Elements in a Contract 35
Just like the words in an enactment or a statute can lead to
an ambiguity, similarly words in a contract can also sometimes be a source of
confusion. Therefore, the courts have developed certain guidelines in addition
to the existing rules of interpretation (see statutory interpretation) to make
the law more flexible.
In Investors Compensation Scheme Ltd. v West Bromwich
Building Society (1998) Lord Hoffman set out five guidelines to aid with the
interpretation of contracts. They are as follows: -
1)
The terms in a contract should be looked at from the perspective of the
reasonable man after taking into account all the background knowledge that was
available to the parties at the time of entering into the contract.
2) The background knowledge that is to be taken into account
is what is known as the matrix of facts or the factual matrix that was put
forward by Lord Wilberforce and it includes anything, as long as the
information is available to the parties, which would have affected the way in which
the language of the document would have been understood by a reasonable man.
For example, in the case of Reardon Smith Line v Hansen
Tangen (1976) the charterers agreed to take ownership of a tanker that was
being built in a specific shipyard. The contract identified the tanker as Osaka
No. 354 corresponding to the shipyard that it was being built in. Due to
unspecified reasons the work could not be completed in the shipyard and the
building of the tanker was subsequently transferred to another shipyard. The
tanker was completed satisfactorily but it was no longer designated Osaka No.
354.
In the meantime, the world tanker market had taken a turn
for the worse. The charterers refused to take possession of the tanker and
claimed that the tanker did not fit the description as per s. 13 of the Sale of
Goods Act – “Where there is a contract for the sale of
goods by description, there is an implied condition that the goods shall
correspond with the description ….”. The courts held that the designations i.e.
Osaka No. 354 and the following designations were merely labels and were not
valid descriptions as per the act and that there was in fact a valid contract
in place.
3) Previous negotiations or any other past declaration of
intent however is not included in what is deemed or termed as background
knowledge. Lord Wilberforce in Prenn v Simmonds (1971) said that the reason for
not admitting evidence of these exchanges is not a technical one or even one of
convenience. It is simply that such evidence is unhelpful.
By the nature of things, where negotiations are difficult,
the parties’ positions, with each passing letter, changes. It is only the final
document which records a consensus.
4) The meaning of the words that have been used and the
meaning of the words incorporated in a document may not be the same as that
which is perceived or understood by an ordinary man. Words and sentences have
numerous meanings. The meaning of the words in a contractual document is what
the parties using those words against the relevant background would reasonably
have understood the words to mean.
In Mannai Investment Co. Ltd. v Eagle Star Life Assurance Co.
(1997), the appeal was concerned with the question of whether a notice given by
a tenant pursuant to a break clause in a lease was effective notice, Lord
Hoffman said that it is of course true that the law is not concerned with the
speaker’s subjective intentions. But the notion that the law’s concern is
therefore with the “meaning of his words” conceals an important ambiguity. The
ambiguity lies in a failure to distinguish between the meanings of words and
the question of what the words would mean to a person who uses the words.
5) The “rule” that words should be given their “natural and
ordinary meaning” excludes the probability that people can make mistakes
especially when it comes to formal documents. The law does not attribute to the
parties an intention that they clearly could not have had.
In the Antaios Compania Neviera S.A. v. Salen Rederierna
A.B. (1984) Lord Diplock said that “if detailed semantic and syntactical
analysis of words in a commercial contract is going to lead to a conclusion
that flouts business commonsense, it must be made to yield to business
commonsense.”
Copyright © 2019 by Dyarne Ward and Kathiresan Ramachanderam
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