Mannai, ICS, and Kirin-Amgen cases,⁶⁵ and by Lord Neuberger⁶⁶ in Arnold v Britton (2015).

20.49 In Prenn v Simonds (1971)⁶⁷ Lord Wilberforce emphasized that, as part of the process of construction, the court can legitimately have regard to the ‘factual matrix’, that is, the context in which the transaction arose. But pre-formation negotiations cannot be considered for the purpose of construction and interpretation.

20.50 Similarly, the House of Lords in Reardon Smith Line Ltd v Hansen-Tangen (‘The Diana Prosperity’) (1976) confirmed that the contract is not to be construed in a sterile semantic vacuum. Instead it must be examined against the ‘factual matrix’, or commercial setting, in which it is situated. He said:⁶⁸

(p. 434)

No contracts are made in a vacuum: there is always a setting in which they have to be placed … In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating … [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 … [What] the court must do must be to place itself in thought in the same factual matrix as that in which the parties were . …

20.51 As Lord Mustill put it, in Charter Reinsurance Co Ltd v Fagan (1997):⁶⁹ ‘The words must be set in the landscape of the instrument as a whole’. This broader examination will assist the court to understand the contract’s main aim and context, but without straying into the impermissible detail of the minutiae of the negotiations.

Prenn v Simonds (1971): in Detail.

20.52 The trigger for Simmonds’ share option was a specified level of ‘profits’ (the relevant shares were in a subsidiary company, which was part of a group). Based on both the commercial ‘purpose’ of the document, as indicated by its factual matrix, and having regard also to internal linguistic factors (negotiation evidence being inadmissible), it was held that ‘profits’ referred to (i) corporate group profits, as distinct from (ii) the profits of the subsidiary company. Because the trigger was (i), Simmonds was now able to show that he had become entitled to exercise the share option.

20.53 Simmonds succeeded at all three levels (Pennycuick V-C, Court of Appeal, and House of Lords). The first instance decision had turned on rectification, but in both appeals the case was resolved by construction. On final appeal, Lord Wilberforce also noted that the rival and unsuccessful interpretation in that case did not ‘correspond with commercial good sense’.⁷⁰ Lord Wilberforce presented an important analysis of the legal framework governing construction of written contracts, which culminated with this comment:⁷¹

evidence of negotiations, or of the parties’ intentions, and a fortiori of Dr Simmonds’ intentions, ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction.

20.54 On the facts Lord Wilberforce concluded⁷² that the proper construction was that ‘profits’ referred to group profits.

Reardon Smith Line Ltd v Hansen-Tangen (‘The Diana Prosperity’) (1976).

20.55 This was the second of the seminal discussions of interpretation in which Lord Wilberforce was dominant and influential. In this case the House of Lords held that, having regard to the factual matrix evidence, there had been no misdelivery of a vessel and that the buyer was obliged to pay for the relevant vessel.⁷³

Transparency of the Background.

(p. 435) 20.56 The background material must be accessible to both parties, as Lewison LJ emphasized in Kason Kek-Gardner Ltd v Process Components Ltd (2017).⁷⁴ And so, when construing a negotiable instrument, or other document which is likely to pass through different hands, the courts insist on a narrow consideration of the factual matrix. The Supreme Court emphasized this point in Re Sigma Finance Corpn (2009).⁷⁵ Lord Collins (with the support of Lords Mance and Hope) disapproved too broad a search for background information when, as in the Sigma case itself, the parties to the relevant transaction might not have been present at her birth, and had instead become second-hand or remoter recipients of others’ contractual text which had been in circulation in the relevant financial market.

Objective Facts and Not Subjective Material or Evidence of Various Negotiation Phases.

20.57 In Merthyr (South Wales) Ltd v Merthyr Tydfil County BC (2019)⁷⁶ Leggatt LJ repudiated the pre-Chartbrook decision of Sales J in Investec Bank (Channel Islands) Ltd v The Retail Group plc (2009),⁷⁷ where it had been stated that negotiation evidence could be legitimately considered as shedding light on the transaction’s ‘genesis’ and ‘aim’. Instead the true proposition, as Leggatt LJ emphasized, is that such background evidence is admitted only in (i) a circumscribed fashion to illuminate the transaction’s overall genesis and the parties’ objective aim, and not (ii) in a particular and focused manner to allow the negotiation evidence to control how the contract, or particular parts of it, should be interpreted. To stray beyond (i) and venture as far as (ii) would involve subverting the bar on negotiation evidence which the House of Lords had upheld in the Chartbrook case.⁷⁸

20.58 Consistent with this, Hildyard J in Lehman Brothers International (Europe) (In Administration) v Exotix Partners LLP (2019)⁷⁹ adopted a delineation of the factual matrix which reflected an objective reasonable understanding of what the parties would know, or be expected to be able to discover, when engaging in the relevant trade.

Commercial Common Sense

Leading Case.

20.59 The Supreme Court in Rainy Sky SA v Kookmin Bank (2011)⁸⁰ held that where there are two available constructions (ie a genuine, but not a specious, ambiguity), the court will adopt that which is more consistent with commercial common sense.⁸¹ A (p. 436) banker’s payment bond was held to cover a shipyard’s inability to repay caused by insolvency, and not just its failure by breach to repay. Such a commercial common-sense construction is appropriate in the face of genuine ambiguity.

20.60 In greater detail, the bank contended that the relevant clause in these bonds did not cover the case where the payee could not make repayment to the purchaser because of the payee’s insolvency. If so, the bonds would only cover a less obvious commercial failure to repay: the payee’s refusal, although solvent, to repay when the payor has justifiably terminated the contract and where the payor becomes entitled to recover the payment.

20.61 Lord Clarke said:⁸² ‘where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common-sense’.

20.62 Similarly, he said:⁸³ ‘Since the language of paragraph 3 is capable of two meanings it is appropriate for the court to have regard to considerations of commercial common-sense in resolving the question what a reasonable person would have understood the parties to have meant.’

20.63 Lord Sumption has commented extra-judicially:⁸⁴ ‘it was in the interest of the purchaser to get as much as it could out of the guarantor bank. The surrounding circumstances cannot tell us how far he succeeded in that endeavour, as against a bank whose interest was to concede as little as possible.’ But, with respect, the Supreme Court’s construction of the bond in ‘The Rainy Sky’ seems sound.

Other Cases.

20.64 In Grove Developments Ltd v Balfour Beatty Regional Construction Ltd (2016)⁸⁵ the parties had entered into a contract on the JCT Design and Build Contract 2011 form, with ‘bespoke’ amendments, including a schedule of twenty-three monthly interim payment dates ending on the contractual date of practical completion. The question was whether the agreement should be construed, alternatively whether an implied term could be found (on that aspect [18.122]), to enable the contractor (Balfour Beatty) to make a twenty-fourth interim application for payment in respect of work done after expiry of the payment schedule. The Court of Appeal, by the majority, held that the contract was not ambiguous and that, in effect, it constituted a bad bargain.⁸⁶ Although the contractor would receive full payment in due course for all its work, it would have to wait. There was no scope for giving effect to an additional interim payment in respect of the period covered by the express terms of the contract. In a dissenting judgment in the Grove Developments case, Vos LJ said that the contract should be construed as providing for an additional interim payment application in respect of work until the date of practical completion. But the majority rejected this, declaring⁸⁷ that Vos LJ’s approach involved unacceptable insertion into the text of a word which was missing, namely the word(s) ‘et cetera’.

(p. 437) 20.65 In Crédit Suisse Asset Management LLC v Titan Europe 2006-1 plc (2016)⁸⁸ Arden LJ (with whom Underhill LJ agreed) gave weight to the factor of commercial common sense when construing a complex financial contract. But in his dissent Briggs LJ⁸⁹ considered that the document was sufficiently clear, so that commercial common sense did not arise for consideration. It is submitted that the following comment by Briggs LJ might have resonance over the ensuing decades:⁹⁰

The detection of ambiguity does not entitle the court to resolve it simply by reference to a balance of commercial considerations. Sometimes the words used, even if admitting some ambiguity, still point firmly towards a different answer to that which is to be derived from a balancing of commercial considerations.

20.66 In Network Rail Infrastructure Ltd v ABC Electrification Ltd (2019)⁹¹ Joanna Smith QC held that the word ‘default’ covered any form of contractual default. The judge rejected the attempt to narrow this word to ‘wilful’ and deliberate’ default. That would involve the addition of words. It was held that neither ‘corrective construction’ nor commercial common-sense justified rewriting the contract so as to relieve the party who had been in actual default from the loss of £13 million (that being the amount of the disallowed cost consequent on that party’s default). The case concerned interpretation of a clause⁹² concerning ‘Disallowed Cost’ in a contract for the construction of some rail track. As for ‘corrective construction’, the judge said:⁹³ ‘[35] … there is nothing in the Contract to support the proposition that the parties intended the word ‘default’ to be restricted purely to wilful and deliberate failure to comply with the obligations under the Contract’. On the issue of commercial common-sense the judge said:⁹⁴

[39] … the words … are clear. This is not a situation in which I am dealing with two conflicting interpretations in an ambiguous clause, where it may often be appropriate to adopt the interpretation which is most consistent with business common-sense. As Lord Clarke made clear in Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at [23] [20.59], ‘where the parties have used unambiguous language, the court must apply it.’ …

[40] … ABC may now take the view that the commercial consequences of Network Rail’s interpretation of clause 1.1(j)(iii) are disastrous but, as Lord Neuberger said in Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [19] and [20] [20.67]: ‘The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language … a court should be slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight.’

(p. 438) No Escape from A Bad Bargain: Arnold v Britton (2015)

Leading Modern Decision.

20.67 In Arnold v Britton (2015)⁹⁵ the Supreme Court made clear that the courts cannot rewrite a contract in order to relieve a party against the adverse consequences of an imprudent term or set of arrangements.

20.68 The case concerned service charges payable by tenants on a Welsh holiday chalet park. The contracts provided that a service charge of £90 would increase ‘by ten pounds per hundred for every subsequent three-year period’. This wording (irredeemably but disastrously) imposed uncapped compound interest. As noted by Lord Neuberger, if a lease had started in 1980, the service charge would be over £2,500 in 2015 and £550,000 by 2072. The tenants contended that the relevant clause should be construed as requiring the tenants to contribute a proportionate part of the landlord’s actual outlay in each year, subject to a cap calculated as the compound interest at 10 per cent on the original sum of £90. This had been the construction favoured by the trial judge. On third appeal, the majority of the Supreme Court held that the wording was clear. The service charge was a fixed sum, which was inflation-linked in a manner which had proved very advantageous to the landlord.

20.69 In Arnold v Britton (2015) Lord Neuberger said:⁹⁶

… commercial common-sense is not to be invoked retrospectively … Commercial common-sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made.

20.70 Lord Neuberger added:⁹⁷

… while commercial common-sense is a very important factor to take into account when interpreting a contract … it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalize an astute party.

20.71 Lord Neuberger further commented:⁹⁸ ‘there is no principle of interpretation which entitles a court to re-write a contractual provision simply because the factor which the parties catered for does not seem to be developing in the way in which the parties may have expected’.

20.72 Nor, as Lord Hodge said, would it be legitimate to rewrite the clause in the interest of abstract fairness:⁹⁹ ‘[construction is not intended] to re-write the parties’ agreement because it was unwise to gamble on future economic circumstances in a long term contract or because (p. 439) subsequent events have shown that the natural meaning of the words has produced a bad bargain for one side’.

20.73 In Arnold v Britton (2015) the court had no opportunity for ‘corrective construction’ because there had been no obvious (shared) error of drafting, and there was no obvious solution.¹⁰⁰

Wording Probably the Result of Tough Bargaining: Wood v Capita (2017)

20.74 In Wood v Capita Insurance Services Ltd (2017)¹⁰¹ the Supreme Court held that the courts should not avoid adopting a construction of a written contract just because it confers an advantage on one party. If the advantage makes commercial sense, it is likely that it was both deliberate and the result of hard negotiation. Furthermore, the court held that it would be wrong to conduct the process of construction with an overly sensitive and pedantic regard to linguistic imperfection including problems of punctuation or arrangement. This case has become the locus classicus in the sense that the Supreme Court currently accepts that the principles of interpretation of written contracts were authoritatively summarized by Lord Hodge¹⁰² in Wood v Capita Insurance Services Ltd (2017): see text at [20.15] above for quotations, as well as for Lord Hodge’s comments at [20.14] on the significance of Arnold v Britton (2016).

20.75 The case concerned a share-purchase agreement. The vendor’s liabilities are customarily arranged in favour of the buyer as (i) a set of warranties and (ii) a schedule of indemnities. The dispute concerned the material scope of one of the indemnities. The Supreme Court noted, first, that indemnity liability was not time-limited (other than the basic six-year limitation period for breach of contract). By contrast, a time-clause in the present transaction restricted liability in respect of the warranties to two years, a period which had already elapsed when the present dispute fell for consideration. The Supreme Court held that the relevant indemnity should be construed as not extending to the situation where the loss (as here) was a result of a self-reporting by the purchaser of the problem to the Financial Services Authority, the regulator. The indemnity thus did not cover the target company’s liability to compensate customers if that liability arose from such self-reporting of the target company’s default to the regulator, whereas time-limited warranty liability did cover this. The judge at first instance, Popplewell J, had adopted a pro-buyer construction which made the indemnity clause extend to the present facts, that is, to include liability consequent upon self-reporting. But both the Court of Appeal and Supreme Court held that a narrower construction, operating in favour of the seller, was available, so that self-reporting was not included in the scope of the indemnity cover.

(p. 440) 20.76 That narrow construction was consistent with the commercial supposition that the seller did not wish its indemnity liability (since it ran for more than two years) to mirror in scope that arising under the warranty. This point was made crisply by Lord Hodge in the Supreme Court in Wood v Capita Insurance Services Ltd:¹⁰³ ‘It is not contrary to business common-sense for the parties to agree wide ranging warranties, which are subject to a time limit, and in addition to agree a further indemnity, which is not subject to any such limit but is triggered only in limited circumstances’.

20.77 And so the Supreme Court held, upholding the Court of Appeal, that the seller was not liable for this loss under the indemnity.

20.78 In greater detail, Wood sold to Capita his shares in company T. The target company, T, sold insurance cover for classic cars. Capita, after the sale, discovered that there had been ‘mis-selling’ by T’s employees of the insurance cover. The mis-selling involved selling the relevant insurance cover at prices above the originally quoted level for insurance cover, when there was no sound reason for the increase, or the reason dishonestly given for the increase was false. Capita punctiliously reported this to the Financial Services Authority (FSA) (an example of self-reporting). The upshot was that T was made liable for many millions of compensation to affected insured persons. It was held by the Court of Appeal, and upheld by the Supreme Court, that the seller, Wood, was not liable for this loss under the indemnity. The indemnity was construed as not extending to the situation where the loss as a result of a self-reporting by the purchaser of the problem to the FSA.

20.79 The indemnity provided:

7.11. The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service. (Emphasis added.)

20.80 The Supreme Court agreed with the Court of Appeal’s decision that this difficult, erratically punctuated, and somewhat tautological language meant this:¹⁰⁴

[The indemnifier’s] liability under the indemnity cannot arise unless there has been either (i) a claim made against the Company, a Seller or a Relevant Person or (ii) a complaint has been registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person and, in either case, the claim or complaint (a) related to the period prior to the Completion Date and (b) pertains to any mis-selling or suspected mis-selling of any insurance or insurance related product.

(p. 441) 20.81 Wood v Capita Insurance Services Ltd (2017) demonstrates the importance of reading provisions against the background of the whole contract. The courts must also be sensitive to the possibility that the negotiations prevailed in favour of one party, not as a matter of accident, but on rational grounds, consistent with commercial common sense. The Court of Appeal and Supreme Court’s approach turned on the need for interpretation of the scope of indemnities to proceed by considering the wider context of the operation and scope of the relevant warranties. Mismatches in scope between the respective rafts of warranties and indemnities are not irrational or commercially surprising. And thus the warranties, in principle available in respect of the present problem, were subject to a two-year express contractual time-limit, whereas liability under the indemnities was not restricted by any such express time-limit and instead would be subject only to the six year period of limitation under the statute of limitations.¹⁰⁵

20.82 In short, the fact that the vendor faced greater time exposure under the indemnities was the pivotal factor. This meant that it was not commercially absurd, and indeed both sensible and even inevitable, that the seller would have fought hard to restrict the scope of the indemnity to claims or complaints made directly against the target company or to claims or complaints generated as a result of contact between victims making complaints about the target company to the FSA, etc.

‘Corrective Construction’

Nature and Criteria.¹⁰⁶

20.83 Even without resort to rectification, the courts are at liberty to reconstruct phrases if it is obvious that something has gone wrong in the contractual formulation and it is also evident precisely how the textual defect should be remedied. And so, adopting the ordinary process of construction, and without resort to rectification, the court (p. 442) can interpret a written contract so as to correct a slip or other drafting problem, provided it is clear both that (i) there is a defect in the text and (ii) that text can be rearranged in an obvious way so as to reflect the parties’ objective true meaning. The essence of the process is immediate identification of an obvious error and immediate substitution of an obvious revision or re-reading of the text: ‘double obviousness’.¹⁰⁷

20.84 Snowden J in Hayfin Opal Luxco 3 SARL v Windermere VII Cmbs plc (2016) summarized¹⁰⁸ the present doctrine and declared¹⁰⁹ that ‘corrective construction’ had not been impliedly abrogated by the Supreme Court in the Marks and Spencer case. Earlier, Arden LJ in Cherry Tree Investments Ltd v Landmain Ltd (2012) identified a threefold set of criteria:¹¹⁰

In particular: (i) it must be clear from the document interpreted with the admissible background that the parties have made a mistake and what that mistake is; (ii) it must be clear, from the rest of the agreement interpreted with the admissible background, what the parties intended to agree; and (iii) the mistake must be one of language or syntax.

20.85 Point (iii) had been earlier emphasized by Arden LJ in Scottish Widows Fund and Life Assurance v BGC International (2012)¹¹¹ where she said:¹¹² ‘[apart from syntactical and verbal errors of drafting] it could be said that ‘something must have gone wrong with the language’ if the provision in question is inconsistent with some other provision which it is clear must have precedence’.

20.86 Arden LJ’s formulation of the test at (iii) is attractive if understood to refer to problems arising in the formulation of the written contract, as distinct from failure by both parties to think ahead and resolve issues of substance within their negotiations.

20.87 ‘Corrective construction’ is ‘controversial’¹¹³ for two reasons: first, the court is granted power to correct the text, employing substitution of words, or rearrangement of text, where it is satisfied that something has gone awry (obvious error) and there is a manifest verbal correction of that erroneous form of expression; but this alteration can range from a small and confined slip to a wide-ranging rearrangement of the text; and, secondly, corrective (p. 443) construction has a close, and hence problematic, relationship with rectification (see the literature cited at [20.83] above, on this second point). Unlike rectification, there is no discretion to withhold ‘corrective construction’, whether on general grounds or specifically to protect third party purchasers without notice.¹¹⁴ The discussion in that case concerned a long-established canon of construction, which is a sibling of, or perhaps now subsumed within, the modern principle of ‘corrective construction’. Lewison LJ noted that a licence agreement concerning a trademark gave the wrong number of its registration. But this was a plain instance of false description: ‘In those circumstances the court is entitled to apply the ancient principle falsa demonstratio non nocet (‘a plain misdescription does no harm’).’¹¹⁵

20.88 In the Kason Kek-Gardner case Lewison LJ added:¹¹⁶

[42] … when the court applies these principles [of construction, to cure a false description, etc] it is not rectifying the contract (in the sense in which that expression is used when dealing with the equitable remedy of rectification). It is interpreting the contract, which has the same meaning both at common law and in equity. If it were a question of the grant of the equitable remedy of rectification, the intervention of third party rights might lead a court to decline to grant the remedy. But where it is a question of interpreting the contract, there is no such discretion: see Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, [2013] Ch 305 at [99] and [122].

20.89 In Network Rail Infrastructure Ltd v ABC Electrification Ltd (2019)¹¹⁷ the judge rejected the attempt to narrow this word ‘default’ to ‘wilful’ and deliberate’ default in the context of a ‘Disallowed Cost’ clause. The judge said that ‘corrective construction’ presupposed that the court had been satisfied:¹¹⁸ ‘not only that the parties had made a mistake in referring to a “default” without qualification, but also as to precisely the words that they had intended to use (see Arnold v Britton, Lord Hodge at [78])’. But here there was no good reason to refrain from applying the unqualified word ‘default’ in its unvarnished general sense.

Examples of ‘Corrective Construction’: Example 1. Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) (1998).¹¹⁹

20.90 This case is often abbreviated simply as the ICS case. Here the House of Lords, by a majority (Lord Lloyd dissenting), held that the following phrase (excluded from an assignment) ‘any claim (whether sounding in rescission for undue influence or otherwise)’ meant ‘any claim sounding in rescission (whether for undue influence or otherwise)’. Lord Hoffmann, in a seminal restatement of the principles of interpretation, encouraged¹²⁰ courts not to be shy of verbal rearrangement of difficult text, as part of the legitimate process of Common Law construction. Such rearrangement is permissible, however, only if (i) it is obvious that the text is defective and (ii) also obvious how it should be adjusted (ie ‘corrective construction’).¹²¹ And so, a document can be (p. 444) judicially revised either by ordinary interpretation principles or by the doctrine of rectification (chapter 21). The safer course is for a party who is seeking a favourable judicial decision on a disputed written contract to plead and argue before the court both ‘construction’ (in the ‘corrective’ style just explained) and ‘rectification’.

20.91 In the ICS case (1988) (Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1))¹²² (for the fundamental passage see [20.18]) a large number of homeowners had entered into disastrous investments following mis-selling by investment advisors who had become insolvent. The investment involved re-mortgaging their homes and investing in funds. But the funds proved inadequate. The investors faced repossession of their mortgaged properties by the West Bromwich building society. As for the liability of the investment advisors, the investors were entitled to compensation from the Investors Compensation Scheme under a statutory scheme. Such compensation had been paid, but in return for the investors assigning to ICS their claims to compensation vis-à-vis both the investment advisors and all others (thus including the West Bromwich Building Society’s possible liability to pay compensation to the investors). It appears that the intention underlying the assignment was that all compensatory causes of action would be transferred by the investors to the ICS, but the investors would retain any rights to rescind the mortgages, together with monetary adjustment consequent on restoration of the parties to the original position and a possible indemnity. But the assignment expressed this retention cryptically by reserving (in clause 3(b)) in favour of the investors (and thus removing from the assignment) a certain category of ‘claim’:

Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the West Bromwich Building Society in which you claim an abatement of sums which you would otherwise have to repay to that society in respect of sums borrowed by you from that society in connection with the transaction and dealings giving rise to the claim (including interest on any such sums).

20.92 This exclusion was construed by a majority of the House of Lords to mean: ‘Any claim sounding in rescission (whether for undue influence or otherwise)’. It is submitted that this is a correct reading of the scheme. ICS was intended to be the compensatory vehicle (compensating the investors but receiving an assignment of their rights to damages) but that assignment was intended to operate¹²³ subject to the investors retaining certain rights of vis-à-vis the mortgage lender. Claims brought by ICS against the building society and by individual investors against the building society overlapped, but the House of Lords held that ICS was the successful assignee of the compensatory claims, the individual investors retaining only the possibility of obtaining rescission of the mortgages. In the ICS case a majority¹²⁴ held that this reservation was restricted to the adjustment of the liabilities between the borrower/investor and the building society consequent on a successful claim by the investor for rescission (reversing on this point the Court of Appeal). The same majority (p. 445) also held that the assignment of all claims for compensation was effective (reversing on this point Evans-Lombe J). The upshot of this interpretation was that: (i) the investors retained their right to rescind the mortgages if there had been misrepresentation or some other vitiating factor; (ii) ICS (having already compensated the investors under the statutory scheme) could proceed to bring compensatory claims against the building society.¹²⁵

Example 2. Chartbrook Ltd v Persimmon Homes Ltd (2009).¹²⁶

20.93 Chartbrook the owners contended that the overage clause in a housing development contract should be interpreted or rectified in their favour so as to yield, in addition to the basic rate, a percentage of total sales. Persimmon, the developer, successfully resisted this, contending instead that the same clause should be construed as providing a contingent payment which would be triggered only if the total sales exceeded a specified percentage of the basic rate.

20.94 The House of Lords held that it made no sense in the present context for Chartbrook, the owner, to receive the basic rate per square foot for a residential development plus a specified percentage for sale prices exceeding that basic amount. That was too generous. Such a construction would dispense with any real element of contingency, given the low level of the basic rate and the state of the property market. Instead Chartbrook, the owner, was entitled to the extra amount only if the cumulative sales price was a sum exceeding the specified percentage of the basic rate. The (complicated) issue of the overage clause’s objective scope was treated by Lord Hoffmann as a self-evident matter. He emphasized¹²⁷ two commercial considerations: (i) the absence (in the current market climate) of any risk to Chartbrook (the owner) before the uplift would be triggered, if their interpretation were to prevail; (ii) the implausibility of the parties having adopted the land price figure for this trigger, rather than a rounded-up figure.

20.95 Davies notes¹²⁸ that the formula:

Additional Residential Payment (`ARP’) means 23.4% of the price achieved for each Residential Unity in excess of the Minimum Guaranteed residential Unit Value [‘MGRUV’] less the Costs and Incentives [‘C & I’] was construed to mean: ‘ARP’ means the amount (if any) by which 23.4% of the price achieved for each Residential Unit is in excess of the ‘MGRUV’ less the ‘C & I’.

20.96 Lord Sumption has queried¹²⁹ the result in the Chartbrook case:

Lord Hoffmann reconstructed [in the Chartbrook case] the commercial logic of the transaction on the assumption that it was highly unlikely that land values would fall. From this he concluded that on the developer’s construction the result was more favourable to him than the parties can have intended. The result may have been just, but I have some (p. 446) difficulty in recognizing it as a process of construction. Moreover, if the case had been decided two decades earlier, when property values were indeed falling fast, it may be that Lord Hoffmann’s view about the parties’ expectation would have been different [compare, for example the decline in property values which underpins the decision in Cheese v Thomas (1994) [11.89]].

20.97 As noted at [21.12], the Court of Appeal in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd (Rev 1) (2019)¹³⁰ has rejected obiter remarks by Lord Hoffmann in the Chartbrook case¹³¹ concerning the nature of common mistake rectification.

Example 3.

20.98 In Littman v Aspen Oil (Broking) Ltd (2005)¹³² a lease contained a mutual break clause exercisable by either party upon giving six months’ written notice. The landlord had intended that the contract should permit the tenant to exercise this break clause only if the tenant had complied with its covenants at the relevant time. But the botched text stated: ‘that up to the Termination Date in the case of a notice given by the Landlord [emphasis added] the Tenant shall have paid the rents … and shall have duly observed and performed the Tenant’s covenants … and the conditions herein contained’. The Court of Appeal upheld Hart J’s decision that the four words highlighted above should be construed to read: ‘given by the Tenant’. Otherwise, the final text would be commercial nonsense. There is no need for the corrupted text to be grammatically or syntactically wrong. Such ‘construction’ could cure a manifest slip.

Example 4.

20.99 In Pink Floyd Music Ltd v EMI Records Ltd (2010)¹³³ Lord Neuberger MR and Laws LJ held that an agreement for exploitation of the ‘records’ of Pink Floyd could be construed as embracing digital recordings by the same band. To decide otherwise would run counter to the obvious commercial purpose of the transaction (but Carnwath LJ dissented, finding no such obvious mistake).

Example 5.

20.100 In Caresse Navigation Ltd v Office National de l’Electricité (‘The Channel Ranger’) (2014)¹³⁴ a bill of lading purported to incorporate from a charterparty ‘[a]ll terms … including the law and arbitration clause’. In fact, the charterparty contained no arbitration clause and instead provided for the exclusive jurisdiction of the English courts. The Court of Appeal held that the jurisdiction clause was validly incorporated. The incorporation clause (containing the words ‘and arbitration clause’) had been plainly intended to incorporate ‘any arbitration clause or jurisdiction clause’.

Example 6.

20.101 In Hopkinson v Towergate Financial (Group) Ltd (2018)¹³⁵ the phrase ‘taxation covenant’ was held to be a manifest error for ‘tax warranties’. The error had occurred in a notification clause within a share purchase agreement.

Example 7.

(p. 447) 20.102 In Liberty Mercian Ltd v Cuddy Civil Engineering Ltd (2013)¹³⁶ Ramsey J held that there was no basis for substituting a different party as the named party in a contract. The judge said:¹³⁷

[99] … it requires a strong case to persuade the court that something has gone wrong with the language in naming CCEL and not CDDL as a party to the Contract. It must be an intention which a reasonable person would not have understood them to have had … [100] … I do not consider that this is a case where on an objective reading of the Contract having regard to the relevant background or context it can be said that there is a mistake.

Example 8.

20.103 The following example is equivocal and rests on dictum. In McDonagh v Bank of Scotland plc (2018) Morgan J said¹³⁸ that he would have been prepared to have exercised ‘corrective construction’ (in favour of the lender) so as to remove words had it not been possible to achieve the same outcome by a different legal analysis. The suggested deletion involved excising from a repayment obligation a reference to a specific sum in UK pounds. The result achieved in the case involved repayment of the loan in Euros, which was the currency in which the loan had been drawn down in favour of the borrower.

Example 9.

20.104 But removal of words was appropriate in the following case. In Al-Dowaisan v Al-Salam (2018)¹³⁹ Judge Hodge QC held that it was an obvious matter that words in a document must be treated as deleted and that this was a legitimate application of the process of ‘corrective construction’, without the need to employ the equitable remedy of rectification. The obvious error in that case was the failure to strike out from the document’s default provisions which had clearly become redundant because of the insertion into the text of positive and express provisions which constituted declarations of trust with respect to shareholdings. And so, this was a simple case where the necessary deletion was obviously required otherwise the document would be a nonsense and contain plainly contradictory elements.

Example 10.

20.105 In Monex Europe Ltd v Pothecary (2019)¹⁴⁰ the judge was prepared, during the hearing of an application for an interim injunction, to predict that at trial ‘corrective construction’ might yield an interpretation, notably by the addition of the word ‘global’, which would operate in favour of the employer’s claim. It is submitted that at a pre-trial hearing the court can and should normally be able to decide finally a point of interpretation of a written contract, this being a point of law which, in nearly all circumstances, need not be postponed until trial. The only exception is where trial is necessary to hear oral testimony on the factual matrix, but that would be exceptional, given the narrow approach to factual matrix or admissible background evidence.

Example 11.

20.106 In Prudential Assurance Co Ltd v Ayres (2008)¹⁴¹ the Court of Appeal held that there had been no true intent to confer upon a third party assignor a ‘shield’, by way of (p. 448) a ‘limb 2’ Contracts (Rights of Third Parties) Act 1999 benefit, against rent liability. Instead there had been a drafting error. The error was palpable once regard was had to the context and, notably, the sequence of documents.

Examples 12 to 15.

20.107 There are other instances of ‘corrective construction’: (12) Holding & Barnes plc v Hill House Hammond Ltd (2001);¹⁴² (13) KPMG LLP v Network Rail Infrastructure Ltd (2007);¹⁴³ (14) Multi-Link Leisure v North Lanarkshire (2010);¹⁴⁴ (15) Springwell Navigation Corporation v JP Morgan Chase (2010).¹⁴⁵

Contexts Where ‘Corrective Construction’ is Unavailable.

20.108 This form of construction is unavailable in the following situations.

(1) ‘Bespoke’ and Complicated Document: Not Clear that Text is Defective.

20.109 Snowden J in Hayfin Opal Luxco 3 SARL v Windermere VII Cmbs plc (2016) held¹⁴⁶ that it was not at all clear that the parties had overlooked a financial possibility when drafting a complicated instrument, and thus the court could not engage in ‘corrective construction’. The judge concluded¹⁴⁷ that it was ‘very difficult for the court to be confident that the absence of additional wording altering the definitions of Senior Rate and Junior Rate in the event that the Swap Agreement was no longer in place was the result of oversight or mistake’.

(2) Obvious Error but No Obvious Solution Shown.

20.110 Even if it is apparent that something has gone awry, the court must be satisfied that there is an obvious solution. If no such obvious solution leaps up from the page, ‘corrective construction’ cannot be granted. This is because to purport to change the wording in these circumstances would involve speculative readjustment of the text and this would infringe the principle of freedom of contract [2.02]. This was the position concerning an alleged implied right of way in a conveyance, as explained by King LJ in Parker v Roberts (2019).¹⁴⁸ Similarly, in ING Bank NV v Ros Roca SA (2011)¹⁴⁹ it was held that the relevant clause was flawed but it did not disclose an inner solution. The Court of Appeal found it impossible on the facts to apply ‘constructive construction/interpretation’ to rewrite a clause concerning an investment bank’s ‘additional fee’ (but the court was able to achieve a favourable outcome for the bank by employing the doctrine of estoppel by convention to take account of post-formation dealings: generally on that species of estoppel [2.58]).

(3) Suggested Obvious Solution is Contentious: It Exceeds what is Necessary to give Adequate Expression to the Contract.

20.111 In R&S Pilling (t/a Phoenix Engineering) v UK Insurance Ltd (2019)¹⁵⁰ a motor insurance policy was held not to extend to property damaged when the vehicle was being repaired on private land. It was not legitimate to adopt an (p. 449) expansive interpretation of the word ‘use’ (of a vehicle) to overcome the double problem that the property damage occurred when the vehicle was not on a road, and when the insured was not sitting in it (or getting into or out of it). The insured, himself a welder, had started to weld the underside of the car so that it could be rendered roadworthy. During the course of the welding, a fire broke out and destroyed the repair-garage in which the welding was taking place. That site belonged to the welder’s employer. It was insured by Phoenix. Phoenix, suing in the name of the garage proprietor, claimed that the insured was liable and that he had insurance cover under his motor insurance policy. The dispute was, therefore, between two insurers as to who was liable for the indemnification of the garage proprietor (or whether both were). Lord Hodge noted that the policy wording was confined to situations where ‘you have an accident in your vehicle and … you damage [another’s] property’. The Court of Appeal had stretched this to refer more widely to: ‘[situations involving loss] if there is an accident involving your vehicle’. But the Supreme Court held that the only elasticity necessary and legitimate on these facts was that the policy should cover the statutory minimum: namely injury, death, or loss ‘caused by, or arising out of, the use of the vehicle on a road or other public place’ (as required by section 145(3)(a) of the Road Traffic Act 1988). Here the incident had occurred ‘off road’ and fell outside the scope of the policy.

(4) A Bad Bargain Has Arisen for One Party.

20.112 In Bashir v Ali (2011) Etherton LJ said:¹⁵¹

The wording of the documentation in the present case is clear … It may have resulted in a good bargain for one of the parties, but, as Lord Hoffmann pointed out in Chartbrook at [20], that is not itself a sufficient reason for supposing that the contract does not mean what it says.

(5) Contract is Beyond Verbal Redemption.

20.113 This was the position in Fairstate Ltd v General Enterprise & Management Ltd (2010), where the judge said:¹⁵² ‘the defects in the agreement recorded in the Guarantee Form are so fundamental and extensive that they cannot sufficiently be cured, either by purposive construction, or by rectification, or by any combination of those approaches’.

(6) Public Registers.

20.114 A majority of the Court of Appeal in Cherry Tree Investments Ltd v Landmain Ltd (2012) held that ‘Corrective Construction’ could not be used to change a public document (a land registration) to reflect a special clause concerning the operation of the relevant registered interest.¹⁵³ Instead the majority gave priority to the statutory process of rectification which had been introduced in that particular context under the land registration legislation.¹⁵⁴ In her dissent in this case, Arden LJ contended that ‘Corrective Construction’ should be permitted because the present case did not in fact involve prejudice to third parties.¹⁵⁵

(p. 450) Radically Different and Unimaginable Change of Events

20.115 In Lloyds TSB Foundation for Scotland v Lloyds Group plc (2013)¹⁵⁶ the Supreme Court held that the contract should not be over-stretched so as to cover a momentous change which, at the time of the original agreement, the parties could not possibly have contemplated.

20.116 In this remarkable case (which was worth an astronomic sum—£1 billion), a gratuitous promise, made by deed, to donate a percentage of annual profits did not cover an illusory ‘profit’ resulting from changes in accountancy requirements introduced unforeseeably eight years after the original covenant. The reality was that the supposed profit was a mirage and that it resulted from an accounting technicality introduced after the contract. That change fell completely outside the zone of events which could have been contemplated at the time of the contract’s formation.

20.117 The deed of covenant, dated 1997, stated that the Lloyd’s Banking Group would pay to a charitable foundation, the appellants, (i) £38,920 or (ii) (if higher) a specified percentage of the group’s pre-tax profits, as defined in the deed. Eight years later, in 2005, listed companies were required to include in their audited accounts unrealized gains, known as ‘negative goodwill’ or ‘gains on acquisition’. In 2009, Lloyd’s Banking Group acquired and ‘rescued’ HBOS (a stricken bank) for half its book price. This newly accounted item (worth £11 billion—the amount of the ‘negative goodwill’) would generate an apparent ‘profit’ of £1 billion (but in fact that profit would be quite illusory, because the acquired company was financially stricken). The Supreme Court held that the change in accounting practice created the mirage of profit. It could be safely disregarded. The parties could not reasonably have contemplated the radical change in accountancy practice implemented eight years after the 1997 deed.¹⁵⁷

20.118 The Supreme Court in Aberdeen City Council v Stewart Milne Group Ltd (2011)¹⁵⁸ construed a provision for a payment in a development contract by reference to the parties’ original assumptions. In the Arnold case (2015) Lord Neuberger commented:¹⁵⁹

in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract … An example … is the Aberdeen City Council [case] … where the … conclusion was based on what the parties ‘had in mind when they entered into’ the contract.

20.119 In the Lloyds TSB Foundation case (2013) the present technique of interpretation by reference to the parties’ original assumptions had the effect of saving the covenantor from a calamitous and astronomic extra level of liability to pay.

20.120 Similarly, the Court of Appeal held in The State of the Netherlands v Deutsche Bank AG (2019)¹⁶⁰ that a financial arrangement had not contemplated the payment of ‘negative (p. 451) interest’, and the court noted the citation in Arnold v Britton (2015) of Aberdeen City Council v Stewart Milne Group Ltd (2011).¹⁶¹

20.121 We have seen that ‘unthinkable’ or unimaginable changes of events will not justify literal application of the original words if that will produce flagrant injustice in the light of a sensible understanding of the parties’ original understanding. Conversely, as the next case demonstrates, a party will not have its obligation reduced because of a technical change of circumstances if there is no justice in the party enjoying the benefit of such a reduction, having again regard to the parties’ original assumptions.

20.122 In Debenhams Retail plc v Sun Alliance and London Assurance Co Ltd (2005)¹⁶² the Court of Appeal, having regard to the parties’ ‘original joint assumption’, held that the calculation of rent referable to the tenant’s retail sales should not be reduced because of an unforeseen change in the legal framework (VAT (value-added tax) tax replacing Purchase Tax).

20.123 In the Debenhams case turnover rent was to be calculated as a percentage of the ‘gross amount of total sales’. The lease to Debenhams had been granted in 1965 when Purchase Tax was levied on certain goods. Purchase Tax was paid by wholesalers. This tax would have been included in the payment made by Debenhams to wholesalers. In turn it would affect the retail price. At that point, although indirectly, Purchase Tax would swell the gross takings received from retail customers by the tenant and thus affect the level of the turnover rent. In 1973 VAT had been introduced. This is payable on the retail value of goods. The seller must transfer the tax in due course to the Revenue. The Court of Appeal held that the rent should be reckoned by taking into account VAT because this formed part of the tenant’s gross receipts. The Court of Appeal rejected¹⁶³ the tenant’s interpretation because this would result in an ‘uncovenanted bonus’, by reducing their rent, even though the tax change had not disturbed the overall structure of the arrangement, namely rent adjusted to reflect the level of income derived from customer purchases. The overriding factor, expressed¹⁶⁴ by Mance LJ in that case, is that the court must ‘promote the purposes and values which are expressed or implicit in the wording and reach an interpretation which applies the … wording to the changed circumstances in a manner consistent with them’.

Footnotes:

¹ For literature (including leading articles), Bibliography, Part II, section (25).

² Carmichael v National Power plc [1999] UKHL 47; [1999] 1 WLR 2043; Pioneer Shipping Ltd v BTP Tioxide Ltd (‘The Nema’) [1982] AC 724, 736 (HL); Cottonex Anstalt v Patriot Spinning Mills Ltd [2014] EWHC 236 (Comm), [2014] 1 Lloyd’s Rep 615 at [43] to [51] (Hamblen J), noting at [50], that tribunal’s special trade experience might induce appellate deference. Appeal courts have power to review first instance errors of law, but in general defer to findings of fact. Andrews on Civil Processes (2nd edn, Intersentia Publishing 2019) 15.35 ff; for the contrast with the position in Canada (Sattva Capital Corpn v Creston Moly Corp 2014 SCC 53, [2014] 2 SCR 633; noted, S Waddams (2015) 131 LQR 48); but compare Ledcor Construction Ltd v Northbridge Indemnity Insurance Co 2016 SCC 37, [2016] 2 SCR 23, K Lewison, Interpretation of Contracts (7th edn, Sweet and Maxwell 2020) 4.01; G McMeel, The Construction of Contracts: Interpretation, Implication and Rectification (3rd edn, OUP 2017) 1.13.

³ [2019] EWCA Civ 335, [2019] PNLR 19, [2019] 4 WLR 81 at [56] (appeal still pending 14 January 2021), citing FAGE UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5, [2014] FSR 29 at [114], on which Andrews on Civil Processes 15.37, 15.48.

⁴ On which Andrews on Civil Processes, 41.71 ff.

⁵ ‘ut res magis valeat quam pereat’, Lewison, Interpretation (2020) 7–16; McMeel, Construction (2017) 8.18.

⁶ [2019] UKSC 32, [2020] AC 154 at [38] to [42]. And note the comment by Lord Tomlin in Hillas v Arcos [1932] All ER 494, 499, (1932) 43 Lloyd’s Rep 359, 364 (HL): ‘the problem for a court of construction must always be so to balance matters that, without violation of essential principle, the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains’. The last passage was cited, along with numerous other authorities, by Leggatt J in Novus Aviation Ltd v Alubaf Arab International Bank BSC [2016] EWHC 1575 (Comm), [2017] 1 BCLC 414 at [60].

⁷ Wood v Capita [2017] UKSC 24, [2017] AC 1173 at [8] to [15], notably [10] to [12]; in Taurus Petroleum Ltd v State Oil Marketing Co 2017] UKSC 64, [2018] AC 690 at [86], Lord Mance cited paragraphs [10] to [12] of Lord Hodge’s judgment in Wood v Capita as canonical.

⁸ [2017] UKSC 24, [2017] AC 1173 at [9] and [10] (Lord Hodge, the others agreeing).

⁹ [1971] 1 WLR 1381, 1383 letter H–1385 letter D (HL).

¹⁰ [1976] 1 WLR 989, 997 (HL).

¹¹ [1998] 1 WLR 896, 912–913.

¹² [2017] UKSC 24, [2017] AC 1173 at [9].

¹³ ibid, at [10].

¹⁴ ibid, at [11] and [12].

¹⁵ ibid, at [13] and [14].

¹⁶ ibid, at [9], [13], [14]. See also Lord Hodge, ‘Judicial Development of the Law of Contract in the United Kingdom’ (2017) 85 George Washington L Rev 1587.

¹⁷ Sir Geoffrey Vos, ‘Contractual Interpretation: Do Judges Sometimes Say One Thing and Do Another?’ [2017] 23 Canterbury L Rev 1, at 2.

¹⁸ [2015] UKSC 36, [2015] AC 1619 at [15]; this six-point analysis was adopted verbatim by King LJ in Parker v Roberts [2019] EWCA Civ 121, [2019] 2 P & CR 16 at [61], as the template for considering construction of a contract of conveyance.

¹⁹ [1998] 1 WLR 896, 912–13 (HL) (Lord Hoffmann; Lords Goff, Hope, and Clyde agreeing; Lord Lloyd dissenting).

²⁰ ibid, 912.

²¹ [2017] UKSC 24, [2017] AC 1173 at [10]. That statement was cited in Egon Zehnder Ltd v Tillman [2019] UKSC 32, [2020] AC 154 at [36]—see also In Re Sigma Finance Corporation (in administrative receivership) [2009] UKSC 2, [2010] 1 All ER 571, [2010] BCC 40 and the Charter Reinsurance (1997) case (see [20.21]); Lewison, Interpretation (2020) 7-02, 7-03; McMeel, Construction (2017) ch 4; the same approach is recognized in the (non-binding) codes: PECL, Principles of European Contract Law, Article 5:105; and UNIDROIT’s Principles of International Commercial Contracts (2010), Article 4.4.

²² [1997] AC 313 (HL).

²³ [1974] AC 235 (HL); noted, JH Baker [1973] CLJ 196, R Brownsword (1974) 37 MLR 104, and FA Mann (1973) 89 LQR 464.

²⁴ [2017] UKSC 24, [2017] AC 1173.

²⁵ [2019] EWHC 1220 (Comm) at [38].

²⁶ [2019] EWCA Civ 230, [2019] 1 WLR 3433 at [57] (UKSC judgments pending).

²⁷ [1998] 1 WLR 896 (HL).

²⁸ Lewison, Interpretation (2020) 3-19; Lord Neuberger, ‘The impact of pre–and post-contractual conduct on contractual interpretation’ (Banking Services and Finance Law Association Conference, Queenstown, 2014, <https://www.supremecourt.uk/docs/speech-140811.pdf>).

²⁹ Lewison LJ said in Kason Kek-Gardner Ltd v Process Components Ltd [2017] EWCA Civ 2132, [2019] 1 All ER (Comm) 381 at [16]: ‘the subjective intention excluded by this principle is subjective intention about what the contract in question means. I do not consider that this exclusion extends to a statement of what one party intends to do outside the contract and after it has been executed’.

³⁰ See preceding fn.

³¹ Prenn v Simmonds [1971] 1 WLR 1381, 1384–1385 (HL), Lord Wilberforce; Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896, 913 (HL), Lord Hoffmann; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [28] to [47].

³² [2009] UKHL 38, [2009] 1 AC 1101, at [41], [42].

³³ [2016] EWCA Civ 396, [2017] 1 All ER (Comm) 601, 168 Con LR 59, [2016] 1 CLC 712 at [61].

³⁴ [2019] EWCA Civ 526, [2019] JPL 989 at [54].

³⁵ Sparks v Biden [2017] EWHC 1994 (Ch) at [49] (Judge Davis-White QC), noting Government of Kelantan v Duff Development Company Ltd [1923] AC 395, 411 (PC).

³⁶ [2009] UKHL 38, [2009] 1 AC 1101 at [42].

³⁷ Such a word or phrase can be elucidated by reference to extrinsic evidence; an entire agreement clause does not preclude this: Lewison LJ in NHS Commissioning Board (known as NHS England) v Vasant [2019] EWCA Civ 1245, [2020] 1 All ER (Comm) 799 at [42] (see the cases cited therein at [43] to [49]).

³⁸ On situations (1) to (3), see the acute analysis in D McLaughlan, ‘Common Intention and Contract Interpretation’ [2013] LMCLQ 30.

³⁹ [2010] UKSC 44, [2011] 1 AC 662.

⁴⁰ ibid, at [40]; PS Davies [2011] CLJ 24 notes the artificial distinction between resort to negotiation evidence for discovery of background facts (allowed) and of the trend of negotiations (not allowed).

⁴¹ [2001] EWCA Civ 735, [2001] 2 Lloyd’s Rep 161 at [83].

⁴² ibid; Rix LJ’s statement was applied in Medenta Finance Ltd v Hitachi Capital (UK) plc [2019] EWHC 516 (Comm) at [49] and [50] (Stephen Hofmeyr QC).

⁴³ [2009] UKHL 38, [2009] 1 AC 1101 at [41].

⁴⁴ ibid, at [35] [36] [37], [41] (Lord Hoffmann); similarly, [69] and [70] (Lord Rodger).

⁴⁵ ibid, at [35].

⁴⁶ [1971] 1 WLR 1381, 1384–85 (HL). See also Britoil plc v Hunt [1994] CLC 561, 569–74 (Hobhouse and Glidewell LJJ agreeing; Hoffmann LJ dissenting); explained by Leggatt LJ in FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd (Rev 1) [2019] EWCA Civ 1361, [2020] Ch 365 at [88] to [97].

⁴⁷ Lord Hoffmann, [2009] UKHL 38, [2009] 1 AC 1101 at [38].

⁴⁸ Lord Sumption, ‘A Question of Taste: The Supreme Court and the Interpretation of Contracts’ (2017) 9 The UK Supreme Court Yearbook (Appellate Press 2018) (<https://www.supremecourt.uk/docs/speech-170508.pdf>).

⁴⁹ Law Commission, ‘The Parol Evidence Rule’ (Law Commission Report No 154, Cmnd 9700, 1986) 2.43, on the position of assignees; Lord Hoffmann commented on this point in detail, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [40]

⁵⁰ Lord Hoffmann, Chartbrook case, ibid, at [38]; earlier, in the same litigation, Lawrence Collins LJ, [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 387 at [111].

⁵¹ Lord Gifford in the Court of Session (Inner House), in Union Bank of Scotland v John Buttery & Company (1877) 5 R 58; approved by Lord Blackburn in A & J Inglis v John Buttery & Co (1878) 3 App Cas 552, 577 (HL), and by Lord Hoffmann in the Chartbrook case [2009] UKHL 38, [2009] 1 AC 1101 at [29].

⁵² [2009] UKHL 38, [2009] 1 AC 1101 at [27] to [41]. These rationalia are considered in Lord Nicholls’s famous lecture, ‘My Kingdom for a Horse: the Meaning of Words’ (2005) 121 LQR 577 (as noted by Briggs J in Chartbrook Ltd v Persimmon Homes Ltd [2007] EWHC 409 (Ch) at [34] and by Lawrence Collins LJ in the Court of Appeal, [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 387 at [111]. Arguments (1) to (5) are described as unconvincing by D McLaughlan (2010) 126 LQR 8, 9–11; see also G Yihan, ‘A Wrong Turn in History: Re-Understanding the Exclusionary Rule against Prior Negotiations in Contractual Interpretation’ [2014] JBL 360.

⁵³ [2016] EWCA Civ 88, [2016] 1 WLR 2366 at [20].

⁵⁴ [2018] EWCA Civ 1525, [2019] 1 All ER (Comm) 955, 179 Con LR 32 at [34] to [36]. Singh LJ’s dictum is approved in Lewison, Interpretation (2020) 3.04.

⁵⁵ Bou-Simon case, ibid, at [23] to [32].

⁵⁶ On this two-pronged approach of simultaneous attempts by parties to resort to principle of construction and to the equitable remedy of rectification, see, notably, AS Burrows, ‘Construction and Rectification’ in AS Burrows and E Peel (eds), Contract Terms (OUP 2007) 88 ff, R Buxton, ‘ “Construction” and Rectification After Chartbrook’ [2010] CLJ 253 and G McMeel, ‘The Interplay of Contractual Construction and Civil Justice: Procedures for Accelerated Justice’ (2011) European Business L Rev 437.

⁵⁷ [1971] 1 WLR 138. Here (i) Simmonds’ construction—profits means group profits—was rejected by Pennycuick V-C, but then (ii) upheld following rectification, but on appeal and further appeal the matter turned solely on ordinary construction, the decision on point (i) being reversed by both the Court of Appeal and the House of Lords), and the rectification argument became superfluous at both levels of appeal.

⁵⁸ FSHC Group Holdings Ltd v GLAS Trust Corporation Ltd (Rev 1) [2019] EWCA Civ 1361, [2020] Ch 365 at [176].

⁵⁹ James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583, 603 (HL) (Lord Reid), is the leading authority on the general bar.

⁶⁰ For a suggested longer list of exceptions, Chitty (2018) 13-136.

⁶¹ For example, WJ Alan v El Nasr [1972] 2 QB 189, 206–7 (CA) (Lord Denning MR).

⁶² [1938] AC 260, 272–73 (PC).

⁶³ [1971] 1 WLR 1381, 1384–85 (HL).

⁶⁴

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