Interpreting the Contract: The Second Principle

Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 is among the most reviewed contract law cases that laid down the contextual approach that is critical when interpreting contracts. The ruling of the case was based on the Lord Hoffman’s five principles useful in the interpretation of the contract.[1]

The case involved investors who were given negligent advice by financial advisers, solicitors and building societies and were accused of breaching statutory duty. The compensation scheme was started by the Securities and Investment Board. The judgment held that the right to claim rescission had been withheld by the investors, while the damages claim is assigned.[2]  The ICS Ltd, therefore, had the right to sue West Bromwich as well as other building societies when vindicating the claims by investors. However, the Court of Appeal indicated that the interpretation of the judgment had no meaningful words similar to Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945 whereby the parties used the wrong syntax that did not have the relevant background.[3] 

The judgment of the court of appeal ruled by Leggatt indicated that the construction was natural, and the words used had ordinary meaning. The ruling discredited the concept of natural and ordinary meaning since he did not identify words that had been used in an ordinary and natural manner.[4] The primary purpose of this contractual interpretation is to identify the true meaning of contracts based on Lord Hoffman’s five principles that are used to interpret terms or syntax used in contracts.[5] The analysis presents usefulness of the principles in establishing the true meaning of contractual terms by reflecting other relevant case laws.

Lord Hoffmann’s Five Principles

            Hoffman’s speech in ICS v West Bromwich enhanced modernism of contractual interpretation that declared the previous baggage meaningless by setting out construction express principles that include:

1. The court is expected to consider the message conveyed by the document to a reasonable individual with background knowledge that is reasonably available to parties when developing the document.

2. The background knowledge incorporates all relevant factual information that is accessible to all parties and that has influenced the manner in which the usage of language in the document is understood by a reasonable individual.

3. The background information does not contain pre-contractual negotiations.

4. The meaning of the words used may not be the same as the overall meaning of the document. Therefore, the court has a duty to ascertain the intention of selecting specific words to convey certain information contrary to their literal meaning

5. The words used by whilst parties are chosen for a reason, which makes it possible to identify that something went wrong with the language, and the effect to what the parties indented to say must be given by the court.   

The interaction between the principles is fundamental in interpreting the nature of the contract that leads to the case of ICS v West Bromwich. Lord’s principles are not just a pattern of logic steps, decision tree or flow chart since there evaluation cannot be carried on logically.[6]

First Principle:

            The first principle indicates that “Interpretation is ascertainment of the meaning of what a reasonable individual with background knowledge would have understood.[7]” Based on ICS v West Bromwich case, the principle indicates that for the judge to interpret the allegations presented before the court, he or she should have background knowledge about the parties in the contract’s time situation.[8] The application the first principle is witnessed in the court of appeal judgment by Leggatt LJ, he stated that his construction was based on “the natural and ordinary meaning of the words used.” However, it is not clear that the natural and ordinary concepts when the words have not been used in ordinary and natural manner.[9] The ruling of ICS Ltd v West Bromwich reveals that the court is inevitably involved in selecting between competitive unnatural meanings of words. Leggatt LJ also indicates that the construction made by the judge did not have an available meaning of the syntax.[10]

The statement means that the judges could not make a decision that the parties made mistakes of words’ meaning or syntax.[11] However, Leggatt’s statement may be not appropriate since the words used in ICS v West Bromwich could not mean what they ordinarily mean as long as there is a background information indicating what they have a different meaning.[12]

Second Principle:

The second Hoffman’s principle involves background knowledge that contains factual information accessible to all parties, which influence language used in the document by a reasonable person.[13] In ICS Ltd v West Bromwich case, Hoffman held that regardless of the wording, the clause used in the ruling of the case did not exclude claims for damages, and it was appropriate to conclude that when conducting contract assignment and the judge did not have an intention to exclude damages claims.[14]  The background is considered to be the matrix of facts, but there is no specific description of what should be contained in the background.  However, the principle indicates that regardless of the subject to the requirement, the information should be reasonably available to the relevant parties.

The principle presents the meaning of the third party claim, which means the course of action that the claimant has against the other party. The elements of the claim are used to determine whether it arises in breach of contract, tort, debt or breach of trust between parties. In this case, the language used by parties usually has more than one reasonable meaning. However, the submission made in the case of ICS Ltd v West Bromwich on behalf of appellants that the construction activity is a single unitary exercise, and the court should consider the language applied and explain the elements of a reasonable person, is acceptable.[15] Nevertheless, a reasonable person is considered as an individual with background knowledge that is appropriate to the parties in the state in which they were when making the contract. In achieving that, the court should consider all important surrounding circumstances, especially deciding which construction is consistent with the terms used in the document.[16]

Third Principle:

            In this principle, Hoffman indicates that the law excludes from the admissible background the negotiations between parties and the associated declarations of the subjective intent.  The distinctions are made by the law for the purpose of practical policy since the interpretation for legal concepts differs from the understanding of utterances in ordinary life.  Based on the presentation of the case, ICS is viewed to have moved away from the from the admissible background to a more purposive approach during the construction of express terms. Similarly to ICS v West Bromwich, the case by Rainy Sky v Kookmin [2011] UKSC 50 is based on construction approach, but not dispute.[17]

The primary issue was the role played by a judge in determining what the parties meant in their claims.[18] Considering background information that is accessible to different parties, the admissible background concepts incorporates elements that would have influenced the way in which the language in the document is understood the reasonable individual.[19]

            In the case, ICS demonstrates that it is uncontroversial and it has been accepted within the common law jurisdictions, without downgrading the previous construction canons.  Through the principle, Hoffman acknowledges that the court should be open for the possibility to explain that the drafted words may fail to reflect the ascertained intention of the parties.[20]

Therefore, parties may have used the wrong syntax when drafting their claims. However, Whilst parties need to consider linguistic mistakes to identify where they go wrong with the language and terms when drafting their claims.                    

Fourth Principle:

In the fourth principle, Hoffman states that “ a contract is construed based on where  words’ meaning is deduced contextually and not literally.” The statements reveal that the meaning conveyed by a document to a reasonable person is not similar to the exact meaning of its words. Lord adds that the meaning of words is defined by grammars and dictionaries, while the meaning of the document reflects how parties are using words against their reasonable meaning.[21]  The literalism helps in eliminating the ambiguity in the language used to reach a conclusion in a court of law. Literally, usage of words with contradicting meaning result into unavoidable consequence since language is open-textured with the specific fluidity of the usage.  The approach of ICS on this principle suggests that the ruling was an expectation of a tenuous justification of court processes.

The principle holds that it is critical to acknowledge that acceptance wrong word used in the legal system because of its significance in the previous cases such as Wickman Machine Tool Sales v. L Schuler AG

whereby the construction was considered to lead to unreasonable result\, with relevant consideration. Lord Reid noted that the unreasonable results expected by parties make them make it more necessary to ensure that their intention is made clear.[22]  According to Lord Diplock, the syntactical analysis of words in construction contract leads to a conclusion to the commercial common sense that is described by the fifth principle.

Fifth Principle:

            The fifth principle is based on “Commercial common sense.” In this principle, Hoffmann states that every word should be assigned both natural and ordinance meaning to reflect the common sense proposition since people do not accept when they make linguistic mistakes, especially when developing formal documents.[23]

However, in case there are no conclusions that something went wrong with the syntax used, judges are not allowed to attribute to the parties an intention that is contrary to their initial decision.[24] Therefore, one should not consider the literal meaning of the words as determinative. For instance, the judgment made by Lord Steyn on Sirius International Insurance v FAI General Insurance

case by referring to the 18th century William Paley’s sentiment that the communication tendency should be general and against literalism based on the context.[25] He also repeated the words used in Mannai Investment v Eagle Star life Assurance, by arguing that the determination of the commercial contract language meaning, whereby the law favors a commercial construction that is sensible.[26]  However, the language used by parties in many cases has more than one potential meaning.[27]

The argument is supported by the case of Luxembourg v Barclays Bank Longmore LJ [2011] 1 BCLC 336, Which held that the construction did not demonstrate commercial sense, and the most effective approach to use is to pick the most commercial.[28]

Conclusion

            The interpretation of Hoffman’s five principles indicates that a reasonable person with background knowledge or matrix of facts would understand the language used in a document.  However, the meaning of words is not a literal meaning and reasonably understood syntax are given natural and ordinance meaning that relies on the primary propositions that individuals do not easily accept when they make linguistic mistakes. The principles that the understanding of court proceeding as well as the claims made by parties is determined by the linguistic approach used to present legal facts linked to the case. Therefore, the judge should either use words that are naturally and ordinarily understandable to the reasonable person.  

Bibliography

Case Laws

Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945

Sirius International Insurance v FAI General [2004] 1 WLR 3251

Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896

Luxembourg v Backays Bank Longmore LJ [2011] 1 BCLC 336

Wickman Machine Tool Sales Ltd. v L. Schuler A.G., [1974] AC 235, [1973] 2 All ER 39

Rainy Sky v Kookmin [2011] UKSC 50

Secondary Sources

Andrews Neil, ‘Interpretation of Contracts and “Commercial Common Sense”: Do Not Overplay This Useful Criterion’ (2017) 1 The Cambridge Law Journal 76, 36-62.

Andrews, Neil, ‘Interpretation of Written Contracts in England’ (2014) Russ. LJ 2, 12.

Barber, Matthew, ‘The contractual interpretation of tipping J.’ (2016) Victoria U. Wellington L. Rev. 47, 227.

Cranston, Ross, Principles of banking law (Oxford University Press, 2018).

Davies Paul S ‘Interpretation and Rectification in Australia (2017) 3 The Cambridge Law Journal 76, 483-486.

Davis, Hugh, ‘The Problems with Amann: Would an Agreement-Centered Approach to Remoteness Benefit Australian Jurisprudence’ UW Austl. L. Rev. 42 (2017): 1.

Eldridge, John. "'Surrounding Circumstances' in Contractual Interpretation: Where are we Now?’ (2018) 3 Commercial Law Quarterly 32: 3-11.

McLauchlan, David, ‘Some Fallacies Concerning the Law of Contract Interpretation’ (2017).

McLauchlan, David, and Matthew Lees, ‘More Construction Controversy’ (2012).

Mitchell, Catherine, Interpretation of contracts

(Routledge-Cavendish, 2018).

Osgerby Katharine, and Christopher Stothers ‘Contracts, patents and chess—applying Arnold v Britton to patent claim construction’ (2017) 1 Journal of Intellectual Property Law & Practice12: 23-29.

O'Sullivan, Janet ‘Absurdity and ambiguity–making sense of contractual construction’ (2012) 1 The Cambridge Law Journal 71, 34-37.

Robertson, Suzanne, ‘Making sense of commercial common sense’ (2018) 49 Victoria U. Wellington L. : 279.

Sumption, Lord. "A question of taste: the Supreme Court and the interpretation of contracts’ (2017):  2 Oxford University Commonwealth Law Journal 17, 301-314.

Vos, Geoffrey,  ‘Contractual interpretation: Do judges sometimes say one thing and do another?’ (2017) 1 Canterbury Law Review 23

[1] ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896

[2]  Suzanne, Robertson, ‘Making sense of commercial common sense’ (2018) 49 Victoria U. Wellington L. 279.

[3] Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945

[4]Matthew, Barber , ‘The contractual interpretation of tipping J.’ Victoria U. Wellington L. Rev. 47 (2016): 227.

[5] ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896

[6] ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896

[7] Janet, O'Sullivan, ‘Absurdity and ambiguity–making sense of contractual construction’ (2012) 1 The Cambridge Law Journal 71, 34-37.

[8] Catherine Mitchell, Interpretation of contracts (Routledge-Cavendish, 2018).

[9] ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896

[10]Hugh , Davis, ‘The Problems with Amann: Would an Agreement-Centered Approach to Remoteness Benefit Australian Jurisprudence’ (2017) 42 UW Austl. L.: 1.

[11] McLauchlan, David, and Matthew Lees, ‘More Construction Controversy’ (2012).

[12] ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896

[13] Neil Andrews, ‘Interpretation of Contracts and “Commercial Common Sense”: Do Not Overplay This Useful Criterion’ (2017) 1 The Cambridge Law Journal 76, 36-62.

[14] Ross Cranston, Principles of banking law (Oxford University Press, 2018).

[15] Vos, Geoffrey,  ‘Contractual interpretation: Do judges sometimes say one thing and do another?’ (2017) 1 Canterbury Law Review 23

[16] John Eldridge. "'Surrounding Circumstances' in Contractual Interpretation: Where are we Now?’ (2018) 3 Commercial Law Quarterly 32: 3-11.

[17] Rainy Sky v Kookmin [2011] UKSC 50

[18] Rainy Sky v Kookmin [2011] UKSC 50

[19]Paul Davies,  ‘Interpretation and Rectification in Australia (2017) 3 The Cambridge Law Journal 76, 483-486.

[20] Katharine Osgerby and Christopher Stothers ‘Contracts, patents and chess—applying Arnold v Britton to patent claim construction’ (2017) 1 Journal of Intellectual Property Law & Practice12: 23-29.

[21] ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896

[22] Wickman Machine Tool Sales Ltd. v L. Schuler A.G., [1974] AC 235, [1973] 2 All ER 39

[23] Neil, Andrews, ‘Interpretation of Written Contracts in England,’Russ. LJ 2 (2014): 12.

[24]  David, McLauchlan, ‘Some Fallacies Concerning the Law of Contract Interpretation’ (2017).

[25] Sirius International Insurance v FAI General [2004] 1 WLR 3251

[26] Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945

[27] Lord Sumption, ‘A question of taste: the Supreme Court and the interpretation of contracts’ (2017):  2 Oxford University Commonwealth Law Journal 17, 301-314.

[28] Luxembourg v Backays Bank Longmore LJ [2011] 1 BCLC 336