Interpretation of Contracts; the relevant background and the factual matrix: The Financial Conduct Authority v Arch Insurance (UK) Limited & Ors [2020] EWHC 2448 (Comm).

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A helpful overview of this topic in the context of insurance cases. This is taken from the decision of a strong Commercial Court (Flaux LJ and Butcher J).

  1. When interpreting the provisions of a contract, the court can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or “reasonably available” to both parties: Arnold v Britton at [21]; Investors Compensation Scheme at 912-913.
  2. The material which is reasonably available to the parties includes the relevant legal background (see Lewison on the Interpretation of Contracts (6th ed) at ยง4.06), and the parties are “taken to have contracted against a background which includes the previous decisions upon the construction of similar contracts” (Toomey v Eagle Star Insurance Co Ltd [1994] 1 Lloyd’s Rep 516 at 520 (Hobhouse LJ)). It is also part of the factual matrix known or taken to be known to both parties that both statute law and the common law develop over time, so they can be taken as having agreed that their agreement be interpreted in the light of the general law from time to time: Lymington Marina Ltd v MacNamara [2007] EWCA Civ 151 at [33] (Arden LJ).
  3. An example in the context of insurance is Sunport Shipping Ltd v Tryg-Baltica International (UK) Ltd (The Kleovoulos of Rhodes) [2003] EWCA Civ 12, [2003] 1 Lloyd’s Rep 138. In that case, the claimants’ vessel was insured under a policy of marine insurance which contained a standard Institute clause excluding cover for arrest or detainment “by reason of infringement of any customs or trading regulations”. The parties were at issue in particular about the breadth of the expression “customs regulations” and therefore whether the clause in question excluded cover in relation to an infringement of laws prohibiting the import of drugs (at [15]). In his judgment, Clarke LJ (with whom Scott Baker LJ and Peter Gibson LJ agreed) referred to the principle that “where the relevant expression has been given a settled meaning by the Courts the Court should so construe it in the same context in the future” (at [25]). He went on as follows at [28]:
    “Where a contract has been professionally drawn, as in the case of the Institute Clauses, the draftsman is certain to have in mind decisions of the Courts on earlier editions of the clause. Such decisions are part of the context or background circumstances against which the particular contract falls to be construed. If the draftsman chooses to adopt the same words as previously construed by the Courts, it seems to me to be likely that, other things being equal, he intends that the words should continue to have the same meaning.”
  4. Clarke LJ held that part of the relevant context against which the exclusion should be understood was an earlier decision of the Court of Appeal (Panamanian Oriental Steamship Corporation v Wright (The Anita) [1971] 1 Lloyd’s Rep 487) which addressed the meaning of the expression “customs regulations”. Against that background, it was clear that the phrase had a broad meaning and therefore the exclusion did cover laws prohibiting the import of goods (The Kleovoulos of Rhodes at [47], [56]).
  5. The approach exemplified in The Kleovoulos of Rhodes is one based on the clause having a settled meaning, by reason of its being used against a background of long-standing and clear authority. There was argument in the present case as to whether the decision in Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531 (“Orient Express”) gave rise to the application of this principle. We do not consider that it does. It is a comparatively recent, first instance, decision, which has been the subject of some critical commentary and has not been the subject of any substantial judicial consideration, and does not give a particular meaning to a specific clause which is of relevance here.