1- Construing Commercial Contracts Flashcards
The court’s approach to standard form commercial contracts?
Unlikely to interfere. Created and negotiated by commercial men and settled over time by persons who understand the interests involved.
The court’s approach to non-standard form commercial contracts?
Where there is uncertainty as to meaning, courts may construe the contract to discover the true mutual intent of parties.
Has been a shift away from literal interpretation towards a contextual, commercially sensible approach.
BUT this has lead to considerable disagreement, many appeals and many dissents.
Approaches taken in each case?
Manni Investments v Eagle Star- Hoffman’s commercial;
ICS v West Bromwich BS- Hoffman’s commercial approach;
Rainy Sky- Return to more literal approach, but still commercial (maybe);
Arnold v Briton- more literal
Wood v Capita- Plays down the shift and tried to show continuity. There is no contest between literal and commercial, they are just different tools.
Manni Investments v Eagle Star, 1997, HOL (remember this is an older case, but it is Hoffman)
Valid termination of agreement?
Case: Lease agreement contained clause allowing tenant to end lease by serving not less than 6 months-notice on the 3rd anniversary of the commencement of the lease. Tenant gave notice to determine the leases of the 12th of Jan but the third anniversary was not until the 13th.
Decision: Hoffman
- The notice was effective. The tenant had clearly made a mistake when writing the date in his serving of the notice.
- Steyn- ‘a reasonable recipient would have understood and appreciated that the tenant wished to determine on the 3rd anniversary, so the notices achieved their intended purpose.
- Hoffman- minor irregularities are not to override the clear intention. The question is not how the landlord understood the notice, but how objectively a reasonable recipient would have understood it to mean.
- ‘Words do not in themselves refer to anything. It is the people who use the words to refer to things’- so seems to completely reject plain meaning.
Investors Compensation Scheme v West Bromwich Building Society (1998)- HOL, Hoffman
Case: ICS paid compensation to persons who had received negligent investment advice from another company, on the condition that the right to sue the other company was assigned to ICS.
Clause: ‘ICS agrees that the following claims shall ensure to you absolutely: Any claim (whether sounding in rescission for undue influence or otherwise) that you have against WB’
Decision: 4:1 majority.
1. The clause did not achieve what was intended.
- Court move the brackets to give effect to the assignment- i.e. ‘any claim sounding in rescission (whether for undue influence or otherwise) that you may have against WB’.
- A fundamental change has occurred which has assimilated contractual interpretation with common sense principles and discarded the ‘intellectual baggage’ of the ‘legal’ interpretation.
- Hoffman’s principles of interpretation:
(i) The court’s role in the interpretation is to assign the meaning the document would convey to a reasonable person, having all the background knowledge that would have reasonably been available to persons at the time of contracting (objective); and
(ii) Matrix of fact- the court should take into account ‘absolutely anything’ in the background which would have affected the way the language of the document would have been understood to a reasonable man.
- BUT the law excludes the previous negotiations of parties from admissible background evidence.
(iii) The meaning a document would convey to a reasonable man is not the same as its words. Meaning is what persons using the words against the background would have understood them to mean.
(iv) The court should not easily accept that the wrong language has been used in a document. BUT It should not attribute to the parties intent which they did not have.
(v) If the background indicates that wording does not represent intended meaning, the court may correct the language by INTERPRETATION.
Primary difference between ICS and the traditional approach?
The traditional approach begins with an investigation into whether words used are/are not ambiguous. If they aren’t then no further action is taken and the words are construed literally and the parties must seek rectification if they argue the words do not represent their intent. If words are ambiguous then commercial common sense can be used to determine which meaning the parties intended, on the background.
The Hoffman approach begins by looking at the words in the context of the background before asking what they mean, and discovers their meaning in this way. Wording can be altered through interpretation.
Charbrook v Persimmon (2009) HOL- Hoffman
Case: C and D contracted to construct residences on C’s land and sell the properties.
They fell into a dispute concerning a term which stipulated that D would pay C for their services subject to an ‘additional residential payment’ of ‘23.4% of the price achieved at sale for each residential unit which is in excess of the minimum guaranteed unit value, less the costs and incentives’.
C calculated this to be £897K, D calculated it at £4.4M.
D claimed for the court to rectify the contract to reflect the parties mutual intent, in reliance on pre-contractual negotiations between the parties.
Decision:
1. As long as the ICS conditions are met, there no is limit to the court’s ‘red ink’ power.
- C would receive the lesser sum. The words ‘additional payment’ are ambiguous. Their ordinary meaning would not make commercial sense because it would unduly favour C.
- The fact a contract seems unduly favourable to one party doesn’t by itself mean that the parties cannot have intended this, but here the structure and language appear irrational, when it is possible to construe them in a rational way.
- Affirmed ICS view that pre-contractual negotiations are excluded from background evidence (though D did not need them here anyway). The HOL is not entitled to depart from this rule because it has not impeded the development of law or lead to unjust results.
- BUT this rule does not exclude evidence of prior negotiations to establish that a fact which may be relevant background information was known to the parties.
Belize Telecom (2009) SC
Hoffman further attempted to extend contextual contractual interpretation to the implication of terms, i.e. beyond just construing words.
Case: Art of association provided that if the holder of a special share was also the holder of 37.5% of the issued ordinary share capital be entitled to appoint two of the co directors, and remove any director so appointed and appoint another in his place.
X had the special share and the necessary ordinary shares so appointed 2 directors, but after defaulting on an agreement, lost many ordinary shares, so held less than 37.5%.
Issue: Did the two directors remain on the board? Under the articles the directors could only be removed by a P with power to appoint them, but no such P existed.
Decision:
1. The test for an implied term is whether such a provision would spell out, in express words, what the instrument, against the relevant background, would reasonable be understood to mean.
- So could imply a term that if the holder lost the power to appoint, the directors would be removed.
- The many phrases used by judges in similar cases are not a series of independent tests. They are a collection of different ways or expressing that a proposed implied term must spell out what the contract actually meant.
- i.e. it must go without saying that the term is necessary to give business efficacy to the contract.
Rainy Sky SA v Koomin Bank (2011) SC
Potential move back to literal approach.
MaLauchlan- A source of much confusion because it is unclear whether Clarke was attempting to support the contextual or traditional approach.
Case: A contract for the purchase of a vessel stipulated that it would be paid for by C in 5 instalments, and that, as a condition of the first instalment, the seller would give the buyer refund guarantees for all the instalments.
In accordance with this, the bank issued C with advance payment bonds of £26M (the total amount of the remaining instalments).
The seller fell into financial troubles and after the initial instalment was paid refused to refund further instalments, against the contract. So, C brought proceedings against the bank claiming refunds under para 3 of the guarantee. C argued that ‘such sums’ in 3 referred to the ‘pre-delivery instalments’ also in pars 3, which would entitle them to the refund.
Bank argued para 3 must be read in conjunction with para 2, so did not cover refunds on the event of the seller’s insolvency. ‘Such sums’ is a reference to the sums refered to in Para 2, in which case a refund would only be paid on termination of the contract or total loss of the vessel.
Decision: Clarke
1. Takes a literal approach first, construing the words, and finds ambiguity.
- If an event in clause 3 were to make ‘such sums’ as in clause 3 i.e. the ‘delivery installments’ payable and this did not happen (due to insolvency) then the contract would be in limbo. Neither would have the right to terminate.
- Or if in the event that ‘such sums’ in 3 did refer to clause 2, If the seller could not continue building (likely in insolvency) then C could terminate under 2, but only after 90 days, so it would be 90 days before it could call on the bond for the repayments.
- Contextual- this is not a remedy which C could possible have been satisfied with.
- If there are two possible construction, the court is entitled to prefer the reading which prefers commercial common sense
In making this decision, can take account of fact an experienced judge of the commercial court
M&S v BNP Paribas (2015) SC
Narrower approach to the implication of terms after Belize.
Case: A lease ran until 2018. Rent was payable quarterly in advance. A break clause in the agreement stipulated that it could be terminated if there was no arrears of rent, and by paying a premium of 1 year’s rent.
M tried to exercise this right and paid for the quarter from 25 Jan to 24 March plus the premium payment.
BUT
M later demanded repayment of the 25 Jan to 24 March payment, arguing it was not a condition of the break clause. LL refused.
Decision:
1. Belize did not relax the highly restrictive approach to the implication of terms.
- Belize suggests that process of implying terms is part of the construction exercise. This is not true.
- First, the contract’s express words should be construed. A term can only after this be implied based on business efficacy if without it the contract lacks total commercial coherence.
- A term should not be implied into a detailed contract just because it seems fair, or the parties would have included it had it been proposed.
- Though Belize is still good law, it should be treated as inspired, rather than authoritative guidance.
- Argument for an implied term- each quarter’s rent can be said to be referable to the tenant’s enjoyment of the premises, so if LL could retain it is would be unfair to the tenant.
- BUT on the facts the tenant was not entitled to reclaim the rent. The lease was a detailed document made by experienced parties and drafted by expert solicitors. So such a term would not be implied ‘save in a very clear case’.
Arnold v Briton (2016) SC
Seems to be a move back to literal, but maybe not. Could just be that the court thought the wording was very clear so no need to apply contextual.
Case: 21 lessees of chattels agreed under Clause 3 ‘to pay a proportionate part of the expenses/repairs in a yearly sum of £90, with an annual increase of 10%’.
The 71 other chattel lessees who made contracts before 1977 were only subject to a service increase once every 3 years.
BUT Clause 4 required all leases to be subject to similar obligations. By 2011, the 21 charges were extortionate.
Issue: On true construction, did Clause 3 actually provide for a 10% annual increase OR, taking into account Clause 4, did it mean the lessees had to pay a fair proportion of the costs of the services up to a maximum of £90 in one year, with the potential maximum figure rising by 10% each year- i.e. could the court intervene to say this was the mutual intent and change the wording?
Decision: Neuberger
1. The lessees were liable for the higher charge.
- Commercial common sense should not undercut the importance of words used.
- ‘I accept that the less clear the wording or the worse the drafting the more ready the court can be to depart from their natural meaning’ (recognising contextual?)
- BUT that does not justify the court searching for infelicities to facilitate a departure from the natural meaning (against contextual)
- Commercial common sense cannot be invoked retrospectively just because the agreement worked out badly for one party.
- There is no special rule which requires service charge clauses to be interpreted restrictively (means the court is of the view that the literal approach is the one to adopt in like cases, not just service charge ones).
- Cranworth Dissent- the consequence of the lessor’s interpretation is so commercially improbable that only the clearest words could justify adopting it. The language used here does not justify commercial nonsense
Wood v Capita Insurance (2017) SC- Facts and arguments
Indemnity clauses.
Case: An indemnity clause in an agreement for sale of a co stipulated that the seller would indemnify the buyer for many things, including complaints registered with the FSA pertaining to mis-selling by the seller, in the period before sale.
Just before the purchase the co’s employees alleged mis-selling and the buyer informed the FSA, which directed the buyer to pay compensation to customers.
CoA Decision: Buyer’s losses were not covered by the indemnity clause because the buyer’s referral of the claim to the regulator was not a complaint registered by a customer as required by the clause.
Buyers argued CoA placed too much emphasis on the words (Arnold) and not enough on the factual matrix (which in rainy lead to considerations of commercial common sense).
Argued on a commercial construction, indemnity arises because the words ‘following and arising from claims/complaints registered with the FSA’ applies only to fines and remedial action, but do not include mis-selling.
Wood v Capita- Judgement
Hodge:
1. There is no difference in approach between Rainy Sky and Arnold v Briton.
- The court’s task is to ascertain the objective meaning of language in the wider commercial context.
- It does not matter whether this is commenced by analysis of the background or an examination of language, so long as the court balances the implications of each.
- Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of interpretation. They are judicial tools for the ascertainment of meaning.
- Arnold v Briton was not an attempt to recalibrate the approach in Rainy Sky.
- ‘The recent history is of continuity, not change’. The certainty of English commercial law is one of its attractions.
- On the facts the CoA’s interpretation was correct. It was be commercially absurd if there were no limits as to whom the claims in the clause could be made by so as to trigger indemnity.
Owen v Teather Greenwood (1967)
NB: Usage= a settled practice of a trade or profession.
For a practice to amount to a recognised usage it must be:
1. Certain- clearly established;
2. Well- known; and
3. Reasonable
Then the court’s will be not able to interpret another meaning to it.
BUT if a P knows about the usage and agrees to it, though unreasonable, he is bound by it.
