Transcript Chapter 8

Chapter 8
Construction of Contracts
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• Lewinson, The Interpretation of Contracts, (3rd ed)
(London, Sweet & Maxwell, 1997)) starts with an extract
from one such case (Investors Compensation Scheme v
West Bromwich Building Society (1998)) and remarks
“the lazy reader may stop here”.
• Indeed, the Investors Compensation Scheme v West
Bromwich Building Society (1998) is generally taken as
setting out the basic principles and has, in fact, been
approved as a statement of the law in Analog Devices v.
Zurich Insurance (2005) by Geoghegan J and used
continuously since then including by Clarke J in BNY
Trust Company (Ireland) Ltd & Ark Life Assurance v
Treasury Holdings (2007)
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The Overall Aim of Contract Interpretation
• Reardon Smith Line Ltd v. Young Hansen-Tangen (1976)
• Lord Wilberforce said the following:
– When one speaks of the intention of the parties to the contract,
one is speaking objectively - the parties cannot themselves give
direct evidence of what their intention was - and what must be
ascertained is what is to be taken as the intention which
reasonable people would have had if placed in the situation of
the parties. Similarly, when one is speaking of the aim, or
objective, or commercial purpose, one is speaking objectively of
what reasonable persons would have had in mind in the situation
of the parties
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• Overall aim is to decide what the intention of the parties
is but this is gathered from objective sources, rather than
from the parties own evidence as to what their intention
was.
• Lord Wright in Inland Revenue Commissioners v
Raphael (1935) in a passage cited by Murphy J in the
Irish case of Igote Ltd v Badsey (2001):
– “It must be remembered at the outset that the court, while it
seeks to give effect to the intention of the parties, must give
effect to that intention as expressed, that is, it must ascertain the
meaning of the words actually used
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The Factual Matrix of the Parties
• Prenn .v. Simmonds (1971) Lord Wilberforce
said:• “The time has long passed when agreements,
even those under seal, were isolated from the
matrix of facts in which they were set and
interpreted purely on internal linguistic
considerations .... We must ... inquire beyond
the language and see what the circumstances
were with reference to which the words were
used, and the object appearing from those
circumstances, which the person using them had
in view.”
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• Investors Compensation Scheme v West
Bromwich Building Society (1998) (approved, as
noted above) by several Irish courts:– 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.
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1. Caution in Using the Factual Matrix
• Plumb Brothers .v. Dolmac (Agriculture) Ltd (1984)[
– There is the danger, if one stresses reference to the “factual
matrix” that one may be influenced by what is in truth a finding of
the subjective intention of the parties at the relevant time, instead
of carrying out what I understand to be the correct exercise,
namely, determining objectively the intent of the parties from the
words of the documents themselves in the light of the
circumstances surrounding the transaction.
– The contract between the parties is what they said in the
relevant document. It is not for this or any court to make a
contract for the parties different from the words that the
documents actually use merely because it may be that the
parties intended something different.”
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2. Time Limits
• It seems clear that no matter what can be
adduced as part of the factual matrix, it
must be something done or said before or
at the time the contact was made, not after
it. Keane J said as much in LAC Minerals
v Chevron
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Literal Words Get Literal Meanings
• Literal words get their literal meaning (to a
point) In LAC Minerals v Chevron Keane J
pointed out that if a term of a contract is
unambiguous and can only have one
meaning, the Court cannot go beyond that
unambiguous meaning so as to seek to
interpret the intention of the parties.
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• The fifth principle from Investors Compensation Scheme
v West Bromwich Building Society (1998) is as follows:– 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.
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• Antaios Compania Naviera SA v. Salen
Rederierna AB (1985) where Lord Diplock
stated the following:– "(I)f 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 yield to business
common sense".
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G. Previous Negotiations
• One cannot adduce evidence of past
negotiations to explain the present meaning of
contractual terms.
• Bula v Tara (1999)
– Keane J expressed the rule as being that oral
evidence is admissible to show the factual matrix in
which an agreement has been reached but this
cannot be pushed so far as to mean that evidence of
negotiations and of parties subjective intentions is
admissible. Rather “what is permissible is evidence
of the factual context in which the parties came to
terms”.
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• BNY Trust Company (Ireland) Ltd & Ark
Life Assurance v Treasury Holdings (2007)
– Clarke J was invited to follow authority from
New Zealand which suggested that evidence
of past negotiations could be admissible in
certain cases
– Clarke J still held that it was impermissible in
Ireland
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H. Where Clauses are Inconsistent With
One Another
• In LAC Minerals v Chevron Keane J adopted the following from
Chitty on Contract:– “Where the different parts of an instrument are inconsistent, effect must
be given to that part which is calculated to carry into effect the real
intention of the parties as gathered from the instrument as a whole, and
that part which would defeat it must be rejected. The old rule was, in
such a case, the earlier clause was to be received and the latter
rejected, but this rule was a mere rule of thumb, totally unscientific, and
out of keeping with the modern construction of documents. To be
inconsistent, a term must contradict another term or be in conflict with it,
such that effect cannot fairly be given to both clauses. A term may also
be rejected if it is repugnant to the intention of the parties as it appears
from the document. However, an effort should be made to give effect to
every clause in the agreement and not to reject a clause unless it is
manifestly inconsistent with or repugnant to the rest of the agreement”.
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I. Overall Commercial Purpose
• In the recent English case of LT & R
Vowles (Parent) Ltd v Aston (2005) Patten
J. suggested that ambiguous clauses in
contracts should be interpreted to given
them such meaning as best suits the
commercial purpose of the transaction
insofar as that purpose can be gathered
from the background facts.
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