2.2.1 The Construction of a Contract

When two parties enter into a contract, the contract will be composed of various contract terms. Where a dispute arises, the construction of these terms, and of the contract itself, becomes a matter of Law — for the Court to determine. The professed object of the Court in construing a written contract is to discover the mutual intention of the parties, the written declaration of whose minds it is.1


The old approach to the construction of a contract was that, subject to ambiguity and to some other exceptions, words were to be interpreted literally – according to their plain meaning – without reference to extrinsic evidence of the background.2

But, in 1971, Lord Wilberforce, when giving reasoned judgement in Prenn v Simmonds, stated:

In order for the agreement .... to be understood it must be placed in context. The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. In my opinion, then .... evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and, objectively, of the 'aim' of the transaction.

 

The subsequent judgement of the House of Lords, in Rearden Smith Line Ltd v Yngvar Hansen-Tangen (1976 England), heralded this contextual approach to the interpretation of contracts.

Again Lord Wilberforce, in giving judgement, stated that in construing a contract, the Court must 'place itself in thought in the same factual matrix as that in which the parties were' up to the time when the contract was made.3

 

The leading modern explanation of this contextual approach to what a contract in writing actually means is that given by Lord Hoffman in Investors Compensation Scheme Ltd. v West Bromich Building Society (1998 England):4

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable man 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 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 the 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 chose 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.

(3) The 'rule' that words should be given their 'natural and ordinary meaning' reflect 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.

 

 


While all 'rules' of interpretation must be read in light of the modern contextual approach (as described above), subordinate to this contextual approach there are certain other basic 'rules' and 'maxims' applied by the Court to aid in its interpretation of a written document.

(1)

Words susceptible of two meanings should be given the meaning which will make the instrument valid rather than void or ineffective.5
(2)

‘An agreement ought to receive that construction which its language will admit, which will best effectuate the intention of the parties, to be collected from the whole of the agreement, and greater regard is to be had to the clear intent of the parties than to any particular words which they may have used in the expression of their intent.’6
(3)

Greater weight should attach to terms which the particular contracting parties have chosen to include than to pre-printed terms.7
(4)

Where there is an express mention in the instrument of a certain thing, this will tend to exclude any other thing of a similar nature.8
(5)

The meaning of general words may be narrowed and restrained by specific and particular descriptions of the subject matter to which they are to apply.9
(6)

The words of written documents are construed more forcibly against the party putting forward the document.10 This is known as the ‘Contra Proferentem (against the offerer) Rule’.

This rule is based on the principle that a party putting forward the wording of a proposed agreement has no right to induce another to make a contract on the supposition that the words mean one thing, and then to argue for a construction by which they would mean another thing, more to its advantage.11


 


In tandem with the contextual approach, whereby the background to a contract is critical to its interpretation, the Courts may also be prepared to treat a preliminary statement or assurance as a contract or ‘warranty’, collateral (i.e. additional but subordinate) to the principal agreement.12



In Esso Petroleum Co., Ltd. v Mardon (1976, England), for example:

Esso found a site on a busy main street which it considered suitable for the erection of a petrol filling station. An experienced employee estimated that the throughput of petrol at the station would reach 200,000 gallons in the third year of operation. But the planning authority refused permission for the forecourt and pumps to be sited on the main street and they had to be sited at the rear of the premises where they were only accessible by side streets. Mardon applied for a tenancy of the filling station. He was interviewed by the experienced employee, who gave him the same estimate of throughput but failed to take account of the fact that the filling station was now ‘back to front’. In reliance on the estimate, Mardon took a three-year lease of the filling station. Despite his best efforts, the site proved incapable of a throughput of more than 60,000 to 70,000 gallons. In an action by Esso for possession of the station and monies due for petrol supplied, Mardon counterclaimed damages for (inter alia) breach of a collateral warranty. The Court of Appeal rejected the argument that the estimate could not amount to a warranty because it was a forecast or statement of opinion.12A


Lord Denning M.R. stated the position as follows:

Now I would quite agree [with counsel for the plaintiff] that it was not a warranty –– in this sense –– that it did not guarantee that the throughput would be 200,000 gallons. But nevertheless, it was a forecast made by a party –– Esso –– who had special knowledge and skill. It was the yardstick (the estimated annual consumption) by which they measured the worth of the filling station.

They knew the facts.

They knew the traffic in the town. They knew the throughput of comparable stations. They had much experience and expertise at their disposal. They were in a much better position than Mr. Mardon to make a forecast.

It seems to me that if such a person makes a forecast, intending that the other should act upon it –– and he does act upon it, it can well be interpreted as a warranty that the forecast is sound and reliable in the sense that they made it with reasonable care and skill. It is just as if Esso said to Mr. Mardon: ‘Our forecast of throughput is 200,000 gallons. You can rely upon it as being a sound forecast of what the service station should do. The rent is calculated on that footing.’ If the forecast turned out to be an unsound forecast such as no person of skill or experience should have made, there is a breach of warranty just as there is a breach of warranty when a forecast is made –– ‘expected to load’ by a certain date –– if the maker has no reasonable grounds for it.13


1, 2 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29 th ed.), p. 166.

3 J. Beatson, Anson’s Law of Contract, (28 th ed.), p. 160. (In deference to Lord Wilberforce, I'm using this extract from Beatson's 28th edition here.)

4 Furmston, Cheshire, Fifoot and Furmston's Law of Contract, (15th ed.), p. 160 and 161.

5 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 169.

6, Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 169 (citing Ford v Beech (1848), per Parke B. at p. 866).

7, 8, 9, 10, 11 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 169 and 170.

12, 12A Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 136 and 137.

13 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 528.

 

Copyright © 2013, 2014 John O'Meara. All Rights Reserved.

Copyright © 2005 - 2013, 2014 John O'Meara. All Rights Reserved.