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Part V Changing Words, Epilogue

From: Principles of Contractual Interpretation (2nd Edition)

Richard Calnan

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023


(p. 203) Epilogue

A.  Drafting Contracts

Ep.01  It would not be fitting to leave the subject of contractual interpretation without considering its effect on drafting. Reading contracts is the obverse of writing them, and anyone drafting contracts must be mindful of the way in which they are interpreted. What clues do the principles of contractual interpretation give us to the way in which we should draft contracts? And, more generally, what is good drafting?

Ep.02  The only rule of drafting is that there are no rules. As the Prologue makes clear, interpretation of contracts is an art, not a science; and the same is true of drafting. One person’s deathless prose is another’s legal jargon. To some, simple drafting is a form of brutalism.1

Ep.03  It is nevertheless possible to lay down certain general principles of good drafting, and this is what this Epilogue tries to do. Each of the principles of contractual interpretation is considered with a view to deciding how it affects the way in which contracts are written and the extent to which it can be contracted out of. In the light of this, there is then a brief discussion of principles of drafting in a broader context.

B.  Using the Interpretation Principles when Drafting

Principle 1

Ep.04  The purpose of contractual interpretation is to establish the objective common intention of the parties. In principle, therefore, it must be possible for the parties to decide for themselves how they want their contract to be interpreted and to make this clear to those who will interpret it. The clearest external manifestation of what the parties intend is for them to say what they intend in the contract. If the parties decide in the contract how they want it to be interpreted, it is no business of the courts to tell them that they do not mean what they have said.2 What can be (p. 204) clearer evidence of the parties’ objective intention than what they have said in their contract?

Ep.05  There is little clear case-law authority for the proposition that the parties are able to decide how their contract can be interpreted. Like many self-evident propositions, it is rarely necessary to express it. But the Scottish Law Commission did refer to this issue in its Discussion Paper on Interpretation of Contract, issued in February 2011.3 It is also discussed in detail in Chapter 5 of Catherine Mitchell’s book, Interpretation of Contracts.4 There seems to be little dissent from the proposition that the parties can decide how their contract can be interpreted. As Catherine Mitchell comments:5

[I]f contract law is to remain a facilitative and supportive institution for the parties, the courts must remain mindful of the fact that in the end, commercial parties should have as much control over interpretative method as they do over other terms of the contract.

Principle 2

Ep.06  Where the contract is in writing, it is the writing which is the primary source of the parties’ objective intention.

Ep.07  Commercial parties need to know what the terms of their contract are. And the demise of the parol evidence rule has made it even more important that they regulate that in their contract. Hence the ubiquity of entire agreement clauses in commercial contracts. The purpose of an entire agreement clause is to establish what it is which constitutes the contract. In practice, it is likely to go further and provide that any pre-contractual statements do not give rise to non-contractual liability, for instance in equity or in tort. As the discussion of Principle 2 makes clear, there is no doubt that a properly drafted clause of this type will do what it says.6 That is what the parties have agreed.

Ep.08  Entire agreement clauses come in various shapes and sizes but, in essence, they are concerned to ensure two things:

  1. (1)  that the entire agreement between the parties is set out in one contract (or in a series of contracts, which constitute the transaction documents), and that any prior agreement or arrangement has been superseded and is therefore of no effect;

  2. (p. 205) (2)  that the parties agree that they are not relying on any statement (whether or not in writing) made before the contract, except to the extent that it is expressly set out in the contract.

Ep.09  The first part of the clause describes what the contract is and therefore the limits of the contractual liability of the parties. The second part excludes any potential extra-contractual liability for misrepresentation (for instance, to rescind in equity or to claim damages in tort or by statute).

Ep.10  If properly drafted, there is no doubt that an entire agreement clause can describe what the contract is. If it is sufficiently clear,7 it can also exclude liability for misrepresentation8 subject to any relevant statutory provisions.9 What it cannot do is to provide for what happens once a contract has been entered into. Whatever the contract may say about this, it is capable of being varied by agreement. The parties are always free to change their mind in the future.10

Principle 3

Ep.11  The principle that contracts are read as a whole encourages the draftsman to provide a proper structure for the contract. As anyone who has drafted a long contract will know, the problems frequently come not within individual clauses but in trying to make the clauses fit together as a whole. How does one clause, in one part of the contract, affect another, in a different part? How does an undertaking by one party to do something specific affect a more general undertaking which, on the face of it, encompasses the more specific undertaking? And where there are mutual undertakings, to what extent is the performance by one party conditional on performance by the other?

Ep.12  The only way to deal with these problems is to have a clear understanding at the outset of drafting as to the structure of the contract and how the various parts fit together. In practice, of course, that is easier said than done, and it would be a bold draftsman who would be confident that all the inconsistencies had been ironed out. But, nevertheless, time spent at the outset planning the structure of the contract is rarely wasted. And, where there is more than one contract, the structuring needs to ensure that they fit together as seamlessly as possible.

Ep.13  It has been seen in the discussion of Principle 3 that, where possible, courts try to give effect to each part of the contract. This can often create problems in practice (p. 206) where the draftsman has covered the same point more than once. The courts are aware of this problem, but it is nevertheless better to avoid overlap where possible. Brevity and simplicity are required, rather than length and complication.

Principle 4

Ep.14  Contracts are read in the context of their background facts. One of the problems with this principle is the increasing tendency of the courts to consider that more and more background information should be available in the interpretation process. This is understandable in principle if the background information is relevant to establishing the objective intention of the parties, but many commercial lawyers recognize that it can create practical problems by reducing certainty, increasing the time and cost where there is a dispute, and potentially adversely affecting third parties. As has been seen in the discussion of Principle 4, it is not entirely clear at the moment how these problems will be resolved. All the more reason, then, for the parties to make the decision themselves and record it in the contract.

Ep.15  It is not common in practice for the parties to regulate the scope of background material available to interpret their contract. But, for the reasons discussed in relation to Principle 1 above, there is no reason why they should not do so. The advantage of doing so is that it can settle in advance the question of what background information is available—at a time when the law on this point is in a state of flux.

Ep.16  Commercial contracts commonly contain interpretation clauses, which deal with relatively minor issues such as the use of singulars and plurals and the status of amendments to documents. But the parties could go further, and establish the matters which can be taken into account in interpreting the contract. For instance, the contract could provide that its terms will be interpreted only in the light of:

  • •  the other provisions of the contract;

  • •  the other transaction documents (if there are any);

  • •  certain specific permitted background facts to the extent that they were reasonably available to persons in the position of the parties to the contract at the time the contract was entered into.

Ep.17  This issue has been discussed by Catherine Mitchell:11

If we accept that commercial parties can choose their contracting partners and their obligations, why shouldn’t the parties also choose the interpretative theory that will be applied to their contract? Or, in other words, why shouldn’t the contract tell the court not to look at the context? Contracts frequently do include ‘interpretation’ (p. 207) clauses and there is no more objective statement of the parties’ intentions than the terms they commit to writing.

Ep.18  The parties could then decide which background facts should be relevant—such as the identity of the parties, the nature of the transaction, and the market in which the transaction was entered into. If the courts continue to extend the scope of relevant background facts under the general law, it would be no surprise to see the parties taking the law into their own hands and regulating it themselves. An approach to the drafting of such a clause is set out at the end of the Epilogue. It contains a suggested outline structure, which can be adapted to reflect the nature of the contract concerned. It is essentially concerned to do two things:

  1. (1)  to require the words used in the contract to be given their ordinary meaning;

  2. (2)  to limit the amount of background information which can be used in the interpretation process.

Principle 5

Ep.19  Principle 5 emphasizes that the courts generally give effect to what the contract says. Words are nearly always given their ordinary meaning in their context. That therefore gives the draftsman a substantial amount of freedom to express what the parties intend in the expectation that the court will give effect to it.

Ep.20  Although styles of drafting differ widely, it would be hard to disagree that drafting should be as simple and clear as possible. There is no reason why a contract cannot be drafted in straightforward, ordinary language, rather than what is sometimes known as ‘legalese’. Experience would suggest that the former is the more likely to produce clarity and certainty. As many a law student will attest, it is much easier to understand a judgment of Lord Denning than of many of his contemporaries. And the reason for that is the clarity and simplicity of his writing. It is not possible to translate that directly into contractual drafting. Creating legal obligations is an endeavour of a different kind from describing them, and so the drafting of a legal agreement involves different skills from the writing of a judgment or of a letter of advice. But that is not to deny that they have certain fundamental features in common, and that clarity and simplicity are important tools for both.

Ep.21  Few contracts can be written without the use of definitions. They serve a useful purpose by enabling the draftsman to use a word or phrase to express a more complex thought. But definitions need to be used with discretion. They should only be used where necessary. They should be as short as possible. And they should not be used to express an operative part of the document. It is also helpful to try to ensure that the word used to describe the concept captures the basic idea of the defined term. It is possible to define a stripy animal with a long neck as an elephant, but it is not particularly helpful for the reader. Something else to be avoided if possible (and it is not (p. 208) always possible), is definitions which cross-refer to each other, so that to understand what one means requires an analysis of a number of others.

Ep.22  The extent to which the canons of construction should still be used is a matter of debate, but the discussion of Principle 5 shows that some are still used in practice. There is no reason why the parties should not contract out of the use of the eiusdem generis rule or the contra preferentem rule, for instance, or indeed out of the use of canons of construction more generally. But the best way to evade the eiusdem generis rule is to avoid lists altogether or, if they must be used, to use them as illustrations of a general principle.

Principle 6

Ep.23  Ambiguous words are given the meaning the parties are most likely objectively to have intended. We all strive to avoid ambiguity, but we do not always succeed. Again, although there is little consensus on styles of drafting, it is hard to disagree with the idea that the words used should be as clear as possible. If particular words are ambiguous, the overall structure of the contract can often assist in clarifying what they mean.

Principle 7

Ep.24  Very occasionally, the courts rewrite contracts—or at least clauses. They may do so less frequently in common law jurisdictions than in civil law ones, but it does happen. If you want to prevent them from doing this, can you do so?

Ep.25  As has been seen in the discussion of Principle 7, the reason why courts do rewrite clauses of contracts is because they regard them as being so unreasonable that the parties cannot possibly have intended them. The answer, for the draftsman, is simple. Do not make your contracts so unreasonable that a court is likely to believe that the parties cannot have intended what has been said. As one of my former partners said about a clause which had just been drafted (admittedly by himself): ‘It probably won’t work: it’s too clever by half.’

Ep.26  It is a mistake when drafting contracts to try to be too clever. You may think that you are winning a famous victory for your client by imposing yet more obligations on the other side and reducing yet further the scope of your own client’s commitment, but if you carry it too far, a court is likely to say that it is so unreasonable that the parties cannot have intended it. And they will then rewrite it. It is true that there is no general duty of good faith in English law. It is true that parties do not have a general obligation to exercise their contractual rights reasonably. But there can be little doubt, in the light of Principle 7, that the courts will interfere in cases of egregious unreasonableness.

Ep.27  The best approach, therefore, is not to draft so unreasonably that the court will be minded to find a way round the drafting. If you want to impose a very wide (p. 209) obligation on the other side, put yourself in the position of a judge reading the obligation and consider whether it might, on the face of it, apply where it might not be expected to do so. Bank of Credit and Commerce International v Ali12 is a good example. There, the release purported to exclude ‘all or any claims … of whatsoever nature that exist or may exist’ by the employee against the employer. On the face of it, this applied to all claims, whether or not they arose out of the employment relationship. Can that really have been intended? The House of Lords thought not. And it was therefore able to rewrite the clause so that it only applied to claims arising out of the termination of the employment contract. If the contract had expressly limited the release to claims arising out of the employment relationship, the court would not have been able to rewrite the contract in a more limited way.

Ep.28  In addition to the general injunction not to draft so unreasonably that the court will try to find a way round it, the draftsman needs to be aware that the courts do try, with particular vigour, to avoid giving effect to clauses which they regard as being particularly unfair. In this category are clauses which allow a party to terminate a contract for a minor breach by the other, or which exclude or limit liability.

Ep.29  It is generally unwise to provide that a party to a contract can terminate it as a result of any breach of the contract by the other party. The response of a court to such a provision is that the parties cannot have intended that a very minor breach should allow the other party to terminate. They will then read it down—possibly by implying a term that the breach concerned must be repudiatory. This, of course, defeats the whole purpose of the clause, since the innocent party can terminate in any event for a repudiatory breach.

Ep.30  In practice, it is better to draft a termination clause in a way in which the court is unlikely to want to find a way round. This can be done by limiting the ability to terminate to ‘material’ breaches, and then defining clearly what they are. In addition, the clause can establish a process by which the party in breach is given a period of time to rectify the breach before the contract can be terminated. What is appropriate depends, of course, on the contract concerned. The key point is that the end result should not be so unreasonable that the court will try to find a way round it.

Ep.31  The approach of the courts to exclusion and limitation clauses is much less hostile than it used to be. In principle, such a clause ought to be interpreted in the same way as any other, except that any ambiguity will be construed against the person relying on it. The moral is to make such a clause as clear as possible. In practice, if the liability of a party for a deliberate or negligent breach is to be excluded, it is better expressly to say so.

(p. 210) Ep.32  The other way in which the parties can deal with the problem of the courts rewriting contracts is by prohibiting it in the contract. If interpretation is ultimately a matter of establishing the objective intention of the parties, it must be open to the parties to decide how they want their words to be interpreted. In principle, therefore, the parties must be able to include a clause in the contract to the effect that, when interpreting it, the words will be given their ordinary meaning in the context of the transaction documents and of those background facts which are permitted to be used for this purpose. That still gives a substantial amount of flexibility in the interpretation process.13 But it should limit some of the more egregious examples of rewriting contracts.

Ep.33  There will doubtless need to be exceptions—for instance, where there is an obvious typographical error and it is clear what was intended. But, subject to those exceptions, the parties would have made it clear that they mean what they say and that the court has no licence to rewrite the contract. This would be the equivalent of adding the words ‘and I really mean it’ to each contentious clause.

Ep.34  An approach to drafting such a clause is set out at the end of the Epilogue.

Principle 8

Ep.35  Words are implied into a contract if the parties must objectively have intended them. It is, of course, the wish of every draftsman to avoid the necessity for implication of terms but it is almost impossible in practice to achieve this. However elaborate the document, a circumstance can occur which will not have been considered, and where a term might therefore be implied. And because of this, there is no point in trying to provide for it in the contract. By definition, it will be the event that you had not anticipated which will cause the problem.

Ep.36  In practice, all that can be done is to try to ensure that the document is as complete as it practically can be.

Principle 9

Ep.37  Rectification is available if a written contract does not record the parties’ common intention at the time it was entered into. It seems generally to be accepted that this is not something which can be contracted out of, even if the parties wanted to do so. Since, by definition, the parties do not know of the problem at the time the contract is entered into, and because it can happen to either party, the likelihood is that they will not want to forego the possibility of rectifying the contract if it can be established that the contract does not properly record the agreement reached between them.

(p. 211) Principle 10

Ep.38  Estoppel by convention will be available if the parties have dealt with each other on the basis of a particular interpretation of the contract and it would be unjust for the parties to go back on that. The parties might well want to avoid the possibility of this happening but, in practice, it is impossible to do so. If there is an estoppel by convention, it will normally arise as a result of matters which take place after the contract has been entered into, and it is therefore difficult to see how the contract itself can prevent this.

C.  Principles of Drafting

Ep.39  In the light of this review of the way in which the principles of contractual interpretation impinge upon drafting, are there any general principles of drafting which can be established?

Ep.40  Since drafting, like contractual interpretation, is an art rather than a science, it is only possible to state principles at a high level of generality and, in reality, they do little more than state the obvious. But then sometimes the obvious is worth stating.

Ep.41  The aim of drafting should be to produce a document which is as clear and as brief as possible.

Ep.42  There can be little doubt that the contract should be as clear as possible—in other words, plain, simple, straightforward, understandable, direct, and to the point; and without confusion, complication, or doubt. There is little controversial there. The suggestion that it needs to be as clear as possible reflects the fact that, in giving effect to complicated arrangements, clarity is an aspiration which cannot always be achieved.

Ep.43  It is also suggested that the document should be as brief as possible—consistent with the nature of the contractual arrangements being documented. This is perhaps more controversial. If clarity requires a lengthy document, then so be it. The suggestion is not that documents should be short, but that they should be as short as possible in the light of what needs to be achieved. This reflects the fact that legal documents, unlike novels, are not read for pleasure; and it seems reasonable to assume that business people would like their contracts to be as short as they sensibly can be.

Ep.44  In order to achieve a document which is as clear and brief as possible, the draftsman needs to consider three things:

  1. (1)  the structure of the transaction;

  2. (2)  the layout of the document;

  3. (3)  the words to be used in the document.

(p. 212) Ep.45  As far as structure is concerned, the contract needs to be planned logically, and the individual clauses need to fit with each other. This requires planning in advance before drafting.

Ep.46  In practice, the layout of a document can be almost as important as the words used. The purpose of any document is to tell a story—in this case as clearly and briefly as possible. Anyone who has had to read a document which consists of pages of text without indentations and with no indication that the sentence will ever end (and many legal documents are like that) will need no instruction in the importance of spaces in documents. It will never be a pleasure to read a legal document, but the role of the draftsman must surely be to make it as little of a penance as possible. This is helped by:

  • •  the use of spaces;

  • •  short sentences;

  • •  short paragraphs;

  • •  the use of parts in long documents;

  • •  the clever use of headings.

These all go to making the document easier to read.

Ep.47  As far as the words are concerned, there is no requirement to use ‘legalese’ and every incentive to use ordinary, understandable words to make points which the reader will understand. The draftsman should put himself or herself in the position of the persons who will read the contract—the parties, transferees, and the court—and ask how they will understand it.

Ep.48  One of the problems which the courts have to deal with in relation to drafting is the use of lists. The problem with lists is that the draftsman normally ends up by using a general sweeping concept in case he or she has missed something. But, as can be seen from the discussion of Principle 5, this invites the court to read the general words eiusdem generis, and thereby defeats the object of the exercise. Far better to use general, all-encompassing words to express the concept which needs to be covered, and then, if necessary, to use lists as examples of the general concept. In that way, the court cannot read down the general words. The use of general words also enables the draftsman to cut down the number of words used, which is itself an advantage.

Ep.49  On a more substantive note, the draftsman should always have in mind the reasonableness of what he or she is producing. As has been seen in the discussion of Principle 7, the more unreasonable the drafting, the more the court will try to unravel it.

(p. 213) Ep.50  These principles are set out in tabular form in the next section of the book, Principles of Drafting, and they are followed by a draft interpretation clause.

Ep.51  If one wanted to express the basic principles of drafting in just two simple concepts, I would suggest that drafting should be:

  • •  as clear and brief as possible;

  • •  not so unreasonable that the court will try to get round it.

(p. 214)


1  I speak here from personal experience.

2  Adapting the comment of Longmore LJ on entire agreement clauses in North Eastern Properties v Coleman [2010] 2 EGLR 161 at [82].

3  Scottish Law Commission, Discussion Paper No. 147 at 7.23–7.25.

4  Mitchell, Interpretation of Contracts (Routledge Cavendish, 2007), Chapter 5.

5  Mitchell at 148.

6  Subject to any relevant statutory constraints on evading liability for misrepresentation, for instance under section 3 of the Misrepresentation Act 1967.

7  AXA Sun Life v Campbell Martin [2011] EWCA Civ 133 at [94] (Rix LJ).

8  Peekay Intermark v Australia and New Zealand Banking Group [2006] 1 CLC 582 at [56]–[57] and Springwell Navigation v J P Morgan Chase [2010] 2 CLC 705 at [143]–[171].

9  Such as the Unfair Contract Terms Act 1977 or section 3 of the Misrepresentation Act 1967.

10  Globe Motors v TRW Lucas [2016] EWCA Civ 396 and MWB Business Exchange Centres v Rock Advertising [2016] EWCA Civ 553.

11  Catherine Mitchell, ‘Entire Agreement Clauses: Contracting Out of Contextualism’ (2006) 22 JCL 222 at 236–7. And see Mitchell, Interpretation of Contracts, Chapter 5.

12  [2002] 1 AC 251.

13  As The Aragon demonstrates—Segovia Compagnia Naviera v R Pagnan & Fratelli [1977] 1 Lloyd’s Rep 343, discussed in Chapter 5, at paras 5.11 and 5.12.