A New Thing Under the Sun? The Interpretation of Contract and the ICS Decision

Published date01 September 2008
Date01 September 2008

The story is told of a science teacher called upon at short notice to cover for an absent colleague by taking a lesson in English literature, a subject unfamiliar to him. The class was studying The Merchant of Venice and all went well until an odious child in the front row put her hand up. “Please, Sir”, she asked, “when Shakespeare says ‘The quality of mercy is not strain'd’, does he mean strained in the sense of ‘stretched’ or ‘extended’ or ‘strained’ in the sense of ‘filtered’?” The science teacher was momentarily thrown, but recovered quickly. “If you look at the text closely”, he replied, “you will see that Shakespeare says quite clearly that the quality of mercy is not strained, so the question doesn't arise.”

Such a convenient escape route is not, unhappily, available to lawyers instructed to advise on the meaning of disputed provisions in a commercial contract, or to judges required to rule on the meaning of such provisions. For better or worse, they must do their best to say what such provisions mean. This is by no means an easy task, as evidenced by the amount of time which commercial lawyers and courts devote to it, and by the divergence of opinion which not infrequently emerges. But there is probably agreement on the broad objective to be achieved. As Lord Goff of Chieveley put it, extra-judicially:1

“Commercial contracts and the Commercial Court” [1984] LMCLQ 382 at 391.

We are there to help businessmen, not to hinder them: we are there to give effect to their transactions, not to frustrate them: we are there to oil the wheels of commerce, not to put a spanner in the works, or even grit in the oil.

Lord Steyn, also extra-judicially, made very much the same point:2

Democracy Through Law: Selected Speeches and Judgments (2004) 225-226.

A thread runs through our contract law that effect must be given to the reasonable expectations of honest men … The function of the law of contract is to provide an effective and fair framework for contractual dealings.

The problem of course arises when one tries to give practical effect to these laudable aims.3

In J H Wigmore, Evidence, rev by P Tillers (1983) vol 9 para 2461, reference is made to “flexible rationalism”. In “My kingdom for a horse: the meaning of words” (2005) 121 LQR 577 at 577, 586, 591, Lord Nicholls of Birkenhead adopted this expression as capturing what he advanced as the preferred approach to interpretation.

It is often suggested and widely believed that our forebears of 50 to 100 years or more ago adopted a strictly literal approach to the interpretation of contracts, but that we now adopt a much more flexible and rationalist approach. This comparison, although capturing an element of the truth, is in my opinion considerably exaggerated. One recalls that Lord Blackburn was not speaking only of statutory interpretation when in River Wear Commissioners v Adamson in 1877 he said:4

(1877) 2 App Cas 743 at 763.

My Lords, it is of great importance that those principles should be ascertained; and I shall therefore state, as precisely as I can, what I understand from the decided cases to be the principles on which the Courts of Law act in construing instruments in writing; and a statute is an instrument in writing. In all cases the object is to see what is the intention expressed by the words used. But, from the imperfection of language, it is impossible to know what that intention is without inquiring farther, and seeing what the circumstances were with reference to which the words were used, and what was the object, appearing from those circumstances, which the person using them had in view; for the meaning of words varies according to the circumstances with respect to which they were used.

That is a very modern-sounding approach, which had its counterpart in Scotland where in Bank of Scotland v Stewart in 1891 Lord President Inglis said:5

(1891) 18 R 957 at 960.

In a question of this kind, arising upon the construction of a contract, the Court are quite entitled to avail themselves of any light they may derive from such evidence as will place them in the same state of knowledge as was possessed by the parties at the time that the contract was entered into.

Again, a very modern approach.6

In Petromec Inc v Petroleo Brasileiro SA Petrobras [2005] EWCA Civ 891, [2006] 1 Lloyd's Rep 121 at para 23, Mance LJ voiced doubts whether courts ever construed agreements literally and without regard to their context.

On the other side of the comparison, it is one thing to abjure pedantic literalism, as we all do; it is quite another to suggest that the terms in which the contracting parties have chose to express their bargain are not in all cases important and in most decisive. I am inclined to think, as suggested by Professor McMeel, that what Lord Hoffmann described in Investors Compensation Scheme Ltd v West Bromwich Building Society7

[1998] 1 WLR 896 at 912.

(hereafter “ICS”) as a “fundamental change” over recent years may “come to be seen, with greater historical perspective, as more a change of emphasis or of rhetoric.”8

G McMeel, “The principles and policies of contractual construction”, in A Burrows and E Peel (eds), Contract Terms (2007) 27 at 29.

In the view of one judge of the Commercial Court, “Lord Hoffmann was simply overruling old and outdated cases by reference to an approach to construction which has been followed in the Commercial Court for many years.”9

NLA Group Ltd v Bowers [1999] 1 Lloyd's Rep 109 at 112 per Timothy Walker J.

The sober truth may be, as I ventured to suggest in an unreported judgment in 1993,10

Arbuthnott v Fagan, Court of Appeal (Civil Division) 30 July 1993, Transcript No 1024/1993, quoted by Mance J in Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 325-326, 350.

that “construction is a composite exercise, neither uncompromisingly literal nor unswervingly purposive”. Lord Hoffmann's opinion has, however, been widely perceived as effecting a radical change in the law, and to examine the soundness of that perception it is necessary to remind oneself of what Lord Hoffmann actually said and of the authority on which he drew
THE <bold><italic>ICS</italic></bold> DECISION Two cases

It will be recalled that Lord Hoffmann introduced his discussion of principle by referring to the speeches of Lord Wilberforce in two cases in which a fundamental change in the law is said to have been made. The first was Prenn v Simmonds.11

[1971] 1 WLR 1381.

The only issue before the House in that case was one of construction since the House, having found for the claimant on this issue, heard no argument on his alternative claim for rectification. The claimant, however, contended that a mass of evidence, oral and documentary, as to the parties’ intentions, admissible on the claim for rectification, was similarly admissible when considering the issue of construction.12

At 1383.

This contention the House roundly and unanimously rejected. That such evidence is inadmissible on an issue of construction is, I think, the only general proposition of law for which the case is authority. But Lord Wilberforce did very lucidly state what he clearly regarded as settled principle: “The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations.”13

At 1384.

Citing the passage from Lord Blackburn's judgment in the River Wear Commissioners case which I have already mentioned, Lord Wilberforce saw no need to appeal to any modern, anti-literal tendencies; it had been clear, at any rate since 1859, that evidence of mutually known facts might be admitted to identify the meaning of a descriptive term.14

At 1384-1385.

What he could not accept, and what he went on to address, was whether prior negotiations could be looked at in aid of construction of a written document. Rejecting the notion that English law was left behind in some island of literal interpretation, he cited a 1918 judgment of Cardozo J15

Utica City National Bank v Gunn (1918) 118 NE 607.

for the proposition that surrounding circumstances may stamp upon a contract a popular or looser meaning than the strict legal meaning, certainly when adoption of the latter would make the transaction futile. Praising this judgment for its combination of classicism and intelligent realism, Lord Wilberforce was laying no claim to novelty. It is perhaps unsurprising that the editors of the Weekly Law Reports did not assign their report of Prenn v Simmonds to their premier series.16

This judgment by the Law Report editors was repeated in the case of Reardon Smith and, perhaps more surprisingly, in the case of ICS itself.

The second case to which Lord Hoffmann made express reference was Reardon Smith Line Ltd v Yngvar Hansen-Tangen.17

[1976] 1 WLR 989.

As explained by Lord Wilberforce, the appeals in that case arose out of a charterparty and sub-charterparty both relating to a newbuilding tanker to be constructed in Japan. By the time the ship was ready for delivery the market had collapsed in the wake of the 1974 oil crisis and the charterers’ interest was to escape from their contracts by rejecting the vessel. The ground upon which they sought to do so was that the vessel tendered did not correspond with the contractual description. This was because there had been a change in the building plan and the newbuilding had been assigned a different number at a different yard from that in the charterparty documentation, Oshima 004 instead of Osaka 354. The vessel as built met the charterparty specification. Thus the charterers’ argument made little appeal on the merits. It was in this context that Lord Wilberforce said:18

At 995-996.

It is less easy to define what evidence may be used in order to enable a term to be construed. To argue that practices adopted in the shipbuilding industry in Japan, for example as to sub-contracting, are relevant in the interpretation of a charterparty...

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