Cayman Islands: If It Ain´t Broke Don´t Fix It - Contract Interpretation After Chartbrook v Persimmon

Last Updated: 5 October 2009
Article by Laura Hatfield

The recent House of Lords decision in Chartbrook v Persimmon, with Lord Hoffman delivering the leading judgment, confirmed that the rules for contractual interpretation remain:

  1. what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to, by using the language in the contract, mean.
  2. pre-contract negotiations are inadmissible for the purpose of interpreting a contract.

It is a little unusual that a case which decides nothing new creates so much interest in the legal community. It might be thought that the reason Chartbrook v Persimmon has done so may be due to the fact it is the last decision of Lord Hoffman sitting on the House of Lords Judicial Committee. However, that would be to vastly underestimate the usefulness of the case and the comprehensive review of the rules undertaken by Lord Hoffman.


Knowing the nature of the actual dispute that was decided is not all that important but, for what it is worth, it related to the price to be paid by a developer to a land owner in relation to property built on the land when the property built was sold. The dispute required interpretation of a clause that provided for additional sums to be paid by the developer to the land owner if the price achieved on sale exceeded an anticipated amount. The question was whether a particular deduction from the sale price was applied before or after calculating the percentage of the price to be paid to the landowner by the developer .This question was worth about 3.5 million pounds.

The House of Lords decided that it should not interpret the clause according to the normal rules of syntax as it made no commercial sense to have the clause read in that way. Also, such an interpretation rendered other parts of the contract arbitrary and irrational. Accordingly, the House of Lords ruled in favour of the developer paying the land owner on the basis of the contract interpretation that led to less money being due to the land owner.


Lord Hoffman started from the point that the well established rule of contract interpretation is what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to mean when using the language in the contract. The House of Lords had said previously that it did not easily accept that people have made linguistic mistakes, particularly in formal contracts, but that in some cases the court was driven to the conclusion, from looking at the background and context, that something had gone wrong with the language of the contract. However, it required a strong case to persuade the court that such a thing had happened.

Lord Hoffman considered that where the court was driven to the conclusion that something had gone wrong with the language, whether with the meaning or the syntactical arrangement, it doesn't matter that the meaning the court must give the words does not reflect the conventional meaning of the words. The job of the court, in such a case, is to decide what a reasonable person would have understood the parties to have meant by using the language which they did, and the fact that the court might have to express that meaning in language quite different from that used by the parties is not an issue. In what, I believe, is a soon to be famous statement Lord Hoffman said:

" What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant ".

At this point Lord Hoffman could have stopped, as applying these principles to the contract between Chartbrook and Persimmon gave the answer that Persimmon's interpretation of the contract was the correct one. However, Persimmon raised two other points on appeal that their Lordships thought should be addressed. The first was the question of including pre-contract negotiations as an aid to contract interpretation and the second was a rectification claim.

Although the obiter discussion on rectification is interesting and important it goes beyond the scope of this article on contract interpretation. I will, therefore, turn to the other issue dealt with by their Lordships in obiter discussion.

Pre-Contract Negotiations in Interpretation

The rule that pre-contract negotiations are not admissible as evidence in regard to interpreting a contract was traced back by Lord Hoffman to 1878, although Lord Rodger traced it back to 1822 in a marriage contract case. Whether first stated in 1822 or 1878, the rule has, as Lord Hoffman said, been established for a very long time. On top of its venerability it is also a rule that the House of Lords has looked at, and affirmed, as recently as 1971 in Prenn v Simmonds and which the Scottish Courts and the Privy Council have acknowledged even more recently. Accordingly, their Lordships were being asked to depart from a long and consistent line of authority by agreeing to admit pre-contract negotiations in aid of contract construction.

Lord Hoffman considered whether such a departure was justified looking at both the theoretical arguments raised by those for and against the rule, as well as pragmatic considerations. Lord Wilberforce in Prenn v Simmonds was of the opinion that the main reason for not considering pre-contract negotiations is "simply that such evidence is unhelpful". He considered that parties' stated positions, intentions and objectives in pre-contract negotiations do not often reflect their true understanding of the contract. The contrary view is elegantly put as "Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement". Lord Hoffman accepted that in some cases considering negotiations may, in fact, be helpful in interpretation although he did comment that there were examples of cases where one court's gold had been found to be another court's dirt!

Lord Hoffman then examines a number of arguments and factors such as the use of evidence of pre-contract negotiations for contract interpretation in Civil Law, the requirement for consideration of much more material if evidence of pre-contract negotiations is included, that the more one allows conventional meanings or syntax to be displaced by inferences drawn from background the less predictable the outcome of interpretation is likely to be, and the disadvantage to assignees of a contract who were not involved in pre-contract negotiations.

After all this, Lord Hoffman concluded there was no clearly established case for departing from the rule excluding evidence of pre-contract negotiations from contractual interpretation and said:

"Your Lordships are being asked to depart from a rule which has been in existence for many years and several times affirmed by the House. There is power to do so under the Practice Statement (Judicial Precedent) [1966] 1 WLR 1234. But that power was intended, as Lord Reid said in R v. National Insurance Comrs, Ex p Hudson [1972] AC 944, 966, to be applied only in a small number of cases in which previous decisions of the House were "thought to be impeding the proper development of the law or to have led to results which were unjust or contrary to public policy". I do not think that anyone can be confident that this is true of the exclusionary rule."

In reaching this conclusion Lord Hoffman did refer to his decision in Bank of Credit and Commerce International SA v. Ali [2002] 1 AC 251, 269, where he said "that there are no conceptual limits to what can properly be regarded as background ". On that basis although evidence of what was said, or done, during pre-contract negotiations can't be used to decide what the contract meant, it can be used for other purposes, such as to establish that a fact which may be relevant as background was known to the parties.

Lord Hoffman also had some comment to make on cases which he saw as trying to get pre-contract negotiation evidence in the back door for use in contract interpretation. He considered that it was not objectionable that evidence be adduced that the parties habitually used words in an unconventional sense in order to support an argument that words in a contract should bear a similar unconventional meaning. Known as the "private dictionary" principle, such consideration is like the principle by which an unconventional linguistic usage in a trade or among a religious sect may be provided in evidence to show that the parties had in common an understanding of the meaning of a word, or words, which was different to that of the reasonable person considering the contract. In this context evidence of usage by the parties could come from the course of negotiations or any other occasion. However, Lord Hoffman considered the case Karen Oltmann (Partenreederei MS Karen Oltmann v Scarsdale Shipping Co Ltd [1976] 2 Lloyd's Rep 708 went too far in using pre-contract communication to interpret the meaning of the word "after". Lord Hoffman stated that if a word can have more than one conventional meaning in the context in which it used then the court should give it the meaning that makes most sense having regard to the background and context. In the case where the parties intended to use different words, or they mistakenly thought their words bore a different meaning, rectification is available. If the parties have negotiated an agreement upon some common assumption, which may include an assumption that certain words will bear a certain meaning, they may be estopped from contending that the words should be given a different meaning.


Whilst there is nothing new that is decided in Chartbrook v Persimmon nevertheless it is an important judgment as it re-states eloquently the fundamental rules of contract interpretation. Further, in examining why the rules exist and the history of their development, Lord Hoffman has nipped a lot of potential clever legal argument in the bud and firmly slammed the back door on attempts to subvert the integrity of the rules' application. Once again, Lord Hoffman has done great service to all of us, as the users and drafters of contracts, as, in his words, " the law of contract is an institution designed to enforce promises with a high degree of predictability". His last but not, on any basis, least House of Lords decision aids greatly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.