Interpretation of contracts under English law

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.

Legal rules of contractual interpretation

General rules of interpretation

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 natural and ordinary meaning of the clause. The courts "do not easily accept that people have made linguistic mistakes, particularly in formal documents".⁴  However, the worse the drafting of a particular clause, the more readily a court will depart from its natural meaning.⁵
• Any other relevant provisions of the contract.
• The overall purpose of the clause and the contract.
• The facts and circumstances known or assumed by the parties at the time the contract was executed.
• Commercial common sense.

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.

Common terms and phrases

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

What about special or technical meanings?

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

Commercial common sense

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

Canons of construction

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.

• Clear words. The court will be reluctant to adopt a meaning that gives an unfair result in the absence of clear drafting. For example, the courts have held that unambiguous language is required to exclude certain contractual remedies.¹¹
• In whose favour should ambiguities be decided? Usually the court will resolve any uncertainty or doubt surrounding a provision against the party who would benefit from the suggested interpretation. This is the so-called "contra proferentem" rule whereby the clause is construed against the party seeking to rely on it. It applies in particular to the party seeking to take the benefit of an exclusion or limitation of liability. However, recent cases indicate that the rule has a very limited role in relation to commercial contracts negotiated between sophisticated parties of equal bargaining strength.¹²
• Categories and lists. Where the preceding words are each part of a common genus or category, subsequent words will be interpreted "ejusdem generis", i.e. read as being part of that same class, in the absence of a contrary indication. So, for example, the words "or other inevitable accident" in a clause making reference to "fire, flood, storm, tempest" means other accidents of a similar kind.¹³

Can the court look beyond the contract?

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 

Subsequent unintended events

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

Implied terms 

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. 

Terms implied by law, custom and practice or a prior course of dealing

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.

Terms implied to reflect the parties' presumed intentions

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

Conclusion

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

1. It is worth noting that the approach applies equally to deeds as to agreements under hand.
2. Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, para 14.
3. Wood v Capita Insurance Services Limited [2017] UKSC 24.
4. Lord Hoffman in ICS, at 913.
5. Lord Neuberger in Arnold v Britton [2015] UKSC 36, para 18.
6. Wood v Capita Insurance Services Limited [2017] UKSC 24.
7. Legal dictionaries such as Stroud's Judicial Dictionary of Words and Phrases by Daniel Greenberg or Words and Phrases Legally Defined by David Hay, which collate the enormous body of case law on judicial interpretation, are useful sources of reference for the meaning of common terms and phrases.
8. Chitty on Contracts (32nd ed. 2015), chapter 13.
9. Lord Neuberger in Arnold, paras 17-20.
10. Rainy Sky SA and Others v Kookmin Bank [2011] UKSC 50; Andrew Wood –v- Sureterm Direct Ltd [2014] EWHR 3240 (Comm), [28] (Clarke LJ).
11. E.g. the right of set-off in WRM Group Ltd v Wood [1998] CLC 189.
12. In Persimmon Homes v Ove Arup [2017] EWCA Civ 373, the Court of Appeal confirmed that the contra proferentem rule had a very limited role to play in relation to commercial contracts negotiated between parties of equal bargaining strength. However, it is still applied (see Lexi Holdings Plc v Stainforth [2006] EWCA Civ 988 and Pratt v Aigaion Insurance Company [2008] EWCA Civ 1314).
13. Saner v Bilton (1878) 7 Ch D 815; Manchester Bonded Warehouse Co. v Carr (1880) 5 CPD.
14. Although this long-established rule has been criticised it has been firmly upheld by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 and by the Supreme Court in Arnold.
15. ICS [1998] 1 WLR 896. The court cannot consider subsequent conduct except where a contract is part oral and part written in order to determine the parties' original intentions. See Brian Maggs v Guy Marsh [2006] EWCA Civ 1058.
16. If, instead of construing the contract, the court is being asked to rectify it, extrinsic evidence is admissible. For a summary of the law relating to rectification see the Ashurst Quickguide Rectification of Contracts.
17. Rugby Group Ltd v ProForce Recruit Ltd [2006] EWCA Civ 69.
18. Per Lady Justice Arden, paragraph 55.
19. Lord Neuberger, Arnold, para 22.
20. See the Privy Council decision in Attorney General of Belize v Belize Telecom Limited [2009] UKPC 10. The case concerned the construction of a company's articles of association but the Privy Council affirmed that the relevant principles apply more widely.
21. (1978) 52 ALJR 20.
22. [2015] UKSC 72.