2.01  When interpreting a written contract, the starting point has to be the text itself. Having negotiated and written the contract, the parties are entitled to expect that it will be given effect. Most commercial contracts are in writing for this reason.¹

2.02  This point is made very clearly by two eminent commercial judges, each writing extra-judicially. In the words of Lord Steyn:² ‘The mandated point of departure must be the text itself. The primacy of the text is the first rule of interpretation for the judge considering a point of interpretation.’ Sir Christopher Staughton made the same point even more bluntly:³ ‘The first place where you look for the intention of the parties is in the language which they themselves used. And it is very often the last place too.’

2.03  This principle has also been expounded in the cases many times. In River Wear Commissioners v Adamson,⁴ Lord Blackburn said: ‘The object is to see what is the intention expressed by the words used.’ Lord Steyn again, in National Commercial Bank Jamaica v Guyana Refrigerators,⁵ said that: ‘the paramount principle to which all other principles of construction are subordinate requires loyalty to the contractual text viewed in its relevant context’. And, in the High Court of Australia, Gibbs J in Australian Broadcasting Commission v Australasian Performing Rights Association⁶ (p. 28) said: ‘It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied.’

2.04  The reason is obvious. Parties put their contracts in writing in order to clarify what they have agreed. Having done so, they expect what they have written to be given effect.⁷

2.05  This point was made by Lord Blackburn in Inglis v Buttery, quoting with approval words of Lord Gifford:⁸

2.06  This is not the law now—if it ever was. Contracts have to be read in the light of their background facts, as Principle 4 demonstrates. But it does illustrate very clearly the reasons why commercial lawyers are nervous of bringing too much background into the interpretation process.

2.07  Principle 2 is one aspect of the objective theory of interpretation described in Principle 1. The common intention of the parties is established from its outward manifestations—and what could be a more obvious outward manifestation of their intention than what they have jointly written? The benefits of this approach are the (p. 29) same as those discussed under Principle 1—promoting certainty, saving time and expense, and protecting third parties.

2.08  The first question to ask is: ‘What is the contract?’ Until you know what the contract is, you cannot start to interpret it.

2.09  Just because the parties have entered into a document, it does not necessarily follow that it is the whole contract. There may be other documents (such as letters or emails or standard terms), or even oral statements, which might form part of the contract.⁹

2.10  Whether they do form part of the contract depends, as would be expected, on the objective intention of the parties.¹⁰ Would a reasonable person consider that the parties would have intended them to form part of the contractual arrangements between them? If so, they are part of the contract. But even if they are not, they may still amount to representations inducing the contract, and would still have some legal (though extra-contractual) effect in equity or in tort.¹¹

2.11  In Inntrepreneur Pub Co v East Crown,¹² Lightman J described the circumstances in which a document or statement which is not part of the written agreement is contractually binding. He set out five principles, the first two of which are particularly important:¹³

2.12  Lightman J went on to say:¹⁴

(p. 30) 2.13  This is a basic principle of the law of contract and is not directly concerned with their interpretation. But there are two matters which do need to be mentioned, if only briefly, because they do impinge upon issues of interpretation. These are the parol evidence rule and entire agreement clauses.

2.14  The parol evidence rule is one of those ancient principles of the law of contract which is much talked about in theory but hardly ever applied in practice. The idea behind the parol evidence rule is simple. If the parties have gone to the trouble of writing down their agreement, then the courts should give effect to that agreement without being distracted by other things which the parties may have said or done. The contract stands and falls with the document.¹⁵

2.15  As a basic principle, this has much to commend it. The issue with the parol evidence rule is that it should not be carried too far. It is all very well to exclude extrinsic evidence if that is what the parties intended, but it is clearly inappropriate if the parties did intend their contract to consist of something other than just the one document.

2.16  The parol evidence rule was described by P.O. Lawrence J in Jacobs v Batavia¹⁶ as requiring that: ‘parol evidence cannot be admitted to add to, vary or contradict a … written instrument’. In the 1970s and 1980s, the Law Commission analysed the parol evidence rule, and the report they produced in 1986¹⁷ contains a very clear discussion of the rule and its effect.

2.17  The Law Commission regarded the ‘parol evidence rule’ as being:¹⁸

a proposition of law which is no more than a circular statement: when it is proved or admitted that the parties to the contract intended that all the express terms of their agreement should be as recorded in a particular document or documents, evidence will be inadmissible (because irrelevant) if it is tendered only for the purpose of adding to, varying, subtracting from or contradicting the express terms of that contract.

2.18  In other words, it is all a question of the intention of the parties. The issue is whether the parties intended that the whole of their agreement should be as recorded in a particular document. If they did, other evidence is excluded. If they did not, it is not. And, as usual, that intention is to be judged objectively.¹⁹

(p. 31) 2.19  In practice, therefore, the parol evidence rule is almost never an issue. It only applies if the contract is intended to be wholly in writing; and, when deciding whether or not the parties intended the contract to be wholly in writing, the court must look at all the evidence—including evidence from outside the writing itself.²⁰

2.20  The Law Commission concluded that:²¹

in so far as any such rule of law can be said to have an independent existence, [it] does not have the effect of excluding evidence which ought to be admitted if justice is to be done between the parties … Evidence will only be excluded when its reception would be inconsistent with the intention of the parties. While a wider parol evidence rule seems to have existed at one time, no such wider rule could, in our view, properly be said to exist in English law today.

2.21  Even today, the parol evidence rule is very occasionally called in aid²² but, in practice, it is a dead letter.

2.22  The absence of the parol evidence rule has, however, left a gap. As Tindal CJ said about the rule in Shore v Attorney-General:²³ ‘If it were otherwise [i.e. if the rule did not exist], no lawyer would be safe in advising upon the construction of a written instrument.’ Lord Hobhouse made the same point more recently, in Shogun Finance v Hudson,²⁴ when he said that: ‘the bargain is the document; the certainty of the contract depends on it’. The High Court of Australia echoed these sentiments in Equuscorp v Glengallan Investments:²⁵

2.23  The problem is this: the parties enter into long discussions about a transaction and eventually negotiate and sign a written agreement. For good commercial reasons, they may want that document to represent their deal.²⁶ But there is nothing to prevent one of the parties from dredging up an email or conversation made in the course of the negotiations and claiming that it is part of the contract. The court then has to decide if that was the parties’ intention—which is likely to be a time-consuming and expensive exercise with an uncertain outcome.

(p. 32) 2.24  Experience suggests that this is something which commercial parties want to avoid. And that is why so many commercial contracts contain what has become known as an ‘entire agreement clause’.

2.25  As its name suggests, an entire agreement clause is intended to put beyond doubt the question as to what constitutes the contract between the parties.²⁷ At its simplest (and most are more complex than this), it will state that the document is the entire agreement between the parties, and therefore that any prior written or oral arrangements between the parties do not form part of the contract. In addition, it will also normally seek to ensure that any such statements will not give rise to any liability as non-contractual representations, whether in equity (to rescind the contract) or in tort.²⁸

2.26  If a clause states that the document is to be the entire agreement between the parties, then that is what it is. The agreement is what the parties intend it to be, and the entire agreement clause makes it very clear what their intention is. In Inntrepreneur Pub Co v East Crown,²⁹ Lightman J said: ‘Such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere …’ And, as Longmore LJ said in North Eastern Properties v Coleman:³⁰ ‘If the parties agree that the written contract is to be the entire contract, it is no business of the courts to tell them that they do not mean what they have said.’³¹

2.27  Entire agreement clauses have therefore replaced the parol evidence rule as a mechanism for identifying the terms of the contract.

2.28  This approach has not gone without criticism. The Law Commission, in its Report on the Parol Evidence Rule, regarded an entire agreement clause as strongly persuasive, but not as conclusive.³² And in the Law Quarterly Review,³³ David McLauchlan has (p. 33) argued that an entire agreement clause, while usually being entitled to considerable weight, should not be regarded as being conclusive that the written agreement is the entire agreement between the parties. The clause may be part of the boiler-plate, and may simply be an untrue statement of what the parties have actually agreed. ‘A writing has no magical power to cause statements of fact to be true when they are actually untrue.’³⁴ All evidence is relevant to the question of what the parties intended their contract to be. It is open to a party who signs a document containing an entire agreement clause to say that he simply did not agree to it.

2.29  There are two problems with this approach—the first conceptual, the second practical. The first is that the basic principle of contractual interpretation is that it is concerned with establishing the objective intention of the parties to the contract. And what could more clearly express their objective intention than what they have written?

2.30  The second problem is that it would undermine the commercial imperative of certainty. If the parties want to put beyond doubt what is the scope of their agreement, then why should they not be allowed to do so? The point is put very clearly by Lightman J in Inntrepeneur Pub Co v East Crown:³⁵

2.31  The courts have recognized the efficacy of entire agreement clauses, and it is suggested that this is correct in principle, and is justified in practice.

2.32  In its primary sense, the parol evidence rule was about what a contract is, not what it means. It was in the past extended to cover the interpretation of contracts³⁶ but, at least since the 1970s, it is clear that evidence of the background facts at the time the contract was entered into is available to interpret the contract. The extent of that evidence is discussed under Principle 4.

(p. 34) 2.33  A traditional entire agreement clause is also concerned with what the contract is, rather than what it means, and it cannot therefore affect the question of whether evidence is admissible to aid the process of interpreting their contract.³⁷ But there is no reason in principle why the parties should not be able to restrict the background information available in the interpretation process. That is a subject which is discussed in the Epilogue.

2.34  Although the text of the agreed document is the starting point for any discussion of the parties’ obligations under their contract, there are circumstances in which what they have said in the document, in the light of the background facts at the time they entered into it, is not conclusive.

2.35  In the first place, there is a distinction between what the parties have actually agreed and how that agreement is categorized as a matter of law. This issue is discussed under Principle 5 at paras 5.83–5.90.

2.36  Second, in very rare cases, a document may be regarded as a sham. This will be the case if it does not express the real intention of the parties. If it is a sham, it will have no effect on third parties.³⁸

2.37  In Snook v London and West Riding Investments,³⁹ Diplock LJ explained the sham doctrine in the following words:

2.38  It is rare to come across a sham document in practice. A document will only be a sham if the parties are fraudulent—putting forward a document to a third party which does not represent their real agreement.