Contracts: which meaning prevails?

What does your contract mean? Perhaps not what you intended…

Words vs Purpose

The courts interpret contracts based on examining each word (the literal approach focusing on language) and business common sense (the ‘purposive’ approach focusing on practical implications).

Although language should be the surest guide as to what the parties intended, that only makes logical sense if we are considering plain language and clear drafting. The tortuous phrases and jargon beloved of many contract writers is no guide at all – even if the judges can eventually untangle the meaning, the words haven’t helped the parties (so it can’t be a tool to help them do business).

In Wood v Capita, Lord Hodge said precisely that as he stated that the quality of drafting of the clause would determine the usefulness of a literal approach. He said there may be “provisions in a detailed professionally drawn contract which lack clarity and the [interpreter] may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type“. So the poorer the drafting, the more the balance tips away from a strict semantic reading.

He also said that any clause may be a ‘negotiated compromise’ or the negotiators were ‘unable to agree more precise terms’. [IMHO that’s just phooey: get the principles right and clear drafting follows; unclear drafting comes from unclear thinking]

For common sense, Hodge said the courts had to be ‘alive to the possibility one side may have agreed to something which with hindsight did not serve his interest‘ aka had struck a bad bargain… the courts cannot interfere to help fools!

In Persimmon v Ove Arup the court used both the language used by the parties and the application of business common sense, often to come to the same conclusion! But it also looked an indemnity clauses and said:

In major construction contracts the parties commonly agree how they will allocate the risks between themselves and who will insure against what. Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down. Contractors and consultants who accept large risks will charge for doing so and will no doubt take out appropriate insurance. Contractors and consultants who accept lesser degrees of risk will presumably reflect that in the fees which they agree.” [57]

What should you do?

Do not whine. Read before you sign!

The best way to ensure your contract is interpreted as you intend is to ensure the drafting is accurate, brief and clear.

If that fails, then you will need to rely on a mix of the factual background and literal word-play to see if the courts roll the dice in your favour. If you like a gamble then continue as before with stodgy complex contracts written for you and understood by just an elite.

Cases: Wood v Capita Insurance Services Ltd [2014] UKSC 24; Persimmon Homes Ltd v Ove Arup & Partners Ltd & Anor [2017] EWCA Civ 373

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