Interpretation of contracts - Some old rules still in the bag

"Almost all the old intellectual baggage of "legal" interpretation [of contracts] has been discarded".

So said Lord Hoffman in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 All ER 98 - a comment which he repeated in Bank of Credit & Commerce International SA (in liquidation) v Ali [2001] 1 All ER 961.

But what does this mean in practice? The five principles of interpretation set out in Lord Hoffman's speech in West Bromwich are now familiar, but what "intellectual baggage" has been discarded?

The principle of "contra proferentem" is disappearing. In the principles Lord Hoffman enunciated in West Bromwich, he said that a reasonable man, construing a contract in its factual matrix, may be able to choose between the possible meaning of words which are ambiguous. If this were so, then there would be little space for the contra proferentem rule. Judge Bowsher in British Fermentation Products Limited v I Reavell Limited [1999] BLR 352 applied the Hoffman principles and did not use the contra proferentem rule. However, the Judge in Fliptex Limited v Edney Enterprises Limited [2002] All ER (D) 439 – a case concerning an ambiguous guarantee - confirmed that the principle could still be used, even if just as a last resort when the contract term in question could not be resolved by giving effect to the ordinary words of the guarantee. It therefore seems that this rule is still being kept in our suitcases and has not quite been jettisoned yet.

Lord Hoffman also suggested in his (dissenting) judgment in BCCI v Ali that the artificial rules for the construction of exemption clauses have gone. An example of where this is the case is the rule that clear words must be used to exclude liability for negligence. This seems to be under threat - at least where insurance is concerned. This can be seen from the Court of Appeal's decision earlier this year in Scottish & Newcastle plc v GD Construction (St Albans) Limited. In that case, the parties had contracted on the basis of the JCT Intermediate Form with the insurance to be taken out by the Employer (as existing buildings were involved). A fire occurred – alleged to have been caused negligently by the Contractor - which damaged the Works and the existing buildings. The Court held that a combination of the indemnity and insurance provisions in the JCT Intermediate Form meant that the Contractor was not liable for the damage to the works and to the existing buildings where they had been damaged by a Specified Peril. This was so even where that Specified Peril had been caused by the Contractor's negligence or default, as the Employer's sole remedy was supposed to be via the insurance. This was the case even though the Contractor's liability for negligence/default had not been excluded in express terms.

Similarly the rules on determining whether or not a contract has been formed are now more relaxed. Take for example the trend of cases beginning with the likes of Pagnan SpA v Feed Products Limited [1987] 2 Ll R 601 and G Percy Trentham Limited v Archital Luxfer Limited [1992] BLR 44 concerning acceptance of an offer by conduct. An offer can be accepted by conduct (for example, by performance of the works in question) and failure to reach agreement on some non-essential term does not preclude a contract from existing. Where works have already been carried out, a contract will be more readily found to exist unless there are clear indications that the parties did not intend to enter into a contract.

Some of the principles from these cases were applied earlier this year by John Uff QC in his decision in Harvey Shopfitters v ADI Limited. In this case, there was an argument between the parties about whether a letter of intent constituted a "bare" contract (thus entitling the Contractor to payment on a quantum meruit basis) or whether it incorporated the JCT Intermediate Form Conditions (meaning that the sum payable for the works was to be calculated on a fixed price basis and that the Employer would be entitled to claim liquidated damages for delay).

In that case, the letter of intent in question had said that the IFC Conditions were terms that the parties "intended" to use. In addition, the parties had not decided on the details of the Conditions (for example, whether the Sectional Completion Supplement was to be used). Nevertheless, the Court took into

account that:

• the works had been performed;
• the Contractor had tendered on the basis that the Intermediate Form Conditions would apply; and
• the incorporation of the Supplement did not affect the nature of the agreement.

On that basis, the Court found that the contract did incorporate the IFC Conditions. This is, perhaps surprising given that the Supplement affected the completion dates and damages available for delay.

Another matter likely to affect the interpretation of contracts to a greater extent in the next few years is the use of partnering charters. Even where the parties have drawn up a charter which is not intended to be legally binding, it may affect their rights. Take, for example, the comments by Humphrey Lloyd QC in Birse Construction Limited v St David Limited [1999] BLR 194. There, the parties had signed up to a non-binding partnering charter, but the Judge decided that the charter set the standards by which the parties were to conduct themselves and against which their conduct and attitudes were to be measured. As a result, he thought, the Contractor would expect a sympathetic approach to extension of time questions not only where Relevant Events had occurred, but also where delays were caused by other matters beyond its immediate control. Also, whilst the Judge said that the terms of the charter would not alter or affect the terms of the contract, he also said that the fact the parties had entered into the charter made it very unlikely they would adopt a rigid attitude to the formation of a contact (and therefore would not have insisted on execution of the formal contracts before the contract came into existence even though it was envisaged that the formal documents would be executed at some point).

So we have a less formulaic approach both to the process of deciding whether a contract exists and to the interpretation of contracts, with the increased use of partnering charters adding a layer of complexity to the latter. The "baggage" of the old rules has been thrown out (or at least has been left at home) and we have common sense and pragmatism in its place. We live in a more uncertain world. The traditional cry of lawyers is "how can we advise our clients if we don't have certainty?" but clients are generally well able to implement the terms of the contracts they have agreed. The reason they come to lawyers is for the exercise of their judgment when difficult issues arise. We should take this in our stride and continue our travels with a lighter step.

This article first appeared in Construction Law magazine.

For further information please contact Victoria Peckett at [email protected]