John Weale^*

"Many people, including politicians, celebrities and Mrs Malaprop, mangle meanings and

syntax but nevertheless communicate tolerably clearly what they are using the words to mean."

Convention requires, I believe, that the layman invited to address such a splendid gathering as this should grovel a bit and make suitably fatuous remarks about poachers presuming to lecture game-keepers on how to breed pheasants. But, as we seem to be a little short on time, I propose to forego this ritual self-abasement, and will merely remark that a better analogy might be an ambulance driver speaking to pathologists. Broadly speaking, we are in the same line of business: it is simply that most of the contractual specimens which you will see will either be dead or very sickly by the time they reach you.

It may, therefore, come as a mild shock when I tell you that the area of contract law which most troubles commercial men is how to interpret their written agreements. The common question is: but what does this document actually mean?

Your natural reaction may be that this is a trite and arid topic, more suited to textbooks and the class-room; and, until a few years ago, you would be right. But in the last five years or so, the House of Lords has whipped up quite a lively discussion in this area. In such a context, "lively" is, of course, a relative term: the debate has all the spectator appeal of a fly-fishing contest - a perception which is reinforced by the polite tendency of the protagonists to pretend that they are really doing nothing more than restating the existing law. But, despite this disingenuous diffidence, the issues really are quite vital, and should occasionally keep you awake at night, let alone just after lunch.

Legal interpretation is, of course, something which the courts of common law have always jealously guarded. This is usually explained as a hangover from the days when civil suits had to be decided by illiterate jurors; but the real reason, I would submit, is to be found in the four fictional premises of contractual construction. I wasn’t at all sure that "fiction" was quite the right term to use here; but my dictionary defines it as: "a supposition of law that a thing is true, which is either certainly not true, or at least is as probably false as true." If that is correct, then "fiction" is precisely the word I was looking for.

The first of these fictions is, of course, the premise of mutual intent. This implies that the parties did actually have such an intention, which, as experience has shown, is often not the case at all. This can occur for all sorts of reasons, most frequently perhaps because both parties overlooked the problem which has arisen in the course of performance. Or perhaps – and this happens a lot - one of them has foreseen the problem very clearly, but decides to remain silent in case it blows the deal away. "Let’s not go there - we’ll deal with that if and when it arises," is a remark which is heard all too often on the broker’s cell-phone.

The second and third premises are rather less logical: one is the assumption that there exists only one true and correct meaning for the bargain which the parties have struck; and the other is the assumption that this one true meaning may actually be something which neither of the parties intended.

Oddest of all, however, is the fourth fiction, which relates to the concept of objective interpretation. This rests on the sensible premise that the wording of the contract has simply to be construed in its context, from the objective point of view of reasonable persons standing in the shoes of the contracting parties. So far, so good; but the inherent illogicality appears when you look around the court-room, and discover that the only person who is actually dressing up as the reasonable man is the ranking pathologist – I mean, of course, the judge himself.

Some judges will readily admit the inherent absurdity of this assumption. Lord Bramwell expressed it in his usual robust terms:

"Here is a contract made by a fishmonger and a carrier of fish who know their business, and whether it is just or reasonable is to be settled by me who am neither fishmonger nor carrier, nor with any knowledge of their business."

But all too often, I am afraid, it happens that the judge will solemnly rely on his "instinctive appreciation of commercial likelihood" (or some other, equally improbable abstraction), when everyone else in the room knows perfectly well that he has to rely on his wife to balance his cheque book.

But I must get to my main point. The case which really set the purposive cat among the literalist pigeons came to the House of Lords in 1997. Its unwieldy title was Investors Compensation Scheme v. West Bromwich Building Society. I will, for convenience, just refer to it as "ICS". I do not intend to quote from ICS at length: the relevant passage is included in the dark blue folder, which you can pick up afterwards if you wish to.

The defining speech was given by Lord Hoffmann. His message was quite simple. The meaning of a document or any other utterance is not necessarily the same as the meaning of its words. The meaning of the document is what the parties using those words in that context would reasonably be understood to mean. The context or background allows us not only to choose between alternative possible meanings, but even to conclude that the parties have used the wrong words or syntax. From this, it follows that you cannot properly construe any written document, unless you know its context and background. With the sole exception of the preceding negotiations, absolutely anything is admissible which could affect the way in which the language of the document might be understood by a reasonable man. (Here, I must echo Anna Russell and assure you that I am not making any of this up: Lord Hoffmann did actually say "absolutely anything".)

According to this view, the time-honoured "Golden Rule", that words should be given their "natural and ordinary meaning", simply reflects the common-sense proposition that we do not readily accept that people make linguistic mistakes in formal documents. But if it is clear from the background that something has gone wrong with the language, the law does not require the court to attribute to the parties an intention which they plainly could not have had.

The ICS case concerned the interpretation of a legally drafted form of release. A few weeks earlier, Lord Hoffmann had applied his skills as a linguistic philosopher to a parallel problem in respect of a formal notice given under a lease. His remarks in that case present a lively and animated picture of his general approach:

"No one ... has any difficulty in understanding Mrs. Malaprop. When she says ‘She is as obstinate as an allegory on the banks of the Nile’, we reject the conventional or literal meaning of allegory as making nonsense of the sentence and substitute ‘alligator’ by using our background knowledge of the things likely to be found on the banks of the Nile and choosing one which sounds rather like ‘allegory’.

Mrs. Malaprop's problem was an imperfect understanding of the conventional meanings of English words. But the reason for the mistake does not really matter. We use the same process of adjustment when people have made mistakes about names or descriptions or days or times because they have forgotten or become mixed up. If one meets an acquaintance and he says ‘And how is Mary?’ it may be obvious that he is referring to one's wife, even if she is in fact called Jane. One may even, to avoid embarrassment, answer ‘Very well, thank you’ without drawing attention to his mistake. The message has been unambiguously received and understood."

Lord Hoffmann’s easy and persuasive style, coupled with his coy description of his heterodoxy as "some general remarks about the principles by which contractual documents are nowadays construed", may have led some judicial commentators to conclude that, after all, there is nothing very revolutionary in his approach. From a semantic point of view, his views make good sense; and he may be the first senior judge to recognise the relevance and importance of the work done by the linguistic philosophers at Oxford fifty years ago. But as a general rule for interpreting legal documents, ICS has undoubtedly turned things upside down and effected what Lord Mustill has correctly described as "a sea change in the way contracts are to be interpreted".

For all sorts of reasons, including those which I mentioned earlier, legal construction is a highly contrived and artificial exercise; and there is really no logical reason why its rules should track those of everyday speech, any more than the rules of hockey should follow the Geneva Convention. But rules there are; and once the rule-making body decides to alter them, the rest of us must do what we can to assimilate the changes.

Before ICS, the traditional and "correct" approach was the one very neatly summarised by Mr Justice Saville (as he then was) in a 1988 case: I have quoted the relevant paragraph in the blue folder (together with some other specimens which may be relevant to your autopsy).

Essentially, what he had to say was this: the whole exercise is simply to establish the objective intent of the parties from the words which they have chosen to use. If those words are clear and will allow only one sensible and acceptable meaning, then that is that. If, however, the wording is ambiguous, or will allow more than one sensible meaning then, and only then, do you turn to consider the aim and genesis of the agreement, and select from among the competing interpretations the one which makes most sense in the overall context of the contract when set among the circumstances which surrounded its making.

In other words, in a written agreement, you must first concentrate exclusively on the wording, and you may only venture into the background if the words are ambiguous. The written agreement lives in one room, and the surrounding circumstances live in an adjoining room; and you only cross from the first room to the second if the first contains an ambiguity. If the words are clear and will carry only one relevant meaning, then that is where you must stop: the background is forbidden territory. It is this simple orthodoxy which Lord Hoffmann and his learned brethren have now overturned.

Not everyone has been convinced. In ICS itself, Lord Lloyd – himself quite open to the idea of purposive construction – voiced a strong dissent:

"As Leggatt L.J. said in the Court of Appeal, such a construction is simply not an available meaning of the words used; and it is, after all, from the words used that one must ascertain what the parties meant. Purposive interpretation of a contract is a useful tool where the purpose can be identified with reasonable certainty. But creative interpretation is another thing altogether. The one must not be allowed to shade into the other."

Soon afterwards, Lord Justice Saville expressed his own misgivings. One could hardly quarrel, he said, with the proposition that the purpose was to work out what the parties really intended as opposed to analysing their words in a vacuum. But if that intention was clear from those words, there must be two serious objections to admitting the background and factual matrix to alter that meaning.

The first objection was clearly one of cost: the requirement to dig into the background to see whether it might change the meaning of the written words must add greatly to the length and complexity of the proceedings.

The second objection was that this new doctrine must create serious problems for third parties such as endorsees or assignees: for how can a third party rely on the meaning of his document if that meaning may be governed by external events and situations of which he has no knowledge? But equally, how can it be satisfactory to have the same document carrying different meanings, quite possibly at the same time, depending on who relies on it?

This difficulty with the rights and obligations of such third parties is, of course, nothing new. Nor is this the only area where interpretative problems can and often do arise: to take a topical example, the war clause of a time charter entered into last August might quite properly be construed to mean something entirely different in a back-to-back sub-charter entered into a week after the bombing began in Afghanistan. The difficulties which such situations raise are certainly not semantic problems; and it would be unfair to lay these at Lord Hoffmann’s door.

But ICS has clearly modified the traditional approach to contractual interpretation, and in doing so has effectively blurred the distinction between the construction of the written words within their documentary context, and the matrix of fact and circumstance which surrounded the genesis and creation of the contract itself.

Let me give you a simple example of what I mean. Suppose that an owner and a charterer are negotiating a voyage charter through an exchange of faxes. This is being done on an "accept/except" basis, and the open issues are progressively reduced until there is very little left to be agreed apart from the rate of freight. At this stage, the owner sends a message saying that he repeats his last offer, with the freight rate to be $6.00 per ton. The charterer, who knows that the market is really closer to $16, loses no time in returning his clean acceptance; and at that point the contract is made.

This would be hard luck on the owner. Perhaps he might hope to persuade an arbitration tribunal to correct his mistake (although this is clearly not a case for rectification in the legal sense); but it would undoubtedly be an up-hill task. Now, armed with the authority of ICS, the owner can say: "But a reasonable man standing in the shoes of the parties would understand immediately that something has gone wrong with the wording of the contract, because he would know that the market is not $6, but somewhere in the mid-teens, and would naturally recognise my typographical mistake for what it is. Any fool, let alone your reasonable and well-informed bystander, would have to know that I had mangled my numerical syntax." Of course, he could have said that before: the issue is whether the tribunal could properly listen to him and then search out some convenient device to free him from his inequitable trap.

Now, before you reject this example as too absurd for serious consideration, let me explain briefly what was the issue in ICS.

There was a scheme for compensating investors which was set up under a section of the Financial Services Act. The issue in the case concerned a single clause in the form of release to be signed by the investors when making their claim for compensation. An exclusion was carved out from the general surrender of the investors’ claims in return for the compensation, where the offending words read:

"Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against West Bromwich Building Society …"

The judge at first instance accepted that the construction offered by the investors and the building society was the more natural meaning of the words, so that the exclusion covered all possible claims, and not just claims for rescission; but he then went on to reject this interpretation, on the grounds that it produced a ridiculous result which was contrary to "the demonstrable purpose of the parties in entering into the claim forms."

The Court of Appeal agreed about the natural meaning of the words, but declined to go any further: in giving the leading judgment, Lord Justice Leggatt said: "There is simply no warrant for limiting the rights retained to claims for or consequent upon rescission."

With the exception of Lord Lloyd, the House concluded that the Court of Appeal had got it wrong: in effect, they said, the words "in rescission" did not belong inside the brackets, but outside. The text should not be read as: "Any claim (whether sounding in rescission for undue influence or otherwise …", but as: "Any claim in rescission (whether sounding for undue influence or otherwise …" In other words, they decided to rewrite the contract.

Part of the surrounding matrix was an Explanatory Note addressed in non-legal language to the investor himself, but which formed no part of the formal document itself. This stated: "You also agree that ICS should be able to use any rights which you now have against anyone else in relation to the claim. … You give up all those rights and transfer them to ICS." This Note, which was praised by Lord Hoffmann as "a model of clarity", obviously influenced the purposive interpretation which was finally upheld.

ICS should not be viewed in isolation: there are a number of earlier decisions in the Court of Appeal as well as the House of Lords which show a tendency to move in the same direction, notably those which arose in the stream of litigation concerning the Lloyd’s names and their reinsurers. But none of these, I think, ever actually crossed the threshold between our first room and our second except by going through the single door to which ambiguity is the only key.

In ICS, however, Lord Hoffmann elected not to use the door at all: he simply knocked down the adjoining wall, and turned the two rooms into one. And that, surprising though it may seem, is the current state of the law on this point in England.

What has this to do with the Federal Court of Canada? Our common law has long since, you will say, thrown off the fetters of the English system: why, we even admit expert evidence in collision cases where the judge is sitting with assessors – and what could be more daring and grown-up than that?

The problem is that these issues of interpretation are already surfacing in arbitration; and with the introduction of Section 46 of the new Marine Liability Act, they are likely to arise much more frequently, not least because the usual claimant will be the third man: as endorsee of the contract of carriage, he will find that he has unwittingly picked up an arbitration agreement which is expressly subject to an alien jurisdiction.

So my question is this: how are our Canadian arbitrators to deal with arguments based on Lord Hoffmann’s new approach to constructive home improvement?