Interpretation of contracts

under English law

This guide summarises the general approach taken by the English Courts
to contractual interpretation.

Legal rules of contractual interpretation

General rules of interpretation

English law takes a purposive and commercial approach to the

construction of contracts.2 The starting point for the court is to identify the
intention of the contracting parties. This is an objective test; the court is
concerned to identify the intention of the parties by reference to "what a
reasonable person having all the background knowledge which would have
been available to the parties would have understood them to be using the
language in the contract to mean".3

The court looks, therefore, at the contract as a whole and considers not
only the words of the relevant clauses, but also the "documentary, factual
and commercial context".4 The following considerations will be relevant to
the court's analysis:

The natural and ordinary meaning of the clause.5 The courts "do not easily
accept that people have made linguistic mistakes, particularly in formal
documents".6 However, the worse the drafting of a particular clause, the
more readily a court will depart from its natural meaning.7
Any other relevant provisions of the contract.
The overall purpose of the clause and the contract.
The facts and circumstances known or assumed by the parties at the time
the contract was executed.
Commercial common sense.

The court will not take into account any subjective evidence of either
party's intentions.
Common terms and phrases

Some words and phrases have come to acquire an accepted legal sense
through decided cases. Good examples of this are phrases such as "best
endeavours" or "reasonable endeavours".8

What about special or technical meanings?

The court first tries to find the ordinary meaning of words as they are
popularly understood but if the context clearly requires a special or
peculiar interpretation, the court will accept that special meaning.
Technical or scientific words are usually given their technical or scientific
meanings unless the context indicates otherwise.9

Commercial common sense

The courts will take into account commercial common sense when
interpreting a contract. In recent years there has been a shift in emphasis
in the importance of commercial common sense when interpreting
contractual terms. However, the Supreme Court has now made it clear that
the starting point is the natural meaning of the language used; commercial
common sense cannot be relied on to undervalue the importance of the
language of the provision which is to be construed. Courts will be slow to
reject the meaning of a provision simply because one of the parties made a
bad bargain; it is not for the court to improve the positions of the parties by
re-writing the contract.10 However, where there is ambiguity and more
than one possible construction, the court will select the interpretation that
makes the most commercial sense, the presumption being that the parties
would not have intended an uncommercial result.11

Canons of construction

The English court sometimes employs certain "canons of construction" or

"rules of thumb" in an attempt to do justice between the parties. However,
these principles are just pointers and the court will only resort to applying
them if the meaning cannot be found using the general rules of
interpretation outlined above.
Clear words. The court will be reluctant to adopt a meaning that gives an
unfair result in the absence of clear drafting. For example, the courts have
held that unambiguous language is required to exclude certain contractual
remedies.12
In whose favour should ambiguities be decided? Usually the court will
resolve any uncertainty or doubt surrounding a provision against the party
who would benefit from the suggested interpretation. This is the so-called
"contra proferentem" rule whereby the clause is construed against the
party seeking to rely on it. It applies in particular to the party seeking to
take the benefit of an exclusion or limitation of liability. However, recent
cases indicate that the rule has a very limited role in relation to commercial
contracts negotiated between sophisticated parties of equal bargaining
strength.13
Categories and lists. Where the preceding words are each part of a common
genus or category, subsequent words will be interpreted "ejusdem generis",
i.e. read as being part of that same class, in the absence of a contrary
indication. So, for example, the words "or other inevitable accident" in a
clause making reference to "fire, flood, storm, tempest" means other
accidents of a similar kind.14

Can the court look beyond the contract?

Can the court look beyond the written contract when construing the
meaning of a contract? While the court must examine the full background
to the contract, it cannot look at prior negotiations15 or the parties'
"declarations of subjective intent".16 This means that the court cannot look
at extrinsic evidence such as antecedent agreements, oral negotiations,
exchanges of letters, etc., preceding the contract.17 However, the Court of
Appeal has held that in construing the meaning of an unusual combination
of words not defined in the agreement and with no obvious natural and
ordinary meaning, the court can "explore the factual hinterland of the
agreement" to ascertain how the parties understood the phrase.18 In so
doing the court is not taking into account the parties' "declarations of
subjective intent", rather it is identifying the meaning shared by the parties
and in effect incorporated into their agreement.19
Subsequent unintended events

If an event occurs which, judging from the language of the contract, was
"plainly not intended or contemplated by the parties" at the time the
contract was made, the court will give effect to the intention of the parties
where it is clear what the parties would have intended.20

Implied terms

If, having regard to the express words of the agreement, it is still not
possible to ascertain the meaning, the court may be willing to imply certain
terms.21 However, courts are reluctant to depart from the express wording,
particularly if the contract is detailed and appears comprehensive. In
practice the situations in which courts are prepared to imply a term into a
contract are limited.

Terms implied by law, custom and practice or a prior course of

dealing

In particular kinds of contract, for example employment, consumer and

landlord and tenant agreements, certain standard terms are implied by
legislation and/or common law. In appropriate cases the court will
recognise standard practice in particular trades or areas of industry and is
willing to imply terms into an agreement to reflect this practice, provided
the wording of the contract is not inconsistent with the implication.
Finally, if it can be shown that the parties have consistently and clearly
dealt with each other on a particular basis the court may be prepared to
imply terms to reflect this, again provided the actual wording of the
contract does not contradict this.

Terms implied to reflect the parties' presumed intentions

The court will only be prepared to accept other implications if it is satisfied

that the implication sought reflects the presumed intention of the parties.
The court will look at the particular context of the contract and its language
and the relationship between the parties to ascertain if the implication
sought can be inferred. The criteria for implying a term were expressed
succinctly by the Privy Council in B.P. Refinery (Westernport) Pty Ltd -v-
Shire of Hastings:22

"(1) it must be reasonable and equitable; (2) it must be necessary to give

"business efficacy" to the contract, so that no term will be implied if the
contract is effective without it; (3) it must be so obvious that 'it goes
without saying'; (4) it must be capable of clear expression; (5) it must not
contradict any express term of the contract."

Further clarification has since been given by the Supreme Court in Marks
and Spencer plc -v- BNP Paribas Securities Services Trust Company
(Jersey) Ltd and another.23 This decision clarified that a term will be
implied if a reasonable reader of the contract, knowing all its provisions
and the surrounding circumstances at the time the contract was made,
would consider the term to be so obvious as to go without saying or to be
necessary for business efficacy.
Essentially the court is trying to make the contract workable and to
ascertain the parties' presumed intentions (in the sense of what they would
have agreed if they had thought about the point).24

Conclusion

The flowchart below gives a broad overview of the general way in which the
English courts tend to approach the task of construing disputed or
ambiguous wording. Ultimately, however, the "rules" of construction are
no more than guidance tools and the particular facts and circumstances of
the case determine how they are applied. In practice it is open to judges to
select from these tools at their discretion in order to make the contract
work, give effect to the parties' (presumed) intentions and to try to achieve
reasonable justice between them.
Notes:

1 It is worth noting that the approach applies equally to deeds as to agreements under hand.

2 Investors Compensation Scheme –v- West Bromwich Building Society [1998] 1 WLR 896 (ICS).

3 Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, para 14.

4 Arnold -v- Britton [2015] UKSC 36, (Arnold), Lord Neuberger, para 15.

5 BCCI -v- Ali (No.1) [2002] 1 AC 251; "This is not necessarily the dictionary meaning of the word, but
that which is generally understood". But the court will not "attribute to the parties an intention which
they plainly could not have had" and will not rewrite the contract (The Antaios Compania Naviera SA
-v- Salen Rederierna AB [1985] 1 AC 191 and Co-Operative Wholesale Society Limited -v- National
Westminster Bank PLC [1995] 1 EGLR 97).

6 Lord Hoffman in ICS, at 913.

7 Lord Neuberger in Arnold, para 18.

8 Legal dictionaries such as Stroud's Judicial Dictionary of Words and Phrases by Daniel Greenberg
or Words and Phrases Legally Defined by David Hay, which collate the enormous body of case law on
judicial interpretation, are useful sources of reference for the meaning of common terms and phrases.

9 Chitty on Contracts (32nd ed. 2015), chapter 13.

10 Lord Neuberger in Arnold, paras 17-20.

11 Rainy Sky SA and Others –v- Kookmin Bank [2011] UKSC 50; Andrew Wood –v- Sureterm Direct
Ltd [2014] EWHR 3240 (Comm), [28] (Clarke LJ).

12 E.g. the right of set-off in WRM Group Ltd -v- Wood [1998] CLC 189.

13 In Persimmon Homes -v- Ove Arup [2017] EWCA Civ 373, the Court of Appeal confirmed that the
contra proferentem rule had a very limited role to play in relation to commercial contracts negotiated
between parties of equal bargaining strength. However, it is still applied (see Lexi Holdings Plc -v-
Stainforth [2006] EWCA Civ 988 and Pratt –v- Aigaion Insurance Company [2008] EWCA Civ
1314).

14 Saner -v- Bilton (1878) 7 Ch D 815; Manchester Bonded Warehouse Co. -v- Carr (1880) 5 CPD.

15 Although this long-established rule has been criticised it has been firmly upheld by the House of
Lords in Chartbrook Ltd -v- Persimmon Homes Ltd [2009] UKHL 38 and by the Supreme Court in
Arnold.

16 ICS [1998] 1 WLR 896. The court cannot consider subsequent conduct except where a contract is
part oral and part written in order to determine the parties' original intentions. See Brian Maggs -v-
Guy Marsh [2006] EWCA Civ 1058.

17 If, instead of construing the contract, the court is being asked to rectify it, extrinsic evidence is
admissible. For a summary of the law relating to rectification see the Ashurst Quickguide Rectification
of Contracts.

18 Rugby Group Ltd -v- ProForce Recruit Ltd [2006] EWCA Civ 69.

19
Per Lady Justice Arden, paragraph 55.

20 Lord Neuberger, Arnold, para 22.

21 See the Privy Council decision in Attorney General of Belize -v- Belize Telecom Limited [2009]
UKPC 10. The case concerned the construction of a company's articles of association but the Privy
Council affirmed that the relevant principles apply more widely.

22 (1978) 52 ALJR 20.

23 [2015] UKSC 72.

24 Shell UK Ltd -v- Lostock Garage Ltd [1976] 1 WLR 1187 - see the judgment of Lord Denning.