Some Fallacies Concerning the Law of Contract Interpretation

Abstract

This article seeks to refute several basic propositions concerning the law of contract interpretation that have recently been put forward by academic commentators, some of which gain implicit support from an extrajudicial speech by Lord Sumption earlier this year. These propositions are: the very purpose of a written contract dictates the existence of a plain meaning rule; evidence of prior negotiations is necessarily irrelevant; the explanation for allowing evidence of trade usage or custom to override plain meaning is that the document was not intended to contain the whole contract; the ICS principles are inherently flawed; the “assimilation” theory on which the principles are based is also flawed; recent decisions of the UK Supreme Court demonstrate that the principles have been abandoned and that, as a result, Lord Hoffmann’s legacy in the area of contract interpretation has ended; and this development is to be welcomed because it has the benefits of increased certainty, cost savings and greater protection for third parties. I. INTRODUCTION Lord Hoffmann’s well-known restatement of the principles of contract interpretation in Investors Compensation Scheme Ltd v West Bromwich Building Society (“ ICS ”) 1 has been contentious ever since it was pronounced in 1997. Although it was adopted on countless occasions by the courts, the reaction of some judges, commentators and commercial practitioners was hostile, and it now seems that their concerns have been heeded, at least to some extent. Thus, as I have discussed elsewhere, 2 recent developments suggest that a court should depart from what it considers to be the plain meaning of a contract only in truly exceptional circumstances, a main plank of what was generally considered to be the correct approach prior to ICS . Particularly important in this context is the reasoning of Lord Neuberger (with which Lord Sumption and Lord Hughes agreed) in Arnold v Britton . 3 Having found that the service charge clauses in 99-year leases of holiday chalets contained no ambiguity and that nothing had gone “significantly wrong” with