Upload
matt-keating
View
231
Download
0
Embed Size (px)
Citation preview
THE MEANING OF ‘MEANING’ (AND WHY IT DOESN’T MATTER IF
LORD HOFFMAN INTENDED ‘INTENTION’)
Answering question 4: “Should we continue to use canons of construction such as eiusdem generis and contra proferentem?”
If contemporary discussions of common law contractual interpretation do not begin with
Lord Hoffman in Investors Compensation Scheme v West Bromwich1 (“ICS”), they ordinarily
pivot on that judgment. There, his Lordship attempted to summarise the law on contractual
interpretation, beginning:
“Interpretation is the ascertainment of the meaning which the document would
convey to a reasonable person having all the background knowledge which would
reasonably have been available to the parties in the situation in which they were at
the time of the contract”2.
This paper is not directly about that judgment. Rather, it is about Lord Hoffman’s earlier
(dissenting) judgment in BCCI v Ali3 (“BCCI”) rejecting the use of established canons of
contractual construction, saying:
“If interpretation is the quest to discover what a reasonable man would have
understood specific parties to have meant by the use of specific language in a specific
situation at a specific time and place, how can that be affected by authority? How
can the question of what a reasonable man in 1990 would have thought the
1 [1998] 1 WLR 896. 2 Ibid, 912. 3 [2002] 1 AC 251.
[contracting parties] meant…be answered by examining what Lord Keeper Henley
said in 1758?”4
Crucially, his Lordship’s point in this passage rests on a different account of contractual
interpretation to that which he later articulated in ICS. Specifically, in BCCI his Lordship
refers to what “the specific parties…meant”, but in ICS this became “the meaning which the
document would convey”. We may call these the ‘intention-directed’ and ‘document
meaning’ approaches respectively. It is not clear whether Lord Hoffman was cognisant of
this distinction between his two statements or whether he understood a document’s
meaning to be one and the same as the author’s objective5 intention. The two approaches
are often conflated6 and, when the distinction is noted it is typically thought that intention
“must be what is guiding the person interpreting the contract”.
This paper will defend the opposite view, taking the form of a counter-argument to Lord
Hoffman in BCCI and a defence of the canons of construction. It will be argued that:
1. The ‘meaning’ of a document or utterance is frequently interpreted in a variety of
contexts using principles which aren’t directed to discovering intention; and
2. Understanding ‘meaning’ in this way reveals an important, enduring role for the
canons of construction as ‘gap-filling’ mechanisms.
4 Ibid at [51] (emphasis added). 5 Noting that both of Lord Hoffman’s accounts of interpretation are ‘objective’ ie. the pertinent consideration is what a reasonable person would have understood, not what was actually going on within the minds of the contracting parties. 6 See eg. D Nicholls, ‘My kingdom for a horse: the meaning of words’ (2005) 121 LQR 577, 579.
Before beginning the substantive argument however, it will pay to briefly highlight the legal
and conceptual background.
1. HOW CANONS OF CONSTRUCTION CAN INFORM CONTRACTUAL MEANING
1.1 THE LEGAL AND CONCEPTUAL BACKGROUND
Dismissing Extreme Literalism
One way to distinguish between the ‘document meaning’ and ‘intention-directed’
approaches is by adopting extreme literalism and saying that the document’s meaning can
be constructed entirely from the dictionary definition of each component word of the
contract, independently of any search for an objective intention. The problem with this is
that both the ‘document meaning’ and ‘intention-directed’ approaches are judged by an
objective reasonable observer. Extreme literalism can produce perverse results and so falls
foul of this requirement. In the words of Lord Steyn:
“The tyrant Temures promised the garrison of Sebastia that no blood would be shed
if they surrendered to him. They surrendered to him. He shed no blood. He buried
them alive. That is literalism”7
This paper will be distinguishing between the two approaches without abandoning “the
common sense principles by which any utterance would be interpreted in ordinary life”8. It
7 J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ (2003) 23(1) Sydney Law Review 5 (citations removed). 8 Investors Compensation Scheme v West Bromwich [1998] 1 WLR 896, 913.
will be shown that implicit interpretative principles always operate in ordinary life and that
these principles are not always directed towards discovering an intention.
Canons of Construction
The canons of construction are legal principles “lay(ing) down rules as to how words are to
be interpreted”9. These may be divided into substantive canons, intended to promote
certain policy grounds10, and language canons, being textual rules for interpreting particular
grammatical forms11. An example of the former is contra proferentem which holds that any
ambiguity in a clause must be resolved against the interests of the party who drafted it. An
example of the latter is eiusdem generis which interprets general words to fit within the
class of any preceding specific words (such as interpreting the general words ‘other
provisions’ in the phrase “meat, fish, poultry, vegetables, fruit and other provisions”12 to be
limited to raw foodstuffs, such as eggs, to the exclusion of ‘finished’ products like pies).
As Lord Hoffman argues, substantive canons cannot provide any assistance to discovering
the parties’ intentions. Language canons, though potentially relevant to how the parties
may have intended their words13, can have only peripheral significance to that question as
an esoteric way of expressing findings which were first reached on ‘common sense’ grounds.
Accordingly, any defence of the canons of construction must rest on the proposition that a
9 R Calnan, Principles of Contractual Interpretation (Oxford University Press, 1st ed, 2013) at [5.49]. 10 J Brudney & C Ditslear, "Canons of Construction and the Elusive Quest for Neutral Reasoning" (2005) 58(1) Vanderbilt Law Review, 11. 11 Ibid. 12 Hy Whittle Ltd v Stalybridge Corp (1967) 65 LGR 344. 13 Chandris v Isbrandtsen-Moller [1951] 1 KB 240, per Devlin J at 245.
document’s meaning can be interpreted with the aid of principles which are not directed to
discovering intention.
It is crucial to note however that this is not to exclude the central importance of intention.
Of all the principles that guide interpretation, those directed to objectively-manifested
intention are primary. However, as this paper will argue, they are not sufficient and so must
be complemented by other forms of interpretative principle.
Legal Background
When parties reduce commercial agreements to written contracts they do so to decrease
uncertainty as to the scope of the obligations that they have taken on14,15. Accordingly, the
first point of reference for a court interpreting these obligations is the text of the contract
itself16. This does not just mean the particular clause in dispute, but also the surrounding
text if it can shine light on that clause17. The background facts in which the document was
drafted, to the extent that they can be objectively ascertained, may also be considered by
the court in its interpretative task18.
This much is essentially uncontroversial (though precisely what should count as ‘background
facts’ remains a burning issue19), and notably, it can be understood in terms of either of the
‘document meaning’ or ‘intention-directed’ approaches. That is, these interpretative
principles can be either understood as a way of finding what the document means
14 M Ahmed, "The interpretation of commercial contracts: time for reform" (2012) 21 Nottingham Law Journal 26, 27. 15 Per Lord Blackburn, Inglis v John Buttery & Co (1878) 3 App Ca 552 at 577.
16 C Staughton, ‘How Do the Courts Interpret Commercial Contracts?’ (1999) 58 CLJ 303, 305. 17 K Lewison, The Interpretation of Contracts (5th ed, Sweet & Maxwell, 2011) at [7.02]. 18 Ibid at [3.17]-[3.18]. 19 See C Staughton, above n 16, 307.
(understood in its context, as all words are20) or as a way of finding out what the parties
intended based on what they chose to write and the context within which they made that
choice. Accordingly, as far as these first principles of interpretation are concerned, the
difference between the ‘document meaning’ and ‘intention-directed’ approaches is a moot
point.
Unfortunately for the law of contract however, these principles alone are insufficient to
conclusively interpret many commercial contracts21. The remainder of the interpretative
process is substantially less clear and can be seen as a battleground in the “eternal conflict”
between the literalist22 and purposive23 schools, which drastically undermines the
predictability of the courts. This is the point where the distinction between the ‘document
meaning’ and ‘intention-directed’ approaches becomes important. It will be argued that
seeking the document’s meaning with the aid of canons of construction can lead the way
out of this quagmire. In contrast, interpreting contracts under the banner of ‘intention-
directed’ approaches is fundamentally indeterminate and serves to cloak the true principles
on which judges are resolving interpretative questions.
1.2 VARIOUS INTERPRETATIVE PRINCIPLES ARE EMPLOYED IN VARIOUS CONTEXTS, AND
THESE ARE NOT ALWAYS DIRECTED TO DISCOVERING INTENTION
The meaning of a document and its author’s objective intention so frequently overlap that it
can be tempting to fall into the trap of equating them. This is both because objective
intention is a primary part of the interpretative process, and because speakers always try to
20 R Calnan, above n 9, at [4.04]. 21 D McLauchlan, Contract Interpretation: What is it about? (2009) 31(1) SLR 5, 50. 22 Emphasising the plain meaning of the text. 23 Emphasising the apparent purpose of the wider contract.
use words which carry the meaning that they intended. Nevertheless, ordinary
interpretative principles for uncovering meaning are wider than this, and are context-
dependent, as the following examples illustrate.
Intention-directed Interpretation
In May 2015 David Cameron referred to the upcoming UK election as “career-defining”
while speaking to a group of Asda employees. Mr Cameron later said that “career-defining”
meant ‘career-defining for Asda employees’24, though critics may suggest that it actually
meant ‘career-defining for David Cameron’. In either case, it is clear that the ‘meaning’ of
the phrase is being equated with the speaker’s intention – with what David Cameron had in
mind at the time.
This account of ‘meaning’ springs from the context of an election campaign, where people
are concerned with the character of prime-ministerial candidates; if “career-defining”
meant ‘career-defining for David Cameron’ it could suggest that his priorities are amiss. In
contrast, people are not so concerned with what Mr Cameron’s words tell them about the
election’s implications for his or Asda employees’ careers because such vague words, when
uttered on the campaign trail, amount to almost nothing (they are, in the immortal words of
Lindley LJ in another context, “mere puffery”25).
24 ‘David Cameron: I meant that the election was ‘career defining’ for Asda employees’ Channel 4 News (1 May 2015) Available: <http://news.channel4.com/election2015/05/01/update-4741/> [Accessed 1 November 2015] 25 Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1.
At a more basic level, all conversational contexts will have intention as a prime concern
because of the importance for conversational flow of speakers understanding one another’s
minds.
The Principle of Charity
In contrast, interlocutors in academic debates are less concerned with discovering one
another’s actual intention, and accordingly different interpretative principles come into
play. In this context the ‘Principle of Charity’ – directing that one should interpret texts to
maximise the correctness or rationality of their content26 – is frequently employed.
Notably, this principle may assist in discovering intention (on the assumption that the
author is highly rational), but its significance is wider than this. By taking the most charitable
interpretation, academics are able to “bring out the strongest arguments on both sides”27. It
may be that such an argument was not intended by the writer, but by interpreting in this
way academics can enrich the debate. Indeed, such arguments may have no single creator;
finding their genesis in vague words of one commentator and being improved in the
interpretative work of another. While this is prevalent throughout academia, it perhaps
takes its clearest form in exegetical works applying the work of older scholars to modern
contexts, where the old scholar could not be supposed to have had the foresight to actually
intend the meaning which is extracted from their text28.
Interpreting Judicial Statements
26 D K Henderson, ‘Winch and the Constraints on Interpretation: Versions of the Principle of Charity" (1987) 25(2) The Southern Journal of Philosophy, 153, 153. 27 D Walton & C A Reed, ‘Argumentation Schemes and Enthymemes’ (2005) 145(3) Synthese, 339, 342. 28 See eg. S R Palmquist,’Kantian Causality and Quantum Quarks] (2013) 28(2) Theoria, 283.
When judicial decisions contain statements of law they too must be interpreted. While one
could fill a library with the various principles on which such statements may be interpreted,
for our purposes it suffices to note that these are not directed to uncovering the actual
intention of the judge.
The can be seen from the fact that:
i) The extra-judicial writings of judges do not represent binding authority for
interpreting their own judgments; and
ii) If Judge A articulates a legal principle which needs to be interpreted in later
cases, other decisions of Judge A do not carry greater weight than decisions of
Judge B in interpreting Judge A’s principle29.
“All the people who it is reasonably foreseeable might…need to construe”
There is also recent judicial authority for an interpretative principle which is said to be
employed by reasonable people in daily life but which, on close inspection, is not directed
towards intention. In Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council30
Campbell JA, after expressing the relevant interpretative test as being that of a “reasonable
person seeking to understand what the words of the document conveyed” said:
“That reasonable person would…understand that the sort of background knowledge
that is able to be used as an aid to construction, has to be background knowledge
29 Assuming all else is equal eg. Judge A is not a superior judge to Judge B. 30 [2010] NSWCA 64 at [151].
that is accessible to all the people who it is reasonably foreseeable might, in the
future, need to construe the document”
In this context his Honour explicitly included three classes of contract: assignable contracts,
contracts that will endure for a long period of time, and contracts embodied in instruments
on a Torrens title register. Campbell JA’s statement was approved in England by Lord
Lewison in Cherry Tree v Landmain31, who remarked that there is no conflict between this
approach and Lord Hoffman’s principles in ICS (which, the reader will recall, articulated the
“document meaning” approach).
What Lord Lewison did not remark upon, and what is usually overlooked, is that Campbell
JA’s remark does conflict with the “intention-directed” approach to contractual
interpretation. The very fact that a contract falls in one of these three classes does not
speak to the parties’ intention. This is clear from the disparate nature of the three classes of
contract referred to by Campbell JA which have very few purposive similarities and are only
united by the likelihood that third parties will take an interest in those types of contracts32.
Conclusion from the Examples
These examples illustrate that the meaning of a document (or any other text or utterance)
can be interpreted using principles which are not directed towards finding intention and
that the appropriate principles are context-dependent. This allows the ‘document meaning’
approach in ICS to be understood in a way which is distinct from the ‘intention-directed’
31 [2013] 2 WLR 481 at [128]. 32 Of course, contracting parties may perceive that their contract will need to be interpreted by many people and draft with this in mind; in some sense this provides a secondary link between Campbell JA’s approach and the parties’ intention, but this is no different to any interpretative principle, including the canons of construction.
approach in BCCI (irrespective of whether Lord Hoffman intended this distinction!). It would
also allow judicial statements about finding objective intention33 to be interpreted narrowly
as the best interpretative principle in the context of their respective cases.
However, it still remains to be seen that the document’s meaning and the parties’ intention
are best thought of as distinct within the context of the law of contract. I turn to this point
now.
2. WHY CANONS OF CONSTRUCTION SHOULD INFORM CONTRACTUAL MEANING
2.1 JUDICIAL CONTRACTUAL INTERPRETATION IS HIGHLY INDETERMINATE IN PRACTICE
Note that the ‘document meaning’ and ‘intention-directed’ approaches seek the
document’s meaning and the parties’ intention respectively. That is, they purport to
produce a single answer. This feature is absolutely essential – “the most important rule”34 –
because the alternative is that judges fill the gaps on an ad-hoc basis. This would be
anathema to both commercial sense (preventing parties from knowing ‘where they stand’35
until judgment is handed down) and to basic precepts of fairness (if a dominant factor in
determining the success of a party’s litigation is the judge whom they are assigned36).
33 See eg. Reardon Smith Line v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 996, and Deutsche Genossenschaftsbank v Burnhope [1995] 1 WLR 1580 at 1587. 34 M P Furmston, ‘Current issues in the interpretation of contracts’ (2011) 28(1) Journal of Contract Law, 78, 80. 35 W Swain, ‘Contract codification in Australia: Is it necessary, desirable and possible?’ (2014) 36(1) Sydney Law Review, 131, 140. 36 C Staughton, above n 16, 304.
However, despite the volume of contractual litigation which turns on interpretation37, it is
notoriously difficult to predict the outcome of such disputes38. This can be seen from only a
cursory glance at the cases. In The Laura Prima39, involving a contract having only two
possible interpretations, the umpire decided the matter one way before being overturned
by the first-instance judge; the judge’s decision was overturned by the Court of Appeal, who
was in turn overturned by the House of Lords40. In the leading cases of ICS41, Mannai v Eagle
Star42, BCCI43 and Chartbrook v Persimmon Homes44 there were eight judicial interpretations
of four contracts45. If the interpretative question is “what a reasonable man would have
understood specific parties to have meant”46, the reported cases strongly suggest either
that there are multiple such interpretations open to a reasonable person, or that almost half
of the House of Lords is unreasonable.
2.2 THE ‘INTENTION-DIRECTED’ APPROACH IS INDETERMINATE BY ITS VERY NATURE
The vast majority of interpretation disputes which are litigated arise because a situation has
arisen which was not foreseen at the time of drafting47; therefore, the parties had no
intention in respect of that matter and asking what the parties meant is insufficient to
produce an interpretation of the contract. This argument seems obvious to the point of
triviality, but it has been resisted by many on the supposition that there is some objective
37 Academics from Sydney Law School, Submission to Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework, 20 July 2012, 2. 38 D McLauchlan, above n 21, 6. 39 [1981] 3 All ER 737. 40 R Calnan, above n 9, at [Pr.35]. 41 [1998] 1 WLR 896. 42 [1997] AC 749. 43 [2002] 1 AC 251. 44 [2009] 1 AC 1101. 45 M P Furmston, above n 34, 80. 46 BCCI v Ali [2002] 1 AC 251. 47 D McLauchlan, above n 21, 10.
notion of what the parties would have intended had they turned their attention to it48. This
notion is then smuggled into the concept of objective intention under the moniker of
‘presumed intention’. This, in the words of Thomas J, “provides the community with a
universal law of contract which could otherwise founder on the impossible task of
ascertaining the parties’ intention when in reality they had none”49.
The presumed intention approach may be understood by analogy to asking someone in the
course of a conversation what they meant by particular words. However, even if their
response to this question gives a genuine insight into their intention at the time of speaking
(which may be called into doubt50), the analogy still does not extend to contractual
interpretation. This is because contracts are between multiple parties and there are no
grounds to suppose that the parties had any common intention, except to the extent that
they were prepared to sign the contract as written51.
The Failure of Presumed Intention
Consider the facts of Krell v Henry52: The year is 1902 and London is brimming with
excitement for the coronation procession of the soon-to-be King Edward VII, planned for 26
and 27 June. Mr Henry, eager to partake in the excitement, enters into a rental contract on
these days (though the contract does not contain any statement of these days’ significance)
for an apartment located along the procession’s route, belonging to Mr Krell.
48 R Calnan, above n 9, at [1.13]. 49 Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617, 632. 50 See eg. L Wittgenstein, Zettel (University of California Press, 1967), 135. 51 This is a similar point to that made by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 when he said, at 1385, “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” (though Lord Wilberforce was there talking about the irrelevance of pre-contractual negotiations to interpreting the final document). 52 [1903] 2 KB 740.
Unfortunately, the future King falls ill and his Coronation is delayed. Is Mr Henry bound to
pay the agreed rent to Mr Krell for an apartment which is no longer of any use to him?
It seems clear that the parties did not actually turn their attention to which of them should
bear the risk of the coronation not proceeding and it is not at all apparent that they would
have been in agreement if explicitly asked what would be the effect of the coronation being
delayed. Supposing that Mr Krell understood the contract to be strictly for the days stated,
and Mr Henry understood it to be limited to providing a view of the procession, what would
have happened had this matter been raised prior to signing? There are four possibilities:
1. One party convinces the other to change their understanding of the contract’s
words;
2. The parties cannot agree, but proceed with the contract as-written in the hope that
no dispute arises53;
3. One party agrees to assume the risk of the coronation not proceeding in exchange
for some benefit elsewhere in the contract; or
4. The parties cannot agree and go their separate ways without contracting.
Of these, (1) is implausible, (2) contains no common intention and both (3) and (4) could be
understood either to (i) give rise to no common intention; or (ii) give rise to a common
intention which potentially involves either re-drafting the whole contract to compensate
one party for assuming a risk, or terminating the contract (either ‘interpretation’ being so
53 In Lord Wilberforce’s view, this “often” occurs in commercial contracting – see Prenn v Simmonds [1971] 1 WLR 1381 at 1386.
profoundly removed from the actual contract that no court could ever contemplate it). The
parties’ common intention seems to have evaporated once we looked too closely!
Of course, this counterfactual discussion is concerned with subjective intention while the
interpretative quest in common law systems is decided on an objective basis. Nevertheless,
for a reasonable person to judge the parties’ intention objectively, one must assume that
there is some underlying reality to the notion of subjective common intention54; the above
discussion suggests that the doctrine of objective intention is built on quicksand.
Presumed Intention as a Cloak for Other Interpretative Principles
Naturally the courts do not actually go so deep into detailed counterfactuals when seeking
the parties’ presumed intention. In practice, if the judge seeking the parties’ objective
intention were inclined towards literalism, he or she would probably conclude that the
contract was explicit as to dates and so find a presumed intention favouring Mr Krell. If
more inclined towards purposivism, he or she may instead conclude that the context reveals
a clear purpose to provide Mr Henry with a view of the procession and so it could not be
fulfilled through enforcement of those explicit dates. In either case, couching the question
as a search for the parties’ presumed intention does not provide further assistance and, in
fact, only makes the conflict between literalism and purposivism more opaque by labelling
the outcome of either approach as the parties’ “objective intention”.
This opacity does not just apply to the battle between literalism and purposivism however.
It also applies to cloak the true nature of other principles employed under the banner of
54 This is not to say that there must always be an actual intention for the court to find an objective intention in a particular case. However, for the notion of common objective intention to be conceptually coherent in general, the notion of common subjective intention must be conceptually coherence in general.
discovering objective intention. In Rainy Sky v Kookmin Bank55 for example, a shipbuilding
company provided a performance bond from a bank, pursuant to a shipbuilding contract,
guaranteeing that the buyer’s money would be repaid by the bank upon “termination,
cancellation or rescission of the contract” by the shipbuilder. As it transpired, the
shipbuilder became insolvent and the bank argued that this was not a “termination,
cancellation or rescission” and so was not protected by the guarantee. The Supreme Court
rejected this argument on the basis that it did not satisfy “business common sense” and so
could not have been intended by the parties56, but this is patently untrue. The bank’s
decision to issue the bond, and the purchaser’s decision to accept it, is intricately bound up
with the precise terms used in the bond and the consequent risk allocation associated with
those terms. It is a daily part of business that companies decide to take on some risks and
outsource others (using insurance, guarantees or other commercial mechanisms) based on
their own quantification of those risks. By interpreting the bond widely to include default
from insolvency, the court’s decision deprives the bank of its ability to calculate risk
appropriately because the bank cannot know whether the actual risk that the courts will
enforce is wider than that which is written in the bond.
Another example is found in Charter Reinsurance Co v Fagan57 in which a reinsurance
contract provided for payments from a reinsurance company to an insurance company to be
calculated from sums “actually paid” by the insurance company to policyholders. The
insurance company had become insolvent and so no money was actually paid to the
respondent policyholder, despite the policyholder being entitled to payment. Accordingly,
55 [2011] 1 WLR 2900. 56 See the discussion in L Mason, ‘The Role of Business Common Sense in the Construction of Commercial Contracts’ (2012) 33(2) Business Law Review, 32, 32. 57 [1997] AC 313; 381.
the reinsurance company argued that they had no obligation to honour the money owed by
the insurer to the policyholder. The court rejected this argument, saying that a wider
reading of the contract showed an intention that “actually paid” was intended only to
provide a clear metric for calculating reinsurance payments, rather than a condition
precedent for those payments. However, a faithful application of the ‘intention-directed’
approach could surely not yield this result because it supposes that the reinsurance
company intended to take on an additional risk even though the insurance company would
have had almost no reason to push for it58.
2.3 THIS INDETERMINACY OF ‘OBJECTIVE INTENTION’ IS NOT LIMITED TO A FEW ISOLATED
CASES
There are undeniably some cases in which one may be tempted, despite the above
arguments, to assert with confidence that the parties would have been of one mind had
they turned their minds to the pertinent matter59. However, these cases are few. Indeed,
there are factors at play in contractual negotiation which tend to produce a final document
hiding the divergence of intentions of the contracting parties (hereafter called “contractual
gaps”). These include:
58 This assertion is based on the fact that potential policyholders of that insurer would surely not be aware of the precise terms of its reinsurance contract; therefore, those potential policyholders would not be more likely to sign up with the insurance company on the basis of the protection afforded to them through the reinsurance contract. 59 Consider Lloyds TSB Foundation v Lloyds Banking Group [2013] 1 WLR 366 in which a Deed of Covenant required Lloyds Bank to pay the Foundation a percentage value of their “group profit before taxation” as “shown in the audited accounts”. Under the law at the time, profits could only be included in a profit and loss account once actually realised. However, the law later changed such that unrealised profits were to be included in the profit and loss account. The change in law drastically affected the size of Lloyds Banking Group’s accounted-for profits and the Foundation sought payment of a sum calculated from this figure. However, the Supreme Court found in favour of Lloyds Bank, interpreting “group profit before taxation” in accordance with the law as it existed at the time the contract was formed. The parties had not turned their minds to the possibility of a change of law, but the court presumed that they would not have intended for ‘profit’ to change its meaning under the contract based on a change in its legal meaning.
1. “Contract writing costs”60
Commercial contracts are drafted in a commercial context and time is money.
Consequently, there comes a point where it does not serve either party’s interests to
refine the details of the contract, because any gains in certainty from unifying the
parties’ intentions are more than offset by time lost in beginning the transaction.
2. “Contract reading costs”61
As contracts become more precise and explicitly address more possibilities, they
become denser and harder to read. The more complicated a proposed clause, the
more likely it will be rejected by the other party for fear that it contains a covert
obligation, even if it is in fact mutually beneficial. This creates a force inhibiting
contracts from coming too close to completeness.
3. “Studied ambiguity”62
As with “contract writing costs”, this factor reflects the time constraints associated
with commercial contracting, but in this case it is not that the parties do not have
the time to turn their minds to certain contingencies. Rather, it is that parties have
considered those contingencies but are unable to reach agreement on them. As
such, in an effort to push through the contract, they draft deliberately ambiguous
language, gambling that later facts do not give rise to a dispute.
4. Fear of “signalling”63
60 E B Rasmusen, ‘Explaining Incomplete Contracts as the Result of Contract-Reading Costs’ (2001) Advances in Economic Analysis & Policy, iii, 3. 61 Ibid. 62 J Steyn, above n 7. 63 E B Rasmusen, above n 60, 2.
In this case one party has observed a specific ambiguity in the proposed contract and
would like greater clarity, but does not raise it in negotiations because it could signal
something about themselves and thereby weaken their bargaining position. For
example, in a long-term sale contract, an industrial buyer may be cautious about
seeking clarity on a guaranteed monthly supply for fear that the seller will infer a
lack of alternative supply sources and raise the price accordingly64.
This suggests that contractual gaps are not limited to exceptional cases which can be
addressed by a few exceptions to the general principle. Rather, they must be tackled at their
source: the ‘intention-directed’ approach.
2.4 CONTRACT LAW IS REPLETE WITH DOCTRINES WHICH FILL GAPS LEFT BY ‘OBJECTIVE
INTENTION’
The wider contract law seems to have made its peace with the existence of contractual gaps
and has responded with various legal mechanisms for filling these gaps.
In the statutory context, many Commonwealth nations have Sale of Goods Acts65, based on
the UK’s now-superseded Sale of Goods Act 1893, which provide for certain terms to be
automatically implied66 into sales contracts. While some of these implied terms may be
understood to enshrine what the parties may be supposed to have intended67, other terms
cannot be understood in this way. For example, the risk of damage to property prima facie
64 Ibid. 65 In Australia these have been enacted by the States. See eg. Sale of Goods Act 1923 (NSW). 66 Meaning that they can be defeated by express words. 67 Consider, for example, this principle: a bulk volume of some product, offered for sale on the basis of a sample, “shall correspond with the sample in quality” – s 23(2)(a), Sale of Goods Act 1923 (NSW)
passes with that property68 and property prima facie passes from seller to buyer at the
moment that it is passed to a third party carrier for delivery69. The combined effect of these
terms is that, in the absence of explicit contrary intention, the buyer bears the risk of
damage in transit. There is no apparent basis on which such an outcome can be thought to
reflect the intention that the parties would have had had they turned their minds to it.
The common law too has mechanisms for filling gaps in the parties’ objective intention.
Consider again the case of Krell v Henry, which we have seen cannot be resolved on the
basis of presuming a common intention. This case in fact stands as one of the foundational
cases in the doctrine of frustration70 which brings an end to a contract “by operation of law
on the emergence of a fundamentally different situation”71. The stark contrast between this
and any attempt to uncover an objective common intention can be seen from the decision
of the Australian High Court in Codelfa Construction v SRA of NSW72. In that case the State
Rail Authority of NSW had contracted for Codelfa Construction to excavate a tunnel for a
new railway. However, contrary to the contracting parties’ shared expectations, the work
was severely delayed by third-party injunctions preventing construction occurring at certain
times. Codelfa suffered resulting loss and commenced proceedings. The High Court notably
refused to imply a term as a matter of interpretation73, but did find that the contract had
been frustrated:
68 Ibid, s 25. 69 Ibid, s 35. 70 Wolters Kluwer, ‘Australian Contract Law Commentary’ [online] (CCH, 2015) 71 Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696, per Lord Reid at 723 (emphasis added); cited with approval by the High Court of Australia in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 356. 72 (1982) 149 CLR 337. 73 Ibid at 21.
“I find it impossible to imply a term because I am not satisfied that…the term sought
to be implied was one which parties in that situation would necessarily have agreed
upon as an appropriate provision to cover the eventuality which has arisen. On the
other hand…the performance of the contract in the events which have occurred is
radically different from performance…in the circumstances which it…contemplated”74
Therefore, the doctrine of frustration affects the parties’ contractual obligations in
circumstances where there is no objective intention favouring that outcome. In fact, there is
both judicial and academic support for understanding a suite of contractual defences as
‘default rules’ for filling contractual gaps75
There are two important points to note about how these gap-filling mechanisms function.
The first is that, though they are not directed towards finding objective intention, they
nevertheless will never conflict with the parties’ intentions. This is because they only apply
when there is a gap in those intentions and, furthermore, because having established
default positions (such as the buyer bearing transit risks) ensures that everyone76 is ‘on the
same page’ and so a genuine common intention is more likely. The second point is that by
filling gaps these default rules improve predictability for the contractual parties. Even
though parties may not have turned their minds to an issue at the time of contract
formation, when that issue later arises it is important that the parties have a good idea of
the terms on which a court is likely to enforce their contract.
74 Ibid at 55. 75 B Bix, Contract Law: Rules, Theory, and Context (Cambridge University Press, 2012), 57. 76 Or, at least, everyone who frequently enters into contracts of that type.
The significance of this legal background for the canons of interpretation is twofold. Firstly,
it provides a basis in law to justify interpreting contracts in a way which is not directed
towards finding intention but which, nevertheless, does not conflict with clear intention and
which serves the further purpose of maximising predictability. Secondly, it provides a
background against which appropriate principles of interpretation in this context can be
recognised.
A Brief Remark on the Parallels between Contractual Interpretation and the above
Doctrines
One might argue that interpretation is fundamentally different to the doctrines discussed
above because those doctrines arise in situations where the contract was silent on a matter,
but interpretation is usually concerned with giving meaning to specific provisions.
This argument fails on the ground that it is viciously circular: one cannot determine the
matters on which a contract is silent until one has first interpreted the scope of the
provisions that are included. For instance, to determine whether a security trust deed
provides for an order of priority between short- and long-term creditors, it is necessary to
first interpret the trustee’s duty to discharge all short-term debts “so far as possible”77.
2.5 THE CANONS OF CONSTRUCTION CAN BE UNDERSTOOD AS FILLING GAPS IN THE SAME
WAY THAT THESE OTHER DOCTRINES DO
Once the wider contract law is understood in this way, the way is paved for an account of
contractual interpretation which incorporates canons of construction as a ‘gap-filling’
77 Re Sigma Finance [2010] 1 All ER 571.
mechanism to promote predictability. It will be seen that canons of construction promote
predictability in two distinct ways and that these arise naturally from the contracting
context, just as any other interpretative principle would.
Interpretative Principles and the Choice between the Unknown and the Unknowable
Contract law can be understood as a legal mechanism to “empower individuals to pursue
their goals in a cooperative way”78,79. For parties to do this effectively it is essential that the
scope of their obligations to one another is as clearly defined as possible. This is especially
important in commercial relations where business decisions will be made according to
known obligations. In this context it is natural that interpretative principles should seek to
maximise predictability.
The canons of construction are frequently criticised on the grounds that they are unknown
to many contracting parties and that therefore it would be unjust to use them to interpret
those parties’ words. However, if parties to the same contract have different intentions, it is
inevitable that contractual interpretation will sometimes involve burdening parties with
obligations to which they did not knowingly assent. In such situations, if sufficient
interpretative principles cannot be known to the parties, it is surely preferable that these
principles be at least knowable for any party which chooses to seek legal advice.
Of course, even with well-established canons and competent legal advice, it is inevitable
that some cases will defy a clear answer – human affairs are simply too complicated for any
78 P Cserne, 'Policy considerations in contract interpretation: the contra proferentem rule from a comparative law and economics perspective’ in G Gavvala (ed) Contract Theory - Corporate Law (ECFAI University Press, 2009) 66, 69. 79 See the discussion in M Hogg, ‘Competing Theories of Contract’ in L A DiMatteo et al (eds), Commercial Contract Law: Transatlantic Perspectives, (Cambridge University Press, 2013) 14.
rule to guarantee determinacy in all cases80. However, in the words of Lord Neuberger,
canons of construction represent “a very good example of the value of precedent”81
because they can be refined to accommodate borderline cases. In contrast, ‘intention-
directed’ interpretation is beyond the reach of precedent and so is irreparably
indeterminate82.
‘Predictability’ as Adherence to ‘Intuitive Reactions of Justice’
Consider the following propositions:
1. The predictability of judicial outcomes is not merely a question of how often one
correctly predicts decisions. There is a further question: when one has predicted a
decision incorrectly, what is the magnitude of the discrepancy between actual
decision and predicted decision?
2. It is not just lawyers who make predictions about what obligations the law will and
will not impose; modern law encroaches on almost every facet of daily life, and yet
people are able to operate on only a miniscule knowledge of that law. That is, they
make elementary predictions about what the law demands.
In light of (1) and (2), it is desirable that on those occasions when non-lawyers falsely predict
their legal obligations under a contract, that the magnitude of the discrepancy not be
unduly large. The canons of construction assist with this.
80 A C Spiropoulos, ‘Making laws moral: a defence of substantive canons of construction’ (2001) 2001(4) Utah Law Review, 915, 949. 81 Cited in The Times Law Report, ‘Value of canons of construction’ The Times (55, London, 23 July 2013). 82 As pointed out by Lord Hoffman in BCCI.
To see how, consider the basis on which non-lawyers make these elementary predictions:
they expect that in most domains the law will not drastically depart from the intuitions of
ordinary “reasoning members of society”83. This basic expectation is said to be one of the
justifications for the principle that ‘ignorance of the law is no excuse’84 and it also finds
voice within the commentary on contractual interpretation through the assertion of Lord
Steyn that: “the law must not be allowed to drift too far from the intuitive reactions of
justice of men and women of good sense”85. Given that contractual interpretation is
concerned to find a document’s meaning in its context, why should this context not include
the fact that the parties have chosen to commit their agreement to writing with an
understanding that: (i) any disputes may be resolved by the courts (including the use of legal
doctrines, the details of which the parties are not aware); and (2) that the law will not
depart too drastically from intuitive reactions of justice86?
Of course, when entering contracts, reasoning members of society will rightfully expect that
any clearly stated intention will be honoured, but this is not the extent of their reasonable
expectations. Another is that they will not find themselves, by some sleight of hand, taking
on a substantially bigger contractual burden than they had expected. They expect that a
court will not impose a liability on them which is orders of magnitude larger than anything
for which they knowingly signed up.
83 S W Buell & L K Griffin, ‘On the mental state of consciousness of wrongdoing’ (2012) 75(1) Law and Contemporary Problems, pp. 133, 148. 84 Ibid. 85 J Steyn, above n 7. 86 Australian Corporate Lawyers Association, Submission to Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework, 20 July 2012, 2.
The contra proferentem canon, outlined above, responds to this natural expectation of
contracting parties. The canon provides an incentive to clear drafting87 which limits parties’
ability to profit from sleight-of-hand drafting techniques and promotes the cooperative
enterprise underscoring contract law. Euisdem generis can likewise be understood as
ensuring that general words do not drastically expand a party’s obligations well beyond the
scope that they may have anticipated88.
A similar explanation can be given for the majority decision in BCCI (in which Lord Hoffman’s
statement against the canons was uttered in dissent). In that case BCCI entered an
agreement in which it paid a pecuniary sum to former employees in exchange for “full and
final settlement of all or any claims whether under statute, common law or in equity of
whatsoever nature that exist or may exist...”89. It later came to light that the bank had been
run fraudulently and the House of Lords was asked to determine whether the settlement
precluded those former employees from suing in respect of their consequentially
diminished re-employment prospects. The majority found that it did not, with Lord Bingham
referring to “a long and…salutary line of authority”90 for the interpretative principle that
very clear words are required for a party to surrender rights of which they were not, and
could not be, aware.
This can be seen as protecting the former employees from inadvertently contracting away
drastically more rights than they could have reasonably anticipated at the time of signing.
87 P Cserne, above n 78, 69. 88 This can also explain why Devlin J did not apply eiusdem generis in Chandris v Isbrandtsen-Moller Co [1951] 1 KB 240 at 246, when finding that “acids, explosives, arms, ammunition or other dangerous cargo” included turpentine. In this case the inclusion of turpentine clearly does not unreasonably enlarge the scope of the clause beyond what could have been anticipated. 89 BCCI v Ali [2002] 1 AC 251 at [3]. 90 BCCI v Ali [2002] 1 AC 251 at [10].
Thus it empowers parties to enter contracts without needing to stay hyper-vigilant to the
possibility that they are in fact contracting away far more than is readily apparent. While
parties will never be able to be precisely sure of all their contractual obligations, they should
at least be able to accurately gauge the magnitude of what is at stake.
3. CONCLUSION
The law of contract has long been burdened with the misleading imagery of a ‘meeting of
the minds’ – an almost spiritual metaphor of two entirely separate sets of intentions
becoming one. Against this background it is natural to imagine the parties as having a fully-
formed common intention which can only be imperfectly captured in a written document. If
this were the case it would be natural that the courts interpret those documents according
to that common intention.
However, as we have seen, the reality is that parties ordinarily have only reached
agreement to the limited extent that is clear from the contract’s words in context. Given
this, it is essential that interpretative principles look beyond the parties’ intentions, but that
does not mean applying rules arbitrarily. Rather, it is to recognise that reasonable people
always use interpretative principles which are sensitive to the surrounding context. In the
context of contractual interpretation, these principles have long included, and must
continue to include, the canons of construction.
BIBLIOGRAPHY
PRIMARY SOURCES
Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617.
BCCI v Ali [2002] 1 AC 251.
Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1.
Chandris v Isbrandtsen-Moller [1951] 1 KB 240.
Chartbrook v Persimmon Homes [2009] 1 AC 1101.
Charter Reinsurance Co v Fagan [1997] AC 313; 381.
Cherry Tree v Landmain [2013] 2 WLR 481.
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.
Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696.
Deutsche Genossenschaftsbank v Burnhope [1995] 1 WLR 1580.
Hy Whittle Ltd v Stalybridge Corp (1967) 65 LGR 344.
Inglis v John Buttery & Co (1878) 3 App Ca 552.
Investors Compensation Scheme v West Bromwich [1998] 1 WLR 896.
Krell v Henry [1903] 2 KB 740.
The Laura Prima [1981] 3 All ER 737.
Lloyds TSB Foundation v Lloyds Banking Group [2013] 1 WLR 366.
Mannai v Eagle Star [1997] AC 749.
Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64.
Prenn v Simmonds [1971] 1 WLR 1381.
Reardon Smith Line v Yngvar Hansen-Tangen [1976] 1 WLR 989.
Rainy Sky v Kookmin Bank [2011] 1 WLR 2900.
Re Sigma Finance [2010] 1 All ER 571.
Sale of Goods Act 1923 (NSW).
SECONDARY SOURCES
Academics from Sydney Law School, Submission to Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework, 20 July 2012, 2.
Ahmed, M. 2012, "The interpretation of commercial contracts: time for reform", Nottingham Law Journal, vol. 21, pp. 26.
Australian Corporate Lawyers Association, Submission to Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework, 20 July 2012, 2.
H G Beale, W D Bishop & M P Furmston, Contract Cases and Materials (5th ed, Oxford University Press, 2008).
J Brudney & C Ditslear, "Canons of Construction and the Elusive Quest for Neutral Reasoning" (2005) 58(1) Vanderbilt Law Review, 11.
S W Buell & L K Griffin, ‘On the mental state of consciousness of wrongdoing’ (2012) 75(1) Law and Contemporary Problems, pp. 133, 148.
R Calnan, Principles of Contractual Interpretation (Oxford University Press, 1st ed, 2013).
G M Cohen, ‘Interpretation and implied terms in contract law’ in G Geest (ed), Contract law and economics (Edward Elgar, 2011).
P Cserne, 'Policy considerations in contract interpretation: the contra proferentem rule from a comparative law and economics perspective’ in G Gavvala (ed) Contract Theory - Corporate Law (ECFAI University Press, 2009) 66.
C Gauker, 'The Principle of Charity’ (1986) 69(1) Synthese, 1.
D K Henderson, ‘Winch and the Constraints on Interpretation: Versions of the Principle of Charity" (1987) 25(2) The Southern Journal of Philosophy, 153.
M Hogg, ‘Competing Theories of Contract’ in L A DiMatteo et al (eds), Commercial Contract Law: Transatlantic Perspectives, (Cambridge University Press, 2013) 14.
D B Kostrub. & R S Christenson, ‘Canons of construction for the interpretation of mineral conveyances, severances, exceptions, and reservations in producing states’ (2012) 88(3) North Dakota Law Review 649.
K Lewison, The Interpretation of Contracts (5th ed, Sweet & Maxwell, 2011).
L Mason, ‘The Role of Business Common Sense in the Construction of Commercial Contracts’ (2012) 33(2) Business Law Review 32.
E McKendrick, Contract Law: Text, Cases and Materials (4th ed, Oxford University Press, 2010)
D McLauchlan, Contract Interpretation: What is it about? (2009) 31(1) SLR 5, 50.
D Nicholls, ‘My kingdom for a horse: the meaning of words’ (2005) 121 LQR 577
A C Spiropoulos, ‘Making laws moral: a defence of substantive canons of construction’ (2001) 2001(4) Utah Law Review, 915, 949.
C Staughton, ‘How Do the Courts Interpret Commercial Contracts?’ (1999) 58 CLJ 303.
J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ (2003) 23(1) Sydney Law Review 5.
A Tettenborn. ‘Codifying Contracts—An Idea Whose Time has Come?’ (2014) 67(1) Current Legal Problems 273.
The Times Law Report, ‘Value of canons of construction’ The Times (55, London, 23 July 2013).
D Walton & C A Reed, ‘Argumentation Schemes and Enthymemes’ (2005) 145(3) Synthese, 339.
L Wittgenstein, Zettel (University of California Press, 1967).
Wolters Kluwer, ‘Australian Contract Law Commentary’ [online] (CCH, 2015).