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Lord Clarke said,

The correct approach to construction

14 …The principles have been discussed in many cases, notably of course,… by Lord Hoffmann in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd…, in Investors Compensation Scheme Ltd v West Bromwich Building Society…and in Chartbrook Ltd v Persimmon Homes Ltd…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 [Investors] principles…, 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.

20. … 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 Machine Tool Sales Ltd v L Schuler AG [1974] AC 235…

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 Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191 . After quoting the passage from the speech of Lord Diplock cited above, Hoffmann L.J. said, at p 99:
“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.”

25. In 1997, writing extra-judicially in “Contract law: Fulfilling the reasonable expectations of honest men” 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] WLR 756 , 763:

“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 (No 2) [2001] 2 All ER (Comm) 299 , Mance L.J. said:

“13. Construction… is thus
‘a composite exercise, neither uncompromisingly literal nor unswervingly purposive’.
To para 5, one may add as a coda words of Lord Bridge… [s]peaking 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 ed) (1999), vol 1, para 12–049, a ‘balance has to be struck’ through the exercise of sound judicial discretion.”

27. More generally,…
“the rule to which Lord Halsbury L.C. alluded,… ‘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. …The same approach was adopted… by this court in In re Sigma Finance Corpn [2010] 1 All ER 571, para 12, where Lord Mance said 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, [he mentions the decision of] Longmore L.J. in Barclays Bank plc v HHY Luxembourg SARL…:

30. In my opinion Longmore L.J. 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…

[Edited for ease of reading. You can find the official law report on Westlaw.

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