College Papers

Textualism the contractual text.[1] While the textualist approach

Textualism and contextualism
are not conflicting paradigms in a battle for exclusive occupation of the field
of contractual interpretation

 

1. Introduction

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The interpretation of contracts is
until this day still a very prominent source of commercial litigation. In this contentious
area, two principal positions have challenged each other for dominance in the
interpretation of commercial contracts. In the case of textualist regime,
courts generally do not take the context of the agreement into account. In a
contextualist regime, the courts would be obliged to consider the context of
the contract regardless of the contractual text.1

 

While the textualist approach would
generally favor a more certain and predictable outcome, the contextualist
approach could in some cases lead to the more reasonable outcome that gives
effect to legitimate commercial expectations. Consequently, the debate between
the textualist and contextualist approach is fierce as there is a normative
justification for both of the approaches. This leaves the question whether one
of these approaches should prevail over the other or whether both approaches
can be used in arriving at the objective meaning of contracts. 

 

As a starting point, this essay will
begin by briefly highlighting the justifications for both the contextualist and
textualist approach. Secondly, this essay will highlight the developments of
both approaches under UK case law. Thirdly, this essay will discuss whether
these approaches can go hand in hand with each other. Finally, the essay will provide
a conclusion regarding the central question of this essay whether textualism
and contextualism are “conflicting
paradigms in a battle for exclusive occupation of the field of contractual
interpretation”.

 

2. The justification
for the contextualist approach in commercial contracts

 

The autonomy of contract theories
highlight that the agreement between parties has normative force as both
parties willfully entered into a contract.2
Consequently, it is the duty of the law to make sure that the will of the
parties is actually enforced. Therefore, it is the role of the courts to
objectively and prospectively discover, to the fullest possible extent, what
the parties intended when they entered into the contract. This can be described
as the contextualist approach which rests on two main assumptions: (i) courts
are in fact capable of understanding and learning about the commercial context
and (ii) the parties would have finished the contract the same way as the court
has done if the costs would have been reasonable. According to these
assumptions, the contextualist approach allows courts to learn about the
commercial context and interpreting the terms of contract accordingly. Courts
which adopt a contextualist approach may consider factors such as the
bargaining power of the parties, the parties’ negotiations, past dealings
between the parties and commercial industry-related practice. Furthermore, contextualist
interpretations can often be justified as a necessity to protect legally
unsophisticated parties from being exploited by more legally sophisticated
parties. As such, contextualist interpretations can, in hindsight, offer
protection towards unsophisticated parties, but also ensure a reasonable
outcome that supports the realizations of both the parties’ legitimate
contractual intentions.3

 

3. The justification
for the textualist approach in commercial contracts

 

On the other hand, we have the
textualist approach which suggests that legally sophisticated commercial
parties generally favor a regime that allows for parties to specifically
specify when a contract needs to be interpreted in a strict manner and when to
give courts the authority to also consider the context around the contract.

This would allow parties to mitigate the risk that the court will intervene and
choose an interpretation of the contract terms which is not to any of the
parties’ liking. Such an approach strengthens the parties’ control over the
contract and also reduces the cost of enforcing the contract.4

 

The textualist approach can be
justified through several arguments. Firslyt, a textualist approach allows for
parties to create a standardized vocabulary for their commercial contracts.

This can ensure that the standard meaning of the contract is protected from
erroneous interpretations through a set of plain and unambiguous meanings that
are easily understood by the involved commercial parties. As such, the
textualist approach can provide for certainty and predictability in the
interpretation of commercial contracts.5

 

Secondly, the textualist approach
incentivizes parties to diligently and carefully draft the contract. A party in
a contextualist regime for whom a contract has worked out negatively may have
an incentive to claim that the contract actually had a different meaning than
the standardized meaning. Consequently, (sophisticated) parties generally want to
carefully draft the contract as unambiguously as possible. However, it is
important to note that the textualist approach cannot forbid courts to use
discretion when a mistake has been made or when a term has been formulated
ambiguously.6

 

Finally, the textualist theory of
interpretation allows businesses to reduce contracting costs through shifting
these costs from the end of the contracting procedure (where courts intervene
and enforce the contract) towards the beginning of the contracting procedure
(where the contract is actually being designed and negotiated). As such, a
trade-off takes place between drafting costs and enforcement costs.7

 

The main justifications for both the
contextualist and textualist approach have now been discussed. It is shown that
a textualist approach is generally favored by legally sophisticated commercial parties,
while the contextualist approach could be more favorable to the less legally
sophisticated commercial parties. The textualist approach, however, does not
dismiss context, but instead attempts to include the context in the contract.

To a certain degree8,
it is up to the parties to decide to what extent a court can consider context
when the contract is being enforced. As the discussion has been merely
theoretical so far, this essay will now discuss how both textualism and
contextualism have been applied by the British courts in practice. This will
bring us closer in trying to answer the main question of this essay whether contextualism
and textualism are conflicting paradigms or whether these approaches can both
be used to arrive at the objective meaning of the contract.

 

4. The contextualist
approach under UK case law

 

As a starting
point for the contextualist approach, this essay will go back to Investors Compensation Scheme v West Bromwich BS 1998 1
All ER 98 (hereafter: ICS)9  in which Lord Hoffman set out five principles
for the interpretation of contracts:

 

(i) what a reasonable person with all
the available background knowledge at the time of entering into the contract
would have understood;

(ii) the so-called ‘matrix of facts’, which
allows the intentions of the parties to be determined by the context of the
contested term;

(iii) for the purpose of reducing litigation,
all past negotiations10 and
subsequent conduct11 are
inadmissible;

(iv) the meaning of the words is not to
be deduced in a literal manner, but in a contextual manner;

(v) the aforementioned rule rests on
the presumption that people do not easily make linguistic errors, especially
when the documents are of a formal nature.

 

The principles set out in ICS highlight that courts do not only
have to consider the literal meaning of the words in the contract, but they may
also consider other factors such as all the relevant objective background
information that the parties had when they entered into the contract.12 These
principles have proven to be cornerstones in later cases regarding contract
interpretation, most notably in Rainy Sky
SA v Kookmin Bank 2011 UKSC 50.

 

Recently, the Supreme Court used the
contextual approach in Rainy Sky. This
decision follows the reasoning of previous cases such as ICS, Persimmon Homes13
and Sigma Finance14
where the Supreme Court has persisted in moving away from the strictly textual
approach to the more wide and flexible contextual approach that is based on
business common sense. The Rainy Sky
case can therefore be regarded as evolutionary rather than revolutionary as no
new ground is being broken. In this case Lord Clarke confirmed that Lord
Hoffman’s approach to contractual construction in ICS is correct.15
However, this still leaves the question what the correct interpretation is when
a reasonable business man can reach two different interpretations from the same
wording. Following Lord Reid in Wickman v
Schuler where the wording of the contract has an ambiguous meaning, courts
should interpret the contract in a manner that is the most consistent with commercial
business common sense. This is also confirmed by Lord Clarke in Rainy Sky as he argues that rather than
upholding an extreme or irrational result, the Court should, in the case of two
competing interpretations, choose the most commercial interpretation and give effect
to this (para 21).16

 

There are some lessons to be learned
from the outcomes in ICS and Rainy Sky. It is obviously paramount
that contracts are drafted diligently with the aim to avoid ambiguities as much
as possible. When it proves to be impossible to avoid ambiguities then Courts
are, following the aforementioned cases, definitely willing to adopt a more
contextual interpretation rather than a textual one. However, this approach can
also be criticized as it may be difficult in giving a satisfying definition of
“commercial business common sense” which may be an argument to adopt a stricter
and literal approach which will be discussed more in-depth in the next
paragraph.17

 

5. The textualist
approach under UK case law

 

More recently, the Supreme Court
adopted a more literal approach in Arnold
v Britton 2015 UKSC 36. The case highlights how commercial common sense
is not to undermine the importance of the words that were actually used. Naturally,
if the used words are less clear, then the courts would shift away from the
natural meaning. However, this does not mean that courts should actively look
for drafting inaccuracies so that a shift from the natural meaning may be
facilitated. Furthermore, commercial common sense is not to be applied
retrospectively just because a contractual provision turns out to work badly
for one of the parties. The Court could not decline the natural meaning of a
word merely because it could be perceived as undiligent that the parties agreed
to it (para 15-23). Moreover, there are judges who have expressed their concern
whether they would be able to adequately weigh the interests that arise out of
commercial common sense.18 These
concerns are reflected in Arnold v
Britton as emphasis is laid on the language of the contract rather than
commercial common sense.19

 

One may note that Lord Neuberger in Arnold v Britton challenges some of the
principles that were set out by Lord Hoffman in ICS. In both cases the starting point when there is an issue in
interpreting a contract seems to be the test of the reasonable person with all
the available background information when entering into the contract. However, Lord
Hoffman stated in his fifth proposition in ICS
that where the natural meaning of the wording produces a commercial outcome
that is nonsense then the courts should reinterpret the contract in order to
arrive at the desired commercial outcome. In contrast, in Arnold v Britton the majority agreed with Lord Neuberger that courts
may only reinterpret the contract if there is a plurality of meanings to the
questioned provision.20

 

In summary, following the reasoning of ICS a clause may reinterpreted
retrospectively because a reasonable person would never have agreed to the
outcome of the clause’s natural wording. In Arnold
v Britton the clause can not be reinterpreted only to arrive at an outcome
that commercially sensibly. The contract may only be reinterpreted when the
wording can have more than one meaning. Consequently, following the reasoning
of Arnold v Britton commercial common
sense can only be considered by the courts if this can be deduced naturally and
at first sight from the plain wording of the contract. The test used in Arnold v Britton seems therefore to be of
a more restrictive nature than in ICS
and Rainy Sky. In other words: it is
not possible for commercial common sense to override the plain wording of a clause.21

 

6. Can the
textualist and contextualist approach go hand in hand?

 

In Arnold v Britton it seemed as if the
Supreme Court moved to a more strict and literal approach in the interpretation
of contracts instead of the more contextual approaches that were adopted in
cases as ICS and Rainy Sky. However, in 2017 the Supreme Court seemed to revisit the
balance between the plain language and commercial context of contracts in Wood v Capita 2017 UKSC24. In
this judgment the Supreme Court clarified that the decisions made in Rainy Sky and Arnold v Britton are in fact consistent. The court further
elaborated this by stating that the recent history of contractual
interpretation in British common law is “one of continuity rather than change”.

The Court confirmed that courts have
the opportunity to look at both the wording of the contract and the commercial
context surrounding the drafting of the contract in order to arrive at the
objective meaning of the questioned provision. As such, both textualism and
contextualism are tools for courts when interpreting contracts, but it will
always be fact-dependent which one will have the upper hand.22

 

Another important point is that courts
are likely to adopt a more textualist approach in case of complex and detailed
drafted contracts by professional parties. On the other hand, more emphasis
will be given to the commercial context when the contract is less formal and lacking
in detail. Consequently, the facts of each individual case will always decide
to which approach courts will steer the most as was seen in Rainy Sky (contextualist approach) and Arnold v Britton (textualist approach).23

 

In the case of Wood v Capita is is shown that neither the contextualist approach
nor the textualist approach is dominant by default. Consequently, Arnold v Britton never illustrated an
actual change in direction, but was rather consistent with British common law
regarding contractual interpretation. Thus, which of the approaches ought to be
used for the interpretation of contracts will always be dependent on the facts
of the case. As such, both approaches are valid tools for courts to wield in
contract interpretation cases. For example, in case of two possible
interpretations, business common sense can be considered by the courts, but
this will need to be balanced against the plain wording of contract and the
surrounding context. The way this balance will be struck is always dependent on
the facts of the case. Finally, Wood v
Capita reiterates the importance of careful and precise drafting to avoid
any ambiguity surrounding the meaning of a clause: a badly drafted clause will
not be interpreted without restrictions if the meaning can be found in the
language of the contract.24

 

7. Conclusion

 

The main purpose of this essay was to
ascertain whether contextualism and textualism are “conflicting paradigms in a battle for exclusive occupation of the field
of contractual interpretation”. Following the most recent judgment in Wood v Capita it can be argued that this
is not the case. While it could be argued the historical ICS case shifted judicial emphasis towards contextualism, Wood v Capita highlighted that balance
needs to be struck between the plain language of the contract and context. This
will leave the everlasting question how both these approaches are then to be
balanced adequately. Ultimately, lawyers and commercial parties can in good
faith have an argument about the meaning of a contractual clause. It is then a
matter of judgment how both contextualism and textualism are traded off through
a reasoned judicial resolution based on the (unique) facts of the case.

1 Ronald J. Gilson Charles F. Sabel
Robert E. Scott, Text and Context: Contract Interpretation as Contract
Design, Cornell Law Review Volume 100 Issue 1 November 2014, p. 25-27.

2 Usually, the theories about
autonomy of contract rely on the premise of consent or the exercise of the
parties’ will. One may also refer to Robert E. Scott & Jody S. Kraus, Contract
Law and Theory, (5th ed. 2013) 23-26 and Charles Fried, Contract
as Promise: a Theory of Contractual Obligations, 1981, 13-16.

3 Ronald J. Gilson Charles F. Sabel
Robert E. Scott, Text and Context: Contract Interpretation as Contract
Design, Cornell Law Review Volume 100 Issue 1 November 2014, p. 37-38.

4 Ronald J. Gilson Charles F. Sabel
Robert E. Scott, Text and Context: Contract Interpretation as Contract
Design, Cornell Law Review Volume 100 Issue 1 November 2014, p. 40.

5 McMeel, Foucault’s Pendulum: Text, Context and Good Faith in Contract Law,
Volume 70, Issue 1, 1 December 2017, p. 366.

6 For discussion, one may refer to
Jody S. Kraus & Robert E. Scott, ‘Contract
Design and the Structure of Contractual Intent’, 84 N.Y.U. L. REV. 2009
supra note 41, at 420–437, 539–541, 691–693.

7 Ronald J. Gilson Charles F. Sabel
Robert E. Scott, Text and Context: Contract Interpretation as Contract
Design, Cornell Law Review Volume 100 Issue 1 November 2014, p. 41.

8 In case of a clear
ambiguity courts will generally have much wider discretion when interpreting
what the parties actually intended. One may refer to Wood v Capita 2017 UKSC24.

9 It should
of course be noted that the contextualist approach has been adopted by courts
before ICS. For example, one may refer to Schuler v Wickman
1974 AC 235. In this case the courts argued that when there is a breach of a
particular provision in the contract, then it is of importance that this breach
is read within the context of the entire contract before deciding whether
rescission is in order.

10 Prenn v Simmonds 1971 1 WLR 1381 (n. 7).

11 James Miller
Partners Ltd v Whitworth Street Estates (Manchester) Ltd 1970 AC 583 (HL).

 

12 Sir Geoffrey Vos, Chancellor of the High Court, Lecture to Canterbury
University, Christchurch, 18 October 2017: ‘Contractual
Interpretation: Do judges sometimes say one thing and do another?’, p. 3-4.

13 Chartbrook Ltd v Persimmon Homes Ltd
2009 UKHL 38. In para 25 of the judgement Lord Hoffman stated: “…All that is required is that it should be clear that something has gone
wrong with the language and that it should be clear what a reasonable person
would have understood the parties to have meant”.

14 Re
Sigma Finance Corporation 2009 UKSC 2.

15 Lord Hoffman’s approach
was also adopted in subsequent cases. One may refer to Pink Floyd v EMI 2010 EWCA Civ 1429 (para.

14).

16 This view
is also repeated in Barclays Bank plc v HHY Luxembourg SARL 2010 EWCA Civ 1248 (para 26).

17 O. Gayner and C. Hopkins, ‘Case Comment Rainy Sky S.A. & Ors v Kookmin
Bank 2011 UKSC 50’,
UK Supreme Court Blog, Matrix & Olswang 9 November 2011.

18 One may
refer to Jackson v Dear 2012 EWHC 2060 (Ch) 40
(Briggs J)

and BMA Special Opportunities Hub Fund Ltd v African Minerals Finance Ltd
2013 EWCA Civ 416 24 (Aikens LJ).

19
McMeel, Foucault’s Pendulum: Text,
Context and Good Faith in Contract Law, Volume 70, Issue 1, 1 December
2017, p. 376.

20 R. Hocking, ‘Commercial nonsense and the reasonable man: Arnold v Britton & Ors
2015 UKSC 36’, Hardwicke 24 july 2015.

21 R. Hocking, ‘Commercial nonsense and the reasonable man: Arnold v Britton & Ors
2015 UKSC 36’, Hardwicke 24 july 2015.

22  Sir Geoffrey Vos, Chancellor of
the High Court, Lecture to Canterbury University, Christchurch, 18 October
2017: ‘Contractual Interpretation: Do
judges sometimes say one thing and do another?’, p. 13-14.

23 C. Newington-
Bridges, ‘Wood v Capita Insurance Services 2017 UKSC 24 – the last word on
contractual interpretation for the time being’, St John’s Chambers, 25 September 2017, p. 10.

 

24 Sir Geoffrey Vos, Chancellor of the High Court,
Lecture to Canterbury University, Christchurch, 18 October 2017: ‘Contractual Interpretation: Do judges
sometimes say one thing and do another?’, p. 13.