Implication and interpretation - does my contract mean what I think it means?

  • By Joanne Pye
  • 08 Mar, 2017

Article by Panel Member Stephen Homer

Parties to a contract aim to achieve certainty as to the bargain they have reached. However, when unanticipated events unfold it is not uncommon for the parties to differ in their understanding of the agreement between them, and for the courts to be requested to interpret the contract as to its true meaning. Sometimes one party will argue the court should imply a term which has not been expressly agreed in the contract.

This article considers recent judicial developments concerning interpretation and implication, the relationship between the two, and the tests applied by the courts in each case.

Interpretation of contracts

"The professed object of a common law court in interpreting or construing a written contract is to discover the mutual intention of the parties" (Lord Justice Beatson in Globe Motors Inc and others v TRW Lucas Varity Electric Steering Limited and others [2016] EWCA Civ 396).

The court's approach, when interpreting contracts, is to look at the contract as a whole and consider not only the words of the relevant clauses, but also the commercial context. However, in identifying the intention of the parties, the court will apply an objective test of, "what a reasonable person having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract to mean" (Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38). The court is interested in establishing the understanding of a 'reasonable person', rather than that of the parties themselves.

By way of example, in his earlier judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffman stated the court, "is concerned only to discover what the instrument means. However, the meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed." It is this objective meaning which is conventionally called 'the intention of the parties'.

In Arnold v Britton [2015] UKSC 35, Lord Neuberger identified six considerations of general applicability when interpreting a contract which are:

* The natural and ordinary meaning of the clause.

* Any other relevant provisions of the contract.

* The overall purpose of the clause and the contract.

* The facts and the circumstances known or assumed by the parties at the time that the document was executed.

* Commercial common sense.

* But disregarding any subjective evidence of any party's intentions.

It has been argued that the process of implying a term into a contract is no more than a facet of interpreting its true meaning; as it will sometimes be necessary to imply a term into the contract in order to make the contract work as the parties must have intended. However, despite some uncertainty following the judgment of Lord Hoffmann, this time in the Privy Council case of Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 (as to

which see more below), the processes of interpretation and implication are "different processes governed by different rules" (per Lord Neuberger in Marks and Spencer plc v BNP Paribas [2015] UKSC 72) and it is only once the court has construed the express terms of the contract that it will consider whether to imply a term.

Implied terms

Then, in what circumstances will the court imply a term into a contract? Lord Neuberger addressed this recently in Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor [2015] UKSC 72, essentially refining the earlier test laid down by the courts so that the necessary factors, before implying a term into a contract, can now be summarised as:

* The term must be necessary to give business efficacy to the contract or it must be so obvious that it goes without saying (it will be rare for one to be present without the other).

* The term must be capable of clear expression.

* It must not contradict any express terms of the contract.

Traditionally, the courts' approach to implication of terms into contracts has centred around the application of the business efficacy test. The 1889 case of The Moorcock [1889] 14 PD 64 provided that a term would only be implied into a contract if it was necessary to give business efficacy to the contract.

The officious bystander test, set out in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, takes into consideration what the parties would have intended at the outset. A term will be implied if it is so obvious that, if an officious bystander suggested to the parties that the term should be included, "they would testily suppress him with a common 'oh of course'".

As touched on above, recent case law has allowed the Supreme Court to revisit these principles and clarify the position on implication and interpretation, including the distinction between the two.

The Privy Council Case, Attorney General of Belize and others v Belize Telecom Ltd [2009] UKPC 10, has been considered to be widely misunderstood to mean that a term could or should be implied if it is reasonable to do so, and that implying a term is part of the process of interpretation of a contract. It was noted that the court has:

"no power to improve upon the instrument which it is called upon to construe…[And] cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means"

The Privy Council held that, "The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs." Under these circumstances, the usual approach is that nothing is to happen, as any alternative result would have been provided for in the instrument. However, the court considered a scenario in which any reasonable person, who read the document in question, would consider that the only meaning consistent with the remainder of the document, taking into account the relevant background, would be that something should occur. Only in these circumstances would the court then imply the term. The Privy Council considered that it would be appropriate to imply a term because any reasonable person would consider it necessary.

The requirement of necessity was further confirmed by Mr Justice Edwards Stuart in Manor Asset Ltd v Demolition Services Ltd [2016] EWHC 222 (TCC). In this case the contract had been varied in a way which was inconsistent with other provisions of the contract. The judge

reasoned that it must have been the intention of both parties to give effect to the variation, and so the contract was interpreted in a way which enabled the new clause to work. This involved either implying a term or interpreting it in a certain way, which effectively reduced the prescribed period for service of a pay less notice before the final date for payment to nil, which the court did. If the court had not implied this term, the variation would have been inconsistent with the original terms and could not have operated, which could not have been what the parties had intended. Mr Justice Edwards Stuart acknowledged elements of the approach of Lord Hoffman in Belize Telecom, but in the light of the qualifications made by Lord Neuberger in Marks and Spencer. He stated:

"…the overriding point to be borne in mind before implying any term the court must conclude that the implication of that term is necessary in order to give business efficacy to the contract, or to put it another way, it is necessary to imply the term in order to make the contract work as the parties must have intended."

In Marks and Spencer, the Supreme Court stated that whilst interpreting the words which the parties have used and implying words into the contract, both involve determining the scope and meaning of the contract, these are different processes governed by different rules.

The recent case law shows that the courts continue to take a strict approach to the circumstances in which they will imply a term, and the requirement of necessity has not fallen away, even when a broader approach is applied. When interpreting contract terms, the key consideration continues to be the intention of the parties as described by Lord Hoffman in the Investors Compensation Scheme judgment. When implying terms, the courts will respect the parties' freedom of contract to set out their own terms and will only interfere when it is necessary, and not because the words used in the written contract result in a bad bargain for one of the parties. When negotiating contracts it is not safe to assume the law will assist with a common sense interpretation if the agreement is coherent and workable as it stands.

Stephen Homer

Ashfords LLP

This article was first published in Driver Trett Digest, Issue 12 September 2016.

All-Party Parliamentary Group on ADR

By Chris Reeves 27 Jun, 2017
Constructing Excellence South West have circulated news of the new Construction Mediation Guide and Protocol. The press release is here: http://www.constructingexcellencesw.org.uk/assets/newsletter/jul17/story3.htm  where a copy of the Guide can be downloaded
By Chris Reeves 07 Jun, 2017

Constructing Excellence South West, in collaboration with Mediation for Construction (M4C), has identified the need to highlight how mediation can and should be used to resolve disputes and Constructing Excellence South West has given its support and encouragement of the use of mediation as a process of resolving disputes.

To promote the greater use of mediation, a CESW Construction Mediation Guide and Protocol has been prepared by a drafting committee: Alan Tate (Trowers and Hamlins LLP), Chris Hoar (Michelmores LLP), Stephen Homer (Ashfords LLP) and our founder Chris Reeves. The Guide will be launched at the summit on 9 June 2017, details o which can be found here  

By Chris Reeves 06 Jun, 2017

Location: Reading, Berkshire

Date: Wednesday 4th July 2017

Event programme:

 09:00  Registration and welcome
 09:30  Speaker – Chris Reeves

  • Overview of mediation compared to other dispute resolution processes
  • The new edition of the Construction and Engineering Pre-Action Protocol
  • What the courts and civil procedure rules are saying about mediation/why mediate
  • Why mediate – the commercial reasons
  • The typical mediation process
 Lunch break
 13:45  Speaker – Elizabeth Repper

  • Practical tips on how to prepare for mediation and how to be a party at a mediation
  • Workshop of construction based scenarios to demonstrate how to approach a mediation
  • Conclusions and summaries
For booking please click here

By Chris Reeves 06 Jun, 2017

Join us for a very informative CPD event covering all the ins and outs of mediation in construction disputes:

What is mediation: an introduction to mediation

Why mediate: the factors as to why one would mediate as well as dispelling some common myths

When to mediate: the factors that affect the timing of when to mediate

Making the most of mediation: tips on how to make the most out of the process

How to encourage parties to mediate

Click here  for full details

Places are limited so booking is essential at: events@m4c.org.uk


By Blog Admin 13 Apr, 2017

Special guest:

Jackie Gregory-Stevens FRICS MCIArb CEnv

Head of Commercial - Major Projects - Babcock International Group

17:30 to 19:30 on 16 May 2017

2hrs CPD

By Joanne Pye 06 Apr, 2017
M4C panel member Elizabeth Repper discusses recent commentary from the Courts on when to mediate and sanctions for not getting on with a proposal to mediate. A link to Elizabeth’s article can be found here:

http://constructionblog.practicallaw.com/mediation-update-the-question-of-when-and-costs-sanction-fo...
By Joanne Pye 05 Apr, 2017
Readers will probably be aware that one of the issues that often arises in construction disputes regarding extensions of time is the issue of who owns the contractor's float in his programme. Contractors invariably include a contingency period in their programme of works. This can be either a contingency specific to a particular item on the programme or a general contingency, for example the last two weeks of the programme prior to the contractual completion date. Stephen Homer talks us through how this works under NEC3.

When a contractor applies for an extension of time the architect will often look to use the float to mitigate the delay caused by relevant events. The contractor will often be of the view that the architect is not entitled to do this as the contractor placed the float in his programme for his own use. The contractor will argue that the delay should be measured from the contractual completion date rather than the beginning of the float period.

When considering this issue, the first place to look for guidance is in the contract itself. Although unusual, it is possible for the contract to stipulate how the contractor's float should be used in these circumstances. However, the JCT and PPC 2000 contracts are silent as to contractor's float.

The NEC contract on the other hand stipulates that the programme to be provided by the contractor is to identify float, planned completion and contractual completion dates together with other information.

Whilst under most forms of contract extensions of time are to be measured from the contractual completion date, this is not the case under NEC. Clause 63.3 of the NEC3 Contract states that a delay to the completion date is assessed as the length of time that, due to the compensation event, planned completion is later than shown on the accepted programme. Where the contractor's programme shows planned completion 2 weeks earlier than the contractual completion date with 2 weeks float then it is the planned completion date from which delays are measured in granting an extension of time and the contractor keeps the benefit of the last two weeks float period in his programme.

If, on the other hand, float is shown as apportioned to various items of works programmed to take place prior to the planned completion date then this float will be dealt with in the same way as the float under JCT contracts. Whilst every case turns on its facts, the general rule here is that unless the float has already been used by contractor delay, the contract administrator can use the float to mitigate the effect of relevant events (although there has been judicial commentary that if there is then some later delay event, for which the contractor would not be entitled to an extension of time, the architect should then grant an extension for the period of float used previously to mitigate an earlier relevant event). In this way the contractor is not permanently deprived of his float.

Stephen Homer is a Partner at Ashfords.This article was origninally published on the NEC - Adjudicators Website
By Joanne Pye 20 Mar, 2017
M4C are pleased to support this event and our founder Chris Reeves will be speaking on the programme.

If you want more information or want to make a booking please go to the event here:   Bevan Brittan Mediation in Practice
By Joanne Pye 15 Mar, 2017

Date: 22 March 20017

Time: 8.15am - 9.30am - breakfast bacon rolls, tea and coffee will be provided

Address: Woodwater House, Pynes Hill, Exeter EX2 5WR

The event will be of particular interest to architects, quantity surveyors, engineers, project managers, building owners and managers, contractors and sub-contractors as well as construction lawyers and claims consultants. 

If you are able to join us, please contact a member of our team to confirm your place by calling:

0203 411 4425 or email admin@m4c.org.uk

By Joanne Pye 10 Mar, 2017

Simon Henderson:   “I am delighted to be joining this exciting new organisation. Although mediation has become increasingly popular in recent years, it is still under-used in the construction world where traditional forms of dispute resolution are often seen as the first rather than the last option. I am confident that M4C can play an important role in changing this culture and by doing so, M4C can provide real assistance to all those involved in the construction industry to achieve cost-effective solutions which benefit all parties to disputes. I am greatly looking forward to contributing to this change.”

Chris Reeves, Founder of M4C:  
“The news that Simon decided to join Mediation for Construction has been welcomed by everyone. Simon is a fantastic and exciting addition to our unique group of highly respected accredited construction lawyers and I look forward to the benefits that Simon’s knowledge and experience brings to not only our group but also our clients".

SIMON HAS OVER 20 YEARS' EXPERIENCE AS A BARRISTER SPECIALISING IN CONSTRUCTION AND TECHNOLOGY DISPUTES

Simon was called to the bar in 1993 and has been a barrister at 4 Pump Court since completing his pupillage there in 1994. He specialises in construction and technology law and related professional negligence and commercial work. He is CEDR-accredited and part of CEDR’s UK Mediator Panel. Read more ...
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