THE UNIVERSITY OF HONG KONG

ACADEMIC YEAR 2024/25

LAW OF CONTRACT

INTERPRETATION

MASSIMO LANDO
31 OCTOBER 2024
OUTLINE

• Interpretation in general
• Interpretation of terms
• Interpretation of exclusion clauses
INTERPRETATION:
WHY AND AIMS
“[T]he staple diet of the Commercial Court can
be summed up in one word—‘Construction’.”
(R Goff, ‘Commercial Contracts and the Commercial Court’
[1984] LMCLQ 382, 385)
• Why interpretation?
• open texture of language
• inadvertence of parties
• Aims of interpretation of contracts:
• give effect to parties’ intention
• avoid unfairness
• ensure business efficiency
INTERPRETATION:
HOW TO ACHIEVE ITS AIMS
• How do achieve aims of interpretation?—
balance:
• literal interpretation
• contextual interpretation
• teleological interpretation
• Difference from:
• statutory interpretation—whose intention matters?
• interpretation in international law—codified rules
• Limited role of precedent (Surrey Heath Borough
Council v Lovell Construction (1988) 42 BLR 25)
INTERPRETATION:
WHO AND WHEN
• Who is the interpreter?
• role of courts
• role of parties
• define terms in contract
• agreement in court proceedings
• When to interpret?
• interpretation presupposes:
• term exists
• term is incorporated
• terms is unclear
• interpretation comes before statutory controls
TERMS:
LITERAL MEANING
• Courts’ position in 19th century
“instrument is always to be construed according to the strict,
plain, common meaning of the words themselves; and that in
such case evidence dehors the instrument, for the purpose of
explaining it according to the surmised or alleged intention of
the parties to the instrument, is utterly inadmissible.” (Shore v
Wilson (1842) 9 Cl & Fin 355)
• Irrebuttable presumption—Grey v Pearson (1857) 6
HL Cas 6
• words “shall be interpreted in their strict and primary sense,
and in no other, although they may be capable of some
popular or secondary interpretation, and although the most
conclusive evidence of intention to use them in such
popular or secondary sense be tendered”
• example—meaning of “money” (Re Morgan [1942] Ch 345)
TERMS:
LITERAL MEANING
• Why literal meaning?
• parol evidence rule and “four corners” doctrine
• assumption that intention conveyed by text
• E.g., RTI Ltd v MUR Shipping [2024] UKSC 18
• Problem—words have multiple meanings:
• “semester”
• “fall”
• “spouse”
• Need to temper literal meaning?
TERMS:
CONTEXT
• State of the common law today
• Main question—how much context can one
use in interpretation? (cf. international law)
• Investors Compensation Scheme Ltd v West
Bromwich Building Society [1998] 1 WLR 896,
at 912–13 (Lord Hoffmann)
• Set out 6 principles governing interpretation
• Confirmed in later cases (e.g., Globe Motors v
TRW Lucas [2016] EWCA Civ 396; Wood v
Capita Insurance Services [2017] UKSC 24)
TERMS:
ICS PRINCIPLE 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.”
• need ambiguity for interpretation?
• objective test
• background not limited to actual knowledge
TERMS:
ICS PRINCIPLE 2

“[The background] includes absolutely anything which

would have affected the way in which the language of
the document would have been understood by a
reasonable man.”
• admissibility v weight
• a question of relevance?—see BCCI v Ali [2001]
UKHL 8
• what do parties do in litigation?
TERMS:
ICS PRINCIPLE 3
“The law excludes from the admissible background the
previous negotiations of the parties and their declarations of
subjective intent. […] 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.”
• inconsistent with relevance of background?
• limitations:
• establish fact in background (Chartbrook v
Persimmon Homes [2009] UKHL 38)
• construction so broad to allow rectification
(Oceanbulk Shipping v TMT Asia [2010] UKSC 44)
• Subsequent conduct—Schuler v Wickman [1974] AC 235
TERMS:
ICS PRINCIPLES 4-5
“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.” (Principle 4)
“[I]f one would […] 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.” (Principle 5)
• widens courts’ discretion in interpreting contract
• question of language mistakes
• ensures business viability of contract
TERMS:
ICS PRINCIPLES 4-5 (CONT.)
• Language mistakes—“red ink” approach:
“When the language used in an instrument gives rise to difficulties
of construction, the process of interpretation does not require one
to formulate some alternative form of words which approximates
as closely as possible to that of the parties. It is to decide what a
reasonable person would have understood the parties to have
meant by using the language which they did. […] there is not, so to
speak, a limit to the amount of red ink or verbal rearrangement or
correction which the court is allowed. All that is required is that it
should be clear that something has gone wrong with the language
and that it should be clear what a reasonable person would have
understood the parties to have meant.”
(Chartbrook v Persimmon Homes [2009] UKHL 38 [21]–[25])
TERMS:
ICS PRINCIPLES 4-5 (CONT.)
• Ensuring business viability:
• terms to be interpreted based on commercial common
sense (Rainy Sky v Kookmin Bank [2011] UKSC 50)
• query whether judges well placed to ascertain commercial
common sense (J Sumption, “A Question of Taste: The
Supreme Court and the Interpretation of Contracts” (2017)
17 Oxford University Commonwealth Law Journal 301)
• Avoid unreasonable results:
• most important principle of interpretation
• example—Lehman Bros v Exotix Partners [2019] EWHC
2380 (Ch)
TERMS:
THE LAW SINCE ICS

• Balance of textualism and contextualism:

• textualism prevails where agreement is sophisticated
• contextualism prevails where agreement informal
• Apply business common sense
• Cannot have regard to:
• pre-contractual negotiations
• subjective declarations of intention
• subsequent conduct
EXCLUSION CLAUSES:
WHY DIFFERENT APPROACH

• Exclusion clauses are “special” terms

• General rules of contractual interpretation still
apply to them but:
• additional rules of interpretation
• aim—restrict scope of exclusion clauses
• Gradual movement towards unification of rules
on interpretation?—impact of statutory
controls
EXCLUSION CLAUSES:
FUNDAMENTAL BREACH

• Idea—parties cannot rely on exclusion clauses

if it excludes liability that “goes to the root of
the contract”
• Rule of construction:
• the more unreasonable the result, the less likely the
clause enforceable
• very clear words necessary to exclude liability for
fundamental breach
• Example—Photo Production v Securicor
Transport [1980] AC 827
EXCLUSION CLAUSES:
CONTRA PROFERENTEM
• Idea—ambiguous term construed against party
who introduced it (Transocean Drilling UK v Hut
Group [2016] EWCA Civ 372)
• Examples:
• Nobahar-Cookson v Hut [2016] EWCA Civ 128—
liability for claims where notice served within 20 days
• Persimmon Homes v Ove Arup and Partners [2017]
EWCA Civ 373—liability for causing presence of
asbestos v for identifying presence of asbestos
EXCLUSION CLAUSES:
NEGLIGENCE LIABILITY
• Idea—clauses excluding liability for negligence
effective only if no other way to interpret them
• Why?—assumption that innocent party would
have agreed to them
• Impact of CECO—less compelling need to
control construction of exclusion clauses
• Evolution:
• Canada Steamship Lines v The King [1952] AC 192
• reading down of Canada Steamship principles
EXCLUSION CLAUSES:
CANADA STEAMSHIP PRINCIPLES
• Three principles:
• does exclusion clause expressly refer to negligence
liability?—“whatsoever or howsoever” (Shell Chemicals
UK v P&O Roadtanks [1995] 1 Lloyd’s Rep 297)
• if not, words wide enough to cover negligence liability?
• if yes and clause limits (not excludes) liability—clause
effective (Mitchell v Lock [1983] QB 284)
• if yes and clause excludes liability—next question
• can exemption cover liability other than negligence?
• if no—clause effective
• if yes—clause will cover non-negligence liability
(Dorset County Council v Southern Felt Roofing (1990)
48 BLR 96)
EXCLUSION CLAUSES:
READING DOWN CANADA STEAMSHIP
• Cases not applying Canada Steamship principles:
• National Westminster Bank v Utrecht-America Finance
[2001] CLC 1372
• Mir Steel UK v Morris [2012] EWCA Civ 1397
• Persimmon Homes v Ove Arup and Partners
[2017] EWCA Civ 373:
• focus on natural meaning
• Canada Steamship principles more relevant to
indemnity clauses
• Triple Point Technology v PTT Public Co [2021] UKSC
29—“old and outmoded”