GENERAL PRINCIPLES OF INTERPRETATION/CONSTRUCTION OF DOCUMENTS

[Mr. M. GOVINDARAJAN]

The general principles pertaining to interpretation/construction of documents/contracts were delineated in ‘Investor Compensation Scheme Limited V. West Bromwich Building Society’ – (1998) 1 ALL ER 98 and Hideo Yoshimoto V. Canterbury Golf International Limited’ – 2000 NZCA 350. Lord Hoffmann in the leading opinion of the House of Lords in West Bromwich Building Society, while observing that almost all the old intellectual baggage of ‘legal’ interpretation was discarded, summarized the principles by which contractual documents are considered as under:

• Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having 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;
• 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 documents would have been understood by a reasonable man;
• 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 is not the occasion on which to explore them;
• 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 mean.   The back ground 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 word, words or syntax (Mannai Investments Co. Limited V. Eagle Star Life Assurance Co Limited’ – (1997) ALL ER 352);
• The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense 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 from the background that something must 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 in Antaios Cia Naveira SA V. Salen Rederoerma AB. The Antaios – (1984a) 3 ALL ER 229 at 233, (1983) AC 191 at 201 – “…If detailed semantic and syntactical analysis of words in a commercial contract is going to lead a conclusion that flouts business common sense, it must be made to yield to business common sense.”

In ‘Hideo Yoshimoto’ case Thomas, J. for the New Zealand Court of Appeal after quoting with approval the restatement of law by Lord Hoffmann in West Bromwich Building Society and noting that the five principles Lord Hoffman articulated were reiterated and applied by the New Zealand Court of appeal in ‘Boat Park Limited V. Hutchison’ referred to a paradigm shift in the interpretative principles noticed by Wigmore (Wigmore on Evidence – 1981 –vol.9, para 246) and agreed with the observation: The history of the law of interpretation is the history of a progress from a stiff and superstitious formalism to a flexible rationalism and proceeded to state: The cardinal rule of contractual interpretation must be to ascertain the intention of the parties.   To the extent this rule is not implemented, the courts must incur the criticism of failing to give effect to the reasonable expectations of the parties.   Surely the parties are reasonably entitled to expect that the courts will strive to ascertain their true intention or, certainly, not to arrive at a meaning of their contract which is a variance with their actual intention.   They cannot expect that the judicial exercise of constructing their contract will be buried under a stockpile of excessive formalism.

Lewison [Kim Lewison – The Interpretation of Contracts, Sweet and Maxwell, (1989)] refers to a lucid summary of the relevant principles set out in the judgment of ‘Saville, J. in Vitol B.V. v Compagnie Europeene des Petroles’ – (1988) 1 Lloyd’s Rep 574.   The approach of the English law to questions of the true construction of contracts of this kid is to seek objectively to ascertain the intentions of the parties from the words which they have objectively to ascertain the intentions of the parties from the words which they have chosen to use.   If those words are clear and admit of only one sensible meaning, then that is the meaning to be ascribed to them and that meaning is taken to represent what the parties intended.   If the words are not so clear and admit of more than one sensible meaning, then the ambiguity may be resolved by looking at the aim and genesis of the agreement, choosing and meaning which seems to make the most sense in the context of the contract and its surrounding circumstances as a whole.   In some cases, of course, having attempted this exercise, it may simply remain impossible to give the words any sensible meaning at all in which they (or some of them) are either ignored, that is to say, treated as not forming part of the contract at all, or (if of apparent central importance) treated as demonstrating that the parties never made an agreement at all, that is to say, had never truly agreed upon the vital terms of their bargain.