In the very recent case of Persimmon Homes Ltd & Others v Ove Arup & Partners Ltd & Others [2015] EWHC 3573 (TCC), Mr Justice Stuart-Smith helpfully set out the latest established principles in respect of the interpretation of contract terms. In that judgment he reiterated that the overarching objective for the Court is to identify the intention of the parties, something that may be achieved by determining "what a reasonable person having all the background knowledge which would reasonably have been available to the parties would have understood the parties to have meant".
In this search for meaning, the law has developed many tools, including the following points of principle;
i) interpretation should be neither uncompromisingly literal nor unswervingly purposive;
ii) the process of interpretation is an iterative process, meaning that it is necessary to keep in mind and bring to bear all relevant considerations and to revisit them as necessary in the search for the correct meaning of the contract;
iii) where words are capable of more than one meaning, the Court should consider the implications of the rival constructions as part of the interpretive process and is entitled to prefer a construction which is consistent with business common sense and to reject one that is not;
iv) the Court should treat what it considers to be "business common sense" with caution, because what appears to be business common sense may depend upon the standpoint from which the question is asked;
v) the Court should not strain to find ambiguity where none exists. If at the end of the normal interpretative process, the true meaning of the contract has not emerged and remains unclear and ambiguous, the Court has as a last resort various presumptions to assist it, such as the contra proferentem rule.
Mr Justice Stuart-Smith went on to consider the approach to be adopted when interpreting exclusion clauses. He said that, in order to be effective, exclusion clauses must be "most clearly and unambiguously expressed" and "the more improbable it is that the other party would agree to excluding the liability of the proferens, the more exacting the application of the principle will be". He added that there is an increasing recognition that parties to commercial contracts are and should be left free to apportion and allocate risks and obligations as they see fit. In this respect, he referred to the comment by Lord Diplock in the Photo Production v Securicor Ltd [1980] case which was;
"In commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is , in my view wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made of the presumption in favour of the implied primary and secondary obligations."
The recognition that parties may choose to allocate risks and liabilities in a way that may at first sight seem unlikely to an outsider has grown in the field of commercial contracts in general and contracts related to construction in particular where the allocation of risk has been a commonplace in standard forms of building contracts for years.
However, the Court's task is essentially the same when interpreting what is said to be an exclusion clause as it is when interpreting any other provision of a contract: it is to identify what a reasonable person having all the background knowledge which would reasonably have been available to the parties would have understood the parties to have meant.
The above case therefore sets out a very useful checklist when attempting to interpreting contract and/or exclusion clauses.
Peter Barnes
21 December 2015
i) interpretation should be neither uncompromisingly literal nor unswervingly purposive;
ii) the process of interpretation is an iterative process, meaning that it is necessary to keep in mind and bring to bear all relevant considerations and to revisit them as necessary in the search for the correct meaning of the contract;
iii) where words are capable of more than one meaning, the Court should consider the implications of the rival constructions as part of the interpretive process and is entitled to prefer a construction which is consistent with business common sense and to reject one that is not;
iv) the Court should treat what it considers to be "business common sense" with caution, because what appears to be business common sense may depend upon the standpoint from which the question is asked;
v) the Court should not strain to find ambiguity where none exists. If at the end of the normal interpretative process, the true meaning of the contract has not emerged and remains unclear and ambiguous, the Court has as a last resort various presumptions to assist it, such as the contra proferentem rule.
Mr Justice Stuart-Smith went on to consider the approach to be adopted when interpreting exclusion clauses. He said that, in order to be effective, exclusion clauses must be "most clearly and unambiguously expressed" and "the more improbable it is that the other party would agree to excluding the liability of the proferens, the more exacting the application of the principle will be". He added that there is an increasing recognition that parties to commercial contracts are and should be left free to apportion and allocate risks and obligations as they see fit. In this respect, he referred to the comment by Lord Diplock in the Photo Production v Securicor Ltd [1980] case which was;
"In commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is , in my view wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made of the presumption in favour of the implied primary and secondary obligations."
The recognition that parties may choose to allocate risks and liabilities in a way that may at first sight seem unlikely to an outsider has grown in the field of commercial contracts in general and contracts related to construction in particular where the allocation of risk has been a commonplace in standard forms of building contracts for years.
However, the Court's task is essentially the same when interpreting what is said to be an exclusion clause as it is when interpreting any other provision of a contract: it is to identify what a reasonable person having all the background knowledge which would reasonably have been available to the parties would have understood the parties to have meant.
The above case therefore sets out a very useful checklist when attempting to interpreting contract and/or exclusion clauses.
Peter Barnes
21 December 2015
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