How the Courts Decide if There is a Contract and Interpret its Terms

EMCOR v Edinburgh1 and Felton v Liverpool2 provide summaries of the law on interpreting contracts

In Emcor v Edinburgh, the court had to interpret what a signed contract meant. Lord Drummond Young set out the principles applicable to interpreting the contract:3

1. As a whole: “a contractual provision must be construed in the context of the contract in which it is found. The documents forming the contract must be construed as a whole.”

2. Objectively: the contract is interpreted “according to the standards of a reasonable third party who is aware of the commercial context in which the contract occurs.”

3. Sensibly: “a commercial contract should be given a commercially sensible construction” in other words when reviewing what a contract means the court should prefer a reasonable result over any other; and where there are competing meanings, the court should consider “meaning is more likely to have been intended by reasonable businessmen.”4

4. Cohesively : printed clauses take preference over handwritten terms5 but “only… if there is a conflict that cannot be reconciled using the normal processes of contractual interpretation.”

5. Effectively: “the court must give effect to the parties' bargain; it must not substitute a different bargain from that made by the parties.”

6. In context: “it is permissible in construing a contract to have regard to the circumstances in which the contract came to be concluded for the purpose of discovering the facts to which the contract refers and its commercial purposes, objectively considered [6]. This means in particular that the court may have regard to expert or other technical evidence as to the meaning of technical provisions in a contract. Nevertheless, regard may only be had to matters that were known, or ought reasonably to have been known, to both parties.”7

7. As written: discussions are only admissible to establish the parties’ knowledge of the relevant context8 but it is generally unhelpful to consider the evidence of the contract negotiations – as only the final contract records the agreement or consensus position.9 Any words deleted prior to signature should be disregarded as they “are not part of the agreement.”10

In Felton v Liverpool, the court was tasked with deciding whether there was a contract at all, as well as what that contract meant. HHJ Toulmin QC started by repeating the principles set out in Investors Compensation Scheme v West Bromwich:11

“i) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would be available to the parties in the situation in which they were at the time of the contract.

ii) The background may include anything which would have affected the way in which the language of the document would have been understood by a reasonable man or woman.

iii) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.

iv) The meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.

v) Words should be given their ‘natural and ordinary meaning’. However this does not require Judges to attribute to the parties an intention that they plainly could not have had.”

In relation to whether or not there was even a legally-binding contract, he added these principles:12

Even if a clause is difficult to interpret it may not be meaningless. “The court must do its best to select among contending interpretations the one that best matches the language of the parties.”

The court can “look behind the apparent or literal meaning of the words” to determine the true intent of the parties….

The parties have freedom to contract and can decide “whether they wish to be bound and…[on] what terms.”

The court must consider “whether or not the [material] terms of a contract have been agreed.”

In contracts between businesses the court will generally “strive to uphold a commercial bargain.”

o ‘When much has been done the courts will do their best not to destroy the bargain.’13

o The court will even provide a substitute machinery to fill a gap in the contract when appropriate.14

Conclusion The starting point is that the court has to consider whether there was any agreement (in terms of the five essentials for a legal contract15). This does not depend on the view of the partners, but an objective view. Once an agreement has been found, it then has to define and interpret that agreement by reading any signed contract as it was written to determine the partners’ intent. Where the language used is plain then the court will tend to interpret the contract in the same way as the partners. Where the language is used is unclear, for example where the words used are not to be taken literally, then there is likely to be disputes about the partners’ roles, responsibilities, rights and remedies. The best course is to record every term of your agreement clearly and unambiguously.

The Author Sarah Fox of 500 Words Ltd prepared this note. She provides confidence to construction companies to read, use and understand their contracts. She is also author of the 500 Word Contract™. To find out how Sarah can help you love your terms and conditions, contact her on: 07767 342747 or by email: sarah@500words.co.uk.

Footnotes

1 Emcor Drake And Scull Ltd v Edinburgh Royal Joint Venture& Ors [2005] ScotCS CSOH_139. 2 Felton Construction Ltd v Liverpool City Council [2007] EWHC 3049 (TCC).

3 Paragraphs 13 and 14. 4 Commercial Union Assurance Co. Ltd v Hayden, [1977] QB 804.

5 Barry D Trentham Ltd. v McNeil, 1996 SLT 202, at 207. 6 Prenn v Simmonds, [1971] 1 WLR 1381; Reardon Smith Line Ltd v Hansen Tangen, [1976] 1 WLR 989

7 Howgate Shopping Centre Ltd v Catercraft Services Ltd, 7 January 2004, unreported, per Lord Macfadyen at paragraph [36].

8 Bank of Scotland v Dunedin Property Investment Co. Ltd, supra, at 665 F-G per LP Rodger; a similar point is made in Bovis Construction (Scotland) Ltd v Whatlings Construction Ltd, 1994 SC 351, by LP Hope at 357 C-G.

9 Lord Wilberforce in Prenn v Simmonds, at [1971] 1 WLR 1384G-1385A.

10 Inglis v Buttery & Co., 1878, 5 R. (HL) 87, per Lord Hatherley at 96-97, Lord O'Hagan at 98-99, and Lord Blackburn

at 102; Prenn v Simmonds, supra, per Lord Wilberforce at [1971] 1 WLR 1384G-1385H: London & Overseas Freighters Ltd v Timber Shipping Co. SA, [1972] AC 1, per Lord Reid at 15-16.

11 Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28; [1998] 1 All ER 98; [1998] 1 WLR 896.

12 Paragraph 15. 13 Sykes v Fine Fare [1967] 1 Lloyds Rep 53. 14 Sudbrook Trading Estate v Eggleton [1983] 1 AC 444 at 460. 15 Offer, acceptance, intention, consideration and certainty.