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The principles of interpretation of contracts have changed significantly since the House of Lord decision in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. In the seminal judgement of Investors Compensation Scheme Ltd v West Bromwich Building Society (“ICS”), Lord Hoffman declared that ‘almost all of the old intellectual baggage of “legal” interpretation has been discarded’1. Historically, the courts have favoured a literal approach to contractual interpretation. As Lord Cozens-Hardy MR explained in Lovell & Christmas Ltd v Wall2 , ‘it is the duty of the courts…to construe the document according to the ordinary grammatical meaning of the words used therein’. However, ICS required the court to adopt a more purposive approach: per Lord Hoffmann, one must objectively construe the terms of a contract – independent of the parties’ pre-contractual negotiations and individual, subjective considerations. As such, ICS represents a clear departure from the ‘four corners’ approach of Lord Greene in Hankey v Clavering3 ; it illustrates the court’s ultimate desire to give effect to that which the parties agreed. It has been since argued that there has been a gradual retreat from Lord Hoffman’s approach. Indeed, at first glance, the case of Arnold v Britton4 may be seen to mark a shift to the traditional, literal approach: per Lord Neuberger, ‘the mere fact a court may be pretty confident that the subsequent effect…of a particular interpretation was not intended by the parties does not justify rejecting that interpretation’5. However, it will be argued that, on closer inspection, there has been no significant change since ICS. In fact, it will be submitted that Lord Neuberger’s statement that ‘the reliance…on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of [a] provision’ 6 is indicative of the approach laid out in ICS – per Lord Hoffmann, ‘the “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents’7. As such, it will be argued that Arnold v Britton is better viewed as a clarification as opposed to a significant departure – with the recent decision of Wood v Sureterm Direct Ltd8 even cautioning against the suggestion that Arnold v Britton marked a departure from earlier practice. It will be concluded that the only significant change is practical. As a result of Lord Hoffmann’s clarification of the exclusionary rule in Chartbrook v Persimmon9 - that pre-contractual negotiations may be submitted for ‘other purposes’10 – Rees argues that parties may now submit such negotiations in the hope that it will, in any case, influence their decision11. It is first necessary to explore the reasoning of Lord Hoffmann’s judgement in ICS. Here, the courts examined the meaning of a clause that purported to exclude the assignment of ‘any claim (whether sounding in rescission for undue influence or otherwise)’. The courts were asked whether this exclusion extended to claims for damages. Although a literal approach would suggest the exclusion of such claims, the House of Lords (“HoL”) undertook a purposive approach: to Lord Hoffmann, ‘the exercise of interpretation is to…identify what a reasonable individual would have understood the parties to have meant by the language used’12. In Sirius International Insurance Company v. FAI 1 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, pg. 912 2 (1911) 104 LT 85 3 (1942) 2 All ER 311 4 (2015) UKSC 36 5 [2015] UKSC 36 6 [2015] UKSC 36 7 [1998] 1 WLR 896, pg. 912 8 (2017) UKSC 24, 9 (2009) UKHL 38 10 (2009) UKHL 38, Para 42 11 Peter Rees QC, Where are we now on the interpretation of contracts? A cloak and dagger tale, 2015 12 [1998] 1 WLR 896, pg. 912

The principles of interpretation of contracts have changed significantly since the House of Lord decision in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. General Insurance ltd13 Lord Steyn states that this is done through an examination of ‘the text under consideration and its relevant contextual scene’14. Given this, the HoL held that the clause did not exclude claims for damages as no objective intention to exclude such claims could be derived. The decision in ICS is ultimately indicative of the idea formal documents may include linguistic mistakes; that the wording of contractual clauses may not reflect the intention of the parties. As such, ICS establishes that, on the basis of all admissible information, the objective meaning of both ambiguous and unambiguous clauses may not reflect the objective intending meaning. It is in this light that Lord Hoffmann states ‘the law does not required judges to attribute to the parties an intention which they plainly could not have had’15. This approach was, and continues to be, positively welcomed. Firstly, it precludes the potential dangers of a literal approach. Again, in Sirius International Insurance Company, Lord Steyn is particularly critical of literalism, referencing William Paley’s example of Temures and the garrison of Sebastia16. By this, Lord Steyn suggests an approach that focuses too much on the literal interpretation of words may, in fact, undermine the ad idem of the contracting parties. Stemming from this, ICS rightly reflects the commercial nature of contract. Lord Steyn states that ‘in determining the meaning of the language of a commercial contract…the law generally favours a commercially sensible construction’17. This acceptance that erroneous wording may be present in contacts was also reinforced by Lord Hoffman’s earlier judgment in Charter Reinsurance Co Ltd v Fagan18 in his admission that ‘the notion that words have a “natural” meaning is not a very helpful one’. Above all, ICS accorded the court with much flexibility so as to reflect the parties’ true intentions. However, it may be argued that the case of Rainy Sky v Kookmin Bank19 represents a slight departure from the principles of interpretation of contract established in ICS. The case concerned the interpretation of refund guarantees issued by Koomin Bank (“the Bank”) to protect advance payments made by buyers to a shipbuilder under shipbuilding contracts. In particular, the courts were asked to interpret a clause that required the Bank to pay “such sums”: whilst the Bank argued that a prior clause set out specific circumstances in which they would reimburse Rainy Sky (excluding insolvency), the plaintiff argued another clause obliged the bank to reimburse them for all sums due to them under the contract (including insolvency)20. In his leading judgement, Lord Clarke confirmed the principles laid out in ICS: ‘The court must consider the language used and ascertain what a reasonable person, that is a person who has all the back knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood to have meant’. 21 However, in this case, there were two possible constructions of the clause in question. In turn, Lord Clarke confirmed that, in such a case, ‘the court is entitled to prefer the construction which is 13 (2004) UKHL 54 14(2004) UKHL 5, para 18. 15 [1998] 1 WLR 896, pg. 912 16 (2005) 1 Lloyd’s Rep 461, para 19 17 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd (1997) AC 749 18 (1996) 5 Re LR 411 19 (2012) BLR 132 20 https://www.wrighthassall.co.uk/knowledge/legal-articles/2011/12/03/interpretation-contracts-rainy-sky-sv-kookmin-ban/, accessed 16/01/2020 21 (2012) BLR 132

The principles of interpretation of contracts have changed significantly since the House of Lord decision in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. consistent with business common sense and to the reject the other’ 22. As such, it was held that, since insolvency was the situation in which Rainy Sky were most likely to claim, the most commercial common-sense interpretation of the two clauses was to include claims for insolvency. In this light, Rainy Sky can be seen to support the principles laid out in ICS: as Lord Hoffmann referenced in ICS, ‘if…syntactical analysis of words in a commercial contract is going to lead to the conclusion that flouts business common sense, it must yield to business sense’23. Rainy Sky can thus be viewed as a natural progression of the law laid out in ICS. Having said that, it may also be argued that Rainy Sky attempts to narrow the scope of contractual interpretation. Rees argued that, under ICS, ‘there is no conceptual limit to the amount of re-writing a court can do when interpreting a contract’24. Here, Rees references Chartbrook v Persimmon25 in which Lord Hoffmann admits that, when ‘something has gone wrong with the language…there is no limit to the amount of red ink…which the court is allowed’26. However, Lord Clarke stresses that ‘where the parties have used unambiguous language, the court must apply it’ 27. This caution is not limited to just Lord Clarke: while, in BMA Special Opportunity Hub Fund Ltd28, Aiken LJ stressed that ‘commercial common sense’ is not limiting factor in contractual interpretation, the court in US Bank Trustees v Titan Europe29 stressed the importance of enforcing unambiguous language ‘even though some other result might be…more commercial reasonable’. In other words, the courts may be seen to be shifting towards a more literal approach. However, it is submitted that this is, in no way, a departure from ICS. In any case, it should be viewed as a re-assertion of Lord Hoffman’s fifth principle – ‘the rule that words should be given their natural and ordinary meaning [except if] …something must have gone wrong with the language’. In this light, the principles of interpretation cannot be said to have significantly departed from ICS. It is argued that Chartbrook v Persimmon illustrates a practical departure from ICS. In his third principle, Lord Hoffmann ‘excludes from the admissible background the previous negotiations of the parties and their declaration of subjective intent’30. However, in this case, the claimant wanted to rely upon pre-contractual negotiations in order to support their interpretation of a contractual clause. Notwithstanding long-standing criticism of the exclusionary rule – Lord Nicholls argued that exclusion of such contextual knowledges runs the risk of enforcing a clause contrary to the parties’ intention 31 The HoL refused to depart from this principle. As set out in ICS, ‘the law makes this distinction for reasons of practical policy. To Lord Hoffman, the exclusionary rule protects the ‘general interests of the economy and predictability’32. As such, there has be no real theoretical change. However, Lord Hoffman goes on to confirm that ‘the rule…does not exclude the use of such evidence for other purposes: e.g. to establish a fact which may be relevant as background’33. It is argued that this presents a significant practical change. As Howlett argues, parties may now ‘introduce evidence of

22 (2012) BLR 132 23Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 24 Peter Rees QC, Where are we now on the interpretation of contracts? A cloak and dagger tale, 201 25 (2009) UKHL 38 26 ibid 27 ibid 28 BMA Special Opportunity Hub Fund Ltd v African Minerals Finance Ltd (2014) EWCA Civ 416, para 8 29[2014] EWHC 1189 (Ch) 30 (2009) UKHL 38 pg 913 31 Lord Nicholls, ‘My Kingdom for a Horse’ (2005) 121 LQR 577 32 (2009) UKHL 38 para 42 33 ibid

The principles of interpretation of contracts have changed significantly since the House of Lord decision in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. pre-contractual negotiations as background material but, in reality, so that the court heard evidence of what the parties intended’34. Finally, it is submitted that Arnold v Britton does not represent a significant change since ICS. The case concerned a service charge provision in respect of a 99-year leasehold agreement. Although, for the lessor, the language made no objective, commercial sense, the courts felt bound to enforce its only literal interpretation. Per Lord Neuberger, ‘the fact a court may be…confident that the…effect of a particular interpretation was not intended by the parties does not justify rejecting their interpretation’. To some, this represents a significant change. Firstly, prior to the case, it was believed that words did not need to be ambiguous for the background matrix of facts to be considered in construing them. Secondly, it was believed that, in the event of two possible interpretations, the court would side with the one making most commercial sense. However, in contrast to Lord Hofmann who said ‘the background…may reasonable man to conclude parties…must have used the wrong words’35, Lord Neuberger stresses hat ‘commercial common sense…should not…undervalue the importance of language’36. Nevertheless, it should be noted that, in this case, no background documentation was submitted. In this light, Goddard and Johnson argues that, with no evidence, even Lord Hoffmann would find difficulty in departing from a literal interpretation. It is thus submitted Arnold v Britton does not represent a significant change – its decision is a consequence of its unique facts. It has been argued that there has been no significant change since the decision of ICS. Although there has been a small shift, in that the courts seem eager to respect the literal meaning of words, it has been argued that Neuberger’s decision was simply to deter the courts from re-writing entire agreements under the guise of ‘commercial common sense’. It is thus concluded that the principles of ICS are simply, now, more refined: the commercial common-sense approach is simply one factor to be considered when departing from the natural meaning of language in contracts.

34 James Howlett, Development of the interpretation of contracts, 2017 35 (1998) 1 WLR 896, pg. 913 36 (2015) UKSC 36...