Mark Heslin looks at the ongoing challenge for a solicitor in relation to contractual interpretation and says that the Supreme Court in the recent case of Law Society of Ireland v Motor Insurers’ Bureau of Ireland has provided some useful guidance, in the Winter 2017 edition of the Parchment.

Whether concerning the sale of land, the terms of an employment relationship or a commercial transaction, solicitors deal with a wide variety of contracts on a daily basis. A perennial problem for the common law, and a significant issue for practitioners who are asked to interpret and advise on a contract, is the tension between the subjective intention of parties to it and the objective meaning of the contract which was entered. Another challenge is to reconcile the proposition that it is not for a court to make agreements for parties who have failed to do so for themselves with the idea that a court may insert a term into the contract to make it workable, in certain circumstances.

Disastrous contracts

As Mr. Justice McCarthy put it in the Supreme Court decision in Tradax (Ireland) v Irish Grain Board Ltd [1984] I.L.R.M. 471:

“It is not the function of the Court to write a contract for parties met upon commercially equal terms; if such parties want to enter into unreasonable, unfair or even disastrous contracts, that is their business, not the business of the Courts.”

Implied terms

Much earlier Authority makes it clear, however, that the court can and will imply a term into a contract if such a term is an obviously reasonable one and is also necessary to give business efficacy to the contract. The classic statement of the principle can be found in the Moorcock [1889] 14 PD 64, where Lord Justice Bowen, stated, at page 68:

“…the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have.”

Thus, even where a contract is apparently complete, the court will add a term if that term is reasonable and, without it, the contract will not work. What then of the proposition that it is not the court’s function to write contracts?

Business efficacy

In Trollope and Colls Ltd v Northwest Metropolitan Regional Hospital Board [1973] 1 W.L.R. 601, at 609, the court made is clear that any term to be implied into a contract must be both so obvious as to have tacitly formed part of the contract, as well as being necessary to give the agreement business efficacy. The statement, later approved in Ireland by the Supreme Court in Carna Foods Ltd & Anor v Eagle Star Insurance Company (Ireland) [1997] 2 IR 193 was in the following terms:

“An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves.”

Necessity

As the House of Lords emphasised in Liverpool City Council v Irwin & Anor [1977] A.C. 239 insofar as the question of implying a term into a contract is concerned “the touchstone is always necessity and not merely reasonableness”. That case concerned a contract under which dwelling units in a council block had been let to tenants under conditions which imposed obligations on the tenants but were silent regarding the contractual obligations of the landlord. The House of Lords implied an obligation on the part of the landlord to take reasonable care to keep the essential means of access and other communal facilities in reasonable repair.

Objective v subjective

When interpreting the terms of an agreement, Irish courts have an obligation to interpret the contract objectively, regardless of the subjective intention of the parties. The public policy behind this approach is readily understood. If it were otherwise, radically different interpretations could be given to two similar contracts, where the parties to each contract had different subjective intentions. In explaining the objective approach which courts must take to contractual interpretation, Laffoy J. put it succinctly in UPM v BWG, [High Court, Unreported, 11 June 1999 at p 24] as follows:

“The Court’s task is to ascertain the intention of the parties and the intention must be ascertained from the language they have used considered in light of the surrounding circumstances and the object of the contract…in attempting to ascertain the presumed intention of the parties the Court should adopt an objective, rather than a subjective approach, and should consider what would have been the intention of reasonable persons in the position of the parties.”

Parol evidence

The parol evidence rule prevents extrinsic evidence from being admissible for the purposes of varying, contradicting or subtracting from the written terms of an agreement. However, parol evidence may still have a role to play in terms of contractual interpretation, given, for example, the following comments by Geoghegan J. in Dillon –V- McGovern [16th March 1993, unreported, High Court]:

“… I decided that parol evidence could be admitted to assist me in determining the true intention of the parties as well as for the purpose of placing the contract in context. I am satisfied, however that as a matter of law I am entitled to have regard to the parol evidence only for the purpose of helping me to construe the written words in light of the intention of the parties and the general context and not for the purpose of varying the written agreement.”

What Geoghegan J. refers to as the “general context” would seem to be equivalent to the “matrix of fact” referred to by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1386. The phrase is also similar to the words “background knowledge”, as employed by Lord Hoffman when setting out 5 basic rules of contractual construction in the seminal case of Investors’ Compensation Scheme –v- West Bromwich Building Society [1998] 1 ALL ER 98 at 114.

5 rules of contractual construction

In Investors’ Compensation Scheme, Lord Hoffman provided clear guidance which, almost three decades later, continues to be the touchstone for any solicitor asked to advise a client in respect of the proper interpretation of a contract:

“(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;

(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.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. 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. The boundaries of this exception are in some respects unclear. But this not the occasion on which to explore them.

(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…

(5) The “rule” that words should be given their “natural and ordinary meaning” reflects the commonsense 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 form the background that something just 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. Lord Diplock made this point more vigorously when he said…

“…if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense””

As can be seen from the foregoing, “rule” (3) excludes from the admissible background, the previous negotiations and declarations of subjective intent. In light of the comments by Laffoy J in UPM and by Geogeghan J. in Dillon, it’s settled law that the subjective intent of the parties and what they said in their negotiations, prior to the contract coming into being will not “trump” or unseat the plain meaning of the words used in their contract. However, the intent of the parties is not irrelevant, insofar as it will show the background or general context in which the parties agreed a form of wording and it is against that background and in that context, the court must establish the objective meaning of the contract in question.

2017 guidance

In the recent Supreme Court decision in Law Society of Ireland v Motor Insurers’ Bureau of Ireland [2017] IESC 31, the five rules of contractual construction set out by Lord Hoffman in Investors Compensation Scheme Limited were cited with approval. Commenting on them, O’Donnell J. gave the following analysis of the modern approach to contractual interpretation:

“These principles represent a significant staging point in the development of what might be described as a modern approach to the interpretation of contracts, a development which, as the principles recognise, has not necessarily reached its terminus…the modern approach to the interpretation of contracts is one which would probably be unrecognisable to, and might be regarded as heresy, by the Victorian judges who expounded so confidently on commercial matters.”

Words v meaning

O’Donnell J. went on to emphasise that the meaning of a contract is far more than merely the meaning of the words in it. Having emphasised the importance of approaching an agreement “…in a holistic way rather than having immediate resort to case law…” O’Donnell J. gave the following useful guidance at paragraph 9 of his Judgment:-

A contract is a form of communication intended to convey the meaning agreed upon by the parties. Words are the vehicle through which that meaning is conveyed but the meaning of a document is much more than the meaning of the words. It is what the parties would reasonably have been understood to mean from a consideration of all the available guides to the meaning of the agreement. Words are an important and very often the only necessary guide to discerning the meaning, but they are only a guide, and as recognised by Lord Hoffman, they can be ambiguous, and sometimes even, as happens in real life, it may be apparent the parties have for whatever reason used the wrong words or syntax. In those circumstances, the words must give way.”

Holistic approach

Language is a code with two elements: semantics being the meaning of words and syntax being the order in which words are arranged. As solicitors will recognise, interpreting the meaning of a contract is more than a slavish analysis of either or both elements and the context in which a contract came into being plays a crucial part, albeit within defined boundaries. As recognised by Lord Hoffman and O’Donnell J., meaning can be conveyed unambiguously even where the wrong words are used. The challenge for the solicitor is to approach contractual interpretation in a modern context in what O’Donnell J. described as “a holistic way”, to continue to best serve our clients and, ultimately, the administration of justice.