How do the Courts interpret contracts? A recent essay from the UK Supreme Court entitled ‘The impact of pre- and post-contractual conduct on contractual interpretation’

I was recently asked what might be the best way to negotiate or ‘agree’ a contract, and the attached essay goes a great distance in answering that question. Or at least goes to laying down the current ground rules. The essay is worth reading in the original short form, as a neat summary of the case of Rainy Sky [2011] 1 WLR 2900, and the statements by Lord Hoffmann about prior negotiations in Chartrbrook [2009] UKHL 38 and some points of note being:

1. Look for what the parties meant by the language used, and the test being ‘what a reasonable person would have understood the parties to have meant’ – Lord Clarke in Rainy Sky. (paragraph 2 attached)

2. The contexts the parties can take into account when interpreting an agreement: (i) documentary context, including the other provisions and clauses in the agreement (ii) factual context, and facts known to both parties (iii) the commercial context, including the perhaps unstable concept of ‘commercial common sense’) – Lord Neuberger explores the difficulties of the unstable element of ‘commercial common sense’ throughout the short essay. (paragraph 4)

3. What not to take account of when interpreting a contract: (i) what either party said they meant (ii) what either party believes that they intended (iii) facts known to one party and not the other (iv) what was stated in negotiations including earlier drafts of the contract (v) what the parties said or did after the contract was entered into. Lord Neuberger said that points (i) to (iii) are pointed to the objective question of what it would mean to the hypothetical reasonable person in the position of the parties. (paragraph 5 of the attached)

4. At paragraph 6 there is a short legal history as to how and why the interpretation of written contracts are essentially a question of law residing in the judge – and is likely to change in the future.

5. Contracts arising from discussions and oral statements: Inevitably, what the parties understood or intended their contract to mean would be admissible as an aid to interpretation. This is an important distinction (written and unwritten; and shows where ancillary or collateral documents can come into the Court in evidence for unwritten agreements – but it is important to note that the general rule is exclusionary regarding collateral documents (paragraph 7 in the attached) – for written agreements at least, for unwritten the admission of ancillary documents becomes more blurry.

6. The Court has a power to ‘rectify’ an agreement to ensure that it complies with the parties’ common intention – however this is a remedy available only in relation to documents (a short summary of the effect of the remedy is at paragraph 10)

7. The reasons for excluding pre and post – contractual negotiations: there is a problem of the sheer volume of documents and the fact that very often the evidence is essentially equivocal – and in a written agreement, the Court has to adhere to what words the party chose to set out the terms of their bargain (paragraphs 11 to 23).

The article: The impact of pre and post-contractual conduct on contractual interpretation

Click to access speech-140811.pdf

Rainy Sky:

Click to access UKSC_2010_0127_Judgment.pdf

Press Summary for Rainy Sky:

Click to access UKSC_2010_0127_PressSummary.pdf

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