Lecture 6 - Contractual interpretation

Question 1

Two folds:

Answer 1

1- Words in the contract. Parole rule. Nothing beyond 4 corners of the contract. What plain meaning says.
2- Nothing else than the contract. Exclude all the world around the contract.

Question 2

Smith and Hughes

Answer 2

Smith v. Hughes, (1871) LR 6 QB 597

The complainant, Mr. Smith, was a farmer and the defendant, Mr. Hughes, was a racehorse trainer. Mr. Smith brought Mr. Hughes a sample of his oats and as a consequence of what he had seen, Mr. Hughes ordered 40-50 quarters of oats from Mr. Smith, at a price of 34 shillings per quarter. To begin with, 16 quarters of oats were sent to Mr. Hughes. When they arrived, he said that the oats were not what he had thought they were. As he was a racehorse trainer and he needed old oats, as this was what the horses had for their diet. The oats that were sent to Mr. Hughes were green oats, the same type as the initial sample. Mr. Hughes refused to pay Mr. Smith for the delivery and remaining order.

Issues
Mr. Smith argued that Mr. Hughes had breached the contract as he had not paid for the delivery and future oats to be delivered. The issue in this case was whether the contract could be avoided by Mr Hughes, as Mr. Smith had not delivered the type of oats he had expected.

Held
It was held that there was a contract between Mr. Smith and Mr. Hughes and that it would not be avoided. There had been no discussion between the parties regarding the delivery of old oats. An objective test revealed that a reasonable person would expect the sale of good quality oats in a similar contract, since there was no express discussion of old oats. The sample gave him the chance to inspect the oats and this was an example of caveat emptor (buyer beware).

Case of small value, heard at first instance in the County Court (1st instance for cases of low value), which found for Hughes. Smith appealed to the Court of Queen’s Bench. This Court said that there is a mistake that vitiates the contract.

The Court of Queen’s Bench (Court of appeals) held that there was a contract; it did not matter that the subjective intention of the parties differed - that is, that Smith intended to sell new oats and Hughes intended to buy old oats.

Question 3

Foundational case Hughes v. Smith

Answer 3

1. They found that it was agreement in the contract terms that has to be understood in an objective basis. Objective interpretation. Objectively speaking, nothing could suggest that there is a contract for old oats.
2. Mistake that vicious the contract- For English law a mistake is for the interpretation of contractual terms not for the assumptions There is no subjective obligation in the vendor to correct buyers obvious mistake and assumptions (Caveat emptor -buyers be aware).

Question 4

Parole evidence rule

Answer 4

Why this rule?

1. Relation to the objective theory of contractual interpretation
2. Concern about third parties who become interest in the contract like assignees (cesionarios).
3. Concern about complexity and cost of considering this external evidence of party intention

Question 5

Investors Compensation Scheme v. West Bromwich Building Society, [1998] 1 WLR 896 - Current approach to contractual interpretation

Answer 5

Leading judgment, Lord Hoffmann – objective interpretation of contracts but, with some few exceptions, based on all relevant evidence at the time of contracting

See Burrows at 330:”[Lord Hoffmann] stressed that one is seeking to ascertain ‘the meaning which the [contract] would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation they were in at the time of the contract”.

Question 6

Chartbrooke v. Persimmons [2009] UKHL 38

Answer 6

Chartbrooke Ltd v Persimmon Homes Ltd [2009] UKHL 38 is an English contract law case concerning interpretation of contracts. It creates a so-called “red ink” rule, that there is no limit to verbal rearrangement that the court may deploy to give a commercial sensible meaning when construing a contract in its bargaining context. It also, importantly, reaffirmed the rule of English law, that pre-contractual negotiations were ordinarily inadmissible when construing a contract.

Pre-contractual negotiations may in principle not be referred to interpret the final contract.

Question 7

Factors rendering a contract defective

Answer 7

(a) void (as for mistake in limited circumstances); - It’s very difficult to be appreciated.
(b) Voidable (as for, for example, misrepresentation or undue influence);
(c) Unenforceable (as for example, illegality);
(d) Rectifiable (as for mistake in limited circumstances). Very rare. E.g. Both parties agree

Question 8

What is the difference between mistake and misrepresentation? Fundamental distinction in English law.

Answer 8

Mistake is an error. Misrepresentation, someone has induced you to have this error.

Question 9

Misrepresentation:

Answer 9

• At common law – only fraudulent misrepresentation gave contractual remedies (rescind contract and claim damages) – Person inducing misrepresentation wanted to tricky.
• Tort remedy: deceit and negligence remedies
• Equity: rescission for negligent and innocent misrepresentation. Common law remedies are the law, equity is a discretion.
• Misrepresentation Act, 1967
• Rescission for negligent and innocent misrepresentation and action in damages for negligent whilst court has discretion to grant damages for innocent misrepresentation