A Disagreement with Lord Hoffmann's Rules in Contract's Interpretation
I.
Introduction
It appears that there is a difference between two
principles in common law when it comes to contracts interpretation. Since 1982,
The Australian High courts have endorsed the Codelfa approach, from Codelfa
Construction Pty Ltd v State Rail Authority of N.S.W., in interpreting commercial contracts.[1] The notion of Codelfa approach requires judges to
adopt the natural and ‘plain meaning’ of contract words – not to construe the
meaning of the words of an agreement, that is, unless there is an ambiguity.[2] In such cases where an
obscurity in wording does occur, then the ‘evidence of surrounding
circumstances is admissible to assist in the interpretation of the contract.’[3] Thus, the judge will
consider the background facts just when there is a lack of plain meaning in the
terms of an agreement.
In 1998, however, a new approach to contract
interpretation was introduced, developed by Lord Hoffmann in the case of Investors Comp Scheme v West Bromwich
Building Soc (ICS).[4] His Honour employed the
principle there is no such thing as a natural meaning of words; the judge must
explain the words regardless of the degree of ambiguity, to ‘ascertain what a reasonable person …
who has all the background knowledge of the surrounding circumstances when the
contract is signed’ would suppose what kind of
conclusion the contract is intended to observe.[5] Such interpretation,
moreover, should not oppose commercial common sense, as this would violate the
principle of background knowledge.[6] To summarize, Lord
Hoffmann’s approach gives no consideration to the plain meaning of words in
contracts, because there always more than one definition of a word.
Recently, the
High Court of Australia appeared to change its view in the issue and its favored
approach to contract interpretation. Although this court ordered the lower
courts to keep endorsing Codelfa rule
in Western Export Services Inc and Others
v Jireh International Pty Ltd, it had followed the ICS principles just two months before in Byrnes v Kendle.[7] One might, therefore, wonder
which approach is more lawful and thus better to use when interpreting
contracts.
Assuming a main
aim of law being that of delivering justice among people, judges need to
consider the true intentions of parties in their judgments. However, because of
the difficulties involved in this, which might generated from the time those
matters need to be figured, courts exclude the consideration of real intent.
Consequently, courts in contract interpretation cases have taken two routes,
the Australian Courts that of adopting Codelfa
rule, and the England Courts that follow ICS
principles.[8]
It appears that
each approach is trying to facilitate judgments about commercial transactions,
either by keeping to the plain words or else by reconsidering them according to
certain principles. In my opinion, the Codelfa
true rule is more just than the Lord Hoffmann principles, and it is this that
ought to be followed by common law courts and all other jurisdictions. This
paper thus explains reasons to support the Codelfa
approach, and criticizes the ICS
method.
II.
Codelfa
and ICS: Distinguishing Issues
In
this section, I provide various arguments for the authority of Codelfa rule and its endorsement by
courts. Sub-sections on plain meaning, ambiguity and commercial sense serve the
main object, which is to support the legitimacy of the Codelfa method and outline the reasons why this should prevail.
a.
The
Plain Meaning of Words
Clearly,
it is an important to explain what English legal society means by the ‘plain
meaning’ of a word in a contract. Mason J defines the word that has a clear
meaning as one with only a single clear meaning in the context. His Honour’s
view can be derived from his statement in Codelfa
about when to use background facts – ‘the issue is which of two or more
possible meanings is to be given to a contractual provision’ – implying that if
a word has one meaning we do not consider the factual matrix.[9] Buxton LJ gives another
explanation of the plain meaning of words in Martin v David Wilson Homes Ltd, which is that they ‘yield a fairly
clear conclusion’. As a consequence, a third definition, which combines these
explanations and gives further explication of what they indicate, might be that
the plain meaning of a word appears when the word has a sole indication that
leads to a clear and obvious outcome.
The
opposing argument, however, is that there is almost always more than one
meaning of words (as listed in dictionaries, for example). As a result, it would
be unfair to allocate a particular concept of the words of an agreement as long
as there is a possibility that another meaning is still applicable. For
instance, the word ‘pay’ might refer to money handed over in an exchange or liabilities held in order to obtain benefits.[10] Consequently, one party
in a particular contract may claims that a particular word – or phrase – in the
agreement has a different meaning from his or her perspective.
In
responding to this contrary point of view, attention should be drawn to the fact
that the words in contracts, according to Moore-Bick LJ, have to be ‘construed in their ordinary and popular
sense.’[11] Understanding a word according
to an unusual, or uncommon, definition should not be an excuse to gain the
right to a court’s reconsideration of an agreement, even though a less possible
meaning might appears. Moreover, as Lord Hoffmann stressed in Chartbrook Ltd v Persimmon Homes Ltd, judges ‘do not easily accept that
people have made linguistic mistakes, particularly in formal documents.’[12] As a result, in the case
of a claim that a written word has two meaning in the (contractual) context,
which implies a kind of mistake (that a meaning understood is not that which
was intended, or vice versa), judges cannot regard this view as long as the
word has a clear meaning, no other indication is equally possible, that leads
to an applicable conclusion.
However, Lord
Hoffmann claims that the words in a contract have no plain meaning, that ‘the
meaning of words is a matter of dictionaries and grammars’ so terms indicate
what ‘the parties using those words against the relevant background would
reasonably have been understood to mean.’[13] Consequently, there is no
real ordinary definition of the terms in an agreement, and therefore, a
reasonable man, the judge, will need to consider the surrounding circumstances
to understand what the parties really meant.
Nevertheless, a
declaration must be observed regarding Lord Hoffmann’s definition of terminology.
Obviously, from the previous quotation and what Lord Hoffmann indicates in Investors Comp Scheme v West Bromwich
Building Soc that legal language is supposed to be
treated as ‘any serious utterance would be interpreted in ordinary life’.[14] However, Spigelman CJ
emphasized that he disagrees with the previous presumption, because legal terms
‘impose obligations’ on both parties to agreements and need to be clear if it
imposed on a third party.[15] Legal terminology clearly
has its own ordinary meaning, which might be different from that of definitions
found in general dictionaries: if there is no, recognized, ambiguity in a
contract’s terms, there is no need for interpret.
It
appears, therefore, that the courts need more time and many judges to study
every contract that might have a dispute over its wording, in order to make a
ruling. Instead of saving time and expenses, ICS principles require judges to work on what should be the role of
the parties, that is, on being clear about the meaning of the contract before
signing. In fact, it is obvious that ICS
approach is a kind of obstruction of justice, because of the demands of having
to go in-depth into contract terms makes on the courts.
Finally,
if the context of a contract is in harmony with the terminology of the document,
the written sentences are binding. However, to be certain about the meaning of
a word, the complete agreement has to be read as one body: some parts may only be explained in the context of
the document as a whole.[16] Digging for other meanings
on the pretext of other definitions in single clauses, for example, may just be
a denial of the existence of the natural meaning that gives a clear outcome
when that clause is contextualized by the whole document, and should be
considered time-consuming for courts.
b.
Ambiguity
in Words
In Codelfa rule, it is important to define
opacity in language, because the judge is not allowed to regard surrounding circumstances
unless he or she found an ambiguity. Therefore, ambiguity, as Mason J stated in
Codelfa when commenting on Lord
Atkinson and Lord Shaw opinions in Great
Western Railway and Midland Railway v Bristol Corporation[17], that is relevant insofar
as ‘evidence of surrounding circumstances was inadmissible except to resolve an
ambiguity, that is, where the words are susceptible of more than one meaning’.[18] As result, if a word has
no clear meaning, or more than one meaning, the judge ascertains the background
facts in order to rule on which indication is proper for the term.
However,
the requirement of finding ambiguity before considering background facts is not
a part of Lord Hoffmann principles.[19] As Giles JA further
explained in Franklins Pty Ltd v Metcash
Trading Ltd in the context of the ICS
point of view toward ambiguity, ‘as
the law has developed, it is not necessary to find ambiguity in the words of a
written contract before going to context and purpose in the construction of a
contract.’[20]
Consequently, it is not essential to define opacity in contract wording
according to the ICS approach.
Generally,
according to Codelfa definition of
ambiguity, Lord Hoffmann’s method presumes that the wording of all agreements
requires interpretation because it is inherently vague. This view concluded because
terms in contracts are presumed in ICS
to have more than one meaning, they are considered ambiguous. However, as
discussed, the ICS approach is an appropriate
method by which to construe contracts, considering the time and the cost
required for possible or claimed ambiguities to be processed in courts.
Moreover, it may be noted, ambiguity is not found in all agreements, such as
those written by experienced barristers, for example. Therefore, why not to
give the plain written words their important weight in legal environment, by
endorsing them as they are, if there is no other qualified meaning in the
context.
c.
Commercial
sense
It
appears that there is no consideration for the commercial aims in the Codelfa approach as long as is the
wording has a plain meaning. Obviously, the aim or the object of the
transaction is included under background facts as evidence that is not admissible
unless there is an ambiguity in the contract’s language.[21] Moreover, the High Court
rejected the reasoning of MacFarlin JA in Jireh,
that the judge should give regard to the business interpretation of the terms,
of the contract, regardless their non-ambiguity.[22] The plain meaning of written
terms in agreements appears to be essential in Codelfa conduct, whatever the aim of the transaction, if it leads
to ‘fairly clear conclusion’.[23]
On
the contrary, because ICS principles
adopt construe contracts directly without searching for ambiguity, the object
of the transaction is highly relevant. As Lord Hoffmann emphasized the
importance of considering the commonsense when construe a contract by referring
to a statement expressed by Lord Diplock that ‘if detailed semantic and
syntactical analysis of words in a commercial contract is going to lead to a
conclusion that flouts business commonsense, it must be made to yield to
business commonsense.’[24] Moreover, The High Court in Pacific Carriers Ltd v BNP Paribas,
which took ICS as its authority in
this sense, indicated that ‘the purpose and object of the transaction’ must be
ascertained along with background facts in order to construe an agreement. It
is a significant principle in ICS to
find the aim of the deal; it is thus a more important, unconditioned, issue
than in Codelfa method.
Finally, it
appears that what hold judges that adopting Codelfa
from taking into account the commonsense of an agreement is the plain meaning.
Therefore, if there is an ambiguity in words, justices probably would consider
the aim of the transaction when interpret the contract.
III.
Islamic Opinion
An
alternative point of view, out of the common law environment, might enrich this
argument about the right approach in contract interpretation. After the world
financial crisis of 2007 and 2008, Islamic banks, institutions that adopt
Islamic law in dealing with monetary services, survived successfully with their
funds intact. As a result, many commentators advised the adoption of Islamic
conduct in finance in commercial contracts.[1]
However,
there is here also what could be seen as a similar argument about what the
judge should consider, the obvious meaning of the agreement’s words or the
intention of the parties by looking at facts surrounding the contract. In
practice, the courts that adopt the Islamic law prefer to go with the plain
meaning of the words unless evidence appears to against it.[2] In fact, one of the
reasons given for why it is not appropriate to consider the parties’ intention
when interpreting contract wording is that it is time-consuming, a reason
suggested above for not following ICS
principles in Australia.[3] For example, the judges in
Byrnes v Kendle described the claims
in Chartbrook v Persimmon Homes Ltd that
all negotiations before signing the contract should be considered in the
evidence of background facts as ‘rejected argument’.[4] We are minded of the
statement of Mason J in Codelfa that
‘an investigation of those matters would not only be time consuming but it
would also be unrewarding as it would tend to give too much weight to these
factors at the expense of the actual language of the written contract.’[5]
IV.
Conclusion
To
sum up, there is a clear distinction between the Codelfa and ICS approaches,
which might allow to a comparative study to reach to significant result. Codelfa true rule was established in
1982, where the Australian High Court endorsed it, and still do, as they
observation in the judgment of Jireh.[6] Lord Hoffmann principles, however, appears to
be persuasive for England High Court. In
1998, in Investors Comp Scheme v West
Bromwich Buildings Soc, the principles, Lord Hoffmann’s, was founded and
adopt thereafter by many judges across common law countries.[7] As a consequence, because
there is approximately sixteen years between the two approaches, there would be
significant differences.
In
fact, from a focus on showing the differences between the two methods in
matters of defining the plain meaning, ambiguity and the value of transaction
purposes in contracts are highlighted. Therefore, in Codelfa it concluded that interpretation is conditioned with
consideration and search for whether the words of a contract have ordinary
meaning or it was ambiguous, then the agreement to be construed. On the other hand, Lord Hoffmann’s principles
indicates that judges directly regard the background facts without looking for
opacity in words, because all words have two meanings. Accordingly, commonsense
is not considered in Codelfa if there is no ambiguity, however, is highly
important to be included in surrounding circumstances when interpreting
according to ICS.
The essay also observes the elements that might
enhance or effect interpretation, which clearly shows the important of legal
practitioners, courts and parties. Obviously, when formatting a contract the
parties should not leave their role to revise the agreement terms before
signing, to their employees or lawyers. Moreover, attorneys must avoid the
words that have a lack of clarity, or explain it in agreement’s terms. If the two previous factors done their role,
therefore, courts, especially the High Court, might not need to get into
controversial position with its judgments. Furthermore, another jurisdiction
point of view in regard to which of the two conducts is most suitable in order
to reach complete justice, has being shown in this paper, which support the
last decision Australian High Court in Jireh.[8]
In
my opinion and from many of the authorities and comments cited, it appears that
Codelfa is the preferable approach in
contract construction in any court. The way Codelfa
conduct gives the written document its weight, by not modifying the clear
meaning of its wording, provides a stable position. Moreover, by adopting Codelfa rule, people in the commercial
sector, as well as other fields, are encouraged to pay more attention to the
language they use and the intentions of other parties, because the court will
not interpret the agreement unless there is an ambiguity, and which thus has
the advantage of decreasing pressure upon judges.
The ICS method, on the other hand, although
assumed to be more perfect in the purely legal aspect, is demanding of time and
costs that make it less practical in real life. Courts, for example, would
suffer from the increasing numbers of disputes regarding contract
interpretation, if judges were to follow ICS
principles in their decision making, because it demands that every case be gone
through for surrounding circumstances, regardless of the existence of
ambiguity.
[1] Ahmet Akgunduz, Studies in Islamic Economics: Islamic
Banking and Development (IUR Press, 2009) 11; Patmawati Ibrahim, Siti Arni
Basir and Asmak Ab Rahman, ‘Sustainable Economic
Development: Concept, Principles and Management from Islamic Perspective’ (2011) 24(3) European Journal of Social Science 337.
[2] Bha’a Audeen Alalaali, النظرية
العامة للعقود في الفقه الإسلامي و القانون [The General Theory of Contracts in
Islamic Law and Civil Law] (Dar Alshowaf, 2005) 198-199.
[6] Western Export Services Inc and Others v Jireh International Pty Ltd
[2011] HCA 45, 3-4.
[8] Western Export Services Inc and Others v Jireh International Pty Ltd
[2011] HCA 45.
[7] Western Export Services Inc and Others v Jireh International Pty Ltd
[2011] HCA 45; Byrnes v Kendle [2011]
HCA 26.
[8] David McLauchlan, ‘Plain
Meaning and Commercial Construction: Has Australia Adopted the ICS Principles?’ (2009) 24 (1) Journal of Contract Law 10.
[10] David McLauchlan, ‘Plain Meaning and Commercial
Construction: Has Australia Adopted the ICS
Principles?’ (2009) 24 (1) Journal of
Contract Law 15.
[15] Spigelman AC,
‘Contractual Interpretation: A Comparative Perspective’ (Paper presented at the Third Judicial Seminar on Commercial
Litigation, Sydney, 23 March 2011) 3.
[16] David McLauchlan, ‘Plain
Meaning and Commercial Construction: Has Australia Adopted the ICS Principles?’ (2009) 24 (1) Journal of Contract Law 7.
[24] Investors
Comp Scheme v West Bromwich Building Soc
(1998) 1 WLR 896, 913 (Lord Hoffmann),
quoting Antaios Compania Naviera SA v
Salen Rederierna AB [1985] AC 191, 201.
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