Practical Law

In a common law jurisdiction, the law proceeds by principle intertwined with precedent. When judges give talks about the law, they often focus exclusively on precedent. Lord Sumption has taken a different approach. His talks focus on points of principle: witness his speech to the Chancery Bar Association on Reflexions on the Law of Illegality on 23 April 2012. He is unafraid of being seen as outspoken in differing from judges and, indeed, generally (witness his talk, Home Truths about Judicial Diversity, 15 November 2012).

So what should one make of his most recent lecture, given as the Harris Society Annual Lecture, at Keble College, Oxford on 8 May 2017? The title was deceptively neutral: A Question of Taste: The Supreme Court and the Interpretation of Contracts. The contents are another matter.

The main thrust of the lecture was an extended criticism of the approach taken in cases culminating in Investors Compensation Scheme v West Bromwich (ICS) but, in Lord Sumption’s view, continued in decisions through Chartbrook Ltd v Persimmon Homes Ltd to Rainy Sky v Kookmin Bank. Two judges in particular are singled out for criticism: Lord Diplock, a leading judge in the 1970s and 1980s and, in particular, Lord Hoffmann. As Lord Hoffmann’s speech in ICS had become one of the keystones of contractual interpretation, this is no small matter. Lord Hoffman had placed stress on the proposition that the meaning of words in a contract fall to be determined not simply by their meaning in isolation but in the light of the surrounding circumstances of the factual background to the contract and that, moreover, they should be interpreted in the light of “commercial common sense”. This approach, described by him as “the Hoffmann offensive”, is the subject of Lord Sumption’s attack.

The focus of the speech

There are three grounds on which Lord Sumption stated dissatisfaction with the Hoffmann approach:

“The first and main point to make is that the language of the parties’ agreement, read as a whole, is the only direct evidence of their intentions which is admissible. I would certainly not advocate literalism as an approach to construction. But it is a fallacy to say that language is meaningful only in relation to some particular background. Most language and all properly drafted language has an autonomous meaning… The surrounding circumstances may well enable us to discover what the objective was, but not how far it has been achieved… The draftsman, whether he is an amateur or a professional cannot alter the surrounding circumstances and may regard them as a great deal less important than the court does. He has no way to tell the court what he really wants other than the deployment of words.

The second major problem about the use of the surrounding circumstances to modify the effect of language… is the difficulty of applying it fairly in a legal system like ours which rigorously excludes the use of precontractual negotiations as evidence of intention… Once the courts resort to sources other than the language in order to identify the object of the transaction, it is difficult to justify the current law about extrinsic evidence.

My third difficulty with the Investors Compensation Scheme approach is that judges are not necessarily well-placed to determine what commercial common sense requires.”

Lord Sumption had much more to say about these three issues. However, the speech also raises questions.

Recall the recent Supreme Court decision, handed down on 29 March 2017, in Capita v Wood. Lord Sumption describes that decision as “a new direction of travel”. Yet in Capita itself, Lord Hodge, who gave the single judgment, stated in terms that the law of contractual interpretation has not changed at all. Lord Sumption sat on the panel and is recorded as agreeing with that judgment. Has he changed his mind in the two months which followed?

Indeed, if one can see that the lecture’s ostensible targets are Lords Diplock and Hofffmann, who are the readers of the lecture intended to be? Lord Sumption criticises a “loose approach to the construction of commercial documents which [has] reached its highest point in Rainy Sky”. As he points out, the leading judgment in that case was given by Lord Clarke, who remains his colleague on the court. What should Lord Clarke or Lord Hodge make of the lecture?

The future

Both Lords Clarke and Sumption will have retired by the end of 2018 and one might better ask, therefore, what are the key battleground points which arise from Lord Sumption’s intervention. Two stand out in particular.

First, the speech is a call for an approach more focussed on what the words of a contract indicate and less on what the parties might have been expected to write instead. As London becomes ever more a focus for the resolution of disputes between foreign parties, there is a risk that their expectations of what makes for “business common sense” may be so different from what English lawyers would expect that such a criterion would provide no useful guide at all. Moreover, such disputes may turn on contracts whose draftsmen may not be native English speakers. A focus on the wording may at least offer the prospect of certainty. One wonders if the lecture is in this respect a guide to the future.

Second, there is still the question of what might be called “local rules” of contractual interpretation: such rules as those governing the interpretation of exclusion clauses or indemnities or the contra proferentum rule. Even if one focuses on the words themselves, which of these rules apply and with what weight? The lecture does not provide an answer, although one infers from comments in it that Lord Sumption would not discard recourse to “local rules”. We will have to await decisions of the full Supreme Court to see the direction of travel on such matters.