Striking a Balance in Contract Interpretation: The Primacy of the Text
| Pages | 52-74 |
| Date | 01 January 2019 |
| Published date | 01 January 2019 |
| Author | |
| DOI | 10.3366/elr.2019.0524 |
The ‘construction’ or ‘interpretation’ of a contract turns on a balancing act: “the assessment of disparate (and therefore incommensurable) factors to reach … [a] conclusion”;
Scholars and judges have described the balancing act in construction as intuitive, a matter of judgement and a question of judicial preference. This article claims that the balancing exercise is guided by unique principles. Those principles manifest themselves once construction is understood in a particular way, namely, as a technique employed to infer objective intention from the choice of words in a contract. The process is structured. It begins with the identification of a discrete question regarding what the parties agreed in the contract. Each party then advances a competing answer, i.e. a potential ‘construction’ or ‘interpretation’. Arguments in favour of each interpretation are built from the admissible materials, i.e. the text as a whole, the potential meanings for the words, the background, the objects served by the contract and the potential consequences of each construction. Finally, the correct interpretation is chosen by weighing and balancing the competing considerations to arrive at the probable intention of the parties. Hence, although a sequential process, construction is a ‘unitary’ exercise: all of the competing factors are evaluated at once to determine the correct interpretation.
It is trite that, in construction, the contract text is “the primary source of the parties’ objective intention”.
The textual focus that is applied in construction is often a significant factor in the resolution of an interpretative dispute. A question of construction is determined by evaluating the relative strength of the competing arguments and by identifying the set of arguments that establishes the objective intention of the parties to the highest degree of probability. Hence, the determination of the dispute depends on the composition and strength of the arguments at play, including the extent to which each interpretation is reinforced by the text. The case may be straightforward, e.g. all indicators point to a particular intention. Alternatively, the dispute may be hard to resolve because the competing considerations are finely balanced. In such a case, the party that succeeds is usually the one who can find the strongest support for its construction in the text of the contract. Hence, an interpretation that is advanced predominantly by the apparent meaning of a key word or phrase, i.e. a ‘linguistic’ interpretation, may be defeated by a construction that aligns with the commercial purpose of the contract, i.e. a ‘purposive’ construction, because such purpose is clear from the contract text itself. Likewise, a construction that is anchored by the consequences of the competing interpretations, i.e. a ‘consequential’ construction, may be preferred over a linguistic interpretation because the results said to justify the former are evident analysing the contract as a whole.
This article is split into two parts. The first part deals with theoretical considerations. It sets out the principles that guide the balancing exercise in construction. It demonstrates that these principles have a sound theoretical foundation. The second part of the article illustrates how the principles apply in practice. Five leading judgments of the UK Supreme Court and House of Lords are analysed.
The aim of the first part of this article is to demonstrate that, as a matter of theory, the balancing act in construction is guided by unique principles – principles influenced by the notion that primacy should be given to the text in construction. The principles advanced in this article are put forward on the basis that construction can be understood as a sequential process: a technique employed to infer objective intention from the choice of words in a contract. If construction is understood in this way, the balancing act takes shape as a matter of basic principle. Each factor in the text, background and so on is taken into account by evaluating the extent to which it establishes what was objectively intended by the choice of words in the contract. Factors drawn from the text are usually more persuasive than indicators of intention established purely as a matter of background.
The principles that guide the balancing act in construction are straightforward. The construction that was probably intended prevails. Some cases are clear: all arguments point in favour of one construction or a decisive argument is determinative. Other cases are more difficult. In particular, one party may allege that its interpretation follows from the apparent meaning of a key word or phrase, while the other claims that its construction is evident taking into account purposive or consequential considerations. Such a conflict is often resolved by investigating whether the purposive or consequential construction has a firm foundation in the contract text.
The principles outlined in this article are not set out in seminal judgments on construction. Instead, the principles are evident upon a close analysis of the reasoning employed in such cases. The proposed approach also follows as a matter of theory. It fits with key characteristics of construction as recognised in leading authorities. In particular, it follows from the fact that construction is conventionally described as a process that requires the balancing of a variety of factors.
The modern approach to contract interpretation developed in a series of leading judgments over the last half a century.
When interpreting a written contract, 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” … And it does so by focussing on the meaning of the relevant words … That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions [in the contract], (iii) the overall purpose of the clause and [the contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions.
An interpretative dispute is resolved by weighing and balancing the various factors drawn from the text and background so as to arrive at the correct construction. The UK Supreme Court recently emphasised this point in
Interpretation is … a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. [The court] strik[es] a balance between the indications given by the language and the...
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