Thursday, November 10, 2011

Principles of Interpretation of Commercial Contracts

Interpretation of contracts is a topic of vital importance in corporate law practice. Formation of contracts, mistake and misrepresentation, frustration are all interesting topics to study and grasp the concepts thereof.  However, it is interpretation and construction of contracts which is far more important in practice.  There appears to be a shortage of academic work on the subject, perhaps because it would be a great labour to assemble to the definitive work from a great mass of material. Some of the principles of interpretation of commercial contracts arising out of body of authorities are provided hereunder.

In Chitty On Contracts, Twenty-Eighth Edition, it is stated as follows:

“12-042   Object of construction.   The object of all construction of the terms of a written agreement is to discover therefrom the intention of the parties to the agreement. Marquis of Cholmondeley v. Clinton (1820) 2 Jac. & W. 1, 91.

12-044 Further it has long been accepted that the courts will not approach the task of construction with too nice a concentration upon individual words.

“The common and universal principle ought to be applied: namely, that [an agreement] ought to receive that construction which its language will admit, and which will best effectuate the intention of the parties, to be collected from the whole of the agreement, and that greater regard is to be had to the clear intention of the parties than to any particular words which they may have used in the expression of their intent.” Ford v. Beech (1848) 11 Q.B. 852, 866.  See also Smith v. Packhurst (1742) 3 Atk. 135, 136; Lloyd v. Lloyd (1837) 2 My. & Cr. 192, 202; SA Narutune et Commerciale of Geneva v. Anglo-Iranian Oil Co. Ltd. [1953] 1 W.L.R. 1379; affd. [1954] 1 W.L.R. 496.

12.055   Mercantile contracts.   Although it has been stated that there is not in law any difference of construction between mercantile contracts and other instruments [Southwell v. Bowditch (1876) 1 C.P.D. 374, 376], commercial documents “must be construed in a business fashion” [Southland Frozen Meat and Produce Export Co. Ltd. v. Nelson Brother Ltd. [(1898) A.C. 442, 444.  See also Menth & Co. v. Ropner & Co. (1913) 1 K.B. 27, 32 (“must be understood in a business and practical sense”)] and “there must be ascribed to the words a meaning that would make good commercial sense.” [Miramar Maritime Corpn. v. Holborn Oil Trading Ltd. [(1984) A.C. 676, 682; International Fina Services AG v. Katrina Shipping Ltd. (1995) 2 Lloyd’s Rep. 344, 350].  Indeed, In The Antaios Compania Naviera SA v. Salen Rederierna A.B. [1984]A.C. 191, 201, Lord Diplock said that “if detailed semantic and syntactical analysis of words in commercial contract is going to lead to a conclusion that flouts business commonsense, it must yield to business commonsense.” See also Shipping Corpn. of India Ltd. v. NBB Niederelke Schiffartsgesellschaft mbH & Co. [1991] 1 Llyod’s Rep. 77, 80; Bankers Trust Co. v. State Bank of India [1991] 2 Lloyd’s Rep. 443, 456; International Fina Services AG v. Katrina Shipping Ltd., supra, at 350; Charter Reinsurance Co. Ltd. v. Fagan [1997] A.C. 313, 355; but cf. ibid., at 387.

In Pollock & Mulla, Indian Contract And Specific Relief Acts, Twelfth Edition 2001, Vol. 1 at 264, it is stated as follows:

“The court should put itself in a frame of mind which would make itself possible to understand how commercial minds work [Navneet Lal & Co. v. Kishan Chand & Co. AIR 1956 Bom 151 at 153].  The House of Lords in Adamastos Shipping Co. Ltd. v. Anglo-Saxon Petroleum Co. Ltd., [1959] AC 133 at 158, [1958] 1 All ER 725 (HL); Dhanrajamal Gobindram v. Shamji Kalidas & Co. [1961] 3 SCR 1020 at 1035, AIR 1961 SC 1285, summarizing the rules applicable to construction of commercial documents laid down that effort should be made to construe commercial agreements broadly and one must not be astute to find defects in them or reject them as meaningless.  The dealings of men should, as far as possible, be treated as effective and the law may not incur the reproach of being the destroyer of bargains. Hillas & Co. v. Acros Ltd. (1932)147 LT 503 per Lord Tomlin at 512, [1932] All ER Rep 494 at 499; Coffee Board v. Janab Dada Haji Ibrahim Halari AIR 1966 Mys. 118; Dhanrajamal Gobindram v. Shamji Kalidas & Co. [1961] 3 SCR 1020, AIR 1961 SC 1285.

“Where the parties have used unambiguous language, the court must apply it. This can be seen from the decision of the Court of Appeal in Co-operative Wholesale Society Ltd v. National Westminster Bank plc [1995] 1 EGLR 97.  … The court held that ordinary principles of construction applied to rent review clauses and applied the principles in The Antaios (Antaios Compania Naviera SA v Salen Rederierna AB) [1985] AC 191. After quoting the passage from the speech of Lord Diplock cited above, Hoffmann LJ said, at p 98:

"This robust declaration does not, however, mean that one can rewrite the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement."  See also International Fina Services AG v Katrina Shipping Ltd, The Fina Samco [1995] 2 Lloyd's Rep. 344, where Neill LJ said at page 350 it was necessary when construing a commercial document to strive to attribute to it a meaning which accords with business common sense.

In Society of Lloyd's v Robinson [1999] 1 All ER (Comm) 545, 551 it was held as follows:

"Loyalty to the text of a commercial contract, instrument, or document read in its contextual setting is the paramount principle of interpretation. But in the process of interpreting the meaning of the language of a commercial document the court ought generally to favour a commercially sensible construction. The reason for this approach is that a commercial construction is likely to give effect to the intention of the parties. Words ought therefore to be interpreted in the way in which a reasonable commercial person would construe them. And the reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language".

In Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] CLC 1103, 1118-1119; [2011] EWCA Civ 1047; [2001] 2 All ER (Comm) 299, Mance LJ observed:

"13. Construction, as Sir Thomas Bingham MR said in Arbuthnott v Fagan [1995] CLC 1396 at p 1400 is thus 'a composite exercise, neither uncompromisingly literal nor unswervingly purposive'. To para (5), one may add as a coda words of Lord Bridge in Mitsui Construction Co Ltd v A-G of Hong Kong (1986) 33 BLR 14, cited in my judgment in Sinochem International Oil (London) Ltd v Mobil Sales and Supply Corp [2000] CLC 878 at p 885. Speaking of a poorly drafted and ambiguous contract, Lord Bridge said that poor drafting itself provides:

'no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used interpreted in the light of the relevant factual situation in which the contract was made. But the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis.'

16 ... in my judgment the sub-clause has no very natural meaning and is, at the least, open to two possible meanings or interpretations - one the judge's, the other that it addresses two separate subject-matters. In these circumstances, it is especially important to undertake the exercise on which the judge declined to embark, that is to consider the implications of each interpretation. In my opinion, a court when construing any document should always have an eye to the consequences of a particular construction, even if they often only serve as a check on an obvious meaning or a restraint upon adoption of a conceivable but unbusinesslike meaning. In intermediate situations, as Professor Guest wisely observes in Chitty on Contracts (28th edn) vol 1, para. 12-049, a 'balance has to be struck' through the exercise of sound judicial discretion."

In Homburg Houtimport BV v Agrosin Private Ltd: The Starsin [2004] 1 AC 715, para 10 Lord Bingham referred to "the rule to which Lord Halsbury LC alluded in Glynn v Margetson & Co [1893] AC 351, 359, 'that a business sense will be given to business documents. The business sense is that which businessmen, in the course of their ordinary dealings, would give the document."

Three other cases merit brief reference. The same approach was adopted by Arden LJ in In the Matter of Golden Key Ltd (In Receivership) [2009] EWCA Civ 636, paras 29 and 42 as also in In Re Sigma Finance Corporation (in administrative receivership) [2009] UKSC 2; [2010] 1 All ER 571, where Lord Mance observed at para 12 that the resolution of an issue of interpretation in a case like the present was an iterative process, involving checking each of the rival meanings against other provisions of the document and investigating its commercial consequences.

In Barclays Bank plc v HHY Luxembourg SARL [2011] 1 BCLC 336, paragraphs 25 and 26:

"25. The matter does not of course rest there because when alternative constructions are available one has to consider which is the more commercially sensible. On this aspect of the matter Mr Zacaroli has all the cards. ...

26. The judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction."

The House of Lords of the UK in Sirius International Insurance Company (Publ) v. FAI General Insurance Limited [2004] UKHL 54, at paragraph 18, has held as follows:

"The aim of the inquiry is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language.  The inquiry is objective: the question is what a reasonable person, circumstanced as the actual parties were, would have understood the parties to have meant by the use of specific language.  The answer to that question is to be gathered from the text under consideration and its relevant contextual scene."

In Rainy Sky SA v Kookmin Bank [2011] UKSC 50, the UK Supreme Court citing various authorities as above concluded and held as follows:

“30.   In my opinion Longmore LJ has there neatly summarised the correct approach to the problem. That approach is now supported by a significant body of authority. As stated in a little more detail in para 21 above, it is in essence that, where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense.”  See also [1997]89 Comp Cases 849 (SC) : (1995) 1 SCC 478 and (2007) 3 GLR 899  

Further, in Chitty On Contracts, Twenty-Eighth Edition, it is stated as follows:

“12-052   Established judicial construction.   Where the same words or contractual provisions have for many years received a judicial construction, the court will suppose that the parties have contracted upon the belief that their words will be understood in the accepted legal sense. Thames and Mersey Marine Insurance Co. v. Hamilton, Fraser & Co. (1887) 12 App. Cas. 484, 490; Skips A/S Nordheim v. Syrian Petroleum Co. Ltd. [1983] 2 Lloyd’s Rep. 592, 597; Navrom v. Callitsis Ship Management SA [1987] 2 Lloyd’s Rep. 276, 278 (affd. [1988] 2 Lloyd’s Rep. 416); Marc Rich & Co. Ltd. v. Tourloti Compania Naviera SA [1988] 2 Lloyd’s Rep. 101, 105; Chiswell Shipping Ltd. v. National Iranian Tanker Co. [1991] 2 Lloyd’s Rep. 251, 257 But contrast Wickman Machine Tool Sales Ltd. v. L.G. Schuler A.G. [1974] A.C. 235; Macedonia Maritime Co. v. Austin & Pickersgill Ltd. [1989] 1 Lloyd’s Rep. 73.”.

The Supreme Court of India in The Union of India v. D.N. Revri & Co., AIR 1976 SC 2257 at 2262 held as follows:

"It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it.  It would not be right while interpreting a contract, entered into between two lay parties, to apply strict rules of construction which are ordinarily applicable to a conveyance and other formal documents.  The meaning of such a contract must be gathered by adopting a commonsense approach and it must not be allowed to be thwarted by a narrow pedantic and legalistic interpretation."

The Supreme Court of India, in Citibank N.A. v. TLC Marketing PLC, (2008) 1 SCC 481 : 2007 AIR SCW 6263, has held as follows:

 "Commercial contract must be broadly construed with a view to give efficacy to such contract rather than to invalidate it.  Clauses of the contract must be liberally interpreted.  Narrow and technical approach should be avoided. [see also Russel on Arbitration (1997); p.60]"
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