The Construction of Commercial Contracts Part 2

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Recent cases

Lord Hoffmann has made several general statements concerning the principles of contractual interpretation. He has used interesting literary examples to emphasise that all meaning comes from context and has advocated a wide ranging ability to examine all that can be described as context to ascertain meaning. Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd (6), involved a dispute concerning the construction of a notice under a commercial lease where a commercial tenant purported to give a notice to its landlord to end its tenancy. The notice was expressed to take effect on the wrong date. The House of Lords held (with Lords Goff and Jauncey dissenting) that the notice was effective because, in the commercial context, a reasonable recipient of the notice would have been left in no doubt that the tenant wished to determine the tenancy on the right date under the lease but had put the wrong date in the notice. Lord Hoffmann emphasised that sometimes the context of a statement can show that the plain meaning of the words used in a contract may be wrong and found that in the context of this lease a reasonable recipient of the notice would have understood the notice as being a notice to terminate on the correct day in accordance with the lease . (7)

This case can be interpreted simply as involving the interpretation of unilateral notices, where it can be contended that the notice only has to be generally effective as opposed to strictly complying with the contract. However, the broad statements by Lord Hoffmann which apparently allow the background to the contract to be used to “correct” the plain meaning of a contract have attracted both criticism and approval. Some have said that the statements herald a “new” approach to construction.

After Mannai came the statement of general principle concerning the construction of commercial contracts in Investors Compensation Scheme Ltd v West Bromwich Building Society (8) which was adopted by the New Zealand Court of Appeal in Boat Park Ltd v Hutchinson (9). Lord Hoffmann said as follows (with emphasis added):

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945).

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:
… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.

This statement of general principles, made in the context of a dispute about the construction of a claim form, was adopted and applied to the construction of a contract by Justice Thomas in the New Zealand Court of Appeal in Boat Park Ltd v Hutchinson (10) and has been repeated in most New Zealand contract interpretation cases since (11). It is to be noted that the possible available background on a question of construction under this approach is broad - “absolutely anything” - and seems to be readily available to check or interpret the meaning of the words used in the contract, rather than only being brought into play when there is uncertainty or ambiguity in the contract. The background still does not include the evidence of the subjective intentions of the parties or their negotiations, although the scope of this exception is now said to be “unclear”.

The Boat Park case concerned the construction of a contract for the sale of land in which the vendor was to provide a mortgage to the purchaser limited to 75 percent of a registered valuer’s valuation of the property. The purchaser obtained a valuation on the basis that the subdivision proposed for the land had been carried out and claimed that this was the meaning of valuation under the contract. The vendor said “valuation” meant the current valuation of the land at the time of sale. There does not seem to have been a need to adopt the broad statements of Lord Hoffmann in this case. The word “valuation” in the context of a sale of land at a particular point in time, absent express definitions providing for valuation on another basis, would usually refer to the valuation of the land at the time of the contract on the basis of established valuation principles.

The problem with statements of the breadth of those made by Lord Hoffmann is that they can act as an open invitation to avoid construing a contract on its terms and to search amidst the background material to arrive at a meaning which best suits the view taken by the judge of what the obligations between the parties ought to be. The dangers of this approach in a commercial context have been noted by a number of commentators.

6. [1997] 3 ALL ER 352, [1997] 2 WLR 945 (HL)
7. See the use of Mrs Malaprop to explain how the context may show that the conventional meaning of the words in an agreement is wrong in the judgment of Lord Hoffmann
8. [1998] 1 All ER 98, [1988] 1 WLR 896 (HL)
9. [1999] 2 NZLR 74 (CA)
10. Supra
11. See eg. J Burrows, J Finn, S Todd (Eds), Burrows, Finn & Todd Law of Contract in New Zealand, 2nd Ed (Wellington: LexisNexis Butterworths, 2002) p 172
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