English Law and Interpreting Contracts

The latest UK Supreme Court decision  (Wood v Capita Insurance Services Ltd [2017] UKSC 24) shows how far the courts have travelled with their jurisprudence over the decades when its comes to contract interpretation. In English law the interpretation (“construction”) of a contract is a matter of law.

The long legal journey started with the orthodox or “objective” approach set out in numerous cases such as Lovell & Christmas Ltd v Wall (1911) 104 LT 85 which allowed only for a literal interpretation of the words contained within the “four corners” of the contract document. Any other extrinsic information such as minutes of negotiations or previous contract drafts were to be excluded: “ it is the duty of the court… to construe the document according to the ordinary grammatical meaning of the words used therein“.

The tide eventually seemed to turn with the landmark decision of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 where the House of Lords attacked the traditional overly-stringent application of the “old” four corners rule and suggested that when interpreting contract meaning due consideration should be given to the commercial purpose and the general “matrix of fact” surrounding the contract formation. In addition, the meaning of words to a reasonable business person was also regarded as being critical. The judgment was soon hailed in the legal world as introducing a “modern approach” to contract interpretation: the words alone are not enough.

The apparent conflict between the “old” principles and the “modern” approach to interpretation first clearly set out by Lord Hoffmann in 1998 has been called the battle of  Textualism v Contextualism. In last month’s Wood v Capita Investment Services judgment the Supreme Court held that there was indeed never a real battle at all. Peace has actually broken out in contract drafting! Textualism and contextualism are not conflicting paradigms. Indeed, both should be used as devices to determine the objective meaning of the language used in a contract, and the extent to which each tool will assist will vary according to the circumstances. Some contracts might be successfully interpreted principally by textual analysis (for example, due their sophistication and complexity, or where they have been negotiated and prepared with the input of skilled legal professionals). On the other hand, the correct interpretation of other contracts might demand greater emphasis on  Lord Hoffmann’s “factual matrix” (for example, due to their informality, brevity or the absence of skilled drafting).

So, it seems that the two sets of principles are to co-exist. The application will depend on the “sophistication” of the contract drafting. This two-tier approach could prove to be problematic. It will be interesting to see what comes next…