Traditional Approach to Interpretation
Traditionally, all contracts were interpreted in the same manner. Commercial and consumer contracts were subject to the same broad principles. The traditional approach emphasises the plain meaning. In the absence of ambiguity or something pointing to the contrary, effect is to be given to the plain meaning. Under this approach, background evidence is not permitted to show the meaning if the plain meaning is clear.
The traditional plain meaning approach emphasises certainty over intention. Where parties express their meaning in plain and clear terms, effect is to be given to them. However, the courts look at the document as a whole. This informs the individual words, which should not be looked at in isolation.
As in everyday life, the context of the words in the document informs the meaning of particular clauses. Words which by themselves might seem to have one meaning, may in the context of the document as a whole, have another meaning, and should be interpreted as a whole.
The modern attitude to the construction of contracts generally favours a holistic approach to resolution of apparently conflicting provisions, often by reference to well established doctrines such as the ‘matrix of fact’ principle, the parol evidence rule, the contra proferentem rule and the maxims of construction.
Documents are generally interpreted by judges in a manner that accords with the common sense principles by which any serious utterance would be interpreted in ordinary life.
The exercise of interpretation is a 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.
Factual Matrix Approach
Over the last twenty years, the courts have reaffirmed that business contracts should be given business efficacy and interpreted in a way that is commercially effective and sensible. The House of Lords and the Irish Supreme Court have adopted an approach that interprets the agreement in the light of its “factual matrix”. In effect, this approach gives precedence to a purposive over a literal approach.
The modern, broader approach emphasises the factual matrix to the contract. There is now less emphasis on interpreting contracts by reference to rules of construction and established legal meanings. This change in emphasis within has sought to place the words as expressed in the contract in context. There is less emphasis on interpreting the contract in a legalistic, literal and narrow way,divorced from its factual background.
What a section of the document means is to be seen in the context of the entire agreement set against the background of the factual matrix that generated it.. If there is inconsistency between provisions of the document, it is necessary to consider the entire document and facts and circumstances surrounding its execution to ascertain which conflicting expression must take precedence.
Parol Evidence Rule Modified
This modern approach has modified the parol evidence rule, to a certain extent. The parol evidence rule always allowed evidence to explain the meaning of words, where they were in any way ambiguous. However, under the traditional “plain meaning” approach, the courts were less likely to have recourse the factual background. Under the modern approach, there is greater emphasis on the factual background. However, the parol evidence rule remains so that evidence should not be allowed to add to, vary or contradict an agreement, which is recorded in writing.
The modern approach to interpretation has been summarised as follows. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person, having all the background knowledge which would reasonably be available to the parties, in the position in which they were in, at the time of the contract. This background is described as the “matrix of fact”.
Scope of Factual Matrix
The ‘matrix of fact’ includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. However, reference to the previous negotiations of the parties is generally excluded. They are allowed only to rectify the contract. This is done for practical policy reasons. The parties’ subjective intentions are relevant, only in so far as manifested in the contract terms.
The meaning of a document which would be conveyed to a reasonable man is not necessarily the same as the meaning of words. The meaning of words is, in one sense, a matter of dictionary definition and grammar. The meaning of a document is what the party using the words against the relevant background would be reasonably understood to have meant.
The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.
The rule that words should be given their natural and ordinary meaning reflects the common-sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. Nevertheless, where one concludes from the background that something must have been wrong with the language, the law does not require judges to attribute to the parties an intention which the y plainly could not have meant.
Limits of Factual Matrix Approach
The limits of the new approach are not fully clear. Some cases hold that where the plain meaning of the contract is evident, effect should be given to it. Although the factual matrix and evidence of the surrounding circumstances are admissible to assist in interpretation, it should not be admitted to contradict the plain meaning. Other cases have indicated that the factual matrix is always relevant, even where the plain meaning is clear.
A distinction may be drawn between contracts which are formally drafted by the party’s solicitors, and contracts entered more informally. In the latter case, the contract is to interpreted from the perspective of the ordinary reasonable man’s understanding, in the circumstances. The law will seek to give effect to the common intention of the parties. The factual background is more important, and a purposive approach is more appropriate.
Legal documents will be usually drafted formally, in the light of established rules of interpretation. In this context, a more traditional approach will usually be appropriate. In one sense, this might be said to be embraced within the more modern approach, in that the professionally drafted agreements are likely to intend that legal terms and expressions should be interpreted in accordance with their legal meaning. They are likely to be intended to be self-contained, with established law and legal practice as the background. With a formal legal document, technical legal language is likely to have been deliberately chosen. The words are likely to be given their technical legal meaning.
The factual matrix approach has been approved numerous times in Ireland in the last 20 years. It appears that the parol evidence rule is now subject to a qualification, that oral evidence may be received of the factual matrix within which the agreement was concluded so as to explain or interpret the terms of the agreement.
Subjective Intention Remains Irrelevant
Evidence of the parties’ subjective intentions is not admissible. The factual background and context are admissible to inform the terms of the contract, as expressed. The court should not seek to speculate on the parties’ actual attention, apart from how it is expressed in the contract.
The factual matrix is said to include anything which would have affected the way in which the language of the document would be understood by a reasonable man. The information and context should be available to the party at the time it is made. The approach has a greater tendency to bring in the background facts and circumstances to the contract. However, the approach is not to allow in the background negotiations, through the back door.
Irish Expression of Modern Approach
The court must not speculate as to the intention of parties, apart from their words, but may, if necessary, interpret words by reference to surrounding circumstances. If one would conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.
The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even to conclude that the parties must, have used the wrong words or syntax.
Excepting previous negotiations of parties and declarations of subjective intent, the matrix of fact includes, subject to the requirement that it should have been reasonably available to the parties, anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
What the court must do must be to place itself in thought in the same factual matrix as that in which the parties were.. Evidence of surrounding circumstances, but not subjective intentions, may be admitted to explain the subject-matter and even particular words used should be understood as referring to; however, such evidence will not normally be allowed to alter the plain meaning of words.
Common-sense and ‘business sense’
Business people will be assumed to know what they are doing and will normally be bound by what they have signed. However, if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common-sense, it must yield to business common-sense.
Where parties have used unambiguous language, irrespective of the question of commercial sense, the unambiguous language must be applied; there is no need to confer business efficacy on the agreement. If there is an ambiguity the court is entitled to construe the contract in the more commercially sensible manner.
The standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.
It is not for the court, either by means of giving business or commercial efficacy or otherwise, to import into an arrangement a meaning, that might also be available from an understanding of the more general context in which the document came to exist, but is one not deducible by the use of the interpretive rules as mentioned.
Implied terms in Context of Modern Approach.
In business transactions: term can only be implied if it is necessary in the business sense to give efficacy to the contract. Whether a term will be implied is a question of law for the court. A term will not be implied where a contract is effective without the proposed term.
A term ought not be implied unless it is clear that the parties must have intended that there should be the suggested stipulation. The court has no discretion to create a new contract. If there is any reasonable doubt whether the parties did intend to enter into such a contract as is sought to be enforced, the document should be looked at and all the surrounding circumstances considered.
If the document is silent and there is no bad faith on the part of the alleged promisor, the court ought to be extremely careful how it implies a term. It is not enough that it would be reasonable to make a particular implication; nor that it would make carrying out the contract more convenient; nor that it is consistent with the express provisions of the contract or with the intentions of the parties as gathered from other provisions.
Where a contract contains an express obligation by a party to the contract, it is for that party to show that there is some implied term which qualifies the obligation.
An implied term must not contradict any express term of a contract. The court cannot imply a term that is contrary to statutory rules. The court cannot imply a term that is contrary to the clear intention of one of the parties.
References and Sources
Irish Textbooks and Casebooks
Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch 5
Friel, R. The Law of Contract 2nd Ed, (2000)
McDermott, P. Contract Law (2001) 2nd Ed (2017) Ch 9
Enright, M. Principles of Irish Contract Law (2007)
Clark and Clarke Contract Cases and Materials 4th Ed (2008)
English Textbooks and Casebooks
Poole, J. Casebook on contract law. (2014) 12th edition
Stone and Devenney, The Modern Law of Contract 10th Ed (2015)
McKendrick, Contract Law 10th Ed (2013)
Chen-Wishart, Contract Law 5th Ed (2015)
Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)
Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.
Chen-Wishart, M. (2015) Contract law. 5th Ed.
Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.
Duxbury, Robert (2011) Contract law. 2nd Ed.
Halson, Roger (2012) Contract law. 2nd Ed.
Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)
O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)
Peel, and Treitel, The law of contract. 13th Ed. (2011).
Poole, J.Casebook on contract law. 12th Ed. (2014).
Poole, J. Textbook on contract law. 12th Ed. (2014)
Richards, P Law of contract. 10th Ed. (2011)
Stone, R. The Modern law of Contract. 10th Ed. (2013)
Treitel, G. H. An outline of the law of contract. 6th Ed (2014).
Turner, C Unlocking contract law. 4th Ed. (2014).
Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).
Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)
McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)
Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)
Burrows, A. S. A Casebook on Contract. 4th Ed.
Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)
Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)
UK Practitioners Texts
Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)
The above are not necessarily the latest edition.