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.

Dispute

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.

Reasoning

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.

Conclusion

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 Mondaq.com.

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

Authors
 
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”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions