Interpretation of contracts under English

law

AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA
SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA
Interpretation of contracts
under English law

This guide summarises the principles of

English law relating to contractual
interpretation. It outlines the general
approach taken by the courts in construing
the express terms of a contract, the extent
to which terms will be implied and evidential
matters. It also includes a flowchart: Getting
to the meaning: How the courts interpret
contracts.

This publication is not intended to be a comprehensive review of all

developments in the law and practice, or to cover all aspects of
those referred to. Readers should take legal advice before applying
the information contained in this publication to specific issues or
transactions. For more information please contact us at Ashurst
LLP, Broadwalk House, 5 Appold Street, London EC2A 2HA
T: +44 (0)20 7638 1111 F: +44 (0)20 7638 1112
www.ashurst.com

Ashurst LLP and its affiliates operate under the name Ashurst.
Ashurst LLP is a limited liability partnership registered in England
and Wales under number OC330252. It is a law firm authorised and
regulated by the Solicitors Regulation Authority of England and
Wales under number 468653. The term "partner" is used to refer to
a member of Ashurst LLP or to an employee or consultant with
equivalent standing and qualifications or to an individual with
equivalent status in one of Ashurst LLP's affiliates. Further details
about Ashurst can be found at www.ashurst.com.
© Ashurst LLP 2016 Ref: 9091709 January 2016
 Interpretation of contracts under English law

Interpretation of contracts under English law

This guide summarises the general approach taken by the English courts to contractual interpretation. It
considers the legal rules and key principles of interpretation, including the general approach to construing
express terms and the tools of construction that the courts have at their disposal to assist them in reaching a
just outcome between the parties.1 It also looks at the extent to which terms can be implied into a contract, and
concludes with a flowchart setting out how the courts will approach questions of interpretation and implied terms.

Legal rules of contractual interpretation

General rules of interpretation

English law takes a purposive and commercial approach to the construction of contracts.2 The starting point for
the court is to identify the intention of the contracting parties. This is an objective test; the court is concerned
to identify the intention of the parties by reference to "what a reasonable person having all the background
knowledge which would have been available to the parties would have understood them to be using the language
in the contract to mean".3

The court looks, therefore, at the contract as a whole and considers not only the words of the relevant clauses,
but also the "documentary, factual and commercial context".4 The following considerations will be relevant to the
court's analysis:

 The natural and ordinary meaning of the clause.5 The courts "do not easily accept that people have
made linguistic mistakes, particularly in formal documents". 6 However, the worse the drafting of a
particular clause, the more readily a court will depart from its natural meaning.7

 Any other relevant provisions of the contract.

 The overall purpose of the clause and the contract.

 The facts and circumstances known or assumed by the parties at the time the contract was executed.

 Commercial common sense.

The court will not take into account any subjective evidence of either party's intentions.

Common terms and phrases

Some words and phrases have come to acquire an accepted legal sense through decided cases. Good examples
of this are phrases such as "best endeavours" or "reasonable endeavours".8

What about special or technical meanings?

The court first tries to find the ordinary meaning of words as they are popularly understood but if the context
clearly requires a special or peculiar interpretation, the court will accept that special meaning. Technical or
scientific words are usually given their technical or scientific meanings unless the context indicates otherwise.9

1
It is worth noting that the approach applies equally to deeds as to agreements under hand.
2
Investors Compensation Scheme –v- West Bromwich Building Society[1998] 1 WLR 896 (ICS).
3
Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, para 14.
4
Arnold -v- Britton [2015] UKSC 36, (Arnold), Lord Neuberger, para 15.
5
BCCI -v- Ali (No.1) [2002] 1 AC 251; "This is not necessarily the dictionary meaning of the word, but that which is generally understood". But the
court will not "attribute to the parties an intention which they plainly could not have had" and will not rewrite the contract (The Antaios Compania
Naviera SA -v- Salen Rederierna AB [1985] 1 AC 191 and Co-Operative Wholesale Society Limited -v- National Westminster Bank PLC [1995] 1
EGLR 97).
6
Lord Hoffman in ICS, at 913.
7
Lord Neuberger in Arnold, para 18.
8
Legal dictionaries such as Stroud's Judicial Dictionary of Words and Phrases by Daniel Greenberg or Words and Phrases Legally Defined by David
Hay, which collate the enormous body of case law on judicial interpretation, are useful sources of reference for the meaning of common terms and
phrases.
9
Chitty on Contracts (32nd ed. 2015), chapter 13.

Page 1
Interpretation of contracts under English law

Commercial common sense

The courts will take into account commercial common sense when interpreting a contract. In recent years there
has been a shift in emphasis in the importance of commercial common sense when interpreting contractual
terms. However, the Supreme Court has now made it clear that the starting point is the natural meaning of the
language used; commercial common sense cannot be relied on to undervalue the importance of the language of
the provision which is to be construed. Courts will be slow to reject the meaning of a provision simply because
one of the parties made a bad bargain; it is not for the court to improve the positions of the parties by re-writing
the contract.10 However, where there is ambiguity and more than one possible construction, the court will select
the interpretation that makes the most commercial sense, the presumption being that the parties would not have
intended an uncommercial result.11

Canons of construction
The English court sometimes employs certain "canons of construction" or "rules of thumb" in an attempt to do
justice between the parties. However, these principles are just pointers and the court will only resort to applying
them if the meaning cannot be found using the general rules of interpretation outlined above.

 Clear words. The court will be reluctant to adopt a meaning that gives an unfair result in the absence of
clear drafting. For example, the courts have held that unambiguous language is required to exclude
certain contractual remedies.12

 In whose favour should ambiguities be decided? Usually the court will resolve any uncertainty or doubt
surrounding a provision against the party who would benefit from the suggested interpretation. This is the
so-called "contra proferentem" rule whereby the clause is construed against the party seeking to rely on it.
It applies in particular to the party seeking to take the benefit of an exclusion or limitation of liability. 13

 Categories and lists. Where the preceding words are each part of a common genus or category,
subsequent words will be interpreted "ejusdem generis", i.e. read as being part of that same class, in the
absence of a contrary indication. So, for example, the words "or other inevitable accident" in a clause
making reference to "fire, flood, storm, tempest" means other accidents of a similar kind.14

Can the court look beyond the contract?

Can the court look beyond the written contract when construing the meaning of a contract? While the court must
examine the full background to the contract, it cannot look at prior negotiations15 or the parties' "declarations of
subjective intent".16 This means that the court cannot look at extrinsic evidence such as antecedent agreements,
oral negotiations, exchanges of letters, etc., preceding the contract.17 However, the Court of Appeal has held that
in construing the meaning of an unusual combination of words not defined in the agreement and with no obvious
natural and ordinary meaning, the court can "explore the factual hinterland of the agreement" to ascertain how
the parties understood the phrase.18 In so doing the court is not taking into account the parties' "declarations of
subjective intent", rather it is identifying the meaning shared by the parties and in effect incorporated into their
agreement.19

10
Lord Neuberger in Arnold, paras 17-20.
11
Rainy Sky SA and Others –v- Kookmin Bank [2011] UKSC 50; Andrew Wood –v- Sureterm Direct Ltd [2014] EWHR 3240 (Comm), [28] (Clarke
LJ).
12
E.g. the right of set-off in WRM Group Ltd -v- Wood [1998] CLC 189.
13
Photo Production Ltd -v- Securicor Transport Ltd [1980] AC 827 at 847. The courts have been more reluctant to use the "contra proferentem" rule
in recent cases such as Static Control Components (Europe) Ltd -v- Egan [2004] EWCA Civ 392, and it is probably to be seen as a rule of last
resort. However, it is still applied (see Lexi Holdings Plc -v- Stainforth [2006] EWCA Civ 988 and Pratt –v- Aigaion Insurance Company [2008]
EWCA Civ 1314).
14
Saner -v- Bilton (1878) 7 Ch D 815; Manchester Bonded Warehouse Co. -v- Carr (1880) 5 CPD.
15
Although this long-established rule has been criticised it has been firmly upheld by the House of Lords in Chartbrook Ltd -v- Persimmon Homes
Ltd [2009] UKHL 38 and by the Supreme Court in Arnold.
16
ICS [1998] 1 WLR 896. The court cannot consider subsequent conduct except where a contract is part oral and part written in order to determine
the parties' original intentions. See Brian Maggs -v- Guy Marsh [2006] EWCA Civ 1058.
17
If, instead of construing the contract, the court is being asked to rectify it, extrinsic evidence is admissible. For a summary of the law relating to
rectification see the Ashurst Quickguide Rectification of Contracts.
18
Rugby Group Ltd -v- ProForce Recruit Ltd [2006] EWCA Civ 69.
19
Per Lady Justice Arden, paragraph 55.

Page 2
 Interpretation of contracts under English law

Subsequent unintended events

If an event occurs which, judging from the language of the contract, was "plainly not intended or contemplated
by the parties" at the time the contract was made, the court will give effect to the intention of the parties where
it is clear what the parties would have intended.20

Implied terms

If, having regard to the express words of the agreement, it is still not possible to ascertain the meaning, the
court may be willing to imply certain terms.21 However, courts are reluctant to depart from the express wording,
particularly if the contract is detailed and appears comprehensive. In practice the situations in which courts are
prepared to imply a term into a contract are limited.

Terms implied by law, custom and practice or a prior course of dealing

In particular kinds of contract, for example employment, consumer and landlord and tenant agreements, certain
standard terms are implied by legislation and/or common law. In appropriate cases the court will recognise
standard practice in particular trades or areas of industry and is willing to imply terms into an agreement to
reflect this practice, provided the wording of the contract is not inconsistent with the implication. Finally, if it can
be shown that the parties have consistently and clearly dealt with each other on a particular basis the court may
be prepared to imply terms to reflect this, again provided the actual wording of the contract does not contradict
this.

Terms implied to reflect the parties' presumed intentions

The court will only be prepared to accept other implications if it is satisfied that the implication sought reflects
the presumed intention of the parties. The court will look at the particular context of the contract and its
language and the relationship between the parties to ascertain if the implication sought can be inferred. The
criteria for implying a term were expressed succinctly by the Privy Council in B.P. Refinery (Westernport) Pty Ltd
-v- Shire of Hastings:22

"(1) it must be reasonable and equitable; (2) it must be necessary to give "business efficacy" to the
contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious
that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any
express term of the contract."

Further clarification has since been given by the Supreme Court in Marks and Spencer plc -v- BNP Paribas
Securities Services Trust Company (Jersey) Ltd and another.23 This decision clarified that a term will be implied if
a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances at the time the
contract was made, would consider the term to be so obvious as to go without saying or to be necessary for
business efficacy.

Essentially the court is trying to make the contract workable and to ascertain the parties' presumed intentions (in
the sense of what they would have agreed if they had thought about the point). 24

Conclusion

The flowchart overleaf gives a broad overview of the general way in which the English courts tend to approach
the task of construing disputed or ambiguous wording. Ultimately, however, the "rules" of construction are no
more than guidance tools and the particular facts and circumstances of the case determine how they are applied.
In practice it is open to judges to select from these tools at their discretion in order to make the contract work,
give effect to the parties' (presumed) intentions and to try to achieve reasonable justice between them.

20
Lord Neuberger, Arnold, para 22.
21
See the Privy Council decision in Attorney General of Belize -v- Belize Telecom Limited [2009] UKPC 10. The case concerned the construction of a
company's articles of association but the Privy Council affirmed that the relevant principles apply more widely.
22
(1978) 52 ALJR 20.
23
[2015] UKSC 72.
24
Shell UK Ltd -v- Lostock Garage Ltd [1976] 1 WLR 1187 - see the judgment of Lord Denning.

Page 3
Interpretation of contracts under English law

Page 4
Ashurst Quickguides

Ashurst's Quickguides are a regularly updated mini-

library of short legal summaries on a range of key
issues relevant to businesses. For a full list of
current titles and the most up-to-date versions,
please visit the publications section of our website
(www.ashurst.com).

If you would like further information on this guide,

please speak to your usual contact at Ashurst or one
of our contacts listed below.

Simon Bromwich
T: +44 (0)20 7859 1572
E: simon.bromwich@ashurst.com

David Capps
T: +44 (0)20 7859 1397
E: david.capps@ashurst.com

Mark Clarke
T: +44 (0)20 7859 1562
E: mark.clarke@ashurst.com

Tom Connor
T: +44 (0)20 7859 1638
E: tom.connor@ashurst.com

Tom Cummins
T: +44 (0)20 7859 1051
E: tom.cummins@ashurst.com

Lynn Dunne
T: +44 (0)20 7859 3242
E: lynn.dunne@ashurst.com

Jon Gale
T: +44 (0)20 7859 1630
E: jon.gale@ashurst.com

Ronnie King
T: +44 (0)20 7859 1565
E: ronnie.king@ashurst.com

James Levy
T: +44 (0)20 7859 1810
E: james.levy@ashurst.com

Angela Pearson
T: +44 (0)20 7859 1557
E: angela.pearson@ashurst.com

Tim Reid
T: +44 (0)20 7859 1548
E: tim.reid@ashurst.com

Edward Sparrow
T: +44 (0)20 7859 1573
E: edward.sparrow@ashurst.com

Iain Travers
T: +44 (0)20 7859 1618
E: iain.travers@ashurst.com