A Cold Wind Blows: The Impact Of A More Literal Approach To Contractual Interpretation On Construction Contracts

The key to resolving disputes is all too often working out what a particular provision or provisions actually means. Parties may have wildly different views on what something means even after spending hours negotiating the fine print and signing on the dotted line.

In the last few years the Supreme Court has signalled a distinct change of approach from the judiciary with regard to contractual interpretation. Instead of looking at the "surrounding circumstances" and "commercial common sense" to interpret contractual provisions whose meaning is disputed, a series of judgments have underlined the primacy of language even where this results in a one-sided, unfair or even absurd result.1

In this Insight we look at the impact this has already had on the interpretation of construction contracts. We then ask what in particular those negotiating and drafting construction contracts should be aware of in light of this change of approach.

Contractual interpretation over the last 30 years

Interpretation has been defined as ascertaining the meaning that a contractual document would convey to a reasonable person, but what this means in practice is by no means straightforward.2

Over the past 30 years, two threads of case law have moved the rules on interpreting contracts away from looking primarily at the literal meaning of the words themselves. The first thread opened the door to looking at the surrounding circumstances in which the contract was agreed.3 The second used "commercial common sense" to allow a more sensible, and potentially less harsh, interpretation of the words in dispute.

The first three principles in the famous House of Lords case, Investors Compensation Scheme Ltd v West Bromwich Building Society,4 were recently described as broadening:

"the range of facts which could serve as relevant surrounding circumstances, so as to include 'absolutely anything' which would have affected the way in which the contract would have been understood by a reasonable man apart from pre-contractual negotiations and information unavailable to the parties."5

Further, the suggestion was that if something had gone wrong with the words in the contract the law may attribute a different intention to them.6

The idea of interpreting contracts in line with "commercial common sense" began to appear in the early 1990s. In Mannai Investment Co. Ltd v Eagle Star Life Assurance7 Lord Steyn stated:

"Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language." [Emphasis added]

For those seeking to wriggle out of an unduly harsh result, the attractions of such an approach are obvious: "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." 8

The cold wind: a more literal approach

In the...