Part II Text and Context, 2 Principle 2: The Text
- Construction of contract — Interpretation of contract
Principle 2: Where the contract is in writing, it is the writing which is the primary source of the parties’ objective intention.
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
Lord Gifford expresses in extremely clear words exactly what I think myself when he said:
Now, I think it is quite fixed—and no more wholesome or salutory rule relative to written contracts can be devised—that where parties agree to embody, and do actually embody, their contract in a formal written deed, then in determining what the contract really was and really meant, a court must look to the formal deed and to that deed alone. This is only carrying out the will of the parties. The only meaning of adjusting a formal contract is, that the formal contract shall supersede all loose and preliminary negotiations—that there shall be no room for misunderstandings which may often arise, and which do constantly arise, in the course of long, and it may be desultory conversations, or in the course of correspondence or negotiations during which the parties are often widely at issue as to what they will insist on and what they will concede. The very purpose of a formal 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. The written contract is that which is to be appealed to by both parties, however different it may be from their previous demands or stipulations, whether contained in letters or in verbal conversation. There can be no doubt that this is the general rule …
Now, my Lords, I agree in every word of that.
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.
2.09 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
The relevant legal principles regarding the recognition of pre-contractual promises or assurances as contractual warranties may be stated as follows:
(1) a pre-contractual statement will only be treated as having contractual effect if the evidence shows that parties intended this to be the case. Intention is a question of fact to be decided by looking at the totality of the evidence;
(2) the test is the ordinary objective test for the formation of a contract: what is relevant is not the subjective thought of one party but what a reasonable outside observer would infer from all the circumstances …
2.12 Lightman J went on to say:14
The task in all cases is to consider the representation or assurance in the context of the totality of the facts, and the question to be addressed is whether reliance on the inducement afforded by the representation or promise should be understood as intended to continue and extend to the contract subsequently concluded.
(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
In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements … this is not the time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules.
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.
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
2.28 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
The purpose of an entire agreement clause is to preclude a party to a written agreement from thrashing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need which may arise in its absence to conduct such a search.
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:
I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create … for acts or documents to be a ‘sham’, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.
1 See Lewison, The Interpretation of Contracts (6th edn, Sweet & Maxwell, 2015) at 3.01.
2 Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ (2003) 25(1) Sydney Law Review 5, reproduced in Worthington (ed.), Commercial Law and Commercial Practice (Hart, 2003) 123 at 125.
9 For a discussion of this issue in an American context, see Burton, Chapter 3.
15 See Lewison at 3.11.
19 Law Com No. 154 at 2.14.
27 See McMeel, The Construction of Contracts (2nd edn, Oxford University Press, 2011), Chapter 26; Lewison at 3.16.
28 In principle, such a provision is effective (see Peekay Intermark v Australia and New Zealand Banking Group  1 CLC 582 at – and Springwell Navigation v J P Morgan Chase  2 CLC 705 at –), subject to any relevant statutory constraint, such as under the Unfair Contract Terms Act 1977 or section 3 of the Misrepresentation Act 1967. See Cartwright, ‘Excluding Liability for Misrepresentation’, Chapter 11 in Burrows and Peel (eds), Contract Terms (Oxford University Press, 2007).
31 But it would probably not prevent the contract being rectified if it could be proved that the parties had omitted from the document a clause which they had intended to include: Law Com No. 154 at 2.15; McLauchlan (2012) 128 LQR 521, part 6. Rectification is discussed under Principle 9.
32 Law Com No. 154 at 2.15.
36 See Law Com No. 154 at 1.2 and the speech of Lord Blackburn in Inglis v Buttery (1877) 3 App Cas 552 at 557, quoted earlier in para 2.05.