The Interpretation Of Contracts When The Unforeseen Happens

Purposive and contextual interpretation that achieves the original meaning

Disputes over the meaning of contracts most often arise in one of three circumstances. The first is when an event has occurred that the contracting parties did not foresee or provide for at the time of contracting. The second is when there was (subjectively) no meeting of the minds on a particular point, with the result that the parties have ended up with diverging expectations of their contractual rights and obligations. The third is when there has been sloppy or faulty drafting, such that the contractual language is ambiguous or unclear. The decision of the UK Supreme Court in Lloyds TSB Foundation for Scotland v. Lloyds Banking Group plc decidedly falls in the first category. A change in accounting rules that was unforeseen, unforeseeable and indeed unthinkable at the time of contracting led to an interpretive dispute. How, then, is a contract to be interpreted when the unforeseen happens?

The answer, according to the UK Supreme Court, is to consider the contractual language purposively and contextually to discern the meaning of the contract at the time it was made. The result does not break any new ground - rather it applies well established principles - but it is an interesting example of the way UK (and Canadian) courts approach contractual interpretation. (As a technical matter the case was decided under Scottish law, but the relevant principles are identical to the law of England and of common...