Interpretation of contracts under English law
18 August 2020
18 August 2020
This guide summarises the general approach taken by the English Courts to contractual interpretation. It considers the legal rules and key principles of interpretation, including the general approach to construing express terms and the tools of construction that the courts have at their disposal to assist them in reaching a just outcome between the parties.1 It also looks at the extent to which terms can be implied into a contract, and concludes with a flowchart setting out how the courts will approach questions of interpretation and implied terms.
The starting point for the court is to identify the intention of the contracting parties. This is an objective test; the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean".2
In ascertaining the objective meaning of a contractual provision, the courts will look to both the language of the clause and the commercial context in which it was drafted.3 The following considerations will be relevant to the court's analysis:
The extent to which each is used will vary according to the circumstances. Greater emphasis is likely to be given to textual analysis where the dispute concerns complex agreements agreed between sophisticated parties and with the assistance of skilled professionals. Conversely, commercial context will play more of a role where the agreement is more informal, or lacking in detail. However, there are always exceptions and every case will be decided on its own facts.6
The court will not take into account any subjective evidence of either party's intentions.
Some words and phrases have come to acquire an accepted legal sense through decided cases. Good examples of this are phrases such as "best endeavours" or "reasonable endeavours".7
The court first tries to find the ordinary meaning of words as they are popularly understood but if the context clearly requires a special or peculiar interpretation, the court will accept that special meaning. Technical or scientific words are usually given their technical or scientific meanings unless the context indicates otherwise.8
The courts will take into account commercial common sense when interpreting a contract. In recent years there has been a shift in emphasis in the importance of commercial common sense when interpreting contractual terms. However, the Supreme Court has now made it clear that the starting point is the natural meaning of the language used; commercial common sense cannot be relied on to undervalue the importance of the language of the provision which is to be construed. Courts will be slow to reject the meaning of a provision simply because one of the parties made a bad bargain; it is not for the court to improve the positions of the parties by re-writing the contract.9 However, where there is ambiguity and more than one possible construction, the court will select the interpretation that makes the most commercial sense, the presumption being that the parties would not have intended an uncommercial result.10
The English court sometimes employs certain "canons of construction" or "rules of thumb" in an attempt to do justice between the parties. However, these principles are just pointers and the court will only resort to applying them if the meaning cannot be found using the general rules of interpretation outlined above.
Can the court look beyond the written contract when construing the meaning of a contract? While the court must examine the full background to the contract, it cannot look at prior negotiations14 or the parties' "declarations of subjective intent".15 This means that the court cannot look at extrinsic evidence such as antecedent agreements, oral negotiations, exchanges of letters, etc., preceding the contract.16 However, the Court of Appeal has held that in construing the meaning of an unusual combination of words not defined in the agreement and with no obvious natural and ordinary meaning, the court can "explore the factual hinterland of the agreement" to ascertain how the parties understood the phrase.17 In so doing the court is not taking into account the parties' "declarations of subjective intent", rather it is identifying the meaning shared by the parties and in effect incorporated into their agreement.18
If an event occurs which, judging from the language of the contract, was "plainly not intended or contemplated by the parties" at the time the contract was made, the court will give effect to the intention of the parties where it is clear what the parties would have intended.19
If, having regard to the express words of the agreement, it is still not possible to ascertain the meaning, the court may be willing to imply certain terms.20 However, courts are reluctant to depart from the express wording, particularly if the contract is detailed and appears comprehensive. In practice the situations in which courts are prepared to imply a term into a contract are limited.
In particular kinds of contract, for example employment, consumer and landlord and tenant agreements, certain standard terms are implied by legislation and/or common law. In appropriate cases the court will recognise standard practice in particular trades or areas of industry and is willing to imply terms into an agreement to reflect this practice, provided the wording of the contract is not inconsistent with the implication. Finally, if it can be shown that the parties have consistently and clearly dealt with each other on a particular basis the court may be prepared to imply terms to reflect this, again provided the actual wording of the contract does not contradict this.
The court will only be prepared to accept other implications if it is satisfied that the implication sought reflects the presumed intention of the parties. The court will look at the particular context of the contract and its language and the relationship between the parties to ascertain if the implication sought can be inferred. The criteria for implying a term were expressed succinctly by the Privy Council in B.P. Refinery (Westernport) Pty Ltd v Shire of Hastings:21
"(1) it must be reasonable and equitable; (2) it must be necessary to give "business efficacy" to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."
Further clarification has since been given by the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another.22 This decision clarified that a term will be implied if a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances at the time the contract was made, would consider the term to be so obvious as to go without saying or to be necessary for business efficacy.
Essentially the court is trying to make the contract workable and to ascertain the parties' presumed intentions (in the sense of what they would have agreed if they had thought about the point).23
The flowchart overleaf gives a broad overview of the general way in which the English courts tend to approach the task of construing disputed or ambiguous wording. Ultimately, however, the "rules" of construction are no more than guidance tools and the particular facts and circumstances of the case determine how they are applied. In practice it is open to judges to select from these tools at their discretion in order to make the contract work, give effect to the parties' (presumed) intentions and to try to achieve reasonable justice between them.
Getting to the meaning:
How the courts interpret contracts
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.