[2011] UKSC 50
Lord Clarke, (With whom Lord Phillips, Lord Mance, Lord Kerr and Lord Wilson agree)
The correct approach to construction
14. For the most part, the correct approach to construction of the Bonds, as in the case of any contract, was not in dispute. The principles have been discussed in many cases, notably of course, as Lord Neuberger MR said in Pink Floyd Music Ltd v EMI Records Ltd [2010] EWCA Civ 1429; [2011] 1 WLR 770 at para 17, by Lord Hoffmann in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, passim, in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912F-913G and in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, paras 21-26. I agree with Lord Neuberger (also at para 17) that those cases show that the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. As Lord Hoffmann made clear in the first of the principles he summarised in the Investors Compensation Scheme case at page 912H, the relevant reasonable person is one who has 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.
15. The issue between the parties in this appeal is the role to be played by considerations of business common sense in determining what the parties meant. Sir Simon Tuckey said at para 19 of his judgment that there was no dispute about the principles of construction and the Bank so submitted in its skeleton argument. However, I do not think that is quite correct.
16. At para 18 Sir Simon identified the question of construction substantially as set out in para 9 above and said at para 19:
"There is no dispute about the principles of construction to be applied in order to answer this question. The court must first look at the words which the parties have used in the bond itself. The shipbuilding contract is of course the context and cause for the bond but is nevertheless a separate contract between different parties. If the language of the bond leads clearly to a conclusion that one or other of the constructions contended for is the correct one, the Court must give effect to it, however surprising or unreasonable the result might be. But if there are two possible constructions, the Court is entitled to reject the one which is unreasonable and, in a commercial context, the one which flouts business common sense. This follows from the House of Lords decisions in Wickman Machine Tools Sales Limited v Schuler AG [1974] AC 235, where at 251 Lord Reid said:
'The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.'
and The Antaios [1984] AC 191, where at 201 Lord Diplock said:
'If detailed and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense it must yield to business common sense.'"
17. As I read his judgment, Patten LJ did not put the question in quite the same way. This can be seen from paras 35 to 44 of his judgment. At para 35 he referred to Sir Simon Tuckey's approach at para 19 (as quoted above). He also referred to para 18(iii) of the Judge's judgment, where the Judge described the Bank's construction of the Bond as having the surprising and uncommercial result of the guarantee not being available to meet the Builder's repayment obligations in the event of insolvency. Patten LJ noted that the Judge appeared to have taken that into account as a factor in favour of the Buyers' construction of paragraph [3] of the Bonds. Patten LJ added that the Judge's approach was the same as that of Sir Simon Tuckey.
18. Patten LJ then referred to the cases mentioned above and expressed his conclusion in principle thus at para 42:
"In this case (as in most others) the Court is not privy to the negotiations between the parties or to the commercial and other pressures which may have dictated the balance of interests which the contract strikes. Unless the most natural meaning of the words produces a result which is so extreme as to suggest that it was unintended, the Court has no alternative but to give effect it its terms. To do otherwise would be to risk imposing obligations on one or other party which they were never willing to assume and in circumstances which amount to no more than guesswork on the part of the Court."
19. Finally, at paras 43 and 44, Patten LJ quoted from the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-5 and of Lord Hoffmann in Chartbrook at para 20, where they discussed the reason for the rule excluding evidence of pre-contractual negotiations. In particular they stressed the irrelevance of the parties' subjective intentions and noted that the mere fact that a term in the contract appears to be particularly unfavourable to one party or the other is irrelevant. As Lord Hoffmann put it, the term may have been agreed in exchange for some concession made elsewhere in the transaction or it may simply have been a bad bargain.
20. I entirely accept those caveats. However, it seems to me to be clear that the principle stated by Patten LJ in para 42 is different from that stated by the Judge in his para 18(iii) and by Sir Simon Tuckey in para 19. It is not in my judgment necessary to conclude that, unless the most natural meaning of the words produces a result so extreme as to suggest that it was unintended, the court must give effect to that meaning.
21. The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has 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, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.
22. This conclusion appears to me to be supported by Lord Reid's approach in Wickman quoted by Sir Simon Tuckey and set out above. I am of course aware that, in considering statements of general principle in a particular case, the court must have regard to the fact that the precise formulation of the proposition may be affected by the facts of the case. Nevertheless, there is a consistent body of opinion, largely collated by the Buyers in an appendix to their case, which supports the approach of the Judge and Sir Simon Tuckey.
23. Where the parties have used unambiguous language, the court must apply it. This can be seen from the decision of the Court of Appeal in Co-operative Wholesale Society Ltd v. National Westminster Bank plc [1995] 1 EGLR 97. The court was considering the true construction of rent review clauses in a number of different cases. The underlying result which the landlords sought in each case was the same. The court regarded it as a most improbable commercial result. Where the result, though improbable, flowed from the unambiguous language of the clause, the landlords succeeded, whereas where it did not, they failed. The court held that ordinary principles of construction applied to rent review clauses and applied the principles in The Antaios (Antaios Compania Naviera SA v Salen Rederierna AB) [1985] AC 191. After quoting the passage from the speech of Lord Diplock cited above, Hoffmann LJ said, at p 98:
"This robust declaration does not, however, mean that one can rewrite the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement."
24. The court also comprised Leggatt and Simon Brown LJJ. Simon Brown LJ at p 101 said that, having regard to the improbable result for which the landlords contended, only the most unambiguous of such clauses could properly be found to bear the landlords construction and that in the case of only one of the leases did the clause "unambiguously …achieve the improbable result for which the landlords contend". The case is of interest because Simon Brown LJ considered that, of the other three cases, one unambiguously failed to achieve the result sought by the landlords, whereas, of the other two, he said this at p 102:
"For my part, I would accept that the more obvious reading of both favours the landlord's construction. I am persuaded, however, that they are capable of being, and therefore, for the reasons already given, should be, construed differently."
That case is therefore an example of the adoption and application of the principle endorsed by the Judge and by Sir Simon Tuckey. See also International Fina Services AG v Katrina Shipping Ltd, The Fina Samco [1995] 2 Lloyd's Rep. 344, where Neill LJ said at page 350 it was necessary when construing a commercial document to strive to attribute to it a meaning which accords with business common sense.
25. In 1997, writing extra-judicially ("Contract Law: Fulfilling the reasonable expectations of honest men") in 113 LQR 433, 441 Lord Steyn expressed the principle thus:
"Often there is no obvious or ordinary meaning of the language under consideration. There are competing interpretations to be considered. In choosing between alternatives a court should primarily be guided by the contextual scene in which the stipulation in question appears. And speaking generally commercially minded judges would regard the commercial purpose of the contract as more important than niceties of language. And, in the event of doubt, the working assumption will be that a fair construction best matches the reasonable expectations of the parties."
I agree. He said much the same judicially in Society of Lloyd's v Robinson [1999] 1 All ER (Comm) 545, 551:
"Loyalty to the text of a commercial contract, instrument, or document read in its contextual setting is the paramount principle of interpretation. But in the process of interpreting the meaning of the language of a commercial document the court ought generally to favour a commercially sensible construction. The reason for this approach is that a commercial construction is likely to give effect to the intention of the parties. Words ought therefore to be interpreted in the way in which a reasonable commercial person would construe them. And the reasonable commercial person can safely be assumed to be unimpressed with technical interpretations and undue emphasis on niceties of language".
26. Similar assistance is at hand nearer at home. In Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] CLC 1103, 1118-1119; [2011] EWCA Civ 1047; [2001] 2 All ER (Comm) 299, Mance LJ said:
"13. Construction, as Sir Thomas Bingham MR said in Arbuthnott v Fagan [1995] CLC 1396 at p 1400 is thus 'a composite exercise, neither uncompromisingly literal nor unswervingly purposive'. To para (5), one may add as a coda words of Lord Bridge in Mitsui Construction Co Ltd v A-G of Hong Kong (1986) 33 BLR 14, cited in my judgment in Sinochem International Oil (London) Ltd v Mobil Sales and Supply Corp [2000] CLC 878 at p 885. Speaking of a poorly drafted and ambiguous contract, Lord Bridge said that poor drafting itself provides:
'no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used interpreted in the light of the relevant factual situation in which the contract was made. But the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis.'
…
16 ... in my judgment the subclause has no very natural meaning and is, at the least, open to two possible meanings or interpretations - one the judge's, the other that it addresses two separate subject-matters. In these circumstances, it is especially important to undertake the exercise on which the judge declined to embark, that is to consider the implications of each interpretation. In my opinion, a court when construing any document should always have an eye to the consequences of a particular construction, even if they often only serve as a check on an obvious meaning or a restraint upon adoption of a conceivable but unbusinesslike meaning. In intermediate situations, as Professor Guest wisely observes in Chitty on Contracts (28th edn) vol 1, para. 12-049, a 'balance has to be struck' through the exercise of sound judicial discretion."
27. More generally, in Homburg Houtimport BV v Agrosin Private Ltd: The Starsin [2004] 1 AC 715, para 10 Lord Bingham referred to
"the rule to which Lord Halsbury LC alluded in Glynn v Margetson & Co [1893] AC 351, 359, 'that a business sense will be given to business documents. The business sense is that which businessmen, in the course of their ordinary dealings, would give the document."
28. Three other cases merit brief reference. The same approach was adopted by Arden LJ in In the Matter of Golden Key Ltd (In Receivership) [2009] EWCA Civ 636, paras 29 and 42 and by this Court in In Re Sigma Finance Corporation (in administrative receivership) [2009] UKSC 2; [2010] 1 All ER 571, where Lord Mance said at para 12 that the resolution of an issue of interpretation in a case like the present was an iterative process, involving checking each of the rival meanings against other provisions of the document and investigating its commercial consequences.
29. Finally, it is worth setting out two extracts from the judgment of Longmore LJ in Barclays Bank plc v HHY Luxembourg SARL [2010] EWCA Civ 1248; [2011] 1 BCLC 336, paras 25 and 26:
"25. The matter does not of course rest there because when alternative constructions are available one has to consider which is the more commercially sensible. On this aspect of the matter Mr Zacaroli has all the cards. ...
26. The judge said that it did not flout common sense to say that the clause provided for a very limited level of release, but that, with respect, is not quite the way to look at the matter. If a clause is capable of two meanings, as on any view this clause is, it is quite possible that neither meaning will flout common sense. In such circumstances, it is much more appropriate to adopt the more, rather than the less, commercial construction."
30. In my opinion Longmore LJ has there neatly summarised the correct approach to the problem. That approach is now supported by a significant body of authority. As stated in a little more detail in para 21 above, it is in essence that, where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense. For these reasons I prefer the approach of the Judge and Sir Simon Tuckey to that of Patten LJ, which is to my mind significantly different on this point.