Interpretation of contracts in english law and experience for vietnamese law

17 Chapter 2: GENERAL PRINCIPLES OF INTERPRETATION OF CONTRACTS IN THE ENGLISH LAW OF CONTRACT .... In terms of the English law of contract, the thesis concerns with general principles o

MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH CITY UNIVERSITY OF LAW INTERNATIONAL LAW FACULTY

-

BACHELOR THESIS

INTERPRETATION OF CONTRACTS IN ENGLISH LAW

AND EXPERIENCE FOR VIETNAMESE LAW

HO CHI MINH CITY, 2013

HO CHI MINH CITY UNIVERSITY OF LAW INTERNATIONAL LAW FACULTY

BACHELOR THESIS

INTERPRETATION OF CONTRACTS IN ENGLISH LAW AND

EXPERIENCE FOR VIETNAMESE LAW

STUDENT NAME: NGUYỄN VŨ LIÊN QUỲNH CLASS: 34 STUDENT NUMBER: 0955010188 SUPERVISOR: DOCTOR LÊ THỊ ÁNH NGUYỆT

HO CHI MINH CITY, 2013

ACKNOWLEDGEMENT

I hereby declare that this thesis is my own work The figures used in the thesis are authentic The research results have not been published in any other work

Ho Chi Minh City, July 2013

Nguyễn Vũ Liên Quỳnh

TABLE OF CONTENTS

INTRODUCTION 1

Chapter 1: INTERPRETATION OF CONTRACTS IN THE ENGLISH LAW OF CONTRACT 4

1.1 The English Common Law System 4

1.2 The English Law of Contract 6

1.3 Interpretation of Contracts in the English Law of Contract 15

Summary of Chapter 1 17

Chapter 2: GENERAL PRINCIPLES OF INTERPRETATION OF CONTRACTS IN THE ENGLISH LAW OF CONTRACT 18

2.1 The Language of A Contractual Document 24

2.1.1 The Terminology of “Contractual Document” 25

2.1.2 The Determination of the Meaning of the Language of A Contractual Document 27

2.2 Contractual Document to Be Interpreted to Reflect the Understanding of A Reasonable Person 28

2.2.1 The Terminology of “Reasonable Person” 28

2.2.2 The Determination of the Understanding of A Reasonable Person 30 2.3 Contractual Document to Be Interpreted in the Light of Circumstances 32

2.3.1 The Terminology of “Circumstance” 32

2.3.2 The Determination of Surrounding Circumstances 35

SUMMARY OF CHAPTER 2 38

Chapter 3: A COMPARATIVE STUDY OF VIETNAMESE LAW AND ENGLISH LAW ON INTERPRETATION OF CONTRACTS 40

3.1 Applicable Law of Contract in Vietnam 40

3.2 Overview of Interpretation of Contracts in Vietnamese Law 42

3.3 Interpretation of Contracts in Comparison 50

3.3.1 Similarities 50

3.3.2 Differences 51

3.3.2.1 The Source of Law 51

3.3.2.2 The Role of A Reasonable Person 51

3.3.2.3 Surrounding Circumstances 52

Summary of Chapter 3 53

CONCLUSION 1

INTRODUCTION

1 The basis of the thesis

Contracts are today a popular social phenomenon It can be a phone call, a simply drafted paper, or a carefully negotiated document People cooperate with each other and enter into a contract for the purpose of minimizing potential and unforeseeable risks of their cooperation The language of a contract is a device of managing such risks Therefore, it is suggested that people should use their words

in a cautious manner

In reality, there are a lot of disputes over the language of a contract Such disagreements usually result from vague words which the parties may not discover when they enter into their contract Under these circumstances, the question is how Vietnamese law, especially the law of contract, governs the vague language of a contract This question relates to the methodology of explaining what the contract means Some relevant provisions in Vietnamese law are Articles 126 and 409 of the Civil Code of 2005, Article 21 of the Law on Business Insurance of 2000 (recently amended in 2010) and Article 15 of the Law on Consumer Rights Protection of

2010

Learning from other legal systems and international conventions is one of the routes to acquiring selective knowledge of how similar matters are governed in the other legal systems and the international conventions Accordingly, lawmakers, experts, researchers, and law students review statutory provisions in Vietnamese law

Therefore, the author choose to approach the interpretation of contracts in the Vietnamese Civil Code of 2005 by way of learning from the interpretation of contracts in the English law of contract The title of the author’s thesis is thus

“Interpretation of Contracts in English law and Experience for Vietnamese

Law”

2 Purpose and Delimitation of the Thesis

The purpose of the thesis is to introduce the methodology of interpreting contracts in the English law of contract, to compare the methodology of interpreting contracts in both Vietnamese and English law, and to make several recommendations for Vietnamese Law

The objects of the thesis are words and provisions which are facially expressed in written contracts In terms of the English law of contract, the thesis concerns with general principles of interpretation of contracts, such as contracts for the sale of shares, charterparties, and contracts for the assignment of claims According to the results of research, the primary source of English law is judicial decisions established in England Moreover, the scope of the source of both Vietnamese law and English is the sources of the domestic law

3 The Status of the Study

There are a large number of books on interpretation of contracts in the

English law of contract Some examples are Interpretation of Contracts (Current

Controversies in Law Series) which was written by Catherine Mitchell and

published by Routledge-Cavendish in 2007, The Interpretation of Contracts (5th

edition) which was written by Sir Kim Lewison and published by Sweet and

Maxwell in 2011, and Chitty of Contracts – Volume 1 – General Principles (31st

edition) which was written by Professor Hugh Beale and published by Sweet and Maxwell in 2012 The authors of the books discuss different aspects of the interpretative method in the English law of contract, such as general principles of interpretation, canons of interpretation, available materials for interpretation, and legal effects of interpretation

However, there are a limited number of books and academic papers on the

interpretation of contracts in Vietnamese law Some are Textbook on the

Vietnamese Civil Law which was published by Hanoi Law University in 2009, Textbook on Contract Law and Tort Law in Vietnam which was published by Ho

Chi Minh City University of Law in 2011, and The Law of Contract under The

Vietnamese Civil Code) which was written by Nguyen Ngoc Khanh and published

in 2007 These books to some extent give readers a general picture of interpretation

of contracts in Vietnamese law

In this thesis, the author have adopted the method of dialectical materialism, the method of analysis and synthesis, and statistical method Those methods are carried out at different parts of the thesis in order to achieve the purpose of the thesis

The thesis is expected to provide a theoretical and practical perspective on the methodology of contract interpretation in English law, and to contribute towards further studies of the interpretation of contracts in Vietnamese law In addition, the thesis also emphasises the value of the language of a contract and the skill of drafting and understanding a contract

6 Structure of the Thesis

The thesis contains three following chapters:

Chapter 1 The Interpretation of Contracts in The English Law of Contract Chapter 2 General Principles of Interpretation of Contracts in The

English Law of Contract Chapter 3 A Comparative Study of Vietnamese and English Law on

Interpretation of Contracts

Chapter 1: INTERPRETATION OF CONTRACTS IN THE ENGLISH LAW

1.1 The English Common Law System

There are two main types of legal systems in the world, namely, common law legal system and civil law legal system Countries belonging to the former include England, Wales, the United States, Canada, Australia, New Zealand, Hong Kong, Singapore, etc Indeed, the English common law system, which refers to the legal system of both England and Wales, is the basis of the common law legal system

In English common law, the law is classified into civil law and criminal

law There are three main sources:

Firstly, that is legislation In England, the law-making powers rest with the United Kingdom Parliament, the supreme legal authority in the United Kingdom It can create or end any law The courts cannot overrule its legislation When two Houses of Parliament (the House of Commons and the House of Lords) approve a

draft law (known as “bill”) and the reigning monarch agrees with the draft, it will become an “Act”, which creates a new law or changes an existing law Acts are

considered as the primary legislation which are altered or supplemented by the secondary legislation – that is delegated legislation.1

Secondly, that is case law or judicial decisions There are two important events in the English legal history, namely, (i) the judicial decisions of the Royal

Courts (known as “the common law courts”) became the main source of law in the

whole country from the 12th century, and (ii) the writ system.2 As to the latter, only when there was an existing writ, a person was then entitled to take legal action against someone else However, because of the limited types of writs, in the 14thcentury, the Courts of Chancery were established to supplement the writ system The Courts of Chancery developed a separate body of law from the common law of

the Royal Courts This body of law was known as “equity” In the late 19th century, pursuant to the Supreme Court of Judicature Act 1873-1875, both equity and common law were joined together.3

Thirdly, that is customs Customs are accepted ways of behaving or doing something in England For example, in Suffolk, a thousand means 1,200 This custom is written in a judicial decision.4 Therefore, one of the sources of customs is judicial decisions As a consequence, when judges seek a customary meaning, they will consult relevant judicial decisions

In relation to the courts system of England, civil cases may go to Magistrates’ Court, County Court, High Court, Court of Appeal and Supreme Court Meanwhile, criminal cases may go to Magistrates’ Court, Crown Court,

High Court, Court of Appeal and Supreme Court.5 Alongside the systems of courts

in England, there is a system of tribunals which also deal with civil cases The tribunals are governed by local authorities, government departments, or an agency

of the Ministry of Justice (known as “Her Majesty's Courts and Tribunals

Service”).6

1.2 The English Law of Contract

The law of contract is a branch of the civil law in the English common law

The English law of contract is defined as “the study of the legal principles which

underline all contracts; it is not (generally) concerned with particular types of contracts and their specialized rules”.7 The main sources of the English law of contracts include decisions of the courts and statues; indeed, the law of contract is based primarily on judicial decisions.8 There are some important statues governing the law of contract: the Law Reform (Frustrated Contracts) Act 1943, the Misrepresentation Act 1967, and the Contracts (Rights of Third Parties) Act 1999

What is the definition of the term “contract” in the English law of contract?

A contract is determined as “a legally enforceable agreement giving rise to

obligations for the parties involved.”9 There are six essential elements of a valid contract, namely, (i) an intention to create legal relations, (ii) an agreement, (iii) a consideration, (iv) capacity, (v) genuine consent, and (vi) legality In case there is lack of one of the first three elements, the court will hold that there is no contract

between parties In addition, in case there is an apparent contract which lacks one

of the three remaining elements, the court will decide that the contract is invalid

Firstly, that is an intention to create legal relations This element will be adopted to avoid the enforcement of casual social arrangement, promises made as jokers and informal domestic arrangement.10 For example, a mother promised that she would give her daughter £200 a month if the daughter gave up her job in the USA and completed her studies for the English bar A majority of the Court of Appeal refused to enforce the agreement because there was no intention to create legal relations.11 In terms of commercial transactions, they are generally presumed

to have an intention to create legal relations However, this presumption may be rebutted In 1891, a company advertised in magazines and newspapers that who bought its products (smoke balls) and used in the prescribed manner he could not have got influenza If not, it would pay £100 to any who caught influenza Then a woman purchased a smoke ball and used as it directed However, she still caught influenza She sued the company for a £100 promise The company attempted to argue that there was no intention to create legal relations However, the court rejected the argument because the fact the company had deposited £1,000 with its bank indicated that the advertisement created an intent to be bound.12

Secondly, that is agreement An agreement is usually thought to arise via a process of offer and acceptance An offer is a legal commitment which signifies the willingness to contract.13 It must be made with legal intent In the above example relating to the company which advertised its smoke balls in newspapers and

Laurence Koffman and Elizabeth Macdonald, The Law of Contract, 6th edition, Oxford University Press,

New York (2007), p 101 This was the case of Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256, CA

13

David Oughton & Martin Davis, Sourcebook on Contract, 2nd edition, Cavendish Publishing Ltd, United Kingdom, 2000, p 26

magazines, the court held that the advertisement was an offer to members of the public There are four most widely accepted circumstances in which there is no offer, namely, displays of goods in stores, advertisements, auction sales, and invitations to tender.14 Indeed, the four cases are prima facie presumed as invitations to treat – that is invitations to offer to negotiate or make offers in their return and so incapable of acceptance in themselves An acceptance is an unconditional assent to the terms proposed in the offer A valid offer contains the following conditions:15 (i) the offer must still be in force and open to acceptance, (ii) the acceptance must be unconditional and must not introduce any fresh terms of

a significant or material nature, and (iii) the acceptance is only valid, in general, when received by the offeror The first condition means that there is no lapse, rejection, or revocation made by the offeree Indeed, an offer will lapse when there

is no acceptance within a reasonable time, or a stated time period expires, or there

is the death of the offeror or offeree An offer can be revoked at any time before it

is validly accepted For a revocation to be effective, it should be communicated by

a reasonably reliable source For example, in a case in 1894, a man wrote to a landowner and offered to buy his land for £1,450 He then received a letter from the landowner’s solicitor which purported to accept the offer and attached a document for his signature However, the document contained important new terms which were not stated in the original offer Therefore, the man refused to sign the document It was held that there was no contract between two parties because the letter from the landowner’s solicitor was not an acceptance.16

Thirdly, that is consideration There are various definitions of

consideration One of the definitions is “a valuable consideration, in the eyes of

law, may consist either in some right, interest, profit, or benefit accruing to the one

party, or some forbearance, detriment, loss, or responsibility given, suffered or undertaken by the other”.17 For example, during divorce proceedings, a husband agreed to pay his wife an allowance of £100 each year After several years later, the wife sued her husband because he had never paid her the allowance The court rejected the wife’s claim on the ground that she had given no consideration for the promise of the husband.18 Besides, there are a number of rules of consideration:19(i) consideration needs not be adequate, (ii) consideration must be sufficient, (iii) consideration must not be past, and (iv) consideration must move from the promisee According to the first rule, it does not mean that the wife, in the above example, had to give her husband something of equal value in exchange for the husband’s promise She could have given him something which had a small value

In terms of the second rule, how much consideration is sufficient to make a promise enforceable? It is not easy to determine the extent of sufficiency However, the second rule means that the value is not approached on a completely subjective basis.20 In terms of the third rule, if the wife had exchanged an act which she had executed before the making of the husband’s promise, the act was considered as a past consideration which did not provide a good reason for enforcing the promise According to the fourth rule, the promise moved from the husband, in other words,

he was expected to use his money to pay his wife the allowance

Fourthly, the law prima facie presumes that everyone has a capacity to contract However, there are three classes of individuals who are subject to some degree of personal contractual incapacity, namely, minors, persons lacking the

requisite mental capacity, and drunken persons.21 Indeed, a minor is a person who

is under the age of eighteen In terms of the second class of individuals, that is persons who are mentally disordered or otherwise lacking in mental capacity In justification for the personal contractual incapacity, the three classes of individuals are not able to understand a transaction fully.22

Fifthly, that is genuine consent Genuine consent means the true or authentic agreement of contracting parties There are five scenarios which lack of genuine consent: (i) mistake, (ii) misrepresentation, (iii) duress, (iv) undue influence, and (v) unconscionable conduct In terms of mistake, there are several following circumstances: firstly, both parties agree on the terms of a contract but enter into the contract under a shared and fundamental misapprehension as to the facts or the law (known as “common mistake”);23 secondly, each party is mistaken

as to the terms intended by the other party (known as “mutual mistake”);24 thirdly, only one party misunderstands over the terms of a contract or the identity of the other party (known as “unilateral mistake”).25

In terms of the second scenario, there are now three types of misrepresentation: fraudulent misrepresentation, innocent misrepresentation and negligence misrepresentation There are two factors which constitute effective misrepresentation: firstly, false statement of facts,26 which is a statement and can be determined to be true or false at the time it was made For example, an owner of the land had stated that his land was capable of holding 2,000 sheeps Relying on this

statement of the owner, the respondent entered into a contract with the landowner Then the respondent discovered the fact that the land had never been used for sheep farming in a long period of time Besides, only a small part of the land had been used for sheep farming Therefore, the respondent refused to proceed with the contract Due to such a refusal, the landowner sued the respondent The court held that the landowner’s statement was a false statement Hence, the court decided the respondent won the case.27 Secondly, the false statement of facts made the other party to contract with him or the other party had notice of the false statement.28 In the above example, the respondent did not know the true fact before he entered into the contract with the landowner

In terms of duress, there is sufficient threats to induce a person to enter into

a contract For instance, in a case in 1979, the respondent threatened not to complete the construction of an oil tanker if the appellant did not prepare to pay 10% on top of the contract price The appellant did not know that the respondent was not entitled to the extra 10% Therefore, the appellant paid the extra After the completion of the construction, the appellant sued the respondent for the recovery

of the extra payment The court held that there was an economic duress.29 In terms

of undue influence, it appears in a relationship of trust and confidence where who two parties enter into a contract as the result of an abuse of the relationship For instance, an elderly farmer had a son whose business was in financial difficulty Previously, the farmer had guaranteed his son’s debt and secured the guarantee on his own house A representative of the bank advised the farmer that it could only continue to support the son’s business when he increased the charge on his house However, the bank did not explain clearly the true condition of his son’s business The farmer relied only on the advise of the bank to increase the charge Then the

bank foreclosed the house since the debt was not paid off The court held that the farmer had place confidence in the bank to agree the increase Therefore, there was

an undue influence in the case.30 In terms of unconscionable conduct (also know as

“unconscionable use of power”), it happens when a stronger party takes unconscientious advantage of the weaker party’s disabling circumstances For example, in 1995, the respondent (A) of a case intended that the appellant (B) to be mistaken and diverted the B’s attention from discovering the mistake by making false statement B then made a mistake which was same with A’s intention The court held that A had an unconscionable conduct.31

Finally, that is legality This element requires a contract to adhere to the state of law In other words, a valid contract must follow the law which governs the contract

The word “term” has several meanings It can be defined as “a word or phrase; especially an expression that have a fixed meaning in some field”, or “a contractual stipulation”, or “provisions that define an agreement’s scope; conditions

or stipulations”.32 The thesis concerns with the second sense of the word – that is, a contractual stipulation The question is whether a pre-contractual statement can be terms of a contract To answer the question, it is necessary to know what a pre-contractual statement is Accordingly, a pre-contractual statement can be (i) puffs, (ii) representations, or (ii) contractual terms With respect to puffs, there is no intention to create legal relations Therefore, there is no contract The distinction

between representations and contractual terms is “very imprecise”33 However,

there are some guidelines which have been adopted to determine whether a contractual statement is a contractual term or a representation Judges start from analyzing the intention of the person who makes a pre-contractual statement In case the statement maker asserts that his pre-contractual statement is true, his statement is regarded as a binding promise However, if the statement maker asks

pre-or advises the other, his statement is not regarded as a binding promise that the statement is true.34 For example, according to a case35 in 1913, the respondent sold

a horse to the appellant Before they entered into the contract for the sale, the respondent told the appellant that there was not need to continue examining the horse because it was perfectly sound Three weeks after the purchase, the appellant discovered that the horse was not perfectly sound Therefore, he sued the respondent for beach of contract The court held that the statement which the respondent communicated to the appellant was a promise of the truth Hence, the respondent breached the contract In another scenario, when a statement maker realizes which is important to lead a person to enter into a contract, his statement is regarded as a term.36 For example, there is a case37 in 1998 in which the appellant relied on the specification of a car to buy one from the respondent The appellant then discovered that the car did not accord with the specification Therefore, he sued the respondent for breach of contract The court held that the specification was

a term of the contract; therefore, the respondent breached the contract In brief, a pre-contractual statement in a negotiation can be a contractual term

Relating to the contents of a contract, there are two main types of terms: express terms and implied terms The express terms include written statements of

an agreement and any oral agreement.38 The implied terms are additional terms which have not been mentioned by parties, but the court deems that the parties have agreed on them.39

In terms of written contracts, there are contracts which are wholly in writing and contracts which are partly written and partly oral With respect to the former, are all contractual terms involved in the written documents? There is a general principle which relates to this type of written contracts That is the parol

evidence rule, which states, “if the contract is written then that writing is the whole

contract and parties cannot adduce extrinsic evidence, and especially oral evidence, to add to, vary or contradict that writing”40 “Parol” or “extrinsic” means outside The rule can be reiterated that when there is a written contract, all forms of evidence outside the contract are not generally permissible to contradict, vary or add to the terms of the written document The rule is aimed at protecting contractual certainty Besides, the rule only applies to express terms – that is contractual statements what are stated or expressed in the contracts In brief, all facially expressed terms are contained in the written contracts which are wholly in writing

In terms of contracts which are partly written and partly oral, obviously, the parol evidence rule does not apply in this case, since contractual terms are involved not only in the written contracts Contractual terms between parties, under these circumstances, include written terms and oral terms, indeed, the written terms are contained in a document.41

1.3 Interpretation of Contracts in the English Law of Contract

The primary sources of interpretation of contracts in the English law of contract are judicial decisions, because the law of contract is based mainly on judicial decisions In addition, there is no statutory definition of the concept of

“interpretation” of contracts in the source of legislation In the source of case law,

it may be defined as “the ascertainment of the meaning which the document would

convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”42 This is the definition of the modern approach to

interpretation of contracts in England Sometimes the term “construction” takes the place of the term “interpretation”, which does not give rise to a change of

meaning.43 Furthermore, such a judicial definition indicates the interpretative methodology adopted in England today In general, the interpreter will construe a contract due to a contract itself and surrounding circumstances

The interpretation of express terms is not similar to the interpretation of implied terms This difference results from the different method by which each type

of term is made The express terms are stated clearly in an agreement However, the implied terms can be made by custom, statue, or the courts.44 In the scope of the thesis, it is concerned with interpretation of express terms in written contracts

“The approach of the court to the construction of contracts and other document has been modified in the light of the decisions of the House of Lords in Mannai Investment Co Ltd v Eagle Star Assurrance [1997]

AC 749 and Investors Compensation Scheme Ltd v West Bromwich Building Society (1998) 1 MR 896.”

44

Textbook on Contract Law, p 211

The interpreter of a contract can be parties of a contract, judges, or arbitrators An expert describes the process of interpretation of contracts as follows: from the very first, contracting parties endeavor to interpret the meaning of words

or provisions; in the last resort, when the parties have still differing views about what their contract means and bring the case to a court or arbitrator, judges or arbitrators will then interpret the contract.45

The interpretation of contracts in the English law of contract applies similarly among different types of contracts It it because such an interpretation governs legal principles which are applicable to all types of contract

Today there are a lot of judicial decisions relating to the interpretation of

contracts According to an opinion of a judge, he said “it is often suggested and

widely believed that our forebears of 50 to 100 years or more ago adopted a strictly literal approach to interpretation of contracts, but we now adopt a much more flexible and rationalist approach.” Therefore, the interpretation of contracts

in the English law of contract in this thesis is the modern approach This modern

approach started in 1971 due to the following case Prenn v Simmonds [1971] 3 All

ER 237 This case will be later analyzed in the thesis

45

The Interpretation of Contracts, p 21

of a contract which is partly written and pertly oral, the interpreter is permitted to discover outside evidence Additionally, elements of a valid contract also influence the interpretation of contracts For example, a pre-contractual statement may be a representation or a contractual term The interpretation of express terms is not similar to the implication of implied terms In conclusion, the thesis covers the interpretation of express terms of written contracts under the English law of contract

Chapter 2: GENERAL PRINCIPLES OF INTERPRETATION OF

CONTRACTS IN THE ENGLISH LAW OF CONTRACT

Chapter 2 is aimed at analyzing the principles of interpretation A principle

is defined as a basic rule, law or doctrine.46 In order to grasp the overall insight into

a matter of law, it is necessary to start at principles Accordingly, the principles of interpretation of contracts are the basic rules which are to construe contracts The issue is what the sources are In the English law of contract, the sources are judicial decisions Besides, there are important cases relating to the principles of interpretation of contracts.47 However, the thesis only studies three following cases:

Prenn v Simmonds [1971] 3 All ER 23748 (hereafter referred to as “the case 1971”),

Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co

[1976] 3 All ER 57049 (hereafter referred to as “the case 1976”), and Investors

Compensation Scheme v West Bromwich Building Society 50 [1998] 1 All ER 98 (hereafter referred to as “the case 1998”)

46

The Black’s Law Dictionary, p.1211

47

The important cases are Arbuthnott v Fagan [1996] LRLR 135; BCCI v Ali [2001] UKHK 8, [2001] 1 All

ER 961; Chartbrook Homes Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 4 All ER 677; Charter Reinsurance Co v Fagan [1997] AC 313, [1996] 3 All ER 46; Cosmos Holidays Plc v Dhanjal Investments Ltd [2009] EWCA 316, [2009] All ER (D) 161 (Apr); Eridana v Oetker [2000] 2 All ER (Comm) 108; HIH Casualty & General Insurance v New Hamsphire Insurance Co [2001] EWCA Civ 735 [2001] 2 All ER (Comm) 39; HSBC Bank Plc v Liberty Mutual Insurances [2001] All ER (D) 61 (May); Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98; KPMG v Network Rail Infrastructure [2007] EWCA Civ 363, [2007] All ER (D) 245 (Apr); Mannai Investments Co v Eagle Star Life Assurance Co [1997] 3 All ER 352; Prenn v Simmonds [1971] 3 All ER 237; Sirius International Co v FAI General Insurance Ltd [2004] UKHL 54, [2005] 1 All ER 191

48

Source: All England Reporter; Published Citation: [1971] 3 All ER 237; Court: House of Lords; Judges: Lord Reid, Lord Donovan, Lord Wilberforce, Lord Pearson, and Lord Diplock; Judgment date: 20 July 1971; Appellant: Prenn; Respondent: Simmonds

49

Source: All English Reporter; Publisher Citation: [1976] 3 All ER 570; Court: House of Lords; Judges: Lord Wilberforce, Viscount Dilhorne, Lord Simon of Glaisdale, Lord Kilbrandon, and Lord Russell of Killowen; Judgment date: 7 October 1976; Appellants: Reardon Smith Ltd (in the first appeal), Hansen- Tangen (in the second appeal); Respondents: Hansen-Tangen (in the first appeal), Sanko Steamship Co (in the second appeal)

50 Source: All England Reporter; Publisher Citation: [1998] 1 All ER 98; Court: House of Lords; Judges: Lord Goff of Chieveley, Lord Lloyd of Berwick, Lord Hoffmann, Lord Hope of Craighead, and Lord Clyde;

There are some reasons for such a selection of the three cases: firstly, they are the judgments of the House of Lords, the most powerful legislative authority in the United Kingdom Secondly, these decisions are cited as the primary sources of legal principles in many decisions, especially at Court of Appeal and High Court.51Thirdly, there is a consistent connection among the three cases, which is stated clearly in the case 1998 Indeed, the case 1998 inherited the legal principles of interpretation in the cases 1971 and 1976 Fourthly, there are some important textbooks on the English law of contract which relate to the three cases when the authors discuss the general principles of interpretation of contracts Fifthly, the three cases were hold by two well-known Lords of the House that is Lord

Wilberforce and Lord Hoffmann Lord Wilberforce is appreciated as “one of the

most civilized and balanced judges of the 20th century”52, and Lord Hoffmann is a

“noble and learned friend” of other Lords of the House

The study of the three cases will clarify how judges, in England, address the question of interpretation, how they read a contract, what they rely on to construe a contract, what they would do if there is a vague or self-contradictory terms, and which materials are accepted as an aid in the interpretation

The facts relating to the general principles

In the case 1971, although Radio & Television Trust Ltd (hereafter referred

as “RTT”) was a company, but it did not trade It had a wholly owned trading subsidiary, Airmec Ltd Airmec Ltd employed Doctor Simmonds as it managing director and leading technician Mr Prenn was very impressed by the services of Airmec Ltd under the management of Doctor Simmonds Therefore, he wanted to own Airmec Ltd Mr Prenn then purchased from Crompton Parkinson Ltd its holding of 94 percent of the RTT’s ordinary capital and the whole preference stock

Mr Prenn paid £160,000 in cash and the balance, £294,716, in four equal installments from 1960 to 1963 Indeed, the terminal date for payment was 19thAugust 1963 In 1960, Mr Prenn and Doctor Simmonds entered into a contract for the sale of company shares The agreement was intended to secure Doctor Simmonds the provision of an interest in the equity of RTT Accordingly, Doctor Simmonds had to remain with RTT long enough to ensure that the balance debt under the contract between Mr Prenn and Crompton Parkinson Ltd was paid off out

of profits of RTT The agreement also provided that the sale would go off it Doctor Simmonds left RTT before the terminal date for payment Doctor Simmonds then sued Mr Prenn His claims were (i) he was entitled to acquire from Mr Prenn the company shares because he had finished the conditions of the contract for the sale

of company shares, and (ii) if the contract did not bear the meaning he contended for, it should be rectified

In the case 1976, the facts of the case can be summarized as followed: in

15th August 1972, Sanko Steamship Co (hereafter referred as “Sanko”) and Tangen (hereafter referred as “Hansen”) entered into a charter agreement Clause

Hansen-24 of the charter agreement stated clearly that the description of the vessel was set out in Form B, which gave very detailed particular about the ship, its equipment and performance In 28th March 1973, Sanko and Sculptor Shipping Ltd (hereafter referred as “Sculptor”) entered into a charterparty in which Sculptor agreed to hire

a vessel, which was called No.354 and constructed by Osaka Shipbuilding Co Ltd

(“Osaka”) This charterparty also contained Form B 10th August 1973, an addendum was added to the charter agreement between Sanko and Hansen The addendum altered the duration of the charter, the hire payments, and nominated the vessel which was to be built by Osaka and known as No.354 In 12th October 1973 Hansen entered into a contract with Reardon Smith Line Ltd (hereafter referred as

“Reardon”) in which Hansen agreed to hire the vessel No.354 by Osaka to Reardon Smith according to Form B There were a number of contracts and arrangements concerning the building of the vessel No.354 by Osaka In order to perform the

charter with Sanko, Sculptor and Sumitomo Shoji Kaisha Ltd (“SKK”) entered into

a contract, in which SKK agreed to build the vessel No.354 by Osaka and sell it to Sculptor Then SKK contracted with Osaka to build and deliver the vessel Osaka was unable to build the vessel because of its small yard Hence, Osaka entered into

a joint venture to establish a new company called Oshima Shipbuilding Ltd

(“Oshima”), which was to build a new yard at Oshima Oshima yard is about 300

miles from Osaka yard Osaka then contracted with Oshima to buy a vessel constructed by Oshima Accordingly, the vessel was No 004 in Oshima’s books, but also No.354 in Osaka’s books and in export documents Although the vessel complied with the physical specifications in the charters, both Hansen and Reardon refused to take delivery of the vessel on the ground that it had not been built personably by Osaka and did not bear its yard No.354

In terms of the surrounding facts of the case 1998, there were five Lords hearing the case Lord Hoffmann delivered the judgment of the House Pursuant to section 54 of the Financial Services Act 1986, the Investors Compensation Scheme (hereafter referred as “ICS”) was established to provide a compensation fund for people who had unsatisfied claims against authorized person under the Act to carry

on investment business There were a group of homeowners (hereafter referred as

“investors”) who were invited by authorized persons under the Act to enter into home income plans Under the plans, the authorized persons, in cooperation with some building societies, obtained mortgage loans which were mainly invested in

equity-linked bonds Then equities and house prices fell, which caused the investors severe loss Therefore, the investors required compensation from the ICS The ICS required each investor to sign a claim form According to the contents of the claim form, each investor had to assign all of his rights arising out of the transaction against the authorized persons and anyone else The investors then commenced proceedings against West Bromwich Building Society (hereafter referred as “WBBS”) for damages and rescission The ICS also commenced proceedings against WBBS for damages Therefore, there were competing claims against WBBS for the same damages The question of the case 1998 was whether the investors’ actions had been assigned to the ICS Before delivering the judgment

of the case 1998, Lord Hoffmann stated the principles of interpretation as follows:

My Lords, I will say at once that I prefer the approach of the learned judge But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237 at 240–242, [1971] 1 WLR 1381 at 1384–

1386 and Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570, [1976] 1 WLR 989, is always sufficiently appreciated The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded The principles may be summarised as follows

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract

(2) The background was famously referred to by Lord Wilberforce as the

‘matrix of fact’, but this phrase is, if anything, an understated description

of what the background may include Subject to the requirement that it should have been reasonably available to the parties and to the exception

to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent They are admissible only in an action for rectification The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life The boundaries of this exception are in some respects unclear But this is not the occasion on which to explore them

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood

to mean The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945

(5) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal

documents On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191

at 201:

‘… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’

2.1 The Language of A Contractual Document

Due to Lord Hoffmann’s statements of the five principles, the Lord referred

to other four cases; however, only two of them are examined in this thesis Besides,

Lord Hoffmann said, “the principles may be summarized as follows”, which means

that his statements are a way of expressing the five principles, not relating to the value of the principles Furthermore, in another case53 of the House of Lords, Lord

Hoffmann wrote, “there was little in the statement of principle which could not be

found in earlier authorities” Moreover, based on the five general principles of the

case 1998, a judge of the House of Lords gave a shorter restatement of the principles as follows:

To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties To ascertain the parties’

53

This is the case of Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38

intentions the court does not of course inquire into the parties’ subjective states of mind but makes an objective judgment based on the materials already identified

There are many issues in the contents of the five principles however, in the scope of this thesis, the author will examine the following issues: Firstly, the starting point of the interpretation of contracts is to look at the language of the whole contracts (including the words or provisions which give rise to the question

of interpretation) Secondly, the interpreter has to place their thinking in the positions of a reasonable person, not the contracting parties Thirdly, after looking

at the language of the contracts, the interpreter has to look for evidence of the surrounding circumstances and to determine the weight of the evidence

2.1.1 The Terminology of “Contractual Document”

At the opening of the first principle, Lord Hoffmann stated that the

interpretation of contracts was to determine the meaning of a “contractual

document” Therefore, the issue is what the contractual document is and whether

this concept is similar to the terms “written document” and “written contracts”

Relating to the concept of “written document”, “document” is defined as

“something tangible on which words, symbols, or marks are recorded” or “the

deeds, arrangements, title papers, letters, receipt, and other written instruments used to prove a fact”.54 “Written” is defined as “expressed in writing rather than in

speech” or “in the form of a letter, document, etc and therefore official”.55 In many judicial decisions, the term “written document” is used in two following senses: (i)

a formality of a contract,56 (ii) a replacement of the term “contractual document”.57

In the case of Homburg Houtimport BV v Agrosin Private Ltd and others (The Starsin) [2003] UKHL 12,

[2003] 2 All ER 785, a Lord used the term “a signed and written document”

In brief, the scope of written documents is very broad It can be a non-contractual document, or a contractual document In addition, it can contain contractual statement or non-contractual statement

In terms of the concept of “written contract”, “written contract” is defined

as “a contract whose terms have been reduced to writing”.58 There are two scenarios of written contracts, namely, contracts which are wholly in writing and contracts which are partly written and partly oral Therefore, in the former, a written contract is a written document However, written terms are stated in written document, and oral terms are not In brief, a written contract is a written document, but not all written documents are written contracts

In terms of the concept of “contractual document”, “contractual” means

“according to a contract”59 or “connected with the conditions of a legal written

document”60 or “agreed in a contract”61 In the case 1998, Lord Hoffmann limited the scope of the five principles to the interpretation of “contractual documents” However, there is no definition of the term in the case 1998 In his reasoning, he said that he had to construe the claim form and its explanatory note It is reasonable

to infer that the contractual documents of the case was the claim form and the explanatory note

In conclusion, a contractual document must be a document which contains contractual terms Meanwhile, written terms are not included only in written contracts (for example, the claim form in the case 1998) but also in other written 57

In the case 1971, a Lord of the House mentioned the interpretation of “written document” instead of the interpretation of “contractual document”

document (for example, the explanatory note in the case 1998) Therefore, the three terms “written document”, “written contract” and “contractual document” are not the same at all times

2.1.2 The Determination of the Meaning of the Language of A Contractual Document

Reading a contract is not only to look at the language of the contract but also to determine to read in the position of whose intention one should be put in The matter of intention is very important to the interpretation of contracts Therefore, such a matter will be studied later in Chapter 2

What is the language of a contractual document? The language includes words, provisions of the contractual provision Lord Hoffman explained, at the fifth principle, looking at the language of a contractual document is to discover the

natural and ordinary meaning of words, since the “natural and ordinary meaning

reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal document.”62 The next matter is how to determine the natural and ordinary meaning of words Lord Hoffmann clarifies at the fourth principle that the natural and ordinary meaning is not the meaning which answers directly the question of interpretation at all times In other words, the process of interpretation does not stop completely searching for the natural and ordinary meaning Additionally, such a meaning is learned from dictionaries and grammars, since the dictionaries provide one or more popular meanings of words and sometimes their context Accordingly, the grammars will assist in choosing between such popular meanings

62

The statement is stated at the fifth principles of the case 1998

In the case 1998, the question of interpretation results from section 3(b) of the claim form Both the House of Lords and the Court of Appeal agreed with the way of finding the natural and ordinary meaning of the High Court’s judge

Section 3(b) of the claim form was read as follows:

Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against West Bromwich Building Society in which you claim an abatement of sums which you would otherwise have to repay to that Society in respect of sums borrowed by you from that Society in connection with the transaction and dealings giving rise to the claim (including interest on such sums)

The ICS construed section 3(b) as an exclusion of rescission only In contrast, both the investors and WBBS construed section 3(b) as an exclusion of any claims, including claims for damages The High Court’s judge held that:

according to the ordinary rules of syntax, (i) the term “any claim” was the antecedent of the term “that you have” and (ii) “or otherwise” was in the adjective

parenthesis; therefore the breadth of the term “any claim” was not limited by the term “whether sounding in rescission for undue influence or otherwise” In other

words, the High Court’s judge decided for the construction made by the investors and WBBS

In conclusion, the determination of contractual documents is very important, since it is the starting point in the task of interpretation Additional, at the beginning, judges do not relate to documents which are made before or after the contract is entered into

2.2 Contractual Document to Be Interpreted to Reflect the Understanding of A Reasonable Person

2.2.1 The Terminology of “Reasonable Person”