Construing a contract: Lord Hoffmann’s principles

Here are the principles relevant to the construction of contractual documents summarised by Lord Hoffmann in his judgment in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896. These principles have been much discussed and applied since they were first identified in 1997, but I find them useful as a starting point when construing 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…

(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. (see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1997] 2 WLR 945).

(5)      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 The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. 19851 A.C. 191, 201:

 “. . . 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.”

1 Comment

  1. ”. . . 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.”

    I don’t understand this. Surely a contract drawn up between legal advisors of the parties ought to mean exactly what it says? If it does not, it seems to me this suggests a certain negligence on the part of those responsible for the contract.

    Consider my problem, where in a block of 13 flats leased at different times by different landlords, the leases are not even compatible with each other. The management company sought to resolve this by appointing an expert to define common parts, the proportions payable etc, but a recent application by the landlord to LVT shows that in the end, what matters is not what the lessees have agreed, but what is written in the lease even if this is patently absurd and self-contradictory.

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