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Interpreting Contracts

Photo from Killarney Golf & Fishing Club


In National Tourism Development Authority v Coughlan [2009] IEHC 53 (17 February 2009) Charlton J had little difficulty in concluding that the activities of a golf club were matters of sport and recreation and therefore had insufficient public benefit to amount to a charitable trust. Socially fascinating though the issue is, the judgment is also interesting for Charlton J’s various legal musings, including his comments on the interpretation and construction of private legal documents, including contracts and trust deeds.

The starting point for the interpretation of contracts is now the speech of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, [1997] UKHL 28 (19 June 1997), which has commended itself to the House of Lords, the Privy Council, the High Court of Australia, the Irish High Court (BNY Trust v Treasury Holdings [2007] IEHC 271 [despite the citation, it is not available online, so far as I can find]; Ryanair Ltd v An Bord Pleanala [2008] IEHC 1 (11 January 2008); Connolly v An Bord Pleanála [2008] IEHC 224 (08 July 2008)) and the Irish Supreme Court (Analog Devices v Zurich Insurance Company [2005] IESC 12 (16 March 2005); Emo Oil Limited v Sun Alliance & London Insurance Company [2009] IESC 2 (22 January 2009)).

Indeed, Charlton J himself followed Lord Hoffmann’s approach in Mc Cabe Builders (Dublin) Ltd v Sagamu Developments Ltd [2007] IEHC 391 (23 November 2007) [26]. However, he does not seem to have referred expressly to it in NTDA v Coughlan, despite the Supreme Court’s most recent reapproval in Emo Oil Limited v Sun Alliance & London Insurance Company the previous month, and it is therefore interesting to compare and contrast the principles enunciated by Lord Hoffmann in the Investors Compensation case and those enunciated by Charlton J in NTDA v Coughlan.

Lord Hoffmann began with the unexceptional principle that

(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.

Though unexceptional, it is a significant place at which to commence the analysis, in that it begins simply with the document, and not with the intentions of the parties thereto. The classical starting point has always been with the intentions of the parties. For example, in Kramer v Arnold [1997] 3 IR 43, 55 Keane J held that “the task of the court is to decide what the intention of the parties was, having regard to the language used in the contract itself and the surrounding circumstances”, and he was followed in this by Murphy J in Igote Ltd v Badsey Ltd [2001] 4 IR 511, 516, [2001] IESC 65 (18 July 2001) [10]. Hence, in NTDA v Coughlan, Charlton J’s second principle emphasised the point:

13. Secondly, a court is only entitled to construe a written document according to the intention that is therein clearly expressed. That rule overrides even the most powerful evidence that the settler or testator could not have actually meant what is plainly stated in the document. … The rule is, therefore, that in construing a written contract or settlement, the intention of the parties should be ascertained from the words that they have used within the ascertained context. …

By contrast, Lord Hoffmann’s approach dispenses with this prior stage of this analysis, and simply proceeds straight to the question of the objective meaning of the document. Since the search for intention is always conducted objectively by reference to what the parties actually said and did, rather than subjectively by reference to what they claimed they thought, reference to intention is little more than a ritual incantation to allow the analysis to begin. In practical terms, therefore, it is now analytically reasonable to proceed directly to the question of construction of the words used without pausing first to observe that the words used are taken to reflect the intentions of the parties.

However, in helping to ascertain the meaning of the words used, Lord Hoffmann, Keane J and Charlton J all emphasise the importance of the context in which the contract was drafted. Hence, in his second principle in Investors Compensation, Lord Hoffmann expanded upon this:

(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.

In BCCI v Ali [2002] 1 AC 251, [2001] UKHL 8 (1 March 2001) [39], he glossed “absolutely anything” as “anything which a reasonable man would have regarded as relevant” (emphasis in original). Moreover, in NTDA v Coughlan, Charlton J’s first principle explains the purpose for which such contextual evidence is admissible:

12. … Firstly, the context in which a document was drawn up is always of importance in setting the scene within which the document is to be construed. This does not mean that extrinsic evidence becomes admissible with a view to contradicting the terms of a trust, contract or will. Rather, as is explained by Keane J in O’Connell v Bank of Ireland [1998] IESC 3 [1998] 2 IR 596, 609-610, this is not a matter of evidence reinterpreting the document at all. Context elucidates those surrounding circumstances within which the document to be construed is to be placed. …

Charlton J’s third principle seeks to explain why this context evidence is admissible and thus seeks to set out its limits:

15. Thirdly, in attempting to find out what the expressed intentions of the testator or settler was, extrinsic evidence may be available to assist the court and such evidence is admissible in the event of an ambiguous construction arising on the terms of the written document. It is this ambiguity that makes extrinsic evidence admissible. Such extrinsic evidence, even if it exists, is not always of assistance since it can never be used to contradict any aspect of the document in express language, save when that language is ambiguous in the context of the document considered in its entirety. …

This makes it clear that, so far as Charlton J is concerned, the background is not admissible in its own terms but because it helps to resolve an uncertainty or ambiguity. However, the trend of the cases (see the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 as followed by the Supreme Court in Rohan Construction Ltd v Insurance Corporation of Ireland [1988] ILRM 373 and Igote v Badsey as well as by Lord Hoffmann in Investors Compensation) has not been to confine the admissibility of contextual evidence to situations of ambiguity. Certainly, in cases of ambiguity, contextual evidence will be very useful indeed; but the other cases seem to take the view that contextual evidence need not be limited to cases of ambiguity. Construction of the contract in the context of its drafting history may very well be useful not merely in cases of ambiguity but in understanding the structure of the contract and in explaining why certain things are or are not contained within it. Of course, there are limitations to the use of contextual evidence, but its utility extends far beyond merely the resolution of ambiguity, and it should not be confined to that context. It is for these kinds of reasons that Lord Hoffmann emphasised in Investors Compensation and BCCI v Ali that the admissible contextual evidence includes absolutely anything relevant which would have affected the way in which the language of the document would have been understood by a reasonable man.

As to the limitations to the use of contextual evidence, the Supreme Court emphasised in Igote v Badesy that any attempt to place the agreement in the context in which it was made should not amount to an impermissible investigation of the subjective intentions of the parties in entering into the agreement. As Lord Hoffmann made clear in Investors Compensation:

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. …

For example, in Igote v Badesy, the word “dividend” in a share subscription agreement was interpreted in its usual legal meaning of a duty to pay out of profits, rather than as an absolute duty to pay whether or not the company made a profit. Murphy J held that “the complicated background to the share subscription agreement is at best of a very limited value in construing the concluded agreement. At worst it provides the temptation … of seeking to extract the subjective intention or motivation of one or other, or even both, of the parties from the history rather than construe it in the context of that history”. This is a much more logical limitation than ambiguity, and Charlton J’s decision in NTDA v Coughlan must not be allowed to re-introduce a limitation that is necessary neither for conceptual nor for practical commercial reasons. This point is emphasised by Lord Hoffmann’s fourth principle:

(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] AC 749, [1997] UKHL 19 (21 May 1997)).

In Mannai Investments, a lease permitted the tenant to terminate the tenancy by serving not less than six months notice in writing to expire on the third anniversary of the date of the of commencement of the lease. The tenant served such a notice, purporting “to determine the lease on 12 January 1995”, though the relevant anniversary was in fact 13 January. The majority of the House of Lords (Lords Steyn, Hoffmann and Clyde; Lords Goff and Jauncey dissenting) held that, when the notice was construed against the background of the terms of the lease, it was clear that the tenants meant to refer to the third anniversary, so that the notice was valid and effective. As a consequence, in Inverstors Compensation, Lord Hoffmann concluded, in his fifth principle:

(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense 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.

On the other hand, Charlton J’s approach in NTDA v Coughlan is much more limited; in his second principle, he said that the “court is only entitled to construe a written document according to the intention that is therein clearly expressed. That rule overrides even the most powerful evidence that the settler or testator could not have actually meant what is plainly stated in the document”.

There are many reasons for this difference. The first lies in the different starting points adopted by Charlton J and Lord Hoffmann. As we have already seen, Charlton J began from intention, whereas Lord Hoffmann began from the words, and their interpretation by a reasonable man having regard to their context. The second reason relates to the different justifications which Charlton J and Lord Hoffmann gave for the admission of contextual evidence: Charlton J saw it as admissible only for ambiguity, whereas Lord Hoffmann’s approach is much more extensive. On both of these issues, it is better to take Lord Hoffmann’s line rather than Charlton J’s.

On the other hand, for all that they are a very useful synthesis of the courts’ general approach to questions of contractual construction, nevertheless, Lord Hoffmann’s principles are not comprehensive. There many are other additional specific canons of construction. Charlton J in NTDS v Coughlan helpfully mentioned two. The first is the principle an ambiguous term in a contract will be construed strictly against the interest of the party who drafted it and included it in the contract, particularly in the case of standard form (boilerplate) contracts:

17. Fourthly, in some contract situations a document is often drawn up in standard form with which the other contracting party may accept in full, or reject. In such cases, situations of ambiguity can give rise to a rule that the document is to be construed against the party drawing it up. …

This is illustrated by Analog Devices v Zurich Insurance Company [2005] IESC 12 (16 March 2005), in which Geoghegan J for the Supreme Court approved the Investor Compensation principles, but went on to decide the case on the application of the additional principle described by Charlton J in this quote.

The other specific canon of construction mentioned by Charlton J in NTDS v Coughlan
is this:

18. Fifthly, in documents it can happen that a term of art is used that has a particular meaning for the parties involved. Those who share a particular line of work may use a word within the terms of the meaning that is peculiarly applied between them. …

This is a straightforward principle. Igote demonstrates this, applying the technical legal definition of “dividend”. But there are limits even to this. In Oxonica Energy Ltd v Neuftec Ltd [2008] EWHC 2127 (Pat) (05 September 2008), Peter Prescott QC (sitting as a Deputy Judge) held that, because the document in question had been cobbled together from various sources, it referred to the seemingly technical concept of a patent “application” in two separate senses.

In the end, therefore, Charlton J’s principles are helpful but should not be pressed too far. Perhaps it is best that, in Emo Oil Limited v Sun Alliance & London Insurance Company [2009] IESC 2 (22 January 2009), the Supreme Court, less than a month before, reaffirmed the Investors Compensation principles.

One Response to “Interpreting Contracts”

  1. […] and the clubhouse”. The most important recent statement of the principles by which courts interpret contracts is the speech of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society […]

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Me in a hatHi there! Thanks for dropping by. I'm Eoin O'Dell, and this is my blog: Cearta.ie - the Irish for rights.

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