The Construction of Commercial Contracts Part 1 | ||||
IntroductionAt law school the young lawyer learns about many aspects of contact law - offer and acceptance, the consequence of mistake and misrepresentation, the effects of illegality, the various discretionary powers under our contractual statutes, questions of remoteness of damage etc - but, in practice, the core of a commercial lawyer’s work, whether in drafting commercial contracts or in disputes concerning contracts, is the construction (some might say “deconstruction”) of commercial contracts. At the heart of commercial law and commercial disputes lies the network of contracts formed by commercial parties (primarily contracts governing the sale of goods), and central to the work of commercial lawyers is the drafting and interpretation of those contracts. Two of the most common questions commercial lawyers will hear from their clients are:
The range of bargains with which commercial law is concerned is wide. Occasionally contracts will be oral. Some contracts will be partly oral and partly in writing. Most will be written. There will be the agreement in which every single point is hammered out between two well-advised parties after the exchange of many drafts, where the final agreement can be regarded as the private legal universe created by the parties. At the other end of the spectrum, there will be the contract in writing which is on a standard form (with or without amendments) used for convenience and efficiency to get the deal done as quickly as possible. Some contracts may have no element of negotiation at all and will, in reality, be imposed by one party on another by the nature of the market and bargaining strength. In some areas, agreements will be based on international usage or convention or employ particular terms which have settled, well established meanings, which the parties assume will be strictly applied and construed. The ICC clauses for the international sale of goods (INCOTERMS) and the ICC rules governing documentary credits (UCP) are obvious examples. In the area of international trade, by way of example, the lawyer’s work is taken up with the network of contracts, many on standard bill of lading and charterparty forms with negotiated amendments, between the commercial parties under which goods are moved and transactions completed. Principles of constructionThe construction of contracts and the principles developed by the courts to assist in that exercise may not interest business people. They usually just want an answer to the questions which they bring to the court. However, in any civilised legal system, principles are required so that those who give the answers, our judges and arbitrators, can give reasons and provide certainty of approach to commercial people. The construction of a contract is a question of law and the courts have developed guiding principles to assist in that process. It is important to note that principles of construction are a guide for the court by which the court seeks to arrive at the intentions of the parties. Principles of this kind have always been flexible tools for a court. The flexibility and breadth of the principles has been increased by recent decisions. Historically, the principles of construction focussed on the agreement and drew clear lines against the admissibility of extrinsic material. In the last 50 or so years we have seen a movement in the approach to the interpretation of contracts from a literal approach which focussed solely on the words used by the parties in the contract to a more commercial approach which involves looking rather more at the background (1) to the transaction to ascertain the meaning of the contract in its context. This change came with cases such as Prenn v Simmonds (2) and Reardon Smith Line Ltd v Hansen-Tangen (3) which permitted reference to the background to the transaction or the “matrix” as an aid to the construction of the terms of the commercial contract (and, of course, an exception to the parole evidence rule (4) ). The change was limited but did represent a significant move to examine the meaning of a commercial contract in its context. Recent judgments in both New Zealand and the United Kingdom have contained statements which permit much more reference to the background to the contract to help the court in finding the meaning of the words used. The result of this is a measure of uncertainty as to what is meant by the commercial background and as to when it is appropriate to examine that background, together with continued judicial amplification of what the applicable principles of construction should be. In the older cases, the courts emphasised constantly that the aim of a court construing a contract was to arrive at the meaning of the agreement in an objective sense and thereby declare the intentions of the parties. The rules of construction underlined this fundamental aim. Recourse to the background was rare and only appropriate where the agreement was ambiguous or uncertain or the terms of the contract conflicted. If the contract’s meaning was clear without the background, then the courts would declare the meaning of the contract. The recent cases have cast the background in wider terms and general judicial statements support recourse to the background to allow the court to modify the apparent usual meaning of the words used in the contract. The danger with looking at the background to the transaction and extrinsic material is, of course, that this can get out of hand. The background can be used by an inventive judge with a particular view to justify a finding which he or she believes is just and fair which does real violence to the words used by the parties. There is no general principle of the equitable construction of commercial contracts . (5) The construction of a commercial contract has always been an objective matter in which the court tries to give to both parties the bargain which they have recorded. The court has to declare the meaning of the bargain rather than rewrite its terms. If bargains were to be consistently reframed by judges, the importance of the contract both for the parties and third parties and markets, who deal on the basis of the terms of the contract not its background, would be lost sight of. The potential difficulty with a wide-ranging ability to look at a range of material falling outside the written contract, which is present in modern decisions, is that this gives considerable leeway to judges to produce what they might see as just results and considerable further ammunition to a party looking to disturb a bargain struck in a changed situation. In short, a broad approach can be an open door to both increased levels of litigation and judicial activism in the area of the interpretation of commercial contracts. As I hope the short review of the recent authorities which follows will show, while there is uncertainty in the area, I do not believe that the courts have, in reality, shifted the basic focus away from the words used by the parties. Our courts, and the courts of the common law world, will, I believe, remain focussed on the words used by the parties and the task of ascertaining the meaning of the contract in an objective manner from the contract. 1. This was the traditional matrix identified by Lord Wilberforce - the commercial purpose of the contract, in the objective sense, its genesis and background, the market etc - see Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen Tangen) [1976] 1 WLR 989 (HL) at 996. |
| |||
Copyright © 2012 Paul David. All rights reserved |
