Interpretation of contract: look at the quality of the drafting

There cannot be a lawyer in the land who is not, from time to time, confronted with the problem of the interpretation, construction, and meaning of a contract. The canons of construction are well known. They often conflict. Interpretation may not be so easy.

The issue in Wood v Capita Insurance Services Ltd [2017] UKSC 24 was the interpretation of an indemnity clause in a commercial contract between commercial parties. In a lucid and elegant judgment Lord Hodge summed up the principles, such that in many cases there will be no need to go further:

‘The court invited [counsel for Capita] to present his case without having to refer to the well-known authorities on contractual interpretation, with which it was and is familiar’.

‘The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning’.

The factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations, is potentially relevant.

Which construction is more consistent with business common sense? In striking a balance between competing interpretations the court must consider the quality of the drafting of the clause. With the benefit of hindsight one party may have agreed to something which does not serve their interest. Possibly in the course of negotiating a compromise agreement the negotiators were unable to agree more precise terms.

Both textualism – the actual text – and contextualism – the context in which the contract was made – are likely to be in play. Both approaches should be applied and balanced.

Textual analysis may predominate because the contract was complex and sophisticated, and negotiated and prepared and drafted with the assistance of skilled professionals.

Conversely, contextualism may predominate because of the informality of the situation and the absence of skilled professionals.

Sometimes even the skilled professionals do not achieve a logical and coherent text, perhaps because of the different aims of the parties, failures in communication and understanding, different drafting practices, deadlines, or pressures to compromise and to agree. So even the professionally drawn contract may require reference to the context.

Lord Hodge added: ‘The recent history of the common law of contractual interpretation is one of continuity rather than change. One of the attractions of English law as a legal system of choice in commercial matters in its stability and continuity, particularly in contractual interpretation’.