THE MEANING OF ‘MEANING’ (AND WHY IT DOESN’T MATTER IF

LORD HOFFMAN INTENDED ‘INTENTION’)

Answering question 4: “Should we continue to use canons of construction such as eiusdem generis and contra proferentem?”

If contemporary discussions of common law contractual interpretation do not begin with

Lord Hoffman in Investors Compensation Scheme v West Bromwich1 (“ICS”), they ordinarily

pivot on that judgment. There, his Lordship attempted to summarise the law on contractual

interpretation, beginning:

“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.

This paper is not directly about that judgment. Rather, it is about Lord Hoffman’s earlier

(dissenting) judgment in BCCI v Ali3 (“BCCI”) rejecting the use of established canons of

contractual construction, saying:

“If interpretation is the quest to discover what a reasonable man would have

understood specific parties to have meant by the use of specific language in a specific

situation at a specific time and place, how can that be affected by authority? How

can the question of what a reasonable man in 1990 would have thought the

1 [1998] 1 WLR 896. 2 Ibid, 912. 3 [2002] 1 AC 251.

[contracting parties] meant…be answered by examining what Lord Keeper Henley

said in 1758?”4

Crucially, his Lordship’s point in this passage rests on a different account of contractual

interpretation to that which he later articulated in ICS. Specifically, in BCCI his Lordship

refers to what “the specific parties…meant”, but in ICS this became “the meaning which the

document would convey”. We may call these the ‘intention-directed’ and ‘document

meaning’ approaches respectively. It is not clear whether Lord Hoffman was cognisant of

this distinction between his two statements or whether he understood a document’s

meaning to be one and the same as the author’s objective5 intention. The two approaches

are often conflated6 and, when the distinction is noted it is typically thought that intention

“must be what is guiding the person interpreting the contract”.

This paper will defend the opposite view, taking the form of a counter-argument to Lord

Hoffman in BCCI and a defence of the canons of construction. It will be argued that:

1. The ‘meaning’ of a document or utterance is frequently interpreted in a variety of

contexts using principles which aren’t directed to discovering intention; and

2. Understanding ‘meaning’ in this way reveals an important, enduring role for the

canons of construction as ‘gap-filling’ mechanisms.

4 Ibid at [51] (emphasis added). 5 Noting that both of Lord Hoffman’s accounts of interpretation are ‘objective’ ie. the pertinent consideration is what a reasonable person would have understood, not what was actually going on within the minds of the contracting parties. 6 See eg. D Nicholls, ‘My kingdom for a horse: the meaning of words’ (2005) 121 LQR 577, 579.

Before beginning the substantive argument however, it will pay to briefly highlight the legal

and conceptual background.

1. HOW CANONS OF CONSTRUCTION CAN INFORM CONTRACTUAL MEANING

1.1 THE LEGAL AND CONCEPTUAL BACKGROUND

Dismissing Extreme Literalism

One way to distinguish between the ‘document meaning’ and ‘intention-directed’

approaches is by adopting extreme literalism and saying that the document’s meaning can

be constructed entirely from the dictionary definition of each component word of the

contract, independently of any search for an objective intention. The problem with this is

that both the ‘document meaning’ and ‘intention-directed’ approaches are judged by an

objective reasonable observer. Extreme literalism can produce perverse results and so falls

foul of this requirement. In the words of Lord Steyn:

“The tyrant Temures promised the garrison of Sebastia that no blood would be shed

if they surrendered to him. They surrendered to him. He shed no blood. He buried

them alive. That is literalism”7

This paper will be distinguishing between the two approaches without abandoning “the

common sense principles by which any utterance would be interpreted in ordinary life”8. It

7 J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ (2003) 23(1) Sydney Law Review 5 (citations removed). 8 Investors Compensation Scheme v West Bromwich [1998] 1 WLR 896, 913.

will be shown that implicit interpretative principles always operate in ordinary life and that

these principles are not always directed towards discovering an intention.

Canons of Construction

The canons of construction are legal principles “lay(ing) down rules as to how words are to

be interpreted”9. These may be divided into substantive canons, intended to promote

certain policy grounds10, and language canons, being textual rules for interpreting particular

grammatical forms11. An example of the former is contra proferentem which holds that any

ambiguity in a clause must be resolved against the interests of the party who drafted it. An

example of the latter is eiusdem generis which interprets general words to fit within the

class of any preceding specific words (such as interpreting the general words ‘other

provisions’ in the phrase “meat, fish, poultry, vegetables, fruit and other provisions”12 to be

limited to raw foodstuffs, such as eggs, to the exclusion of ‘finished’ products like pies).

As Lord Hoffman argues, substantive canons cannot provide any assistance to discovering

the parties’ intentions. Language canons, though potentially relevant to how the parties

may have intended their words13, can have only peripheral significance to that question as

an esoteric way of expressing findings which were first reached on ‘common sense’ grounds.

Accordingly, any defence of the canons of construction must rest on the proposition that a

9 R Calnan, Principles of Contractual Interpretation (Oxford University Press, 1st ed, 2013) at [5.49]. 10 J Brudney & C Ditslear, "Canons of Construction and the Elusive Quest for Neutral Reasoning" (2005) 58(1) Vanderbilt Law Review, 11. 11 Ibid. 12 Hy Whittle Ltd v Stalybridge Corp (1967) 65 LGR 344. 13 Chandris v Isbrandtsen-Moller [1951] 1 KB 240, per Devlin J at 245.

document’s meaning can be interpreted with the aid of principles which are not directed to

discovering intention.

It is crucial to note however that this is not to exclude the central importance of intention.

Of all the principles that guide interpretation, those directed to objectively-manifested

intention are primary. However, as this paper will argue, they are not sufficient and so must

be complemented by other forms of interpretative principle.

Legal Background

When parties reduce commercial agreements to written contracts they do so to decrease

uncertainty as to the scope of the obligations that they have taken on14,15. Accordingly, the

first point of reference for a court interpreting these obligations is the text of the contract

itself16. This does not just mean the particular clause in dispute, but also the surrounding

text if it can shine light on that clause17. The background facts in which the document was

drafted, to the extent that they can be objectively ascertained, may also be considered by

the court in its interpretative task18.

This much is essentially uncontroversial (though precisely what should count as ‘background

facts’ remains a burning issue19), and notably, it can be understood in terms of either of the

‘document meaning’ or ‘intention-directed’ approaches. That is, these interpretative

principles can be either understood as a way of finding what the document means

14 M Ahmed, "The interpretation of commercial contracts: time for reform" (2012) 21 Nottingham Law Journal 26, 27. 15 Per Lord Blackburn, Inglis v John Buttery & Co (1878) 3 App Ca 552 at 577.

16 C Staughton, ‘How Do the Courts Interpret Commercial Contracts?’ (1999) 58 CLJ 303, 305. 17 K Lewison, The Interpretation of Contracts (5th ed, Sweet & Maxwell, 2011) at [7.02]. 18 Ibid at [3.17]-[3.18]. 19 See C Staughton, above n 16, 307.

(understood in its context, as all words are20) or as a way of finding out what the parties

intended based on what they chose to write and the context within which they made that

choice. Accordingly, as far as these first principles of interpretation are concerned, the

difference between the ‘document meaning’ and ‘intention-directed’ approaches is a moot

point.

Unfortunately for the law of contract however, these principles alone are insufficient to

conclusively interpret many commercial contracts21. The remainder of the interpretative

process is substantially less clear and can be seen as a battleground in the “eternal conflict”

between the literalist22 and purposive23 schools, which drastically undermines the

predictability of the courts. This is the point where the distinction between the ‘document

meaning’ and ‘intention-directed’ approaches becomes important. It will be argued that

seeking the document’s meaning with the aid of canons of construction can lead the way

out of this quagmire. In contrast, interpreting contracts under the banner of ‘intention-

directed’ approaches is fundamentally indeterminate and serves to cloak the true principles

on which judges are resolving interpretative questions.

1.2 VARIOUS INTERPRETATIVE PRINCIPLES ARE EMPLOYED IN VARIOUS CONTEXTS, AND

THESE ARE NOT ALWAYS DIRECTED TO DISCOVERING INTENTION

The meaning of a document and its author’s objective intention so frequently overlap that it

can be tempting to fall into the trap of equating them. This is both because objective

intention is a primary part of the interpretative process, and because speakers always try to

20 R Calnan, above n 9, at [4.04]. 21 D McLauchlan, Contract Interpretation: What is it about? (2009) 31(1) SLR 5, 50. 22 Emphasising the plain meaning of the text. 23 Emphasising the apparent purpose of the wider contract.

use words which carry the meaning that they intended. Nevertheless, ordinary

interpretative principles for uncovering meaning are wider than this, and are context-

dependent, as the following examples illustrate.

Intention-directed Interpretation

In May 2015 David Cameron referred to the upcoming UK election as “career-defining”

while speaking to a group of Asda employees. Mr Cameron later said that “career-defining”

meant ‘career-defining for Asda employees’24, though critics may suggest that it actually

meant ‘career-defining for David Cameron’. In either case, it is clear that the ‘meaning’ of

the phrase is being equated with the speaker’s intention – with what David Cameron had in

mind at the time.

This account of ‘meaning’ springs from the context of an election campaign, where people

are concerned with the character of prime-ministerial candidates; if “career-defining”

meant ‘career-defining for David Cameron’ it could suggest that his priorities are amiss. In

contrast, people are not so concerned with what Mr Cameron’s words tell them about the

election’s implications for his or Asda employees’ careers because such vague words, when

uttered on the campaign trail, amount to almost nothing (they are, in the immortal words of

Lindley LJ in another context, “mere puffery”25).

24 ‘David Cameron: I meant that the election was ‘career defining’ for Asda employees’ Channel 4 News (1 May 2015) Available: <http://news.channel4.com/election2015/05/01/update-4741/> [Accessed 1 November 2015] 25 Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1.

At a more basic level, all conversational contexts will have intention as a prime concern

because of the importance for conversational flow of speakers understanding one another’s

minds.

The Principle of Charity

In contrast, interlocutors in academic debates are less concerned with discovering one

another’s actual intention, and accordingly different interpretative principles come into

play. In this context the ‘Principle of Charity’ – directing that one should interpret texts to

maximise the correctness or rationality of their content26 – is frequently employed.

Notably, this principle may assist in discovering intention (on the assumption that the

author is highly rational), but its significance is wider than this. By taking the most charitable

interpretation, academics are able to “bring out the strongest arguments on both sides”27. It

may be that such an argument was not intended by the writer, but by interpreting in this

way academics can enrich the debate. Indeed, such arguments may have no single creator;

finding their genesis in vague words of one commentator and being improved in the

interpretative work of another. While this is prevalent throughout academia, it perhaps

takes its clearest form in exegetical works applying the work of older scholars to modern

contexts, where the old scholar could not be supposed to have had the foresight to actually

intend the meaning which is extracted from their text28.

Interpreting Judicial Statements

26 D K Henderson, ‘Winch and the Constraints on Interpretation: Versions of the Principle of Charity" (1987) 25(2) The Southern Journal of Philosophy, 153, 153. 27 D Walton & C A Reed, ‘Argumentation Schemes and Enthymemes’ (2005) 145(3) Synthese, 339, 342. 28 See eg. S R Palmquist,’Kantian Causality and Quantum Quarks] (2013) 28(2) Theoria, 283.

When judicial decisions contain statements of law they too must be interpreted. While one

could fill a library with the various principles on which such statements may be interpreted,

for our purposes it suffices to note that these are not directed to uncovering the actual

intention of the judge.

The can be seen from the fact that:

i) The extra-judicial writings of judges do not represent binding authority for

interpreting their own judgments; and

ii) If Judge A articulates a legal principle which needs to be interpreted in later

cases, other decisions of Judge A do not carry greater weight than decisions of

Judge B in interpreting Judge A’s principle29.

“All the people who it is reasonably foreseeable might…need to construe”

There is also recent judicial authority for an interpretative principle which is said to be

employed by reasonable people in daily life but which, on close inspection, is not directed

towards intention. In Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council30

Campbell JA, after expressing the relevant interpretative test as being that of a “reasonable

person seeking to understand what the words of the document conveyed” said:

“That reasonable person would…understand that the sort of background knowledge

that is able to be used as an aid to construction, has to be background knowledge

29 Assuming all else is equal eg. Judge A is not a superior judge to Judge B. 30 [2010] NSWCA 64 at [151].

that is accessible to all the people who it is reasonably foreseeable might, in the

future, need to construe the document”

In this context his Honour explicitly included three classes of contract: assignable contracts,

contracts that will endure for a long period of time, and contracts embodied in instruments

on a Torrens title register. Campbell JA’s statement was approved in England by Lord

Lewison in Cherry Tree v Landmain31, who remarked that there is no conflict between this

approach and Lord Hoffman’s principles in ICS (which, the reader will recall, articulated the

“document meaning” approach).

What Lord Lewison did not remark upon, and what is usually overlooked, is that Campbell

JA’s remark does conflict with the “intention-directed” approach to contractual

interpretation. The very fact that a contract falls in one of these three classes does not

speak to the parties’ intention. This is clear from the disparate nature of the three classes of

contract referred to by Campbell JA which have very few purposive similarities and are only

united by the likelihood that third parties will take an interest in those types of contracts32.

Conclusion from the Examples

These examples illustrate that the meaning of a document (or any other text or utterance)

can be interpreted using principles which are not directed towards finding intention and

that the appropriate principles are context-dependent. This allows the ‘document meaning’

approach in ICS to be understood in a way which is distinct from the ‘intention-directed’

31 [2013] 2 WLR 481 at [128]. 32 Of course, contracting parties may perceive that their contract will need to be interpreted by many people and draft with this in mind; in some sense this provides a secondary link between Campbell JA’s approach and the parties’ intention, but this is no different to any interpretative principle, including the canons of construction.

approach in BCCI (irrespective of whether Lord Hoffman intended this distinction!). It would

also allow judicial statements about finding objective intention33 to be interpreted narrowly

as the best interpretative principle in the context of their respective cases.

However, it still remains to be seen that the document’s meaning and the parties’ intention

are best thought of as distinct within the context of the law of contract. I turn to this point

now.

2. WHY CANONS OF CONSTRUCTION SHOULD INFORM CONTRACTUAL MEANING

2.1 JUDICIAL CONTRACTUAL INTERPRETATION IS HIGHLY INDETERMINATE IN PRACTICE

Note that the ‘document meaning’ and ‘intention-directed’ approaches seek the

document’s meaning and the parties’ intention respectively. That is, they purport to

produce a single answer. This feature is absolutely essential – “the most important rule”34 –

because the alternative is that judges fill the gaps on an ad-hoc basis. This would be

anathema to both commercial sense (preventing parties from knowing ‘where they stand’35

until judgment is handed down) and to basic precepts of fairness (if a dominant factor in

determining the success of a party’s litigation is the judge whom they are assigned36).

33 See eg. Reardon Smith Line v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 996, and Deutsche Genossenschaftsbank v Burnhope [1995] 1 WLR 1580 at 1587. 34 M P Furmston, ‘Current issues in the interpretation of contracts’ (2011) 28(1) Journal of Contract Law, 78, 80. 35 W Swain, ‘Contract codification in Australia: Is it necessary, desirable and possible?’ (2014) 36(1) Sydney Law Review, 131, 140. 36 C Staughton, above n 16, 304.

However, despite the volume of contractual litigation which turns on interpretation37, it is

notoriously difficult to predict the outcome of such disputes38. This can be seen from only a

cursory glance at the cases. In The Laura Prima39, involving a contract having only two

possible interpretations, the umpire decided the matter one way before being overturned

by the first-instance judge; the judge’s decision was overturned by the Court of Appeal, who

was in turn overturned by the House of Lords40. In the leading cases of ICS41, Mannai v Eagle

Star42, BCCI43 and Chartbrook v Persimmon Homes44 there were eight judicial interpretations

of four contracts45. If the interpretative question is “what a reasonable man would have

understood specific parties to have meant”46, the reported cases strongly suggest either

that there are multiple such interpretations open to a reasonable person, or that almost half

of the House of Lords is unreasonable.

2.2 THE ‘INTENTION-DIRECTED’ APPROACH IS INDETERMINATE BY ITS VERY NATURE

The vast majority of interpretation disputes which are litigated arise because a situation has

arisen which was not foreseen at the time of drafting47; therefore, the parties had no

intention in respect of that matter and asking what the parties meant is insufficient to

produce an interpretation of the contract. This argument seems obvious to the point of

triviality, but it has been resisted by many on the supposition that there is some objective

37 Academics from Sydney Law School, Submission to Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework, 20 July 2012, 2. 38 D McLauchlan, above n 21, 6. 39 [1981] 3 All ER 737. 40 R Calnan, above n 9, at [Pr.35]. 41 [1998] 1 WLR 896. 42 [1997] AC 749. 43 [2002] 1 AC 251. 44 [2009] 1 AC 1101. 45 M P Furmston, above n 34, 80. 46 BCCI v Ali [2002] 1 AC 251. 47 D McLauchlan, above n 21, 10.

notion of what the parties would have intended had they turned their attention to it48. This

notion is then smuggled into the concept of objective intention under the moniker of

‘presumed intention’. This, in the words of Thomas J, “provides the community with a

universal law of contract which could otherwise founder on the impossible task of

ascertaining the parties’ intention when in reality they had none”49.

The presumed intention approach may be understood by analogy to asking someone in the

course of a conversation what they meant by particular words. However, even if their

response to this question gives a genuine insight into their intention at the time of speaking

(which may be called into doubt50), the analogy still does not extend to contractual

interpretation. This is because contracts are between multiple parties and there are no

grounds to suppose that the parties had any common intention, except to the extent that

they were prepared to sign the contract as written51.

The Failure of Presumed Intention

Consider the facts of Krell v Henry52: The year is 1902 and London is brimming with

excitement for the coronation procession of the soon-to-be King Edward VII, planned for 26

and 27 June. Mr Henry, eager to partake in the excitement, enters into a rental contract on

these days (though the contract does not contain any statement of these days’ significance)

for an apartment located along the procession’s route, belonging to Mr Krell.

48 R Calnan, above n 9, at [1.13]. 49 Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617, 632. 50 See eg. L Wittgenstein, Zettel (University of California Press, 1967), 135. 51 This is a similar point to that made by Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 when he said, at 1385, “By the nature of things, where negotiations are difficult, the parties’ positions with each passing letter are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus” (though Lord Wilberforce was there talking about the irrelevance of pre-contractual negotiations to interpreting the final document). 52 [1903] 2 KB 740.

Unfortunately, the future King falls ill and his Coronation is delayed. Is Mr Henry bound to

pay the agreed rent to Mr Krell for an apartment which is no longer of any use to him?

It seems clear that the parties did not actually turn their attention to which of them should

bear the risk of the coronation not proceeding and it is not at all apparent that they would

have been in agreement if explicitly asked what would be the effect of the coronation being

delayed. Supposing that Mr Krell understood the contract to be strictly for the days stated,

and Mr Henry understood it to be limited to providing a view of the procession, what would

have happened had this matter been raised prior to signing? There are four possibilities:

1. One party convinces the other to change their understanding of the contract’s

words;

2. The parties cannot agree, but proceed with the contract as-written in the hope that

no dispute arises53;

3. One party agrees to assume the risk of the coronation not proceeding in exchange

for some benefit elsewhere in the contract; or

4. The parties cannot agree and go their separate ways without contracting.

Of these, (1) is implausible, (2) contains no common intention and both (3) and (4) could be

understood either to (i) give rise to no common intention; or (ii) give rise to a common

intention which potentially involves either re-drafting the whole contract to compensate

one party for assuming a risk, or terminating the contract (either ‘interpretation’ being so

53 In Lord Wilberforce’s view, this “often” occurs in commercial contracting – see Prenn v Simmonds [1971] 1 WLR 1381 at 1386.

profoundly removed from the actual contract that no court could ever contemplate it). The

parties’ common intention seems to have evaporated once we looked too closely!

Of course, this counterfactual discussion is concerned with subjective intention while the

interpretative quest in common law systems is decided on an objective basis. Nevertheless,

for a reasonable person to judge the parties’ intention objectively, one must assume that

there is some underlying reality to the notion of subjective common intention54; the above

discussion suggests that the doctrine of objective intention is built on quicksand.

Presumed Intention as a Cloak for Other Interpretative Principles

Naturally the courts do not actually go so deep into detailed counterfactuals when seeking

the parties’ presumed intention. In practice, if the judge seeking the parties’ objective

intention were inclined towards literalism, he or she would probably conclude that the

contract was explicit as to dates and so find a presumed intention favouring Mr Krell. If

more inclined towards purposivism, he or she may instead conclude that the context reveals

a clear purpose to provide Mr Henry with a view of the procession and so it could not be

fulfilled through enforcement of those explicit dates. In either case, couching the question

as a search for the parties’ presumed intention does not provide further assistance and, in

fact, only makes the conflict between literalism and purposivism more opaque by labelling

the outcome of either approach as the parties’ “objective intention”.

This opacity does not just apply to the battle between literalism and purposivism however.

It also applies to cloak the true nature of other principles employed under the banner of

54 This is not to say that there must always be an actual intention for the court to find an objective intention in a particular case. However, for the notion of common objective intention to be conceptually coherent in general, the notion of common subjective intention must be conceptually coherence in general.

discovering objective intention. In Rainy Sky v Kookmin Bank55 for example, a shipbuilding

company provided a performance bond from a bank, pursuant to a shipbuilding contract,

guaranteeing that the buyer’s money would be repaid by the bank upon “termination,

cancellation or rescission of the contract” by the shipbuilder. As it transpired, the

shipbuilder became insolvent and the bank argued that this was not a “termination,

cancellation or rescission” and so was not protected by the guarantee. The Supreme Court

rejected this argument on the basis that it did not satisfy “business common sense” and so

could not have been intended by the parties56, but this is patently untrue. The bank’s

decision to issue the bond, and the purchaser’s decision to accept it, is intricately bound up

with the precise terms used in the bond and the consequent risk allocation associated with

those terms. It is a daily part of business that companies decide to take on some risks and

outsource others (using insurance, guarantees or other commercial mechanisms) based on

their own quantification of those risks. By interpreting the bond widely to include default

from insolvency, the court’s decision deprives the bank of its ability to calculate risk

appropriately because the bank cannot know whether the actual risk that the courts will

enforce is wider than that which is written in the bond.

Another example is found in Charter Reinsurance Co v Fagan57 in which a reinsurance

contract provided for payments from a reinsurance company to an insurance company to be

calculated from sums “actually paid” by the insurance company to policyholders. The

insurance company had become insolvent and so no money was actually paid to the

respondent policyholder, despite the policyholder being entitled to payment. Accordingly,

55 [2011] 1 WLR 2900. 56 See the discussion in L Mason, ‘The Role of Business Common Sense in the Construction of Commercial Contracts’ (2012) 33(2) Business Law Review, 32, 32. 57 [1997] AC 313; 381.

the reinsurance company argued that they had no obligation to honour the money owed by

the insurer to the policyholder. The court rejected this argument, saying that a wider

reading of the contract showed an intention that “actually paid” was intended only to

provide a clear metric for calculating reinsurance payments, rather than a condition

precedent for those payments. However, a faithful application of the ‘intention-directed’

approach could surely not yield this result because it supposes that the reinsurance

company intended to take on an additional risk even though the insurance company would

have had almost no reason to push for it58.

2.3 THIS INDETERMINACY OF ‘OBJECTIVE INTENTION’ IS NOT LIMITED TO A FEW ISOLATED

CASES

There are undeniably some cases in which one may be tempted, despite the above

arguments, to assert with confidence that the parties would have been of one mind had

they turned their minds to the pertinent matter59. However, these cases are few. Indeed,

there are factors at play in contractual negotiation which tend to produce a final document

hiding the divergence of intentions of the contracting parties (hereafter called “contractual

gaps”). These include:

58 This assertion is based on the fact that potential policyholders of that insurer would surely not be aware of the precise terms of its reinsurance contract; therefore, those potential policyholders would not be more likely to sign up with the insurance company on the basis of the protection afforded to them through the reinsurance contract. 59 Consider Lloyds TSB Foundation v Lloyds Banking Group [2013] 1 WLR 366 in which a Deed of Covenant required Lloyds Bank to pay the Foundation a percentage value of their “group profit before taxation” as “shown in the audited accounts”. Under the law at the time, profits could only be included in a profit and loss account once actually realised. However, the law later changed such that unrealised profits were to be included in the profit and loss account. The change in law drastically affected the size of Lloyds Banking Group’s accounted-for profits and the Foundation sought payment of a sum calculated from this figure. However, the Supreme Court found in favour of Lloyds Bank, interpreting “group profit before taxation” in accordance with the law as it existed at the time the contract was formed. The parties had not turned their minds to the possibility of a change of law, but the court presumed that they would not have intended for ‘profit’ to change its meaning under the contract based on a change in its legal meaning.

1. “Contract writing costs”60

Commercial contracts are drafted in a commercial context and time is money.

Consequently, there comes a point where it does not serve either party’s interests to

refine the details of the contract, because any gains in certainty from unifying the

parties’ intentions are more than offset by time lost in beginning the transaction.

2. “Contract reading costs”61

As contracts become more precise and explicitly address more possibilities, they

become denser and harder to read. The more complicated a proposed clause, the

more likely it will be rejected by the other party for fear that it contains a covert

obligation, even if it is in fact mutually beneficial. This creates a force inhibiting

contracts from coming too close to completeness.

3. “Studied ambiguity”62

As with “contract writing costs”, this factor reflects the time constraints associated

with commercial contracting, but in this case it is not that the parties do not have

the time to turn their minds to certain contingencies. Rather, it is that parties have

considered those contingencies but are unable to reach agreement on them. As

such, in an effort to push through the contract, they draft deliberately ambiguous

language, gambling that later facts do not give rise to a dispute.

4. Fear of “signalling”63

60 E B Rasmusen, ‘Explaining Incomplete Contracts as the Result of Contract-Reading Costs’ (2001) Advances in Economic Analysis & Policy, iii, 3. 61 Ibid. 62 J Steyn, above n 7. 63 E B Rasmusen, above n 60, 2.

In this case one party has observed a specific ambiguity in the proposed contract and

would like greater clarity, but does not raise it in negotiations because it could signal

something about themselves and thereby weaken their bargaining position. For

example, in a long-term sale contract, an industrial buyer may be cautious about

seeking clarity on a guaranteed monthly supply for fear that the seller will infer a

lack of alternative supply sources and raise the price accordingly64.

This suggests that contractual gaps are not limited to exceptional cases which can be

addressed by a few exceptions to the general principle. Rather, they must be tackled at their

source: the ‘intention-directed’ approach.

2.4 CONTRACT LAW IS REPLETE WITH DOCTRINES WHICH FILL GAPS LEFT BY ‘OBJECTIVE

INTENTION’

The wider contract law seems to have made its peace with the existence of contractual gaps

and has responded with various legal mechanisms for filling these gaps.

In the statutory context, many Commonwealth nations have Sale of Goods Acts65, based on

the UK’s now-superseded Sale of Goods Act 1893, which provide for certain terms to be

automatically implied66 into sales contracts. While some of these implied terms may be

understood to enshrine what the parties may be supposed to have intended67, other terms

cannot be understood in this way. For example, the risk of damage to property prima facie

64 Ibid. 65 In Australia these have been enacted by the States. See eg. Sale of Goods Act 1923 (NSW). 66 Meaning that they can be defeated by express words. 67 Consider, for example, this principle: a bulk volume of some product, offered for sale on the basis of a sample, “shall correspond with the sample in quality” – s 23(2)(a), Sale of Goods Act 1923 (NSW)

passes with that property68 and property prima facie passes from seller to buyer at the

moment that it is passed to a third party carrier for delivery69. The combined effect of these

terms is that, in the absence of explicit contrary intention, the buyer bears the risk of

damage in transit. There is no apparent basis on which such an outcome can be thought to

reflect the intention that the parties would have had had they turned their minds to it.

The common law too has mechanisms for filling gaps in the parties’ objective intention.

Consider again the case of Krell v Henry, which we have seen cannot be resolved on the

basis of presuming a common intention. This case in fact stands as one of the foundational

cases in the doctrine of frustration70 which brings an end to a contract “by operation of law

on the emergence of a fundamentally different situation”71. The stark contrast between this

and any attempt to uncover an objective common intention can be seen from the decision

of the Australian High Court in Codelfa Construction v SRA of NSW72. In that case the State

Rail Authority of NSW had contracted for Codelfa Construction to excavate a tunnel for a

new railway. However, contrary to the contracting parties’ shared expectations, the work

was severely delayed by third-party injunctions preventing construction occurring at certain

times. Codelfa suffered resulting loss and commenced proceedings. The High Court notably

refused to imply a term as a matter of interpretation73, but did find that the contract had

been frustrated:

68 Ibid, s 25. 69 Ibid, s 35. 70 Wolters Kluwer, ‘Australian Contract Law Commentary’ [online] (CCH, 2015) 71 Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696, per Lord Reid at 723 (emphasis added); cited with approval by the High Court of Australia in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 356. 72 (1982) 149 CLR 337. 73 Ibid at 21.

“I find it impossible to imply a term because I am not satisfied that…the term sought

to be implied was one which parties in that situation would necessarily have agreed

upon as an appropriate provision to cover the eventuality which has arisen. On the

other hand…the performance of the contract in the events which have occurred is

radically different from performance…in the circumstances which it…contemplated”74

Therefore, the doctrine of frustration affects the parties’ contractual obligations in

circumstances where there is no objective intention favouring that outcome. In fact, there is

both judicial and academic support for understanding a suite of contractual defences as

‘default rules’ for filling contractual gaps75

There are two important points to note about how these gap-filling mechanisms function.

The first is that, though they are not directed towards finding objective intention, they

nevertheless will never conflict with the parties’ intentions. This is because they only apply

when there is a gap in those intentions and, furthermore, because having established

default positions (such as the buyer bearing transit risks) ensures that everyone76 is ‘on the

same page’ and so a genuine common intention is more likely. The second point is that by

filling gaps these default rules improve predictability for the contractual parties. Even

though parties may not have turned their minds to an issue at the time of contract

formation, when that issue later arises it is important that the parties have a good idea of

the terms on which a court is likely to enforce their contract.

74 Ibid at 55. 75 B Bix, Contract Law: Rules, Theory, and Context (Cambridge University Press, 2012), 57. 76 Or, at least, everyone who frequently enters into contracts of that type.

The significance of this legal background for the canons of interpretation is twofold. Firstly,

it provides a basis in law to justify interpreting contracts in a way which is not directed

towards finding intention but which, nevertheless, does not conflict with clear intention and

which serves the further purpose of maximising predictability. Secondly, it provides a

background against which appropriate principles of interpretation in this context can be

recognised.

A Brief Remark on the Parallels between Contractual Interpretation and the above

Doctrines

One might argue that interpretation is fundamentally different to the doctrines discussed

above because those doctrines arise in situations where the contract was silent on a matter,

but interpretation is usually concerned with giving meaning to specific provisions.

This argument fails on the ground that it is viciously circular: one cannot determine the

matters on which a contract is silent until one has first interpreted the scope of the

provisions that are included. For instance, to determine whether a security trust deed

provides for an order of priority between short- and long-term creditors, it is necessary to

first interpret the trustee’s duty to discharge all short-term debts “so far as possible”77.

2.5 THE CANONS OF CONSTRUCTION CAN BE UNDERSTOOD AS FILLING GAPS IN THE SAME

WAY THAT THESE OTHER DOCTRINES DO

Once the wider contract law is understood in this way, the way is paved for an account of

contractual interpretation which incorporates canons of construction as a ‘gap-filling’

77 Re Sigma Finance [2010] 1 All ER 571.

mechanism to promote predictability. It will be seen that canons of construction promote

predictability in two distinct ways and that these arise naturally from the contracting

context, just as any other interpretative principle would.

Interpretative Principles and the Choice between the Unknown and the Unknowable

Contract law can be understood as a legal mechanism to “empower individuals to pursue

their goals in a cooperative way”78,79. For parties to do this effectively it is essential that the

scope of their obligations to one another is as clearly defined as possible. This is especially

important in commercial relations where business decisions will be made according to

known obligations. In this context it is natural that interpretative principles should seek to

maximise predictability.

The canons of construction are frequently criticised on the grounds that they are unknown

to many contracting parties and that therefore it would be unjust to use them to interpret

those parties’ words. However, if parties to the same contract have different intentions, it is

inevitable that contractual interpretation will sometimes involve burdening parties with

obligations to which they did not knowingly assent. In such situations, if sufficient

interpretative principles cannot be known to the parties, it is surely preferable that these

principles be at least knowable for any party which chooses to seek legal advice.

Of course, even with well-established canons and competent legal advice, it is inevitable

that some cases will defy a clear answer – human affairs are simply too complicated for any

78 P Cserne, 'Policy considerations in contract interpretation: the contra proferentem rule from a comparative law and economics perspective’ in G Gavvala (ed) Contract Theory - Corporate Law (ECFAI University Press, 2009) 66, 69. 79 See the discussion in M Hogg, ‘Competing Theories of Contract’ in L A DiMatteo et al (eds), Commercial Contract Law: Transatlantic Perspectives, (Cambridge University Press, 2013) 14.

rule to guarantee determinacy in all cases80. However, in the words of Lord Neuberger,

canons of construction represent “a very good example of the value of precedent”81

because they can be refined to accommodate borderline cases. In contrast, ‘intention-

directed’ interpretation is beyond the reach of precedent and so is irreparably

indeterminate82.

‘Predictability’ as Adherence to ‘Intuitive Reactions of Justice’

Consider the following propositions:

1. The predictability of judicial outcomes is not merely a question of how often one

correctly predicts decisions. There is a further question: when one has predicted a

decision incorrectly, what is the magnitude of the discrepancy between actual

decision and predicted decision?

2. It is not just lawyers who make predictions about what obligations the law will and

will not impose; modern law encroaches on almost every facet of daily life, and yet

people are able to operate on only a miniscule knowledge of that law. That is, they

make elementary predictions about what the law demands.

In light of (1) and (2), it is desirable that on those occasions when non-lawyers falsely predict

their legal obligations under a contract, that the magnitude of the discrepancy not be

unduly large. The canons of construction assist with this.

80 A C Spiropoulos, ‘Making laws moral: a defence of substantive canons of construction’ (2001) 2001(4) Utah Law Review, 915, 949. 81 Cited in The Times Law Report, ‘Value of canons of construction’ The Times (55, London, 23 July 2013). 82 As pointed out by Lord Hoffman in BCCI.

To see how, consider the basis on which non-lawyers make these elementary predictions:

they expect that in most domains the law will not drastically depart from the intuitions of

ordinary “reasoning members of society”83. This basic expectation is said to be one of the

justifications for the principle that ‘ignorance of the law is no excuse’84 and it also finds

voice within the commentary on contractual interpretation through the assertion of Lord

Steyn that: “the law must not be allowed to drift too far from the intuitive reactions of

justice of men and women of good sense”85. Given that contractual interpretation is

concerned to find a document’s meaning in its context, why should this context not include

the fact that the parties have chosen to commit their agreement to writing with an

understanding that: (i) any disputes may be resolved by the courts (including the use of legal

doctrines, the details of which the parties are not aware); and (2) that the law will not

depart too drastically from intuitive reactions of justice86?

Of course, when entering contracts, reasoning members of society will rightfully expect that

any clearly stated intention will be honoured, but this is not the extent of their reasonable

expectations. Another is that they will not find themselves, by some sleight of hand, taking

on a substantially bigger contractual burden than they had expected. They expect that a

court will not impose a liability on them which is orders of magnitude larger than anything

for which they knowingly signed up.

83 S W Buell & L K Griffin, ‘On the mental state of consciousness of wrongdoing’ (2012) 75(1) Law and Contemporary Problems, pp. 133, 148. 84 Ibid. 85 J Steyn, above n 7. 86 Australian Corporate Lawyers Association, Submission to Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework, 20 July 2012, 2.

The contra proferentem canon, outlined above, responds to this natural expectation of

contracting parties. The canon provides an incentive to clear drafting87 which limits parties’

ability to profit from sleight-of-hand drafting techniques and promotes the cooperative

enterprise underscoring contract law. Euisdem generis can likewise be understood as

ensuring that general words do not drastically expand a party’s obligations well beyond the

scope that they may have anticipated88.

A similar explanation can be given for the majority decision in BCCI (in which Lord Hoffman’s

statement against the canons was uttered in dissent). In that case BCCI entered an

agreement in which it paid a pecuniary sum to former employees in exchange for “full and

final settlement of all or any claims whether under statute, common law or in equity of

whatsoever nature that exist or may exist...”89. It later came to light that the bank had been

run fraudulently and the House of Lords was asked to determine whether the settlement

precluded those former employees from suing in respect of their consequentially

diminished re-employment prospects. The majority found that it did not, with Lord Bingham

referring to “a long and…salutary line of authority”90 for the interpretative principle that

very clear words are required for a party to surrender rights of which they were not, and

could not be, aware.

This can be seen as protecting the former employees from inadvertently contracting away

drastically more rights than they could have reasonably anticipated at the time of signing.

87 P Cserne, above n 78, 69. 88 This can also explain why Devlin J did not apply eiusdem generis in Chandris v Isbrandtsen-Moller Co [1951] 1 KB 240 at 246, when finding that “acids, explosives, arms, ammunition or other dangerous cargo” included turpentine. In this case the inclusion of turpentine clearly does not unreasonably enlarge the scope of the clause beyond what could have been anticipated. 89 BCCI v Ali [2002] 1 AC 251 at [3]. 90 BCCI v Ali [2002] 1 AC 251 at [10].

Thus it empowers parties to enter contracts without needing to stay hyper-vigilant to the

possibility that they are in fact contracting away far more than is readily apparent. While

parties will never be able to be precisely sure of all their contractual obligations, they should

at least be able to accurately gauge the magnitude of what is at stake.

3. CONCLUSION

The law of contract has long been burdened with the misleading imagery of a ‘meeting of

the minds’ – an almost spiritual metaphor of two entirely separate sets of intentions

becoming one. Against this background it is natural to imagine the parties as having a fully-

formed common intention which can only be imperfectly captured in a written document. If

this were the case it would be natural that the courts interpret those documents according

to that common intention.

However, as we have seen, the reality is that parties ordinarily have only reached

agreement to the limited extent that is clear from the contract’s words in context. Given

this, it is essential that interpretative principles look beyond the parties’ intentions, but that

does not mean applying rules arbitrarily. Rather, it is to recognise that reasonable people

always use interpretative principles which are sensitive to the surrounding context. In the

context of contractual interpretation, these principles have long included, and must

continue to include, the canons of construction.

BIBLIOGRAPHY

PRIMARY SOURCES

Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617.

BCCI v Ali [2002] 1 AC 251.

Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1.

Chandris v Isbrandtsen-Moller [1951] 1 KB 240.

Chartbrook v Persimmon Homes [2009] 1 AC 1101.

Charter Reinsurance Co v Fagan [1997] AC 313; 381.

Cherry Tree v Landmain [2013] 2 WLR 481.

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.

Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696.

Deutsche Genossenschaftsbank v Burnhope [1995] 1 WLR 1580.

Hy Whittle Ltd v Stalybridge Corp (1967) 65 LGR 344.

Inglis v John Buttery & Co (1878) 3 App Ca 552.

Investors Compensation Scheme v West Bromwich [1998] 1 WLR 896.

Krell v Henry [1903] 2 KB 740.

The Laura Prima [1981] 3 All ER 737.

Lloyds TSB Foundation v Lloyds Banking Group [2013] 1 WLR 366.

Mannai v Eagle Star [1997] AC 749.

Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64.

Prenn v Simmonds [1971] 1 WLR 1381.

Reardon Smith Line v Yngvar Hansen-Tangen [1976] 1 WLR 989.

Rainy Sky v Kookmin Bank [2011] 1 WLR 2900.

Re Sigma Finance [2010] 1 All ER 571.

Sale of Goods Act 1923 (NSW).

SECONDARY SOURCES

Academics from Sydney Law School, Submission to Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework, 20 July 2012, 2.

Ahmed, M. 2012, "The interpretation of commercial contracts: time for reform", Nottingham Law Journal, vol. 21, pp. 26.

Australian Corporate Lawyers Association, Submission to Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice Framework, 20 July 2012, 2.

H G Beale, W D Bishop & M P Furmston, Contract Cases and Materials (5th ed, Oxford University Press, 2008).

J Brudney & C Ditslear, "Canons of Construction and the Elusive Quest for Neutral Reasoning" (2005) 58(1) Vanderbilt Law Review, 11.

S W Buell & L K Griffin, ‘On the mental state of consciousness of wrongdoing’ (2012) 75(1) Law and Contemporary Problems, pp. 133, 148.

R Calnan, Principles of Contractual Interpretation (Oxford University Press, 1st ed, 2013).

G M Cohen, ‘Interpretation and implied terms in contract law’ in G Geest (ed), Contract law and economics (Edward Elgar, 2011).

P Cserne, 'Policy considerations in contract interpretation: the contra proferentem rule from a comparative law and economics perspective’ in G Gavvala (ed) Contract Theory - Corporate Law (ECFAI University Press, 2009) 66.

C Gauker, 'The Principle of Charity’ (1986) 69(1) Synthese, 1.

D K Henderson, ‘Winch and the Constraints on Interpretation: Versions of the Principle of Charity" (1987) 25(2) The Southern Journal of Philosophy, 153.

M Hogg, ‘Competing Theories of Contract’ in L A DiMatteo et al (eds), Commercial Contract Law: Transatlantic Perspectives, (Cambridge University Press, 2013) 14.

D B Kostrub. & R S Christenson, ‘Canons of construction for the interpretation of mineral conveyances, severances, exceptions, and reservations in producing states’ (2012) 88(3) North Dakota Law Review 649.

K Lewison, The Interpretation of Contracts (5th ed, Sweet & Maxwell, 2011).

L Mason, ‘The Role of Business Common Sense in the Construction of Commercial Contracts’ (2012) 33(2) Business Law Review 32.

E McKendrick, Contract Law: Text, Cases and Materials (4th ed, Oxford University Press, 2010)

D McLauchlan, Contract Interpretation: What is it about? (2009) 31(1) SLR 5, 50.

D Nicholls, ‘My kingdom for a horse: the meaning of words’ (2005) 121 LQR 577

A C Spiropoulos, ‘Making laws moral: a defence of substantive canons of construction’ (2001) 2001(4) Utah Law Review, 915, 949.

C Staughton, ‘How Do the Courts Interpret Commercial Contracts?’ (1999) 58 CLJ 303.

J Steyn, ‘The Intractable Problem of the Interpretation of Legal Texts’ (2003) 23(1) Sydney Law Review 5.

A Tettenborn. ‘Codifying Contracts—An Idea Whose Time has Come?’ (2014) 67(1) Current Legal Problems 273.

The Times Law Report, ‘Value of canons of construction’ The Times (55, London, 23 July 2013).

D Walton & C A Reed, ‘Argumentation Schemes and Enthymemes’ (2005) 145(3) Synthese, 339.

L Wittgenstein, Zettel (University of California Press, 1967).

Wolters Kluwer, ‘Australian Contract Law Commentary’ [online] (CCH, 2015).