The main principles of contract interpretation are:
Loyalty to the text. Consider the text of the provision and give it appropriate weight.
Whole contract approach. Consider the remainder of the contract or instrument in which the provision appears.
Context. Consider the factual, legal and regulatory background to the contract or instrument.
Business common sense. Give appropriate weight to business common sense, or the commercial purpose of the contract or provision.
Reasonableness. Avoid giving literal effect to the words of the contract where that would lead to very unreasonable results.
In each case it is necessary to balance these potentially competing principles. It has been stressed that this is nevertheless a single exercise, which considers the practical consequences of possible readings:
“This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.”
Wood v Capita Insurance Services Ltd [2017]
Regardless of the result on appeal, this judgment is a reminder that although the purposive approach to contractual construction will often provide a welcome safeguard against poor drafting and unforeseen situations, there will always be some unpredictability as to how a judge will assess the “business common sense” argument in any case. What might seem obvious to business people operating in a particular market cannot be guaranteed to be equally obvious to a judge. Indeed, as this case demonstrates, uncertainty is not limited to a new or unusual contract provision. The message from results such as this, as always, is that clear drafting is absolutely key.
The Court of Appeal has recently held that an exclusion clause should not be construed as excluding liability for lost profits where this would have left the injured party without a remedy for non-performance:
The exclusion clause provided that “… the Company shall have no liability whatsoever in contract, tort (including negligence) or otherwise for any loss of goodwill, business, revenue or profits…”. Whilst this might be thought to be a widely drafted exclusion of liability, it was found by the Court of Appeal that the parties cannot have intended that it would cover all lost profits. Such a construction would mean that there was no sanction for non-performance and effectively devoid the agreement of contractual content. This would not be consistent with business common sense. The Court of Appeal therefore preferred a much narrower construction, which meant that the clause was inapplicable. So here we do have the court construing a contract consistently with business common sense. This case shows that, if contracting parties intend to exclude liability for all loss, this must be unambiguous
Professor A Burrows QC, sitting as a High Court judge, summed up the current approach to contract interpretation in 2019:
“The modern approach is to ascertain the meaning of the words used by applying an objective and contextual approach. One must ask what the term, viewed in the light of the whole contract, would mean to a reasonable person having all the relevant background knowledge reasonably available to the parties at the time the contract was made (excluding the previous negotiations of the parties and their declarations of subjective intent). Business common sense and the purpose of the term (which appear to be very similar ideas) may also be relevant. But the words used by the parties are of primary importance so that one must be careful to avoid placing too much weight on business common sense or purpose at the expense of the words used; and one must be astute not to rewrite the contract so as to protect one of the parties from having entered into a bad bargain.”
One final point. All parties will be keen to avoid moving from the words used in the contract and the underlying commercial realities. This would leave the court open to the accusation it is rewriting agreements to make them fairer or commercially more reasonable and so undermining the deal documented by the parties. As ever, an old song had it right “it’s a question of balance”.
Fifth article by Nick Gould on Contracts, Deals and other aspects in corporate legal practice
