Beyond the Real and the Paper Deal: The Quest for Contextual Coherence in Contractual Interpretation

Published date01 July 2016
Date01 July 2016
Beyond the Real and the Paper Deal: The Quest
for Contextual Coherence in Contractual
Zhong Xing Tan
Contract lawyers are often divided between two schools of thought: formalism and contex-
tualism. In the realm of contractual interpretation, this division illuminates various debates
surrounding the modern contextual approach. Ultimately, however, the divide between the
‘real and the paper deal’ does not fully reflect the relevantf ault lines. The real contest is between
rival interpretations attempting to make the most coherent sense of the available text and con-
text surrounding the document. In characterising the true nature of the exercise, I draw upon
theories of coherence to articulate a framework of ‘contextual coherence’ that involves con-
cepts of competing narratives, the rational motivations of the parties, and the need for a holistic
assessment of the best hypothesis, in accordance with the English courts’ ‘iterative approach’ to
interpretation. I demonstrate that this framework enables us to explain and evaluate recentcases
such as the UK Supreme Court decision of Arnold vBritton.
Two schools of thought are said to divide contract law scholars: formalism and
contextualism.1This schism is well-established as one of contract law’s great
debates.2Contextualism is said to give primacy to norms such as good faith,
Faculty of Law, National University of Singapore (NUS). I am very grateful to the anonymous
reviewers for their invaluable comments and suggestions which have refined this paper consid-
erably. I am particularly grateful to The Rt Hon the Lord Neuberger of Abbotsbury, President
of the UK Supreme Court, for generously sharing his thoughts on the general subject matter of
this paper, during his visit to the NUS Faculty of Law on 22 September 2015. Special thanks go
to Hans Tjio and Ernest Lim for taking the time to provide encouraging comments on an ear-
lier draft. Finally, I am thankful for the advice and support of other mentors including Damian
Chalmers, David Tan, and Arif Jamal during the course of working on this article. It should be
noted that the views expressed herein are solely the author’s, and all errors and omissions remain
my own.
1 The relevant works in this area are extensively referred to in the following titles (see their
bibliographies for more details): C. Mitchell, Contract Law and Contract Practice: Bridging the Gap
between Legal Reasoning and Commercial Expectation (Oxford: Hart, 2013); J. Morgan, Contract
Law Minimalism: A Formalist Restatement of Commercial Contract Law (Cambridge: CUP, 2013)
and J. Braucher, J.Kidwell and W. C.Whitford (eds), Revisiting the Contracts Scholarship of Stewart
Macaulay: On the Empirical and the Lyrical (Oxford: Hart, 2013). For reviews of the above, see D.
Campbell, ‘Contract Law and Contract Practice: Bridging the Gap between Legal Reasoning
and Commercial Expectation’ (2014) 130 LQR 526; H. Beale, ‘Bridging the Gap: A Relational
Approach to Contract Theory’ (2014) 41 Journal of Law and Society 641 and J. Gava, ‘What we
know about Contract Law and Transacting in the Marketplace – A Review Essay’ (2014) 35
Adelaide Law Review 409.
2 J. Morgan, Great Debates in Contract Law (London: Palgrave Macmillan, 2nd ed, 2015) 70-91.
See further J. W. Carter, ‘Context and Literalism in Construction’ (2014) 31 JCL 100; J. D.
C2016 The Author.The Moder n Law Review C2016 The Modern Law Review Limited. (2016) 79(4) MLR 623–654
Published by John Wiley& Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
Beyond the Real and Paper Deal
while looking to commercial expectations and practices to interpret contracts.3
Formalism, on the other hand, rejects such open-ended norms and favours
‘bright-line rules of enforcement, plain-meaning interpretation, legally sanc-
tioned standard terms and gap-filling defaults, and a strict parol evidence rule’.4
The formalist-contextualist dichotomy is a theme that dominates the discourse
on contractual interpretation, and illuminates the various positions taken by
commentators on doctrinal debates5surrounding the moder n contextual ap-
proach to interpretation in Investors Compensation Scheme Ltd vWest Bromwich
Building Society6(ICS).
Notwithstanding this manner of framing the issues, I argue that the
formalism-contextualism dichotomy does not fully reflect the fault lines divid-
ing parties putting forward rival interpretations or the courts adjudicating be-
tween them. While the labels are used heuristically, they are apt to distort more
than they clarify,and obscure a more textured process undertaken in contractual
interpretation, at least in some cases. There are various anomalies with the as-
sumption that a textualist or contextualist interpretation results predominantly
from a textualist or contextualist judicial philosophy, as it suggests inevitable ar-
bitrariness in judicial decision-making, and cannot account for instances where
similar judges appear to embrace inconsistent philosophies. Further, commen-
tators on both sides of the divide do agree on the trite observation that some
level of context is available in the process of contractual interpretation. Hence, it
is more meaningful not to speak of text versus context, but a rivalry between in-
terpretations attempting to make the most coherent sense of the text and available
In re-framing the debate, I look to various concepts of ‘coherence’ in le-
gal theory to articulate a framework applicable to the exercise of rational-
ising various levels of contractual text and context, which I term a search
for ‘contextual coherence’. While coherence is not an unfamiliar concept to
theorists, it has often been analysed at a higher level of abstraction, in rela-
tion to law generally rather than contract law or interpretation in particu-
lar.7This paper thus seeks to apply a novel theoretical framework to explain
and evaluate some aspects of contract practice which have not been fully
Heydon, ‘How the courts develop commercial law by looking outside the trial record into the
external world’ (2012) LMCLQ 30.
3 J. Gava, ‘What we know about Contract Law and Transacting in the Marketplace – A Review
Essay’ (2014) 35 Adelaide Law Review 409, 410.
4 C. Mitchell, Contract Law and Contract Practice: Bridging the Gap between Legal Reasoning and
Commercial Expectation (Oxford: Hart, 2013) 2-3.
5 For recent discussions on these topics, see S. Waddams, ‘Contractual interpretation’ (2015) 131
LQR 48; F. Dawson, ‘Interpretation and rectification of written agreements in the Commercial
Court’ (2015) 131 LQR 344; M. Hogg, ‘Fundamental issues for reform of the law of contractual
interpretation’ (2011) Edinburgh Law Review 406.
7 See A. Amaya, The Tapestry of Reason: An Inquiry into the Nature of Coherence and its Role in Legal
Argument (Oxford: Hart, 2015).
624 C2016 The Author. The Modern Law Review C2016 The Modern Law Review Limited.
(2016) 79(4) MLR 623–654
Zhong Xing Tan
I draw upon the observations by MacCormick,8Peth ic k,9Bertea,10 Amaya11
and others in developing this notion of contextual coherence, which involves
concepts of competing narratives, ordering and emphasis, the rational mo-
tivations of the parties, and a holistic assessment of the best hypothesis in
accordance with the English courts’ ‘iterative approach’ to contractual inter-
pretation. I argue that this framework illuminates the reasoning processes in
a number of recent cases, most notably the UK Supreme Court decision of
Arnold vBritton12 (Arnold). Further more, I argue that ‘contextual coherence’
provides guidance on the evaluation of rivalrous interpretations, and acts as an
important constraint on the capacity of judges to ‘re-write’ the terms of the
bargain between parties in an arbitrary or unrestrained manner, while providing
potential justification for the court’s interpretation of a contract.13
It is not my objective to describe in detail the various arguments for or against
formalism and contextualism, but simply to outline the fault lines between
them. Understanding how this debate is framed will in turn help us understand
how certain aspects of it may need to be re-framed. The issue at hand concerns
the extent to which contract law can and should give effect to informal norms
and wider commercial expectations that surround a contractual agreement; in
essence, whether contract law should give effect to the real as opposed to the
paper deal.14
The contextualist’s arguments are well-established. There is a misalignment
between contract law on the books and commercial practice in reality. The
former fails to recognise business norms that actually govern the terms of
the parties’ bargain. Contract law should make space for such norms and
8 N. MacCormick, Rhetoric and the Rule of Law: A Theory of Legal Reasoning (Oxford: OUP,2005).
9 S. Pethick, ‘On the Entanglement of Coherence’ (2014) 27 Ratio Juris 116.
10 S. Bertea, ‘The Arguments from Coherence: Analysis and Evaluation’ (2005) 25 OJLS 369.
11 A. Amaya, ‘Legal Justification by Optimal Coherence’ (2011) 24 Ratio Juris 304.
13 On a methodological note, the approach adopted herein is, to use Smith’s terminology, ‘inter-
pretive’, in that it aims to enhance understanding of an aspect of contract law and practice by
highlighting certain important features and seeking to reveal an ‘intelligible order in the law’, in
essence to help us ‘make sense’ of it. It necessarily incorporates both elements of description (in
that it draws upon the raw data of legal materials to impose an ‘order or schema’) as well as pre-
scription (in that it sets up a new paradigm for the practice of contractual interpretation, against
which other decisions can be evaluated), see further, S.A. Smith, Contract Theory (Oxford: OUP,
2004) 4-7. It should also be evident that the theoretical focus of this paper is a specific feature of
contract law and practice rather than a general theory of contract law, and hence is conceptually
orthogonal to the perennial debates on the latter, see for example,R. A. Hillman, The Ric hness of
Contract Law: An Analysis and Critique of Contemporary Theories of Contract Law (Boston: Kluwer
Academic Publishers, 1997) and H. Dagan, ‘Autonomy, Pluralism and Contract Law Theory’
(2013) 76 Law and Contemporary Problems 19 (for a recent critique of general contract theory
from a pluralist perspective).
14 S. Macaulay, ‘The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity
and the Urge for TransparentSimple Rules’ in D. Campbell, H. Collins and J. Wightman (eds),
Implicit Dimensions of Contract (Oxford: Hart, 2003).
C2016 The Author. The Modern Law Review C2016 The Modern Law Review Limited.
(2016) 79(4) MLR 623–654 625

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