Fundamental Issues for Reform of the Law of Contractual Interpretation

DOI10.3366/elr.2011.0059
Published date01 September 2011
Pages406-422
Date01 September 2011
INTRODUCTION

In every legal system there exist a number of perennially troubling aspects of contract law, among them the questions of whether a contract has in fact been formed, alleged errors in contracting, the extent of recoverable damages, and the proper interpretation (or “construction”)1

McBryde argues (W W McBryde, The Law of Contract in Scotland, 3rd edn (2007) para 8-05) that interpretation and construction are two distinct tasks, but this may have been seen by the Law Commission either as an overly fussy distinction or else as a distinction without a difference, as no reference is made in the Discussion Paper to any apparent difference between the two concepts. For academic discussion of Scottish legal perspectives on interpretation of contract, see L Macgregor and C Lewis, “Interpretation of contract”, in R Zimmermann, D Visser and K Reid (eds), Mixed Legal Systems in Comparative Perspective: Property and Obligations in Comparative Perspective (2004) 66, and D Cabrelli, “Interpretation of contracts, objectivity and the elision of consent reached through consent and compromise” 2011 JR 121.

of the contract's terms. The last of these is the subject of a recent Scottish Law Commission Discussion Paper,2

Scottish Law Commission, Discussion Paper on Interpretation of Contract (Scot Law Com No 147, 2011).

this paper forming part of the Commission's ongoing review of contract law announced in its Eighth Programme of Law Reform.3

Scottish Law Commission, Eighth Programme of Law Reform (Scot Law Com No 220, 2010).

If one were to attempt to suggest anything linking these perennially troubling aspects of contract law, one strong candidate would present itself, that being the question of whether, at root, contracts are constituted by the subjective agreement of the parties or by the objective impression which the conduct of such parties presents. The tension between these two perspectives on contracts, the subjective and objective, lies at the very heart of the divergent will and reliance families of contract theory. A tendency to prefer one perspective over the other has had a profound impact upon the judicial assessment of whether parties have yet reached the point of a binding agreement at law, upon policies relating to error, upon the extent of damages recoverable on breach, and – the subject of the matter at hand – upon the approach of courts to the interpretation of contract terms.

SUBJECTIVE OR OBJECTIVE UNDERSTANDINGS OF THE NATURE OF CONTRACT

Historically, Scots contract law has been said to rest upon the agreement of the parties, an exercise which supposes the ascertainment of whether, subjectively, they have reached consensus in idem. In keeping with this, our law has preferred a will theory of contract, rejecting competing ideas that contractual liability is generally based upon reliance (even if reliance-based liability has grounded remedies for misrepresentation, undue influence, and the like).4

On the place of the will and reliance theories in Scots law, see M Hogg, “Perspectives on contract theory from a mixed legal system” (2009) 29 OJLS 643.

Yet, at least since the nineteenth century (but arguably even earlier, since Stair first stressed the necessity for “engagement” before obligations could be constituted),5

Stair, Inst 1.10.2.

it has been recognised that, for all practicable purposes, it is the objective manifestation of the will of the parties upon which courts rely in determining contractual formation and content: not “what did they do?” but “what did they reasonably appear to do?”. Lord President Dunedin's famous words in Muirhead & Turnbull v Dickson6

(1905) 7 F 686.

are often cited to illustrate this, but there are numerous other dicta demonstrating this view. There remains a tension in the law as to whether the proper objective perspective ought to be entirely detached objectivity or rather the objectivity of a reasonable person in the shoes of the contracting parties (what might be called “subjective objectivity”), and there are competing views of courts sometimes stressing one over the other, but the pendulum has undoubtedly swung, in general terms, away from the subjective to one or other manifestation of the objective

How does the issue of objectivity versus subjectivity play out in the field of contractual interpretation? In a number of different ways. At heart, there is the fundamental question of whether contracting parties, in choosing to embody their contract in a particular language and in using particular words from that language, submit themselves to the idea that language has an objective meaning. The idea that it does is the very basis of dictionaries. Dr Johnson would not have got very far in his enterprise if there had been no generally agreed meanings to words.7

Notwithstanding the comment of Humpty Dumpty in Lewis Carroll's Through the Looking Glass that “When I use a word… it means just what I choose it to mean – neither more nor less”.

We do, of course, recognise generally agreed meanings for words, and, when we speak, we make use of such meanings, albeit that the same word can have a number of different meanings depending upon the context in which we use it, and that, while some meanings for words are dropping out of use, others are constantly arising. The law, through the faculty of our wills, allows us to bind ourselves to obligations. To paraphrase Aquinas,8

See Aquinas, Summa Theologica, II-II, Q 88, art 10.

we make, as it were, a law to ourselves when we contract. What we are taken to mean in the contracts we conclude is thus immensely important

On one view of our faculty to bind ourselves contractually, we may even be entitled to create our own personal language or dictionary, one constructed without regard to the meaning which the language we use ordinarily ascribes to the words used by us in the context in question. That, at least, is the conclusion reached from a strong emphasis upon the subjective will of the parties: if what is crucial, in assessing contracts, is discovering what parties really intended, then we should use all available evidence to uncover the meaning which those parties gave to the words and phrases they used. Such an approach gives rise to a very private view of contract: a contract is essentially a personal matter of the parties – if outsiders would be puzzled at what the parties meant when saying what they did, that is of no importance.

There is a different view of contracts, however. If parties choose to frame their agreement in a specific language, then it can be said that they submit to the fundamental purpose of language: communication through the use of a shared linguistic medium. Such a shared medium depends upon words having an objectively agreed meaning, albeit one which may be finely attuned to the specific context in which the words are used (that context being not merely one of sentence structure, but, especially in a legal context, one relating to the legal end which an agreement is designed to serve). Such a view overcomes the difficulty that each of the parties may have had a different understanding of the words being used (a problem which evidently cannot be solved on a subjective, agreement approach), as it holds that the parties must be taken to have intended the objective meaning of the words used in the relevant context. It also recognises that contracts have not just a private life, but also a public one: contracts may confer rights upon third parties, either under a jus quaesitum tertio or through assignation; contracts may be subjected to taxes dependent upon their content (as, for instance, in the case of stamp duty); contracts may be registered in public registers, and may require to be enforced by public officials, including the keepers of registers, arbiters, and courts. Very few contracts are entirely private affairs. An approach to the construction of contracts which emphasises the objective meaning of words seems most suited to the recognition of these public aspects of contracts.

The discussion up to this point may have seemed overly theoretical, but its significance lies in the fact that the theory adopted will heavily influence the detail of the rules chosen in any system for the construction of contracts. It is not surprising then to see that the theoretical questions discussed above have heavily influenced the debates about interpretation of contracts which have featured in the significant judicial decisions of the last fifteen years or so, as well as the content of the new Discussion Paper produced by the Law Commission. The theory preferred – whether it tends towards subjectivity or objectivity – influences a number of interpretative issues, among them the following: (1) a legal system's fundamental or basic rule of interpretation, (2) the question of the breadth of the context or conduct which can be referred to in the interpretative exercise, (3) whether consideration of anything beyond the words of the contract alone is only permissible in cases of “ambiguity”; (4) the position of third parties; (5) the use of maxims or rules of interpretation; and (6) the permissibility and function of so-called “entire contract clauses”. The Discussion Paper considered all of these issues (making some suggestions for law reform on some of them) and sought the views of interested parties on them.

THE FUNDAMENTAL ISSUES RAISED IN THE DISCUSSION PAPER

The Commission was not beginning from a tabula rasa. In 1997 it issued a Report on Interpretation in Private Law (henceforth “RIPL”),9

Scottish Law Commission, Report on Interpretation in Private Law (Scot Law Com No 160, 1997).

but the recommendations contained in the report were never implemented. The matter of interpretation was thus, for the Commission, very much one of unfinished business. In addition to this previous Report, there has since 1997 been something of a revolution (led by Lord Hoffmann) in judicial thought on interpretation, though
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