In most commercial litigation there will be an issue as to what a contract means. So the interpretation or construction of contracts is a subject that preoccupies clients, their lawyers and the courts. The legal rules on the interpretation of contracts are relatively well settled, but it is a subtle art in which judicial mood plays an important role. Lord Sumption, a powerful voice in the Supreme Court, gave a (non-judicial) speech recently in which he noted a change in judicial mood; he likened that change to military advances and retreats.
Lord Sumption suggested that an offensive had been led by the towering figure of Lord Hoffmann and that the Supreme Court has recently retreated from the advance positions seized by the Hoffmann offensive. The opposing forces in this war could perhaps be characterised as literal interpretation on the one hand and commercial interpretation on the other. That distinction does not do justice to Lord Sumption’s speech; the opposing forces are really (a) an approach which concentrates on the meaning of the words in the contract; and (b) an approach which modifies or contradicts the words used in pursuit of a commercially reasonable result. Nevertheless, it is a useful shorthand.
Lord Hoffmann was the dominant judicial figure of his day, and he gave the seminal judgments on the interpretation of contracts, most notably the decision in Investors Compensation Scheme Ltd v West Bromwich Building Society. The prominence of that judgment is such that in the leading textbook (Lewison on The Interpretation of Contracts), the five principles from the case are recited in the opening chapter after which the author states “the lazy reader may stop here”.
Lord Sumption took particular issue with the fifth principle from ICS. The fifth principle was that the traditional adoption of the natural and ordinary meaning of the language is no more than a rebuttable presumption that people mean what they say in formal documents. If the background suggests that something has gone wrong with the words, the law may attribute a different intention to them.
The outcome of the commercial interpretation, Lord Sumption argues, is that the courts have put a greater emphasis on the background circumstances to a contract than the words used by the parties in the contract. He has at least three objections to that trend. First, the language of the parties’ agreement, read as a whole, is the only direct evidence of their intentions which is admissible. If it is not given sufficient weight, then we are simply leaving judges to reconstruct an ideal contract which one party wished it had made, but never actually did. Second, how can the courts fairly use the surrounding circumstances to modify a contract? Our legal system rigorously excludes the use of pre-contractual negotiations as evidence to help construe a contract. That in turn means that the court cannot consider any evidence of the sometimes complex give and take of the negotiations. An apparently harsh term may have been agreed in return for concessions elsewhere, but, since the motive behind the term is not admissible, the court cannot take that into account. Third, judges are not necessarily well placed to determine what commercial common sense requires. They tend to focus on fairness, but fairness often has nothing to do with commercial contracts. Commercial parties can be most unfair and entirely unreasonable, if they can get away with it.
This really raises a philosophical question as to the proper role of the court. Is it to respect the often ruthless nature of commercial reality and be faithful to the parties’ bargain? Or is it to impose a judge’s view of the fair and commercially reasonable result that the parties intended to achieve? The literal interpretation has the benefit of greater certainty; the commercial interpretation has the benefit of greater fairness.
We now know which Lord Sumption prefers. The law may not have changed, but the judicial mood has.
Gibson & Co.
July 2017