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Contract interpretation

In English law, contractual interpretation is, in essence, simply ascertaining the meaning that a contractual document would convey to a reasonable person having all the background knowledge that would have been available to the parties. Notwithstanding this apparent simplicity, there have been a number of changes to the English courts' approach in recent years.

In Arnold v. Britton, Lord Neuberger recently summarised and clarified the approach that the English courts will now take. He explained that the courts will focus on the meaning of the relevant words used by the parties 'in their documentary, factual and commercial context', in the light of the following considerations:

(i) the natural and ordinary meaning of the clause;

(ii) any other relevant provisions of the [contract];

(iii) the overall purpose of the clause and the [contract];

(iv) the facts and circumstances known or assumed by the parties at the time that the document was executed; and

(v) commercial common sense; but

(vi) disregarding subjective evidence of any party's intentions.

This decision is seen by many commentators as a move away from the more 'purposive' approach set out (primarily by Lord Hoffmann) in previous Supreme Court (and House of Lords) decisions. Although two Supreme Court decisions in 2017 suggest that all of these cases 'were saying the same thing' in relation to contractual interpretation, and though there has never been an entirely literal or purposive approach to contractual interpretation, there does appear to be a greater emphasis at present on the primacy of the language used by the parties in their agreement.

Indeed, in a 2017 extrajudicial speech, Lord Sumption suggests that those older cases did adopt a different approach and that they failed to attach sufficient weight to the language of the contract. Later that year, the Court of Appeal ruled in Teva Pharma – Productos Farmaceuticos LDA v. Astrazeneca – Productos Farmaceuticos LAD that the judge in the lower court had failed to have regard to the principles in Arnold v. Briton and had erred by subverting the natural meaning of the contractual provisions in favour of commercial common sense.

Other important points to note regarding the courts' approach to contractual interpretation include the following:

  1. the courts will strictly interpret contractual provisions that seek to limit rights or remedies, or exclude liability, which arise by operation of law; and
  2. where a clause has been drafted by a party for its own benefit, it will be construed in favour of the other party (the contra proferentem rule).
Implied terms

Under English law, the courts have the power to imply a term into a contract. The test for doing so is laid out in Marks & Spencer Plc v. BNP Paribas Securities Services Trust Co (Jersey) Ltd. A term may be implied if:

  1. it is necessary to give the contract commercial or practical coherence;
  2. it can be clearly expressed;
  3. it does not contradict an express term;
  4. reasonable parties would have agreed the term was needed; and
  5. it passes the officious bystander test.

The 2018 case of Bou-Simon v. BGC Brokers LP reiterated the narrow approach that the courts take when implying terms, finding that an implied term could not be read in to a contract simply because it appears fair.